Chairmen Take to Pleading Ignorance ("Enron" Rubin/"Global Crossing" McAuliffe watch

Chairmen Take to Pleading Ignorance
Sat Oct 5, 2:56 AM ET
By MARK SHERMAN, Associated Press Writer

Two of the largest corporate collapses have at least one thing in common: company chairmen who took their creations to great heights, reaped millions from stock sales — and said they knew nothing of problems until it was too late.

Kenneth Lay's defense after Enron Corp.'s spectacular downfall was that he was largely uninformed of how the energy-trading company's finances worked.

In congressional testimony this week, Global Crossing Ltd. Chairman Gary Winnick could not remember receiving a single warning about potential problems at his fiber-optic company, although senior executives were sounding alarms with increasing frequency in the spring of 2001.

Enron filed for bankruptcy protection in December. Global Crossing followed suit a month later.

Critics have challenged the veracity of the claims of ignorance, which also have raised questions about how involved chairmen should be — especially when they are so closely tied to their companies' rise. Winnick founded Global Crossing, while Lay transformed Enron from a small natural gas company into an energy giant.

"Regardless of size, you should expect chairmen to be aware of major factors affecting the business," said Robert Webb, professor of finance at the University of Virginia's McIntire School of Business.

There are, however, no well-established rules about what chairmen are supposed to know, said Lawrence Mitchell, a George Washington University law professor. Chairmen who are not also chief executive are not necessarily kept abreast of day-to-day business, but instead focus on the big picture. At many corporations, the positions are combined.

Some chairmen are so closely linked to their companies that pleading ignorance would not be credible. The government's antitrust case against Microsoft, for example, revealed that Chairman Bill Gates was intimately involved in the company's affairs, Webb said.

David Skeel Jr., a University of Pennsylvania law professor and expert in corporate bankruptcy, said executives who have asserted they did not know what was happening in the recent round of corporate failures were employing a potentially effective legal strategy.

"Strategic ignorance, you might call it," Skeel said. "If you can argue you didn't know what was going on, it's hard to mount a securities fraud case against you."

Rep. Billy Tauzin, R-La., chairman of the House Energy and Commerce Committee, which is investigating Global Crossing, called Winnick's testimony something else — hard to believe.

"Impending corporate doom. Billion-dollar shortfalls. As many times as he said he didn't know that, I can't believe he didn't know that," Tauzin said.

Lay served as both chairman and CEO, then promoted Jeffrey Skilling to chief executive last year. It was in that period that many of Enron's off-the-books partnerships were formed and used to hide some $1 billion in debt. Skilling also has testified he could not recall being involved in approving transactions related to the partnerships.

Lay resumed running Enron when Skilling abruptly quit in August. He stepped down as chairman and CEO in January.

Lay, who asserted his constitutional protection against self-incrimination when he was summoned to testify before Congress, told an internal investigation he knew little about how Enron's finances worked and the forces behind its downfall.

But William C. Powers, dean of the University of Texas Law School, told lawmakers in February that his investigation found "virtually everyone from the board of directors down" understood Enron used its partnerships to "offset its investment losses with its own stock."

In the Global Crossing case, documents and the testimony of other former and current Global Crossing employees contradict Winnick's assertion that he had no hint of trouble despite daily conversations with CEO Thomas Casey, said Rep. James Greenwood, R-Pa., chairman of the House panel at the forefront of Congress' probe of corporate failures.

Before the bankruptcy filing, Winnick had sold $734 million in Global Crossing stock, including 10 million shares worth $123 million that he sold less than two weeks before he said he first heard the company could be in financial trouble.

Tauzin pointed to the May stock sale as the principal reason Winnick repeatedly said he didn't recall earlier warnings. If he acknowledged having been told of problems before selling his stock, he would have opened himself to allegations of insider trading, Tauzin said.

CEOs Worry Governance May Go Too Far
Sat Oct 5, 7:49 AM ET
By Brian Kelleher

WHITE SULPHUR SPRINGS, W. Va. (Reuters) - Top U.S. executives are disgusted by the excesses of some peers and satisfied with actions taken so far to clean up corporate America, but there is concern that lawmakers may go too far.

"Usually in this country when we react to scandals, the pendulum does swing too far and we later regret it," Franklin Raines, Chief Executive of Fannie Mae, told Reuters. "Its not unusual when Congress is responding to an outraged public that they might go too far in one way or another."

Corporate scandals like the Enron Corp. and WorldCom debacles have shaken up investors and have led to criminal indictments of some formerly high-flying executives. It has also tainted the role of chief executive officer.

"It is appalling what some CEOs did in abusing the trust that they had," Raines said. "I am mortified by it as a CEO and chagrined that I'm painted with that same brush."

Corporate governance was one of the hottest topics at a meeting of high-powered CEOs -- known as the Business Council -- at the posh Greenbrier Resort here this week. Past attendees who were notably absent this year included Kenneth Lay, disgraced Enron CEO, and former Tyco boss Dennis Kozlowski, who has been indicted for corruption.

The Sarbanes-Oxley Act, passed this summer in response to the flood of scandals, represented the biggest overhaul of U.S. corporate and accounting regulation since the 1930s.

CEOs and chief financial officers now must sign off on their financial results, making them personally responsible. New York Stock Exchange rules also have been developed to make corporate boards more independent.

"The broad governance issues that were addressed by Sarbanes-Oxley were needed and will be good," Ken Lewis, CEO of Bank of America Corp., said. "We (as CEOs) should all put our heads down, get back to our businesses, benefit our shareholders and lead by example."

WALL STREET EXCESSES

Wall Street was well represented at the meeting, with J.P. Morgan Chase & Co. CEO Bill Harrison, Citigroup Inc.'s Sandy Weill and Goldman Sachs Group Inc. chief Henry Paulson in attendance.

All three executives have been beleaguered by federal and regulatory investigations into business practices ranging from questionable dealmaking to stock offering allocations and the objectivity of stock research.

Weill and Paulson were unavailable for comment, but Harrison, who is vice chairman of the Business Council, addressed some issues at a press conference on Wednesday.

"We were all part of the excesses of the '90s," he said. "We are all having to respond to it."

Critics charge bankers pressure analysts to issue overly bullish research to help win underwriting and advisory deals. The separation of stock research from investment banking and other dramatic changes on Wall Street are an increasingly likely possibility these days.

"I just hope we don't go too far ... and damage the fabric of what has made Wall Street great and what has made America great," Harrison said.

COSTS

Many CEOs declined to talk to reporters during the conference, perhaps a signal that they have been stung by the negative publicity surrounding corporate executives.

"When the man on the street thinks we're all crooks, that hurts," said Sprint Corp. CEO Bill Esrey. "If you spent your time trying to work for your company, build up your company, believe you're doing the right thing, it's a very difficult environment."

With regulation comes costs as well. While 95 percent of respondents to a poll of 75 CEOs said the new rules did not make them change their long-term plans, the costs of having to make sure things are above board can be add up.

"Signing off on documents without making any changes to them ... is costing my shareholders," said Scott McNealy, CEO of Sun Microsystems Inc. "Making it difficult for people to serve on boards will lower the quality of governance in companies massively, that's going to cost my shareholders."

(Additional reporting by Jeremy Pelofsky)

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