~ ~ ~
The poop on Pricewaterhouse’s Coop
Sightings from The Catbird Seat
~ o ~
PricewaterhouseCoopers (or PwC) is the world's largest professional services
firm. It was formed in 1998 from a merger between Price Waterhouse and Coopers &
Lybrand. PwC is the largest of the Big Four auditors, whose other member firms
include Deloitte Touche Tohmatsu, Ernst & Young and KPMG.
PricewaterhouseCoopers earned aggregated worldwide revenues of $20.3 billion for
fiscal 2005, and employed over 130,000 people in 148 countries.
In the United States, where it is the fourth largest privately owned organization, it
operates as PricewaterhouseCoopers LLP.
May 19, 2009
AIG investors to get
$843 million: SEC
WASHINGTON (Reuters) - A federal court has approved the distribution of more than
$843 million to harmed investors at insurer American International Group, the U.S.
Securities and Exchange Commission said on Tuesday.
The court estimates that checks will soon be mailed to more than 257,000 AIG
investors that were affected by an alleged accounting fraud at the company, the SEC
AIG, which has been propped up by billions of dollars in taxpayer funds, was
charged with accounting fraud in 2006. The SEC alleged that the insurer falsified its
financial statements from at least 2000 until 2005 and reported misleading information
about its financial condition.
The company, which did not admit or deny the allegations, had repaid its ill-gotten
gains, as well as penalties to the government. In 2007, a federal court authorized the
SEC to establish a 'fair fund' to distribute the money to harmed AIG investors.
"The commission continues to utilize the tools that Congress provided to ensure that
funds are returned to harmed investors to the greatest extent possible," said Dick
D'Anna, director of the SEC's office of collections and distributions, in an agency
For more, GO TO > > > AIG: The American Idol of Greed; The Buzzards In Charge of
the AIG Bailout; Googling for AIG + PWC; RICO in Paradise; Googling for Fraud +
PricewaterhouseCoopers; Googling for PricewaterhouseCoopers + Tyco+Fraud;
Googling for PricewaterhouseCoopers+Catbird+Seat +fraud; SELLOUT!
* * * * *
THE CATBIRD’S NEST:
WHAT PRICE WATERHOUSE?
* * * * *
April 23, 2009
David Kellermann, Freddie Mac CFO,
Said To Have Committed Suicide
AP | ALAN ZIBEL and MATTHEW BARAKAT
UPDATE: 11:55 PM: The Washington Post reports more new information about
Kellerman's apparent suicide, including the heartbreaking detail that his wife discovered
him hanging from a piece of exercise equipment in the basement.
In addition, he was not immune to some of the recent controversies at Freddie Mac:
He and a group of company attorneys tussled with its regulator in early March as the
firm prepared to file its quarterly earnings report with the Securities and Exchange
Commission. The group insisted that Freddie Mac inform shareholders of the cost to
the company of helping carry out the Obama administration's housing recovery plan.
The regulator urged the company not to do so, according to several sources familiar
with the matter. An FHFA official contested that account, saying the regulator did not
oppose disclosure but how the information was portrayed in the filing.
UPDATE 11:30 PM: More details have emerged about the last few months of David
Kellerman's life. According to the New York Times, he was alarmed by the public outcry
over bonuses, he arranged security guards to watch his home.
Then early this month, Mr. Kellermann and other executives at Freddie Mac and
Fannie Mae became the focus of intense scrutiny when lawmakers learned they would
receive bonuses totaling $210 million. Mr. Kellermann was set to receive $850,000
over 16 months. Reporters and camera crews showed up at his home in Vienna, an
affluent Virginia suburb of Washington. Fearing that someone might attack his house,
his wife or their 5-year-old daughter, he asked the company for a security detail.
According to colleagues, the usually jovial Kellerman had appeared "stressed and
overwhelmed by the job." The Wall Street Journal reports:
"He worked himself into a frazzle," a former co-worker said. Colleagues said Mr.
Kellermann was involved in dealing with investigations into Freddie's accounting by the
Justice Department and the Securities and Exchange Commission, but that there
was no indication he was a target or that the inquiries were causing him anguish.
UPDATE 12:35: SEC, Justice Department investigating accounting practices at the
The Wall Street Journal is reporting that the SEC and the Justice Department have
been questioning Freddie Mac "officials" on possible accounting violations. The
company made the disclosure in an SEC filing in March:
Freddie disclosed in the recent SEC filing that in September it received a federal grand
jury subpoena from the U.S. Attorney's Office for the Southern District of New York
seeking documents related to accounting, disclosure and corporate-governance
matters. That subpoena was later withdrawn, Freddie has disclosed, and the
investigation was taken over by the U.S. Attorney's Office for the Eastern District of
"We know of no connection between this terrible personal tragedy and the ongoing
regulatory inquiries discussed in our recent SEC filing," said David Palombi, Freddie's
UPDATE 11:30 AM EST: Treasury Secretary Timothy Geithner issued a statement
on acting Freddie Mac CFO David David Kellermann's death:
"On behalf of the Treasury we are deeply saddened by the news this morning of David
Kellermann's death. Our deepest sympathies are with his family and his colleagues at
Freddie Mac during this difficult time."...
# # #
* http://www.freddiemac.com/investors/faq.html :
11) Who is Freddie Mac's auditor?
PricewaterhouseCoopers LLP (PwC) has been our auditor since March 6, 2002.
February 6, 2009
PwC dragged into Satyam class action suits
In a new class action lawsuit over the Satyam scandal, global audit major PwC, along
with its Indian and international units, has been charged with having 'recklessly
disregarded' a multi-year massive fraud by the former management of Satyam, which is
already facing many such cases in the US courts.
The lawsuit has been filed in the US District Court, Southern District of New York, by
Pomerantz Haudek Block Grossman & Gross LLP law firm against Indian IT firm
Satyam, its former chairman B Ramalinga Raju, his brother B Rama Raju and Satyam's
outside auditors PricewaterhouseCoopers Pvt Ltd, Price Waterhouse and
Pricewaterhouse Coopers International Ltd.
The suit was filed on behalf of purchasers of Satyam's American Depository Receipts
between January 6, 2004 through January 6, 2009.
'In addition to allegations of fraud against Satyam and the officer defendants, the
complaint alleges that PwC was aware of, or recklessly disregarded, a multi-year
massive fraud by Satyam management to overstate the company's earnings and
concocting $ 1 billion of cash that didn't exist,' the law firm said in a statement.
'The case further alleges that PwC ignored red flags that should have alerted it to the
fraud, and moreover, failed to perform its audits in accordance with the requisite
accounting principles,' it added.
Price Waterhouse, the Indian unit of the global audit major, has been maintaining that it
followed all the standard accounting principles while auditing the books of Satyam
Computers. However, it also said that its auditing on Satyam could be construed invalid
if the statements made by Raju in his admission letter on January 7 about the fraud
Raju had said that the financials of the company were incorrect for past several years,
thus inflating the profit and cash position and under-stating the liabilities.
Two partners of PwC have been arrested in India in connection with their audits of
Disclosure of the stunning fraud at Satyam materially impacted the price of the
company's ADRs. Trading in the company's ADRs was briefly halted after the fraud was
revealed, and the ADRs are now currently trading just below two dollars, a precipitous
drop from the company's 52-week high of 29.84 dollar, the law firm said.
January 23, 2009
Will Satyam sink PriceWaterhouseCoopers?
by Peter Cohan
Filed under: India, Scandals
After Enron, Arthur Andersen collapsed. With a new bombshell allegation about
Satyam Computer Services (NYSE: SAY), will its former auditor
PriceWaterhouseCoopers (PWC) be next? To be fair, I have not seen any evidence
implicating PWC in the Satyam scam. But surely PWC can't have been so incompetent
that it did not know what its client was doing.
Satyam's CEO, B. Ramalinga Raju, initially claimed that there was a $1.1 billion
shortfall between its reported and actual cash. Now an Indian prosecutor alleges that
Raju made up 10,000 employees and then used the money those fake employees
would have received (net of taxes and insurance) to buy land through almost 400
companies with fake names -- including that of his elderly mother. The prosecutor also
alleges that Raju forged documents related to bank deposits.
You can't make this stuff up! And if these allegations are true, it does make me wonder
what PWC was doing to earn its fee. There are some basic things that auditors are
supposed to do -- like checking a company's bank deposits and comparing those to
what management reports or verifying that the employees who are getting paid actually
exist. If PWC couldn't pull off these basics, then it was either incredibly incompetent or
in with management on the scam.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches
management at Babson College and edits The Cohan Letter. He has no financial
interest in the securities mentioned.
Tags: accounting, B. Ramalinga Raju, B.RamalingaRaju, India, inthenews,
December 16, 2008
THE FINTAG NEWSLETTER
Madoff part 2.
Last Thursday the news broke and it hardly registered a blip on the news radar. Today
we face financial meltdown of the hedge fund industry and the loss of tens of
billions of dollars and the destruction of livelihoods.
Yesterday I looked critically at the investors who had not read the prospectuses or
carried proper due diligence. The problem with Madman Madoff's funds is you could
only touch them by investing through feeder funds. These feeder funds were promoted
by interested parties who put layers of fees on top and sold them as proper fund of
Take the Fairfield Sentry fund. It has a proper Auditor - PWC, an administrator and a
custodian - Citco. It is a BVI fund and is managed by a well known Investment
Manager. So far, so good. Ok, the custodian only looks after 5% of the assets (the
other 95% are looked after by Madoff) but unless you like reading small print it looks
The biographies of the managers are respectable, including Jeffrey Tucker who used
to work as a lawyer for the SEC. The fund has a board including 2 directors located in
risk adverse Switzerland. One of the directors is not paid which is strange but I guess
he must be paid elsewhere. Thankfully, Goldman Sachs is a sub custodian although I
think Refco must have been a misprint.
The Investment objective is "The Fund seeks to obtain capital appreciation of its assets
principally through the utilization of a nontraditional options trading strategy described
as "split strike conversion", to which the Fund allocates the predominant portion of its
assets. This strategy has defined risk and profit parameters, which may be ascertained
when a particular position is established ..." and sounds quite convincing.
I am not so sure about the Investment Restrictions including "e) no more than 10
percent of the Net Asset Value of the Fund may be invested in securities of countries
where immediate repatriation rights are not available;" but I like the fact US citizens are
excluded - "The Fund will require as a condition to the acceptance of a subscription that
the subscriber represent and warrant that he has a net worth in excess of U.S.
$1,000,000 and is not a U.S. person".
The 13 year track record averages in excess of 10% a year and its volatility is very low
indeed. The fund has grown and subscriptions exceed redemptions so it must be a
Excellent. So where did it go wrong? Well PWC have some explaining to do. It looks
like they never validated the underlying investments. Madoff obviously just gave
them the NAVs and they took them as red. Citco's care of duty is to look after the
assets and it has done so. Shame it only looked after 5% but that is better than nothing.
The manager should perhaps have carried out some proper due diligence on the
underlying but then it made so much in fees it got a bit punch drunk.
So there you go. A sound investment run by people who didn't quite do their jobs. I take
back all my negative posturing and instead tell you how I see it through a slew of crap
cartoons and virals....
October 6, 2008
PwC Zapped in $97.5-million Settlement
The auditor, accused by Ohio of violating securities laws in its work
with AIG, will pay one of the highest amounts ever for an accounting
firm in a class action.
Alan Rappeport, CFO.com
PricewaterhouseCoopers agreed to pay $97.5 million to the state of Ohio to settle a
class-action lawsuit on behalf of investors in troubled insurer American International
Group, which uses PwC as its independent auditor.
The "partial" settlement, on Friday, came after the Ohio Public Employees
Retirement System, the State Teachers Retirement System, and the Ohio Police
and Pension Fund filed a lawsuit seeking damages for investors who bought AIG
securities from 1999 to 2005. In the complaint, PwC was accused of violating
securities laws relating to a market division scheme allegedly involving AIG that
was disclosed in 2004 and improper accounting for reinsurance and other
In May 2005, AIG's accounting problems led to a $3.9-billion restatement, and
removal of former CEO Maurice Greenberg.
The settlement is among the 10 highest to be paid by an accounting firm to settle a
securities fraud class action lawsuit, according to Nancy Rogers, Ohio's attorney
general. The arrangement, however, still needs to be approved by the U.S. District
Court for the Southern District of New York in Manhattan.
"This important settlement represents a tremendous result for investors," said Chris
Geidner, principal assistant attorney general. "We are pleased with this milestone and
will continue to vigorously pursue investors' claims against the remaining defendants in
"We have decided to settle the case at this stage to avoid the enormous litigation costs
that would be incurred if the case continued against the firm, while at the same time
eliminating any potential exposure," said Steve Silber, a PwC spokesman told The
Columbus Dispatch. "The settlement does not contain an admission of wrongdoing
by the firm, and we continue to believe that our work was in accordance with
AIG currently is facing another lawsuit filed in May by the Jacksonville Police and Fire
Pension Fund. The Florida fund accused the insurer of manipulating the market by
making false statements about its financial health before disclosing a first quarter loss
of $7.8 billion. PwC is not implicated in that lawsuit and in February it gave a warning
sign of AIG's problems when it found that there was a "material weakness in its internal
control" relating to the accounting of its credit default swaps portfolio.
Last month the U.S. government agreed to an $85 billion bail out of AIG in exchange
for warrants to purchase 80 percent of the company, which is selling off several units
of its business to repay the loan.
See also: RICO in Paradise
June 6, 2008
seeking AIG data
WASHINGTON - Federal prosecutors have asked the Securities and Exchange
Commission for material from its probe of whether American International Group Inc.
overstated the value of mortgage-linked contracts, according to a newspaper report
The request to the SEC from prosecutors in the Justice Department and the U.S.
Attorney's office in Brooklyn, N.Y., could lead to a criminal investigation of the matter, in
addition to the SEC's civil inquiry into AIG. The development was reported in Friday's
editions of The Wall Street Journal, which cited unnamed people familiar with the
New York-based AIG, one of the world's largest insurance companies, paid a then-record $1.64 billion in February 2006 in a settlement with federal and New York state
authorities over alleged deceptive accounting practices.
The current SEC investigation focuses on AIG's valuation of credit default swaps,
which function as insurance policies against defaults, including those backed by
subprime mortgages, The Journal reported.
The company in February told the SEC that its outside auditors had found significant
weakness in how it reports the value of certain credit default swaps. AIG also said the
auditors had concluded that the company "had a material weakness in its internal
control over financial reporting and oversight" related to how it determines default
probabilities and expected losses on the underlying securities.
Due largely to writedowns related to credit default swaps of more than $20 billion
through March, the company posted the two biggest quarterly losses in its history: a
$7.8 billion loss for the first quarter, following a loss of nearly $5.3 billion in the fourth
SEC spokesman John Nester in Washington and Bob Nardoza, spokesman for the
U.S. Attorney's office in Brooklyn, on Friday both declined to confirm or deny
investigations by the agencies.
AIG spokesman Chris Winans also would not confirm a federal probe. He said AIG
has always cooperated with regulators and has "consistently and promptly" provided
best estimates of its portfolio valuations and potential exposures of its financial products
amid the recent uncertainty in the credit markets.
The finding of material weakness doesn't mean that the company has reported
inaccurate financial results, Winans said. "We have clean audited financial
statements with no qualifications from our auditors," he said.
< < < FLASHBACK < < <
October 24, 2007
Arthur Levitt and AIG -
Gone Over To The Dark Side, Artie?
I waited to post this story about AIG's reappointment of PricewaterhouseCoopers as
their external auditor. I am incredulous. I was slightly apoplectic too, but then I calmed
After all, greater minds than mine, like the famous Arthur Levitt, have made sure that,
"AIG's selection process was designed and executed with integrity, and the Audit
Committee's evaluation of the proposals was both fair and impartial. AIG did an
It seems Levitt was hired by AIG in 2005 to spruce up their image in the wake of
Elliot Spitzer's investigation of AIG. Mr. Levitt's tenure at that time was expected to be
less than a year as a special consultant to the Board, but it has obviously taken longer
than that to address AIG's governance problems and will continue to take longer to fix
them completely, if that's possible. Mr. Spitzer was the former Attorney General for the
State of New York and is now their Governor.
The audit committee of AIG's board of directors spent 12 months on the RFP process,
which is part of the company's 2006 settlement with the New York Attorney General's
Office, said AIG spokesman Chris Winans.
The agreement, Winans said, required AIG to take actions above and beyond the
normal annual review of its relationship with the company's independent auditor. This
RFP is something we did as part of the settlement agreement, he said. It requires us to
do the RFP process for the 2008 fiscal year.
In 2006, AIG agreed to pay a total of $1.64 billion to settle litigation stemming from New
York state and federal investigations of its accounting, financial reporting and insurance
brokerage practices, and claims related to workers' compensation premium taxes.
Mr. Levitt, therefore, is not a court appointed monitor based on a settlement with the
SEC, a la Mr. Breeden and KPMG, but a shill for AIG.
Interestingly enough Mr. Levitt has a long and contentious history with PwC. It all
goes back to reforms he wanted to make to how the audit firms did and didn't do
business and how PwC was the big stubborn holdout. This was in spite of the fact that
they had been nabbed big time with serious independence violations and the SEC
could have disqualified the audited financial statements of all of their clients (and
caused them to have to resign from those clients) if they had not cooperated with the
regulators at the time. For a history of this sword fight, go here.
So it's all the more surprising that Arthur Levitt was willing to stand by and put his
imprimatur on the charade which is the reappointment of PwC at AIG. After all, AIG's
shareholders are suing PwC. And PwC has been AIG's auditor for as long as they
have been in trouble.
I have seen some Google searches regarding this "RFP" process wherein other firms,
in particular Deloitte, are searching for more details about why they weren't chosen. Let
me give them all a clue... The fix was in.
I have requested via the Freedom of Information Act provisions for the State of New
York Attorney Generals office, a copy of the RFP, the responses, the evaluation
process and the grading of all proposal submissions. I have heard no response from
them. Given that this was a public agency mandated process, I would assume that
public disclosure would be mandated. Will make for interesting reading, if so. How can
anyone for the Attorney General's Office be sure that it was a fair and competitive
process if they also do not see and approve the process that AIG conducted?
As for Mr. Levitt, I am disappointed. I guess everyone has to make a buck. But I had
hoped he would do it by being on the side of the investor and the other
stakeholders of AIG, and not on the side of perpetuating the myth of a job well
done by PwC as AIG's auditor.
Update: One of my favorite writers on these subjects reminded me:
"If you really want to have some fun with this, remember also that Levitt can't let go of
his affiliations inside the Beltway -- now acting as co-chair of the so-called Paulson
committee, along with Don Nicholaisen. Looking at the list of members, it's almost
sure to be MOTS..."
Re: The Auditors
DOW CORNING CORPORATION
SILICONE BREAST IMPLANT PRODUCT LIABILITY
American Institute of Certified Public Accountants
Kathryn J. Wilkiki, Assistant Professor of Accountancy
Providence College, Providence, Rhode Island
Maureen L. Craig, Corporate Area Controller
Dow Corning Corporation, Midland, Michigan
~ ~ ~
Spencer Tillinghast hung up the phone and sighed. Christmas was only a few weeks
away and the winter of 1991 had, so far, been mild. However, his employer, Dow
Corning Corporation (DCC), was faced with another disappointment with respect to the
silicone breast implant product. The legal department had just informed him that a
judge awarded a sizable amount to another woman who had sued for leakage of
silicone breast implants. This time, the award was $7.3 million!
Spencer had been a controller at Dow Corning in Midland, Michigan for the past ten
years, starting at the company in 1981. As the controller, he had the responsibility to
make final decisions about several financial reporting issues to prepare the annual
report to the company’s bondholders. In addition, it was his responsibility to work with
the external auditors at Price Waterhouse.
Since this last lawsuit had resulted in a adverse verdict against DCC, he anticipated
recording a liability and writing a footnote to the financial statements to explain the
outcome of the litigation. His more immediate problem was how to report other claims
that were already pending, and other unasserted claims that he anticipated might
materialize when news of the judgment broke. At this point, the lawyers would be
involved with filing appeals. He was not sure whether they would be able to assess
possible losses under future claims....
For more, GO TO > > > The Downfall of Dow-Corning
From: Trini whistleblower <email@example.com>
Date: Mar 19, 2006 8:29 PM
Subject: CLICO Fraudulent Transactions Covered up by PWC
PriceWaterhouseCoopers are at it again. First it was with AIG and now it is with the
Colonial Life Insurance Company (CLICO) in Trinidad and Tobago.
The following are the brief details :
1) There is impropriety in the accounting treatment of expenses and guarantees in the
CSI CLICO mutual fund.
2) There is collusion by PwC to knowingly allow materially incorrect presentation of
3) CLICO is transferring assets to / from the mutual fund in breach of the law.
4) The CSI Mutual fund has a $800 Million deficit
5) Funds are being withdrawn by the Chairman in breach of the law and sent to Miami.
The Central Bank is incapable of doing a proper investigation since their staff are not
adequately trained or qualified to do a proper life insurance audit . The SEC in Trinidad
on the other hand have no investigative ability and are a ' non entity'.
We need to protect the Policyholders!!!!!!!
* * *
Date: Wed, 15 Nov 2006 16:44:53 -0400
From: " Trini whistleblower" <firstname.lastname@example.org>
To: "Balynsky, Paul" <BalynskyP@pcaobus.org>, email@example.com,
firstname.lastname@example.org, email@example.com, firstname.lastname@example.org, "Malabanan,
Gloria" <MalabananG@pcaobus.org>, email@example.com,
firstname.lastname@example.org, email@example.com, firstname.lastname@example.org, email@example.com, firstname.lastname@example.org, email@example.com
Subject: CLICO ACCOUNTING FRAUD
It is now confirmed that Clico submitted fraudulent financial statements that was audited
by PriceWaterhouseCoopers. The SEC and Central bank are doing nothing because
both parties have been compromised. Icatt is not investigating because some of the
executives are from Pwc.
Clico has not produced any Mutual Fund Accounts to this date and has dropped the
rate to 5% to close down the fund before anyone investigates. They have used the
mutual fund (much like how Enron used dummy companies) to inflate earnings and
hide liabilities. PWC was an accomplice to this by signing the audit reports. They
are not releasing the mutual fund reports because it would reveal the accounting fraud.
This is the first of hundreds of bulletins that will be sent to people across the world.
March 29, 2006
PwC settles dotcom fraud case
By John Oates, The Register
PricewaterhouseCoopers (PwC) has made an out-of-court settlement with
shareholders of e-district who alleged the accountancy giant had failed to discharge its
The case had been due in court in June, and all details of the settlement are
E-district was the last bubble on board the dotcom bandwagon. It claimed one million
users and raised almost £30m selling shares to institutions before it floated on AIM.
PwC was the firm's accountant.
But it all came falling down in 2001 when the CEO was suspended over gaps between
real and claimed revenues, page impressions and number of users. At the end of 2000
it claimed 2.6m active users but an investigation in early 2001 found just over 50,000
The company blamed the ex-CEO Steven Laitman. He was accused of bringing
money into the company and falsely labelling it as revenue from sales agencies.
PwC was being sued by 110 shareholders because it was the company accountant and
A statement for the accountants said the firm was happy to draw a line under the
matter. More from the Independent here. ®
April 11, 2005
Tough Questions For AIG’s Auditors
Regulators are probing if PwC let the
financial shenanigans slip through
By Joseph Weber, Mike McNamee, Marcia Vickers & Diane Brady
Where were the auditors? Now that American International Group Inc. has admitted
to a clutch of accounting improprieties and is mulling whether to restate its past results,
an all-too-familiar question is emerging: Why didn’t the auditor catch what was going
Were misdoings hidden from AIG’s longtime auditing firm PricewaterhouseCoopers,
or did the firm turn a blind eye to problems it should have seen? Indeed, some of the
searing heat that has so far felled AIG Chief Executive Maurice R. “Hank” Greenberg
and several other execs could soon scorch the $17.5 billion accounting giant....
