Corporate Scandals

• Full-service brokers view recent corporate scandals as only a moderate challenge
  
• Corporate scandals have had little impact on consumers’ investing and savings habits
  
• Enron manipulated California’s electricity market to extract illegal profits by submitting false data
  
• Enron executives paid $155 million in fines, including a $90 million lawsuit filed against former CEO Ken Lay
  
• Over $600 million in fines have been levied against financial services companies in regards to their Enron Involvement; Lehman Brothers, JP Morgan Chase, and Citigroup were the hardest hit
  
• World Com executives were accused of masterminding an $11 billion accounting scandal
  
• Former World Com Chief Financial Officer Scott Sullivan agreed to plead guilty in 2005 to securities fraud and agreed to be the government’s primary witness against his former boss
  
• Martha Stewart was tried for securities fraud in 2004
  
• Federal prosecutors alleged that Richard Scrushy and other Health South executives inflated earnings by $2.7 billion between 1996 and 2003 in order to meet Wall Street expectations
  
• The Health South case was viewed as an important test for the Sarbanes-Oxley Act, which holds CEOs and chief financial officers criminally liable for inaccuracies on company financial statements
  
• Adelphia had six former executives, including Founder John Rigas and his three sons charged with 24 counts of fraud & conspiracy
  
• Rite Aid misstated $1.6 billion in earnings which led to huge profits for executives with significant stock holdings
  
• Federal prosecutors alleged that Global Crossing executives created deals in 2000 & 2001 involving the swap of communications capabilities with other telecommunications companies
  
• Federal prosecutors ultimately declined to file charges against Global Crossing due to the lack of sufficient evidence
  
• Kmart misstated its 2001 earnings by $24 million
  
• Nortel executives inflated revenues by $3.1 billion in order to meet bonus targets
  
• Qwest Communications was the subject of a federal hearing involving swap deals, inflated revenues, and alleged executive misconduct
  
• The SEC charged former executives at Gateway with securities fraud
  
  

Financial Services Industry Stumbles

• Full-service brokers view industry stumbles as only a moderate challenge
  
• The mutual funds scandal was not just one scandal but rather a series of wrongful actions, including late trading & timing, failure of proper disclosure, and the application of breakpoints
  
• The Securities & Exchange Commission and Eliot Spitzer charged Invesco and its CEO for allowing dozens of clients to make market timing trades that violated prospectus language
  
• An internal investigation at The Charles Schwab Corporation in 2004 revealed instances of market timing
  
• No charges were filed against The Charles Schwab Corporation regarding the late trades
  
• Franklin Resources suspended one trader and one fund officer for short-term trading of fund shares in its 401k plan
  
• Sun Life of Canada’s MFS paid $225 million in fines and agreed to lower its fees by $125 million over five years to settle charges of including false or misleading information in prospectuses regarding market timing
  
• To temper market timing activities, Fidelity has proposed expanding redemption fees on investors who buy and sell funds too frequently
  
• Some mutual fund companies are lowering fees in response to increased government and public scrutiny
  
• It is tough for investors to win claims against mutual fund practices because mutual funds possess most of the aspects of a conservative investment
  
• But no matter how tainted, mutual fund companies are still being coveted by large financial services companies
  
• In 2002, a $1.4 billion settlement from ten of the largest Wall Street banking firms put an end to the investigation
  
• The aftermath of the scandal brought significant changes to the way the major Wall Street firms do business, particularly in the fields of equity research and investment banking
  
• Consumer households’ sub-prime loans outstanding increased almost 300% between 2003 and 2007 to $1.3 trillion
  
• The write-offs have been staggering, led by those at UBS, Merrill Lynch, & Citigroup
  
• The bigger public policy issue here is the threat to baby boomers’ ability to retire; lost real estate equity will challenge the liquidation
  
• Two-thirds of consumers are very or somewhat confident about their financial situation when retiring; many of these may be overconfident
  
• Ex-All First Financial currency trader John Rusnak covered up almost $700 million in losses