Time Warner settles SEC fraud charges

Time Warner just agreed to pay securities regulators $300 million and restate three years of financial results to settle civil fraud charges stemming from its accounting of online advertising revenues and subscriber counts at its AOL unit.

The settlement with the Securities and Exchange Commission also calls for the world's largest media company to open its books to an independent examiner, which could result in additional restatements.

The settlement closes another chapter in a federal investigation of more than two years into the accounting practices and deal-making at America Online before and after its January 2001 merger with Time Warner.
Time Warner said it had restated financial results for 2000 to 2002 by about $500 million to correct its accounting for deals under scrutiny by the Securities and Exchange Commission (SEC).

The company did not admit or deny wrongdoing as part of the settlement.

The SEC also settled with the company's finance chief, controller and deputy controller, who stood accused of causing false financial reports to be filed in $400 million worth of transactions that Time Warner negotiated with German media company Bertelsmann.
The three men, who were responsible for approving corporate accounting practices, received false information from unnamed insiders and "failed to pursue facts and circumstances" that would have thrown into question the payments in 2000 and 2001, according to court papers.

Chief Financial Officer Wayne Pace, Controller James Barge and Deputy Controller Pascal Desroches are not required to pay fines or face other sanctions as part of yesterday's settlement.

The three men, who did not admit or deny wrongdoing, remain employed at Time Warner, company officials said. Their defense lawyers declined to comment.

SEC enforcement chief Stephen Cutler said the charges in the 29-page complaint detail "a wide array of wrongdoing" at the world's biggest media company, including schemes to inflate advertising revenue and subscriber numbers.

Worldcom-Chief Ebbers found guilty over WorldCom fraud

A jury has found Bernie Ebbers, the former head of WorldCom, guilty of the biggest accounting fraud in history over his role in the firm's $11bn collapse. After deliberating for eight days, the New York jury found Ebbers guilty on nine counts, one each of conspiracy and securities fraud and seven of false regulatory filings. He faces a possible 85 years in jail when sentenced on 13 June.

In a trial that pitted Ebbers' word against that of his former chief financial officer, Scott Sullivan, it's virtually impossible to know for certain whether Ebbers was responsible for the $11 billion accounting fraud at WorldCom, the largest in U.S. history. The jury clearly believed Ebbers was.

The court heard that WorldCom fixed its corporate figures to the tune of $11bn over 2000 to 2002 in order to keep the share price high. When the company collapsed, investors lost $180bn and 20,000 people were laid off."

The conviction of former WorldCom chief Bernard Ebbers, a former milkman, bouncer and motel manager, underlines the accountability of business leaders, according to legal and corporate analysts.

While his wife and stepdaughter cried, Ebbers, 63, sat impassively and listened to the jury's decision: Guilty of one count of conspiracy, one count of securities fraud and seven counts of false regulatory filings.

Bestselling Books on Corporate Fraud

The Audit Committee Handbook, 4th edition is out

Out now: The Audit Committee Handbook, Fourth Edition. This comprehensive reference fills the need for an up-to-date in depth coverage to help busy professionals perform oversight responsibilities during this time of great financial liability.

Comprehensive in scope and an invaluable professional reference, this timely revision provides in-depth guidance on all functions and responsibilities of today’s audit. Features of the Audit Committee Handbook include:

1. Checklists and practical guidance to help audit committee members meet their responsibilities in this new era of accountability
2. The latest guidance for compliance from the SEC and the major stock exchanges
   New material addressing the scandals of the past two years and their impact on audit committees
3. Guidance from the IIA on how to work with internal auditors

The Audit Committee Handbook is a 'must-have' for all audit committee members, board directors, CEOs, CFOs and auditors fighting fraud. Order The Audit Committee Handbook at Amazon

Say It Loud, Say It Proud -- `Shareholder Value!

According to Orit Gadiesh, chairman of management consultants Bain & Company, in a WSJ article of August 3rd, 2004, fraud cases not only dominate the headlines; their fallout makes senior managers more circumspect and risk-averse.

Gadiesh argues that because of scandals like WorldCom's, many CEOs shy away from bold pronouncements or actions. Instead, they're preoccupied with mounting concerns, some seemingly outside of running the business, that add up to huge distractions for CEOs:

1. The first is defending themselves against the charge that all senior executives are crooks; crooks, moreover, who justified their crimes by citing shareholder value as their gospel. Many CEOs understand they can't win this debate. So they remain silent. They deal, instead, with the hassles of Sarbanes-Oxley, Congress's attempt to legislate trust, and the Higgs rules in the U.K.
2. The second, related, CEO distraction is corporate image. CEOs are spending more and more time on the reputational front, promoting good deeds in social responsibility in an effort to be seen as "giving back."
3. The third CEO preoccupation encompasses geopolitical risks, terrorism and the state of the global economy. For instance, U.S. companies increasingly worry about the "American-ness" of their brands overseas

However according to Gadiesh, CEOs have to reclaim their agenda. They must have the confidence to set long-term goals and the will to communicate those goals clearly. So it's long-term shareholder value creation that matters and CEOs need to earn the public's trust the old-fashioned way -- through performance. Because ultimately, the trust that companies build through continuous, solid performance outshines every other consideration.

Enron Capitalism

Feudalism: You have two cows. Your lord takes some of the milk.

Fascism: You have two cows. The government takes both, hires you to take care of them and sells you the milk.

Communism: You have two cows. You must take care of them, but the government takes all the
milk.

Capitalism: You have two cows. You sell one and buy a bull. Your herd multiplies, and the economy grows. You sell them and retire on the income.

Enron Capitalism: You have two cows. You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt-equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred through an intermediary to a Cayman Island company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The Enron annual report says the company owns eight cows, with an option on one more.

Former Enron Chief Pleads Not Guilty

Former Enron Corporation Chief Executive Kenneth Lay has pleaded not guilty to charges connected to the financial collapse of the energy trading company he headed. Mr. Lay appeared in a Houston federal court Thursday and was released on payment of a $500,000 bond. The case is part of an effort by U.S. authorities to restore confidence in the stock market and U.S. business in general.
The indictment unsealed in federal court charges Kenneth Lay with 11 counts including conspiracy, wire F., securities F. and bank F. In an appearance before reporters in downtown Houston only a couple of hours after his court appearance, Mr. Lay denied any wrongdoing.
"As CEO of the company I accept responsibility for Enron's collapse, however that does not mean I knew everything that happened at Enron and I firmly reject any notion that I engaged in wrongful or criminal activity," he said.
Overall attack against corruption

Independent directors decrease F. risk

A recent study provides ammunition for current demands for more independence on the part of C. boards, showing a correlation between a higher proportion of independent, outside directors and a lower likelihood of CF.
The study compared 133 companies that were accused of F. between 1978 and 2001, and 133 companies of similar size and from the same industries that were not, searching for significant differences in director independence, board size and other variables. The result showed that the boards of the companies that were accused of F. had fewer non-executive directors and fewer independent directors, and lower levels of independence on their audit, compensation and nominating committees.
The researchers found that, compared to the non-F. companies, companies accused of committing F.:
- had a lower percentage of outside (non-executive) directors
- had a lower percentage of independent directors (directors with no business or personal ties to the company).
- were less likely to have an audit committee of the board
- were more likely to have a compensation committee of the board
- had a lower level of independence on its audit, compensation and nominating committees (measured by the percentage of directors on these committees with no business or personal ties to the company).
The study was published in the June issue of Financial Analysts Journal, a research publication for investment practitioners worldwide published by CFA Institute.