Because of its role as a dominant force in auditing and accounting for insurance
companies, PricewaterhouseCoopers’ outfit is bound to get an especially close going
over from regulators and shareholders alike. Certainly. the outfits were close. PwC or
its predecessor companies, such as Coopers & Lybrand, had done work for AIG going
back more than 20 years.
How deep were the ties? Recently ousted Chief Financial Officer Howard I. Smith,
whom AIG fired for refusing to cooperate with investigators in the latest probes, had
worked at Coopers & Lybrand for 19 years and was the head partner in its New York
insurance practice before joining AIG in 1984...
More important, PwC was AIG’s auditor through its long years of questionable dealings.
AIG on Mar. 30 said that deals with a Barbados-based insurance company, for
instance, may have been incorrectly accounted for over the past 14 years, because an
AIG-affiliated company may have been secretly covering that insurer’s losses. If AIG
has to unwind its dealings with the Barbados company, it may be forced to take a big
More recently, PwC appears to have dropped the ball on the now-notorious reinsurance
deals between AIG and Berkshire Hathaway Inc.’s General Re Corp.
In those deals, General Re transferred $500 million in anticipated claims and premiums
to AIG. At issue for PwC: Did the auditor do its job by verifying that AIG was assuming
risk on claims beyond the $500 million, thus allowing AIG to account for the deal as
insurance. That’s Accounting 101 in any reinsurance transaction. But the company
itself now admits the business should have been accounted for as a deposit rather than
“The auditor obviously should really stop and think about this because the
transaction really doesn’t pass the smell test,” say Penn State’s [Edward] Ketz.
In its statement, AIG has admitted that some of the paperwork associated with the
deals were improper – but it’s not clear whether the deals were illegal or how much
PwC was told about them. ...
“These seem like things you’d expect an auditor to look at,” says New York attorney
Gerald H. Silk, a plaintiff’s lawyer whose firm has brought cases against Arthur
Andersen and other big auditing firms. “There are sufficient red flags.”...
How vulnerable could PwC be? Already, institutional shareholders, who sued AIG last
fall when its stock began a 21% plunge amid the investigations, are considering roping
the auditing firm into a class action.
“As the case develops we’ll be bringing in other responsible parties,” says Thomas A.
Dubbs, a New York lawyer for three big Ohio pension funds that have lost tens of
millions of dollars on their AIG holdings. Dobbs, working on behalf of the Ohio
Attorney General in the class action, adds that PwC may be among the shareholder
targets. And regulators say PwC could also face regulatory action.
PwC’s level of culpability could take years to sort out. ... Already, though, it is looking at
a hefty blemish on its role as a leader in insurance accounting.
The growing tumult born of AIG’s questionable accounting is just beginning.
For more, GO TO > > > Claims By Harmon; More Claims: PricewaterhouseCoopers;
Dirty Gold in Goldman Sachs; Dirty Money, Dirty Politics & Bishop Estate; The Un-American Insurance Group; The Great Nest Egg Robberies; The Strange Saga of BCCI
January 12, 2005
PricewaterhouseCoopers face HUGE fine,
claimed trade secrets revealed
MT Law Blog
The Cleveland Plain Dealer reports that PricewaterhouseCoopers LLP could be fined
$345 Million because it stalled and mishandled the production of documents in two
The cases [Hayman, et al v. PricewaterhouseCoopers, Case No. 1:01-CV-1078
(N.D. Ohio)] in U.S. District Court in Cleveland stem from Pricewaterhouse’s
relationship with Telxon Corp., a troubled maker of hand-held computers and
While the fine is newsworthy by itself, it looks like the court is releasing information that
PWC claims to be their trade secret.
Magistrate Patricia Hemann’s recommendation isn’t new. She issued her report
in July, but Pricewaterhouse persuaded the court to keep it under seal, arguing it
revealed trade secrets about the firm.
Judge Kathleen O’Malley, who will make the final ruling in the cases, disagreed
with Pricewaterhouse and put Hemann’s report back on the public docket on
Tuesday. O’Malley can adopt the recommendations in whole or in part or can
come to her own conclusions.
At one point, Pricewaterhouse said it had produced more than 55,000
documents, along with indexes, to comply with Telxon’s requests. The firm
initially balked at handing over its electronic databases because it said they
contained trade secrets.
You would think that PWC’s competitors are scurrying over to Pacer to download the
report. It’s document No. 204 from the docket sheet.
May 11, 2004
Warnaco Settles Fraud Case With SEC
PricewaterhouseCoopers, former auditor for
apparel maker, to pay $2.4 million to settle charges.
NEW YORK - Warnaco Group Inc., its former auditor PricewaterhouseCoopers LLP,
ex-CEO Linda Wachner and others have agreed to pay $4 million to settle charges
related to the company’s financial disclosures, federal regulators said Tuesday.
Under the terms of the agreement, PwC will pay a $2.4 million penalty, the Securities
and Exchange Commission said. Wachner will give back $1.33 million, the amount of
her 1998 bonus plus prejudgment interest.
Former general counsel Stanley Silverstein will return $165,772, reflecting the value of
his 1998 bonus plus interest.
Former chief financial officer William Finkelstein agreed both to pay a $75,000 civil
penalty and to disgorge his 1998 bonus. His total fine comes to $264,464.
In addition, the commission said Finkelstein consented to an order prohibiting him from
acting as an officer or director of a public company for four years.
The SEC said Warnaco – whose brands include Calvin Klein Jeans, Chaps Ralph
Lauren sportswear and Warner’s intimate apparel – was charged with securities
fraud for issuing a false and misleading press release about its financial results for the
1998 fiscal year.
On March 2, 1999, according to the SEC, Warnaco issued a press release touting
“record” results for 1998. What the press release didn’t say was that Waranco had
already discovered a $145 million inventory overstatement that would require the
company to restate and significantly lower its financial results for the prior three years.
A month later, the company filed its 1998 annual report. That filing, according to the
SEC, correctly accounted for the $145 million overstatement but misled investors by
characterizing it as a write-off of “startup-related costs.”
In reality, according to the SEC, the overstatement resulted from poor inventory
accounting and internal controls. The commission faulted Wachner, Finkelstein, and
Silverstein for the misstatements, both in the initial press release and the 1998 yearly
The SEC responded by accusing Warnaco of committing securities fraud when it issued
the press release. Regulators also charged PwC, Warnaco’s auditor at the time, with
aiding and abetting reporting violations in the annual report. Finkelstein was charged
separately with aiding and abetting the company’s fraud, the SEC said....
The defendants agreed to settlements without admitting or denying the allegations in
the complaints, the SEC said.
January 28, 2004
Auditor Concern Arises
at Tyco Trial
The New York Times
Lawyers for the former chief executive of Tyco International, L. Dennis Kozlowski,
asked a New York judge to keep prosecutors from asking the company’s former outside
accountant about his lifetime ban from auditing public companies.
The former accountant, Richard P. Scalzo, was barred from auditing public companies
in a settlement with the Securities and Exchange Commission. The judge, Michael
Obus of State Supreme Court in Manhattan, said he was inclined to bar prosecutors
from asking Mr. Scalzo about the subject at the fraud trial of Mr. Kozlowski and Tyco’s
former chief financial officer, Mark H. Swartz.
The S.E.C. accused Mr. Scalzo of “recklessly” issuing fraudulent audits after ignoring
evidence that executives were looting Tyco. Mr. Kozlowski and Mr. Swartz have been
on trial since September, charged with stealing $170 million by hiding bonuses and
secretly arranging for the forgiveness of company loans.
Mr. Scalzo’s role as the partner at PricewaterhouseCoopers overseeing Tyco’s audits
has been a crucial issue. Defense lawyers said that bonuses the two men were
accused of stealing from Tyco were disclosed to Mr. Scalzo.
A lawyer for Mr. Kozlowski told jurors at the start of the trial that Pricewaterhouse gave
the “Good Housekeeping Seal of Approval” to the payments....
For more, GO TO > > > Tracking the Tyco Flock
January 7, 2004
BERKSHIRE HATHAWAY UNIT
ACCUSED OF FRAUD
By Bernard Condon, Forbes
One of Warren Buffett’s companies is fighting charges it helped a customer cook its
For insurance gumshoes, it’s an improbable a scenario as finding a man with a smoking
gun standing over a corpse. The scam is for a company to lend money to another but
call it “insurance” instead so the borrower doesn’t have to put debt on its balance sheet.
The problem is, the perpetrators are usually smart enough not to put any incriminating
stuff in writing.
That is, unless they work for Warren Buffet.
In a case filed in November in U.S. District Court in Richmond, Va. that state’s
insurance commissioner accuses General Reinsurance, a subsidiary of Buffett’s
Berkshire Hathaway, of helping a now-defunct medical and legal malpractice
insurer dress up the books with just such a disguised loan, among other “secret” deals.
And he says he had e-mails from Gen Re to prove it.
Gen Re, based in Stamford, Conn., says it has e-mails of its own exonerating it and
that it was only named as a defendant because it has lots of money. Hanging in the
balance are 18,000 doctors and lawyers with $200 million in unreimbursed claims
who were forced to scramble for replacement insurers.
It’s a complicated suit and it’s not clear where bad – but legal – industry practices end
and fraud, if there’s any, begins. But the case follows the collapse of four American,
Australian and British firms caught in allegedly similar schemes and an SEC settlement
in September to keep American International Group from hawking such bogus
insurance (FORBES, Oct 6, 2003).
Seeds of trouble
The seeds of today’s troubles were planted in 1989 when the privately held malpractice
insurer Reciprocal of America asked Gen Re for help moving money offshore to
cut its tax bill. Gen Re agreed to pay future claims under some ROA policies in
exchange for customers’ premiums – that is, it reinsured ROA. But then it passed
much of this claims risk to another reinsurer, a Bermuda outfit called First Virginia
that was run by ROA management and paid little in U.S. taxes.
At first, providing this not-uncommon middleman service was no problem for Gen Re.
But insurance claims started flowing in, and money flowed out of First Virginia.
In 1998 Gen Re helped bolster First Virginia’s finances by taking some risk back from
the Bermuda company – in effect reinsuring its reinsurer. But this was “sham
reinsurance,” according to the complaint. Gen Re allegedly worked out a secret deal
obligating ROA to “make [Gen Re] whole” if it go stuck with big claims, according to a
letter written by a Gen Re executive that is cited in the suit.
In effect, ROA would be paying back Gen Re for providing First Virginia with a
“booking benefit” or “loan,” to quote the Gen Re executive in two subsequent e-mails.
How to get this money back to Gen Re without anyone’s noticing? ROA, the Gen Re
letter instructed, would simply “renew at higher attachments.” Translation: ROA would
pay inflated fees for Gen Re services in future years.
Gen Re says there was no “deal,” and indeed it lost $15 million or so despite this
As malpractice claims climbed, Gen Re struck a few other reinsurance deals shifting
risk back to ROA and allegedly helped to keep them secret. Gen Re says it disclosed
the deals in a March 2001 letter to ROA auditor PricewaterhouseCoopers, which is
also charged in the suit.
PricewaterhouseCoopers won’t comment on specific allegations but calls the Virginia
regulator’s charges “baseless” and notes that even the suit states ROA had misled it.
When ROA was seized in January 2003, financial filings showed $47 million in net
worth. The suit says the real figure is $4 million.
The complaint is seeking triple damages under federal racketeering statutes. Gen Re
say it will ask the court to dismiss it as a defendant.
Those e-mails, though, could get in the way.
May 25, 2003
Critics Decry SEC's Corporate Settlements
by Marilyn Geewax, Atlanta Journal-Constitution
WASHINGTON -- This past week, the Securities and Exchange Commission reached
settlements with both WorldCom Inc. and PricewaterhouseCoopers LLP, forcing the
companies to pay penalties for wrongdoing.
But some victims of corporate misdeeds ask: Why isn't the SEC hauling the scofflaws
into court to let jurors decide the punishments?
"The SEC should be enforcing the law to its fullest extent," not negotiating
compromises, said Mitch Marcus, a former WorldCom manager who founded
BoycottMCI.com to lobby for stiff punishment. Compared with the suffering of investors,
WorldCom ended up with "a very, very insignificant fine."
But the SEC says a settlement offers several advantages. By negotiating an
agreement, the government can impose swift punishment that forces changes in
corporate behavior to prevent future crimes, said Thomas Newkirk, associate director of
the SEC's enforcement division.
"You get things much more quickly than would otherwise be the case," Newkirk said.
"The typical litigation case probably takes between two and three years," he said. "One
needs to balance the benefit of getting remedial provisions into place now, as opposed
to getting them three years from now."
WorldCom agreed last week to settle fraud charges by paying $500 million, the largest
penalty ever proposed for accounting fraud. In New York, U.S. District Court Judge Jed
Rakoff is expected to decide in June whether to approve it.
Also last week, the SEC announced that PricewaterhouseCoopers LLP agreed to pay
$1 million to settle allegations of improper conduct related to its audits of SmarTalk
TeleServices, a now-bankrupt provider of prepaid telephone cards and wireless
With the lure of a settlement, the SEC can force almost immediate changes to protect
shareholders and others from further victimization, Newkirk said.
For example, after the WorldCom accounting fraud was revealed last June, "we got a
monitor put into place to make sure we didn't have another Enron-type situation where
the managers were giving themselves big bonuses on the way out of the door," Newkirk
said. "We also got controls put into place to fix what was wrong with their record
keeping and the accounting."
In the PricewaterhouseCoopers case, the firm agreed to establish new document-retention policies.
J. Boyd Page, a securities attorney in Atlanta, agreed that settlements typically offer
more benefits than long court battles.
"Settlements can make sense because white-collar crime is ofttimes very, very
complicated," Page said. "It can take weeks on end simply to present a case" to the jury
after years of investigative work.
As the case drags on, costs mount, he said. "There is a huge cost of going to trial, just
in terms of absolute dollars, to retain lawyers, pay experts and pay employees to sit in a
courtroom instead of doing their own jobs," he said. "Furthermore, trials, whether you
win or lose, can be quite devastating simply because of adverse publicity."
But Page said the reluctance to go to trial can harm shareholders who want to sue.
"From a plaintiff's perspective, I prefer to go to trial because during the course of that,
there is a lot of testimony developed, a lot of documentary evidence made public," he
said. "That type of evidence often bolsters the claims of individual investors who have
lost their life savings."
The settlements also fail to help victims of corporate wrongdoing by allowing the
perpetrators to avoid admissions of guilt. The WorldCom settlement allowed the
company to declare that it does not admit guilt.
Page said companies insist on that provision because typically, "they remain subject to
a number of class-action civil lawsuits. An admission of guilt would pretty much stop
them from fighting those lawsuits."
May 22, 2003
Pricewaterhouse Fined $1 Million
SEC: Firm revised work papers in SmarTalk audit
By Matt Andrejczak, CBS MarketWatch
WASHINGTON - The Securities and Exchange Commission has fined
PricewaterhouseCoopers $1 million for “improper professional conduct” in
connection with its audit of SmarTalk Teleservices, a bankrupt provider of prepaid
telephone cards and wireless services.
The SEC charged that PWC failed to comply with generally accepted accounting
principles when auditing SmarTalk’s 1997 financial statements and later tried to cover it
up by revising its working papers.
At issue was a $25 million restructuring reserve PWC created for the anticipated costs
related to SmarTalk’s purchase of six prepaid telephone card businesses.
The reserve failed to conform to accounting standards because the costs were not
proper restructuring costs, the SEC said. In addition, SmarTalk improperly understated
its current operating expenses by charging them against the faulty reserve....
In the settlement, the SEC also charged former PWC auditor Philip Hirsch, who was
the lead accountant on the SmarTalk audit.
PWC, the No. 1 U.S. accounting firm, and Hirsch settled the charges without admitting
or denying the findings....
This is not the first time PWC has run afoul of SEC rules. In July 2002, PWC paid $5
million to settle alleged violations of auditor independence rules....
William J. McDonough, Chairman
Public Company Accounting Oversight Board
1666 K Street, NW
Washington, DC 20006-2803
Dear Mr. McDonough:
As a 30+ year member of the insurance and securities industry I was pleased to see
your appointment as Chair of the PCAOB and applaud your willingness to accept the
job of cleaning up the accounting industry. Restoring consumer confidence in our
markets and the folks that regulate it are a most important factor in restarting the
I would like to call your attention to a matter involving PricewaterhouseCoopers and the
fraudulent financial statements of MONY Group, Inc., and ask your help in obtaining
information that the SEC has refused under Freedom of Information. I am a former 19
yr employee that successfully sued MONY in the early 90s over my termination. As a
result of discovery in that case I became aware of serious criminal acts by MONY’s
Senior Officers and BoD members. I obtained a copy of an N.A.I.C. examination of the
company that revealed over $600,000,000 in illegal transactions on their financial
I later obtained a copy of an investigation by the Florida Department of Insurance that
revealed a $1.3 billion discrepancy in the surplus account. I also obtained a copy of
the “Secret Phantom Stock Plan” that paid 10s of millions of dollars to officers of
the company as a result of the false claims on the financial statements. Those
false statements were also used to illustrate dividends of the ponzi contracts that were
sold to the public as “investment grade” life insurance contracts.
According to the sworn affidavit of “Bush Team” endorsed CPA, R. Larry Johnson,
MONY first started cooking their books in 1982. Coopers & Lybrand /
PricewaterhouseCoopers has issued unqualified opinions falsely claiming to be
independent on financial statements with hundreds of millions of dollars in illegal
transactions. MONY’s Chairman, Michael I. Roth, is a former Coopers & Lybrand
partner. Mr. Johnson, whose affidavit is available on the www.PWCSUCKS.com site,
was unaware of the Florida Department of Insurance letter to Mr. Roth at the time of his
affidavit and did not know of the outside financial dealings between MONY and
Coopers & Lybrand that violated the auditor independence rules.
Prior to MONY’s IPO in November of 1998 the SEC first confirmed (Joseph Dimaria)
that MONY had filed fraudulent financial statements with the SEC and then denied that
they ever filed any statements with the SEC (Carmen J. Lawrence). MONY has filed
with the SEC since at least the early 70s!...
The SEC claimed they were investigating MONY and couldn’t talk about it. Three
years later they admitted that there had never been an investigation and now
refuses to answer for FOI requests.
Attached below are copies of a couple of FOI requests that the SEC has refused to
answer. Can you help me obtain these documents along with a copy of an accurate
financial statement that contains the opinion of an independent accountant?...
R. Dale Abshire
3308 Pin Oak Ln.
Bedford, Texas 76021
December 18, 2002
HERRERA FIGHTS TO HOLD ACCOUNTING FIRMS
ACCOUNTABLE FOR ABETTING CORPORATE
FRAUD IN CALIFORNIA
Office of City attorney Dennis Herrera Press Release
SAN FRANCISCO - In a case that could determine whether independent auditors who
knowingly conceal their clients’ fraud may be held accountable under California state
law, San Francisco City Attorney Dennis Herrera today filed a brief appealing a lower
court’s decision last year that false financial statements submitted by
PricewaterhouseCoopers on behalf of Old Republic Title Company were immaterial
because regulators at the State Department of Insurance may not have acted if the
company’s fraud had been reported.
Herrera’s brief reasserts a mountain of evidence – virtually unchallenged in the trial
court – that PricewaterhouseCoopers issued clean audit opinion letters for Old
Republic for ten years, abetting Old Republic in a systematic fraud siphoned off millions
in unclaimed escrow funds, overstated corporate income and cheated taxpayers of
funds that should have been paid to the State of California.
The City’s brief also contends that the state Department of Insurance did have authority
to act – and would have acted – if PricewaterhouseCoopers had told the truth in its
“Independent auditors have a unique responsibility in the business world that is
vitally important to America’s economic well-being,” Herrera said.
“We have seen that responsibility corrupted in similar book-cooking antics by Enron,
Arthur Anderson and others – and we’re all paying the price for it today. The lower
court’s decision in this case marks a new and dangerous low point in financial integrity
that, left unchallenged, would declare business auditing practices an ethics-free zone.
It would turn corporate watchdogs into corporate lapdogs, undermining investor
confidence in California companies.”
According to the brief filed in State Court of Appeal today, Old Republic Title ignored
California’s Unclaimed Property Law, which requires abandoned escrow property to be
transmitted to the state if left dormant for a certain number of years – a process known
in this case as escheating unclaimed escrow funds. Instead, the company routinely
swept the money into its own general fund.
According to the City and County of San Francisco’s brief, Old Republic’s debt for its
ongoing violation of escheat laws, including interest, has ballooned to some $17 million
as of 1998.
Herrera’s brief further notes that PricewaterhouseCoopers routinely issued “clean” audit
opinion letters for Old Republic as the company’s independent outside auditor between
1989 and 1998, despite the accounting firm’s full knowledge that:
> Old Republic was acting in flagrant violation of state escheat laws
> Old Republic never disclosed its escheat debt to state regulators, and
> Old Republic’s reporting practices unlawfully inflated its corporate
In each instance, PricewaterhouseCoopers’s failure to act ethically – and it deliberate
effort to obfuscate the lawless conduct of its client – runs afoul of “Generally Accepted
Auditing Standards” that serve as guiding principles for accounting professionals.
More seriously, PricewaterhouseCoopers’s conduct violates the California False Claims
Act and constitutes unlawful, unfair and fraudulent business practices under the state
Unfair Competition Law.
“PricewaterhouseCoopers knew Old Republic ignored state escheat laws for years, yet
chose to remain silent as its client essentially stole millions of dollars that should
have been turned over to the state,” said Chief Deputy City Attorney Therese Stewart.
“More seriously, PricewaterhouseCoopers issued clean, unqualified audit letters that
actually aided Old Republic in hiding its wrongdoing – from masking stolen trust
account funds to committing regulatory fraud. PricewaterhouseCoopers’ fraud in this
case is just as wrongful as Old Republic’s, and we don’t intend to let PwC off the hook.”
October 22, 2002
Sued for Fraud in Dallas
AFX News Limited
Three Dallas-based technology entrepreneurs have sued PricewaterhouseCoopers
on claims that the firm certified false and misleading financial statements of San Jose,
CA-based HPL Technologies Inc whose shares fell to pennies on the dollar within five
months of a 33 mln usd stock trade.
Plaintiffs Mark Harward, Brenda Stoner and Merrill Wertheimer said PwC verified the
strong financial position of HPL prior to the trio merging their successful technology
company, Covalar Technologies Group Inc, and its subsidiary TestChip
Technologies, with HPL in Feb 2002 in exchange for 10 million usd in cash and
approximately 33 million usd in HPL stock.
According to the plaintiffs, PwC audited and approved HPL's financial statements for
the three years preceding HPL's initial public offering in July 2001 even though HPL's
financial results were allegedly based on non-existent revenue "fraudulently" reported
by the company's chief executive David Lepejian.
These allegedly fraudulent financial statements were included in a prospectus approved
of and distributed by UBS Warburg, the lead underwriter of HPL's IPO, also a named
defendant in the lawsuit.
On July 19, 2002, HPL surprised the financial world when it announced that the
company was investigating internal financial and accounting irregularities, and that
chairman and chief executive officer David Lepejian was being removed.
HPL's stock, which closed at 14.10 usd per share a day earlier, fell to 4.00 usd per
share before trading was halted.
The company's stock has now been delisted and currently sells for approximately 10
cents per share.
© Copyright 2002 AFX News Limited. All Rights Reserved.
