Former finance chief to fight SEC's accounting fraud charges

Bloomberg News
Published August 30, 2005

The former chief financial officer of Waste Management Inc. has decided to fight the Securities and Exchange Commission's claims that he participated in an accounting fraud at the company when it was based in Oak Brook.

James E. Koenig decided not to settle the civil complaint. "Mr. Koenig firmly believes and stands by the accuracy of the financial statements issued by Waste Management during his entire tenure," Harlan Loeb, a spokesman for Koenig in Chicago, said Monday. The SEC said it will proceed with its case against Koenig.

The company, which was not charged in the suit, disclosed the settlement Friday and said it would pay $26.8 million to settle the suit against four former executives. In 1998, Waste Management, now based in Houston, had to restate its 1992-97 earnings by $1.7 billion.

The SEC also barred all four men from serving as officers or directors of a public company.

PIXAR: SEC makes informal request for data

Associated Press
Published August 27, 2005

Pixar Animation Studios Inc. said Friday that it has received a request for information from the Securities and Exchange Commission, a move that comes less than two months after the SEC made a similar request of Pixar rival DreamWorks Animation SKG Inc.

Emeryville, Calif.-based Pixar, which makes animated films such as "Finding Nemo," declined to say what regulators wanted. But in a brief statement Pixar acknowledged it had received "an informal request for information from the SEC, as companies do from time to time, and we believe we have fully complied with that request."

Analysts who cover Pixar suspect that the SEC wants to learn more about why DVD sales of the movie "The Incredibles" fell short of expectations and whether the company should have notified investors sooner.

Waste Management founder, former top officers settle with SEC

John T. Fakler
South Florida Business Journal
August 29, 2005

The Securities and Exchange Commission said Friday final judgments of $30.86 million are entered against the founder of Waste Management and three former top officers. Dean L. Buntrock, Philip B. Rooney, Thomas C. Hau and Herbert A. Getz are the settling defendants. They consented to the judgments without admitting or denying the allegations in the agency's complaint filed in U.S. District Court for the Northern District of Illinois.

The complaint charged the former officers with perpetuating a massive financial fraud lasting more than five years. The SEC alleged the defendants engaged in a systematic scheme to falsify and misrepresent Houston-based Waste Management's (NYSE: WMI) financial results with profits overstated by $1.7 billion. The trash hauling firm restated its financials in 1998. At the time, it was the largest restatement in history.

Buntrock was the company's founder, chairman and chief executive officer during the relevant period, which began in 1992 and continued into 1997. He is also a relation by marriage to Fort Lauderdale entrepreneur H. Wayne Huizenga, another Waste Management founder. Rooney was the company's president and COO. Hau was corporate controller and chief accounting officer. Getz was general counsel and secretary.

The judgments permanently bar the former officers from acting as an officer or director of a public company. They also enjoin the men from future violations of antifraud and federal securities laws. The $30.86 million payment is for disgorgement, interest and civil penalties.

Billionaire Huizenga doesn't have anything to do with the suit, though. The entrepreneur began his career managing three garbage collection routes in South Florida. His company merged with a garbage business in Chicago to form Waste Management. Buntrock, who had married one of Huizenga's cousins, combined his company with Huizenga's in 1968. That merger formed Waste Management Inc. and, in 1971, they took the company public.

By 1981, the firm was the world's largest waste disposal company. Two years later, Huizenga retired from Waste Management with stock and options valued at $23 million. Waste Management remains the largest trash collector in Florida and the United States with $12.8 billion in revenue last year.

Times good for hired sleuths: Corporate jobs keeping private investigators busy

By Tamara Grippi
Staff Writer
San Francisco Examiner
August 28, 2005

The Hollywood image of the hard-boiled private investigator trailing a shady-looking character down an alley has little to do with today's professionals who find a steady stream of corporate business. Companies are turning to private investigators to conduct background checks and sniff out fraud and internal thefts. P.I.s frequently work for attorneys, locating and interviewing witnesses.

San Francisco, San Mateo and Marin counties have seen 2,500 new jobs in investigation and security services since January 2001, according to the California Employment Development Department. "As the economy expands, the need for this work expands," said Clarick Brown, the recent past president of the California Association of Licensed Investigators...

...Sam Brown, the owner of the Sam Brown Group and the Investigative Career Program believes some electronic avenues of investigation have been closed in recent years, making the P.I.'s job more difficult. The future of the industry will involve a return to reliance on old-fashioned "human intelligence," Sam Brown said. During corporate internal theft investigations, Sam Brown said he has placed undercover investigators at major companies, where "no one knows who they are."

A well-established P.I. firm may charge as much as $100 an hour for its services. Investigators who are just starting out can expect to make about $15 an hour while they complete the three years of paid work necessary to qualify for their license from the state.

Labels: background checks

KPMG Will Pay $456 Mln Fine to Avoid Prosecution, People Say

by Ryan J. Donmoyer
Bloomberg
August 27, 2005

KPMG LLP will pay $456 million in fines under an agreement with federal authorities to avoid prosecution by the U.S. government for selling abusive tax shelters, people familiar with the matter said.

The settlement, under negotiation since June, will be unveiled in Washington on Aug. 29, the people said. The announcement may also include indictments of as many as a dozen former partners of the accounting firm, they said.

The agreement is the government's biggest victory in its fight against tax shelters that proliferated in the 1990s. Avoiding criminal prosecution may enable KPMG International's U.S. arm avoid an exodus of clients, which led to the closing of Arthur Andersen LLP after its indictment for obstruction in 2002. The deal marks a surrender for KPMG, which fought the government after rivals Ernst & Young LLP and PricewaterhouseCoopers LLP paid fines of as much as $20 million.

``KPMG elected to fight to the bitter end, and then they discovered what the bitter end was and decided, `Hey, let's not do that,''' said former IRS Commissioner Donald C. Alexander, now a partner with Akin, Gump, Strauss, Hauer & Feld, a law firm in Washington.

Under the terms of the deferred-prosecution agreement, KPMG will pay the $456 million fine in three installments, the people familiar with the matter said. The first installment, due next week, will be about half the amount. The firm will pay $100 million in June 2006 and another $100 million in December 2006.

Retraining Advisers

Attorney General Alberto Gonzales, Internal Revenue Service Commissioner Mark Everson and U.S. Attorney David Kelley will announce the settlement, the people said. U.S. District Judge Loretta A. Preska, who must approve the agreement, will hold a hearing earlier in New York.

KPMG also agreed to not take on any new tax clients for 30 days while it retrains its advisers on new standards, the people said. Under the agreement, all tax opinions given to clients must be likely to survive an IRS audit, the people said. The previous standard required that the advice be ``more likely than not'' to win IRS approval.

The New York Times said earlier today that the amount of the fine, previously reported by Bloomberg News as more than $450 million, would be $456 million.

Former Securities and Exchange Commission Chairman Richard Breeden, 55, will monitor the firm's compliance with the agreement, the people said. If the firm meets the terms of the deal, the deferred criminal charges against it will be dismissed in December 2006, the people said.

Independent Monitor

Breeden, who was appointed to the SEC by President George H.W. Bush in 1989 and served until 1993, didn't return calls for comment. KPMG spokesman George Ledwith declined to comment. Herb Hadad, a spokesman for the U.S. Attorney's Office in Manhattan, also declined to comment.

Arthur Andersen lost most of its partners and clients after being accused by the Justice Department of obstructing an investigation into its audit client, Enron Corp., the now bankrupt energy trader. Andersen's conviction, overturned by the U.S. Supreme Court in May, came too late to resurrect it and reduced the number of large accounting firms to four.

Deferred prosecutions have been on the rise since the Enron bankruptcy in December 2001 kicked off a wave of investigations into corporate fraud. Computer Associates International Inc., Bristol-Myers Squibb Co., Time Warner Inc. and American International Group Inc. made similar arrangements to avoid criminal charges in the last two years.

KPMG has about 1,600 partners and reviews the books of more than 1,000 companies including General Electric Co. and Pfizer Inc.

`Full Responsibility'

In a June statement, KPMG said that the firm has stopped selling abusive tax shelters and that it took ``full responsibility for the unlawful conduct by former KPMG partners'' from 1996-2002.

The KPMG shelters were sold to wealthy individuals such as former Treasury Secretary William Simon Sr., the late stock car racing champion Dale Earnhardt and Thomas Frist III, the brother of Senate Majority Leader Bill Frist. None of the individuals has been accused of wrongdoing.

