Some Recent Corporate Scandals



Hitmakers Implicated in 'Pay for Play' Plans


Los Angeles Times

December 4, 2005,0,3749240.story?coll=la-home-headlines

When Sony BMG Music Entertainment, the nation's second-largest record company, settled with New York Atty. Gen. Eliot Spitzer in July and agreed to pay $10 million for engaging in "pay-for-play" practices, Spitzer said such corruption reached "the very top of the industry."

Documents released by Spitzer charged that bribing radio programmers with plasma TVs, vacations and laptop computers in exchange for airplay was not only commonplace at Sony BMG, but also had "been tolerated and facilitated by senior executives."

Investigators identified one such executive by title: the executive vice president of promotion at Sony Music's Columbia Records. Spitzer stopped short of naming names.

But an inquiry by The Times has found that Spitzer was told that the trail led to two of the company's highest-ranking executives and some of the most powerful men in music: the Columbia vice president, Charlie Walk, and his boss, Sony Music Label Group U.S. Chief Executive Don Ienner.

Two sources interviewed by The Times said they'd told Spitzer's investigators that Ienner and Walk tolerated and condoned pay-for-play, which is generically referred to as "payola." A third source with firsthand knowledge of the investigation confirmed this.

In response to questions from The Times, Paul Gardephe, a lawyer who negotiated with Spitzer on behalf of Sony BMG, said in a statement: "There is absolutely no evidence that Ienner or Walk knew of any payola activities. If the attorney general's office had such proof, the settlement would have been dramatically different."

A spokesman for Sony BMG said: "After a long, in-depth investigation by the attorney general's office, this whole matter was resolved months ago. It's unfortunate that malicious gossip and false allegations by anonymous sources are now being used to damage the reputations of good and honest people."

Through their lawyers, Ienner and Walk declined to answer questions for this article. Attorneys for both men denied that either one condoned or participated in pay-for-play.

Sony BMG agreed to settle with Spitzer without affirming or denying his allegations, but acknowledged in settlement documents that "some of its employees pursued improper promotion practices."

However, according to three former Sony BMG executives and a fourth source with firsthand knowledge of the investigation, in the months leading up to the settlement, investigators made clear to representatives of Sony BMG that evidence showed that Ienner and Walk knew about pay-for-play.

Two sources said that documents collected by Spitzer indicated that Ienner and Walk were aware of and condoned pay-for-play. The source with firsthand knowledge of the investigation, who has seen the documents, also said the same thing.

Two sources also said that Spitzer's investigators would have named Ienner, Walk and other Sony BMG executives in the body of a complaint if one were brought against the company — not as individual defendants, but as managers who knew about pay-for-play. The source with firsthand knowledge of the investigation confirmed this.

When Sony BMG decided to settle, Spitzer's office agreed to the company's request that documents released by the attorney general not name any Sony BMG employees.

Ienner and Walk are two of the most powerful people in the music industry.

Ienner oversees one of the world's largest music organizations and has been instrumental in building the careers of stars such as Mariah Carey and Lauryn Hill.

Until last week, Walk, a longtime Ienner lieutenant, had managed the promotion departments where Spitzer found evidence that Sony BMG had improperly given radio programmers a Las Vegas trip.

On Friday, Sony Music announced that Ienner had made promotions, including making Walk president of Epic Records, another of its divisions.

The men oversee labels that shipped more than $1 billion worth of albums last year by artists such as Bruce Springsteen, Aerosmith, the Dixie Chicks and Beyoncé Knowles.

In all, The Times interviewed seven former and current associates of Ienner and Walk who confirmed what sources say Spitzer's investigators had discovered. These sources — two current and five former Sony Music or Sony BMG employees — said that during the last decade they observed conversations in which one or both men acknowledged or condoned exchanging improper gifts for increased airplay of certain songs.

All seven sources worked alongside Ienner and Walk when the executives were in their current positions or in previous leadership roles at Sony-owned Columbia Records. Two of those sources left the company after clashing with Ienner or Walk; four sources describe themselves as friends of one or both executives.

Many people interviewed for this article requested anonymity because they feared incriminating themselves or jeopardizing their jobs within the insular music industry.

All seven sources echoed Spitzer's depiction of Sony Music as a place where pay-for-play was a prevalent practice that was discreetly discussed.

