Scandals
Continue
to Rock Wall Street
Investor's confidence
in Wall Street has again been rocked with WorldCom admitting
orchestrating one of the largest accounting frauds in history.
Investors reeling from
the total disregard for the investor by research departments
of many Wall Street firms have also been shaken by a series of
accounting scandals.
What started with an
admission of false profits by Enron has rapidly become a rout
of some of the best-known names on Wall Street.
Since the Enron scandal
came to light, the accounts of many large corporations have been
scrutinized and many more scandals have come to light.
Wall Street Scandals at a Glance
BBC News Online recently took a look at the companies that have dominated the headlines and planted doubts about the integrity of corporate America. Here are their findings:
WorldCom
WorldCom
has admitted orchestrating one of the largest accounting frauds
in history.
The company admitted
that it had inflated its profits by $3.8bn between January 2001
and March 2002.
The firm was already
shrouded in scandal after the departure of its founder and chief
executive, Bernie Ebbers in April.
Mr. Ebbers borrowed
hundreds of millions from the firm to underwrite the inflated
prices he had paid for the company's own shares.
Enron
When
energy giant Enron reported its third quarter results last October,
it revealed a large, mysterious black hole that sent its share
price tumbling.
The US financial regulator
the Securities Exchange Commission launched an investigation
into the firm and its results.
Enron then admitted
it had inflated its profits, sending shares even lower.
Where it all began
Enron's headquarters in Houston -- Once it became clear that
the firm's success was in effect an elaborate scam a chorus of
outraged investors, employees, pension holders and politicians
wanted to know why Enron's failings were not spotted earlier.
The US government is
now thought to be studying the best way of bringing criminal
charges against the company.
Andersen
Attention
quickly turned to Enron's auditors Andersen.
The obvious question
was why did the auditors - charged with verifying the true state
of the company's books not know what was going on?
Andersen
reacted by destroying Enron documents, and on 15 June a guilty
verdict was reached in an obstruction of justice case.
The verdict signaled
an end to the already mortally wounded accountancy firm.
This wasn't the first
time Andersen's practices had come under scrutiny - it had previously
been fined by the SEC for auditing work for waste-disposal firm
Waste Management in the mid-1990s.
The Andersen case raises
a wider question about accounting in the US and how it might
restore its reputation as the guarantor of the honest presentation
of accounts.
Adelphia
Telecoms
company Adelphia Communications filed for bankruptcy on 25 June.
The sixth largest American
cable television operator is facing regulatory and criminal investigations
into its accounting.
The company has restated
its profits for the past two years and admitted that it didn't
have as many cable television subscribers as it claimed.
The firm has dismissed
its accountants, Deloitte & Touche.
Xerox
In
April, the SEC filed a civil suit against photocopy giant Xerox
for misstating four years' worth of profits, resulting in an
overstatement of close to $3bn.
Xerox negotiated a
settlement with the SEC with regard to the suit.
As part of that agreement,
Xerox agreed to pay a $10m fine and restate four years' worth
of trading statements, while neither admitting, nor denying,
any wrongdoing.
The penalty is the
largest ever imposed by the SEC against a publicly traded firm
in relation to accounting misdeeds.
Tyco
In
early June, the US District Attorney extended a criminal investigation
of the firm's former chief executive, Dennis Kozlowski.
Dennis Kozlowski the
man behind the creation of the Tyco conglomerate is charged with
avoiding $1m in New York state sales taxes on purchases of artwork
worth $13m.
The SEC enquiry into
Tyco is understood to relate solely to Mr. Kozlowski but there
are investor fears the probe could reveal accounting irregularities.
Last week, Tyco said
it has filed a lawsuit against one of its former directors, Frank
Walsh, for taking an unauthorized fee of $20m.
Global Crossing
Global
Crossing was briefly one of the shiniest stars of the hi-tech
firmament.
The telecoms network
firm filed for Chapter 11 bankruptcy on 28 January.
