Corporate Crooks Spin Crisis of Confidence

Martha: Hour-to-hour coverage of Stewart's alleged misdeeds.
Comment by Mark Lacter

Whenever there's a plane crash, one of the first things investigators try to determine is whether the aircraft malfunctioned, and if so, whether it was the result of an isolated event or a systemic problem that could happen to other planes.

In the financial world, planes have been crashing all over the place WorldCom, Enron, Global Crossing, Tyco, Adelphia and regulators and investors alike are asking the same question: Are these isolated incidents or examples of a widespread financial plague?

Judging from the media frenzy last week, one could only assume the worst.

In some ways, the iconic Martha Stewart bore the brunt of it, with her stock tanking badly amid each new headline about her alleged mischievousness involving a silly stock sale. For reasons both petty and legitimate, the media jackals have been gunning for her, even though her supposed misdeeds are small potatoes compared with the outright frauds being committed on other fronts.

And yet she has maintained an otherworldly composure amid the fallout that makes her look uncharacteristically awkward and even a bit foolish. During her cooking segment about summer salads on CBS' "The Morning Show," she hastily referred to the scandal as "ridiculousness" and added that, "this will all be resolved in the very near future and I will be exonerated." Then she told co-anchor Jane Clayson, "I want to focus on my salad."

Hall of shame

Jack Grubman, the controversial Salomon Smith Barney analyst who long has been hyping WorldCom and other telecom stocks, had the misfortune of being ambushed on a New York sidewalk last Wednesday by a CNBC reporter. "Why are you harassing me?" Grubman shouted to the reporter who kept peppering him with questions on what he knew about WorldCom and when.

As Grubman tersely responded, occasionally punctuating his answers with claims of invasion of privacy, viewers could almost feel sorry for the guy, until of course, they're reminded that Grubman is under investigation for his chummy relationship with ex-WorldCom boss Bernard Ebbers. He was about to be subpoenaed late last week by the House Financial Services Committee.

So many people, so many scandals. The folks at Enron must be quietly cheering each new headline because it pushes their own troubles to the back of the paper. Does anyone still remember Andrew Fastow and Jeffrey Skilling? Or even L.A.'s own Gary Winnick?

In this world of instant for-or-against judgments, many Americans now assume the worst about corporate chieftains. A CNN/USA Today/Gallup poll found that big business and Wall Street rank just above health maintenance organizations when people were asked how they view the nation's leading institutions. Only one in five said they had a lot of confidence in big business; four of five said they have a lot of confidence in the military.

In time, attitudes will settle down if for no other reason than the obvious one: You and I are financially tied to the stock market, and to the marketplace in general, and if they go down, so does everyone else. Just hours after Wednesday's WorldCom-induced stock slide, Wall Street managed to regain its senses, and by Thursday morning, stocks were back up not by a lot, but enough to recognize that for all the cheating that's taken place, there are still lots of folks looking to make a buck in all the right ways.

A case in point is Rite Aid Corp. Yes, the same Rite Aid that made big news the other week when three of its former executives, including ex-chief executive Martin Grass, were indicted by a federal grand jury on charges of altering the company's books by tens of millions of dollars in order to inflate the drugstore chain's earnings and stock price. Nasty stuff. But getting scant attention just three days later was the release of Rite Aid's financial results, which showed the first quarterly profit in at least four years.

Robert Miller, the company's new chief executive, cautioned that losses were likely to reappear in the second and third quarters, but the fact that this company is even standing after massive restatements and criminal investigations should provide solace that there is life after scandal. In a recent report, Value Line analyst Maurice Levenson concludes: Given time, we believe this management team is capable of restoring Rite Aid's market position."

Same holds for WorldCom and Adelphia. These were not, after all, flimsy Internet plays that generated little business. These are substantial companies that could well transform themselves after all their corruption is shaken out.

A sickened system

As for the system itself, it's worth noting that while the Securities and Exchange Commission last year opened 570 investigations, that's just 10 more than in 1994. Also, the 150 or so earnings restatements in each of the last three years represents only 1 percent of all publicly held companies. In other words, this might not be quite the epidemic that's being portrayed.

And yet, the system has been sickened. Manic efforts to pump up earnings, an over-reliance on Wall Street affirmations, rampant greed surrounding executive compensation packages, the malleable ways in which accounting is handled it's all responsible for creating the current mess.

The SEC is being pressured to step up its enforcement of existing laws, as borne out by its speedy civil fraud lawsuit filed last week against WorldCom. But there's a lot more that's needed: increased oversight of the accounting business, new restrictions involving research analysts, and greater clarification on how companies should be allowed to prepare their earnings statements.

I know, I know, devil in the details. Plus, at least some of these reforms will involve Congress and you know they'll somehow manage to muck things up. Still, it's time to take the medicine, even if it's government prescribed. For folks running a clean shop, there's nothing being proposed that can't be digested. For the cheaters and con artists, only jail time and lots of it will do.



Mark Lacter is editor of the Business Journal. He can be reached at mlacter@labusinessjournal.com

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