Corporate scandals and their consequences

Corporate scandals and their consequences

Merck. The pharmaceutical firm agreed to pay $671 million to settle claims that it overcharged Medicaid programs for four drugs, including Vioxx and Zocor, and to resolve allegations of improper marketing to doctors. Drug companies are required to report to the government the lowest price for its product to ensure that Medicaid programs get the benefit of the same discount. Merck, however, hid the steep discounts it gave to hospitals by reporting higher prices to the government. In addition, Merck gave money and perks to doctors and other health-care professionals to entice them to prescribe Merck drugs.

Milberg Weiss Bershad & Schulman. Former partner William Lerach was sentenced to two years in federal prison and fined $250,000 for his role in a kickback scheme involving class-action lawsuits against some of the nation’s largest corporations. Also sentenced were Seymour Lazar (six months home detention, two years probation, $600,000 fine), Steven Schulman (forfeit of $1.8 million and a $250,000 fine), and David Bershad, who pled guilty to conspiracy and agreed to cooperate with the government. A trial is still pending for cofounder Melvyn Weiss, who pleaded not guilty to several charges.

Brocade Communications Systems. CEO Gregory Reyes was sentenced to 21 months in prison and a $15 million fine for orchestrating a scheme to tamper with financial records of stock options the company offered. Reyes became the first executive to go on trial over stock-options backdating. So far, about 200 companies have been targeted for the practice by the Justice Department and Securities and Exchange Commission, and many have had to restate their finances, erasing billions of dollars in previously reported profits. Firms under investigation include Altera, Apple Computer, Applied Micro Circuits, Asyst Technologies, CNET Networks, Dell, Equinix, Foundry Networks, Intuit, KB Homes, Linear Technology, Marvell Technology Group, Maxim Integrated Products, Openwave Systems, Power Integrations, Redback Networks, RSA Security, UnitedHealth Group, VeriSign, and Zoran. In 2007, the SEC filed charges against former Apple chief financial officer Fred Andersonand former general counsel Nancy Heinen. Anderson settled for a civil penalty of $150,000 and the return of $3.5 million. Charges against Heinen are pending.

AIG/Berkshire Hathaway. The federal trial has begun for four former executives of Berkshire Hathaway’s General Re Corp. (Ronald Ferguson, chief executive officer; Elizabeth Monrad, chief financial officer; Robert Graham, a senior vice president and assistant general counsel; and Christopher Garand, a senior vice president) and Christian Milton, AIG’s vice president of reinsurance. The individuals are charged with participating in a scheme to manipulate AIG’s financial statements to make it appear as if the firm increased its loss reserves by about $500 million in 2000 and 2001, pacifying analysts and investors and artificially boosting the company’s stock price. The trial could shed light on what Berkshire Hathaway’s chairman Warren Buffet and AIG’s former chairman and chief executive Maurice “Hank” Greenberg may have known about the transactions. Both have denied any knowledge or wrongdoing. Ferguson, Monrad, Milton, and Graham each face up to 230 years in prison and a fine of up to $46 million. Garand faces up to 160 years in prison and a fine of up to $29.5 million.

Hollinger International. Founder and media tycoon Conrad Black was sentenced to 6½ years in prison and a $125,000 fine for multiple counts of fraud in siphoning money from the company. Also sentenced were former Chicago Sun-Times publisher F. David Radler (29 months in prison and a $250,000 fine), Canadian executives Peter Atkinson (two years in prison and $3,000) and Jack Boultbee(27 months and $500), and Chicago attorney Mark Kipnis (five years probation and six months house arrest).

Countrywide Financial. North Carolina state treasurer Richard H. Moore has officially requested that the Security and Exchange Commission investigate stock sales made by the mortgage lender’s chief executive, Angelo Mozilo, which allowed him to significantly increase sales of his Countrywide shares just prior to the mortgage crisis. “The timing of these sales and the changes to the trading plans raise serious questions about whether this is a mere coincidence,” Moore wrote in a letter to the commission. Planned stock-sale arrangements, which specify the number of shares to be sold regularly, are intended to protect against accusations of trading on inside information.

