Risk & Compliance

SEC Targets Enron’s Lay as Trials Begin

Kozlowski and Quattrone are in the courtroom, but Kenneth Lay is on the agenda. Also: Time to ''listen'' or leave at the NYSE?; 'Tis the season to ...
Marie Leone and Stephen TaubSeptember 30, 2003

The Securities and Exchange Commission sought a court order Monday requiring former Enron chairman Kenneth Lay to produce documents related to the agency’s probe of the fallen energy giant.

In the U.S. District Court for the District of Columbia, the SEC filed a subpoena enforcement action accusing Lay of refusing to furnish documents on the grounds that it would violate his Fifth Amendment rights. According to the commission, the documents being withheld by Lay appear to be corporate records, which Lay may not withhold from production on those grounds.

The SEC has yet to file charges against Lay or against former chief executive Jeffrey Skilling. Earlier this month former Enron treasurer Ben Glisan pled guilty to criminal conspiracy; former Enron CFO Andrew Fastow, who was named in the same 109-count indictment that included Glisan, has pled not guilty. And last year former Enron executive (and Fastow lieutenant) Michael Kopper pled guilty to money laundering and conspiracy.

The SEC’s action took place against a backdrop of three high-profile cases involving former finance executives.

In lower Manhattan, a pair of former executives of Tyco International Ltd., CEO L. Dennis Kozlowski and CFO Mark Swartz, face accusations that they stole about $600 million from the conglomerate.

While most of the trial exhibits are expected to be financial documents, Kozlowski’s lifestyle will also be on display for jurors. According to published reports, Kozlowski shelled out $6,000 for a shower curtain and $15,000 for an antique umbrella stand, and had Tyco pay for a $2 million birthday party for his wife in Italy, featuring musician Jimmy Buffett and an ice sculpture of Michelangelo’s David.

Kozlowski and Swartz’s trial is expected to last four months, said Reuters. Each defendant faces 30 years in prison if convicted on grand larceny and lesser counts, according to reports.

Less than a block away, former Credit Suisse First Boston investment banker Frank Quattrone also went on trial, on charges stemming from the government investigation into conflicts of interest on Wall Street.

Quattrone’s trial is expected to last just two to three weeks. He faces 25 years in prison if convicted on all counts — two of obstruction, one of witness tampering.

And in Harrisburg, Pennsylvania, opening statements began on Monday in the trial of former Rite Aid Corp. general counsel and vice chairman Franklin C. Brown.

Brown, who is accused of inflating the company’s financial performance and then obstructing an investigation, faces 11 criminal charges, including conspiracy to defraud, conspiracy to obstruct justice and tampering with a witness.

Five other former Rite Aid executives have pleaded guilty to federal charges and are awaiting sentencing, including former chief executive and chairman Martin L. Grass and former chief financial officer Franklyn M. Bergonzi.

Time to ”Listen” or Leave at the NYSE?

Quit or be sacked.

That seems to be the choice facing many officials at the New York Stock Exchange. As former Citigroup chairman John Reed prepared to take over as interim chairman of the exchange, several additional resignations were announced.

Georges Ugeux, a senior managing director at the NYSE, said he will leave the exchange on Tuesday to concentrate on being chairman and CEO of his consulting company, Galileo Global Advisors LLC, according to Reuters.

Ugeux added, however, that his departure and Grasso’s were not related, and that he had told Grasso last year that he wanted to focus on personal interests, such as consulting, academic education, and public speaking. “[My resignation] just happened to coincide with the events, which is very unfortunate,” he told the wire service.

H. Carl McCall, lead director and head of the NYSE board’s compensation committee, was the first board member to resign after Grasso stepped down. Over the weekend, board member and DaimlerChrysler AG Chairman Juergen Schrempp resigned, citing the huge demands on his time.

In addition, Reuters reported that Stanley O’Neal, chief executive of Merrill Lynch & Co., would willingly resign from the board of the Exchange as part of any changes deemed necessary by Reed.

