Report: Deal may hit fed AIG case
Report: N.Y. grant of immunity for ex-AIG Reinsurance exec could hurt federal prosecution efforts.
CNN.com, June 8, 2005

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NEW YORK (CNN/Money) - A grant of immunity to a former top executive of American International Group by New York Attorney General Eliot Spitzer could cause problems for federal authorities looking at the practices of the embattled insurer, according to a published report.

The New York Times reported that Joseph Umansky, who as president of AIG Reinsurance Advisers, has been granted full immunity from state prosecution for his testimony about practices at the insurer. It said the agreement could cause problems for a parallel investigation being conducted by the Justice Department and the Securities and Exchange Commission.

The paper said that if federal authorities try to prosecute Umansky, they will have to prove the evidence they obtain was not information obtained through the executive's immunized testimony. But the paper said that testimony is included in Spitzer's recently filed civil complaint against the company, former AIG Chairman and CEO Maurice "Hank" Greenberg and the former chief financial officer Howard Smith. The paper said including that testimony in the complaint is a highly unusual move.

"Once Umansky has landed the prize of outright immunity from the state, he and his lawyer will be reluctant to accept anything but that from the feds," Robert Mintz, an expert in white-collar criminal law, told the paper.

Representatives of the Justice Department, S.E.C. and Spitzer's office declined to comment to the paper.

For more news on corporate corruption scandals, click here.

Eberhard sentenced to 13 years for fraud
Ex-broker and television host sentenced to prison for fleecing investors out of at least $20M.
June 7, 2005: 6:07 PM EDT

NEW YORK (Reuters) - Todd Eberhard, a former stockbroker and personality on financial television shows, was sentenced Tuesday to 13 years and four months in federal prison for defrauding investors out of millions of dollars and generating excessive commissions for himself.

The sentencing before U.S. District Judge Robert Sweet in Manhattan follows Eberhard's guilty plea in September 2004 to 11 counts of investment advisory fraud, wire and mail fraud and obstruction of justice.

Prosecutors accused Eberhard, 40, of cheating clients out of at least $20 million from about 1993 through his arrest in February 2003.

Prior to his arrest, Eberhard frequently appeared on business news programs such as CNN's Moneyline.

At his plea hearing last year, the ex-broker admitted that he made excessive trades in clients' accounts, a practice known as "churning," to bring in commissions for himself. He also admitted stealing client funds through unauthorized transfers and preparing false account statements showing that clients had much bigger portfolio balances than actually existed.

The judge said he will determine the amount of restitution Eberhard owes to his victims in proceedings to be completed by Sept. 5.

Click here for CNN/Money's special 'Scandal Inc.'

The story of Martha Stewart

Scrushy says 'no deal!'
Ex-HealthSouth exec says he will not cut deal with Feds; prosecutors will retry case if necessary.
CNNMoney, June 6, 2005: 5:50 PM EDT

BIRMINGHAM, Ala. (Reuters) - Former HealthSouth Corp. chief executive Richard Scrushy will not cut any deals with prosecutors in his corporate fraud trial and is ready for a retrial if necessary, his lawyers said Monday as a deadlocked jury began another week of deliberations.

Scrushy, 52, has denied any involvement in a $2.7 billion accounting fraud at the medical rehabilitation group, claiming the massive conspiracy was carried out by former executives without his knowledge.

Although ridiculed as a fantasy by prosecutors, Scrushy's line of defense appears to have gained some traction with the jury, which acknowledged late last week that it was split on all 36 charges against the flamboyant multimillionaire.

The jury adjourned without reaching a verdict Monday, its 11th day of deliberations. A federal court official later announced the seven male and five female jurors would not work Tuesday, Thursday or Friday.

Sharon Harris, chief deputy of Birmingham's federal court, where Scrushy is being tried, cited juror scheduling and vacation conflicts for the abrupt changes.

But with a mistrial looming in the five-month trial, Scrushy's defense team says there is no possibility their client will consider a plea bargain.

Scrushy is charged with conspiracy, mail and wire fraud, money laundering and other wrongdoing in connection with a scheme to inflate HealthSouth's profits and stock price and allegedly enrich himself between 1996 and 2002.

