9781557788382

"The Gray, Frieder, and Clark author team does a terrific job integrating the diverse elements that resulted in unparalleled scandal. This work is detailed, objective, definitive, and includes the latest developments. Its insightful presentation of a $1.6 trillion financial 'heist' is must reading for all observers of U.S. capitalism and corporate governance." Dr. Stanley D. Smith, SunTrust Chair of Banking and Professor of Finance, University of Central Florida "Corporate Scandals is the encyclopedia of corporate scandals and an essential text for Business Ethics." Dr. Gary Quinlivan, Dean of the Alex G. McKenna School of Business, Economics, and Government at Saint Vincent College "Corporate Scandals is accurate and well-grounded both in business theory and in ethical perception of just how much a good society needs a moral foundation. It is a critique and a road-map forward combined in one wide-ranging discussion of stock-market capitalism and how to improve it." Steve Young, Global Executive Director, The Caux Round Table

Kenneth R. Gray is Eminent Scholar Chair Professor of International Management at the School of Business and Industry, Florida A&M University in Tallahassee, Florida.

Acknowledgements

vii

List of Tables and Figures

xiv

List of Abbreviations and Acronyms

xv

Foreword

xix

Sybil C. Mobley

Corporate Scandals

1

(12)

The Need to Restore Trust and Integrity

3

(2)

Root Causes of the Current Crisis

5

(2)

Remedies to the Current Crisis

7

(1)

Corruption and Greed on Wall Street

8

(1)

Overview of the Text

9

(4)

A Short History of Business Scandals

13

(34)

The Mississippi Company Bubble of France

15

(2)

The South Sea Company Bubble of England

17

(3)

The Age of the Railways

20

(1)

Railroad Scandals

21

(2)

Railway Stocks, Jay Cooke, and the U.S. Stock Market Crash of 1873

23

(3)

The Ponzi Pyramid Scheme of Finance

26

(1)

Swindles of the Boom Era of the 1920s

27

(6)

Kreuger and Toll

28

(1)

The Middle West Utilities Holding Company

29

(1)

Albert Wiggins Sells Short

30

(1)

Charles Mitchell's Financial Supermarket

31

(2)

Government Regulation: The United States' Response to the Stock Market Crash and Corporate Misdeeds

33

(4)

The Bank Act of 1933

33

(3)

Securities and Exchange Act of 1934

36

(1)

More Scandals---McKesson & Robbins Company

37

(1)

Savings & Loan Scandals

38

(2)

Final Thoughts

40

(7)

Corporate Malfeasance: Fraud, Theft, and Regulatory Laxity

47

(36)

Major American Corporations Lose Their Way

49

(22)

Enron

49

(8)

Tyco

57

(4)

WorldCom

61

(3)

Global Crossing

64

(2)

Qwest

66

(1)

Adelphia

67

(1)

ImClone

68

(3)

Scandals Appear in Europe

71

(5)

Missing Oil Reserves At Shell

71

(1)

Royal Ahold

72

(1)

Parmalat

73

(2)

Other European Scandals

75

(1)

International Reactions

76

(2)

Conclusion

78

(5)

Addressing Corporate Scandals: The Sarbanes-Oxley Act as a Panacea?

83

(20)

The Public Company Accounting Oversight Board (PCAOB)

84

(1)

Corporate Self-Regulation

84

(3)

CEO/CFO Reporting Certification

84

(1)

Disgorgement of CEO and CFO Compensation and Profits

85

(1)

Ban on Personal Loans to Executive Officers and Directors

86

(1)

Accelerated Reporting of Trades by Insiders

86

(1)

Prohibition on Insider Trades During Pension Fund Blackout Periods

86

(1)

New Audit Committee Standards

87

(1)

HealthSouth: An Early Test of the Sarbanes-Oxley Act

88

(3)

Sarbanes-Oxley Paying Dividends

91

(1)

Demise of Arthur Andersen

92

(3)

The Plight of Other Accounting Firms

95

(1)

Freddie Mac Suppresses Profits

96

(2)

Broad Effects of Corporate Malfeasance

98

(1)

Assessment and Final Thoughts

99

(4)

Scandal Spreads to Wall Street

103

(30)

Pressures Mount in Washington: SEC Chairman, Harvey Pitt, at Center of Controversy

104

(1)

Bush's Reaction: Status Quo?