Merrill Lynch. At least two class-action lawsuits have been filed on behalf of shareholders against the firm and former chairman and chief executive Stanley O’Neal, co-presidents Ahmass Fakahany andGregory Fleming, and chief financial officer Jeffrey Edwards for issuing false and misleading statements about the company’s involvement with collateralized debt obligations (CDOs). When Merrill announced that a third-quarter charge on its income statement would be $8 billion instead of $5 billion – the biggest quarterly loss in its 93-year history – the stock plummeted, and Standard & Poor’s reduced the brokerage’s credit rating to negative.

Wal-Mart. An appeals court has ruled that former No. 2 executive Tom Coughlin, who earlier had been sentenced to five years probation for wire fraud, filing false tax returns, and using Wal-Mart money and gift cards to pay for about $500,000 in personal items, got off too lightly and must be sentenced again. Despite Coughlin’s net worth of approximately $50 million, the prosecution had erroneously determined that he could not afford the penalty and that his health was too poor to withstand a prison sentence. Coughlin had faced more than 28 years in prison and fines of $1.35 million.

Qwest Communications. Former chief executive Joe Nacchio was sentenced to six years in prison and fined $19 million for making $52 million in illegal stock sales as the telecommunications firm faced bankruptcy due to a multibillion-dollar accounting scandal. Nacchio must also forfeit the $52 million within 15 days. Thousands of investors lost money when Qwest’s stock price plummeted from more than $60 a share in 2000 to $2 a share in 2002. The case grew out of the accounting scandal in which Qwest falsely reported fiber-optic capacity sales, allowing the firm to improperly report about $3 billion in revenue and helping it acquire the former Baby Bell company, US West Inc. The Securities and Exchange Commission has requested that the company begin distributing $267 million to victimized investors.

Enron. Two former executives, Kevin Hannon and Kenneth Rice, were sentenced to 24 and 27 months in prison respectively for their roles in the energy giant’s financial collapse. Both officers for the firm’s broadband unit pleaded guilty to conspiracy for scheming with other executives to exaggerate its network capabilities to impress analysts and inflate company stock. Rice’s plea agreement requires him to also forfeit $13.7 million in cash and property.

Wal-Mart. A federal appeals court ruled that a 2001 pay-discrimination lawsuit filed by six women can be elevated to class-action status, allowing claims from up to 1.5 million female U.S. employees. The judge cited “significant proof of a corporate policy of discrimination.” Wal-Mart argued that granting the lawsuit class-action status is inappropriate because its 3,400 stores operate as individual businesses and that issues of pay and promotion are decided locally. In 2006, however, the retailer was ordered to pay at least $78 million in compensation to workers for not paying staff for working during breaks.

United Nations. Texas oilman Oscar Wyatt Jr. pleaded guilty to charges that he paid millions of dollars to Iraqi officials to illegally win contracts connected to the United Nations’ oil-for-food program. The plea deal called for Wyatt to be sentenced to 18 to 24 months in prison and to forfeit $11 million. The U.N. oil-for-food program, which ran from 1996 to 2003, was set up to finance Iraqi imports. It became corrupted when Iraqi officials began demanding illegal surcharges in return for contracts to buy Iraqi oil.

Fuqua School of Business. For those who think the Enron crisis sent a message to future graduate business school students, think again. In the largest ever cheating scandal at Duke’s illustrious Fuqua School of Business, 34 first-year master’s of business administration students were caught cheating on a take-home test. An anomaly? Not according to a study conducted by Rutgers University and the Center for Academic Integrity at Duke, which found that students pursuing MBA degrees cheat more than all other U.S. graduate students (56 percent of those in business schools acknowledge violating the rules compared with 54 percent in engineering, 48 percent in education, and 45 percent in law).