He faces life in prison if convicted.

"We have absolutely no interest in making a deal with the government," Donald Watkins, a Scrushy attorney, said when asked if defense attorneys had discussed a plea deal with prosecutors.

"We can go round for round as many times as they want. We've seen the government's entire hand," Watkins said.

Prosecutors agreed that a deal was unlikely at this point in the trial. "Why would a man who looks like he has a hung jury make a deal?" said U.S. Attorney Alice Martin, the lead prosecutor in the case.

She refused to say whether the government would retry Scrushy if the trial ended with a hung jury. Her predecessor, however, said prosecutors had little choice but to proceed with a retrial if that occurred.

"I think for the government to back off at this stage would send a very bad message across the country," said Doug Jones, a lawyer who served as U.S. Attorney for the Northern District of Alabama prior to Martin's appointment.

"Stockholders would go ballistic," Jones added.

The two sides' disavowal of interest in a deal came amid growing signs that the prosecution's case was unraveling. Since beginning deliberations on May 19, the jury has told U.S. District Judge Karon Bowdre four times that it is divided.

It has also asked her for help on several occasions.

Bowdre could eventually declare a mistrial if she concludes there is no hope the jury can reach a verdict. But Friday she issued a so-called "Allen charge," ordering jurors to work harder to break the impasse.

Scrushy's trial has attracted attention because he is the first major figure charged with violating the 2002 Sarbanes-Oxley Act, the corporate reform law passed by Congress requiring, among other things, that chief executives certify the accuracy of their financial statements.

He did so before stepping down in 2002 as CEO of HealthSouth, which he had built into the nation's largest chain of rehabilitation and outpatient surgery clinics. He was ousted as the company's chairman the following year.

Prosecutors say Scrushy, who hosts a religion-inspired television show and regularly preaches in Christian churches in this Bible Belt city, directed the fraud to inflate the value of his stock options and fund an extravagant lifestyle. He sold more than $200 million worth of stock.

Scrushy's defense team has admitted it wanted as many religious believers as possible sitting on the jury. Alabama has a large population of fundamentalist Christians and a high church attendance rate.

The government had hoped jurors would be offended by tales of Scrushy's lavish spending, which outraged many investors. HealthSouth's stock fell from a high of $30.56 a share in 1998 to 8 cents a share after the fraud came to light in 2003.

Once a billionaire, now a prisoner
Scandal dogs tech investor Alberto Vilar, accused of fleecing investors out of millions of dollars.
CNN May 30, 2005: 2:45 PM EDT

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NEW YORK (CNN/Money) - Alberto Vilar's nine lives may be through.

The prominent U.S. investor -- who regained wealth lost in the 1990s tech collapse and was clawing his way back into the upper echelons of billionaire philanthropy -- has been arrested for defrauding investors of million of dollars.

According to court documents, Vilar was charged Friday in the Southern District Court of New York for pocketing an individual's investment worth $5 million for his personal use.


He has pleaded not guilty and is being held at the Metropolitan Correctional Center in Manhattan, unable to pay his $10 million in cash for bail,the New York Times reported Monday.

This could be a final nail in the coffin for the head of Amerindo Investment Advisors Inc., who seemed well on his way to putting scandal and embarrassment behind him.

Vilar, who is ranked 327th on Forbes' list of wealthiest Americans and is estimated to have a personal net worth of over $950 million, has gained recognition in recent years for his philanthropy to arts and educational institutions.

But his reputation was tarnished after his primary technology fund lost more than 80 percent of its value and he was forced to postpone millions of dollars in pledges to the arts institutions he had famously donated to, including the Metropolitan Opera and the Metropolitan Museum of Art.

That handful of difficult years had all but faded for the former refugee from the Cuban revolution, with tech shares advancing on the stock market and a return to philanthropy, until last week's arrest.

The complaint, which was lodged by United States Postal Inspector Cynthia M. Fraterrigo, also charged Gary Tanaka, the executive vice-president and one of the founders of Amerindo Investment Advisors. The federal complaint noted that Tanaka fraudulently used investors' money for the purchase of thoroughbred horses.

Amerindo, a San Francisco-based investment fund which started in 1985, historically has invested in Internet companies as well as firms in the technology and biotech industries.