Corporation/CEO Scandal Investigations -
Election Cycle 2002
Lucent Technologies/ Henry Schact
Adjusted 2000 revenues by $679 million, spurring SEC investigation. Also investigating
whether vendor-financing played an improper role in sales.
Accountant: Pricewaterhouse Coopers LLP
Political Contributions: to Democrats: $39,550; to Republicans: $43,090
CEO Compensation: $21.56M salary, grant options
Other: stock drop since 1/14/00: -93.39%
< < < FLASHBACK < < <
Lucent Technologies Inc - DEF 14A · For 2/16/0
Filed On 12/21/99 - SEC File 1-11639 - Accession Number 912057-99-10197
COMMITTEES OF THE BOARD OF DIRECTORS
During fiscal 1999, the Board of Directors had two ongoing committees: an Audit and
Finance Committee and a Corporate Governance and Compensation Committee.
The Audit and Finance Committee meets with management periodically to consider the
adequacy of the company's internal controls and the objectivity of its financial reporting.
The committee also meets with the independent auditors and with appropriate company
financial personnel and internal auditors regarding these matters.
Both the independent auditors and the internal auditors regularly meet privately with the
committee and have unrestricted access to the committee. The Audit and Finance
Committee recommends to the Board the appointment of the independent auditors. The
Audit and Finance Committee reviews the company's financing plans and reports
recommendations to the full Board for approval and to authorize action.
The committee has a written charter. The members of the committee have reviewed the
charter and believe that the committee complied with the charter in fiscal 1999.
The Audit and Finance Committee met five times in fiscal 1999. The functions of the
Corporate Governance and Compensation Committee include: recommending to the
full Board nominees for election as Directors of the company, making recommendations
to the Board from time to time as to matters of corporate governance, administering
management incentive compensation plans, establishing the compensation of officers
and reviewing the compensation of Directors.
The committee will consider qualified candidates for Director suggested by
shareowners in written submissions to Lucent's Corporate Secretary....
COMPENSATION OF DIRECTORS
Each non-employee Director receives annually a retainer of $100,000 and an option to
purchase 5,000 shares of Lucent stock. The Chairman of each committee described in
the previous section receives an additional retainer of $10,000. Directors may elect to
receive between 50% and 100% of their retainer in Lucent stock or an option to
purchase Lucent stock or a combination of stock and an option. Any remainder will be
paid in cash.
Any option elected will enable the Director to purchase a number of shares equal to
three times the number of shares that could have been purchased with the portion of
the retainer elected to be received as an option. The exercise price per share under the
option will be the fair market value of a share on the date of grant. Options will generally
become exercisable on the six-month anniversary of the date of grant and have a 10-year term.
Under the company's Deferred Compensation Plan, non-employee Directors may
defer all or a portion of their cash and stock compensation to a deferred compensation
account. Deferred compensation plan accounts have two components. The first is a
Lucent stock portion. The second is a cash portion. Directors can defer receipt of cash
retainers to either portion of their accounts. The stock portion of a retainer can be
deferred only to the Lucent stock portion of an account.....
An individual who became a non-employee director before 1999 may purchase life
insurance under a company program pursuant to which the company will pay a portion
of the premium. The amount paid by the company is to be returned to the company no
later than following the death of the individual. This benefit will continue after the non-employee Director's retirement from the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In fiscal 1999, all of our independent Directors served on the Corporate Governance
and Compensation Committee. Franklin A. Thomas was the Chairman of the
committee. The other committee members were: Paul A. Allaire, Carla A. Hills, Drew
Lewis, Paul H. O'Neill, Donald S. Perkins and John A. Young. Patricia F. Russo,
Executive Vice President and CEO, Service Provider Networks, is a director of Xerox
Corporation, of which Mr. Allaire is currently Chairman of the Board. During fiscal
1999, Mrs. Russo was also a member of the Executive Compensation and
Benefits and Nominating Committees of Xerox.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
Upon recommendation of the Audit and Finance Committee, the Board has reappointed
PricewaterhouseCoopers LLP as the independent public accounting firm to audit our
financial statements for the fiscal year beginning October 1, 1999. Representatives of
PricewaterhouseCoopers will be present at the meeting. They will be given the
opportunity to make a statement if they desire to do so, and they will be available to
respond to appropriate questions...
BOARD OF DIRECTORS
The Board of Directors is divided into three classes currently consisting of three
Directors each, whose terms expire at successive annual meetings. This year, Messrs.
Drew Lewis and Donald S. Perkins will be retiring from the Board after the annual
meeting. Messrs. Lewis and Perkins have been Directors of the company since 1996
and we are grateful to them for their counsel and business advice. Following their
retirement, one of the classes of Directors will consist of one Director. We have
nominated Mrs. Carla A. Hills, the remaining Director in the class of Directors whose
terms expire at the annual meeting, for a three-year term that will expire at our annual
meeting in the year 2003. You can find the principal occupation and other information
about Mrs. Hills below....
CARLA A. HILLS, Director of Lucent since 1996. Chairman and Chief Executive
Officer of Hills & Company (international consultants) since 1993, United States Trade
Representative (1989 -1993). Director of American International Group, Inc.,
Chevron Corp. and Time Warner Inc. Committees: Member of the Corporate
Governance and Compensation Committee. Age: 65....
For more on Lucent Technologies’ $1.1 billion accounting fraud, see:
October 14, 2002
Is the Avalanche Headed for
Investigators are digging into the firms Tyco dealings
Business Week Online
For Arthur Andersen, the scandal was Enron, and before that, Sunbeam and Waste
Management. For KPMG, it was Xerox.
Now, PricewaterhouseCoopers has its own client implosion to worry about. Tyco
As a remarkable scale of misdoings at Tyco is revealed, the heat is rising for PwC, the
firm that signed off on Tyco’s financial statements for the past 8 years.
If Tyco’s former chief executive, L. Dennis Kozlowski, and former chief financial officer,
Mark Swartz, did loot $600 million from the company and its investors, as the
Manhattan district attorney has charged, then where were the auditors?
That’s the question many investigators are now reviewing PwC’s work for Tyco are
asking. Among them: the Internal Revenue Service, the Securities & Exchange
Commission, plaintiffs’ lawyers across the country, and Tyco itself, which has retained
a forensic accounting firm to review its books.
As the Tyco scandal unfolds, the focus is increasingly turning toward PwC. The firm
maintains it is cooperating fully with investigators and says it is not aware of being the
target of any investigation....
Still, critics abound. Especially outrageous to such critics as former SEC Chief
Accountant Lynn E. Turner is PwC’s failure to flag nearly $100 million in forgiven
executive loans that Tyco booked against the gain from the partial initial public offering
of a subsidiary in 2000. “Auditors must look at these large adjustments, because that is
where we find the fraud has always be committed,” says Turner.
But PwC’s relationship with Tyco went far beyond auditing the company’s books.
Reducing its tax bill has long been a key Tyco strategy for boosting earnings, and PwC
was deeply involved in that effort. According to its 2001 proxy statement, in addition to
$13 million PwC earned in 2001 for auditing Tyco, the firm was paid even more – $18
million – for tax work.
For that hefty fee, a Tyco spokesman says, PwC helped Tyco with its “U.S. tax-planning, and the review and preparation of non-U.S. tax returns in more than 80
What tax work PwC was doing and how that affected its audits is of particular interest
because Tyco has been based in the tax haven of Bermuda since 1997. It also has
dozens of subsidiaries in other offshore tax havens. These moves saved the company
hundreds of millions in U.S. taxes, providing a major competitive advantage.
Tyco says this structure saved the company $600 million in taxes in 2001 alone.
Although it is common practice among accounting firms to serve as both auditor and tax
adviser, the dual role has given rise to a chorus of critics. And for PwC, wearing both
hats at scandal-ridden Tyco risks at least an appearance of conflict of interests....
“You are auditing the validity of a product that you’re selling,” complains John L.
Buckley, Democratic counsel to the House Ways & Means Committee. “It is a gross
conflict of interest.”...
For more, GO TO > > > Tracking the Tyco Flock
October 04, 2002
SEC seen settling with PwC
NEW YORK - The U.S. markets' top regulator is expected to close its probe of the audit
of once high-flying software maker MicroStrategy Inc. (MSTRD.O) by settling with the
PricewaterhouseCoopers partner who led the account, a source familiar with the
situation said on Friday.
A final settlement, which has not yet been inked, would close the chapter on a
prominent accounting irregularity case that has hung over the world's largest accounting
firm for more than two years.
Under the terms of the deal, the Securities and Exchange Commission has decided
not to bring an enforcement action against the accounting firm, the source said.
But the partner at PricewaterhouseCoopers, Warren Martin, who led the MicroStrategy
account for the accounting firm, will be suspended from practicing as an auditor for two
years, the source said.
McLean, Virginia-based MicroStrategy Inc. has struggled since its shares plunged 62
percent in one day from a high of $333 in March 2000 after it was forced to restate
three years of profits as losses....
The technology firm, including its top executives, settled with the SEC over the issue
and paid out $10 million in stock to shareholders as part of a lawsuit settlement.
PricewaterhouseCoopers has already forked out $55 million to settle a shareholder
lawsuit stemming from the case but admitted no wrongdoing.
The latest news comes at a time when the accounting giant is already in the spotlight
for its work for client Tyco International Ltd., where a band of investigators are poring
over controversial deals that happened on the accounting firm's watch....
PricewaterhouseCoopers in July agreed to pay $5 million to settle charges brought by
the SEC that its auditors approved improper accounting and that it violated
independence standards for several clients in the past. It was the second-largest
payment ever by an accounting firm to the market's top regulator.
PricewaterhouseCoopers in June also agreed to make a payment to settle with the
Internal Revenue Service over advice on tax shelters it provided clients....
For more on Tyco International, GO TO > > > Tracking the Tyco Flock
July 28, 2002
'Global' dodge lets big firms off hook
Companies are calling themselves international but then
failing to take any responsibility for dirty deals abroad.
By Prem Sikka, The Observer
How global are the 'global' accountancy firms and who are they accountable to? Such
questions are highly relevant: 'global' firms audited Enron, WorldCom, Xerox and
The websites of all major accountancy firms claim they are 'global' businesses offering
integrated services. This has boosted their worldwide income to more than $70 billion
a year. They use the same logo, headed paper and advertising campaign. They have a
worldwide board of directors, a chairman and a chief executive officer, often
headquartered in secretive offshore tax havens with no information-sharing treaties
with other nation states or regulators.
These firms have been the driving force behind moves by the International Accounting
Standards Board to take accounting rules out of the hands of governments and put
them in the grip of major corporations and firms. But they are silent on their global
Arthur Andersen audited Enron, including its UK operations, and also provided
worldwide consultancy. As the Securities & Exchange Commission launched criminal
proceedings against the firm for shredding documents in Houston, Chicago and
London, the firm claimed that it was not 'global'....
Its press statement stated: 'Arthur Andersen LLP [the US firm], an autonomous member
firm of the Andersen Worldwide SC organisation, contracted with, performed the audits
of, and signed the audit opinions on Enron's financial statements. Accordingly, Arthur
Andersen LLP is the only proper defendant in claims relating to that audit opinion.
Andersen in the UK has no obligation to satisfy the legal liabilities of other
Price Waterhouse (now part of PricewaterhouseCoopers) became the auditor of the
fraud-infested Bank of Credit and Commerce International (BCCI) by claiming it was
a 'global' firm.
In 1991, after the forced closure of BCCI, a committee of the US Senate conducted an
inquiry into the $11bn frauds and audit failures.
It subpoenaed Price Waterhouse to produce its files, including the papers held by its
UK offices. At this point, the US office of the firm claimed: 'The British partnership of
Price Waterhouse did not do business in the US and could not be reached by
subpoena.' . . .
The US Senate inquiry also learned that ultimate control of Price Waterhouse rested
with Price Waterhouse Worldwide, based in Bermuda, which did not co-operate with
the US Justice Department. In 1996, the Justice Department pursued a fraudster
operating a shell company, Merlin Overseas Limited, from Antigua.
It consisted of little more than a fax machine in a Caribbean office of Price
The Manhattan district attorney prosecuted the fraudster, but could not get at Price
Waterhouse. The district attorney's office asked Price Waterhouse in Manhattan for
help, but was told that Price Waterhouse in Antigua is not the same legal creature as
the one in New York.
On 26 February 1995, amid revelations of £827 million fraud, Barings Plc collapsed.
For many years it had been audited by Coopers & Lybrand (C&L - now part of
PricewaterhouseCoopers) in Singapore and also by Deloitte & Touche (D&T).
The Bank of England's inquiries were frustrated. Its 1995 report said: 'We have not
been permitted access to C&L Singapore's work papers ... or had the opportunity to
interview their personnel. C&L Singapore has declined our request for access, stating
that its obligation to respect its client confidentiality prevents it assisting us. We have
not been permitted either access to the working papers of D&T or the opportunity to
interview any of their personnel who performed the audit.'
Major accountancy firms have devised careful corporate structures to avoid showing
their files to regulators. The governments know that despite securing 'global'
appointments and fees, these firms are avoiding their responsibilities.
They could pass laws requiring auditors to show their working papers to named
regulators. They could fine and shut firms obstructing fraud inquiries. Instead of
exposing audit failures and increasing protection for stakeholders, governments have
done nothing to call 'global' firms to account.
– Prem Sikka is Professor of Accounting at the University of Essex
July 17, 2002
PwC Settles SEC Charges
NEW YORK - The Securities and Exchange Commission fined audit firm
PricewaterhouseCoopers LLC $5 million for violating accounting standards, the agency
In a letter to partners dated Wednesday, company Chairman Dennis Nally said
PricewaterhouseCoopers had agreed to pay a fine to the SEC to settle the case and to
improve audit procedures without admitting or denying charges.
The settlement comes at a time when everyone from Wall Street to Washington to Main
Street is keeping a close eye on accounting scandals such as at Enron and WorldCom
that have dampened confidence in U.S. markets in the past several months....
“As part of the settlement, we have agreed to strengthen our internal risk and quality
procedures,” Nally said in the letter....
“This case demonstrates the heightened risk of an audit failure when an accounting firm
assists in and approves the accounting treatment of its own consulting fees,” said
Stephen Cutler, the SEC’s enforcement division director. “Faced with that situation
here, PwC lacked the objectivity and impartiality required of an independent auditor.”
The SEC found that between 1996 and 2001, PwC and one of its predecessors,
Coopers & Lybrand, entered improper fee arrangements with 14 public audit clients.
In each case, the client hired the firms’ investment bankers and hinged the amount of
their advisory fees to the success of each particular project, the SEC said.
That practice violated the rules of both the accounting profession and the SEC’s auditor
independence rules, the SEC said.
Additionally, the agency ruled that in 1999 and 2000, PwC permitted the improper
accounting of its own non-audit fees by clients Pennacle Holdings Corp. and Avon
Products Inc, both of whom were forced to restate financial information for those
As part of the settlement with the SEC, PwC has agreed to make such changes as
reviewing new fee agreements for non-audit services before signing off on them and
appointing an “independent reviewing partner” from the company’s Risk Management
partners to ensure auditing and accounting industry rules are followed.
The company will also provide annual employee training on auditor-independence
June 28, 2002
Pricewaterhouse, IRS settle case
Feds push for info on tax shelters, clients
By John D. McKinnon, The Wall Street Journal
WASHINGTON, June 28 — In the first public agreement of its kind, the Internal
Revenue Service said it reached a settlement with PricewaterhouseCoopers spelling
out a process for the big accounting firm to disclose information about its tax shelters
and clients who have used them.
AS PART of the settlement, the IRS also said PwC agreed to pay a “substantial”
amount. Tax lawyers in Washington said this week that the amount was expected to be
$1 million, but neither the IRS nor the firm would discuss the amount. A PwC
spokesman said in the context of the firm’s overall finances, the amount was “not
The firm didn’t admit to any wrongdoing.
The IRS and Treasury have been trying to enforce a requirement that accounting firms
and other shelter promoters register their aggressive tax-savings strategies with the
government, and disclose lists of their clients. Some of the requirements have been on
the books for years, and others were significantly expanded through new Treasury
regulations in early 2000.
For the last year or so, as pressure has grown to crack down on tax-dodging, the IRS
has begun demanding client lists from promoters through informal requests and even
summonses. Some firms have cooperated, but a number haven’t, citing
accountant-client privilege, among other things.
Just how much the IRS gained with the PwC agreement is unclear.
The IRS said that PwC “agreed to provide certain client information pursuant to
authorized legal process, such as summonses,” and “to work with the IRS to develop
processes to ensure ongoing compliance” with disclosure rules. But the accounting
giant said the IRS would “limit its requests for client-specific information from the firm to
authorized legal processes, such as summonses.” The IRS declined to elaborate.
PwC also said the agreement “has no impact on our clients’ ability to sustain the tax
benefits of the tax advice we provided.”
Further, it said it has risk-management procedures in place “to ensure that we can
continue to pursue tax-minimization strategies for our clients while complying fully” with
Copyright © 2002 Dow Jones & Company, Inc., All Rights Reserved.
March 22, 2002
PricewaterhouseCoopers stands to lose
millions in H.J. Heinz business
In wake of Enron, Heinz to split accounting,
By Tim Schooley
H.J. Heinz Co. said last week it would cease using its auditor, the local office of
PricewaterhouseCoopers LLP, as a consultant.
What Heinz didn't say was that it paid PricewaterhouseCoopers about $17 million in
consulting fees last year, the fattest fees by far paid to a Big Five accounting firm by a
Pittsburgh public company in 2001....
According to SEC documents, Heinz paid $20 million in fees to PwC last year,
including about $3 million for auditing. That is nearly double the total accounting fees
paid by the public company with the next-highest fee total, Alcoa, which spent $12.5
million in auditing and consulting fees. Alcoa is another of PwC's clients.
`THE PRICIER PROJECTS'
Jack Kennedy, general manager for strategic communications at Heinz, said the
company was sensitive of the current scrutiny of the accounting industry brought on by
the Enron scandal and proposed regulations requiring public companies to limit the
amount of consulting conducted by their audit firms....
According to SEC documents, PwC charged Heinz $7.7 million in fees for financial
information systems design and implementation; PwC also charged Heinz another $9.2
million for a variety of other consulting work listed as "all other services."
Mr. Kennedy confirmed that Heinz has made the conscious decision to not use PwC for
such work in the future....
PricewaterhouseCooper's local office declined to comment on its relationship with
Heinz; the firm and its pre-merger predecessor, Coopers Lybrand, has audited Heinz'
books since 1979.
Heinz' announcement could prove to be the first major impact the Enron scandal has
had on the accounting industry here....
`LIKE AN ANNUITY'
Nationwide, many U.S. companies are cutting consulting work purchased from their
auditors. Walt Disney Corp. and Lucent Technologies Inc. both have done so, said
Walt Disney, based in Burbank, Calif., totaled $31.9 million in consulting fees; New
Jersey-based Lucent Technologies: $63.2 million.
Both are also audited by PwC....
© 2002 American City Business Journals Inc.
January 25, 2002
Kmart, SEC Investigate Letter
Raising Accounting Questions
By The Associated Press
DETROIT -- Kmart Corp., which filed for bankruptcy protection earlier this week, said
Friday it has begun an investigation after receiving an anonymous letter claiming to be
from employees that expressed concern about unspecified accounting matters.
The nation’s third biggest discount retailer said it had contacted the Securities and
Exchange Commission about the letter and its own investigation and is cooperating
with the regulatory agency.
The disclosure comes amid heightened sensitivity about accounting issues in the wake
of the collapse of the energy trader Enron Corp. amid questionable accounting
Kmart said the letter, which it received just over a week ago, was addressed to the
SEC, Kmart’s auditors PricewaterhouseCoopers and Kmart’s board of directors.
“The letter has been referred to the audit committee of the board of directors, which
promptly engaged outside counsel and accounting consultants to conduct an
independent investigation,” the company said in a news release.
After receiving the letter, Kmart said it contacted the SEC and notified it about its own
investigation. Kmart said the SEC has authorized a private investigation, and Kmart
plans to fully cooperate with it.
An SEC spokesman said Friday that the agency had no immediate comment on the
PricewaterhouseCoopers spokesman David Nestor confirmed that the company also
received a copy of the letter. He said the auditor was cooperating with Kmart and its
outside council in the investigation.
Analyst Jeff Stinson with Midwest Research said it makes sense that Kmart and the
SEC would be attentive to the claims raised in the letter, given the current publicity
surrounding Enron’s failure.
“This is something that if they go through and they don’t find anything it will really
reassure people,” Stinson said. “Right now, after declaring Chapter 11 bankruptcy, it’s
going to take a lot of time to rebuild confidence.”
Troy-based Kmart filed Tuesday for Chapter 11, a move that came after lower-than-expected holiday sales and fourth-quarter earnings, downgrades by credit-rating
agencies and a drop in its stock price.
Last week, Kmart’s board fired the company’s president, Mark Schwartz, and hired
turnaround specialist James Adamson as chairman —— replacing Chuck Conaway,
who remains as chief executive.
In announcing the bankruptcy filing, Kmart said it will evaluate store performance and
lease terms by the end of the first quarter of 2002, and will close unprofitable or
Kmart also said it would reduce staff.
In midday trading Friday on the New York Stock Exchange, Kmart shares were down 8
cents a share at 85 cents.
Copyright © 2002, Newsday, Inc.
From Take on the Street What Wall Street and Corporate America Don’t Want You
to Know, by Arthur Levitt, former Chairman of the Securities and Exchange
FROM THE INTRODUCTION:
...When I came to Washington, I had a pretty clear understanding of how the main
power centers worked. Once I began pursuing my agenda, however, I saw a dynamic I
hadn’t fully witnessed before: the ability of Wall Street and corporate America to
combine their considerable forces to stymie reform efforts. Working with a largely
sympathetic, Republican-controlled Congress, the two interest groups first sought to co-opt me. When that didn’t work, they turned their guns on me.
I first saw it happen on the issue of stock options. I spent nearly one-third of my first
year at the commission meeting with business leaders who opposed a Financial
Accounting Standards Board (FASB) proposal that, if adopted as a final rule, would
have required companies to count their stock options as an expense on the income
statement. The rule would have crimp earnings and hurt the share price of many
companies, but it also would have revealed the true cost of stock options to
Dozens of CEOs and Washington’s most skillful lobbyists came to my office to urge me
not to allow this proposal to move forward. At the same time, they flooded Capitol Hill
and won the support of lawmakers who didn’t take the time to understand the
complexities of the issue and the proposed solution. Fearful of an overwhelming
override of the proposal, I advised the FASB to back down. I regard this as my single
biggest mistake during my years of service.
From there, I skirmished many times with the business community and Wall Street.
During this period the stock market rose to incredible heights. Online trading became
cool, luring millions of middle-class savers into believing that investing was a no-lose
game. They traded impulsively, many basing their decisions on recommendations they
heard on financial news shows, which were almost always “buy.”...
But what investors didn’t know was that many analysts were plugging companies that
had banking relationships with the analyst’s firm. For corporate executives, managing
short-term earnings to meet the market’s expectations became all-consuming, along
with keeping the share price high so they could reap big rewards by cashing in their
I came to recognize certain behavioral patterns when business groups became
concerned about commission actions. The first indication of trouble was often a staff
discussion between one of the SEC division heads and an aide at one of our
Congressional overseer’s offices. A gentle letter from the committee chairman signaled
the start of a skirmish. Face-to-face visits were next followed by hearings, press
releases, and ultimately a drawn-out, costly battle.
When the FASB, for example, tried to stop abusive practices in the way that many
companies accounted for mergers, two of Silicon Valley’s VIPs, Cisco Systems Inc.
CEO John Chambers and venture capitalist John Doerr, tried to persuade me to rein in
When I refused, they threatened to get “friends” in the White House and on Capitol Hill
to make me bend. When we proposed new rules to make sure that auditors were truly
independent of corporate clients, some fifty members of Congress promptly wrote
stinging letters in rebuke.
