Enron will go down as the mother of all corporate governance fiascos. It falsified reported earnings by creating off-balance-sheet "special purpose entities," into which it shoveled under-performing assets and their related debt. Its executives ran the entities, often making millions on the side. It paid Arthur Andersen, its auditors, more for consulting than for auditing, corrupting and nearly destroying what was once a top firm in its field. It had undisclosed financial dealings with some of its "independent" board members.

Then, as disaster approached, executives dumped millions of shares of Enron stock while 401(K) participants were stuck in a no-trade "blackout period." Enron's collapse vaporized about $60 billion of shareholder wealth, along with tens of thousands of careers at the company and Arthur Andersen. Unfortunately, it wasn't alone. Lots of other companies have pulled various kinds of fast ones on their shareholders, employees or both. Among them:

Wachovia
In April of 2001, North Carolina super regional bank Wachovia agreed to be acquired by First Union. Despite Wachovia's mediocre record over the previous few years, the deal provided 58-year-old CEO L.M. "Bud" Baker with a $2 million a year retirement package for life, and his wife, should she survive him, with "no less than 60 percent of such benefit" over her lifetime.

The proposed buyout price was only 6 percent higher than Wachovia's pre-announcement market value, despite the fact that a higher, hostile bid from Florida-based SunTrust was on the table.
The resulting outcry threatened the deal. But by the time of the Wachovia shareholder vote, First Union's share price had risen dramatically, making the offer acceptable to shareholders. "Who was buying First Union stock, driving up the price and putting a nail in the coffin of the SunTrust offer?" asked W. David Moon, head of Knoxville, Tenn.-based Moon Capital Management. "In the three months prior to the shareholder vote, Wachovia (using its shareholders' money) bought over $550 million of First Union stock."

Global Crossing
The idea was to lay as much fiber optic cable as possible, and then charge for its use when humanity became addicted to bandwidth. Problem was, everyone else had the same idea. Far too much cable was laid and prices plunged, turning Global Crossing's projected profits into huge losses. But instead of admitting its mistakes and taking its lumps, it supported its stock price through a series of "bandwidth swaps," which, according to a shareholder lawsuit, were designed solely to pump up reported revenues and earnings. Along the way, insiders sold nearly $1.3 billion of stock, while making glowing public statements about the company's future. Global Crossing is now bankrupt and its stock is worthless.

E*Trade
The pioneering online stockbroker has seen its share price fall by 90 percent in the past two years. Yet the company paid CEO Christos Cotsakos about $80 million in 2001. He now has a golden parachute worth $125 million should the firm be bought out, and a retirement package worth nearly $9 million a year.

WorldCom
After turning a sleepy little Mississippi phone company into the United States' second-largest telecommunications firm, CEO Bernie Ebbers went a little crazy, buying truckloads of his company's stock on margin. The stock went down, Ebbers got a margin call and WorldCom's board agreed, in 2001, to lend Ebbers $430 million (at an interest rate of 2.15 percent, no less) to pay off the loans. Why? To protect shareholder value, said a company spokesman at the time. A cynic might wonder whether it was to keep Ebbers from having to join many of his stockholders in bankruptcy. Ebbers has since resigned, and the unsecured loan appears on WorldCom's balance sheet under "other assets."

Imclone
This high-profile biotech firm lent its two top officials (and largest individual shareholders) nearly $34 million in June of 2001. The purpose: to allow them to exercise stock options just prior to the announcement of a highly positive joint venture with Bristol-Myers Squibb. More recently, the Securities and Exchange Commission and a congressional subcommittee are looking into the dumping of huge amounts of stock by some family members of the company's former CEO, Samuel Waksal. The stock sales came just prior to an unfavorable ruling by the Federal Drug Administation on an application for a cancer drug, sparking rumors of insider trading, which the family members have denied.

Qwest Communications
The Denver-based telecom giant lent a joint venture run by its founder, chairman and largest stockholder, Philip Anschutz, nearly $85 million. Nine months later, Qwest bought half of Mr. Anschutz's stake in that affiliate for $43 million. The SEC is currently probing this and other Qwest practices.

Return to Virginia Business - July 2002