According to the complaint filed against Vilar, Amerindo had $1.2 billion in assets as of July 15, 2004.

CNN/Money's phone calls to Amerindo's San Francisco and New York offices late Friday afternoon were not immediately returned.

Bristol-Myers said to settle for $300M
Reports say drugmaker to also make governance changes as it ends accounting manipulation case.June 6, 2005: 5:31 AM EDT

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SAN FRANCISCO (Dow Jones) - Bristol-Myers Squibb Co. is expected to pay $300 million to settle a U.S. investigation of its alleged accounting manipulations, according to media reports Sunday.

The deferred prosecution agreement could be announced as early as Monday, according to stories in the online editions of The Wall Street Journal and the New York Times.

The newspapers reported they based their stories on unnamed people close to or familiar with the situation.

According to The Journal, the deal is expected to include a deferred prosecution of Bristol-Myers (BMY) for about two years. Deferred prosecution allows a potential defendant to avert charges by agreeing to settlement terms and complying with them.

No current Bristol-Myers executives face charges, The Journal said.

Bristol-Myers is expected to incorporate several governance changes, including the separation of the titles of chairman and chief executive held by Peter R. Dolan, The Journal said.

The company also will continue to use retired federal judge Frederick B. Lacey as an independent monitor of its accounting practices, internal controls and financial reporting,

In March 2003, the company admitted its accounting for years had been " inappropriate," that sales had been inflated by $2.5 billion , and profit by $900 million , The Journal said.

Bristol-Myers already has paid more than $500 million to settle lawsuits and investigations stemming from the accounting matter and has agreed to some governance improvements.

In August, Bristol-Myers agreed to pay the Securities and Exchange Commission $150 million to settle a civil investigation. The company also has paid $300 million to settle a class-action suit brought by shareholders and said last week it would pay $89 million to settle four suits by shareholders who opted out of the class-action agreement, The Journal said. The company also is being investigated by the U.S. attorney in Newark, N.J., The Journal said.

Bristol-Myers shares closed down 28 cents at $25.22 Friday. Dow Jones Newswires 06-05-05 2212ET Copyright (C) 2005 Dow Jones & Company, Inc. All Rights Reserved.

Report: Ex-CFO of Qwest cuts deal
Report says former executive to plead guilty to insider trading and cooperate with probe.
June 3, 2005: 8:17 AM EDT

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NEW YORK (CNN/Money) - The one-time chief financial officer of Qwest Communications has agreed to plead guilty to insider trading and testify against other former executives from the company, according to an article.

The Wall Street Journal reports that the cooperation of Robin Szeliga could be a turning point in the criminal investigation of Qwest. She is the highest-ranking former Qwest official to be charged with a crime related to accounting problems at the Denver-based telecom. The paper also states that the Justice Department continues to investigate other former Qwest executives, including former Chairman and Chief Executive Joseph Nacchio.

A spokeswoman for Nacchio repeated his earlier statements that he did nothing wrong while at Qwest.

The company restated $2.2 billion in earnings and $2.5 billion in revenue for 2000 and 2001, according to the Journal. Nacchio left the company in June 2002 just as the questions about its accounting practices surfaced.

Szeliga, Nacchio and three other former Qwest executives already face civil fraud charges from the Securities and Exchange Commission, alleging that from 1999 through 2002 the executives engaged in "massive financial fraud" to hide the deteriorating fortunes of the company, the paper reports.

Deliberations begin in Tyco case
Jurors begin deliberations on whether Kozlowski and Swartz "systemically looted" $150 million.
June 2, 2005: 2:09 PM EDT

NEW YORK (Reuters) - Jurors began deliberations Thursday on whether two former top executives at Tyco International Ltd. "systemically looted" $150 million from the company's coffers over four years.

Former Chief Executive Dennis Kozlowski, 58, and Mark Swartz, 44, the conglomerate's former finance chief, are on trial for the second time in New York State Supreme Court on charges including grand larceny, securities fraud, falsifying business records and conspiracy.

The first trial ended in a mistrial last year. The case is one of a series of recent government prosecutions aimed at convicting former corporate chieftains of alleged boardroom wrongdoings.