In the final days of negotiation with the Big Five accounting firms
(PricewaterhouseCoopers, Deloitte & Touche, KPMG, Ernst & Young, and Arthur
Andersen) over new independence rules, I was constantly on the phone with lawmakers
who were trying to push the talks toward a certain conclusion, or threatening me if they
didn’t like the outcome.
In particular, Representative Billy Tauzin, the Louisiana Republican, became a self-appointed player, negotiating on behalf of the accountants. And when we began
investigating possible price-fixing by Nasdaq dealers, Representative Tom Bliley call to
say I was going too far. The Virginia Republican held great sway as chairman of the
House Commerce Committee, which oversees the SEC, but he backed off once I told
him that the Nasdaq matter could become a criminal case....
From Chapter 5: THE NUMBERS GAME
The Anonymous Letter
In the winter of 1997, an anonymous letter arrived at the SEC’s southeast Regional
Office in Miami. It would greatly improve the hand we were holding. The letter alleged
that certain audit staff in the Tampa, Fla., office of Coopers & Lybrand owned stock in
the companies they were auditing. If true, this was a violation of independence rules if
ever there was one.
We didn’t take the letter seriously at first because the writer, we learned, had recently
been fired. We had to be sure she wasn’t making wild charges to harass her former
bosses and co-workers. Once we investigated, though, we found that the violations in
the Tampa office were even more widespread that our whistle-blower realized.
While we were investigating, Coopers merged with Price Waterhouse to form
PricewaterhouseCoopers (PwC), reducing the Big Six accounting firms to the Big Five.
But the merger also exacerbated the stock ownership problem. After the merger,
Coopers partners and staff dad to divest shares they owned in companies audited by
Price Waterhouse, and vice versa.
Some of the required divestitures, however, never took place. At the SEC’s insistence,
PWC hired a special counsel to conduct a nationwide internal investigation. The results
PwC partners, it seemed, viewed compliance with the stock ownership rules as merely
optional. The investigation uncovered an incredible 8,000 violations, involving half the
firm’s partners. A random check also showed that three-fourths of PwC partners had
failed to disclose violations of independence rules when they were asked to do so
Admittedly, some were minor infractions, such as when the shares in question were
held in trust for the children of a partner. Some, however, were more serious. The
heads of major PwC divisions and top managers in charge of enforcing the conflict-of-interest rules owned stock in audit clients.
Even PwC chief executive James Schiro owned forbidden stock. He and eight other
partners owned shares in Emcore, a New Jersey semi-conductor manufacturer whose
auditor had been Coopers & Lybrand, and then PwC after the merger. Schiro was
obligated to sell his shares, but he didn’t do so until February 1999, seven months after
the merger and four months after PwC had completed Emcore’s 1998 audit.
Because of the massive number of stock-ownership violations, we now had irrefutable
evidence of independence violations by PwC, the largest of the Big Five. When an
auditor violates independence rules, the SEC has the right to reject audit clients’ filings.
Had the SEC taken that step, PwC almost certainly would have been fired by hundreds
of companies. With that possibility hanging like a sword over PwC, the firm agreed to
conduct an internal investigation....
From Chapter 9: HOW TO BE A PLAYER
During my seven and a half years in Washington, I was constantly amazed by what I
saw. And nothing astonished me more than witnessing the powerful special interest
groups in full swing when they thought a proposed rule or a piece of legislation might
hurt them, giving nary a thought to how the proposal might help the investing public.
With laserlike precision, groups representing Wall Street firms, mutual fund companies,
accounting firms, or corporate managers would quickly set about to defeat even minor
Individual investors, with no organized lobby or trade association to represent their
views in Washington, never knew what hit them....
The American Institute of Certified Public Accountants is another major player on
investment issues. It represents 330,000 individual CPAs but is dominated by
PricewaterhouseCoopers, KPMG, Deloitte & Touche, Ernst & Young, and what’s left of
It has a $140,000,000 budget and employs fourteen lobbyists, three of whom lobby full-time, but the real source of its clout is a widely dispersed membership.
Every Congressional district is home to hundreds of CPAs who are often prominent
members of the community. They frequent the local golf course, are active in local
business clubs, and contribute to local politicians.
I saw the AICPA unleash this grass-roots force when the SEC was pursuing stiffer
auditor independence rules. The SEC and Congress within weeks heard from
thousands of accountants. Many of their written comments were suspiciously alike; the
AICPA had mass-mailed sample letters, and members dutifully copied them and sent
them under their own names. The same goes for the letters the SEC received from
Capitol Hill. Lawmakers put their own signatures on letters that were word-for-word the
same, written by accounting lobbyists.
Corporate managers also support legions of lobbyists and public relations experts, who
act as a company’s eyes and ears and alert it when any issue arises that ultimately
might affect profits. Hiring the right lobbyist can help ensure that the CEO has access
to powerful lawmakers when he needs it.
Campaign contributions also open doors.
Many CEOs donate their own money to elected officials, and some also form political
action committees to which employees can donate funds, and which the lobbyist can
then contribute, with strict limits, to helpful lawmakers.
I explain all this not to offer great new insight into how Washington operates, but to
show how sophisticated the business lobby is. By contrast, individual investors lack a
power base in Washington. And that’s exactly how the business community would like
to keep it.
I know from my own experience that when investors do find their voice, business
groups too often succeed in drowning them out. One way they do this is by assiduously
courting the lawmakers who chair the panels that oversee the SEC. Increasingly when
the agency makes a move they disagree with, business’s hired guns go directly to
Capitol Hill, bypassing the SEC....
For more, GO TO > > > Spotting the SEC
For another PwC whistle-blower letter, GO TO > > > Harmon’s Letter to the SEC
July 16, 2000
Auditor row over Leeson
This Is Money
The accountancy group that acted as auditor to Barings, the bank brought to its knees
by rogue trader Nick Leeson, has been found guilty of professional failings.
The firm, Pricewaterhouse-Coopers, has lodged an appeal against the finding, which
was delivered last week by a disciplinary tribunal of the accountancy profession.
Meanwhile, the Joint Disciplinary Scheme, the accountancy regulator, has laid
complaints against former Barings deputy chairman Andrew Tuckey, a chartered
accountant, for failing to detect Leeson's activities. These complaints will go before a
Coopers has the right to clear its name publicly by opening the appeal to Press and
public, but it said on Friday that it had no plans to exercise this right.
The tribunal found charges of serious failings brought against the Coopers part of the
now-merged practice to have been proved, a verdict that, if upheld, would prove
damaging to Coopers in its attempts to fend off its share of a £1 billion lawsuit from
fellow accountancy group Ernst & Young, liquidator of Barings.
Ernst is alleging professional negligence by Coopers in its Barings audit work, and is
making similar allegations against the Singapore practice of accountancy firm Deloitte
No date has been set for the appeal.
January 6, 2000
Independent Consultant Finds Widespread
Independence Violations at
SEC News Release
The staff of the SEC today made public the report by independent consultant Jess
Fardella, who was appointed by the Commission in March 1999 to conduct a review of
possible independence rule violations by the public accounting firm
PricewaterhouseCoopers arising from ownership of client-issued securities. The
report finds significant violations of the firm’s, the professionals, and the SEC’s auditor
independence rules. . . .
The independent consultant’s report discloses that a substantial number of PwC
professionals, particularly partners, had violations of the independence rules, and that
many had multiple violations. . . .
A year ago, the firm agreed in a settlement to conduct the review and create a $2.5
million education fund after the SEC alleged that some of its accountants compromised
their independence by owning stock in corporations they audited. As a result of the
review, five partners of the firm and a number of other employees had been dismissed.
The independent consultant’s report found that nearly half the firm’s 2,698 partners
reported having committed at least one violation of the auditor independence rules,
while 153 of them admitted to more than 10 each.
Of a total 8,064 violations reported by those involved, 81.3% were by partners and
17.4% by managers.
Almost half the reported violations involved direct investments by the PwC
professionals in securities, mutual funds, bank accounts or insurance products related
to client companies.
Office of the Chief Accountant: Regarding Auditor Independence Letter to
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON. D C. 20549
July 26, 1999
Mr. Nigel Buchanan
32 London Bridge Street
London SEI 9SY
Dear Mr. Buchanan:
You have requested the SEC staff's concurrence with your firm's conclusion set forth in letters
dated June 9, and July 9, 1999 that your firm is independent of your client Prudential
Corporation plc ("Prudential").
As noted below, the staff is unable to concur with your conclusion.
Investment Management Services
You have represented to the staff in your letters and in meetings with the staff that Prudential
provides investment management services to the trustees of a legacy Price Waterhouse LLP
("PW") defined benefit pension plan and that the trustees of the plan are partners in PwC.
Rule 2-01 of Regulation S-X states that, "... an accountant will be considered not independent
with respect to any person or any of its parents, its subsidiaries, or other affiliates (1) in which,
during the period of his professional engagement to examine the financial statements being
reported on or at the date of his report, he or his firm or a member thereof had, or was
committed to acquire, any direct financial interest or any material indirect financial interest..."
For purposes of interpreting this section, as noted in section 602.02.b of the Codification of
Financial Reporting ("the Codification"), "any financial interest in a client, owned by the
accountant ... is considered to be a direct interest." And, "[a]s indicated in this section,
materiality is not a consideration in the case of a direct financial interest."
Further, as noted in section 602.02.g of the Codification, "direct and material indirect business
relationships, other than as a consumer in the normal course of business, with a client ... will
adversely affect the accountant's independence with respect to that client. Such a mutuality or
identity of interests with the client would cause the accountant to lose the appearance of
objectivity and impartiality in the performance of his audit because the advancement of his
interest would, to some extent, be dependent upon the client."
The SEC staff position regarding the independence of an auditor under these circumstances is
accurately reflected in your correspondence dated July 9, 1999 stating that the "Investment
Advisor .. cannot be an attest client of the Firm." The SEC staff believes that PwC is not
independent under circumstances in which Prudential is acting as an investment adviser to the
Unit Linked Insurance Policies
You have represented that Prudential offers, and members of PwC have invested in, unit-linked
insurance products where the policy holder pays a premium, a portion of which is used to
purchase a death benefit for the policyholder and the remainder is invested and managed by
Prudential in unit linked funds. PwC has further represented that the value of the policies is
linked to the underlying assets of the policy. You have stated your belief that this arrangement
is analogous to the facts set forth in AICPA Ruling 41, Member as Auditor of Insurance
The SEC staff believes that permitting a member to leave on deposit sums with an audit client
raises the same independence issues that are raised under similar facts and circumstances
where the staff has objected to the independence of the auditor.
>> As noted above, and as documented in PwC's correspondence to the staff, an auditor is not
independent of an a client that acts as an investment adviser for the auditor. PwC has stated
that Prudential manages the investment of the portion of premiums not used to purchase a
death benefit for the policyholder. Thus, Prudential appears to be acting as an investment
adviser to members that hold investments in unit-linked insurance products.
>> The SEC staff has objected to the independence of auditors that allow a broker/dealer audit
client to hold the auditor's funds or securities for longer than a normal settlement period.
Permitting an insurance company/investment adviser to hold the auditor's cash and securities in
a unit-linked fund conflicts with previous SEC staff positions in which the auditor was found to
be lacking in independence from a broker/dealer audit client.
You have represented that the unit linked funds appear on the balance sheet of Prudential as
"assets held to cover linked liabilities (or the corresponding balance sheet liability associated
with the unit-linked policies." As a result, the auditor appears to be placed in the position of
auditing the valuation of the respective assets and liabilities that include amounts attributable to
the auditor. In essence, the auditor has a direct financial interest in the audit client that creates
a lack of independence due to an impermissible mutuality of interest because the advancement
of the interest of members of the audit firm would, to some extent, be dependent upon the
client's ability to manage and value the members assets."
As noted above, the SEC staff believes that PwC is not independent under circumstances in
which Prudential is acting as an investment adviser to the firm with respect to funds that are
separately managed in unit-linked investment accounts.
You have represented that Prudential sold its Canadian subsidiary and thereafter had no
employees in Canada. PwC also represented that PwC Canada performed bookkeeping
services for a price that was less than 1% of total audit fees for Prudential. This amount has
been permitted under certain circumstances by the SEC Staff as set forth in section 602.02.c.iii
of the Codification of Financial Reporting. PwC has also indicated that the service has been
terminated. Based on the facts and circumstances, the aforementioned bookkeeping services
would not impair the firm's independence.
You have represented that PwC received a contingent fee from an entity ("Newco") of which
Prudential owns 45% and that Prudential has the right to appoint one of six board members of
Under Rule 2-01 of Regulation S-X, an auditor would lack independence where the auditor had
a direct financial interest in an audit client or any affiliate of the audit client. A contingent fee is
viewed by the SEC staff as a direct financial interest that creates an impermissible mutuality of
interests between the audit client and the auditor. The staff believes that an auditor lacks
independence even if the contingent fee arrangement was with an affiliate of the audit client.
The staff does not concur with PwC that Newco is not an affiliate of Prudential.
In this case, PwC indicates that the contingent fee does not cause PwC to lack independence
since the fee was immaterial to PwC, and the audit client. However, the staff does not use a
materiality test in assessing whether a contingent fee arrangement causes the auditor to lack
independence. Consequently, the staff believes that PwC's independence was impaired due to
the contingent fee arrangement with Prudential's affiliate.
Investments by Former Partners
You have represented that ownership of investments in audit clients by former partners that
continue to share in the profits of PwC is not precluded under applicable independence rules.
PwC has represented that it has informed the affected former partners that US independence
rules preclude those partners from holding any direct or material indirect financial interests in
Prudential, and in Prudential unit trusts (which are not unit-linked insurance policies).
Based on the aforementioned discussion of unit-linked insurance policies, the staff would object
to PwC's independence if former partners that continue to share in the profits of PwC hold unit-linked insurance policies in Prudential or its affiliates.
Investments in Prudential Held in Retirement Plan
You have represented that several years ago, C&L acquired Deloitte, Haskins & Sells-UK
("DH&S") and that the DH&S retirement plan was not discontinued. The plan held 292,OOO
shares in Prudential and 16,226 shares in Prudential Property Managed Fund (which was not
an audit client). PwC has represented that these shares "have recently been disposed of"
Based on the facts and circumstances, the investments held in the DH&S retirement fund would
not impair the firm's independence.
Based on the facts and circumstances that you have provided the staff in your letters dated
June 9, and July 9, 1999 and in subsequent discussions, the Staff is unable to concur with your
conclusion and can provide you with no comfort that you are independent of Prudential under
the U.S. independence rules.
In order to comply with the US independence rules, you must undertake the following:
1. Terminate the relationship through which Prudential provides investment management
services to the trustees of the legacy PW benefit pension plan.
2. Eliminate any investments by members of PwC in unit-linked insurance products offered by
Prudential and any of its affiliates. Also, please provide the SEC staff with a copy of the letter(s)
notifying the affected former partners and describe to the staff the procedures that PwC and
Prudential will undertake to assure that no affected former partners continue as investors in
3. Discontinue providing any services to Prudential and any of its affiliates or investees on a
contingency fee basis. Also, please provide the staff with a copy of the PwC policy on
contingent fees as well as a description of the quality controls in place to assure that the firm
does not enter into contingent fee arrangements with other US and foreign registrants or their
You may be aware that where an auditor has complied with home country independence
requirements for all periods, the staff has permitted the inclusion of the auditor's reports in an
initial registration statement if the auditor was independent under U.S. requirements for at least
the most recent fiscal year covered by the reports. You have represented to the staff that PwC
was in compliance with the independence requirements applicable in the home country in this
This letter outlines steps that PwC must take to comply with U.S. independence rules. If PwC
completes those steps before beginning its audit of Prudential's 1999 financial statements, and
Prudential's registration statement includes audited financial statements for a period in 1999 of
not less than nine months, the staff will not object to the inclusion of PwC's audit reports for all
This should not be construed as a conclusion by the staff that PwC was independent for any
period prior to January 1, 1999....
Lynn E. Turner, Chief Accountant
~ ~ ~
For more on Prudential, GO TO > > > Prudential: A Nest on Shaky Ground
January 6, 2000
The Honorable Arthur Levitt, Jr.
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Dear Chairman Levitt:
Thank you for transmitting a copy of the SEC news release on the independent
consultant report finding numerous significant violations of the firm’s, the profession’s,
and the SEC’s auditor independence rules by PricewaterhouseCoopers and its
partners and other professionals.
I have raised these concerns to the SEC and held Oversight and Investigations
Subcommittee hearings about accountant/auditor independence issues in the past. The
General Accounting Office’s two-volume 1996 report, The Accounting Profession
(GAO/AIMD-96-98), expressed GAO’s belief that "the SEC should take a leadership
position in working with the accounting profession to enhance the auditor’s
independence." At that time, the SEC Chief Accountant agreed with the auditor
independence concerns identified in the GAO report and also agreed that they "must be
resolved." (See September 5, 1996 letter from Michael H. Sutton, Chief Accountant,
SEC, to Charles A. Bowsher, Comptroller General of the United States.) SEC delegated
that responsibility to a newly-formed Independence Standards Board (ISB) in 1997.
From what I have observed, the ISB has done little more than hold inconclusive
"standard setting meetings" since that time, while the conflicts of interest have
multiplied and the problem has progressively worsened.
Moreover, common sense tells us that the problems revealed in the PwC report are not
confined to that firm. The accounting profession is now the management services
industry: the profession and the companies that it is charged with auditing to protect
investors and the integrity of our markets are quickly becoming wholly-owned
subsidiaries of one another. Self-interest has replaced much of the profession’’s fidelity
to the public trust.
The federal securities laws require that financial statements filed with the SEC be
certified by independent public accountants. The U.S. Supreme Court has stated that
"[t]he independent public accountant ... owes ultimate allegiance to the corporation’s
creditors and stockholders, as well as to the investing public. The ‘‘public watchdog’’
function demands that the accountant maintain total independence from the client at all
times and requires complete fidelity to the public trust...." U.S. v. Arthur Young & Co.,
465 U.S. 805, 817-818 (1984).
I want to know what the Commission and the ISB, having taken little meaningful action
to date, are doing to clean up this mess. I look forward to your response.
JOHN D. DINGELL
cc: The Honorable Tom Bliley
The Honorable Michael G. Oxley
The Honorable Edolphus Towns
Prepared by the Democratic staff of the Commerce Committee
2322 Rayburn House Office Building, Washington, DC 20515
From the RICO lawsuit: Harmon v. Federal Insurance Company, P&C Insurance Co.,
Inc., Marsh & McLennan, Inc., Trustees of Kamehameha Schools/Bishop Estate,
PricewaterhouseCoopers, et al:
Defendant PricewaterhouseCoopers is one of the nation’s largest accounting firms,
and conducts business in Hawaii and throughout the United States.
Despite written opinions from Pricewaterhouse that P&C should operate at “arms-length” from KSBE, all or some of the Trustees of KSBE, and all or some of the
directors and officers of P&C, conspired to disregard these opinions and to conceal
violations of I.R.S. “interim sanctions” regulations.
Plaintiff Harmon personally reported his concerns regarding the apparent “sweetheart
deals” with M&M, at the direction of Peters, Aipa and Kam, to representatives of
Coopers & Lybrand in October, 1996, and followed this up in writing on November 20,
1996. At this meeting and in his letter, Plaintiff explained that he would not sign P&C’s
annual financial statements due to the apparent conspiracy between certain trustees,
managers, directors and officers at KSBE, P&C and M&M, to defraud KSBE, P&C, and
Plaintiff also sent a copy of this letter to the Insurance Commissioner, State of Hawaii,
along with all enclosures which provided documentary evidence of these wrongful
activities. Neither entity responded to this report. Plaintiff later learned that Nathan
Aipa had approved P&C’s annual financial statements, and that Coopers & Lybrand
had not disclosed in their review the information that Marsh & McLennan was charging
excessive fees, and that certain claims were intentionally inadequately reserved.
Plaintiff alleges that Pricewaterhouse had knowledge of these improper activities and
financial statements, had a professional duty to report improper and illegal conduct
regarding the preparation of these financial statements, and knowingly and wrongfully
colluded with some or all of trustees of KSBE, with officers and directors of P&C, in a
conspiracy to defraud the beneficiaries of the Estate of Bernice Pauahi Bishop and
P&C; racketeering; mail fraud; wire fraud; and violations of the “interim sanctions”
regulations of the I.R.S., as detailed in Plaintiff’s complaint....
- For more on PricewaterhouseCoopers’ attorney, Warren Price III, GO TO > > > The
Firing of Evan Dobelle; RICO in Paradise
February 12, 2000
Dispute has cost estate millions
By Rick Daysog, Honolulu Star-Bulletin
The state probes and IRS audit pushed related bills from law and accounting firms to $5
million. . . . The three-year Kamehameha Schools controversy continues to take a
heavy financial toll on the nonprofit charitable trust.
A Star-Bulletin review of the $6 billion estate’s voluminous expenditures for its 1999
fiscal year found that the trust paid about $5 million to law firms and accounting firms
that were involved in defending it from the Internal Revenue Services’ massive audit
and the state attorney general’s criminal and civil investigations....
The financial records, which were filed in state probate court on Dec. 30, ALSO
INDICATE FORMER TRUSTEES CONTINUED TO REWARD THEIR FRIENDS WITH
LUCRATIVE OUTSIDE CONTRACTS....
In many ways, the records offer a snapshot of a boardroom under siege. . .
That point is underscored by the enormous amount of legal and tax work awarded to
PricewaterhouseCoopers LLP. The firm billed the Kamehameha Schools $1.2 million
last year, largely for legal and tax work involving the IRS audit. The firm, recently
merged with Coopers & Lybrand, which also conducts work for the trust....
Much of the Pricewaterhouse work came after January 1999, when the IRS issued its
scathing preliminary findings of the estate’s operations. The IRS later threatened to
revoke the trust’s tax-exempt status, setting off a chain of events that resulted in the
resignation of former board members Henry Peters, Oswald Stender, Richard “Dickie”
Wong, Lokelani Lindsey and Gerard Jervis....
February 5, 2000
Trustees helped by Inouye,
Akaka in fighting pay limit
By Sally Apgar, The Honolulu Advertiser
The ousted trustees of Kamehameha Schools enlisted the aid of Sens. Dan Inouye and
Daniel Akaka in 1995 to influence fellow members of Congress to vote against a bill
that threatened the trustees’ $1 million-a-year paychecks, according to internal trust
documents obtained by The Advertiser....
Thirteen confidential memos during the fall of 1995 through April 1996 detail the
trustee’s strategy against the bill, which called for intermediate sanctions that penalize
high-ranking insiders of charitable organizations for taking excessive personal
The memos express the trustees’ intent to “kill the measure” and their recruitment of
influential contacts, such as Inouye, Akaka and the Rev. Jesse Jackson. They also
targeted others, including Senator Patrick Moynihan of New York and even White
House insiders such as Leon Panetta, then President Clinton’s chief of staff, to win
The memos give a glimpse of the behind-the-scenes political power and influence the
former trustees once wielded and describe a costly, intensive effort to protect their
Mark McConaghy of PricewaterhouseCoopers, a longtime tax adviser to the trust,
was charged with contacting Leslie Samuels, then assistant secretary for tax policy....
- For more, GO TO > > > Harmon’s Letter to the SEC
September 25, 2000
Powerful consultants are the targets
of Arthur Levitt’s crusade
It’s a pitched battle the likes of which Washington and Wall Street have never seen
before. Largely out of the public eye, a morality play is being acted out, and the plot
involves power and greed.