The message was veiled, but clear. As one source put it, when conversations regarding pay-for-play arose, "Donnie would tell you: 'Do whatever it takes. Get the song played.' "

Other former colleagues disagreed. Tony Anderson worked with Ienner at Arista Records in the 1980s and at Columbia Records in the mid-1990s.

Pay-for-play "is the kind of thing that Don was not a fan of nor supportive of," Anderson said. "When people would discuss improper practices, I'd hear him say, 'You must be out of your mind. We're not doing those kinds of things.' "

Representatives of Spitzer's office would not discuss their investigation, nor why neither Ienner nor Walk were charged. When asked at a July news conference why his investigators did not name any Sony BMG executives, Spitzer said his staff focused on improving corporate practices rather than targeting specific individuals.

"The first effort is to change the way business is done," he said.

Legal experts said it would have been difficult for Spitzer to win convictions of individual Sony BMG executives.

"These things seldom go to trial because they are so hard to prove," said Harry Cole, a communications attorney who has argued before the U.S. Supreme Court.

The only Sony BMG executive fired in the wake of the investigation, Joel Klaiman, was accused of asking a San Diego radio programmer to provide a false name and social security number in exchange for a television.

Through his attorney, Klaiman denied the allegations.

Last month, Warner Music Group became the second music company to settle pay-for-play claims with Spitzer, agreeing to pay a $5-million fine.

Spitzer continues to investigate the two other major record companies — Universal Music Group and EMI Group — as well as the country's largest radio corporations, including Clear Channel Communications Inc. and Infinity Broadcasting Corp.

Defining Bribery

Pay-for-play has been practiced in the music industry since the 1930s, with some disc jockeys accepting cash, drugs or prostitutes in exchange for airplay.

The bribes discovered by Spitzer were more genteel: merchandise, airplane tickets and electronics. But the goal was the same.

Spitzer launched his investigation of Sony BMG under multiple New York laws, including commercial bribery, false advertising and deceptive practices statutes.

In a letter to The Times, Sony BMG asserted that trading things of value for airplay was not in and of itself payola.

Sony BMG general counsel and Executive Vice President Daniel Mandil wrote that although "providing things of value for a contest giveaway in exchange for airplay is now prohibited at Sony BMG — and has been since early in the attorney general's inquiry — it does not constitute payola. Providing financial support to a radio station itself in exchange for airplay, a practice also now prohibited by the company's guidelines, also does not constitute payola."

But according to Spitzer's settlement, unless Sony BMG received the consent of station owners or management, trading goods and financial support for airplay may constitute commercial bribery.

In his settlement documents, Spitzer details that under New York's commercial bribery law, "it is a misdemeanor for anyone to confer (or offer to confer) a benefit upon another party with the intent to influence the recipient's conduct regarding the business affairs of the recipient's employer, without the employer's consent."

Spitzer's settlement labels as "bribes" the gifts, trips and listener giveaways Sony BMG gave to radio programmers and radio stations in exchange for airplay of songs.

However, Spitzer formally alleges that the company violated two civil laws and does not charge that Sony BMG committed commercial bribery.

"It's common for Spitzer to exclude criminal charges in exchange for a settlement," said Elkan Abramowitz, a New York lawyer who has negotiated with him.

In a statement, Gardephe, Sony BMG's outside counsel, disagreed, saying the attorney general's office "does not negotiate away criminal charges for individuals in exchange for corporate settlements."

Spitzer does offer evidence that employees of both Clear Channel and Infinity received improper gifts from Sony BMG in exchange for airplay. Clear Channel has since fired at least two employees who were named in the Sony BMG settlement document.

Representatives of Clear Channel and Infinity said their corporations' policies prohibited employees from consenting to the exchange of gifts for airplay. Infinity's policies have explicitly prohibited any exchanges since at least 1995, a company spokeswoman said. Clear Channel allows exchanges only if approved by station management and disclosed on-air.

Four sources said that Sony BMG executives knew or should have known of Clear Channel's and Infinity's policies because the radio companies regularly communicated them to record labels. But these sources said Ienner and Walk nonetheless condoned their promotion executives trading goods for airplay when they knew it would not be disclosed on-air, and without receiving the consent of the station's managers or owners.