The two defendants face up to 25 years in prison if convicted of the top count of grand larceny.

Both men have denied any wrongdoing.

Prosecutors contend that Kozlowski, who was known as "Deal-a-Day-Dennis" for his aggressive acquisition strategy at Tyco, and Swartz misused company funds, hid unauthorized bonuses and abused company loan programs to buy yachts, jewelry and real estate.

After receiving lengthy instructions from Manhattan Supreme Court Judge Michael Obus, the jury of six men and six women began deliberations on the 31-count indictment. The judge told the jury that "you've not been asked to make an assessment about corporate America, or to make a judgment about anyone's lifestyle or send a message."

The judge also told jurors the verdict was not to be based on whether they thought it would be popular or not and it was not up to them to make any decisions about punishment.

"That is not your concern and is fixed by the court of law," he said.

Prosecutors contend there is no evidence that millions of dollars in payments to Kozlowski and Swartz were authorized by the company. Kozlowski said his former mentor, Phil Hampton, who died of cancer in 2001, was the only director who knew of the payments.

"That story is not worthy of your belief," prosecutor Owen Heimer told jurors last week. "The story is ludicrous."

Defense lawyers had argued during closing remarks that Tyco's other former board directors had "selective" memories when they testified about events at Tyco to protect themselves from pending lawsuits by stockholders.

The first trial ended in a mistrial in April 2004 when a juror received a threatening letter and phone call after her name was printed by some news organizations during deliberations. According to some courtroom observers, she also gave an "OK" signal to the defense.

That juror, Ruth Jordan, sat in the audience on Thursday near members of Kozlowski's family. During the judge's instructions, she took notes on a yellow pad.

During the trial, which began Jan. 18, the jury listened to 27 witnesses -- 25 called by prosecutors and two defense witnesses, Kozlowski and Swartz, who testified on their own behalf.

Before reaching a verdict, jurors can ask to have more than 16,000 pages of trial transcript read back to them and can pore over 860 exhibits.

Will Wall Street hold a grudge against Tyco?

Tyco: Street forgives and forgets
Nevermind the $6,000 shower curtain. Wall Street likes the prospects for a scandal-free Tyco.
May 2, 2005: 12:55 PM EDT
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) – It's good to see that Wall Street doesn't hold a grudge.

Tyco International was market darling in the 1990s thanks to an aggressive acquisition strategy that fueled impressive earnings growth. But investors were burned three years ago after questionable accounting practices came to light and the stock took a big nosedive.

What's more, former Tyco (Research) CEO Dennis Kozlowski and former chief financial officer Mark Swartz have been accused of treating the company's coffers as their own personal bank. A larceny trial for Kozlowski and Swartz ended in a mistrial last year and a second trial is now in the process of wrapping up.

Still, it hasn't taken long for Wall Street to forgive and forget. Fifteen of the 17 analysts who follow Tyco have it rated at least a buy, according to Thomson/First Call. And nine have it rated a strong buy.

And though shares are trading at nearly 50 percent below where they were before the scandal broke nearly three years ago, the stock has bounced back sharply under the leadership of CEO Ed Breen. Shares shot up 56 percent in 2003 and 35 percent last year.

So is Tyco still a "buy"-co?

Expectations are rising...
It might get tougher for the company to impress investors since much of the turnaround is factored into the price. Under Breen, Tyco already has sold several non-core assets to cut costs and lower its debt load.

At some point, the market will want to see healthier levels of sales growth.

Tyco will report its fiscal second quarter results on Tuesday and analysts are forecasting a solid increase in profits of 15 percent from a year ago. Revenues, however, are expected to increase only 4 percent.

"Breen has done a marvelous job. But going down the road we have to wait and see," said Jeff Pittsburg, an analyst with independent research firm Pittsburg Research.

The stock's comeback under Breen raises another risk. Expectations are once again high for the company. When Tyco reported earnings for its fiscal first quarter in February that matched estimates, the stock wound up falling nearly 4.5 percent on the news.

"Investors were disappointed with in line results and were expecting a strong to blowout quarter," wrote Robert McCarthy, an analyst with CIBC World Markets, in a report following the first quarter results.

