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States Embarrassing the Feds, part III
Posted By Barry Ritholtz On August 29, 2003 @ 7:19 am In Current Affairs,Finance | Comments Disabled
The very able Jesse Eisinger of the WSJ this morning observes that the Feds have nobody to blame but themselves for Oklahoma stepping into the yawning vacuum that was the lack of Worldcon prosecution. In a piece titled “The Okies Take Over ,” Eisinger states:
Note to those Feds who cringe every time Oklahoma Attorney General Drew Edmondson denounces Bernie Ebbers and works on his klieg-light tan: You brought this on yourselves.
For this is the result of federal investigators — at the SEC and the Justice Department — not enforcing the nation’s antifraud statutes to the fullest extent of the law.
At least lately, federal justice don’t work too well. Cendant’s Walter Forbes still hasn’t been brought to trial; The Feds also let the statute of limitations expire against Sunbeam’s Al Dunlap. Meanwhile, Ken Lay, Jeff Skilling, Richard Scrushy and Bernie Ebbers are still walking about free — and very, very wealthy.
Apparently, crime does pay. Eisinger continues:
And so ambitious pikers from the states step in. The Feds should have learned their lesson from Eliot Spitzer and seen this coming. In the case of WorldCom (now called MCI), public frustration is palpable. The accounting fraud was revealed well over a year ago.
Now any possible case against Mr. Ebbers could be jeopardized, the Feds complain. It’s true. We have national securities laws, national regulators and national authorities because the markets wouldn’t function with 50 different sets of law (not to mention what Guam might say). That’s all the more reason for the Feds not to give any local authority an opening to meddle.
The Feds complain about how difficult it is to prove accounting fraud. But it is their culture that sets them up for second-rate results. They love to settle. When the SEC settles, the guilty party neither admits nor denies wrongdoing. This isn’t a bit of harmless Kabuki theater in which we all know the truth. Indictments and convictions for accounting fraud are exceptions, not the rule. Settlements are less significant than prosecutions that result in prison. Prison deters white-collar criminals. Household names need to be busted quickly and some need to head to jail.
Meanwhile, the States are doing what the Feds would or could not: Killing Worldcom/MCI. In another WSJ which also reveals the huge schism between the WSJ’s reporters and her editorial writers, comes this rather empathetic view of the States flexing their muscles when the Feds refuses to do so: In the article, titled: “States Mull Civil Suits Charging Worldcom/MCI With Widespread Tax Fraud ,” Yochi Dreazen writes:
For MCI, it may be death by a thousand cuts.
The embattled long-distance carrier, reeling from the criminal indictments filed against it and several former executives by Oklahoma prosecutors Wednesday, may soon face civil lawsuits from other state attorneys general alleging widespread tax fraud. The first of the suits, which is being prepared by West Virginia Attorney General Darrell McGraw, may be filed within days, according to people familiar with the matter. At least one other state suit is expected by the middle of next month . . .
The new lawsuits would be another blow for WorldcomMCI, which is struggling to emerge from the long shadow cast by an $11 billion accounting fraud, the largest in U.S. history. The company recently agreed to a $750 million settlement with the Securities and Exchange Commission and had hoped to come out of bankruptcy later this year.
Instead, WorldcomMCI is running into a growing number of roadblocks erected by rivals like Verizon Communications Inc. that believe the company hasn’t been punished enough and would enjoy an unfair competitive advantage if it emerged from bankruptcy debt-free. Verizon has relentlessly lobbied state and federal policy makers to come down hard on MCI. And Verizon has already helped persuade the federal government’s contracting arm to suspend its dealings with MCI and bar the company from new government contracts.
Compare the Worldcom case with the Arthur Anderson/Enron debacle. A few things leap to mind: Arthur Anderson recieved the death penalty. But the vast majority of Anderson employees — I would hazard to say most — had nothing to do with Enron. This could have easily been compartmentalized, with the offending Anderson partner (and everyone who worked for him) excised like a tumor. Instead of removing the cancer, the patient was put to death.
I would note that the Anderson execs at the time played it wrong; They should have moved aggressively to cooperate, mea culpa-ed themselves for not finding out sooner, amd cordon off the rot ASAP. That could have saved the company.
Still, its hard to explain that kind of poor judgement on the Feds part; And, you cannot discuss Enron without noting that the comapnies and its execs were the President’s single largest campaign contributors. It taints the entire issue, making it hard to remove a political component from the entire process.
Enron was put down like the mangy dog it was, but why no charges against the founders and leaders of this vast criminal conspiracy?
Worldcom, unlike Anderson, rotted from the head down. It was corrupted nearly all the way through; We’re still learning about some of their fraud, like routing calls thru Canada and falsely dumping the bills on AT&T and Verizon. There seems to be no end to these miscreant’s bad behavior.
Their punishment? They receive a huge contract to rewire Iraq’s telecomm infrastructure . . .
Does that make any sense to you?
The Okies Take Over 
Article printed from The Big Picture: http://www.ritholtz.com/blog
URL to article: http://www.ritholtz.com/blog/2003/08/states-embarrassing-the-feds-part-iii/
URLs in this post:
 The Okies Take Over: http://online.wsj.com/article/0,,SB106210514824844000,00.html
 States Mull Civil Suits Charging Worldcom/MCI With Widespread Tax Fraud: http://online.wsj.com/article/0,,SB106211056488006100,00.html
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