The U.S. Senate's Governmental Affairs Permanent Subcommittee on Investigations concluded in November 2003 that accounting firms sold illegal shelters because the penalties for doing so were minuscule compared with the fees they earned.

Labels: Department of Justice, Enron, KPMG, New York AG

U.S. Department of Justice Corporate Fraud Task Force Fact Sheet

8/29/2005 2:29:00 PM

To: National Desk

Contact: U.S. Department of Justice, 202-514-2007 or TDD 202-514-1888

WASHINGTON, Aug. 29 /U.S. Newswire/ -- The following is a fact sheet released today by the U.S. Department of Justice:

FACT SHEET: CORPORATE FRAUD TASK FORCE

Since its creation by Executive Order in July 2002, the Corporate Fraud Task Force (CFTF) has spearheaded the Administration's effort to prosecute corporate malfeasance, protect the jobs of hard-working Americans, and restore confidence to the marketplace. Through the coordinated efforts of several federal agencies, the CFTF is sending a clear message that criminal activities in the corporate world will be swiftly and decisively prosecuted. By acting to deter fraud, the Task Force is also helping to restore shareholder and employee trust, and demonstrating to the American people that the vast majority of corporate leaders are still honest and hardworking. With today's deferred prosecution agreement with KPMG LLP, and the indictment of nine former employees and individuals associated with KPMG-as well as one former partner of a prominent law firm-the Justice Department furthers its commitment to the American worker, investor, and honest taxpayers.

Since its inception, the Task Force has contributed to the following:

-- Securing over 700 corporate fraud convictions;

-- Convicting over 100 corporate CEOs and presidents with some type of corporate fraud crime in connection with close to 600 filed cases;

-- Convicting more than 80 vice-presidents;

-- Convicting more than 30 CFOs; and

-- Charging more than 1,300 defendants, including the indictment announced today.

-- From June 1, 2002 through June 30, 2005, more than $266 million has been collected in restitution, fines, and forfeitures from corporate fraud convictions.

-- Significant cases prosecuted criminally include, among others: Worldcom Chief Executive Officer Bernard Ebbers, convicted on fraud charges in the Southern District of New York; a deferred prosecution agreement with America Online in the Eastern District of Virginia; Adelphia Chief Executive Officer John Rigas, convicted on charges of securities fraud, bank fraud, and conspiracy in the Southern District of New York; a deferred prosecution agreement with Computer Associates, prosecuted in the Eastern District of New York.

-- The Justice Department's Enron Task Force has obtained charges against 33 Enron defendants, including 21 former Enron executives, obtained the convictions of 11 Enron defendants, including its former CFO and treasurer, and seized over $162 million for the benefit of victims of the frauds at Enron.

-- Federal prosecutors working with the CFTF have entered into a variety of agreements with corporations regarding allegations of fraudulent criminal activity, including guilty plea agreements, deferred prosecution agreements, and non-prosecution agreements. These agreements, such as the deferred prosecution agreement with KPMG today, ensure the company admits its conduct, agrees to real reforms-including full cooperation in ongoing investigations-and the establishment of internal controls to prevent criminal conduct from re-occurring. In cases where the company fails to agree to these conditions, or fails to abide by the terms of such an agreement, the Department of Justice will not hesitate to prosecute the company.

The work of the CFTF is ongoing. The Task Force will continue to successfully:

-- Restore confidence to the marketplace;

-- Provide fair and accurate information to the investing public;

-- Reward shareholder and employee trust; and

-- Protect jobs and savings of hard-working Americans.

Labels: Department of Justice, Enron, KPMG

Group Seeks Suits Against Plaintiffs Firms

Justin Scheck
The Recorder
August 29, 2005

A prominent tort reform group has a new idea for attacking out-of-control litigation: more lawsuits. That was the theme of an online seminar Thursday morning by the conservative Washington Legal Foundation, the champion of free markets, constraints on litigation and rollbacks of government regulation.

The group -- which has become known for filing objections to plaintiffs lawyers' fee requests -- is now advocating for a new type of litigation: shareholder suits against plaintiffs lawyers famous (they would say infamous) for bringing shareholder suits. The occasion, of course, is the highly public federal investigation of the plaintiffs firm formerly known as Milberg Weiss Bershad Hynes & Lerach.

As prosecutors continue to pursue former lawyers of that firm -- it split up last year, with San Diego-based star partner William Lerach forming his own firm, Lerach Coughlin Stoia Geller Rudman & Robbins -- the Washington Legal Foundation aims to piggyback on the allegations by giving the country's top shareholder plaintiffs attorneys a dose of their own litigiousness.

"A taste of their own medicine might be poetic justice," said Paul Kamenar, the group's senior executive counsel and an outspoken critic of securities litigation. The muse behind Kamenar's idea for litigious poesy is Seymour Lazar, the lead plaintiff in many Milberg Weiss suits who was indicted by federal prosecutors in June for allegedly taking payments from the firm (Milberg Weiss and its former lawyers have not been charged).

In his Thursday morning seminar, Kamenar suggested that allegations in that indictment could form the basis for a wide range of suits by former class members from Milberg Weiss suits. "To the extent that shareholders were either defrauded or misled," he said in an interview Wednesday, "or kickbacks were given, there should be some liability, to be sure."

For example, Kamenar said the former class members could sue over fraud claims, unjust enrichment, breach of fiduciary duty (if lawyers put lead plaintiffs' interests ahead of the rest of the class) and -- for good measure -- civil Racketeer Influenced and Corrupt Organizations Act violations.

In the seminar, titled "Trial Lawyers' Enron" after a Wall Street Journal editorial about the indictments, Kamenar criticized the plaintiffs lawyers and spent time discussing a suit in San Francisco federal court that the Washington Legal Foundation has been researching for years.

In that U.S. district court case, Henry v. Terayon, 00-CV-1967, Lerach's named plaintiff is a short-seller, who, Kamenar said, worked to drive down a company's stock price and then sued executives over the fraud that allegedly caused the price to drop. The SEC, he said, is investigating the case.

Kamenar -- who conducted the seminar solo, since another scheduled panelist canceled at the last minute -- said afterward that he's optimistic about the chances of suing the plaintiffs lawyers. "We would be prepared to file such a case," he said. "The foundation is looking to file such a legal action."

Joseph Grundfest, a securities expert at Stanford Law School and frequent critic of the plaintiffs bar, said Thursday that he has heard little about the idea of private civil suits in connection with the federal investigation. "All of this seems premature until we know what allegations, if any, are going to be made against the firm and individual attorneys," he said.

And Robert Lieff, a securities plaintiffs lawyer and partner at Lieff Cabraser Heimann & Bernstein, agreed. "I hadn't thought about it," he said. "It seems bizarre to me." But to Kamenar, bizarre or not, the idea has irresistible appeal. "It would be kind of ironic," he said in the seminar, "to have a class action against Milberg Weiss."

Labels: Enron, Standford Securities Class Action Clearing House

Voice Mail Poses Threat, but Gets No Respect

By Fred J. Aun
Ziff Davis Internet
August 26, 2005

If you shudder at the thought of a jury or government investigator reading your company employees' e-mails, consider what it would be like when indiscreet voice mails are played back in open court. In the appendix of their book, "The Practical Guide to Electronic Discovery," attorney Mary Mack and technology expert Matt Deniston provide readers with a collection of "electronic discovery templates."

Lawyers are urged to use the forms as guides when requesting information from adversaries in lawsuits. As might be expected in these post-Arthur Andersen/Enron days, the electronic discovery templates are for use when seeking e-mails stored in company computers. But Page 122 includes a carefully worded sample request that might catch even the most modern company off guard:

"Produce any and all voice messaging records including, but not limited to caller message recordings, digital voice recordings, interactive voice response unit (IVR/VRU) recordings, unified messaging files and computer-based voice mail files to or from [specified parties] for the period _____ to _____."

The inclusion of that template in the book is one indication among a growing number that, like it or not, voice messages are increasingly considered fair game by lawyers. "Voice mail is often a quick and casual way to communicate, but it is serious business in the world of discovery," wrote April Berman, Mary Ann Miranda and Sonya Smith in an article called "Voicemail: The Other Smoking Gun."

The authors wrote for the American Bar Association's Litigation News, and posted on the Web site of their employer, the law firm of Baker, Donelson, Bearman, Caldwell & Berkowitz. The piece offers an unsettling reminder: "When a live voice mail is played for a jury, the jury hears not only the witness' words, but the tone, expression and other subtle cues inherent in speech." In other words, your PBX just might be a legal minefield.