The peculiar economics
of bandwidth meant that firms could drum up the appearance of
lively business by trading network access with each other. They
could effectively book revenues when in many cases no money at
all changed hands.
US regulators are now
looking closely at the collapse, questioning whether it is another
case of a company flattering its figures.
Merrill Lynch
In
this atmosphere of corporate distrust, the role of investment
banks has also faced increased scrutiny.
Analysts were suspected
of advising investors to buy stocks they secretly thought were
worthless. The rationale for this `false advice' was that they
might then be able to secure investment-banking business from
the companies concerned.
Merrill Lynch reached
a settlement with New York attorney general Eliot Spitzer. The
settlement imposed a $100m fine upon Merrill but demanded no
admission of guilt . Under
the deal, Merrill Lynch has agreed to sever all links between
analysts' pay and investment banking revenues.
Era of Uncertainty
"With
increased uncertainty and suspicion in the stock market, many
Americans are being forced to re-evaluate their financial security,
especially if they are in or near retirement," says Martin
D. Weiss, chairman of Weiss Ratings, Inc.
"As exemplified
by the Enron debacle, one of the greatest dangers investors face
today is lack of trustworthy information coming from corporations
and Wall Street," commented Dr. Weiss. "It's unfortunate
that consumers have been kept in the dark about how Wall Street
really works."
Martin Weiss has authored,
The Ultimate Safe Money Guide, published by John Wiley
& Sons, which exposes the conflicts of interest that continue
to plague the stock brokerage community and offers clear guidance
on selecting a broker as well as stock and mutual fund investments.
The book, available in most major bookstores, offers a proven
and effective plan for preserving your nest egg, building wealth,
and securing retirement. For more information on Weiss Ratings,
Inc. consumers and investors can call 800-289-9222 or visit www.WeissRatings.com.
Wall Street's Hall of Shame
After
reading about the blatant conflict of interest and a total disregard
for the investor, Donald Rowe, publisher of The Wall Street
Digest newsletter says he is amazed the major brokerage firms
are still in the business of selling stocks to investors.
The following is Donald
Rowe's comments from his June issue on stock analysts that were
misleading investors:
"On NBC's Today
Show, New York Attorney General Eliot Spitzer was asked, "How
do you feel about the SEC joining your investigation of the conflict
of interest between Merrill Lynch's stock analysts and Merrill's
investment banking division?"
Mr. Spitzer chilled
Wall Street by saying, "I welcome the SEC. Together, we
will root out corruption on Wall Street."
Spitzer's investigation
has been expanded to include all major Wall Street brokerage
companies: Goldman Sachs Group; Credit Suisse First Boston, a
unit of Credit Suisse Group; Morgan Stanley Dean Witter &
Co.; the UBS Paine Webber division of UBS AG; the Salomon Smith
Barney unit of Citigroup, Inc.; and Bear Sterns Co.
NYSE Chairman Richard
Grasso was apparently alarmed with the terrible smell of Wall
Street's dirty laundry.
He urged Spitzer and
SEC Chairman Harvey Pitt to meet privately with Merrill Lynch's
chairman without lawyers to quickly resolve the crisis of confidence
in Wall Street. What is wrong with the stock market? Angry investors!
They don't want a settlement. They want blood and lots of it.
This problem is not going to go away anytime soon.
Any settlement with
Spitzer will reportedly leave the brokerage companies vulnerable
to class action suits from investors.
Class action suits
were filed last year against Morgan Stanley Dean Witter and its
star Internet analyst, Mary Meeker. These suits were shamefully
dismissed by the courts. However, this time around the conflict
of interest evidence is convincing. If you read the e-mails from
former Merrill Lynch Internet analyst, Henry Blodget, you are
probably still fuming about your losses.
The following article
from the California Technology Stock Letter will bring
you up to speed on Henry Blodget:
"When Merrill
Lynch's Internet analyst told the brokerage firm that Amazon
was a dangerous stock and advised against doing a securities
underwriting for the company, he was fired and replaced by Henry
Blodget. Blodget, a journalist with no obvious financial background,
promptly put a buy [rating] on Amazon with a $400 price tag (pre-split),
which sent the stock over $400 in short order.