On one side: Arthur Levitt, Jr., chairman of the Securities & Exchange Commission,
convinced that greed and arrogance have diverted the accounting profession from its
mission of providing sound financial reports for shareholders....
Levitt is determined to halt a wave of auditing failures— breakdowns that have cost
investors $88 billion in the past seven years — by ending what he sees as a
massive conflict of interest between accountants’ duties as auditors and the
profits they earn as consultants to the same corporate clients....
THE SEC SAYS:
Audit Quality. Audit failures are soaring: 362 companies have restated annual
financials since 1997. ... Cost to investors in just 9 cases: $41 billion ...
Consulting Services. Accounting firms that consult for audit clients aren’t truly
independent. Firms should be banned from selling their audit clients a wide range of
consulting services, including acting as an advocate for clients. SEC says its proposal
mainly clarifies existing ethics rules.
Disclosure. Companies should disclose consulting fees paid to their auditing
firm. Boards and audit committees must spell out steps taken to ensure the audit
Investment Conflicts. Strict rules that now bar accountants and their families
from owning stock, even indirectly through a retirement plan, in any of their firms’
audit clients should be relaxed.
New rules should apply mainly to firm members who can influence a client’s audit....
Accountants gave House, Senate, and Presidential candidates $10.4 million in
campaign contributions in this election cycle, through June 30.
Of this amount, PricewaterhouseCoopers gave $1,421,489 ($400,009 to Democrats
and $1,019,280 to Republicans).
DID THE AUDITORS CROSS THE LINE?
The SEC has tough questions for MicroStrategy and PWC . . .
On a recent Aug morning, Michael J. Saylor, CEO of MicroStrategy Inc., stood before
an overflow crowd at a high-tech trade show. ... He spun his vision of the future, in
which he personalized news and alerts are delivered through wireless devices and clip-on computers equipped with voice recognition. The crowd was riveted.
The electrifying moment allowed Saylor to look past the software maker’s calamitous
earnings restatement of last spring. The company had booked $66 million more in
revenue than it should have from 1997 through 1999— more than one fifth its sales
total. The restatement wiped out $55.8 million in earnings, turning profits into losses for
each of those years.
But as diverting as the interlude may have been, recovery will not come that easily for
Saylor and MicroStrategy. As he attempts to rebuild the company ... one of his chief
hurdles is a Securities & Exchange Commission investigation into the company’s
accounting practices. BUSINESS WEEK has learned that the SEC is investigating
whether MicroStrategy and its auditor, PricewaterhouseCoopers LLP, covered up a
prohibited financial relationship by using a third party as a go-between.
The agency is also probing whether PWC sacrificed its independence by entering
into deals to buy MicroStrategy products for resale to consulting clients— a
financial link the SEC thinks may have made PWC unwilling to make tough audit
And the SEC is investigating whether MicroStrategy backdated documents to move
revenues from one quarter to another....
The swift fall of MicroStrategy exemplifies the questions that arise when auditors do
more for a client than just examine the books. Shareholders lost $10.4 billion in stock
value, and 10% of the company’s employees have been laid off. The scope of investor
losses, and the web of relationships between auditor and client, have persuaded the
SEC to put its investigation on a fast track....
* * *
For more, GO TO > > > The Securities & Exchange Commission; The Prudential: A
Nest on Shaky Ground; P-s-s-t, wanna buy a good audit?; Zeroing In On Zurich
The Corporate Hall of Shame
The 10 Worst Corporations of 1994 — Who examines the examiners? .
Price Waterhouse faces approximately $12.5 billion in legal claims from the Deloitte &
Touche liquidators of the collapsed Bank of Credit and Commerce International over
Price’s audit of the bank....
In Italy, shareholders in the agrochemical group Ferruzzi Finanziaria and its industrial
subsidiary Montedison plan to sue Price Waterhouse in the wake of the administrator of
Ferruzzi and Montedison’s finding of serious oversights in Price Waterhouse audits of
the group’s accounts over a number of years.
He outlined a catalog of accounting malpractices, including: an irrecoverable credit of
$261 million to a company in the British Virgin Islands, and recognition of revenues of
$146 million on nonexistent sales and huge undocumented payments to offshore
companies, supposedly for consulting work...
* * *
1998 Profile: PricewaterhouseCoopers
Total Lobbying Expenditures: $960,000.
Total Lobbying Income: $6,500,000.
~ ~ ~
Some of PricewaterCoopers’ Lobbying Clients
El Paso Energy
Electronic Commerce Tax Study Group
Entertainment & Media Cybertax Study Group
Fremont Group Inc
Goldman, Sachs & Co
Kamehameha Schools/Bishop Estate
Morgan Stanley Dean Witter & Co
Multinational Tax Coalition
Section 41 Coalition
Securities Industry Assn
Starwood Capital Group
Walt Disney Co.
From The Cheating of America, by Charles Lewis and Bill Allison:
GIMME SHELTER . . .
On May 4, 1999, PricewaterhouseCoopers L.L.P. sent out a confidential letter, some
22,000 words in length, to invite corporations to take part in its Bond and Options
Sales Strategy, or BOSS shelter, which, like the shelter Merrill Lynch sold, involved
investment vehicles with foreign partners created solely to provide a paper tax
On Dec 9, 1999, the Treasury Dept issued notice 99-59, warning companies that if they
made use of BOSS, the IRS would challenge any losses they claimed.
Representative Lloyd Doggett (D) of Texas and a member of the House Ways and
Means Committee ... issued a statement welcoming the notice. “While encouraged that
Treasury has quickly shut down an obviously abusive tax shelter,” he said, “I am
reminded that one Big Five accounting firm requires staff to cook up a new shelter
And for the IRS, discovering, unraveling, and denying them can take years....
~ ~ ~
Kenneth J. Kies, the former chief of staff of the Joint Committee on Taxation–
Congress’s in-house policy think tank on tax matters– has testified several times before
the Senate Finance Committee and the House Ways and Means Committee arguing
that there is no corporate tax shelter problem.
Kies is now a managing partner in PricewaterhouseCoopers’ Washington office, the
same firm that promoted the BOSS shelter....
From: Harry Sweeney <Sweenfam@teleport.com>
Subject: Re: Known CIA fronts (200+ listed here)
Date: 20 Sep 1996
Organization: Teleport - Portland's Public Access (503) 220-1016
The following several hundred firms and persons represent "suspected" or reported
fronts as found in various published resources or based on my personal beliefs arrived
at through personal experience and research.
Most of these are out of date, out of business (disbanded or evolved to some new
operation), but the list serves as example of the marvelous diversity and clever (or not
so clever) naming conventions applied. . . .
Keep in mind that there ARE NO FRONTS. CIA was ordered by Congress to divest,
and they have. The CIA obeys Congress and the law... by "selling" the fronts to "retired"
Of course, if they should still do favors for CIA, that would be OK. If CIA gives them
business, that would be OK. So it is business as usual, with LESS oversight by
Congress, thanks to their “crack down” on errant CIA activities....
Here are just a few familiar names from Harry Sweeney’s list:
>> Battelle Memorial Institute and other Battelle operations (hires retired spooks in
quantity): Jim Hougan, Spooks
>> Bill (Slick Willy) Clinton (President, and CIA operative): The Spotlight.
>> Bishop, Baldwin, Rewald, Dillingham and Wong: Johathan Kwitny, The Crimes
>> Price Waterhouse (not a true front, but certified obviously fraudulent books for CIA
fronts): Johathan Kwitny, The Crimes Of Patriots
>> Quantum Corp: Jim Hougan, Spooks
>> Resorts International (Parent of Intertel): Jim Hougan, Spooks
>> Wackenhut: Jim Hougan: Jim Hougan, Spooks; Michael Riconosciuto,
* * * * *
Disavow: A CIA Story of Betrayal
By Rodney Stich & T. Conan Russell
The Saga of
Ron Rewald and Bishop, Baldwin, Rewald & Wong
CAST OF CHARACTERS
* * * * *
February 9, 2001
SEC investigating fraud at Lucent
By David Berman, Michael Schroeder and Shawn Young
The Wall Street Journal Online
The Securities and Exchange Commission's enforcement division is conducting a
formal investigation into possible fraudulent accounting practices at Lucent
Technologies Inc., according to people with knowledge of the investigation.
The probe focuses on whether Lucent (NYSE: LU) improperly booked $679 million in
revenue during its 2000 fiscal year, which ended Sept. 30, according to people familiar
with the investigation. The telecom-equipment maker, once a highflying spinoff of AT&T
Corp., restated the same revenue in December after conducting its own investigation.
As part of that restatement, Lucent deducted $199 million in credits offered to
customers, and $28 million for a partial shipment of equipment. Further, the company
took back an additional $452 million in revenue it had sent to its distribution partners but
never actually sold to end customers.
According to one person with knowledge of related SEC documents, commission staff
are investigating Lucent's procedures for booking sales, in particular its use of
"nonrecurring credits," or one-time discounts, given to customers, as well as Lucent's
accounting treatment of software-licensing agreements.
The SEC is also looking at how Lucent recognized revenue on sales to its distributors,
who may not have sold the products, a practice known as stuffing the channels. Also
under examination is the company's use of revenue targets for fiscal 2000.
"We are voluntarily and completely cooperating with the SEC," said Lucent
spokeswoman Kathleen Fitzgerald.
Fitzgerald said the company initiated contact with the SEC on the morning of Nov. 21,
just before it first publicly revealed some of the problems. Since then, Lucent has
shared all of its findings on revenue restatements with the commission, she said. In
addition, Lucent shared the results of an external audit of fiscal year 2000 conducted by
PricewaterhouseCoopers LLP and Lucent's outside counsel, Cravath, Swaine &
Moore, late last year. The company's lawyers have also made two in-person
presentations at SEC headquarters in Washington, D.C.
The SEC has also requested documents from Lucent's customers and independent
auditor, PricewaterhouseCoopers, people familiar with the matter said.
"We don't comment on any investigation the SEC may have under way. However, it's
always our practice to fully cooperate with SEC requests for information," said Steve
Silber, a spokesman for PricewaterhouseCoopers. A n SEC spokesman declined to
confirm or deny the investigation.
Lucent's December restatement reduced already-flagging investor confidence in the
battered company. Since the company first hinted of financial difficulties with an
earnings warning last January, Lucent's stock has lost 77% of its value. Since January
2000, Lucent's market capitalization has dropped roughly $185 billion.
Lucent's board fired former Chief Executive Richard McGinn in October after Lucent
had missed numerous quarters of revenue and earnings targets. McGinn ended up
being at the top of a long list of high-ranking Lucent executives who left or were fired
In a whistleblower lawsuit filed in December, Nina Aversano, former president of
sales for North America, claimed she was fired in retaliation for giving McGinn in
October a detailed warning that Lucent's sales targets were unrealistic. Aversano
couldn't be reached for comment.
In the suit, filed in a New Jersey Superior Court in Middlesex County, she alleged her
former boss, Patricia Russo, who is now nonexecutive chairman of Avaya Inc., a
Lucent spinoff, was also ousted for giving McGinn a similar warning. Russo has said
she doesn't believe the elimination of her job was a punishment for anything. McGinn
said Thursday he hasn't been contacted by the SEC.
Lucent also changed chief financial officers in fiscal 2000, hiring Deborah Hopkins in
April, after naming former Chief Financial Officer Donald Peterson to the CEO's post at
Avaya. Peterson had been Lucent's chief financial officer since its 1996 spinoff from
AT&T. During Peterson's tenure, Lucent's accounting was sometimes criticized by
analysts and some investors as aggressive, but legal. An Avaya spokeswoman said
Peterson hasn't been subpoenaed or approached by SEC investigators.
Fiorina left before the mess
Carly Fiorina, now CEO of Hewlett-Packard Co., and formerly head of Lucent's
global-services business and in charge of world-wide sales, left Lucent in July 1999,
shortly before the beginning of the fiscal year that is involved in the continuing
A spokeswoman for Hewlett-Packard said the company's attorneys haven't received
any SEC subpoenas and "to our knowledge," Fiorina hasn't been contacted by any
SEC investigators. Fiorina was traveling and couldn't be reached directly for comment.
The SEC brings as many as 100 enforcement actions involving accounting-related
fraud each year, representing about 20% to 25% of its caseload. A formal investigation
must first be approved by the commission itself. Once it has that status, staffers can
use legal subpoena power to compel employees, ex-employees and customers to
Two years ago, the SEC made accounting-fraud cases a priority, weighing whether
companies intended to deceive shareholders with aggressive financial reporting.
Contributing to the rise in accounting-enforcement cases have been Wall Street
pressure on financial executives to meet earnings estimates; court rulings and
legislation making it harder to sue outside accountants; and greater use of stock
options as executive compensation.
Restatements, resulting in earnings swings of tens of millions of dollars, have
flourished amid the SEC crackdown on "earnings management" through accounting
For example, many SEC probes have focused on one popular form of manipulation:
inflating revenues by posting them prematurely or by playing games with inventory.
-- David Hamilton in San Francisco contributed to this story.
August 3, 2001
Three Accountants Face Charges
of Securities Fraud Over Audit
The SEC alleges Coopers & Lybrand auditors masked
deteriorating finances at Allegheny Health.
The Securities and Exchange Commission took the unusual step of charging three
accountants with securities fraud in connection with their audits of Allegheny Health
Education & Research Foundation, a Pennsylvania nonprofit organization that filed
for bankruptcy, reports the Wall Street Journal.
William Buettner, Mark Kirstein and Amy Frazier, senior accountants at Coopers &
Lybrand LLP, now PricewaterhouseCoopers LLP, "actively participated" in a fraud
scheme to mask deteriorating finances at Allegheny Health, according to the SEC.
The move comes as the regulatory agency is intensifying its campaign to crack down
on what officials consider an accounting-fraud epidemic, says the Journal.
"It's rare that we would sue accountants for fraud in federal court," Ronald Long, district
administrator of the SEC's Philadelphia office told the Journal. In the past, the agency
has sought to discipline accountants through lesser administrative proceedings.
Long added that was one of the first complaints taken against auditors in an alleged
case of municipal-bond fraud.
Allegheny Health, the largest nonprofit health-care organization in Pennsylvania at its
height, settled SEC fraud charges last year and agreed to a cease-and-desist order. It
filed for bankruptcy in 1998.
Lawyers for the three accountants disputed the charges, telling the Journal, among
other things, that they were "utterly false."
PricewaterhouseCoopers and its predecessor, Coopers & Lybrand, weren't named in
the SEC's lawsuit, filed in federal court in Pennsylvania, Journal.
According to the SEC, the three accountants helped Allegheny Health transfer $99.6
million from the books of a recent acquisition to an ailing unit known as the Delaware
Valley Obligated Group. . . .
The three auditors knowingly participated in "a shell game," Long told the Journal. As
a result of the transfers, the SEC said Allegheny Health and the Delaware Valley group
reported net income for fiscal 1997, when in reality, both were operating with a
substantial net loss.
Buettner, Kirstein, and Frazier allegedly "turned a blind eye to the fraud" and
sought to conceal it from other Coopers & Lybrand accountants for more than a year,
according to the complaint.
Coopers & Lybrand issued clean audit opinions on Allegheny Health that were
distributed to investors holding more than $900 million of bonds.
In September 1998, after filing for bankruptcy, Allegheny Health issued a news
release acknowledging that the 1997 audits were inaccurate.
If the SEC wins its civil-fraud suit, the three auditors would face a court order
permanently barring them from future securities-law violations and fines of as much as
$110,000 for each violation, according to the Journal.
May 1, 1994
Who Watches the Watchers?
TO: The San Jose Mercury News
The federal regulatory agencies during the Savings and Loan Debacle that began in the
early 1980's and continues to this day were the Federal Home Loan Bank Board
(FHLBB) and its successor agencies, the Resolution Trust Corporation (RTC) and
the Office of Thrift Supervision (OTS). Some of the higher ranking people in these
agencies, many of them political appointees, have engaged, and may be engaging in
activities that call out for investigation. Because of Whitewater, the hands of the Clinton
Administration are tied. Any attempt to investigate the RTC and the OTC would be
viewed as an attempt to interfere with the on-going investigation.
But who watches the watchers?
With the Clinton Administration out of action, the only institutions with the power to
investigate the regulatory agencies are the Congress and the news media. The Mercury
News cannot claim ignorance of highly suspicious activities in these agencies, I have
documented a number of them in the letters I've sent you since the fourth of April. Let
me try one more time, citing some of the same examples, and giving you a few new
Silverado Banking and Savings and Loan Association.
1984 to 1988. According to Steven Wilmsen's book, Silverado, that S&L began
engaging in fraud as early as 1984, but the Kansas Federal Home Loan Bank "actually
approved most of Silverado's illegal and wildly imprudent transactions" from 1984 to
1988. The man responsible for "those approvals was Kermit Mowbray, president of the
Topeka bank." Regulators at the bank (and not political appointees) discovered the
fraud in late 1986 and tried to serve a cease and desist order on the S&L on March 10,
1987, but were overturned by Mowbray. During the 1991 OTS $200 million dollar
lawsuit against Neil Bush and other Silverado directors, the defense asked for the
release of documents pertaining to the bank's oversight of Silverado on the basis that
the bank had approved the transactions. The OTC refused, claiming confidentiality, and
stating they would rather receive a contempt citation rather than release the documents.
Is this why the OTS finally settled for $49 million dollars, one-fifth of the amount they
originally sued for?
1988. In October 1988, Mowbray stopped the closure of Silverado until after the
presidential election and after he received a mysterious phone call from Washington.
The final bailout costs of Silverado are in excess of $1 billion dollars. The increase in
the Silverado bailout costs, based upon the S&L regulator's own estimates of what it
would have cost to close the S&L in October 1988 rather than December 1988, ranges
from $400 million to $600 million dollars.
1988 - The Accounting Firm of Cooper and Lybrand. In the summer of 1988, the
regulators were closing in on Silverado and its accounting firm, Cooper and Lybrand.
Cooper and Lybrand had affirmed Silverado was in excellent financial health; had
affirmed Silverado made a profit of $15 million in 1986 and had let the top four S&L
executives take $3.2 million dollars bonuses. In truth, the S&L was near insolvency, had
lost $15 million in 1986, and the bonuses were based upon phantom earnings.. For this
and other accounting "mistakes," the OTS in December 1990 slapped Cooper and
Lybrand with a cease and desist order for its "abusive and self-serving actions."
Less than a week later, the RTC awarded Cooper and Lybrand a "lucrative contract"
to manage $278 million dollars in loans and real estate from failed savings and loans.
Broward Savings and Loan
In an earlier letter, I mentioned to you that in exchange for $505,000 dollars from Jed
Bush and his real estate partner in 1990, the RTC forgave a defaulted loan of $4.5
million dollars. The two men had borrowed the money in 1985 to purchase an office
On the surface, this appears to be a "sweetheart" of a deal for the President's son; he
retains a major equity holding for a payment of one-ninth the original amount of the
loan. Who takes the loss? The American people....
What was the basis of this settlement? Did the fact that the government negotiators
were sitting across a table from the son of the President of the United States have any
bearing on the case? Or were they government negotiators? Was the final settlement
negotiated by government lawyers or by a legal firm hired by the RTC?
But we should thankful that Jed Bush was involved, otherwise we would not have
known that the RTC was forgiving loans on such advantageous terms to the borrowers.
Or where they? We don't know because the matter has not been looked into by the
Congress or the national media. Again, what was the basis of the Bush settlement? Did
political connections have something to do with the settlement of this (and possibly
other) loans or was the RTC in a Santa Claus mode for all the borrowers of money from
failings savings and loans?...
Franklin R. Mancuso
# # #
CAN YOUR STOMACH TAKE SOME MORE?
Then climb into the Catbird Seat and take a look at some of the gigantic
nests that PricewaterhouseCoopers has helped construct!
Apollo Advisers - Financial investment managers. 13th largest campaign contributor to
Senator Joseph Lieberman (D-CT), Al Gore’s vice presidential running mate (, and a
client of lobbying firm Akin, Gump, Strauss, Hauer & Feld.
One of Akin, Gump’s clients is Miller & Chavalier, a Washington, D.C.-based law firm
which, together with PricewaterhouseCoopers, drafted the multi-million dollar IRS
settlement agreement for Hawaii’s Kamehameha Schools.
Apollo Advisers has another connection with Kamehameha Schools: Along with
National Housing Corp (which was involved in an alleged kick-back scheme with
ousted Bishop Estate trustees Henry Peters and Richard Wong), Apollo has financial
interests in several estate owned properties involving two alleged Yakuza-connected
companies: Azabu Building Company and Mitsui Trust.
For more, GO TO > > > Apollo Advisors
Bank Bali - From ON WISCONSIN : JS ONLINE , 10/19/99, (AP) :
Indonesia Court Rules on Bank Case
JAKARTA, Indonesia - The Supreme Court ruled today that an independent report
about the Bank Bali corruption scandal must be given to Parliament, a move that could
persuade international donors to lift their suspension of billions of dollars in loans to
The decision ends weeks of controversy over whether the entire audit report can legally
be made available for public viewing.
The International Monetary Fund, the World Bank, the Asian Development Bank
and the Japanese government have stressed that any resumption of their $4.7 billion
in loans to Indonesia hinged on the publication of the Bank Bali report by the
PricewaterhouseCoopers auditing firm.
“This is very good news,” said Anoop Singh, the IMF's deputy Asia-Pacific director. He
said the fund's management will soon consider lifting the suspension of its loans to
In Singapore, World Bank official Paula Donovan welcomed the court decision, saying it
could eventually lead the bank to resume its loans. But she also said Indonesia must
prosecute those involved in the scandal.
There was no immediate reaction from the Asian Development Bank or Japan.
Bank Bali was one of several troubled financial institutions that was closed down and
broken up by the government in recent times as part of an economic reform program.
About $80 million was allegedly transferred this year from Bank Bali to a private
company controlled by a senior official in President B.J. Habibie's ruling Golkar Party,
allegedly for Habibie's campaign leading up to Wednesday's presidential election.
The scandal led to sharp criticism of Habibie and his government, which had vowed to
reduce widespread corruption in Indonesia after taking over from President Suharto,
who was driven from power in 1998 by a violent, pro-democracy movement....
So far, the government has only published a synopsis of the report, which does not
name any of those responsible for the scandal. The full report is believed to contain
names of senior government officials and politicians that helped orchestrate the
For more, GO TO > > > The Indonesian Connection
Bank of Credit and Commerce International (BCCI) - From The Laundrymen:
Banco Ambrosiano was the greatest banking collapse in Europe since the end of World
War II. It was shortly to be followed by the greatest banking collapse in the history of
In 1988, the Justice Department launched Operation C-Chase, the letter C standing for
currency. Posing as drug dealers, undercover agents put out the bait that they had
loads of currency to launder. And BCCI fell for it....
A costly and complicated five-year operation— involving agents from Customs, the IRS,
the DEA, and the FBI— C-Chase produced more than twelve hundred conversations
and nearly four hundred hours of clandestinely recorded videotape. By assisting drug
dealers to wash $34 million, the Justice Department was able to indict, and in 1990 to
convict, several BCCI bankers and dozens of other individuals. In one blow, the
Americans had unknowingly pulled the bottom out from under a gargantuan house of
* * *
Multinational Monitor, 12/94: The Corporate Hall of Shame . . . The 10 Worst
Corporations of 1994 — Who examines the examiners? . . . PRICE WATERHOUSE
faces approximately $12.5 billion in legal claims from the Deloitte & Touche liquidators
of the collapsed Bank of Credit and Commerce International over Price’s audit of the
For more, GO TO: The Strange Saga of BCCI
Bishop, Baldwin, Rewald, Dillingham and Wong - CIA-connected investment
company based in Hawaii.