Many attorneys involved in the growing field of "electronic discovery" agree that it's prudent for companies to treat voice mail messages as business records on par with e-mail. That means government investigators or civil practice lawyers searching for damaging evidence are increasingly likely to ask for those messages.

So far, both government and corporate attorneys have avoided the issue of voice mail files as evidence. But compliance and legal experts are increasingly worried that it will become the next major minefield in corporate litigation. Some companies pin their hopes on expectations that judges will deem it "unreasonable" to ask businesses to retain the thousands of voice mails recorded daily. Indeed, companies are not expected to forever retain every record they generate.

Still, Michele Lange, a staff attorney specializing in electronic discovery for security firm Kroll Ontrack Inc., said lawyers and company executives are nervously awaiting the court case that will "blow the door off" the voice mail topic. Such a case would entail a precedent-creating judicial opinion approving or denying a request for a company to produce all its discoverable voice mails.

So, if this is the calm before the storm, should companies make a point of archiving and otherwise nurturing the myriad voice messages they receive? "Maybe," is the bottom-line advice of Steven Bennett, an attorney who writes about electronic discovery. "We should think about what we're doing," he said. "The question is, are you going to think about it in advance or will you wait until something happens in the course of litigation and then try to make up a system after the fact?"

Labels: Enron, Kroll

Wall Street's private eye

Vanson Soo
The Standard
August 29, 2005

Jeremy Kroll rolls his eyes when someone attempts to portray him as a second-generation private eye, even though his family name is as synonymous with the modern profession of risk consultancy and investigations as Pinkerton's once was with detection.

Still, the 34-year-old son of the man who founded Kroll Associates, who works under his father as managing director of global business development and strategy of the company's consulting services group, acknowledges that something akin to the film noir gumshoe spirit does run in his family.

``Back when my dad started the business, my grandma spent a week tailing a subject in her car, changing her outfit every day to make herself harder to spot,'' he says, smiling at the recollection.

``My family is full of curious people, and that has not changed.'' The patriarch, Jules Kroll, now 64, is a former Manhattan assistant district attorney who came to believe that a lot of the time and money spent prosecuting corporate crime would be better spent trying to prevent it. With that in mind, he set up the company in 1972.

Though the company was sold last year to insurance giant Marsh & McLennan, Jules Kroll remains its executive chairman. The younger Kroll, who was in Hong Kong earlier this month to visit clients, graduated in French, Italian and fine arts from Georgetown University in Washington, DC, the same school where his father got his law degree.

A family man, he's the eldest of four children; his sister, Dana Kroll, also works at New York headquarters as an associate managing director. In nine years with the firm, Jeremy Kroll has risen from investigator in the areas of corporate intelligence and due diligence to head of a division with more than US$500 million (HK$3.9 billion) in annual revenue.

If Kroll Associates enjoys some cloak-and-dagger mystique, it's probably because of the large number of ex-police, military and intelligence officers Jules Kroll originally hired to lend his new company credibility.

Nowadays, its recruits are just as likely to be computer nerds, lawyers, accountants and investment bankers. The company has spread far beyond its beginnings in investigative and security services. Today, its four primary business segments are consulting, corporate advisory and restructuring, background screening and technology services.

"Technology is a big growth area,'' Jeremy Kroll says. "Computer forensics is a major weapon in our arsenal.'' The company glories in its reputation as "Wall Street's private eye,'' a firm that multinationals, and on occasion even the US government, are comfortable entrusting with their most sensitive affairs.

It burnished its reputation in the early 1990s, successfully tracking down millions of dollars of assets concealed by political outlaws like Jean-Claude Duvalier of Haiti, Ferdinand and Imelda Marcos of the Philippines, and Saddam Hussein of Iraq. Less glamorous, but probably more typical of the way Kroll earns its bread and butter, is its mandate, bestowed in 2002, to restructure Enron, the fallen angel of the US energy business.

Kroll booked US$900 million in turnover last year and currently employs more than 4,000 people in 65 offices worldwide. Kroll files says the company's security work revolves mainly around emerging markets. ``In some industries, such as oil and energy, there is a need for companies to be in `bad neighborhoods' where it's dangerous to business.''

Does that include China? Not really, he says. If China were considered that dangerous, he adds, would Yahoo! ever have invested, as it did recently, US$1 billion (HK$7.8 billion) to acquire a 40 percent stake in Alibaba, a narrowly focused Internet outfit in a speculative industry that last year earned just US$46 million?

``Overall, we have seen a maturing view of Greater China over the past five to 10 years, as experience and confidence have increased,'' he says. Though in earlier years, China may have been just another bandwagon on which globetrotting companies were expected to jump, it has since moved up the charts to become an integral part of many global strategies.

With that, the level of risks has risen proportionately. ``We get daily phone calls from American and European companies about troubles that are threatening their joint ventures in China,'' Kroll says. The China concerns of Kroll's clients today fall very broadly into three categories - transactional risks, regulatory risks and operational risks. Transactional risks relate to joint ventures and partnerships.

Regulatory risks are those inherent in a company's dealings with Chinese authorities, and operational risks involve issues like technology, supply chains and general ambiguities associated with doing business in the mainland, for example, intellectual property protection.

Kroll also advises on political and societal risks that tend to become more important for companies as their mainland roots deepen. "Kroll helps clients understand their markets a lot better, and to recognize that China is becoming an influential player in the global marketplace,'' he says.

Financial institutions are also rushing headlong into the mainland but many are plagued by doubts about their clients - as basic, in some cases, as whether they are real or fictitious. "The real ownership structure of a company and who's behind them are issues that must be dealt with.''

Establishing title is a major headache for real estate investors. Shell companies abound, and it is often unclear just who owns what. I ask Kroll what, after a decade in the company, is his most memorable experience? Surprisingly, it has nothing at all to do with catching someone red-handed in a headline-grabbing scandal. "No. It's the recovery of a kidnapped child. It happened when I was in my late 20s. The feeling of returning a child safely to his family is beyond description.''

Finally, I can't help asking him if it's true, as some people have suggested, that Kroll people carry guns when they're in China. "No way,'' he says, laughing. ``The only people in the company who ever carry guns are those involved in personal security protection, but they've never been deployed anywhere in Greater China.''

That's a pretty good indication that Hong Kong and China are not all that dangerous as places to do business.

Labels: background checks, China, Enron, Kroll, New York AG

“The vast majority of state and federal prosecutors don’t have the resources, staff, energy, perspective, know-how, legal authority, and – perhaps most importantly – political drive needed to bring major corporate crime prosecutions,” said Russell Mokhiber, editor of the Corporate Crime Reporter. “The overwhelming number of prosecutors in the country look at the obstacles and say – I’ll pass. But these ten prosecutors have what it takes to tackle the problem.”

“The prosecutors who enter this field need an added element – a finely tuned sense of political and prosecutorial discretion – knowing when to go and when to stop, so as not to offend the powers that be,” Mokhiber said. “If things go right, prosecutors use the publicity they gain from these prosecutions to fuel their ongoing quest for higher office. If things go wrong, as they can easily and often do, these prosecutors will be publically humiliated in the courtroom by high-priced white collar crime defense attorneys and in the court of public opinion by the business press and political rivals.”

The top prosecutors (in alphabetical order) are:

Christopher Christie, U.S. Attorney, New Jersey
James Comey, Deputy Attorney General, Justice Department, Washington, D.C.
Patrick Fitzgerald, U.S. Attorney, Chicago
David Kelley, U.S. Attorney, Manhattan
Alice Martin, U.S. Attorney, Birmingham, Alabama

Patrick Meehan, U.S. Attorney, Philadelphia, Pennsylvania
Robert Morgenthau, District Attorney, Manhattan
Eliot Spitzer, Attorney General, New York
Michael Sullivan, U.S. Attorney, Boston, Massachusetts
Debra Yang, U.S. Attorney, Los Angeles, California.

The prosecutors were chosen for their consistent emphasis on high profile corporate and white collar crime cases.

Labels: Department of Justice, Eliot Spitzer, New York AG, Quest

Spotlight turns to chief compliance officers

By Linda Tucci
Senior News Writer
August 25, 2005
SearchCIO.com

Eastman Kodak Co. this week named Patrick Sheller as its first chief compliance officer, joining a growing pack of companies that want a single person representing their slew of new compliance practices and policies.