"Station management never knew," said one executive who worked with Ienner and Walk when both men were at Columbia Records. "Are you crazy? We would never tell them."

On the Warpath

In 1989, when Ienner became president of Columbia Records at 36, he was the youngest person to head the label. Within a handful of years, he built the struggling company into the industry's No. 1 hit machine and developed a reputation as a fierce competitor.

In a 2001 interview with The Times, Ienner likened his promotion strategy sessions to what he called "war meetings. We devise a plan of attack where we figure out … how bloody we expect the battles to be." He added, "I hate to lose."

But according to seven sources, that competitive zeal made him look the other way when it came to pay-for-play — both at Columbia Records and, since 2003, at the label's parent company, Sony Music Label Group U.S.

In interviews with The Times, one source said that he told Spitzer's investigators that in the last two years, Ienner was periodically informed of promotional activities, including when Sony employees gave radio programmers under-the-table presents to increase airplay — or "spins" — of specific songs. The source with firsthand knowledge of the investigation confirmed this.

Three of the sources who are current or past employees of Sony Music or Sony BMG confirmed that Ienner was told of pay-for-play during that period.

"It's not something anyone runs at the mouth about," said a person who worked alongside Ienner. But "this thing was pervasive and rampant. It was standard business practice."

Another source, who regularly attended meetings with Ienner, said he "would berate you. He would say, 'You are letting everyone down. You know what to do.' We would talk about getting [radio station employees] trips to see upcoming shows, about sending someone a TV."

This source said some of those gifts were kept by programmers for personal use; others were used by stations to aid them in their daily broadcasts.

John Rosenberg, Ienner's attorney, said in a statement: "Mr. Ienner emphatically and categorically denies that he engaged in any unlawful or improper conduct. It is troubling in the extreme that unnamed individuals, who are too cowardly to publicly stand behind their baseless allegations, believe it appropriate to attack Mr. Ienner's reputation. That they are willing to do so speaks volumes about their true motivation and their utter lack of credibility."

Five executives who worked with Ienner when he was president of Columbia Records, from 1989 to 2003, said he was directly involved in overseeing pay-for-play. Three sources confirmed that Spitzer's investigators were told of Ienner's practices while he was at Columbia.

"I've been in rooms where Donnie says, 'Get the records on the radio. Get the envelopes ready,' " said one person who worked as an executive with Ienner at Columbia. "Envelopes" referred to cash and gifts for radio programmers in exchange for airplay, without the station management's consent, the former executive said.

A second person who was also a Sony Music executive during that period said that although Ienner did not refer to envelopes, he told him to exchange gifts with radio programmers for airplay, again without the consent of station higher-ups.

"Donnie created this business. He taught me how to do this," this source said.

Another executive said pay-for-play took different forms.

Ienner "would say, 'I've approved $50,000 this year for that [program director], and when we're developing this baby band, we get nothing. Tell him if we don't get spins, we're cutting his support,' " this source said.

The source added that the $50,000 in support might include electronics for a programmer's personal use, valuable gifts for DJs to give away on-air and services such as flying in bands to play at concerts free of charge. These exchanges were not disclosed on-air, said the source, though some exchanges had the consent of station management.

Spitzer called these promotional practices "equally deceptive." Such "promotional support" exerts "the same influence over the stations' airplay decisions as when a bribe goes directly into a station employee's pocket," he said in the Sony BMG settlement document.

Spitzer's settlement also states that in September 2001, when Ienner headed Columbia Records, "a senior staff meeting was called at Columbia to address the problem posed by the compensation Columbia was giving to indies."

"Indies" are the independent promoters that Spitzer said Sony BMG hired to implement the company's pay-for-play strategy.

Burt Baumgartner, a Columbia Records veteran who worked under Ienner in the mid-1990s, said he did not recall his boss explicitly directing improper gifts to programmers. But the expectation was there, he said.

"I would sign off on it," said Baumgartner, now executive vice president of MusicBiz, a music industry website. "There was always a buffer. But [Ienner] always knew how these relationships worked. He knew how much was getting spent. Every staff member gave stuff away."

Lieutenant's Role

In 2003, when Sony Music reorganized and Ienner was promoted to his current position as chief of U.S. operations, he tapped Walk to serve as Columbia Records' executive vice president of creative marketing and promotion.

