Stolen Without a Gun
2007, Etica Books
By Walter Pavlo, Jr. and Neil Weinberg
Stolen Without a Gun is a compelling, emotion and humor charged, honest account of white collar crime perpetrated within the walls of Walt Pavlo's former employer, the once mighty, MCI WorldCom. With novelistic prose and a plethora of supporting evidence, Pavlo and Weinberg weave the true tale of exactly how corporate corruption, stemming from the competitive need to make profit targets, infiltrates all levels of a company; CEO to middle executive to junior accountant. When Pavlo realizes that orders to 'make the numbers' at MCI rank above ethics to achieve that performance, he decides to embark on some accounting sleight of hand of his own. His scheme to siphon off $6 million for himself is a smaller version of what MCI WorldCom later did to thousands of shareholders in an $11 billion scandal that became the largest bankruptcy in US history.
The unlikely combination of authors - Walt Pavlo, a convicted white collar felon, and Neil Weinberg, an award-winning Forbes senior editor - lend the story texture and perspective. Without striving for sympathy, they tell a non-apologetic tale of one man's journey from being a wide-eyed fresh MBA to discovering the rot beneath the surface of a major American corporation, which becomes his justification for his crimes. Contriving with slimy external telecom wholesalers to embezzle funds from MCI through a web of false accounting entries, bogus companies, and off-shore accounts, Pavlo gets in so deep that his only option is copping a plea with the federal government and enduring the subsequent punishment, pain, humiliation and alienation from his family.
Pavlo took full responsibility for his actions and spent two years in prison. But, like Frank Abagnale's Catch Me if You Can, the way in which Pavlo and his partners perpetrated crimes via dodgy books, last-minute Cayman-Island bound jets, corporate gala golf events and luxury hotel accommodations - gives a fascinating glimpse of fast-lane life set in an atmosphere of willful corporate neglect, before it came crashing down.
Stolen provides insight into how Wall Street performance pressures and mega mergers present opportunities for companies to hide flaws and falsify earnings at multiple levels. It's not just about WorldCom and MCI; it's about every merger, corporate scandal, and greed-inspired fraud. I had the opportunity to ask Walt and Neil about their experiences both living through, and writing, their book:
Nomi Prins: Neil, you've covered your share of white collar crime and scandals during your career, what differentiated Walt's situation for you?
Neil Weinberg:Stories about financial scandals are usually told from afar, through the lens of dry court documents and legalese. In the case of Stolen Without A Gun, Walt and some of the others who committed the crimes were willing to share with me their inside stories of greed, high-living, fear and punishment. It's full of outsized personalities, juicy details and hilarious anecdotes.
They also told me about the pressures they were under to make their numbers, the corruption they witnessed and how they used it to rationalize behavior. In the end, they told a very human story about what prompts ordinary people to commit extraordinary crimes and the huge costs to them and their families.
Walt and his conspirators were not career criminals or born scam artists. They were normal, college-educated white-collar workers who'd never been in trouble and excelled at their jobs. Their story illustrated universal truths about the white-collar scandals that have occurred since and are breaking news almost every day. They have to do with the tone at the top of corporations, the need for companies to balance the quest for profit with ethical behavior and the way bull markets make people gullible and sloppy.
Prins: How do you think sentiments have changed about white collar crime now that firms like WorldCom and Enron are gone?
Weinberg:I don't think a lot has changed since the days of the dot-com bubble and a high-flying WorldCom and Enron. There have been too many waves of scandals since to presume we've cleaned up our act--everything from mutual fund late trading to crooked stock options pricing. Because such scandals keep popping up, and because the housing meltdown is likely to kick the scandal-machine into high gear, I definitely do not think it's possible for the public to move on, even if it wants to.
Prins: What about Walt's story is timeless to you?
Weinberg:Anti-fraud experts say white-collar crime usually results from the three points of the so-called fraud triangle: Rationalization (I'm not paid enough; everyone's doing it), Opportunity (poor financial controls) and Incentive (greed/revenge). Stolen Without A Gun is a textbook case.
The fact that Walt has tried to make some good out of the bad things he did by telling his story publicly--at the suggestion of the FBI agent who busted him, no less--also has an element of redemption to it.
Prins: How did you contextualize your feelings about Walt's crime within that of the greater MCI, and then WorldCom empire?
Weinberg:Walt was a bit player in the greater MCI WorldCom meltdown. To me that's what makes his story so intriguing. It shows how deep the rot goes in corrupt companies and industries. Was it a shock that virtually every Wall Street firm was foisting crooked stock research on investors? Or that many drug companies are nabbed for bribing doctors?
Stolen Without A Gun reveals a key historic element to widespread corruption, too. We make the case that the bad debt Walt was hiding to help MCI pretty itself up for sale to WorldCom played a key role in the combined company's unraveling and ultimately the largest bankruptcy ever.
Prins: Among senior executives, is business still 'all about the numbers' as it was at the time of this story?
Weinberg:I think senior executives are more wary of cooking the books now simply because internal controls have improved and the punishments for committing financial fraud have stiffened. On paper, anyway. I wrote a story for Forbes in July about how a firm called Bisys recently was fined for cooking its books to please Wall Street. Guess what happened to the top two execs? One went off to be a top exec at another public firm and the other to teach accounting. Disgusting, if you ask me.