For the Rochester, N.Y.-based Kodak, the hiring of Sheller appears timely. His appointment comes two weeks after Kodak revealed that the Securities and Exchange Commission is conducting an "informal" probe into the company's restatement of earnings from 2003 and 2004. In April, Kodak said accounting mistakes had led the company to overstate its 2004 profits by $93 million, and its 2003 profits by $12 million. And other bottom-line issues are looming. The troubled photography company, scrambling to keep up with the digital revolution, is also undergoing a massive restructuring that will eliminate as many as 25,000 by mid-2007.

Asked about the connection between the SEC investigation and the new position, company spokesman David Lanzillo said there is "no connection." The position is new, but its requirements have always been handled by Kodak's general counsel, he said.

For all its particular problems, Kodak is hardly alone in adding a CCO to its roster of top executives. The defense industry was ordered to get busy on compliance programs, following an era of financial and ethical abuses in the late 1980s. Financial services firms have long had compliance officers in place. Mutual funds are now required by the SEC to have compliance offices. And, while the office is not mandatory for most companies, the recent regulatory environment has convinced a much wider group of industries to hire compliance officers.

"If the Federal Sentencing Guidelines issued in November 1991 created the ethics profession, Sarbanes-Oxley created an entire industry," said Keith Darcy, executive director of the Ethics Officer Association (EOA), a not-for-profit based in Waltham, Mass.

Scott Cohen, editor and publisher of Compliance Week, dates the proliferation of CCOs to a 2002 speech by SEC commissioner Cynthia Glassman, in which she called on companies to designate a "corporate responsibility officer." Many companies, including Boeing Co., Kodak, Sunoco Inc. and Walt Disney Co., heeded the call. "At each company it means something slightly different. In some companies, that officer is involved in overseeing investigation of potential wrongdoing -- whistleblower provisions; in others, its compliance issues for the board," Cohen said.

Cohen, whose newsletter conducts a weekly interview with a CCO or person directly involved in compliance issues, said the duties of CCOs vary from industry to industry and training is "all over the map." However, it's not uncommon for a CCO to have served as the company's general counsel. Sheller of Kodak, for example, worked for many years in Kodak's legal department; he will report to both Laurence Hickey, the corporate secretary and chief governance officer and to the audit company of the Kodak board of directors.

While IT executives are rarely tapped for the job, Cohen said, compliance officers are increasingly involved with IT issues, citing the example of the CCO at Cendant, the New York real estate and travel services giant, Cohen said.

"Their chief compliance officer Richard Wolf, a lawyer, is overseeing a huge management records program, many millions of dollars, and some of it that you would traditionally think of as a CIO responsibility," Cohen said.

Big perks, top salaries for CCOs

Established in 1992, EOA has seen its membership double over the past five years, to 1,200, Darcy said. Companies are not only hiring, he said, but paying handsomely for compliance officers. A survey published this month by EOA in conjunction with Salary.com, a compensation data provider in Needham, Mass., shows that total compensation for the top compliance executives at large multinational companies is approaching $750,000.

"One corporate scandal after another has elevated this position to a much more prominent role. In most of these positions, the person is reporting to the board or the CEO," said Joseph Kilmartin, director of surveys at Salary.com.

The perks reflect that. "In the case of the global ethics and compliance executive -- people responsible for worldwide operations -- you're looking at over $300,000 in stock options as the median in the market." The salary data, which includes long-term incentives, was derived from 109 companies. The survey also found that about 79% of these top executive have a law degree or a master's degree.

Labels: Cendant

Federal Judge OKs Global Warming Lawsuit

By David Kravets
AP Legal Affairs Writer
August 24 2005

A federal judge here said environmental groups and four U.S. cities can sue federal development agencies on allegations the overseas projects they financially back contribute to global warming. The decision Tuesday by U.S. District Judge Jeffrey White is the first to say that groups alleging global warming have a right to sue. "This is the first decision in the country to say that climate change causes sufficient injury to give a plaintiff standing, to open the courthouse door," said Ronald Shems, a Vermont attorney representing Friends of the Earth.

That group, in addition to Greenpeace and the cities of Boulder, Colo., Santa Monica, Oakland and Arcata, Calif., sued Overseas Private Investment Corp. and the Export-Import Bank of the United States. Those government agencies provide loans and insure billions of dollars of U.S. investors' money for development projects overseas. Many of the projects are power plants that emit greenhouses gases that the groups allege cause global warming.

The coalition argues that the National Environmental Policy Act, the law requiring environmental assessments of proposed development projects in the United States, should apply to the U.S.-backed projects overseas. The U.S. law should apply, they say, because those developments are contributing to the degradation of the U.S. environment via global warming. The two government agencies claimed that U.S. environmental regulations do not apply to overseas projects, and that the courts have no right to intervene in those agencies' affairs.

Still, the judge's ruling was narrow. White did not rule whether those agencies must perform environmental assessments of projects they help fund, but simply said the groups have a right to sue. If White's decision stands, the issue of whether U.S. environmental rules apply to the projects backed by the agencies likely will be litigated, Shems said. Shems noted that, even if he ultimately wins the case, that doesn't mean a given project would be blocked even if an environmental analysis is performed and highlights severe environmental damage it would cause.

"The first step in getting a handle on climate change is to find out what the sources are and get an inventory," he said. The suit claims 8 percent of the world's greenhouse gases come from projects supported by the two agencies. Linda Formella, a spokeswoman with Export-Import Bank, said the agency, which supported nearly $18 billion in exports last year, does not comment on pending litigation. The Overseas Private Investment Corp. did not immediately return calls seeking comment.

The case is Friends of the Earth v. Watson, 02-4106.

Ex-Hollinger president to plead guilty to fraud charges

Jeannie Shawl
The Jurist
August 24, 2005

David Radler, former President and COO of Hollinger International and former publisher of the Chicago Sun-Times, will plead guilty to fraud charges, his lawyer said Wednesday. Radler was indicted last week on federal mail and wire fraud charges for allegedly diverting more than $32 million from Hollinger [ through a series of self-dealing transactions. Though the terms of Radler's plea agreement have not yet been made public, there is speculation that Radler will testify against former Hollinger CEO Conrad Black who is facing the prospect of criminal charges for looting the company.

Labels: Conrad Black

SEC Charges Bristol-Myers' Execs

August 24, 2005
WebCPA Staff

The Securities and Exchange Commission filed civil fraud charges against two former officers of Bristol-Myers Squibb Co. for allegedly orchestrating a fraudulent earnings management scheme through channel stuffing.

The commission charged former Bristol-Myers chief financial officer Frederick S. Schiff, and the former president of the company's Worldwide Medicine Group, Richard J. Lane, with violations of the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws in U.S. District Court for the District of New Jersey.

According to the SEC filing, under Schiff and Lane, Bristol-Myers sold excessive amounts of its pharmaceutical products to wholesalers ahead of demand and improperly recognized revenue from $1.5 billion of such sales to its two largest wholesalers. The SEC also said that it believes the company used "cookie jar" reserves to further inflate its earnings when it did not meet quarterly earnings targets.

In addition to facing fines, the SEC is seeking the return of any gains the two men made from the alleged misstatements, and seeks to prevent them from serving as officers or directors of publicly traded companies in the future.

The SEC case also charges Schiff with lying to the company's auditors, PricewaterhouseCoopers LLP, in connection with PwC's audits of Bristol-Myers financial statements in 2000 and 2001. A year ago, Bristol-Myers settled with the SEC and agreed to pay $150 million and appoint an independent adviser to review and monitor its accounting practices, financial reporting and internal controls.

Via Reuters.com:

AmSouth units may face SEC civil action over funds

Aug 24, 2005
Reuters

NEW YORK, Aug 24 (Reuters) - AmSouth Bancorp, a large southeastern U.S. regional banking company, on Wednesday said the U.S. Securities and Exchange Commission may recommend civil action against its banking and asset management units for possible securities violations related to its mutual fund business.

The Birmingham, Alabama-based company said its AmSouth Bank and AmSouth Asset Management Inc. units on Tuesday received a "Wells notice" from the SEC's Los Angeles office, indicating that agency staff may recommend civil action, and giving the units a chance to respond.

AmSouth said the notice relates to the SEC's investigation of the fund services unit of Bisys Group Inc., which provides administrative support to financial companies. That probe concerns several fund providers, people familiar with the matter have said.

Last month, New York-based Bisys said it was in talks to settle an SEC probe into its fund services business, and might pay as much as $25 million. It previously said the agency was investigating its payment of marketing and distribution costs for shares of some mutual fund clients.

AmSouth said it has been cooperating with the SEC. It also said its bank and asset management units, as well as a committee of AmSouth Funds' board of trustees, are reviewing the matter and taking appropriate steps to protect fund shareholders, including making payments to AmSouth funds.