His reputation was
made with the day traders and bubble enthusiasts, although subscribers
will recall many sarcastic remarks over the last three years
about Mr. Blodget. Well, we apologize. As it turns out, he is
not dumb as a post and totally unskilled in perceiving real value.
His private views on the companies he was publicly recommending
were insightful and accurate, especially the ones Merrill was
underwriting and then paid him a portion of the fee as a bonus.
At home, he wrote in
an e-mail, was `a piece of st,' and InfoSpace was `a piece of
junk,' while Internet Capital Group was `a disaster,' and `there
really is no floor to this stock.' We could not have said it
better. Unfortunately, the yahoos (in the old sense of the word)
who specialize in locking barn doors after horses are stolen
as long as TV cameras and microphones are present are now making
all the personal career hay they can out of decrying the news
that analysts tend to recommend stocks their firms underwrite,
in part because firms tend to underwrite stocks they analysts
recommend.
Or, as Claude Rains
said in Casablanca: `I am shocked shocked to learn there is gambling
going on here.'
Give us a break.
Really. We all need a break earnings are coming in pretty well,
we are clearly past the bottom in most tech sectors and stocks
keep going down anyway. It doesn't help to have the NASD, the
state attorneys general and now the SEC (via a formal inquiry)
tell investors every day that they cannot trust their brokerage
firms."
In July 2001, I published
an article from Individual Investor magazine by CNBC's
David Faber. The article was appropriately titled, "Wall
Street's Hall of Shame." Almost by definition these days,
an analyst is a stock booster. But were there some standouts
in 2000? David Faber stated, "Yes, four of them." At
the top of his list was the "Queen of the Internet,"
Mary Meeker of Morgan Stanley Dean Witter. She was paid $15 million
for boosting stocks for Morgan Stanley's investment banking division.
Fortune magazine
published a list of Meeker's bad calls that cost investors billions.
Next on Faber's list was Merrill Lynch's star Internet analyst,
Henry Blodget. Besides Amazon, now at $19, what were some of
his biggest bombs? In March 2000, Blodget gave VerticalNet a
target of $250. It trades for $0.39 now. In February 2000, Merrill
Lynch took Pets.com public at $11 and a month later Blodget said
it would hit $16 in 12 to 18 months. By November, it was out
of business.
Who's the third nominee?
Dan Niles. Of all the analysts, he was the most bullish on semiconductors.
Niles is most closely
associated with Intel. When he was still at Robertson Stephens
at a time when many were promoting the stock he was negative,
and rightly so. But when he moved to Lehman, he became 100% positive.
Only on November 30, 2000, did he downgrade Intel, which by then
had fallen from $75 to $35. As we go to press, Intel is trading
around $20.
David Faber saved the
best for last: Salomon Smith Barney's Jack Grubman, who openly
wears two hats as an investment banker and a stock analyst.
One thing that had
given Grubman some credibility, aside from his many insightful
remarks about the telecom industry in general, was that he was
negative on AT&T for years and with good reason. Then, in
the fall of 1999, his firm, Salomon Smith Barney, went after
the underwriting business about to be generated by AT&T's
huge spin-off of its wireless unit.
Suddenly, he was positive
on AT&T and, sure enough, when the IPO happened, Salomon
was a leading participant. That meant tens of millions in investment
banking fees.
He remained bullish
on AT&T through most of its decline in 2000, downgrading
it only in October, when it had already fallen by half. As we
go to press, AT&T trades around $13 after posting a high
of $45. Business Week's update on Jack Grubman is pretty
harsh. He earned $20 million promoting stocks for Salomons' investment
banking division.
Ten of Grubman's highly
touted recommendations are now in bankruptcy."
For more information
on Donald Rowe's, The Wall Street Digest, 1 year, 12 issues,
$150, write One Sarasota Tower, Ste. 602, Sarasota, FL 34236
or visit the web site at www.wallstreetdigest.com.
