Risk & Compliance

Good Week/Bad Week: What’s the Frequency, Kenneth?

Enron founder Ken Lay wants judge to move up one trial, delay another; apparently, dance card is full. Plus: Russian hackers reach a swell mileston...
John GoffApril 15, 2005

Disclaimer: While the entries in GW/BW are based on actual news items, some of the people, quotes, and hat sizes in this article are fictional. Other stuff I just plain made up.

Please, no lawsuits.

GOOD WEEK:

1. Kenneth Lay

In a filing Wednesday, attorneys for the Enron founder argued against the suggestion from prosecutors that the charges against Lay — charges relating to his personal banking — be heard as early as May. Lay’s other trial (in which he, Jeffrey Skilling and former top accountant Richard Causey are accused of perpetrating a massive fraud at Enron) is set to begin in January 2006.

Lay embraced U.S. District Judge Sim Lake’s idea that the judge hear the banking case while jurors deliberate the Enron case. In the filing, Lay’s attorneys argued that a conviction in the banking trial could “severely prejudice Lay’s ability to testify in the main case.”

This is a big turnaround for Lay. Only last month, the former Enron CEO indicated he wanted the banking case to be presented to a separate jury following the conclusion of the conspiracy trial. One of Lay’s attorneys told reporters this week that the legal team decided to scotch that idea because prosecutors said in court papers that they would accept either a bench or jury trial in the banking case.

Explained the lawyer: “If Mr. Lay were acquitted (in the banking case), as we expect, the public perception would likely be that the so-called ‘rich and powerful’ always get off, thereby further inflaming community prejudice against him.”

The attorney, who appeared to be wearing a $2,400 Armani suit and ruby-encrusted sunglasses when he made the statement, failed to note that, all things being equal, the so-called rich and powerful tend to spend considerably less time in the so-called penal system making so-called license plates and bandanas than the so-called poor and disenfranchised.

Also from the Enron trial: earlier this week, the judge overseeing Lay’s Enron trial denied a defense motion requesting that the entire jury consist of Lay’s relatives. “I’m not sure what they were thinking,” the judge noted. “I mean, I almost went for it, but then I thought, ‘Nah, that can’t be right.’”

2.Russian Cybercriminals

A survey put out by ICSA Labs this week revealed that 2004 was a banner year for computer hackers. According to ICSA, corporate computer networks were hit with 50 percent more viruses last year than the year before. The time it took to recover from the pernicious code also went up, by seven person days. The cost of recovery averaged $130,000 per company per incident, a 25 percent jump from 2003.

Said George Japak, vice president of ICSA Labs: “The controls exist to mitigate problems from viruses. A lot of companies still don’t have those, and that’s why the infection rate is still so high.”

In a related story, Russia’s cybercrime division has warned that Russian hackers are now the best in the world. “Everyone knows that Russians are good at math,” said Lieutenant General Boris Miroshnikov of the division known as Department K. “Our software writers are the best in the world, that’s why our hackers are the best in the world.”

Miroshnikov’s startling statement, however, did not sit well with members of El Izar, the shadowy Bahrain-based group dedicated to the destruction of the Great Satin (a mistranslation that apparently explains last year’s denial of service attack on the Bed Bath & Beyond in Racine, Wisconsin). When told of the Russian claim, one incredulous El Izar member told GW/BW: “Russians the greatest hackers in the world? Talk to the FBI. Go ahead. They’ll tell you who the best hackers are. That alarm that goes off on your watch every hour, and nobody can figure out how to shut the bloody thing off? That’s us.”

On a side note: 84 percent of the June Taylor dancers remain “positive” or “fairly certain” that Miami audiences are the greatest audiences in the world.

3. Willis North America

Managers at Willis North America Inc. heaved a collective sigh of relief last Friday when the insurance broker struck a deal with authorities in New York state. The New York-based Willis agreed to pay $50 million — and end the use of contingent commissions — as part of an agreement that ended an investigation by New York Attorney General Eliot Spitzer and the state’s insurance regulators.

