Risk & Compliance

Former Enron Executive Pleads Guilty

Biggest fish so far. Also: another rap on Enron; open the proxy process even further, say pension funds; recognizing the value of a good reputation...
Stephen TaubOctober 31, 2003

David Delainey, the former chief executive of Enron North America and Enron Energy Services, pleaded guilty to insider trading in federal court on Thursday, reported Reuters.

In addition to cooperating further with prosecutors, Delainey agreed to pay $8 million in penalties, partly in settlement of a related civil complaint brought by the Securities and Exchange Commission.

The $8 million includes a forfeiture of $4.26 million that he gained from sales made in 2000 and 2001 — while aware of Enron’s scheme to deceive investors, according to the charge — and an SEC civil penalty of $3.74 million, according to Reuters.

The SEC stated that without admitting or denying its complaint, Delainey agreed to be barred from acting as an officer or director of a public company. He still faces sentencing on the criminal charges and faces a possible 10 years in prison.

Last month onetime treasurer Ben Glisan became the first former Enron executive to be sentenced to prison.

Former Enron chairman Kenneth Lay and former CEO Jeffrey Skilling have not been charged.

Another Rap on Enron

David Tonsall, a former Enron pipeline engineer who goes by the name NRun, is releasing a rap album, “Corporate America,” that attacks his former bosses — Kenneth Lay and Jeffrey Skilling — by name, according to Reuters.

Tonsall said he is angry that no one higher up the corporate ladder than former chief financial officer Andrew Fastow has been named in the current criminal investigation of the company.

“I know you can’t go postal. That ends up putting you in jail,” said Tonsall, who now runs his own engineering firm, Synergistic Techneering, according to the wire service. The former Enron employee lost his job due to the company’s accounting scandal and subsequent bankruptcy filing.

He said he has spent $15,000 so far to go “from pocket protector to hard-core rapper” and make the album, he mused to the Reuters reporter.

The title track attacks Lay, saying that Enron’s failure under his watch made a mockery of the values of respect, integrity, communication, and excellence espoused by the former chairman, Reuters explained. Another song declares: “Skilling, going to find you rain, sleet, or snow. When justice comes around, you’re going to get hit.”

The record is due out on December 3, reported the wire service — on the two-year anniversary of the massive layoffs that followed Enron’s bankruptcy filing.

Open the Proxy Process Even Further, Say Pension Funds

Eight state pension fund officials said that the Securities and Exchange Commission’s proposal to open up the proxy process — and allow more outside investors to nominate their own slate of directors — does not go far enough and should make companies more accountable.

The group, led by New York State comptroller Alan Hevesi, said that in a meeting with William Donaldson, the group told the SEC chairman that the proposal must takes effect more quickly and contain fewer obstacles, according to Reuters.

If the SEC’s proposed rules are adopted, beginning in 2005 companies would be required to permit shareholders to place their own nominees for directorships in the proxy, provided one of two “trigger” events occurs — but this provision would be triggered only after a two-year process.

“The proposed rule is unacceptable in its current form,” Hevesi reportedly told reporters after the meeting with Donaldson. “The time period needs to be shorter than two years,” said Jack Ehnes, chief executive of the California State Teachers Retirement System. Added Iowa State treasurer Michael Fitzgerald, “We own these companies and we want a seat at the table to have a say in how they’re run.”

Hevesi said the state treasurers would submit a counterproposal to the SEC in a week or two, according to Reuters.

The treasurers also took the opportunity to urge Donaldson to add his voice to the calls for meaningful reforms at the New York Stock Exchange. “We think John Reed is really going in the right direction,” Hevesi said.

Recognizing the Value of a Good Reputation

According to a recent survey sponsored by executive recruitment firm Korn Ferry and communications consultancy Hill & Knowlton, 65 percent of CEOs surveyed worldwide said it is their personal responsibility to manage their company’s reputation.

Only 14 percent said it was the board’s responsibility, and just 12 percent considered corporate reputation the responsibility of their communications department, according to the Fifth Annual Corporate Reputation Watch survey of senior executives.