Walk started at Sony in 1987 as a promoter, pitching songs to radio stations. He rose through Columbia's ranks, helping turn such artists as John Mayer into stars.

Several sources — former Sony Music executives and people outside the company — said Walk directly took part in exchanging gifts for radio airplay. Two sources who asked not to be named said they told Spitzer's investigators what they knew about Walk's role. That was confirmed by the source with firsthand knowledge of the investigation.

Buffalo, N.Y., radio programmer David Universal said in an interview that Walk told him another Columbia executive would provide gifts in exchange for playing specific songs. That executive came through with plane tickets, Universal said, but they were not disclosed to station management nor to listeners over the air. Universal also alleged that Walk personally gave him limo rides and tickets for baseball games, although he said Walk did not attach strings to those presents.

Universal's employer, WKSE, fired him in January for violating station rules against taking gifts.

In a letter to The Times, Walk's attorney, Martin Singer, wrote: "It is an absolute lie to say that my client promised Mr. Universal, or anyone else, gifts as quid pro quo for airplay."

Spitzer's investigation also found that Walk was directly involved in pay-for-play.

According to Spitzer's settlement document, in an internal e-mail sent in October 2004, a Columbia executive told an employee that radio stations would need to make airplay commitments before he would authorize the band Switchfoot to perform at their Christmas shows.

Spitzer did not name the executive who was "[s]eeking to ensure that these shows would generate significant airplay commitments," but did give his title: executive vice president of promotion.

That executive is Walk, Walk's attorney acknowledged. But Singer said that Spitzer misinterpreted the e-mail. Walk, he said, was merely asking whether the radio station was already playing Switchfoot songs in order to determine whether listeners would be familiar with the band. He was not requesting an exchange of airplay for the band's appearance, Singer said.




Ex-Tyco CEO convicted of looting $600 million


June 18 2005

Former Tyco International CEO Dennis Kozlowski and a subordinate were convicted Friday of looting more than $600 million from their company to pay for lavish parties, fancy art and an opulent Manhattan apartment that featured a $6,000 shower curtain. Kozlowski and former Tyco finance chief Mark H. Swartz joined a string of executives convicted in recent years in high-profile corporate wrongdoing cases, among them former WorldCom CEO Bernard Ebbers and Adelphia Communications Corp. founder John Rigas and his son, Timothy.

Virginia adopts plan for $23M in rail upgrades

Gov. Mark R. Warner signed into law the Rail Enhancement Fund, which would provide $23 million a year in state funding for statewide railroad improvements.

The money, which can be used for both freight and passenger rail improvements, requires a minimum matching contribution of at least 30 percent from non-state sources, such as railroads, local governments and regional authorities. Projects will be selected by the Commonwealth Transportation Board based on the recommendations of the Rail Advisory Board.

The panel begins July 1, and will consist of nine members appointed by the governor to four year terms.

Richmond's Circuit City posts big quarterly loss

Richmond-based Circuit City Stores Inc., the nation's No. 2 chain of consumer electronics stores, posted a larger-than-expected loss in the first quarter, mostly due to costs tied to its ongoing battle with RadioShack Corp. in Canada. Its shares fell 5 percent in morning trading.

The retailer lost $13.1 million, or 7 cents a share, in the quarter ended May 31 compared with $5.9 million, or 3 cents a share, in the year-earlier period. The 2004 quarter included a $700,000 expense related to the sale of its bank-card operation. Analysts expected Circuit City to lose 2 cents a share in the recent quarter. Excluding the Canadian expenses, the company lost 3 cents a share.

Bank of America places $3B bet in China deal

Bank of America Corp.'s $3 billion purchase of a stake in the China Construction Bank drew a mixed reaction as a bold step into a growing market but one that could also be a risky venture that could lead to losses.

Ken Lewis, head of the nation's third-largest bank, depicted it as a logical response to the direction of the global economy. Under its agreement with state-owned China Construction, Bank of America will spend $3 billion for a 9 percent stake of the bank - the largest purchase of stock in a Chinese bank by any foreign bank. Nissan will build hybrid Altimas in Tennessee

Nissan Motor Co. announced it has picked its assembly plant in Tennessee for production of its first more fuel-efficient hybrid vehicle.