For his part, in a meeting with top SEC officials, Reed maintained that “I’m here to learn. I’m obviously in listening mode.” Noted Reed, “A week ago I was retired on an island somewhere.”

Reed added it was “simply not true” that he has preconceptions about who should be on the NYSE board. “The exchange has to look at reforming its corporate governance,” he said, and “the membership of the board should follow from the governance changes.”

“It would be quite foolish to look at the membership issue first and the governance second,” added Reed. “This idea that you should simply throw out everybody who’s currently on the board from the financial community doesn’t seem to me, on the surface, to be a particularly deep thought.”

‘Tis the Season to Improve Working Capital?

Between Q3 and Q4 of 2002, total working capital for the top 1,000 U.S. companies (by sales) dropped by 4.8 percent, or $44 billion — an impressive quarterly improvement. Why then, between Q4 2002 and Q1 2003, might total working capital increase by 5.2 percent, or $48 billion?

Implied in the dramatic difference is what many pundits have suspected, but few could quantify: In a mad, year-end rush, executives boost working capital with a voracious collections effort. The findings were presented yesterday at Total Working Capital Management: Strategies and Tactics for Sustainable Improvement, a CFO magazine conference presented in collaboration with REL Consultancy Group.

“Its a vicious cycle,” said Payne, noting that once companies succumb to the temptation one year, they have to do it every year to sustain year-end numbers. Why are executives so trained on working capital of late? Because many companies are linking executive compensation to metrics based on cash flow.

One approach, noted Payne, is to focus on working capital year-round and make it part of the corporate culture. Companies that have achieved negative working capital, explained REL Americas president Eric Wright, speed through their buy/make/ship/settle operations cycle before they have to pay their vendors. Only 80 of the 1,000 companies have met this goal; they include Barnes & Noble, Amazon, May Department Stores, Sears, Hewlett-Packard, and Dell.

(Read more in “Barely Working,” CFO magazine’s 2003 working capital survey, produced in conjunction with REL.)

At Least They’ve Put the Carbon Paper to Rest

More than 60 percent of Fortune 1000 companies said they have updated their records-management policies within the past year, according to a study released by Iron Mountain Inc., and 44 percent plan to spend more on records management next year.

Many of these companies, it seems, still have a lot of work to do: 87 percent of companies surveyed said they don’t have tools in place to ensure efficient and automated records management, 56 percent fail to regularly evaluate and improve their records management programs, and 44 percent don’t test their programs regularly.

“The good news is that executives clearly recognize this as a risk-management issue, not just another information-technology project,” said Iron Mountain’s executive vice president of marketing, Ken Rubin, in a statement.

The main reason for spending, as you might suspect, is to comply with records-management mandates from the Sarbanes-Oxley Act, the Health Insurance Portability and Accountability Act, and various regulations issued by the Securities and Exchange Commission. Another common reason is the threat of litigation; 44% of the surveyed companies have had to retrieve E-mails from backup tapes in connection with legal matters.

Short Takes

  • The Commerce Department reported that personal spending grew 0.8 percent in August after an upwardly revised 0.9 percent increase in July. Personal income rose 0.2 percent in August, thanks in part to the Bush tax cuts.
  • Finland-based Nokia named Rick Simonson its new CFO as part of a larger shake-up of top management and a revamp of its structure. He replaced Olli-Pekka Kallasvuo, who will now lead Nokia Mobile Phones, replacing Matti Alahuhta.
  • 3M filed a shelf registration to sell up to $1.5 billion worth of debt securities. The St. Paul, Minnesota, company said it would use the proceeds for general corporate purposes, including debt repayment, investments in and extensions to credit to subsidiaries, and for possible acquisitions or business expansion.
  • The companies with the best-performing stocks of the past 50 years had a return on equity of 17 percent or higher before starting their spectacular run-ups, according to an analysis by Investment Business Daily.