Demand in Tyco's two largest businesses -- fire and security products and electronic components -- was relatively tame during the quarter. These two units accounted for nearly 60 percent of total sales in the fiscal first quarter but revenues increased by less than two percent from the same period a year ago in each unit. So investors will be looking for improvement there.

...but demand is improving and stock is attractive
But David Bleustein, an analyst with UBS Investment Research, thinks that investors may have overreacted to the first quarter sales weakness.

In a recent preview of Tyco's second quarter, Bleustein reported that strong earnings reports from chip makers Intel (Research) and Texas Instruments (Research) could be a sign that Tyco's electronics business will have a healthy quarter. He added that solid results from Honeywell (Research) and United Technologies (Research) bode well for Tyco's fire and security division.

And Tyco's healthcare division, which makes medical equipment and represents nearly a quarter of the company's total sales, has been a bright spot with 6 percent sales growth in the first quarter.

Strength in healthcare is particularly important since the unit also has the highest profit margins of Tyco's major businesses and accounted for more than 40 percent of the company's overall operating income in the first quarter.

And fortunately for investors, Tyco's stock, despite its big run, is attractively valued. Shares trade at 16 times fiscal 2005 earnings estimates, which seems reasonable considering that profits are expected to be up 19 percent this year and 17 percent in 2006.

What's more, that's a sizable discount to fellow conglomerate General Electric (Research), which trades at 20 times 2005 earnings estimates even though its earnings are expected to increase at a slightly slower pace than Tyco's: 14 percent this year and 13 percent in 2006.

UBS' Bleustein thinks this much of a premium is unjustified.

"The strength in Tyco's operations and cash flows could enable Tyco to trade at a comparable multiple to leading multi-industry companies, including General Electric," he wrote.

So in some respects, it appears that Tyco could still be paying the price of the Kozlowski/Swartz scandal. Memories of the infamous $6,000 shower curtain and sordid tales of bacchanalian birthday parties don't die easily after all.

"Isn't it amazing that Kozlowski is still in the news?" Pittsburg said. "But the fact of the matter is the company is doing terrific. The real story should be how well Breen has managed the company. I don't understand why people don't focus on that. I guess it's not sensational enough."

But if Tyco can continue to post solid gains in earnings and start to show a meaningful increase in sales as well, then sooner or later investors will reward it for solid fundamentals instead of penalizing it for its former management's sins.

For a look at why Money's Michael Sivy likes Tyco, click here.

For more on Kozlowski, Enron, Martha and other corporate scandals, click here.

Legal
Bernie Ebbers Guilty
Dan Ackman, 03.15.05, Forbes.com

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Bernard Ebbers, the former chief executive of WorldCom and perhaps the most powerful American businessman ever to face a criminal trial, was found guilty today of securities fraud, conspiracy and filing false documents with regulators.

In the courtroom, Ebbers was red-faced and slightly teary-eyed as he hugged his wife, Kristie, and his stepdaughter. He did not speak to reporters. After the verdict was read, he slowly took time to put on his coat before leaving the court and spoke only briefly with his lawyers.

Ebbers' lead attorney, Reid Weingarten, expressed disappointment in the verdict, saying, "We continue to believe there is not one chance in the world that he participated in any efforts to cook the books at WorldCom."

Weingarten said there will be an appeal and specifically noted that the government's refusal to immunize three key witnesses deprived the defense of critical testimony at the trial. They included former WorldCom Chief Operating Officer Ronald Beaumont. Weingarten said all three were much closer to the accounting and were much more sophisticated than Ebbers was. Those witnesses, Weingarten said, would have exculpated Ebbers.

"This argument historically has not worked well," says G. Jack Chin, a law professor at the University of Arizona. Most courts have concluded that it is up to the prosecutors to decide who to prosecute and who not to prosecute. If a witness decides to take the Fifth and not testify at a criminal trial, he can do so even if that means another defendant will be deprived of his testimony, Chin says.

As to Ebbers' decision to take the stand, Weingarten said, "It was an easy call to put him up, and I thought he did fine."