When the time comes to choose a CEO successor, 97 percent of chief executives agreed that boards place at least some weight on a candidate’s ability to protect and enhance the company’s reputation.

This is not just empty talk. Among the global company CEOs, presidents, and chairmen who responded to the 2003 survey, 75 percent said their companies have improved internal controls in response to mounting revelations of corporate wrongdoing.

In addition, 64 percent said that their companies have reviewed their auditor and accounting relationships, and 55 percent noted that they have revised codes of conduct. (These issues weigh heavily on CFOs, too, as we explore in our special report on corporate cleanups.)

“These findings reveal that most of today’s corporate leaders believe their own ethical behavior is critical to how their companies are perceived, and more and more are increasingly implementing measures to ensure that the mistakes of yesterday are not repeated,” said Paul Taaffe, chairman and CEO of Hill & Knowlton.

Which external forces have the greatest impact on reputation? The respondents cited customers (78 percent), the print media (48 percent), and financial analysts (44 percent).

CEOs also seem to believe that corporate social responsibility initiatives contribute to corporate reputation. Fully 80 percent of chief executives said that CSR initiatives contribute at least moderately to their companies’ reputation, although only 30 percent said they contribute a “significant amount.”

European CEOs place a higher weight on CSR initiatives; 94 percent believe CSR initiatives contribute at least moderately to reputation.

Among all respondents, the primary objectives of CSR initiatives are recruiting and retaining employees (71 percent), favorable media coverage (51 percent), and promoting transactions and partnerships (40 percent).

When CEOs look to increase sales or enhance stock price, however, they’re more likely to turn to efforts that build corporate reputation (56 percent and 45 percent respectively) than to efforts that support corporate social responsibility (35 percent and 21 percent respectively).

Freddie Mac Creates Compliance Position, Names Finance Execs

Freddie Mac announced a number of key executive changes, creating a few positions related to compliance and naming new people in its finance department.

“These changes strengthen our accounting, reporting, disclosure and controls capabilities, but they are just initial steps within our remediation plan,” said chief financial officer Martin Baumann.

Jerry Weiss was named senior vice president and chief compliance officer, a new position in the finance division reporting directly to the CFO. Weiss joins the corporation from Merrill Lynch Investment Managers, where he was first vice president and global head of compliance.

Margaret Colon was appointed senior vice president and chief administrative officer, also a new position, reporting to the chief executive officer. Colon, who has spent more than 20 years at Freddie Mac, is responsible for the new Corporate Strategy and Administration division. Colon was formerly senior vice president of infrastructure initiatives program management.

In the finance division, Dave Andrukonis, formerly senior vice president for capital deployment, was named to the newly created position of senior vice president, chief enterprise risk oversight officer. Andrukonis will oversee market risk, operating risk, and credit risk.

Bob Tsien, formerly chief credit officer, takes on new responsibilities as senior vice president, loan production in the corporation’s Multifamily division. Andrukonis also will act as head of market risk oversight and credit risk oversight until the corporation fills those positions.

John Woods was named senior vice president, principal accounting officer; in this new position, he will lead the accounting policy and reporting functions. Edmond Sannini, as senior vice president, corporate controller, leads the financial accounting, control and tax functions for the corporation. A search is under way to fill the position of senior vice president, investments and capital markets accounting, formerly held by Woods.

Woods, Sannini, and Andrukonis, as well as Weiss, report to Baumann.

More CFOs on the move:

  • Urban Outfitters Inc. appointed John Kyees as CFO. He has had experience in the financial management of a number of specialty retail companies including the Express division of The Limited Inc. and, most recently, bebe Stores Inc. He replaces Steve Feldman, who resigned in August to pursue other business interests.
  • Vancouver-based BC Hydro promoted CFO Bob Elton to chief executive of the public electricity utility.
  • Real estate investment trust Prime Group Realty Trust named Richard FitzPatrick executive vice president and chief financial officer. He was former CFO of Omega Healthcare Investors Inc., also a REIT.