AmSouth agreed in June to sell its 23 mutual funds, which have about $5.5 billion of assets under management, to Pioneer Investment Management Inc. for an undisclosed price. Rick Swagler, an AmSouth spokesman said that sale is proceeding toward a September completion, subject to fund shareholder approval. SEC spokesman John Heine declined to comment. Bisys did not immediately return a call for comment. Pioneer was not immediately available for comment. Pioneer is a unit of UniCredito Italiano SpA.

AmSouth has about $50.5 billion of assets, and operates more than 685 branches in Alabama, Florida, Georgia, Louisiana, Mississippi and Tennessee. AmSouth shares fell 29 cents to $26.33 in Wednesday trading on the New York Stock Exchange. The company announced the Wells notice after U.S. markets closed.

The original article appears here.

-- MDT

Labels: Louisiana

PROTECTING YOUR PERSONAL INFORMATION....NOT....Is ChoicePoint a piece of work or what? Here's how they've responded to the theft of hundreds of thousands of private consumer records from their database:

Elizabeth Rosen was plenty angry when ChoicePoint Inc. sent her a form letter acknowledging that crooks might have perused some of her most sensitive personal and financial data.

But the Hollywood nurse was flabbergasted when the company, one of the nation's largest collectors of consumer records, also offered to sell her some of the same information so she could see what might have been compromised.

....Rosen's experience highlights a paradox in the recent string of thefts of personal information: Many of the same companies responsible for safeguarding reams of sensitive data that have fallen into the hands of scammers are now trying to cash in by pledging to protect consumers' privacy.

Information brokers infiltrated by con artists, banks that have lost unencrypted financial data and peddlers of online background checks are pitching fraud-detection plans that cost from $25 a year to more than $150.

Information collection agencies should be required by law to do everything in those "fraud-detection plans" — and more — as a normal course of business. And they would, too, if the cost of losing data were made high enough.

Someday there's going to be an unholy consumer backlash against these guys, and they're going to deserve every last bit of it. The gall is simply beyond belief.

Labels: background checks, database

S.E.C. Accuses 2 Former Kmart Executives of Civil Fraud

By Louise Story
New York Times
August 23, 2005

The Securities and Exchange Commission filed a civil fraud complaint today against two of Kmart's former executives, accusing them of misleading investors about the company's financial conditions in the months before the company filed for bankruptcy in early 2002.

Charles C. Conaway, Kmart's former chief executive, and John T. McDonald, the former chief financial officer, failed to disclose a large over-purchase of inventory in the summer of 2001 in its third-quarter financial statements that year or in its earnings conference call with investors and analysts, the S.E.C. said.

Instead, the S.E.C.'s complaint said, the executives told investors that Kmart's increases in inventory were because of "seasonal inventory fluctuations." The executives also did not acknowledge that the company's late payments to vendors were harming the company's relationships with those suppliers, the S.E.C.

"We would have required full and fair disclosure, which would have been that the company may have purchased a particular amount of inventory and that that created liquidity problems and that the company did not have sufficient cash to pay all its vendors," said Peter H. Bresnan, an associate director in the S.E.C.'s division of enforcement.

Last week, an arbitration panel in Michigan said that Mr. Conaway had not committed fraud and corporate malfeasance. The Kmart Creditors Trust had sued Mr. Conaway for $1.7 billion. The arbitration panel dismissed the charges and awarded Mr. Conaway legal fees.

Lawyers for the two executives said the S.E.C.'s charges were without merit. Mr. Conaway resigned from Kmart in March 2002, and Mr. McDonald also left the company then. Kmart had no comment on the case today.

Kmart emerged from Chapter 11 bankruptcy in the spring of 2003 and it merged with Sears, Roebuck & Company earlier this year. The combined company is now called the Sears Holding Corporation.

Over 90 Percent Of Companies Regularly Expose Data

Personal Tech Pipeline
Courtesy of TechWeb News
August 22, 2005

Employee and customer data is exposed, and potentially within the reach of hackers, at a whopping 91 percent of companies monitored by a security firm.

According to the second monthly Insider Threat Index generated by Reconnex, a Mountain View, Calif.-based enterprise risk management vendor, 91 percent of the companies undergoing assessment in July exposed credit card numbers, and 82 percent exposed employee Social Security numbers.

"The origin of the vast majority of these disclosures stemmed from human resources departments," said Reconnex's July index report. "[These departments] often accidentally exposed employees' personal information when they communicate with partners in health insurance, payroll, workers compensation, and other third-party processors."

In other cases, claimed Reconnex, employees are exposing data by sending files using Web e-mail services such as Hotmail and Yahoo Mail.

"We are seeing evidence of a growing trend regarding the distribution of sensitive data via Webmail," said the index's report. "Because so many corporations are setting size limits on files attached to e-mails, employees' only recourse is to send large, sensitive files using their own personal Webmail accounts."

The July index report can be downloaded as a PDF from Reconnex's Web site.

KPMG in talks

By Andrew Parker in New York
The Financial Times
August 22/23 2005

KPMG is in talks with a leading law firm that could result in compensation for former US clients who were sold two of its flagship tax avoidance schemes. But the accounting firm has also signalled it will aggressively defend itself, and highlight the conduct of others, if clients insist on going to court to seek damages after the US tax authorities objected to the schemes.

Since July last year, KPMG has held talks with Milberg Weiss Bershad & Schulman, a law firm that specialises in class action lawsuits, about a “global settlement” of claims arising from sales of avoidance schemes known as Bond Linked Issue Premium Structure (Blips) and Offshore Portfolio Investment Strategy (Opis).

The tax avoidance industry was highly lucrative until the Bush administration launched a crackdown in 2001. A report by staff on the Senate permanent subcommittee on investigations, published in 2003, found that KPMG generated fees of $124m from four avoidance schemes sold to hundreds of people between 1996 and 2001, including Blips and Opis.

Blips and Opis were classified as “potentially abusive tax shelters” by the Internal Revenue Service in 2000 and 2001, after which KPMG stopped marketing them. The IRS probed people's use of the avoidance schemes, and some face demands for tax payments worth millions of dollars, as well as fines. Meanwhile, David Kelley, the US attorney for the southern district of New York, has been leading a criminal investigation into KPMG's tax work.

The talks between KPMG and Milberg Weiss also involve Sidley Austin Brown & Wood, a law firm. Brown & Wood, a predecessor law firm to Sidley, earned fees of $23m by providing letters to KPMG clients that said its avoidance schemes could withstand scrutiny by the IRS, according to an updated version of the Senate report published in February.

Milberg Weiss alleged in a lawsuit filed in June that KPMG and Sidley “fraudulently misrepresented” Blips and Opis as legitimate investment strategies because they knew the avoidance schemes were “abusive tax shelters that would not pass IRS scrutiny”. Melvyn Weiss, senior partner at Milberg Weiss, said most of the terms of a settlement with KPMG and Sidley were in place although no agreement had been signed. Milberg Weiss is seeking more than $200m from KPMG and Sidley. The intensive nature of the settlement talks has been underlined by the use of two retired judges to act as mediators.

Efforts by former clients of KPMG who bought its tax avoidance products to secure compensation may have been assisted by a statement made by the firm on June 16. KPMG's US business, after outlining the justice department's investigation of its tax services offered between 1996 and 2002, said: “KPMG takes full responsibility for the unlawful conduct by former KPMG partners during that period, and we deeply regret that it occurred.”

However, KPMG, as well as holding talks with Milberg Weiss about a “global settlement”, has signalled it will strongly defend itself if clients insist on going to court. For example, KPMG last month raised the stakes in a lawsuit brought by former clients in Texas who used the Blips avoidance product.

The 2003 Senate report said Blips was designed to generate artificial losses to offset against other income on tax returns. KPMG alleged in court documents that the Texas clients, Cal and Cary McNair, claimed losses resulting from Blips in their 1999 tax returns, which were filed after the IRS had objected to the avoidance product. It also said that a KPMG partner, after the IRS ruling on Blips, had advised the clients to consult lawyers about whether to include losses resulting from the product on their 1999 returns.

To limit the potential impact of the lawsuit, KPMG said if it is found liable to pay damages to the Texas clients then law firms that allegedly advised them on Blips should also contribute. The firms, Andrews Kurth, and Holland, Johns, Schwartz & Penny, were not available for comment.

Paul Dobrowski, a partner at Dobrowski, the law firm representing the McNair brothers in their lawsuit against KPMG, said his clients had acted appropriately. “KPMG assured my clients that the positions they adopted in their 1999 tax returns were appropriate, both before and after they filed them,” he said.