The likely sentence is somewhat indeterminate at this point. Sentencing guidelines that had been in effect in federal courts could call for a sentence well in excess of ten years because sentences would be ratcheted up in accordance with a huge dollar loss in the crime involved. But the guidelines are no longer mandatory under a recent U.S. Supreme Court ruling, notes George Newhouse, a lawyer at Thelen Reid & Priest. Newhouse predicts a sentence for Ebbers of somewhere between five and ten years.

Ebbers was one of the founders of WorldCom, first known as LDDS, and was its CEO from 1985 until 2000. When the company's shares were at their height, Ebbers was nearly a billionaire, though he held those shares until WorldCom filed for bankruptcy in July 2002, three months after he was forced to resign and one month after the fraud was uncovered. His company reemerged from bankruptcy as MCI (nasdaq: MCIP - news - people ) and now faces competing takeover bids from Verizon Communications (nyse: VZ - news - people ) and Qwest Communications International (nyse: Q - news - people ).

Federal prosecutors made the case that Ebbers, 63, was motivated to commit fraud when the end to a wave of mergers and the beginning of a meltdown in the telecom industry put tremendous pressure on the company's share price. Ebbers' personal fortune was largely based on WorldCom shares, and he had borrowed nearly $400 million with those shares as collateral. As CEO, he was also the most empowered to guide the fraud, prosecutors said.

The jury agreed. And as all CEOs are able to push and pull levers of money and power, and all are under pressure, the conviction should resonate well beyond Manhattan's Foley Square.

The direct evidence that Ebbers knew about the massive accounting fraud at WorldCom came from Scott Sullivan, WorldCom's former chief financial officer, who managed the company's accounts. Testifying against his former boss, Sullivan said he acted under Ebbers' direction, noting that Ebbers intimidated him into committing fraud so the company would meet Wall Street's expectations.

"Who had the most to lose if the truth came out? Who had the power?" Assistant U.S. Attorney William Johnson asked in his closing argument. Johnson emphasized that Ebbers had gone deeply into debt as early as 2000, pledging all of his shares as collateral just as the wheels started coming off for WorldCom. After more than a decade of growth through acquisition, its attempt to merge with Sprint (nyse: FON - news - people ) was thwarted by regulators. This meant that WorldCom, for the first time, had to show growth through operations. But operational revenue was slowing at the same time as the Internet and telecom booms had both stalled.

Despite the fraud, WorldCom still had to reduce its guidance, and its share price was under $2 by the time Ebbers was forced out. The decline and the slowing of real growth in operational income led the company to start booking one-time, nonoperational items as revenue--items that WorldCom was unlikely to actually collect. WorldCom never told investors how its revenue mix had changed.

The fraud intensified over time as Sullivan, urged by Ebbers, started using increasingly aggressive accounting "adjustments" to meet investor expectations. The process intensified with more one-time items being selected to fill the gap between expected revenue and actual revenue. Later, the company began cutting reported expenses by capitalizing "line costs"--money WorldCom paid to other telephone companies to rent their lines--by treating them as capital expenditures rather than as ongoing expenses.

Normal "earnings management" slid into fraud. As operations worsened, the fraud increased. Ebbers didn't get into the accounting details and testified he did not understand them, but he would reiterate to Sullivan the importance of "making the numbers." This order made him responsible for the fraud and a criminal, the jury found.

In his testimony, Ebbers denied having conversations with Sullivan and said he didn't even notice the dramatic changes in WorldCom's finances, which were reported to him internally. Prosecutors said Ebbers lied on the stand, and the jury apparently agreed.

WorldCom overstated its results by more than $5 billion over seven quarters, prosecutors said, though by other measures the fraud totaled $11 billion. "A number that big a CEO knows everything about," Johnson said in his closing argument. He emphasized the many reports that Ebbers received, and his famous attention to details, especially about costs. Ebbers famously decided to eliminate free coffee at WorldCom offices, saving $4 million, and had security guards fill watercoolers with tap water.

At trial, Ebbers admitted he paid attention to some costs but did not understand line costs, although that was the larger expense WorldCom faced. He was also forced to admit his involvement in the guidance process, which prosecutors alleged was central to the fraud.

Ebbers testified that his management style was that of a coach, heavy on delegation (he held that job as a young man). But the jury found that he knew what was happening on his watch.