Prins: What do you think should be done to deter white collar crime today?
Weinberg: Politically, about the only thing that would work is 100% public financing of campaigns, but I think America is eons away from adopting such a system.
In business, it's vital for top executives and managers below them to make clear the sort of behavior is not acceptable. It is also important for companies to be open and honest with everyone involved about the conflicts of interest inherent in their businesses. When setting up compensation and bonus structures, they should ensure they're not creating irresistible financial incentives for employees to screw customers or cook results.
Third is telling stories like Walt's in Stolen Without A Gun. Concrete examples are the best way to show people how white-collar crimes can start with average people rationalizing relatively innocuous misdeeds, like fudging expense accounts or quarterly numbers, and then quickly get out of hand.
Prins (to Walter Pavlo, Jr.): When did you realize that what you were doing was wrong?
Walter Pavlo, Jr.:I realized it from the very beginning. I had a feeling that any delay in reporting that customers were not paying MCI was not proper. The more (dollars) that we delayed or hid, the more wrong I knew that it was but at the same time it seemed to be an acceptable practice within the company. This led me to have a tainted view of how business was supposed to operate and I became jaded by the practices. Rather than turn away, report the unethical behavior or just quit the company, I decided to make some money of my own in what I saw as a free-for-all. It was wrong, but in this environment of no real rules, or perceived consequences, I had no feeling that I would ever be caught.
Prins: Did you ever consider the consequences of your actions?
Pavlo, Jr.: I never did. As calculating as I had been in planning some aspects of my crime, I never believed that I would be caught. Prison, the impact to my family, and the financial consequences were all things that I confronted when it was too late. One lesson that I always relay to MBA students when I talk to them is that rarely do many people involved in a crime consider the consequences.
Prins: Do you think that the impetus for white-collar crimes still exists in corporate America?
Pavlo, Jr.: As long as there are performance pressures to meet financial goals, there will be opportunities for people to justify or rationalize bending ethical rules. There are a number of brewing crimes now presenting themselves post Sarbanes-Oxley (2002) with the option backdating scandals, sub prime mortgage debacles, hedge fund fallout and restatement of earnings for top companies. There will always be people who can subvert the best fraud detection systems to commit a crime.
People respond to pressure differently and often this is because their own compensation is tied to that of the corporation. Corporations have established ways to link personal employee performance to their top-line financial goals. This comes with great temptation to meet those goals - at any cost.
Prins: Do you consider prison a deterrent for white-collar crime?
Pavlo, Jr.: It is a deterrent, but certainly not the worst part of the punishment. Prison is difficult and humiliating, but it is also a chance to reflect on the things that went wrong and why. I used my time to evaluate myself and how I reacted to the work environment. In the two years that I was away from society, I can tell you that it was painful to be away from my family, to not work and to be forced to reflect on the reasons that I was in prison each and every day. With the reality that prison was difficult, it has been even more difficult since prison trying to find a job again, mend family relationships, recover financially and distance myself from my past actions. In the four years since my release from prison, I'm nowhere near where I was financially after legitimately saving for the future at MCI, and the upcoming years will be just as difficult. This is something that I never considered as a consequence of my actions.
Prins: You now speak on issues of corporate ethics, as well as your experience - what's the question you get asked the most by today's MBA students?
Pavlo, Jr.: Students want to know why 'I didn't make a run for it?' This is an indication of how little they know about white collar crime. Most assume that authors like John Grisham accurately portray white-collar crime. They see punishment as something that can be avoided by not getting caught, even if that means running away.
I usually answer the questions about fleeing the country with 'where would you suggest that I should have gone?' Most people have never lived a life of being chased, and being under surveillance by the FBI, as I was. It was one of the most difficult times of my life. Running is unrealistic, and facing one's failures is a better lesson to teach students, and learn myself.
Prins: Has the nature of bank account use in the Cayman Island's changed since your use of it as an off-shore money laundering locale?
Pavlo, Jr.: It was quite easy for me to open bank accounts in the Cayman Islands during that late 1990s. There were few questions and no real due diligence. This has altered somewhat, but changes were brought about more to combat terrorism than white-collar crime.
Prins: There is talk of limiting the intent of the 2002 Sarbanes-Oxley legislation - would it have been a deterrent during the time you committed your crimes?
Pavlo, Jr.: I would hope so. There is so much more emphasis now on ethical behavior, employee hotlines, codes of conduct, etc. than there was when I worked in the mid-1990s. That is not to say that such things did not exist at the time but most people only knew of the code of conduct if they read their employee manual at some point in their career. I read my employee manual to see what my healthcare coverage was, number of vacation days and my eligibility for promotion. The company rarely discussed ethical behavior as it related to my job. That is not to say that I thought the company was unethical, just that it lacked any emphasis on doing business with integrity.
Nomi Prins is a senior fellow at the public policy center Demos and author of Other People's Money and Jacked: How "Conservatives" are Picking your Pocket (Whether you voted for them or not).