Excerpted from Disavow: A CIA Saga of Betrayal, by Rodney Stich and T. Conan
The main character in the book is Ronald Rewald. The main CIA proprietary was the
Honolulu-based Bishop, Baldwin, Rewald, Dillingham and Wong corporation
(BBRD&W). This secret CIA operation had offices in 17 countries, and was staffed by
many deep-cover CIA personnel.
Rewald grew up in the Midwest and was recruited by the CIA while in college. The CIA
made him the head of this corporation, and as its chief officer he had many successful
covert operations. He lived the life that CIA spies only dream about. But when the CIA
cover was blown, the Agency made him the scapegoat, denying any relationship with
him or its secret operation.
The CIA funded the corporation and its subsidiaries, and Rewald’s compensation,
through various CIA fronts and proprietaries, including law and public relations firms.
The company engaged in various forms of intelligence activities, some of which could
have embroiled the United States in serious military and political crises.
The Rewald story was front-page news for three years in Hawaii during the mid-1980s.
It was considered by some to be the biggest media event in Hawaii’s history, second
only to the Japanese bombing of Pearl Harbor....
The (Chilean) General (Manterola) then got down to business, explaining that ten years
ago, when they had taken power, the junta had expropriated over five hundred
businesses at the time, and had over the years returned most, or sold them off. They
had, however, retained some, and knowing of the reputation of Bishop Baldwin
Rewald Dillingham & Wong, thought something might be worked out that would be to
the benefit of all.
He further explained that the government of the United States had shunned any
significant relations with Chile under its present leadership and that Commander
Pinochet desired that relations between the two governments be improved, so that
American corporations would once again do more business and prosper together with
Chile as economic partners....
General Manterola went on to explain that they still held one of Santiago’s largest banks
in their control and would be willing to give it to Bishop Baldwin for a token price, “Say
one million dollars, U.S.” It had, he said, assets netting over sixteen million, which they
could have their auditors verify to their satisfaction first. They really wanted it owned by
a new American interest in the hope it would be the start to stimulate other U.S.
companies to do business there.
Ron said he would certainly take it back to his board of directors and check their
interests. What he really meant is he would report it to Jack Kindshci, Charles
Richardson, CIA F.R. (Foreign Resources), Chief of Base and Jack Rardin, CIA Chief of
Station, and let them give the information to the home office at Langley. For, in reality,
Bishop Baldwin was their baby, a CIA owned and operated proprietary company, and
any such decision would in fact be theirs. But then they might see some intelligence
value in this, and they were always seeking new banking capabilities.
The General then sweetened the deal by adding that if Ron would put this deal together
they would throw in for Bishop Baldwin, or its chairman (Ron) 2,800 acres of prime
agricultural land in southern Chile, with timber forests and excellent farm land, included
free for making the deal. All in all it was a hard offer to turn down....
Ron discussed with (Ronald) Wolfson the meeting they had been to with General
Manterola earlier in the day, and explained the offer. Wolfson was impressed and
somewhat in awe of the special treatment these newcomers to Chile had received. If
they, Daily and Wolfson, were to set up BBRD&W offices in Santiago, how long would it
take and how much would it cost, Ron inquired? They estimated sixty to ninety days,
and upwards of forty thousand dollars, was the consensus.
What about auditing the bank offered by Manterola? It would not be feasible to have
Bishop Baldwin do the audit. It would take a local accounting firm. Wolfson suggested
Price Waterhouse, for they had an office in Santiago and were familiar with the
Chilean economy. Ron agreed they would be best, indicating they currently used them
in Taiwan, Indonesia, and London.
After considerable discussion, Ron said at the next board meeting he would propose
the setting up of offices in Santiago, with a retainer agreement satisfactory to Wolfson
for the present....
All parted on good terms and agreed that Wolfson would be brought to Hawaii later in
the year for discussions about his future....
For more, GO TO > > > Flying High In Hawaii; The Secret Nests
Bishop Estate - Many of the key players in this conspiracy are still in place. . . .
~ ~ ~
For more, GO TO > > > Dirty Money, Dirty Politics and Bishop Estate
Consignia - Britain’s new name for The Post Office.
November 24, 2001
Post union warns 'enough is enough'
Geoff Gibbs, The Guardian
A row over job security and "backdoor privatisation" could lead to the first nationwide
postal strike in Britain for more than 13 years, union leaders warned yesterday.
Branch representatives of the Communication Workers' Union from across the country
will meet in London next week to consider balloting for industrial action after it emerged
that Consignia, formerly the Post Office, is considering recommendations that could
lead to the closure of its loss-making Parcelforce operation.
The row comes ahead of the announcement of first-half figures from the state-owned
organisation. Further losses are likely to have been run up this year because of a
slowing in the growth of mail volumes.
Consignia, looking to cut its costs by £1.2bn, says the company can no longer sustain
the losses that have been run up by the packages and express business over the past
10 years. It wants to reduce the parcel company's fixed costs by persuading an
increasing number of Parcelforce staff to become owner drivers.
The move, the latest in a series of outsourcing proposals from Consignia, has incensed
The union said it learned of the new proposals, drawn up by consultants
PricewaterhouseCoopers, only this week after being called to a meeting with
Under the PwC plan "the vast majority" of the company's work would be franchised to
contractors. The alternative put forward in the PwC report involves closure of the
business in its entirety.
Claiming that the Consignia board is pursuing a long-term strategy of backdoor
privatisation, the union has decided to make a stand. It is demanding that Consignia
honour the recent owner-driver agreement in full and has called for an urgent meeting
with the trade and industry secretary, Patricia Hewitt, to discuss developments within
"We have said to them enough is enough," John Keggie, CWU deputy general
secretary, said yesterday.
"The union's membership are fed up with being held responsible for the inability of Post
Office management to run the business effectively."...
© Guardian Newspapers Limited 2001
For more, GO TO > > > Going ‘Postal’ at Consignia
Cisco Systems - From Parish & Company, 9/22/00:
CISCO SYSTEMS WATERED STOCK SCHEME
Microsoft erected a financial pyramid scheme, using employee stock options, designed
to leverage growth in its stock price. Cisco Systems competitive response ... involved
using a merger scheme designed to leverage growth in its own share price. What
neither company anticipated was the impact of Citigroup, quietly using a merger
scheme similar to Cisco’s, in addition to a variety of predatory practices designed to
generate merger fees through its Salomon Smith Barney subsidiary.
While all eyes are on technology, Citigroup has effectively unplugged the new economy
due to excessive mergers and their various peripheral implications, in addition to
becoming a watered stock itself. This may represent the biggest untold story in the
financial media and also the greatest overall risk to the stock market and economy.
No one doubts the remarkable transformation brought about by the Internet. It has
ignited a whole new era of economic prosperity. With an 85% market share in routers
Cisco has certainly seized this opportunity and seen its stock market value soar to half
a trillion dollars....
Meanwhile, Cisco Systems’ remarkable market capitalization is supported by only $20
billion in total revenue and represents a mere $2.35 in sales per share. The current
share price is $67 and there are 8.5 billion shares of stock outstanding, including
options. It’s the 8.5 billion shares outstanding that deserves more attention along with
the illusion that Cisco is rewarding employees with stock options when in reality
employees are prepaying their own wages while management pilfers the retirement
system in a desperate attempt to sustain their financial scheme. A scheme largely
based upon Microsoft like anti-competitive business practices still unknown to the
Cisco claims that “everyone is doing it” yet this report will confirm that this is simply not
true. One notable exemption, however, is Citigroup, which now has 4.5 billion shares
outstanding and is the largest bank in the country with a market value of $230 billion.
Citigroup is using a similar merger scheme and the equivalent of a “fee mill” to sustain
its stock price.
This includes aggressively selling high priced annuity contracts into pension
plans and various other practices, the exact opposite one would expect in a
period of increased automation and efficiency....
For the new economy to regain its footing, industry dominating predators like
Cisco Systems and Citigroup must first be exposed for what they are doing.
This will allow consumers to instead focus on the many excellent alternatives available,
both as consumers of financial services and as investors....
The Big Players and a Historical Perspective
Cisco Systems is using techniques no different than those used by Charles Keating.
Many forget that Keating was a hero in his day ... with even Alan Greenspan referring
to his bank as “an outstanding success.” Sadly, Keating was the catalyst in destroying
a great industry that allowed many consumers to purchase their first home....
You might ask, how does a company become worth half a trillion dollars with gross
revenues of only $20 billion? And why do leading pension funds including Fidelity,
Janus, AXA and Vanguard, which alone own more than $50 billion worth of Cisco
shares, invest in the company? If $300 billion worth of Cisco shares are in equity
mutual funds and other managed investment accounts, it is likely that more than $4.5
billion in management and brokerage fees, 1.5 percent, are being siphoned from
its equity base each year....
Cisco is a giant company that has placed its employees, shareholders and customers in
a mathematical vice resulting from a collapse of ethics and integrity by management.
While they will note that “everyone is doing it,” we will see what is simply false....
Key Factors Leading To “Watered Stock” At Cisco Systems
1) Excessive use of the pooling method to account for acquisitions, thereby hiding the
true cost of acquisition activity....
2) Paying employee wages mostly in non-qualified stock options. This removes the
cost of labor from the financial statements and overstates earnings because these
wages for options exercised, unlike cash wages, are not included as a charge to
3) Sales adjustments now represent a large component of gross revenues and
investors should begin to ask questions. The first question should be, are gross
revenues being manipulated by management? . . .
4) Cisco’s auditors, PricewaterhouseCoopers, are not independent and are helping
disguise the scheme. This firm also audits Fidelity, Janus, AXA and Vanguard in
addition to co-marketing Cisco’s products through its consulting division....
- For more, GO TO > > > Tracking the Pregrines at Cisco Systems
Enron - You may have heard of them, and their accountant Arthur Andersen. But,
have you heard diddly-poop about the role of PricewaterhouseCoopers?...
November 29, 2001
ADMINISTRATOR TO ENRON
PWC News Release
Tony Lomas, Steven Pearson, Dipankar Ghosh and Neville Kahn of
PricewaterhouseCoopers, were appointed joint administrators on 29 November 2001
to the European holding company of the Enron group and a number of its operating
companies. Their appointment follows the credit-downgrading of Enron yesterday and
the impact that has had on its ability to continue to trade. Inevitably, job losses are
Tony Lomas commented:
“There is already very serious interest in Enron’s metal business and negotiations are
expected to lead to a successful deal in the near term. The Enron group built an
extraordinarily complex network of integrated businesses and this will take some time
for the administrators to work through. Our primary focus will be on the large physical
assets and trading position of the group.”
* * *
December 4, 2001
Companies circle to pick off Enron assets
By Mark Tran
Electricité de France today expressed an interest in buying Enron Direct, the
European retail arm of Enron, the failed US energy giant.
"We are talking with PricewaterhouseCoopers to buy Enron Direct," Gérard Wolf, an
EdF director said.
Enron Direct sells gas and electricity to small and medium-sized businesses mainly in
Britain, where it has 150,000 customers....
With Enron filing for bankruptcy protection, companies are circling to pick off the
company's best assets.
In the Philippines, the state-owned generator National Power Company, is looking at
buying Enron's two power plant contracts in the country.
As for Enron Direct, apart from EdF, other companies said to be interested in include
Britain's Centrica and Innogy groups and US-owned TXU Europe and Germany's
Unlike Enron's trading activities in the US, Enron Direct is not legally under
administration but PricewaterhouseCoopers is supervising the sale of the retail
business as part of its efforts to wind up Enron Europe.
Enron Europe went into administration on November 29, three days before its US
parent filed for Chapter 11 bankruptcy protection in the biggest corporate failure in
Enron, once America's seventh largest company, yesterday gained some breathing
space when it secured an $1.5bn emergency round of financing.
Arranged by Citigroup and JP Morgan Chase, the money will be syndicated and is
secured by substantially all of the company's assets.
Enron needs money to ensure delivery of commodities it had already paid for and to
avoid eviction from its new 200,000 sq ft Houston trading floor.
* * *
For more, GO TO > > > The Story of Enron
Hanford's Creations, Inc. - A company that makes Christmas decorations. Owned by
Elizabeth Hanford Dole, a friend of Mark McConaghy of PricewaterhouseCoopers,
before she sold it to a group headed by Bishop Estate.
The estate promptly lost money on the deal.
See also: Mark McConaghy
Henry Peters - Ex-trustee of Kamehameha Schools/Bishop Estate.
From the RICO lawsuit : Civil No. CV 99 00304-DAE - Harmon v. Federal Insurance
Co., P&C Insurance Co. Inc.; Marsh & McLennan, Inc., PricewaterhouseCoopers,
Defendant Trustee Henry H. Peters, was appointed in 1984 by the Justices of the
Supreme Court of the State of Hawaii, acting as individuals, and was entrusted with the
fiduciary duty to administer the Estate of Bernice Pauahi Bishop for the education of the
children of Hawaii....
Defendant Peters is also Chairman of the Board of Directors of P&C. Peters has also
served on the Board of Directors of Mid-Ocean Reinsurance Co. (a Bermuda
company); Underwriters Capital (Merritt) Insurance Co. (a Bermuda company);
SoCal Holdings, Inc.; and numerous other companies owned by, or related to,
Beginning around March 1996, Harmon began questioning what appeared to be
excessive premium charges being made by Marsh & McLennan ... and for fees M&M
was billing to P&C.
For the next several months, Plaintiff was subjected to threats, intimidation and various
abuses from Aipa and Kam for questioning the excessive fees of M&M. Harmon asked
Aipa about the status of his transfer (to P&C).
Aipa's response was that it wasn't going to happen because "arms-length was no
longer an issue," (referring to previous legal opinions from Price Waterhouse that the
IRS might revoke the Trust's tax-exempt status if it did not maintain arms-length from its
* * *
From Equity No. 2048, Petition of the Attorney General on Behalf of the Trust
Beneficiaries to Remove and Surcharge Trustees:
"The Trustees have been unfaithful to the Will and the purpose of the Trust. They have
failed to comply with clear directives of the Will. They have subordinated the sole
purpose of the Trust to their personal gain. They have squandered Trust assets
intended for education by their excessive compensation, and by imprudent and
improper Trust management and investments.
They have violated Hawaii statutes and court orders. They have engendered hostility
between themselves and the Beneficiaries whose interests the Trustees were
appointed to serve....
Peters became lead trustee for asset management in 1993 and assumed responsibility
for Trust investments and for due diligence on prospective investments....
Peters as lead trustee purposely withheld information on existing and potential
investments from his co-Trustees, dismantled the Trust's internal audit function,
instructed staff employees to withhold information from the co-Trustees, and used his
position to approve Trust payment of improper non-Trust expenditures....
As to Peters, the effect of these violations has been that Trust assets have been
mismanaged and misspent to the detriment of the Trust purpose....
Trustees Peters, Wong, and Lindsey have violated their duty of loyalty to the
Beneficiaries by using their positions as Trustees and by using Trust assets and
opportunities to benefit themselves and their relatives and friends....
In 1992, the Trust invested approximately $31 million in Mid Ocean, Ltd. (Mid Ocean),
a Bermuda-based insurance company, and acquired 310,000 Mid Ocean Class A
shares.... In 1993, when Matsuo Takabuki retired as a Trustee of the Trust, Peters
succeeded to Takabuki's seat as a director of Mid Ocean....
Peters served as a Mid Ocean director until early 1998. ... Peters' service as a Mid
Ocean director fell within his duties as Trustee and was a Trust opportunity. . . . While a
director of Mid Ocean, Peters received substantial director's fees and received options
to acquire 6,000 shares of Mid Ocean stock. ... The Mid Ocean fees and stock options
are assets that belong to the Trust and not to Peters individually. ... Peters has
enriched himself at the expense of the Beneficiaries by retaining the fees and stock
options for his personal benefit.
(Note: Marsh & McLennan, and its subsidiary, Guy Carpenter, were major players in
the creation and management of Mid-Ocean.)* * *
Honolulu Star-Bulletin, 4/14/99, by Rick Daysog:
EMBATTLED EMPIRE . . . Larry Landry, former chief financial officer for the $4 billion
John D. and Catherine T. MacArthur Foundation, which is a co-investor with the
estate in a Boston-based investment fund and a Florida apartment complex, describes
Peters as a savvy and thorough investment manager....
Deal promoters often approach large foundations and charitable trusts thinking they
have deep pockets. But Peters brings a healthy skepticism to anyone who brings an
investment to the estate, according to Landry....
"Henry is extremely bright and has the right kind of conservative (investment)
philosophy," said Landry, who now serves as CEO of Florida-based Westport Realty
In his review of the estate's 1994-1996 accounts, court-appointed master Colbert
Matsumoto and the accounting firm of Arthur Andersen said the estate -- during
Peters' tenure as acting asset manager -- generated an embarrassing return on
investment of minus 1%.
During that period, the trust set aside more than $240 million in reserve for future
That woeful performance came as Wall Street was in the midst of a record bull run in
which investors could have made double-digit returns just by putting their money in an
Peters, charges stand out in lengthy Bishop Estate investigation. The state's
exhaustive investigation into the Bishop Estate appears to focus on trustee Henry
Peters as a central figure in the two-year controversy that's rocked the multibillion-dollar
In a September Probate Court petition to permanently remove several trustees,
Attorney General Margery Bronster alleged that Peters took part in repeated acts of
self-dealing and mismanagement.
The state's charges include: ... Between 1993 and 1998, Peters received options to
acquire 6,000 shares of stock as well as substantial director's fees from a
Bermuda-based insurance company, Mid Ocean Ltd.
The estate was a big investor in Mid Ocean. Peters has since declined to exercise the
stock options, which would have been worth more that $400,000 under Mid Oceans's
1993 merger with competitor Exel Ltd. [another Marsh & McLennan financial
Peters directed trust managers and the estate's former Royal Hawaiian Shopping
Center subsidiary to hire his friends and relatives for unbudgeted positions and outside
consulting work, according to the state. The employees included former state Rep.
Terrance Tom, local attorney Albert Jeremiah and Office of Hawaiian Affairs trustee and
former state Sen. Clayton Hee....
Starting in 1995, a company headed by Peters' nephew received more than $1.3 million
in nonbid and subcontracting work from the estate....
The company, Rhino Roofing, conducted renovation work on Peters' Maili home....
Since 1995, Peters' former employer, Dura Constructors Inc., received more than
$2.7 million in nonbid work from the estate....
In one case, Dura billed the estate $465,000 to build an athletic locker room at
Kamehameha Schools that was later deemed unsafe for student use. The trust would
up correcting the building deficiencies itself and did not pursue Dura for the faulty work.
Dura also conducted work on Peters' Maili home....
Along with his fellow trustees, Peters received compensation well above that of
comparable organizations. In 1997, each trustee earned about $840,000 in
Peters and fellow trustees also spent more than $900,000 of trust money to lobby
Congress against the passage of federal legislation limiting salaries for board members
of charitable trusts....
* * *
Reporter Sally Apgar, in the 02/18/00 edition of The Honolulu Advertiser, revealed that
the ousted Bishop Estate trustees used the trust money to "enlist" the aid of U. S.
Sens. Dan Inouye and Daniel Akaka in 1995 to influence fellow members of Congress
to vote against "interim sanctions" regulations that threatened the trustee's $1
According to Apgar:
Thirteen confidential memos during the fall of 1995 through April 1996 detail the
trustees' strategy against the bill....
The memos express the trustees' intent "to kill the measure" and their recruitment of
influential contacts such as Inouye, Akaka and the Rev. Jesse Jackson. They also
targeted others, including Sen. Daniel Patrick Moynahan of New York and even White
House insiders such as Leon Panetta, then President Clinton's chief of staff, to win
The memos give a glimpse of the behind-the-scenes political power and influence the
former trustees once wielded and describe a costly, intensive effort to protect their
As previously reported, the ousted trustees hired former Gov. John Waihee and his
Washington, D.C.-based law firm Verner Liipfert Bernhard McPhearson Hand to
lobby against the federal legislation... Other Verner firm members enlisted in the effort
included former Treasury Secretary Lloyd Bentsen of Texas, former Senate Majority
Leader George Mitchell of Maine and former Texas Gov. Ann Richards....
The state Attorney General's Office has said previously that the trust paid the firm more
than $900,000 for its lobbying efforts on intermediate sanctions legislation between
1995 and 1998.
Waihee alone was in charge of swaying Erskine Bowles, then assistant to the president
and deputy chief of staff, and Doug Sosnick, then assistant to the president and director
of political affairs....
Mark McConaghy of PriceWaterhouseCoopers LLP, a longtime tax adviser to the
trust, was charged with contacting Leslie Samuels, then assistant secretary for tax
Congressman Neil Abercrombie (D-HI) is also mentioned in the memos. For example,
the Oct. 12 memo said, "Congressman Abercrombie is prepared to speak to Rep.
Gibbons, the ranking minority member, Charles B. Rangel (D-NY) and Andrew Jacobs,
Jr. (D-Ind) as well as GOP Rep. Nancy Johnson....
* * *
Honolulu Star-Bulletin, 5/21/99, by Rick Daysog:
It is alleged that trustees Peters and Wong
helped conceal $350 million...
Two weeks after a state judge temporarily removed four of the five trustees of the
Bishop Estate, the state attorney general's office today filed court papers in a separate
proceeding spelling out why trustees Henry Peters and Richard "Dickie" Wong should
be temporarily ousted from their $1 million-a-year jobs....
In an 89-page proposed findings of fact, Deputy Attorney General Hugh Jones argued
that Peters and Wong helped conceal $350 million in trust income that should have
been spent on the estate-run Kamehameha Schools, paid themselves $131,000 more
than they were entitled to and failed to adopt strict conflict-of-interest policies at the
The result of these actions deprived scores of native Hawaiian children of an education
at the Kamehameha Schools, Jones said....
For more, GO TO > > > Dirty Money, Dirty Politics & Bishop Estate
Industrial and Commercial Bank of China - From The Straits Times-Asia, 10/31/00:
TO INCLUDE TOP LEADERS
China's chief auditor plans to take his fight against corruption to almost the top of the
country's political system, according to state media.
This follows the discovery of US$11 billion in mismanaged funds at Chinese
government offices and businesses.
The astounding sum, reported by Mr. Li Jinhua, Auditor-General of China's National
Audit Office, is one of the strongest indications of how mismanagement is in China....
"Corruption thrives under a lack of efficient supervision," the paper said....
According to earlier official reports, the auditing led to the discovery of misuse of funds
at the Industrial and Commercial Bank of China, and the Construction Bank of
China, causing losses worth more than 10 billion yuan (S$2 billion)....
Mr. Li's auditors found that individual officials and managers had misappropriated 590
million yuan. But this marked only a fraction of the 96.17 billion yuan mismanaged, if
not embezzled, by offices and firms, the China Daily said.
The reports did not give details of how the funds were misused . . . But in previous
reports over the past 18 months, Mr. Li has criticised officials for diverting government
subsidies and spending lavishly on offices. There has also been talk of speculation in
stocks. . . .
* * *
November 8 2000
CHINA SENTENCES 14 TO DEATH IN
By Jeremy Page, Asia 2000
China sentenced 14 people to death on Wednesday, including senior police and
customs officials, in the first verdicts of a multi-billion dollar smuggling scandal,
the biggest corruption case of the Communist era.
Those sentenced to death included the former customs chief and deputy mayor of the
southern port of Xiamen, and the former deputy police chief of southern Fujian province
. . .
But state media said the mastermind of the smuggling scam, businessman Lai
Changxing had fled overseas after being tipped off by police....
Lai's Yuanhua Group smuggled more that $6 billion worth of cars, luxury goods, oil
and raw materials in the early 1990s, paying off city and provincial officials to facilitate
and cover up duty evasion, Xinhua said.
"The group also used money and women to seduce a number of government officials
for the convenience of their smuggling activities," Xinhua said.