The company is entering the hybrid market behind some competitors but still expects to sell as many as 50,000 gas-electric Altimas for the 2007 model year.


Copyright © 2005, Daily Press


Other recent corporate scandals:


Adelphia:  Founder John Rigas and his son Timothy were convicted in 2004 on federal charges of conspiracy, bank fraud and securities fraud. John Rigas was sentenced to 15 years in prison and his son was sentenced to 20 years. Six Rigas family members have agreed to forfeit assets worth more than $1.2 billion to settle cases brought by federal regulators. Adelphia has been sold for more than $17 billion to Time Warner Inc. and Comcast Corp.


Credit Suisse First Boston: The company's former investment banking star Frank Quattrone was convicted in May on federal charges of obstruction of justice, after his first trial ended in a hung jury. Quattrone, who made a fortune taking Internet companies public during the dot-com stock craze, was sentenced to 18 months in prison. He is free on bail and appealing the conviction.


Enron: Former chairman and CEO Kenneth Lay, former CEO Jeffrey Skilling and chief accounting officer Richard Causey are scheduled to go in trial in January 2006 on federal fraud and conspiracy charges. Finance chief Andrew Fastow pleaded guilty in January 2004 on conspiracy charges and faces 10 years in prison in a deal in which he agreed to testify against his former co-workers. Former treasurer Ben Glisan pleaded guilty in 2003 and is serving five years in prison.


Health South Corp: Former CEO Richard Scrushy could spend the rest of his life in prison if convicted on all 36 counts of conspiracy, false reporting, fraud and money laundering for allegedly orchestrating a $2.7 billion earnings overstatement at the rehabilitation and medical services chain for seven years beginning in 1996. A Birmingham, Ala., federal jury has been deliberating in the case since May 19.


Martha Stewart: The founder of the homemaking empire was released in March after serving five months in prison, and is serving an additional five months confined to her home. She was convicted in federal court last year of conspiracy, obstruction of justice and making false statements related to a personal sale of ImClone Systems Inc. stock. Her former broker at Merrill Lynch, Peter Bacanovic, also was sentenced to five months in prison.


Qwest: The SEC has sued former Qwest Communications International Inc. Chief Executive Joseph Nacchio and six other former executives, accusing them of perpetrating a massive financial fraud on investors.


World Com: Former CEO Bernard Ebbers was convicted in March of federal fraud and conspiracy charges for his part in a massive accounting fraud now estimated at $11 billion. He is scheduled to be sentenced in July.  See below for update.


Six Krispy Kreme execs ousted

Independent directors force resignations, retirement

The Associated Press

Updated: 11:28 a.m. ET June 21, 2005


WINSTON-SALEM, N.C. - Doughnut maker Krispy Kreme Doughnuts Inc. said Tuesday that a special committee of the company's independent directors has decided that six unnamed company officers should be fired. Five of the executives have resigned and one has retired.

Krispy Kreme shares were recently halted for trading, having closed Monday at $7.67 on the New York Stock Exchange. The stock has steadily declined from its year-ago high of $21, hitting a 52-week low of $5.05 in February. Shares are down about 39 percent so far this year.

The company said the six officers include four senior vice presidents and were in the areas of operations, finance, business development, and manufacturing and distribution. Krispy Kreme intends, for the time being, to fill these positions with existing personnel.

The company's special committee is continuing its investigation. Krispy Kreme said it is cooperating fully with the U.S. Attorney's Office for the Southern District of New York and the Securities and Exchange Commission in their respective investigations.

Last fall, the company formed a special committee of independent directors to examine whether earnings should be restated. Krispy Kreme also has been hit with several lawsuits, including one that alleges workers lost millions of dollars in retirement savings because executives at the company hid evidence of declining sales and profits.

In addition, the company faces a criminal inquiry by a federal prosecutor in New York and an investigation by the SEC into financial irregularities.

Last week, Krispy Kreme said it will miss a deadline for filing financial results for the first quarter that ended May 1, and expects to post a loss when it does file the report. In a filing with the SEC, Krispy Kreme said it was unable to file the quarterly report because of the ongoing internal review of its accounting practices for fiscal 2005 and earlier years.

