Law Assignment Final White Background

7/31/2019 Law Assignment Final White Background

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5/25/2012 Corporate Governance

Introduction Pillars Need Laws

Background Scandal Key players Impact Verdict

Background Scandal Key Players Impact Verdict

Background

Scandal

Background Scandal Key players Impact Verdict Conclusion

CorporateGovernance

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Corporate Governance

5/25/2012 Corporate Governance 3

Corporate Governance refers to the structures and processes for the efficientDirection and proper control of companies (Both private and public) in the interest

of all stakeholders

1. Accountability

2. Fairness

3. Transparency

4. Independence

Four pillars of Corporate Governance


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Four Pillars of Corporate Governance

1. Accountability:-

Ensure that management is accountable to the Board

Ensure that the Board is accountable to shareholders

2. Fairness:-

Protect Shareholders rights

Treat all shareholders including minorities, equitably

Provide effective redress for violations



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Four Pillars of Corporate Governance

3. Transparency:-


Ensure timely, accurate disclosure on all material matters, including the financial situation,performance, ownership and corporate governance.

4. Independence:-

Procedures and structures are in place so as to minimize, or avoid completely conflicts of interest

Independent Directors and Advisers i.e. free from the influence of others


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Need


Retirement funds lost! Thousands of workers lose their pension funds!

Multiplying layers of entities and hidden movement of capital and goods causescollapse of...

Shell corporations and bank confidentiality and secrecy havens discovered at...

Executives investments and illegal actions...

Government levies a record fine on accounting firm


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Laws1. Cadbury Report -1992

1. Wider use of INDEPENDENT DIRECTOR2. Introduction of AUDIT COMMITTEE3. Separation between CHAIRMAN and CEO4. Adherence to detailed code of BEST PRACTICES.

2. Sarbanes Oxley -2002 (Public Company Accounting Reform and InvestorProtection Act (2002))

1. CEOs CFOs certify accuracy 2. Fines up to $1 million/10 years3. No personal loans to executives4. Auditing procedures, incl. rotation5. Whistle blower protection6. Attorneys must report violations



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Introduction1. Formed in 19852. Founder: Kenneth Lay3. Merger of Houston Natural Gas and Inter north The first nationwide natural gas

pipeline network in Houston, Texas4. Enron was electricity , pulp and paper, water, natural gas and communications

company5. In December 1993, Enron inked a 20-year power-purchase contract with

the Maharashtra State Electricity Board.6. The contract allowed Enron to construct a massive 2,015 megawatt power plant.7. By 1994 Enron became the largest Electricity Seller in US8. Nations 7th Largest corporation9. Largest contributor to the political campaign of George W Bush10. 10 yrs to turn from 10-60 billion and 24 hrs to go to 0

11. From 1996 - 2001 they were declared Americas most innovative company by FortuneMagazine12. In August 2000 the value of stock went up to as high as 90$ per share13. In 2001 Fortune Magazine included it in 100 Best Companies to work for in USA list.



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Scandal

1. In April 2001:Enron reveals that it is owed more than fivehundred million dollars bybankrupt California energy companies2. In August 2001 Jeff skilling resigned as CEO3. On the very next day the Stock price fall to$424. In Oct 2001, Enron reports a third quarterloss of $618 million.5. In Oct 2001, stock fall to 15$6. In Nov, admitted accounting errors,inflating income by $586 million since 19977. In Dec. 2001 Enron filed for bankruptcy.8. The share prices fell to $0.129. In 2002 Criminal Investigation waslaunched against the company



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ScandalThe appearance of company was totally Artificial

1. Mark to market Accounting : booked revenues forfuture in any venture they entered in

2. Special purpose entities/Structured FinanceCompanies like JEDI, RAPTOR CHEWCO

3. Executive compensation4. Risk Management5. Auditing



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1. 20,000 lost their jobs/Unemployment2. $2 billion of retirement fund and pension were lost3. Arthur Andersen bankruptcy4. Share holders lost 74$ billion

5. Loss of investors confidence6. Stock Market Runs down7. GDP reduced/ National-local economy8. Estimates that spending on Sarbanes-Oxley will reach $5.8

billion in 20059. In November 2004 Enron emerged from its bankrupts and on

September 2006 they sold Prisma Energy International Inc. theirlast business.10. As of 2007 Enron changed it name to Enron Creditors Recovery

Corporation.


Impact


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Key Players

5/25/2012 Corporate Governance13


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Verdict1. Chairman: Ken lay

Convicted : 10 counts Compensation: 42$ million dollar (1999 only) Sentence :45 yrs (he died in 2006 before being sentenced)

2. CEO: Jeff skilling Convicted : 19 counts Compensation: 132$ million dollar (2001 only) Sentence:24 yrs Charge: Insider trading, false statement, Conspiracies and security fraud Fine: 45$ m

3. CFO: Andrew Fastow Convicted : 2 counts Compensation: 132$ million dollar (2001 only) Sentence:10 yrs Fine: 24$ m Charge



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1. Calisto Tanzi started Parmalat in 19612. Italy's largest food company3. Italy's 8 th largest industrial company4. One of the worlds largest Dairy and milk producer

5. By 2002, 8 billion in yearly sales with 36000 employees in 30countries

6. Had many division like


Introduction

Bakery Fresh Foods

Milk Vegetables.