The smuggling "caused serious damage to the normal economic order, brought huge
financial losses to the state, led to rampant corruption, and impaired the social, political
and economic life in China," it said....
The death sentences included Xiamen's former customs chief Yang Qianxian and
former vice mayor Lan Pu, and former Fujian deputy police chief Zhuang Rushun,
Ye Jichen, head of the Industrial and Commercial Bank of China in Xiamen, was
also given a death sentence....
Leon Panetta - Leon Panetta served as White House Chief of Staff under President
Clinton from 1994 to 1997.
PBS Online, 11/8/96: Presidential Press Conference . . . President Clinton held a
news conference, the first since his re-election victory Tuesday. The major
announcement was that of Erskine Bowles to replace Leon Panetta as White House
Chief of Staff . . .
PRESIDENT CLINTON: . . . I must begin by announcing that Leon Panetta, who has
been my chief of staff since 1994, will be resigning....
REPORTER: The election is over ... but some questions remain. One of them is: How
do you explain the obsession with fund-raising, especially from dubious Asian sources,
and how do you overcome the image created by your opponent that you are a
President who cannot be trusted?
PRESIDENT CLINTON: Let me answer the second question first. I think the American
people, since they’ve been hearing this for five years, took a long, hard look at it, and
they measured that against what they saw in terms of the work of this administration, in
terms of the people who were laboring hard to make their lives better, and in terms of
the President. And I think they made their judgment that I have worked hard for them, I
will keep working hard for them ... and I think that they gave me their trust, and I’m
going to do my best to be worthy of it.
Now, with regard to the contribution issue, the Democratic Party and the Republican
Party raised a lot of money under the rules which now exist. The Democratic Party
received over a million different contributions in two years. They determined two things:
One is that a relatively small number of them – I think – I don’t know exactly what the
number is but quite a small number out of a million, they should not have taken, and
they have returned them.. They also– the Democratic Party said that they should have
a tighter screen on contributions when they come in, and they’ve implemented an
improvement so that they won’t receive contributions they shouldn’t give they can
determine it at all. (Huh?) I think that’s a good thing. ... Terry.
REPORTER: Mr. President. Attorney General Reno is considering whether to appoint
an independent counsel to investigate these allegations of improper fund-raising by
your campaign. She says that she’s got–
PRESIDENT CLINTON: Wait, wait, wait. There have been no allegations about
REPORTER: Well, by–
PRESIDENT CLINTON: That’s correct– by the Democratic Party– let’s–
REPORTER: She says that she’s–
PRESIDENT CLINTON: That was the other campaign that had problems with that– not
REPORTER: General Reno says she’s caught between a rock and a hard place and
that she’ll be criticized no matter what she does. I know that it’s her decision, but what
do you think? Do you think that these– these allegations should be investigated by an
independent counsel, and secondly, do you think that General– would you like to see
General Reno stay on for a second term?
PRESIDENT CLINTON: I think on the first question I should have no comment on that.
On the second question, I should have no comment on any personnel decision until I
have had a chance to meet with the cabinet members....
* * *
From PBS Online, 1/17/97: Panetta Heads West . . . On his last day in office he talks
to Margaret Warner about ethics, money in politics, and Clinton’s Presidency....
MARGARET WARNER: . . . Now one of this group of problems did happen on your
watch, and that is the Democratic National Committee fund-raising, and let me just ask
you whether you think, in retrospect, you all put too much pressure on the DNC to raise
these millions and millions for the presidential year and that there was also maybe
something a little unseemly about the way you involved the President in all these
special things for the donors or the nights in the Lincoln Bedroom or the coffees here at
the White House....
LEON PANETTA: Well, obviously, I think the President and all of us were disappointed
at what happened with regards to how the DNC checked the contributions and the fact
that they had a check system in place and then ignored it or put it aside....
* * *
The Detroit News, 1/29/98: . . . Negotiations to get Monica Lewinsky’s cooperation in
the sexual scandal surrounding President Clinton inched forward Wednesday while
investigators cast a wide net to gain corroborating evidence.
Independent counsel Kenneth Starr’s team called the biggest figure yet to testify before
a federal grand jury sifting through charges that Clinton had sex with Lewinsky while
she was a White House intern and then encouraged her to deny it under subpoena....
“I am personally not aware of any improper relationship, sexual or otherwise, by this
president and any of the White House interns or anyone else for that matter,” Panetta
Panetta’s testimony is seen largely as a building block for the investigation because of
his access to Clinton and because Lewinsky worked for him when the alleged
sexual encounters occurred.
Panetta, though, recently said he didn’t recall Lewinsky....
* * *
The Starr Report Evidence, edited by Paul Kuntz: Monica Lewinsky’s First Interview
with Investigators - Office of the Independent Counsel, 07/27/98...
LEWINSKY first met the President of the United States, WILLIAM J. CLINTON, in July
1995, soon after beginning her job as an intern in LEON PANETTA’s Office in the
White House. The occasion was the departure of the President from the South Lawn of
the White House....
LEWINSKY began her personal relationship with the President on Nov 15, 1995....
LEWINSKY, who was still an intern working for LEON PANETTA in the West Wing of
the White House, saw the President when he came to the West Wing to see PANETTA
and HAROLD ICKES....
For more on Kenneth Starr, GO TO > > > Flying High in Hawaii: The Ron Rewald Saga
* * *
The Honolulu Advertiser, 02/05/00, by Sally Apgar: . . . Trustees helped by Inouye,
Akaka in fighting pay limit. ...
The ousted trustees of Kamehameha Schools enlisted the aid of Sens. Dan Inouye and
Daniel Akaka in 1995 to influence fellow members of Congress to vote against a bill
that threatened the trustees’ $1 million-a-year paychecks, according to internal trust
documents obtained by The Advertiser....
Thirteen confidential memos during the fall of 1995 through April 1996 detail the
trustee’s strategy against the bill, which called for intermediate sanctions that penalize
high-ranking insiders of charitable organizations for taking excessive personal
The memos express the trustees’ intent to “kill the measure” and their recruitment of
influential contacts, such as Inouye, Akaka and the Rev. Jesse Jackson. They also
targeted others, including Senator Patrick Moynihan of New York and even White
House insiders such as Leon Panetta, then President Clinton’s chief of staff, to win
The memos give a glimpse of the behind-the-scenes political power and influence the
former trustees once wielded and describe a costly, intensive effort to protect their
Mark McConaghy of PricewaterhouseCoopers, a longtime tax adviser to the trust,
was charged with contacting Leslie Samuels, then assistant secretary for tax policy....
Lloyd Bentsen - Former U.S. Secretary of Treasury. Bentsen sat on the Board of
Directors of American International Group at the time Governor Clinton's Arkansas
Finance & Development Authority (with help from Goldman Sachs and Robert Rubin)
invested in AIG's Coral Reinsurance in Barbados.
Bentsen, along with Hawaii's ex-governor (and FOB) John Waihee, are also lobbyists
with the Washington, D.C.-based law firm Verner Liipfert Bernhard McPhearson
Hand which was hired by Bishop Estate to lobby against the federal "interim sanctions"
The state Attorney General's Office disclosed that the trust paid the firm more than
$900,000 for its unsuccessful lobbying efforts on intermediate sanctions legislation
between 1995 and 1998.
* * *
New Holland N.V. Press Release, 10/29/96: Former U.S. Treasury Secretary
Bentsen appointed Chairman of New Holland N.V. New Holland N.V. announced
today that Lloyd Bentsen, the 69th U.S. Treasury Secretary, who played a pivotal role in
the Clinton Administration during 1993 and 1994, and former U.S. Senator from Texas,
has been appointed Chairman of the Board of Directors of New Holland.
Senator Bentsen was appointed Treasury Secretary by U.S. President Clinton in Jan,
1993, and served in the Clinton Administration until December, 1994. As Secretary he
was a major policy adviser to the President and was credited with playing a key role in
the Administration’s successful efforts to reduce the federal deficit and to increase trade
and economic opportunity through NAFTA (North American Free Trade Agreement)
and GATT (the General Agreement on Trade and Tariffs.)
Mr. Bentsen said: “As one who has for may years owned farms, I can attest to the high
quality of New Holland’ agricultural equipment. I am pleased to become a board
member of this leading international manufacturer.”...
Before joining President Clinton’s Cabinet, Lloyd Bentsen, born in Texas, was one of
the most powerful members of the U.S. Senate where he served from 1971 until his
appointment as Secretary of the Treasury. He was Chairman of the Senate Finance
Committee, which has the responsibility for tax and trade issues.
He also served as Chairman of the Joint Committee on Taxation and the Joint
Economic Committee. In 1988, he was the Democratic Party’s nominee for Vice
President of the United States.
Mr. Bentsen began his public service as a Texas County Judge, then served three
terms in the U.S. House from 1948 to 1954. After that he pursued a successful
Lucent Technologies - From Goldman Sachs, by Lisa Endlich:
The firm’s trading businesses reemerged strongly in 1997, but it was investment
banking that really shone, accounting for 40% of the firm’s revenues. In a market
where the demand for IPOs was so great that the issues almost walked out the door,
Goldman Sachs was king.
In 1997, Goldman Sachs brought to market such companies as AMF Corporation and
Lucent Technologies (the $3 billion spin-off from AT&T, the largest IPO to date)....
* * *
LUCENT TARGETED BY SEC
Telecom equipment maker says it’s
cooperating with accounting probe.
Lucent Technologies is cooperating with a Securities and Exchange Commission
investigation of possible fraudulent accounting practices during its last fiscal year, the
company said Friday.
The SEC probe is focusing on whether Lucent improperly booked $679 million in
revenue during its 2000 fiscal year, the Wall Street Journal reported....
Lucent in December adjusted its revenue statement for the fiscal fourth-quarter,
deducting the $679 million, after its own investigation....
Shares of Lucent, which have been on a steady downslide since last summer, were
down $1.93 at $14.96 . . . Over the past year, Lucent’s shares have underperformed
the S&P’s 500 index by about 70 percent....
John Hynie, an SEC spokesman, declined comment on the newspaper’s report....
PricewaterhouseCoopers, which is the company’s auditor, also declined comment....
On top of earnings warnings, Lucent has faced job cuts, profit shortfalls and product
development missteps in the past year.
* * *
Multex Market Guide, 2/9/01: Lucent Technologies, Inc. - 52 Week High: $75.38 ...
Recent Price: $15.36
#1 Top Institutional Holder: Barclays Global Investors International - Shares held:
96,482,718 ... Position Value: $2,948,753,000
Other Top Institutional Holders: Teachers Insurance & Annuity Association;
Fidelity Mgmt & Research Co; Deutsche Bank Trust; State Street Global Advisors;
Smith Barney; J. P. Morgan; Vanguard Group; Morgan Stanley Dean Witter;
Putnam Investment Mgmt (Marsh & McLennan); Invesco Inc; and Goldman
Directors and Officers worthy of note:
Paul A. Allaire, a Director of Lucent since 1996. Mr. Allaire is also Chairman (since
1991) and CEO (since May 2000, and 1990-1999) of Xerox Corp.
Carla A. Hills, a Director of Lucent since 1996. Chairman and Chief Executive Officer
of Hills & Company (international consultants) since 1993. U.S. Trade Representative
(1989-1993). Director of American International Group; Chevron Corp; and Time
Deborah C. Hopkins, Executive Vice President, Chief Financial Officer from April 21,
2000. Ms. Hopkins joined Lucent after serving as Sr. V.P. and CFO of the Boeing Co.
since 1998. She also served as Chairman of Boeing Capital Corporation. Prior to her
tenure at Boeing, she served as CFO of General Motors Europe from 1997 to 1998
and as General Auditor from 1995 to 1997. For the Fiscal Year ending 9/30/00, Ms.
Hopkins received a salary of $287,083 and a Bonus of $4,650,000, plus other
compensation of $228,215, for a total annual compensation of $5,165,298.
For more, GO TO > > > The Xerox Conspiracy
Mark McConaghy - PricewaterhouseCoopers tax expert for Kamehameha Schools
Bishop Estate and its subsidiaries.
~ ~ ~
From What It Takes: The Way to the White House, by Richard Ben Cramer (copyright
“Agh! Hollywooood! ...Let’s go! ...The big moneyyy!”
~ ~ ~
Bob Dole had no fear of cameras – nor of the herd: he knew how to make news, and
he was surely the only candidate to admit he would listen to the press....
So, of course, he was offended when the press kept asking about his money – his
income, taxes, net worth. . . . They were trying to make Dole admit ... he was rich!
Well, it was gonna be a cold day in hell – Dole had just got so he could talk about being
And what did it matter, anyway, if Bob Dole, at age sixty-four, had a million dollars, or a
couple of million? The point was not where people ended up – it was where they
If he had a few dollars now, well, uh, well ... he worked for it. He made it the hard way!
He, he ...
He married it.
But he wasn’t going to say that.
In fact, he wasn’t going to talk about that money.
In 1974, when he had to make his first disclosure, Dole’s fortune was $30,000 in a cash
account, in a bank in Russell. . . . That changed the next year, when he married
Elizabeth Hanford. But that didn’t mean Bob did anything with that money . . . or even
knew much about it. In fact, Elizabeth didn’t know much.
When she asked Dave Owen, Bob’s money man, if he’s help with her finances, she
brought a shopping bag to the office. She was in a meeting when Owen picked it up:
he was on his way out of town, and he took it with him, on and off airplanes for a few
When he got a chance to poke through the bag, he was horrified to find bonds, bank
statements, old receipts, savings certificates, check stubs, insurance policies, credit
card reminders, stock certificates . . . everything jumbled in a heap that was worth . . .
well, to put it simply, Elizabeth had two million in a shopping bag.
She wanted Dave to take care of it.
So he did. Elizabeth signed over a power of attorney, and Owen became her personal
investment adviser . . . until 1985, when the Doles (by that time, Senator and Secretary,
the capital’s pet power couple) set up Elizabeth’s blind trust. The trustee was to be
Mark McConaghy, Dole’s old staffer on the Finance Committee who now worked for
Of course, McConaghy was a policy wonk, not a businessman, so he brought in Dave
Owen as investment adviser.
Anyway, Dole never seemed to notice that he lived like a millionaire: cars waiting,
airplanes, staff. It seemed to him an extension of his Senate stature. He wasn’t rich –
he just had work to do! As for money . . . well, Dole didn’t think about the money. He
had nothing to do with that money!
Alas, he did, of course.
And what was worse: after Bush started pointing out that Dole was rich, the
newspaper in Hutchinson, Kansas ... suddenly found itself in possession of a stack of
information about investments made and contributions passed along by Dole’s friend,
So The Hutchinson News launched its own investigation, to suggest that Owen was
making a dirty fortune ... wielding Dole’s political influence ... to steer to Owen’s favored
political campaigns – and to the engorgement of the Elizabeth Hanford Dole Trust.
Well, it was complicated – all of Owen’s business was too complicated by half ... and by
the time the Times went to work again, reporting the stuff reported by The Hutchinson
News, it didn’t just look intricate – it looked awful.
It looked – it smelled – to the pack on Dole’s plane like ... bad fish!
So, in New Hampshire, Dole conducted a bang-up event in a packed pancake house . .
. and, amid a standing ovation, Bob made for the door, where the press was waiting.
Senator! What’s your net worth, jointly, with Elizabeth?
Dole stopped and faced his accusers. “I’m the candidate,” he said. “My net worth is
very little. But I don’t have any idea.”
Are you a millionaire?
“Me? I doubt it. I own an apartment and a car, and I don’t know how much money in
the bank, but...I guess very little.”
Don’t the voters deserve to know?
“They’ll find out. They know. I publish it every year, so it’s no secret.”
Will you release your income tax returns?
“I don’t know. I’m not going to let him set the timetable....”
(He didn’t have to say he was talking about Bush. It was Bush who demanded that
Dole release his tax returns.)....
It went on for days, everywhere Dole stopped....
The Bush campaign was challenging Dole to release five years of his tax returns....
As always, there were more complicated questions about Owen and his real estate
deals, his banks, corporations, partnerships, loans from the Dole trust, sales of property
to the Dole trust....
Senator, were you aware that the Dole Trust had purchased the office building in
Overland Park, which is listed as the address of the E.D.P. and Eagle partnerships,
through which Dave Owen participated, with your former aide John Palmer, in
supplying food service to the Army at Fort Leonard Wood?
Dole’s Senate Press Secretary, Walt Riker, tried to calm the waters ten times a day,
pointing out that Dole knew nothing about the deals for the trust: “You know, that’s why
they call it a blind trust.”
From Kansas, Dave Owen issued blanket denials of wrongdoing – specific denials
wherever he could get a hearing. He got the Kansas City Star to knock down one
charge – that he’d formed shell corporations just to make contributions to campaigns –
but that’s because he knew the reporters in Kansas City. What about the other
hundred and fifty newspapers, all trying to penetrate his business?....
Owen called to assure Dole’s Big Guys that there was nothing to these stories, but the
Big Guys were busy assuring the national big-feet ... that Owen never did much for
Dole’s campaign, he was just a hanger-on, despite his title of Finance Chairman....
Somehow ... Owen got the feeling he was being nudged off the back of the sleigh. ...
Bill Brock bestirred himself to call and suggest: “Dave, I think we’ve got a problem. I
think this is just unfortunate, but, a-h-m-m ... maybe you need to cease doing anything
for the campaign.”
At that point, Owen had to talk to Dole ... but he could never get through. True to form,
Elizabeth called him instead. But Elizabeth just asked about Dave’s family, and told
him this would all work out....
That’s when Owen got the message: he stopped trying to call Dole ... and he scheduled
a press conference to announce he was leaving the campaign....
On the afternoon of Owen’s auto-da-fé, Dole did conduct a quick interview with Angelia
Herrin of the Wichita Eagle-Beacon. Angelia told Dole of Owen’s announcement – he
was stepping down from the campaign until these questions were resolved....
“WHAT?” Dole barked. “No! No! ... I want it resolved. I want it final. His role has
Angelia asked, gingerly:
“How do you feel?” ...
“How would you feel?”
He’d asked Elizabeth, the minute she got into that deal with Owen. “What’re we paying
him for?” Owen was making a career out of the Doles! Doing deals! Guy’s become a
millionaire! ... And too cute: you look in that trust, it’s not IBM stock – you pick up a rock,
you see worms underneath....”
When they got to Dole’s next stop, there were thirty more reporters who wanted to
know: Would Owen’s departure put an end to Dole’s problem?
“I don’t have any problem,” Dole snapped.
“Maybe Dave Owen’s got a problem. I don’t.”
~ ~ ~
Dole was correct about that.
From that day, Dave Owen would face three and a half years of investigation from the
Office of Ethics, the Securities and Exchange Commission, the FBI (in service of a U.S.
Attorney in Missouri), a committee of the U.S. House of Representatives, the Federal
Election Commission, the Kansas Public Disclosure Commission, and the Kansas
Owen’s legal fees would eat up several hundred thousand dollars, his business
opportunities would shrivel, he’d be shunned by former friends, his daughters would be
scorned, his wife wouldn’t know if she should believe him, she would have to take a job
as a secretary, Owen would spend his time playing golf – so he wouldn’t stay in bed all
day. He owned a gun, and he surprised himself by thinking of suicide ... In the end, he
would plead guilty to one Class C misdemeanor in the state election law – the moral
equivalent of parking in front of a hydrant.
In the end, he would never hear another word from Bob Dole.
Dole was correct about his situation, too.
From the day that Bob Dole cut off Dave Owen, Dole would no longer have a problem.
He handed out twenty years of tax returns ... and nobody cared. The story of his
money all but disappeared.
In fact, from the moment Dave Owen was kicked off the sleigh, Dole was immediately
and richly applauded. The big-feet, the smart guys, and everyone they talked to,
* * *
The Honolulu Star-Bulletin, 08/24/99, by Rick Daysog:
Peters Blames Tax Guru
for IRS Problems
For more than a decade, the Bishop Estate and its trustees relied on tax guru Mark
McConaghy to keep the Internal Revenue Service off their backs....
But these days, the estate's former board members blame the Washington, D.C., tax
lawyer for much of their recent troubles with the IRS....
In court papers filed yesterday, ousted trustee Henry Peters asked Probate Judge
Kevin Chang to vacate his historic May 7 order temporarily removing the estate's board,
saying McConaghy, co-managing partner of PriceWaterhouseCoopers' Washington
National Tax Service, and other key tax experts have undeclared conflicts of interest
that have tainted the judge's removal order.
Former trustee Gerard Jervis, who resigned permanently on Friday, also is considering
legal action against McConaghy and several outside consultants, saying he relied on
the experts' advice for decisions that the IRS is now questioning....
Other former trustees are exploring similar options....
"PriceWaterhouse and Mr. McConaghy have conflicts of interests with that of
KSBE," said Peters, who also is asking Judge Chang to disqualify the estate's interim
board of trustees....
“These conflicts of interest now extend to the interim trustees because they have
retained and rely upon the advice and services of PriceWaterhouse."...
Peters' complaint -- which also alleges conflicts of interests on the part of the estate's
acting chief operating officer Nathan Aipa and the trust's mainland law firm of Miller &
Chevalier -- comes as the Bishop Estate's interim trustees filed a lawsuit today seeking
Peters' permanent removal from the estate's board....
The removal suit -- which also will call for the permanent ouster of Richard "Dickie"
Wong -- is in response to the IRS's threat in April to revoke the estate's valuable
tax-exempt status if the former board members were not replaced....
Fellow trustees Oswald Stender and Gerard Jervis have already resigned. Circuit
Judge Bambi Weil permanently removed Lokelani Lindsey on May 6 after a
In his 17-page petition, Peters said that McConaghy could be a target of legal
malpractice claims since he played an integral part in past Bishop Estate transactions
that are now being questioned by the IRS in its four-year audit of the $6 billion dollar
McConaghy's continued role in negotiating with the IRS places his allegiance to
the estate in conflict with his personal interest in fending off a potential
malpractice claim, Peters said....
"I believe that the current reliance on the recommendations of the firm of
PricewaterhouseCoopers is highly improper due to the fact that this firm initially was
instrumental in recommending the creation of the various entity structures that have
caused the IRS to issue substantial proposed deficiencies and penalties for
negligence," said Robert Schrichman, Peters' California-based tax expert.
In many ways, McConaghy -- who was a finalist for the trustee post in 1994 when the
state Supreme Court selected Jervis -- is one of a handful of outsider advisers including
local attorney Michael Hare and Stanley Mukai who have held considerable influence
over the affairs of the 115-year-old Bishop Estate.
He's also one of the trust's best paid consultants. Since 1989, McConaghy and the
PriceWaterhouse firm has billed the estate more than $3.4 million for tax and legal
Since January, PriceWaterhouse, which merged with the Coopers & Lybrand
accounting firm last year, has wracked up more than $700,000....
McConaghy and his staff at PriceWaterhouse also played a big role in the estate's
successful investment in Goldman Sachs Group L.P. Back in 1992, when the Bishop
Estate invested its initial $250 million in Goldman Sachs, the PriceWaterhouse firm
assembled due-diligence team screened the investment for tax and securities law
The value of the estate's Goldman Sachs investment, which included a second $250
million infusion in 1994, has risen to about $3 billion....
At PriceWaterhouse, McConaghy and longtime partner Bob Shapiro head a team of
more than 650 employees, which include lobbyists, economists, and former IRS
officials who represent scores of Fortune 500 companies....
McConaghy -- an associate of former Sen. Robert Dole -- recently served on the
National Commission on Restructuring the IRS, which recommended major reforms on
the U.S. tax agency in 1997.
He also served as a trustee of presidential candidate Elizabeth Hanford Dole's
[Bishop Estate was also involved with Elizabeth Hanford Dole through the buyout of
her company, Hanford's Creations, Inc.]