KPMG's US business said: “We look forward to resclving the civil litigation expeditiously and with full and fair accountability.”

Labels: Department of Justice, KPMG

Chicago Bridge gets SEC subpoena over Halliburton probe

August 23, 2005
KGBT News

Chicago Bridge and Iron has been subpoenaed in a Securities and Exchange Commission investigation of a Halliburton construction project. The Dutch-based engineering and construction company was a subcontractor of Houston-based Halliburton on the Nigerian project. Chicago Bridge and Iron said in its Friday SEC filing that it's cooperating with the request, but it didn't provide further details about the subpoena.

Halliburton's foreign operations have been the focus of investigations by various regulatory agencies. The Justice Department and the SEC have been investigating alleged bribery of Nigerian officials relating to the construction of a natural-gas liquefaction plant at Bonny Island.

Halliburton said it was under formal SEC investigation in June 2004.

Labels: bribery, Department of Justice

PRESS RELEASE:

NEW YORK (Augst 16, 2005) -- For the 10th consecutive year, the Securing New Ground Conference will bring together more industry leaders and investors than any other security industry conference. On November 16 & 17, more than 25 Presidents and CEOs from the security industry's leading suppliers, integrators and investors will present their views on business trends and the investment outlook for the security industry. As described by Jules Kroll, Founder of Kroll Inc. and current Vice Chairman of Marsh Inc., SNG is "Excellent. Thought provoking. Right on target. The best conference of its kind in the world."

The dynamic created by bringing investors together with market leaders continues to attract the "who's who" of the industry along with those funding the markets growth to the Roosevelt Hotel in NYC. The two day conference provides an unparalleled snapshot of the market sectors expected to change the future of the industry plus provide critical information designed to help industry veterans and new investors refine strategies, focus investment and avoid pitfall.

One of the hallmark sessions of the Conference is "Follow the Money" presented by experienced investors Capital Source, Northwest Capital Appreciation and Quadrangle Group. The session, designed to enlighten potential investors or companies wanting to attract investors, has proven invaluable and worth the price of admission.

Other conference highlights include: Jeffrey T. Kessler, Senior VP of Lehman Brothers and "Wall Street's guru on the security industry" will talk about how Wall Street views the market, what sectors and companies are poised for growth and what trends will reshape the traditional industry. Conference attendees will receive a free copy of Kessler's 2006 Security Industry Report.

Keynote speaker, Frank C. Lanza, Chairman and CEO of L-3 Communications Corporation (NYSE: LLL) will provide insights on how security companies can leverage change and find untapped opportunities for growth. Other companies participating that have had a major impact on the industry include Siemens Building Technologies (NYSE: SI) Honeywell Security Monitoring, Guardian Protection Services and The Department of Defense.

About Securing New Ground(TM)

Securing New Ground(TM) is the only conference in the security industry focused on the "business of security." The leaders from all aspects of the security and financial communities come together to discuss trends, opportunities and the businesses changing the face of the industry. For more information about the Securing New Ground(TM) Conference go to: www.SecuringNewGround.com.

The conference was founded in 1995 by Lehman Brothers Inc. - Jeffrey Kessler, ProFinance Associates, Inc. - Michael B. Jones, Sandra Jones and Company - Sandra Jones and was joined by BNP Media in 2005.

Labels: Kroll

Two Ex-Bristol-Myers Officers Sued by SEC for Fraud

By Demian McLean
Bloomberg
August 22, 2005

Two former Bristol-Myers Squibb Co. executives defrauded investors by improperly accounting for $1.5 billion in revenue in 2000 and 2001, according to the U.S. Securities and Exchange Commission.

Frederick Schiff, 56, of New York, former chief financial officer, and Richard Lane, 53, of Doylestown, Pennsylvania, former president of the Worldwide Medicine group, sold excessive amounts of pharmaceutical products to the company's two largest wholesalers to inflate revenue and earnings, according to a complaint filed with the U.S. District Court for the District of New Jersey.

``For two years, Schiff and Lane led the market to believe that Bristol-Myers was meeting its financial projections and market expectations, when in fact the company was making its numbers primarily through channel-stuffing and manipulative accounting devices,'' said Merri Jo Gillette, head of the SEC's Midwest Regional Office in Chicago.

Bristol-Myers, under Schiff and Lane, inflated its results by stuffing its distribution channels with excess inventory to meet targets by providing financial incentives to its wholesalers, the SEC said. When earnings still fell short of internal expectations and Wall Street consensus, the company used ``cookie jar'' reserves at Schiff's direction to further inflate earnings, the complaint said. The former officials also lied to the company's auditor, PricewaterhouseCoopers LLC, the SEC said.

Bristol-Myers agreed to pay $150 million in 2004 to settle with the SEC. The company appointed an independent adviser to review and monitor its accounting practices, financial reporting and internal controls. Neither Lawrence Spiegel, representing Schiff, or Richard Strassberg, the attorney for Lane, returned calls.

The CV detectives

By Tom Geoghegan
BBC News Magazine
August 22, 2005

It might seem like the only way to secure that dream job, but with one in four people lying on their CVs, employers are wising up, and have identified the typical fibs people tell. So, you founded your university debating society, did you?

And what was your greatest challenge in that role? However unlikely, it's a job interview question some people would dread, if they are one of the many people to have faked parts of their curriculum vitae.

A quarter of 3,000 CVs submitted with job applications in 2004 had a lie in them, says employee screening firm Risk Advisory Group. And while the section headed "personal interests and achievements" may seem like a legitimate area for exaggeration, some of the lies are far more serious than fibs about undergraduate life.

Neil Taylor produced a bogus degree certificate to land the position as head of the Shrewsbury and Telford Hospitals NHS Trust in 2003. But after admitting the offence of obtaining a pecuniary advantage through deception, he now faces the possibility of prison.

So what sort of things are people lying about? Inflated job titles, increased salaries and benefits, length of service and qualifications are the most common areas, says Marcia Roberts of the Recruitment and Employment Confederation.

"You'd be surprised to know how common it is to lie about qualifications and how stupid it is because it's easy to check," she says. "Recruiters should never accept that someone has lost their certificates. You'd be surprised how many claim to have been to foreign universities when they don't even exist."

In an extreme case of faking it, people have even been known to send someone else to undertake an interview for them, she says.

Combating the lies

The personal achievements are harder to check and few employers bother. But a skilled interviewer can pick apart any holes in a CV, adds Ms Roberts.

While some people may view the odd lie as acceptable to get the job they think they are fully capable of doing, in areas such as social services or education, there are obvious dangers to employing a bogus carer or teacher. And a criminal records check, which is statutory in some industries, will not pick up lies concerning experience.

But some employers have had enough and are fighting back. London and Quadrant Housing Trust, which provides rented homes to low-income families, says checks on prospective employees reveal so many to have lied that about one in 15 provisional job offers the housing association makes has to be withdrawn.

This is due to the references not standing up or there being errors on the application form such as falsified sick leave. To rectify this, London and Quadrant is among an increasing number of employers turning to outside help.

Checking CVs and application forms is a growing industry, and one that Risk Advisory Group and Kroll Background Worldwide are working within.

Hedley Clark, Kroll's managing director, says: "Companies in the past have done reference checking themselves and just asked people to bring in their qualification certificates when they start.

"What's changing is that people are taking it more seriously and seeing more public instances where a CV fabrication has gone on."

Offenders fired

The extreme examples include people saying they have qualifications they don't have or covering up a period where they were in jail, he says.

Kroll helps the company to devise an application form which is designed to get to the truth in areas like employer history, professional qualifications and directorships. Applicants are warned the forms will be vetted, but that still doesn't prevent nearly one in three containing an error, says Mr Clark.

For between £75 and £300, depending on the seniority of the individual, the person's background as outlined on the form is investigated. This includes financial integrity checks and could mean getting references in different languages.

The penalties vary from being refused the job to being fired if the offender has already started work. Or as Mr Taylor's case demonstrates, the punishment can be even stronger.

Original article appears here.

-- MDT

Labels: background checks, Kroll

The GAO gathers information to help Congress determine how well executive branch agencies are doing their jobs. GAO’s work routinely answers such basic questions as whether government programs are meeting their objectives or providing good service to the public. Ultimately, GAO ensures that government is accountable to the American people. To that end, GAO provides Senators and Representatives with the best information available to help them arrive at informed policy decisions--information that is accurate, timely, and balanced...