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Scandal

1. Parmalats financial conditions started going down in 1980s

2. In 1987 it spent 130 million in odeon TV which went down in just 3years

3. In 1990 Parmalat went public to fix its financial gaps. It had a market

value of 300 million4. In 1993 Parmalat allegedly began to invent its financial transactions to

pad balance sheet5. They started billing twice for the shipment of same merchandise in order

to show increased Accounts receivable

6. From 1990 -2003 they borrowed money from banks and showed inflatedsales.

7. They than made debt disappear by transferring to off self companies8. Transferred companies money to Tanzi family accounts



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Scandal1. Fraudulently offered US$100 million worth of unsecured notes to

U.S. investors in 2003, at the same time inflated its assets by atleast US$5 billion

2. Parmalat has prosecutors scrambling to find out what happened to$8.5 billion to $12 billion in vanished assets.

3. Some 38% of Parmalat's assets were supposedly held in a $4.9billion Bank of America (BAC) account of a Parmalat subsidiary in

the Cayman Islands.



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Key Players


Former chief financial officersLuciano Del Soldato &Fausto Tonna

Calisto Tanzi- 18 years of imprisonment

Auditors Involved: Grant thorton and delloitte touche


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Introduction

1. British imperial chain of wireless stations2. Founded by Gugliemo Marconi in 1897

3. It was british Political scandal that broke in19124. Contract for the construction of a chain of

wireless stations between English Marconicompany and British govt was expected



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Scandal

1. Allegations of insider trading on Ministers2. Key members involved

Lloyd George the chancellor of ExchequerHerbert Samuel, Postmaster GeneralRufus Isaac, the Attorney GeneralGodferry Isaac, Managing DirectorLord Murray, Master of Ellibank



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Background1. Huge telecommunications company2. Formed in 19833. Company began as Long Distance Discount Services4. Founder was Bernard Ebbers5. Largest in the U.S.6. Telecommunications giant7. From 1995 until 2000 worldcom purchased over 60 other telecom firms8. In 1997 it bought MCI for $37 billion9. Worldcom moved into Internet & Data Communication Handling

1. 50% of all united states internet traffic2. 50% of all emails worldwide

10. By 2001 Worldcom Owned one-third of all data cables in the united states11. Became second largest long distance carrier in 1998 & 2002



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How It Happened

1. The fraud was accomplished in two main ways.2. First, WorldCom's accounting department

underreported 'line costs' (expenses with other

telecommunication companies) by capitalizingthese costs on the balance sheet rather thanproperly expensing them.

3. Second, the company inflated revenues with bogusaccounting entries from corporate unallocatedrevenue accounts.



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Scandal

1. They classified over $3.8billion in payments for linecosts as capital expenditures rather than currentexpenses.

2. Irregularities in the reserve accounts.

3. SEC claims that the total for fraudulent accountingcomes to $9 billion dollars.4. The company began to fall in 1999 with massive lay

offs and the steady decline of its stock price.

5. Stock prices for WorldCom were around 60 dollarsand dropped to pennies in 2002 giving sleeplessnights to investors.

6. Business sector mergers were unsuccessful.



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The stock price had fallen from around 60$ in1999 to $1 in 2002


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Government Involvement

1. Despite conspiracy charges and uncovered financialfraud the government still keeps WorldComseligibility to file for bankruptcy.

2. The U.S. gives $2 billion dollars in assets to tap.3. $20 million dollars over the span of three years

given to new CEO

4. WorldCom still allowed to oversee governmentprojects



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Impact

1. Overall investor distrust with companies undergoingsimilar problems.

2. National feeling that the stock market is not as safeas previously thought.

3. SEC forced to keep a closer look on auditor andaccountant dealings.



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Post Fraud Happening

1. WorldCom was renamed MCI in 2004 when itemerged from bankruptcy.

2. Company could spin off several business units.

3. Added additional board members to serve on aspecial investigative panel to review accountingpractices.

4. WorldCom may write off $50.6 billion in intangible assets.

5. WorldCom is trying to secure loans. 17,000 jobs cut tosave $1 billion.



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Verdict


Executives and Accounting Staff 6 individuals convicted of fraud / conspiracy / false filingsEbbers CEO 25 years in prisonSullivan CFO 5 years in prison

Myers Controller 1 year in prisonYates Dir of Acctg 1 year in prisonVinson Acctg Dept 5 months in prison

Manager 5 months house arrest

Normand Acctg Dept 3 years probationManagerAbove 6 individuals agreed to pay a total of $24-34M to

settle securities class action case


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Over all Conclusion


1) Unethical Business Practices Security Scams Wrong financial Statements companies with 25,000 crores without starting business

2) Impact on Govt and economy Low GDP Stock Market crashes Un employment

3) Impact on general public Loose money Lower investments Lost jobs

4) Impact on Globalization Over seas investors loose interest

Documents

Law Assignment Final White Background