Willis North America, the third-largest insurance broker in the US, agreed to pay the cash to settle an investigation into anticompetitive practices involving incentive fees in property and casualty insurance sales. Investigators found that Willis funneled insurance contracts to companies it had fee arrangements with.

In its investigations, Spitzer’s office uncovered a message sent by a Willis executive in 2003 to the broker’s regional marketing officers. The email stated: “I want to see you directing the flow of business to these companies,” and then the executive ticked off the names of insurers with which Willis had contingent fee agreements, including Chubb Group, St. Paul Travelers Cos. and The Hartford. “They were essentially getting kickbacks from these companies,” Spitzer spokesman Marc Violette said.

Asked if he would describe the “contingency fees” as kickbacks, one Willis executive said he preferred to think of the payments as “sales force reincentives,” or, barring that, “stocking stuffers or bon-bons.”

In settling the matter, Willis management emphasized that it is the only insurance broker to resolve these sorts of charges without Spitzer’s office filing a lawsuit — and without being required to issue an apology. Said Joe Plumeri, CEO of the company’s parent, Willis Group Holdings: “We also are pleased that the investigation found no evidence of the practice of bid-rigging or tying.”

As further indication of the company’s high ethical standards, a Willis board member pointed out that state investigators also found no substantive proof that Willis cheats orphans or makes handbags out of little baby kittens.

BAD WEEK

1. Impco Technologies

Impco Technologies reported on Tuesday that the company’s CFO and treasurer, Nickolia A. Gerde, has resigned from the company. Impco manufacturers advanced alternative-fuel systems and components for internal-combustion engines.

It’s not totally clear why Gerde left, although the company stated the finance executive resigned the dual posts “to pursue other interests.” In a 10-K filed weeks earlier, however, Impco management acknowledged that it had identified four material weaknesses in its internal controls over financial reporting.

Those included:

1. A material weakness relating to cycle counting of physical inventory in its U.S. manufacturing plant.

2. A material weakness relating to accounting for deferred tax assets and cash flow statements in preparation for the annual audit.

3. A material weakness relating to the lack of segregation of duties in one of the company’s foreign locations.

Word has it, though, that Impco management disagreed with the company’s IT governance consultant, Stern & Cross, about additional weaknesses the outside firm uncovered. According to well-placed GW/BW sources, the Ypsilanti, Michigan-based S&C identified several potential problems in the autopart maker’s internal controls. The biggest trouble spot: according to S&C, Impco’s computer systems are not based on a conventional microchip/IC bus architecture, but rather mood ring technology. In addition, the consultancy cited Impco management’s constant, baffling use of the phrase “contrapposto” whenever discussing the company’s stance on business process outsourcing.

2. The Internal Revenue Service

This week, the House of Representatives passed a bill to eliminate the estate tax. It’s not clear if the Senate will go along with the dismantling of the levy, which is variously called the death tax (Republicans), wealth tax (Democrats), or How-I Paid-for-My-Summer-Place tax (accountants, chiefly).

Backers of the legislation say assets in estates have already been taxed, and therefore, taxing them upon death constitutes double taxation. Indeed, a McLaughlin & Associates poll in 2001 revealed that 90 percent of seniors feel it is wrong to tax earnings both when they are earned and again upon death.

Critics of the repeal, however, argue that few people end up paying taxes on their estates. They also insist that the elimination of the estate tax will cost the Federal government some $290 billion in lost revenues over ten years, a fact which would seem to undercut their first argument. When pressed to explain the seeming contradiction, Tom Deshanon, president of ASOG (Americans for Soaking the Other Guy), said he did not condone the use of steroids in any form.

Interestingly, Washington insiders say the IRS already has plans in place to make up the shortfall from the repeal of the estate tax. At the top of the list: instituting a flat tax in Kansas and the salty parts of Utah. Sources say officials at the agency are also looking into the possibility of levying a consumption tax on sanatoriums.

Next month, Mark Everson, the commissioner of the IRS, will appear in front of a Senate Appropriations subcommittee to answer charges that the agency has become over-staffed, monolithic, and exceedingly literal.