...With virtually the entire federal government subject to its review, GAO issues a steady stream of products--more than 1,000 reports and hundreds of testimonies by GAO officials each year. GAO's familiar "blue book" reports meet short-term immediate needs for information on a wide range of government operations. These reports also help Congress better understand issues that are newly emerging, long-term in nature, and with more far-reaching impacts. GAO's work translates into a wide variety of legislative actions, improvements in government operations, and billions of dollars in financial benefits for the American people.

GAO blasts Superfund enforcement

Les Blumenthal
The News Tribune
August 17, 2005

A week after Asarco filed for bankruptcy, congressional investigators are warning that other companies might take similar action to shed environmental responsibilities and leave taxpayers liable for billions in cleanup costs. In a report highly critical of the federal Environmental Protection Agency, Congress’ Government Accountability Office said the agency has failed to ensure that financially ailing companies meet their obligations under the Superfund program.

The report, due for release today, also said some companies have transferred their most lucrative assets to parent corporations or subsidiaries to limit their exposure in bankruptcy proceedings. While such transfers are generally legal, it is unlawful to transfer assets with the intent to hinder or defraud creditors. Such cases, however, are difficult to prove, especially when foreign ownership is involved, according to a draft copy of the report obtained by The News Tribune.

Sen. Maria Cantwell (D-Edmonds) plans to discuss the GAO report during a news conference today in a Ruston yard that was abandoned by an Asarco contractor after last week’s bankruptcy filing. “This report confirmed what I feared – corporate polluters are using bankruptcy and other corporate gimmicks to get out of their environmental cleanup obligations,” Cantwell, one of three senators who requested the study, said in a statement issued Tuesday. “Corporate polluters are contaminating our backyards and water, and then sticking us with the mess and the cleanup bill. I’m tired of this abuse. EPA officials had no immediate comment.

Asarco could be liable for more than $1 billion in cleanup costs at more than 30 sites nationwide, including the former copper smelter on the border between Ruston and Tacoma. Grupo Mexico bought Asarco in 1999. Four years later, Grupo Mexico took control of Asarco’s most lucrative assets – two Peruvian mines in the foothills of the Andes and a smelter along the Peruvian coast.

The EPA initially sought to block the deal, but after weeks of negotiations allowed it to proceed. Asarco received an infusion of $765 million at a time it was teetering on the edge of bankruptcy. The company also agreed to set up a $100 million trust fund that would be used to pay some environmental cleanup costs over three years.

The GAO report does not mention Asarco or Grupo Mexico by name. But the report said the complicated financial relationships between a parent company and a subsidiary can be difficult to unravel. “Those who seek to pierce the corporate veil, such as the Department of Justice on behalf of EPA, face a task that has been likened to peeling back the layers of an onion,” the report said.

In addition, parent companies are often stockholders in their subsidiaries, and stockholders can’t be held accountable for environmental liabilities, the report said. Grupo Mexico owns Asarco’s stock. “Federal bankruptcy law, like corporate law, presents a number of significant challenges to EPA’s efforts to hold bankrupt and other financially distressed businesses responsible for their cleanup obligations,” the report said.

Asarco filed a petition for Chapter 11 reorganization in a Texas bankruptcy court. Asarco officials said the company was overwhelmed with financial problems, including cleanup and asbestos liabilities, pension and health costs, downgraded credit ratings and a strike by production workers in Arizona and Texas.

EPA officials have said privately that they were not surprised by Asarco’s decision to file for bankruptcy, but they thought the company would hold on until next year before taking the step. The agency’s lawyers are trying to determine the company’s liabilities site by site and are expected to pursue EPA’s claims in federal bankruptcy court. Cantwell said it shouldn’t stop there.

“Corporate polluters who try to pull this kind of disappearing act after they’ve contaminated our neighborhoods and put our health at risk need to be held accountable. There’s more this administration could be doing to hold Asarco and other companies like it responsible for the harm they’ve done,” she said.

The Superfund, created in 1980, is the nation’s top federal program to clean up dangerously polluted sites. When a “responsible party” for a cleanup could not be found, money from the Superfund was used. The cash came from a special tax on oil and chemical producers and an environmental tax on corporations.

But the tax was allowed to lapse in 1995 and the trust fund used to pay for the cleanup is almost empty. Every year, Congress has provided about $1 billion in general tax funds to continue the work. There are now more than 1,230 sites listed for cleanup under the Superfund program. It is estimated that the 142 largest toxic sites could cost $20 billion to clean. The EPA is already wholly or partially funding cleanup of 60 of these large sites, the GAO report said.

Sen. Maria Cantwell and others will discuss the GAO report during a news conference at 11 a.m. today at a home in Ruston.

Labels: Department of Justice, GAO

Spitzer and SEC question Lloyd's

By Jason Nisse
August 21, 2005
Eliot Spitzer, the New York State Attorney General, and the US financial regulator, the Securities & Exchange Commission, have dragged Lloyd's of London into their investigation into insurance market abuses in America.

Investigators from the SEC and the Attorney General's office contacted Lloyd's last month with a list of questions, The Independent on Sunday has learnt. These relate to a practice called "finite reinsurance", a system of complex long-term transactions which the regulators contend may have been used to make insurance companies' accounts look in better shape than they were.

The investigation has centred on particular contracts between American International Group, one of the US's largest insurers, and General Re, a subsidiary of Warren Buffett's Berkshire Hathaway investment giant. Berkshire admitted earlier this month that it was the target of the investigation and that the Financial Services Authority in London was also involved.

The probe has led to the departure of Milan Vukelic, the chief executive of a Berkshire subsidiary with links to the Lloyd's market, and to questions being asked about the reputation of Mr Buffett, one of America's most respected businessmen.

Lloyd's has confirmed that it has been in discussions with the investigators. US reinsurance accounts for nearly two fifths of the entire turnover at Lloyd's.

"We have had a request from the US regulators for information which we are in the process of complying with," said Julian James, the director of markets at Lloyd's. "We understand that the investigation is not directed at us and the business area they are investigating is a small part of Lloyd's annual business."

Labels: Eliot Spitzer, General Re, New York AG

Law Firm Fined Over 'Frivolous' Suit

AP News
August 16, 2005

LOS ANGELES-A law firm and two of its attorneys must pay $267,000 for helping the developer of a controversial condominium project file a frivolous lawsuit against its opponents, a judge ruled.

U.S. District Judge Manuel Real on Monday sanctioned Foley & Lardner and two attorneys in its San Diego office, S. Wayne Rosenbaum and Suzanne Washington. Developer Irving Okovita had brought a racketeering lawsuit against Sandy Steers, executive director of the Friends of Fawnskin, and three Forest Service employees who had fought his proposed Marina Point luxury condominium development on Big Bear Lake.

The Oakland-based First Amendment Project argued that the suit was aimed at intimidating and harassing Steers, who said she was only trying to force Okovita to follow the law. Real threw out the suit in March. Foley & Lardner, which has 18 offices around the country, including six in California, said in a statement that it expects to appeal Real's ruling.

Okovita wanted to build 132 luxury condominiums, a 175-slip marina and tennis courts on the north shore of Big Bear Lake near the tiny town of Fawnskin. His opponents claim the development would threaten the bald eagle, which is protected under the Endangered Species Act. Further hearings in the opponents' lawsuit are scheduled for next week.

It's unusual for a federal judge to slap a law firm with such a big penalty, said New York University law professor Stephen Gillers, an expert on legal ethics. "For a court to award that kind of money, the court has to find an utter lack of basis" for the lawyers' position, Gillers said.

...[Michael] Kessler was hired by the Cobb County school board to look into the district's now-scrapped effort to provide laptop computers to every middle and high school student. Kessler also is investigating financial problems in the Fulton County schools' construction program.

Kessler, 53, a native of New York City, spent his career working for various public agencies before starting his own corporate investigations firm, Kessler International, in 1998. An accountant by training, Kessler spent the early part of his career working as a forensic accountant in the New York state special prosecutor's office. He was chief of tax investigations for New York state and later served as deputy inspector general for New York City's public transportation agency.

Kessler says his firm has done work for Fortune 500 companies and governments around the world. The company's Web site says Kessler has offices in eight locations, including London, Miami, Chicago and headquarters in Manhattan....

Government Indicts Media Executive, Attorney, and Corp.

Friday, August 19, 2005

The former publisher of the Chicago Sun-Times, along with a lawyer for Hollinger International have been indicted. Additionally, the company that controlled Hollinger International - The Ravelston Corp. Ltd. was also indicted. See DOJ press release here. The press release states that the indictment was for "federal fraud charges for allegedly fraudulently diverting from the U.S.-based Hollinger newspaper holding company more than $32 million through a complex series of self dealing transactions."