Copyright 2005 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

© 2005



Adelphia founder gets 15-year term; son gets 20

Rigases were convicted of stealing $100 million in company funds

The Associated Press

Updated: 7:04 p.m. ET June 20, 2005


NEW YORK - John Rigas, who turned a $300 investment a half-century ago into cable behemoth Adelphia Communications Corp., was sentenced to 15 years in prison Monday for his role in the looting and debt-hiding scandal that pummeled the company into bankruptcy.

Rigas’ son Timothy, 49, who like his father was convicted last year of bank fraud, securities fraud and conspiracy, was sentenced to 20 years in prison. Sand could have sentenced both men to life.

The sentences are among the harshest handed down in any U.S. court since the fall of Enron in 2001 touched off a rash of corporate scandals that rocked the markets and have cost investors billions of dollars.

Raising the possibility that the frail, 80-year-old Rigas could die behind bars, U.S. District Judge Leonard Sand said the sentence might be cut short if Rigas serves at least two years and prison doctors believe he has less than three months to live.

“This is a tragedy lacking in heroes,” the judge said.

Adelphia prosecutors had accused the Rigases of using complicated cash-management systems to spread money around to various family-owned entities and as a cover for stealing about $100 million for themselves.

They were accused of spending the money on a lengthy list of personal luxuries. Prosecutors said John Rigas had ordered two Christmas trees flown to New York for his daughter at a cost of $6,000, ordered as many as 17 company cars and had the company buy 3,600 acres of timberland — for $26 million — to preserve the view outside his Pennsylvania home.

Worse still for investors, the company collapsed into bankruptcy in 2002 after it disclosed a staggering $2.3 billion in off-balance-sheet debt that prosecutors said was deliberately hid by the Rigases.

“Our intentions were good. The results were not,” Timothy Rigas told the judge.

Adelphia, founded by John Rigas in tiny Coudersport, Pa., and the lifeblood of that town for 50 years, now operates under bankruptcy protection in Greenwood Village, Colo.

Sand declined to force the two men to pay restitution, noting the family has already agreed to forfeit more than $1.5 billion to settle regulatory charges.

At the most dramatic moment of a hearing that stretched nearly three hours, John Rigas slowly rose from his chair just before being sentenced, shuffled to a lectern and addressed the judge, speaking slowly and softly.

“In my heart and in my conscience, I’ll go to my grave really and truly believing that I did nothing but try to improve the conditions of my employees,” he said.

He said repeatedly he had led a blessed life, and even thanked members of the military “that fought for America and gave their lives because they believed in America and what it stood for.”

“If I did anything wrong, I apologize,” he said.

Just after he was sentenced, the elder Rigas, hunched forward in his seat, held his right hand over his mouth and dabbed at his eyes and nose with a white tissue.

The judge, while expressing concern for Rigas’ age and poor health, made repeated reference to the investors who had placed their trust in the Rigas family, many losing their retirement security.

At one point, Rigas’ lawyer Peter Fleming tried to convince Sand that his client believed deeply in philanthropy, loved the town of Coudersport and was “obviously scared to death of prison.”

The judge interjected: “Do you see what he did? What he did to Coudersport, what he did with assets and by means which were not appropriately his?”

“To be a great philanthropist with other people’s money really is not very persuasive,” Sand said.

Both men were ordered to report to prison Sept. 19, but lawyers told the judge they planned to file motions for their clients to stay out of prison pending appeal.

One defense lawyer said he hoped the U.S. Bureau of Prisons would assign John Rigas to the Federal Medical Center in Rochester, Minn.

The sentences come as some of the highest-profile white-collar fraud cases in the post-Enron era lurch toward their conclusions in courts around the country.

Just Friday, former Tyco International Ltd. CEO L. Dennis Kozlowski and former CFO Mark Swartz were convicted of looting that company of $600 million. They are to be sentenced in August.

Next month, former WorldCom Inc. chief Bernard Ebbers faces sentencing for orchestrating the $11 billion accounting scandal at that company. Already 63, Ebbers could spend the rest of his life in prison.

In October 2004, former Rite Aid Corp. attorney Franklin C. Brown, 76, was sentenced to 10 years for his conviction on several crimes related to the drugstore chain’s accounting scandal. Five months earlier, former Rite Aid CEO Martin L. Grass was sentenced to eight years in prison.

In Birmingham, Ala., jurors have deliberated for a month in the fraud case against fired HealthSouth Corp. CEO Richard Scrushy. And three top Enron executives go to trial in Houston early next year.