105

(1)

The Martin Act Addresses Wall Street Wrongdoing

106

(8)

Eliot Spitzer---The Public's Hero

108

(1)

Reforms Start: The Global Settlement for Investment Banks

109

(2)

Penaties, Disgorgement, Funds for Independent Research, and Investor Education

111

(1)

Summary of the Enforcement Actions

112

(2)

Summary of Global Settlement

114

(1)

Celebrity Investment Analysts Investigated

114

(6)

Henry Blodger's Resignation

114

(1)

Mary Meeker Never Indicted

115

(2)

Jack Grubman: Permanently Barred from the Securities Industry

117

(1)

Frank Quattrone: The Master of Technology IPOs

118

(2)

The New York Stock Exchange (NYSE): Another Self-Regulation Failure

120

(9)

Richard Grasso: From Hero to Goat

120

(6)

Carl McCall Avocates Separating Trading and Regulation

126

(1)

John Reed Begins Work

127

(2)

Violations of ``Trade-Through Rules''

129

(2)

Final Thoughts and Conclusion

131

(2)

Mutual Funds Scandals: More than a Few Bad Apples

133

(30)

Mutual Fund ``Late Trading'' and ``Market Timing'' Scandals

134

(16)

Canary Capital Partners

136

(1)

Bank of America---Nations Funds Family

137

(2)

Putnam Investments

139

(1)

The Strong Funds

140

(3)

Janus Capital Group

143

(2)

Massachusetts Financial Services Company

145

(1)

Alliance Capital Management

146

(1)

Other Prominent Firms

146

(4)

Mutual Fund Fees Questioned

150

(2)

Illegal Sales Practices---Directed Brokerage Businesses

152

(3)

Fund Trustees As Chihuahuas

155

(1)

Fidelity's Johnson Argues Against Proposed Board Reform

155

(1)

Commission Bundling and Soft Dollar Payments

156

(1)

Malfeasance at Insurance Companies

157

(1)

Cash Withdrawal and the Effect on Funds Size

157

(1)

SEC Reform

158

(3)

Final Thoughts

161

(2)

Executive Perversion of Financial Management

163

(18)

Agency Theory

164

(2)

The Agency Problem in Full Bloom

166

(1)

Leveraged Buyouts and Junk Bonds

167

(1)

Options: The Major By-Product of the LBO Movement

167

(1)

The Economic Boom of the 1990s

168

(1)

Dividend Conventions Violated

169

(1)

The Fundamentals of Share Repurchase Strategies

170

(1)

Buybacks Substituted For Dividends

171

(1)

The Inappropriate Use of Share Buybacks

172

(1)

Anything But Chump Change

173

(2)

What Happened at the End of the Day?

175

(1)

A Trillion Dollar Heist

176

(2)

What About Agency Theory?

178

(1)

Concluding Thoughts and Analysis

179

(2)

Market System and Social Institutions Called into Question

181

(26)

Institutions Establish the Rules of the Game

182

(2)

The Role of Organizations

184

(1)

The Market Economy as an Institution

185

(1)

Public Education is Necessary to Avoid ``Atrophied Personalities''

186

(2)

Transaction Costs and Property Rights Create Institutions

188

(2)

Non-Market Institutions that Counter the Negative Effects of the Market

190

(4)

The Family as an Institution

190

(1)

The State as an Indispensable Institution

191

(1)

The Nation and Cultural Institutions

192

(1)

Professional Associations Let Us Down

193

(1)

Choices Devoid of Meaning

194

(1)

Spill-Over Effects of the Market

195

(2)

Organization Theory: Incentives Versus Leadership

197

(1)

Executive Compensation

198

(3)

Paying for Performance as a Joke

198

(2)

CEO Compensation Excesses: How Much is Enough?

200

(1)

Transparency as a Panacea

201

(2)

Final Thoughts and Analysis

203

(4)

Virtue: Medicine for Business Ethics

207

(28)

Reflections on the Virtuous Life: Early Philosophies

209

(1)

The Study of Virtue in History

210

(14)

Adam Smith Relates Morality to the Invisible Hand

214

(5)

Confucius

219

(5)

Developing Character Through Virtuous Behavior

224

(2)

Blindsided By Greed

226

(3)

Education and Business Ethics

229

(2)

Final Thoughts and Analysis

231

(4)

Reflections on Corporate Scandals

235

(14)

Six Key Questions

236

(9)

A Central Villain?

245

(4)

Appendix 1: Caux Round Table

249

(8)

Appendix 2: Listing of Virtues

257

(6)

Notes

263

(16)

Bibliography

279

(10)

Index

289

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Corporate Scandals The Many Faces of Greed

1557788383

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