The 27 page indictment presents seven counts of mail and wire fraud. Interestingly, 18 U.C.S. sec. 1346, the intangible right to honest services is used in the indictment. The charges against in-house counsel are premised on an alleged "fiduciary duty of undivided loyalty to International, which among other things, required [the attorney] to provide honest services to International, to disclose all material facts regarding all related party transactions to International's Audit Committee, and to refrain from assisting others in any breach of fiduciary duty against International."

Labels: Peter Henning

Iceland's corporate world on trial as Baugur case begins

By Susie Mesure in Reykjavik
August 18, 2005
The Independant

Jon Asgeir Johannesson, the chief executive of Baugur and one of the UK's most prolific retail investors, launched his quest to clear his name yesterday after he was formally charged with committing fraud, embezzlement and breach of trust against the Icelandic company he co-founded with his father 13 years ago.

Pleading not guilty to 40 charges ranging from embezzling company funds for buying a yacht to swindling fellow investors, Mr Johannesson struggled to maintain his trademark aloof veneer during yesterday's 25-minute hearing in Reykjavik's main court.

His five co-defendants, who include his father and sister, all also protested their innocence. Their lawyers have a reprieve before the court sits again on 20 October to hear whether the defence team has managed to bolster its case before the hearings proper, which could last for years, kick off.

Spectators including Mr Johannesson's arch-foe and former business partner, Jon Gerald Sullenberger, jostled for the chance to see how one of Iceland's most eminent businessmen would cope with being formally charged. For Icelanders, it is as if their entire country is on trial, given that the unfolding legal drama pits its corporate against its political elite. Johannes Jonsson, Jon Asgeir's father, speaking afterwards, repeated his belief that the case was a political "conspiracy" drummed up on behalf of the country's former prime minister, David Oddson.

Wheeling out the first of its trump cards, Baugur's board yesterday said a favourable independent report by a UK corporate investigator gave it no qualms about reiterating its "unreserved support" for Jon Asgeir and the others charged. Deidre Lo, a director of Capcorn Argen, a law firm, claimed she had picked apart the 40 charges against the six defendants. Where the police investigators, who have spent the past three years investigating Jon Asgeir's corporate dealings, uncovered fraud, she maintained that in every instance Baugur had been victor not victim.

The crux of the case will hinge on the relationship between Gaumur, Jon Asgeir's private investment company, and Baugur, which is at the centre of almost half the charges. These so-called "related party transactions", which are rare in UK plcs, include one charge that Baugur lent 35m Icelandic kronur (£303,000) to Gaumur to buy shares in a Debenhams franchisee in 1999. Others concern the initial purchase of shares in Icelandair, part of the FL Group that has easyJet in its sights, in 1997 and the acquisition of various chunks of real estate in Reykjavik.

By and large, Icelandic law allows for such transactions between closely linked public and private companies, although there are limits on the loans that can be made in some cases. Whether Jon Asgeir clears his name will largely depend on the interpretation of this law.

Two of the most serious fraud charges relate to the acquisition of Thee Viking, a yacht in Florida, and tax avoidance of about ISK1m. One charge relates to payments to Nordica, Mr Sullenberger's US-based firm that used to source goods for Baugur to sell in its Icelandic retail outlets. There is confusion over whether any of the payments are related to the boat, which Jon Asgeir used when in the US. In his defence, the Baugur chief executive will argue that Gaumur paid $450,000 (£250,000) towards the boat.

Other charges assert that Mr Johannesson embezzled company funds by using a corporate credit card to pay for nearly 200 items. Although the indictment acknowledges that Mr Johannesson did repay the sums, he still stands accused of a crime that violates the country's Companies Act. Ms Lo said: "Here is a CEO of a very fast-growing company who travelled a great deal. He was in London four out of five working days. It's not unusual to use a company credit card but at all times Baugur owed him more money than he owed Baugur."

The fate of the Baugur boss will lie in the hands of three judges, described by one well-connected observer as "heavy hitters", rather than a jury.

In the meantime, Baugur's appetite for deals is undiminished. It recently bought a second Danish department store chain, adding to the £442m it has invested across the UK, Iceland and Denmark since the Icelandic police launched their investigation in August 2002. That same inquiry has scuppered two deals: the possible acquisitions of Arcadia and Somerfield to add to a UK portfolio that includes Hamleys, Iceland, Karen Millen and Oasis. But as Sege Jonsson, a taxi driver, said yesterday: "There is a saying in Iceland that still stands true. If today Jon Asgeir buys one share in a company, tomorrow you should buy two."

Jon Asgeir Johannesson, the chief executive of Baugur and one of the UK's most prolific retail investors, launched his quest to clear his name yesterday after he was formally charged with committing fraud, embezzlement and breach of trust against the Icelandic company he co-founded with his father 13 years ago.

Pleading not guilty to 40 charges ranging from embezzling company funds for buying a yacht to swindling fellow investors, Mr Johannesson struggled to maintain his trademark aloof veneer during yesterday's 25-minute hearing in Reykjavik's main court.

His five co-defendants, who include his father and sister, all also protested their innocence. Their lawyers have a reprieve before the court sits again on 20 October to hear whether the defence team has managed to bolster its case before the hearings proper, which could last for years, kick off.

Spectators including Mr Johannesson's arch-foe and former business partner, Jon Gerald Sullenberger, jostled for the chance to see how one of Iceland's most eminent businessmen would cope with being formally charged. For Icelanders, it is as if their entire country is on trial, given that the unfolding legal drama pits its corporate against its political elite. Johannes Jonsson, Jon Asgeir's father, speaking afterwards, repeated his belief that the case was a political "conspiracy" drummed up on behalf of the country's former prime minister, David Oddson.

Wheeling out the first of its trump cards, Baugur's board yesterday said a favourable independent report by a UK corporate investigator gave it no qualms about reiterating its "unreserved support" for Jon Asgeir and the others charged. Deidre Lo, a director of Capcorn Argen, a law firm, claimed she had picked apart the 40 charges against the six defendants. Where the police investigators, who have spent the past three years investigating Jon Asgeir's corporate dealings, uncovered fraud, she maintained that in every instance Baugur had been victor not victim.

The crux of the case will hinge on the relationship between Gaumur, Jon Asgeir's private investment company, and Baugur, which is at the centre of almost half the charges. These so-called "related party transactions", which are rare in UK plcs, include one charge that Baugur lent 35m Icelandic kronur (£303,000) to Gaumur to buy shares in a Debenhams franchisee in 1999. Others concern the initial purchase of shares in Icelandair, part of the FL Group that has easyJet in its sights, in 1997 and the acquisition of various chunks of real estate in Reykjavik.

By and large, Icelandic law allows for such transactions between closely linked public and private companies, although there are limits on the loans that can be made in some cases. Whether Jon Asgeir clears his name will largely depend on the interpretation of this law.

Two of the most serious fraud charges relate to the acquisition of Thee Viking, a yacht in Florida, and tax avoidance of about ISK1m. One charge relates to payments to Nordica, Mr Sullenberger's US-based firm that used to source goods for Baugur to sell in its Icelandic retail outlets. There is confusion over whether any of the payments are related to the boat, which Jon Asgeir used when in the US. In his defence, the Baugur chief executive will argue that Gaumur paid $450,000 (£250,000) towards the boat.

Other charges assert that Mr Johannesson embezzled company funds by using a corporate credit card to pay for nearly 200 items. Although the indictment acknowledges that Mr Johannesson did repay the sums, he still stands accused of a crime that violates the country's Companies Act. Ms Lo said: "Here is a CEO of a very fast-growing company who travelled a great deal. He was in London four out of five working days. It's not unusual to use a company credit card but at all times Baugur owed him more money than he owed Baugur."

The fate of the Baugur boss will lie in the hands of three judges, described by one well-connected observer as "heavy hitters", rather than a jury.

In the meantime, Baugur's appetite for deals is undiminished. It recently bought a second Danish department store chain, adding to the £442m it has invested across the UK, Iceland and Denmark since the Icelandic police launched their investigation in August 2002. That same inquiry has scuppered two deals: the possible acquisitions of Arcadia and Somerfield to add to a UK portfolio that includes Hamleys, Iceland, Karen Millen and Oasis. But as Sege Jonsson, a taxi driver, said yesterday: "There is a saying in Iceland that still stands true. If today Jon Asgeir buys one share in a company, tomorrow you should buy two."

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