In the Adelphia case, a second Rigas son, Michael, the company’s former executive vice president for operations, faces retrial in October after jurors were deadlocked on securities fraud and bank fraud charges against him.

Former Adelphia assistant treasurer Michael Mulcahey was tried with the Rigases but was acquitted of all charges.

As he left the courthouse in Manhattan and faced a phalanx of reporters and cameras, John Rigas was asked how it felt to watch his son be sentenced to prison.

“It just crushes me,” he said.

© 2005 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

© 2005



KPMG probes ex-partners over tax shelters

Accounting pledges cooperation with Justice Dept.

The Associated Press

Updated: 8:32 a.m. ET June 17, 2005


WASHINGTON - The specter of felled Arthur Andersen LLP hovers in federal prosecutors' calculations as they negotiate with another accounting titan, KPMG, over sales of dubious tax shelters.

The Big Four accounting firm acknowledged Thursday that there was unlawful conduct by some former KPMG partners and said it takes "full responsibility" for the violations as it cooperates with the Justice Department's investigation.

Deals allowing companies to avoid criminal prosecution are becoming an increasingly attractive alternative for the Justice Department and a clear option in the KPMG case. Just Wednesday, the government announced a deal with Bristol-Myers Squibb Co. in which the drugmaker agreed to pay $300 million to defer prosecution related to its fraudulent manipulation of sales and income, in exchange for its cooperation and meeting certain terms.

The Justice Department has been investigating KPMG and some former executives for promoting the tax shelters from 1996 through 2002 for wealthy individuals. The shelters allegedly abused the tax laws and yielded big fees for KPMG while costing the government as much as $1.4 billion in lost revenue, The Wall Street Journal reported in Thursday's editions.

In the case of KPMG, a so-called deferred prosecution deal appears to have an even greater allure and the potential pitfalls of seeking an indictment of the firm are larger. Memories are fresh of the June 2002 conviction of the once-venerable Andersen for destroying Enron Corp.-related documents before the energy giant's collapse.

Corporate clients fled from Andersen and around 28,000 people lost their jobs in an episode of what Justice Department officials call "collateral damage" _ the loss of jobs, investments and pensions. The Big Five accounting firms became the Big Four. The other three are PricewaterhouseCoopers, Ernst & Young and Deloitte & Touche.

The Supreme Court overturned Andersen's conviction on May 31, ruling that the jury had not been properly instructed, but the damage could not be undone.

Like any accounting firm, if KPMG were convicted of a felony, it would be forced to surrender its accounting license and stop conducting public audits, leaving it virtually defunct.

"I don't think that anybody, either KPMG or the Justice Department, wants another Arthur Andersen," said Lawrence Barcella, an attorney specializing in white-collar cases who was a federal prosecutor.

Deferred prosecution? "It may be the only meaningful option," he said.

The corporate scandals of 2002 tarnished the accounting industry, as a stream of instances became known of too-cozy auditors signing off on big companies' inflated and misleading financial statements. Yet having fewer accounting firms could reduce competition and the number of choices for companies seeking auditors, experts have warned.

Congressional auditors have urged government agencies to consider the risks of further consolidation in the accounting industry when they take enforcement action against firms.

In the way that "too big to fail" became an unofficial doctrine of policy toward corporations, "too concentrated to indict" has become a moniker for the accounting industry, suggested John C. Coffee, a law professor at Columbia University.

"It's a strange kind of immunity" for KPMG, he said.

While the prosecutors in principle wield the club of potential indictment, the firm knows that being put in the criminal dock is unlikely and thereby gains a certain leverage in the negotiations, Coffee said.

New York-based KPMG said Thursday that it stopped providing the tax shelters in question in 2002 and that it has taken steps to ensure that the unlawful conduct doesn't recur. That includes "firm-wide structural, cultural and governance reforms" to ensure "the highest ethical standards," the firm said.

KPMG said it "looks forward to a resolution that recognizes the significant reforms the firm has already made in response to this matter while appropriately sanctioning the firm for this wrongdoing."

Justice Department spokesman Bryan Sierra declined to comment Thursday. George Ledwith, a spokesman for KPMG, declined to comment on the negotiations with the department or the firm's options.

