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US: The Big Winner, Again, Is 'Scandalot'

by Gretchen MorgensonThe New York Times
January 1st, 2006

Same stuff, different year.

That's one way to look at 2005, the fourth consecutive year in which corporate chicanery loomed large. But while business titans' transgressions may have lacked creativity last year - there was the usual hubris, greed and accounting tricks to prop up stock prices - at least the cast of "Scandalot 2005" involved a few new characters.

Maurice R. Greenberg, for instance, the revered chief executive of American International Group, was chased off stage by the New York attorney general, Eliot Spitzer, proving that even the most entrenched and imperious executives can be vulnerable to ouster. And a batch of scoundrels surfaced when a couple of hedge funds blew up last year. It's interesting that Bayou Capital, a $450 million fund, went bust just as Hurricane Katrina swamped New Orleans.

Greed was on display throughout 2005 as throngs of executives pocketed pay that was even greater than the previous year's. To hear them talk, they deserved the amounts because - are you sitting down? - they enhanced shareholder value. Never mind that many of their companies' stocks ended the year lower than where they began it.

Some C.E.O. sinners from previous years got ready for their close-ups in 2005. L. Dennis Kozlowski, formerly of Tyco International, and Bernard J. Ebbers, late of WorldCom, sat for mug shots, donned orange jumpsuits and toddled off to jail.

So, again, it is time to administer the Augustus Melmotte Annual Prizes, named for the stock promoter and arriviste strutting through the pages of "The Way We Live Now," the novel by Anthony Trollope. Mr. Melmotte reaches the pinnacle of London society, but then the railroad-company shares he is peddling are found to be a scam.

Here are the 2005 prizes and winners.

THE TOUGH GUYS FINISH LAST AWARD To Philip J. Purcell, the former chief executive of Morgan Stanley, who was defenestrated last June. Under Mr. Purcell and his legal attack dog, Donald G. Kempf Jr., Morgan Stanley regularly snubbed regulators, flouted e-mail retention rules and so enraged the judge overseeing a lawsuit brought by Ronald O. Perelman that she eased the way to a $1.45 billion jury award against Morgan Stanley in the case. Both men's resignations prove that hardball can sometimes backfire, even on veteran players.

THE ROUND WHEEL AWARD
To Mr. Greenberg, the once-autocratic ruler of A.I.G., who often dispatched underlings to browbeat insurance regulators. Last year he finally met a watchdog he couldn't roll - Mr. Spitzer - who sued the executive, accusing him of manipulating A.I.G.'s financial results and misleading investors. Mr. Greenberg, who says he did nothing wrong, called it a case of regulatory overreach. That's hardly surprising, though, given that regulatory pushback of any kind was an entirely new scene for Mr. Greenberg.

THE DOG ATE MY DISCLOSURE AWARD
To Gary L. Wilson, chairman of Northwest Airlines, who failed to divulge the sale of some $1.8 million in Northwest shares within the two-day period that regulators require. The rules on executives' disclosures of stock sales are designed to keep outside investors informed of insiders' actions, which, of course, can be telling.

Mr. Wilson's timing on the sales was good: between the days in late August when he dumped his shares and the time he reported his sales almost three weeks later, Northwest filed for Chapter 11 bankruptcy. Mr. Wilson received $5.07 to $5.84 a share for his stock; by the time he filed his disclosure statement, Northwest's shares were trading at less than $1. A Northwest spokeswoman said the disclosure lapse was the result of "an administrative error."

THE LET THEM EAT CAKE AWARD
To Robert S. Miller, the newly installed chief executive of Delphi, the auto parts manufacturer operating in bankruptcy, who made the command decision to cut workers' pay and benefits while pushing for a munificent compensation package for the company's executives. When asking the bankruptcy court to approve the package, worth an estimated $110 million, Delphi's lawyers made no mention of the fact that several executives in line for the generous pay were also on hand during the years when Delphi's accounting wasn't always proper. After an outcry from Delphi shareholders, the company took back the pay package for a do-over. Who knows? Maybe they'll ask for more.

THE RIDIN' THE GRAVY TRAIN AWARD To James M. Kilts, chief executive of Gillette and recipient of $175 million when the company was taken over last October by Procter & Gamble. The money consisted mostly of stock options that became exercisable when Gillette changed hands and are equal to 35 percent of the company's net income in its last quarter as a standalone company. Not bad for four years' work: Mr. Kilts, who serves on The New York Times Company board of directors, joined Gillette in 2001.

THE HINDSIGHT IS 20-20 AWARD
To Charles O. Prince III, chief executive of Citigroup and head sanitation man in charge of cleaning up the company's practices. "I wish we had never heard of Bernie Ebbers," Mr. Prince said when he was deposed in a shareholder lawsuit against Jack Grubman, Citigroup's disgraced telecom analyst. Certainly understandable, since Citigroup paid $2.65 billion to settle with investors who contended that the bank had defrauded them when it sold WorldCom bonds a few years before it went bankrupt. But Citigroup sure liked the color of Mr. Ebbers's money all those years that WorldCom was a paying customer.

THE HOPE YOU HAVEN'T SPENT IT ALL AWARD To Joseph P. Nacchio, the former chief executive of Qwest Communications, who reaped $100 million in stock sales that the Securities and Exchange Commission said were illegal. The commission sued Mr. Nacchio on the grounds of insider trading as 2005 was drawing to a close, contending that five years earlier he sold Qwest shares when he knew that the company's prospects were dimming. That suit followed a March case brought by the commission against Mr. Nacchio, accusing him of overstating Qwest's revenue.

Mr. Nacchio said he looked forward to clearing his name in court. So did Mr. Ebbers.

Finally, accolades to Peter F. Drucker, the expert in management theory, who died last year at the age of 95. A truth teller, even to the powerful, he swatted down the propaganda that stock option plans align managers' interests with those of company shareholders.

Instead, Mr. Drucker identified option plans as an "encouragement to loot the corporation." As he phrased it, "Instead of asking, 'Are we making the right decision?' " option plans encourage executives to say, "How did we close today?"

Mr. Drucker was equally trenchant on the subject of executive pay. "It is a business responsibility, but also a business self-interest," he said, "to develop a sensible executive compensation structure that portrays economic reality and asserts and codifies the achievement of U.S. business in this century: the steady narrowing of the income gap between the boss man and the working man."

Alas, in recent years chief executives have been working to widen that gap, through which they easily drive their G5 corporate jets.



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