Top department officials embraced the idea of deferred prosecutions several months after Andersen's conviction. A January 2003 memo by then-Deputy Attorney General Larry Thompson signaled the change. It said that pretrial agreements of the sort previously used in criminal cases against individuals could be applied to companies. There have been no high-profile corporate prosecutions since.

Copyright 2005 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

© 2005



Bristol-Myers settles conspiracy charge

Firm agrees to pay $300 million; 2 former executives also indicted

The Associated Press

Updated: 4:19 p.m. ET June 15, 2005


NEWARK, N.J. - Bristol-Myers Squibb Co. agreed to pay $300 million in a deal to defer federal prosecution of a conspiracy charge stemming from an accounting scandal, the company said Wednesday. Two of its former executives also were indicted in connection with the same scandal.

Frederick Schiff, Bristol-Myers former chief financial officer, and Richard Lane, former executive vice president and president of the company's worldwide medicines group, were indicted on charges of conspiracy and securities fraud.

The company said that it would record an additional reserve of $249 million in the second quarter related to the settlement.

With Wednesday's fine, Bristol-Myers has doled out about $800 million to settle lawsuits and investigations tied to the incentives it paid wholesalers to stockpile inventory, inflating sales and earnings. In March 2003, Bristol-Myers restated $900 million in profits and $2.5 billion in revenues reported from 1999 through the first half of 2002.

As part of the agreement, Peter Dolan will relinquish the title of chairman but will remain CEO. Long-time board member and former American Express Co. chairman James D. Robinson III will become the company's chairman. The company also agreed to have a federal judge act as an independent monitor of its accounting practices and financial controls.

© 2005 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

© 2005


WorldCom's Ebbers Sentenced to 25 Years

By Walter Hamilton and Jesus Sanchez
Los Angeles Times,0,6445491.story?coll=la-home-headlines

July 13, 2005

Former Worldcom chief Bernard Ebbers was sentenced to 25 years in federal prison today for orchestrating an $11-billion accounting fraud that helped push the giant telecommunications company into bankruptcy.

The sentence will mean that Ebbers, 63, will spend virtually the remainder of his life in prison. The former chief executive had agreed to forfeit most of his personal fortune in an effort to win a lighter sentence than the 85-year term requested by prosecutors.

Ebbers remained silent and showed no emotion after Manhattan U.S. District Judge Barbara Jones handed down the punishment. He was ordered to report to a federal prison in Yazoo City, Miss. on Oct. 12.

Outside the courthouse, Reid Weingarten, Ebbers' attorney, said his client will appeal the court's decision.

"We've not given up. Bernie Ebbers has not given up," Weingarten said.

A federal jury in March found Ebbers guilty of securities fraud, conspiracy and filing false documents with regulators. He was convicted on all nine counts that he faced in the government's biggest win yet in a string of victories against top corporate figures.

The jury rejected Ebbers' defense that he was unaware of the massive fraud, which he claimed was masterminded by former Worldcom financial chief turned government witness Scott D. Sullivan.

Sullivan pleaded guilty to his role in the fraud last year, and faces up to 25 years in prison. He cooperated with prosecutors in exchange for a leniency recommendation when he is sentenced this year.

In his testimony, Sullivan described how he doctored WorldCom's books in the wake of the dot-com collapse beginning in 2000, and said Ebbers was fully aware of what he was doing. Sullivan recounted conversations in which he asked Ebbers to warn investors about WorldCom's troubles, but his boss instructed him to "hit the numbers" that Wall Street expected.

Ebbers wanted to conceal WorldCom's problems, prosecutors said, because he used his WorldCom stock as collateral for $400 million in personal bank loans. Revealing the extent of WorldCom's troubles would have sent the stock reeling and forced Ebbers to sell his shares at deflated prices, prosecutors said.

Ebbers portrayed himself in homespun terms during two days on the witness stand. He testified that he got into the telecom business by chance when he invested with some friends in a Mississippi phone company that grew into Clinton, Miss.-based WorldCom through a series of mergers

WorldCom filed for bankruptcy protection on July 21, 2002, listing $104 billion in assets. That dwarfed Enron's $63-billion bankruptcy filing the year before.

The company, which was renamed MCI, emerged from bankruptcy in 2004 and this year agreed to be acquired by Verizon Communications.