Before joining PriceWaterhouse in 1983, McConaghy worked for the IRS and later
became chief of staff of the Joint Tax Committee, the powerful congressional panel
which writes most of the tax laws....
To be sure, McConaghy is no stranger to controversy at the estate. Sources said that
he played a significant role in the estate's much-maligned efforts to lobby against
federal legislation barring excessive compensation for directors of nonprofit
He has also invested personal money in several Bishop Estate deals. Court
records show that McConaghy invested about $25,000 in McKenzie Methane Inc., the
troubled Houston-based natural gas producer that was taken over by the Bishop
McConaghy also had a personal stake in a Michigan venture in which the estate
acquired about 292,000 acres of raw timberland for about $25 million in 1991....
The timber venture, now known as Shelter Bay Forest, initially was a partnership with
New Hampshire timber executive Ben Benson, who is a friend of McConaghy's....
- For more, GO TO > > > The Vultures in The Nature Conservancy
* * *
From Equity No. 2048, Vol. 151 - In the Matter of the Estate of Bernice P. Bishop -
SUBPOENA DUCES TECUM issued Apr 17, 2000:
To: Custodian of Records, PricewaterhouseCoopers LLP :
. . . YOU ARE FURTHER ORDERED to bring with you all Documents referred to in the
attached exhibit 1.
Among the documents requested:
1. Written policies of PricewaterhouseCoopers (the Firm) and of professional
associations to which Firm member belong concerning co-investing with or entering
business transactions with clients;
2. Co-investments and other business transactions of Mark McConaghy or other Firm
members with Kamehameha Schools Bernice Pauahi Bishop Estate (KSBE) or any of
KSBE's subsidiary or related partnerships, limited partnerships or other business
3. Disclosures by any member of the Firm of co-investments with KSBE or any of its
subsidiary or related partnerships, limited partnerships, or other business entities;
4. Statements sent by PricewaterhouseCoopers to KSBE or any of its subsidiary or
related partnerships, limited partnerships or other business entities....
* * *
From the RICO lawsuit Harmon v. Trustees of Kamehameha Schools Bishop...et al:
Plaintiff alleges that the following persons, corporations, partnerships and other
business entities knowingly participated in, and improperly benefitted by, the
Racketeering Activities of Defendants. By their acts or omissions, they either
sanctioned or perpetuated the crimes:
gg) Mark McConoghy, Price Waterhouse - McConoghy is the tax expert hired by KSBE
and advises KSBE and its subsidiaries on matters of tax law. McConoghy was a co-investor with KSBE in the McKenzie deal, which had the appearance of, if not actual,
conflict of interest. Plaintiff believes McConoghy also may have personally benefitted in
other KSBE deals, including one or more of the HAK partnerships, and the Benson
jj) Ben Benson, partner with KSBE in Benson Forest, now Shelter Bay Forests.
Plaintiff alleges that Royal Hawaiian Shopping Center, Inc. arranged and paid for a
life insurance policy for Benson, with Marsh & McLennan as the agent, which was
possibly a “sweetheart deal”, and may not have been reported to the IRS as income
to Benson. Plaintiff also alleges that there may have been misrepresentation and/or
fraud involved in the purchase of this insurance as Benson had a heart attack (non-fatal) just prior to the binding of coverages, which Plaintiff believes may not have
been disclosed by M&M to the life insurance company....
* * *
November 5, 2002
Richard D. Fairbank, CEO of Capital One Financial, a fast-growing credit-card
company, bought a six-bedroom home from trustee Mark McConaghy on Langley
Place in McLean for $2,575,000....
* * *
For more, GO TO > > > Broken Trust: The Book; Dirty Money, Dirty Politics & Bishop
Marsh & McLennan Companies, Inc. - From the RICO lawsuit: Harmon v. Federal
Insurance Co, Marsh & McLennan, Inc., Trustees of Bishop Estate, Pricewaterhouse
Coopers, et al: . . .
Defendant Marsh & McLennan Companies, Inc. (M&M) is the world's largest
insurance brokerage firm that conducts business throughout the United States and in
many foreign countries, and is a licensed General Agent for Federal in the State of
On or about May 25, 1994, Plaintiff, in his capacity as Risk/Insurance & Safety Manager
for KSBE, obtained a Captive Management Fee Proposal from Peter Lowe, VP, M&M
Insurance Management Services, Inc. (M&MIMS), which detailed their proposed
services and fees for managing P&C. Their services were to be on a time and expense
basis, with an estimated annual cost of around $70,000. There was no mention in this
proposal that their related subsidiary, M&M, would charge an additional flat annual fee
of $200,000 for providing "brokerage", "risk management" or other purported services to
This proposal, the subsequent contract, and periodic invoices from M&MIMS and M&M
were transmitted by mail and/or wire. Plaintiff relied upon this proposal, its costs and
representations, as an inducement to contract for these captive management services.
Plaintiff alleges that M&M's failure to disclose in their proposal an additional flat annual
fee of $200,000 constitutes wire fraud, mail fraud, fraudulent inducement and
Defendants M&M and M&MIMS, their employees, Rocco Sansone and Peter Lowe,
and others in their organizations benefitted financially from these excessive fees in the
form of salaries, commissions, bonuses, or other manner of compensation. Plaintiff
alleges that M&M's acts in collusion with some or all of trustees of KSBE, with officers
and directors of P&C, and with Federal constitutes a conspiracy to defraud P&C and
the beneficiaries of the Estate of Bernice Pauahi Bishop; racketeering; mail fraud; wire
fraud; extortion; and violations of the "interim sanctions" regulations of the IRS...
For more GO TO > > > Claims By Harmon; The Harmon Arbitration; The Marsh Birds;
Harmon’s Letters to Insurance Commissioners;
McKenzie Methane - A Texas methane gas company in which Bishop Estate was the
majority investor – and in which the estate’s trustees, managers, auditors, friends and
other insiders co-invested their personal funds, then let the estate bail them out when
the deal fizzled.
* * *
From the RICO lawsuit, Bobby N. Harmon v. Trustees of Bishop
Estate...PricewaterhouseCoopers, et al.:
... Plaintiff alleges that Aipa's wrongful acts are multitudinous. These acts include, but
are not limited to: ... Facilitating and concealing co-investments in KSBE deals by the
Trustees, employees, family members and business associates.
In 1989 the four KSBE Trustees, Peters, Takabuki, Richardson and Thompson
approved of the investment of approximately $85 million in a Houston-based energy
venture with McKenzie Methane. (Trustee Lyman had recently passed away and a fifth
trustee had not been appointed.)
This same venture also received more than $3 million in personal funds from all four
trustees and employees and business associates of the estate. The Honolulu
Advertiser reported in their February 26, 1995 issue that: "The troubled deal may cost
the estate as much as $65 million in lost capital and at least twice that much in lost
earnings and tax benefits."...
Honolulu businessman Desmond Byrne ... called the personal investments by estate
trustees and staffers 'an absolutely improper conflict of interest. It raises the
appearance that their official decisions are affected by their own personal financial
The current board is almost completely different from that of 1989. Only one trustee,
Henry Peters, remains. But the current board still holds that the old one did nothing
wrong, according to [Nathan] Aipa....
"There was no conflict of interest," Aipa said.
The Texas court files clearly show, however, that the trustees, their employees and
associates relied on estate reports and financial data when they decided to put their
own money in the deal. Estate personnel have immediate access to the high-priced
and sophisticated financial expertise of such firms as First Boston Bank and
Goldman, Sachs & Co.
The estate, a non-profit, tax-exempt institution ... must be very careful in structuring its
investment activities so it won't imperil its tax-exempt status. The Houston investment
was particularly tricky because one of the principal benefits was that the estate would
receive federal energy tax credits, which the tax-exempt estate intended to sell."
This same news article went on to describe other personal investments in estate-related
business deals: "According to court records, the estate board of trustees was told in
April, 1989 by Aipa, that 'no conflict (of interest) exists in the personal investments.'
The personal investments were made 'only after careful review of the issues and advice
from the law firm of Rush Moore Craven and Stricklin,' Aipa said.
But current trustee Oswald Stender ... said under oath in a 1993 deposition that he
would not have made such a personal investment ... that he would not invest in
activities ... that I had self-dealing in.
Takabuki, his wife, three children and family company, Magba Corp., invested $1.5
The investments were made through a series of five partnerships, called the 'HAK
Partnerships', that were organized and administered by Mitchell Gilbert, Bishop Estate
financial assets manager from 1988 to September 1994....
Gilbert and members of his family invested nearly $72,000 in the five partnerships, the
court records show. And he invited various influential 'investment affiliates' of the
estate to invest in the HAK Partnerships....
In 'marketing' the deal to potential investors, he was acting individually and not as a
representative of the Bishop Estate, Gilbert said in his deposition....
But the letters he wrote were on estate stationery and he signed them as Bishop
Estate's financial assets manager....
A Texas lawyer for Bishop Estate said in Houston bankruptcy court last month that the
estate can only hope to recover $20 million at most of its $85 million investment....
According to the Honolulu Advertiser, other co-investors included:
Henry Peters (trustee)
William Richardson (former trustee and subsequent consultant; Sec./Treasurer of
Myron Thompson (former trustee)
Matsuo Takabuki (former trustee and subsequent consultant)
Dave Thomas (owner of Wendy's restaurants and co-investor with KSBE on several
William E. Simon (former U.S. Treasury Secretary, and co-investor with KSBE on
several other projects, including HonFed Savings & Loan, Sino Finance, Xiamen Bank,
and SoCal Holdings)
Wayne Rogers (the Mash actor, who later brought many suits against KSBE for the
Kona Enterprises deal)
Bruce Nelson (treasurer of the Rockefeller Group)
Raymond Pettit (CFO of the Rockefeller Group)
Frederick "Ted" Field (Big-time movie producer. Three Field employees also
invested. Field was the estate's partner in the corporate takeover of European
conglomerate DRG, Inc. He later brought suit against the estate in a co-investment
deal involving The Pantry)
Mark McConaghy (Bishop Estate's principal tax lawyer and lobbyist. McConaghy, who
works for the Price Waterhouse accounting firm's national headquarters in
Washington, D.C., was a finalist on the state Supreme Court list of nominees to fill the
latest vacancy on the estate board of trustees, losing out to Gerard Jervis.)
Michael Chun (President of Kamehameha Schools)
Gilbert Tam (then-Director of Administration, KSBE; currently, an officer of Bank of
Hawaii and director, P&C)
Guido Giacommetti (then Director of Asset Management, KSBE; now court-appointed
trustee for the Sukamto Sia mega-bucks bankruptcy)
Anthony Sereno (deceased, then Board of Directors, Royal Hawaiian Shopping
Neil Hannahs (head of the estate's Kakaako development project)
Charles Maeda (head of Information Services Division, KSBE)
Richard Wong (president of RHSC and Pauahi Holdings Corp.)
Wallace Tirrell (then president of Kamehameha Investment Corp.)
Gilbert Ishikawa (KSBE tax manager)
Ed Hendrickson (KSBE Financial Assets Division)
Rodney Park (then KSBE Controller; currently Dir, Administration Group, and
President, P&C Insurance Co.)
Wally Chin (then Deputy Controller; currently Controller, KSBE)
Donald K. H. Pang (father of KSBE employee, Leeanne Crabbe)
AIPA and others did such a good job of concealing this information, that Plaintiff was
unaware of these co-investments until he read about them in the newspaper -- even
though his job at the estate required him to be informed of the details of mergers and
acquisitions for insurance and risk management purposes....
For example, in March 1993, B. M. McKenzie and McKenzie Methane Corporation filed
a lawsuit for $2.3 billion against the trustees and KSBE. Additional defendants were
the HAK Partnerships I, II, III, IV and V; Smith-Gordy Methane Co.; SG Methane Co.,
Inc.; Gordy Oil Co.; L. H. Smith; R. D. Gordy; D. A. Barras; Lee H. Henkel, III; Mitch
Gilbert; Royal Hawaiian Shopping Center, Inc.; Maralex, Inc.; M. O'Hare; Kukui, Inc.;
JGI Resources, Inc; and Northwestern Mutual Life Insurance Co.
AIPA initially did not report this lawsuit to the insurance company, United Educators.
Plaintiff learned of this lawsuit several months after it was filed, and only as a result of
his inquiring about unreported claims in preparation for the renewal of this policy.
When Harmon did report this claim to the insurance carrier, Aipa immediately took
control and directed that all correspondence to or from the carrier would be made by
AIPA repeatedly refused to furnish information to the insurance company regarding the
claim, despite frequent and urgent requests. Eventually, the insurance company closed
its files on the case due to Aipa's failure to respond to the carrier's request for
information. The actual cost to the estate is unknown, but Plaintiff estimates that the
loss of legal defense costs alone could easily have been in excess of a million dollars....
For more, GO TO > > > Broken Trust: The Book
Miller & Chevalier - A Washington, DC-based nest of Lawyers and Lobbyists.
From their web-site, 8/1/00: ...
In 1920, Robert Miller and Stuart Chevalier founded Miller & Chevalier as the
nation's first law firm specializing in tax matters. Mr. Miller had served as Solicitor and
Mr. Chevalier as Asst Solicitor of the Internal Revenue Service shortly after the first
federal income tax laws were enacted. ... Like our firm's founders, many of our tax
lawyers have worked in federal government service. ... We serve clients in numerous
industries: ... aerospace, automobile, banking and finance, natural resources and
energy, chemicals, electronics, pharmaceutical, retail, and health care insurance. . . .
Our firm represents over half of the Fortune 50 companies. We also work with
foreign-owned companies of similar size ...
NOT MENTIONED in their website (though certainly worthy of note) is Miller &
Chevalier's tax services to Hawaii's Bishop Estate. According to news reports, after a
four-year audit the IRS was looking to recover around $680 million or more in back
taxes and penalties due to some improper bookkeeping manipulations, plus possibly
revoking the trust's tax-exempt status.
Who do they call -- TAXBUSTERS -- Miller & Chevalier.
Together with Tax Magician Mark McConaghy of the accounting firm of
PricewaterhouseCoopers they "negotiate" with the IRS to make over $650 million of
(The secret behind this trick, if you watch closely, is to quietly slip the tax burden over to
the millions of US ordinary citizens while we're distracted by an attractive, young
magician’s assistant named Monica showing hand-tricks to another master magician
named Slick Willy.)
* * *
In addition to their legal services, Miller & Chevalier declared lobbying income of
$1.4 million in 1998, with total lobbying expenditures of $320,000 (all to the lobbying
firm of Akin, Gump)....
For more GO TO > > > Letters to McCubbin: The Morgan Lewis & Bockius Report
NASA - The ‘black hole’ of the federal budget.
March 21, 2002
Panel: NASA Can't Manage Funds
By Larry Wheeler, FLORIDA TODAY
WASHINGTON -- Government and private auditors testified Wednesday that NASA
has operated for years with an antiquated accounting system, making it almost
impossible to track how billions of public dollars are spent.
Since 1990, the General Accounting Office, Congress's investigative arm, warned
lawmakers the space agency was headed for trouble without a modern financial
Yet for five years, the Arthur Andersen accounting firm gave the agency a clean bill of
Last year, Price Waterhouse Coopers took over as NASA's independent auditor and
determined the agency could not accurately account for expenses, property, equipment
It took staffers on the House Science Committee to identify a $644 million
misstatement in NASA's 1999 budget statement.
The irony, Arthur Andersen has been indicted in connection with the Enron scandal,
was not lost on those at Wednesday's hearing.
"Is NASA the government's Enron?" asked Rep. Stephen Horn, R-Calif., chairman of
the House subcommittee on government efficiency, financial management and
Half-joking, Horn asked whether there had been any document shredding at NASA.
"Not to my knowledge," was the somber answer from Alan Lamoreaux, NASA
Assistant Inspector General for Audits.
Patrick McNamee, a Price Waterhouse Coopers partner, declined to second-guess
Arthur Andersen's auditing practices.
Gregory Kutz, GAO director of financial management and assurance, testified
Andersen's work did not meet professional audit standards.
Paul Pastorek, NASA's newly appointed general counsel, did not dispute the audit
"It is undeniable. NASA has financial management problems," Pastorek said.
NASA Administrator Sean O'Keefe is determined to restore the agency's credibility with
Congress, auditors and the public by improving its financial management performance,
The core of a $835 million new integrated management system could be in place by
June 2003 with the final pieces in place by 2005, two years earlier than previously
projected, Pastorek said.
Unlike other NASA hearings, which often draw standing-room only crowds,
Wednesday's hearing was sparsely attended, and for most of the session Horn was
the only lawmaker present.
Throughout the 1990s, the space agency has been hounded by cost overruns and
schedule delays as it developed the International Space Station, its most ambitious
engineering project since the Apollo program.
The cost overruns are directly linked to the agency's inability to accurately manage its
finances, said Allen Li, a GAO director.
"If you don't know what you have in the bank, you can't predict how much money you
will have or need for expenses in the future," Li said.
Copyright © 2001 FLORIDA TODAY.
For more, GO TO > > > NASA...and the ‘War on Truth’
Pacific Islands - From Pacific Islands Report, by Pacific Islands Development
Program/East-West Center - Center for Pacific Islands Studies/University of Hawai`i at
RUSSIAN MAFIA USING PACIFIC REGION
TO LAUNDER MONEY
Paris, France (Feb. 14, 1999 - AFP) — Russian organized crime is increasing using the
Pacific region as a base for laundering its ill-gotten gains, the Organization of Economic
Cooperation and Development (OECD) Financial Action Task Force (FARF) said last
“A heavy concentration of financial activity related to Russian organized crime has been
observed, specifically in (Western) Samoa, Nauru, Vanuatu and the Cook Islands,”
the FATF said in an annual report on money laundering.
It cited “an increasingly common scheme whereby apparently American middlemen are
used to open accounts or charter banks in one of the locations” to hide the Russian
origin of the money after local authorities became suspicious at the high level of
Russian activity in the region.
The Russian mafia are also looking for “potential alliances” with drug traffickers in
Central and South America and the Caribbean....
There is also concern over the rise in internet gambling, which generates nearly $1.5
million dollars a month in the Pacific region and is seen as “another potential
vulnerability for money laundering and financial crime.”
Such electronic casinos offer clients virtual anonymity, making the source of their cash
all the harder to trace.
Elsewhere in the Asia-Pacific region, the report said, the principal sources of criminal
funds are human trafficking, drug trafficking, gambling and organized crime.
South Asia is a particular focus for money laundering activities as it is home to
several major international banks as well as being a transshipment point for drugs
from Afghanistan, Iran, Myanmar, Thailand and Laos.
In South Asia, money laundering through gold transactions is particularly popular, either
through a gold dealer who provides gold in exchange for cash and checks received by
the presenter, or through a cash transaction in one country which is completed by a
gold deposit to the owner in another country.
But as elsewhere in the world, electronic payment transactions are also a cause for
concern, along with the increasing use of accountants and lawyers to help set up
and manage accounts set up to launder the proceeds of criminal activity....
Panin Group - From The Honolulu Star-Bulletin, 10/29/97, by Rick Daysog: Bishop,
partners alter Chinese bank plan.
The turmoil in Hong Kong’s stock market may hamper plans by Bishop Estate and its
partners to take a mainland Chinese bank public....
With the benchmark Hang Seng index losing more than a fifth of its value during the
past weeks, analysts said that a proposal to list shares of Xiamen International Bank
on the Hong Kong Stock Exchange could be put on hold.
The development underscores Bishop Estate’s growing exposure to global economic
trends. It also calls attention to the $10 billion trust’s high-risk, high-reward investment
Bishop Estate, the state’s largest private landholder, owns nearly 5 percent of Xiamen,
which last year applied with the People’s Bank of China to list its shares on the Hong
Kong Stock Exchange.
Henry Peters, a Bishop Estate trustee and a member of Xiamen’s board of directors,
conceded that the volatile Hong Kong market may delay Xiamen’s initial public offering.
But he said the bank’s partners are committed to taking it public, which would greatly
enhance the estate’s investment. . . .
Critics say the trust should not be investing in exotic companies such as Xiamen. They
argue that the nonprofit foundation — which finances Kamehameha Schools — should
avoid high-risk ventures in emerging markets such as China....
The list of Xiamen International Bank’s investors reads like a who’s who of Wall Street
and Pacific Rim finance. They include former U.S. Treasury Secretary William Simon,
Manila-based Asian Development Bank and Long-Term Credit Bank of Japan Ltd....
The largest shareholder is Min Xin Holdings Ltd., formerly the Panin Group, which
owns 36.75 percent of the bank.
An affiliated company, Panin Bank, formed Xiamen in 1985.
Panin was founded by Indonesian businessman Mu’min Ali Gunawan, a brother-in-law
of Indonesian banking tycoon Moshtar Riady....
Riady, who heads the Lippo Group, is at the center of the campaign finance scandal
plaguing the Clinton administration....
Peters said he was unaware of the relationship between Panin Bank and the Riady
family. ...but investments of Simon, Panin and the estate have been linked for years.
The estate was a big shareholder in First Interstate Bank of Hawaii Inc. when Simon
sold the local bank to First Hawaiian Inc in 1991.
Simon, in turn acquired much of his stake in First Interstate in the mid-1980s from
Panin Bank executives....
Peters was a director of the local affiliate Panin North America Inc. in 1983 when he
was a legislator, according to filings with the state Ethics Commission.
For more, GO TO > > > Broken Trust; Dirty Money, Dirty Politics and Bishop Estate;
Sukamto Sia: The Indonesian Connection; William Simon Says
Robert Maxwell - A publisher and media mogul, Robert Maxwell was born 6/10/23 in
Slatinske Dooly, Czech Republic. He fled the Nazi invasion of Czecholovakia in 1939
and settled in Britain, though most of his family was killed in the Holocaust. Maxwell
fought in World War II in the British army, then began a career in publishing.
He soon owned a controlling share in Pergamon Press, which he built into a
successful publishing house specializing in trade journals and technical and scientific
books. Based partly on this success, Maxwell won a seat in Parliament, serving as a
Labour MP (1964––70). He diversified his publishing interests through leveraged
purchases of the Mirror Newspaper Group, Macmillan (a U.S. publisher), and The
New York Daily News.
Financial scandals plagued Maxwell throughout his career and even after his death. In
1969 he was forced to surrender control of Pergamon in a financial scandal that also
cost him his political career, and in 1991 he was forced to seek public funds through a
stock offering to keep the Mirror Group afloat.
On Nov 5, 1991, Maxwell drowned under mysterious circumstances while boating off
the Canary Islands. Upon his death, investigators found that Maxwell had been secretly
diverting millions of dollars from two of his companies and from employee pension
funds in an effort to keep the corporation solvent.
The effort failed and in 1992, Maxwell's companies were forced to file for bankruptcy
protection in Great Britain and the United States.
* * *
MAXWELL AUDITORS AND
SELF-REGULATION: THE VERDICT
By Prem Sikka, Professor of Accounting, University of Essex
What do Edencorp, International Signal Corporation, London and Capital, London and
Counties, London United Investments, Ramor Investments, Sound Diffusion, Lloyd’s of
London, Johnson Matthey and Atlantic Computers have in common?
They are examples of audit failures.
Each involved a major accountancy firm that ticked and blocked, collected its fees,
issued worthless audit reports and trusted people’s inability to call auditors to account.
No partner from any of the major firms involved in any of the major audit failures has
been disqualified. No regulator has investigated the overall standards of any of the
firms involved. No firm has been required to issue a public statement, stating the
reasons for the audit failures and the steps it is taking to remedy the failures.
In each case, the auditing industry blamed someone else for its own shortcomings. The
‘‘expectations gap”, and other usual suspects are routinely wheeled out. It is business
The ranks of the audit failures and feather-duster regulation now further swelled by the
THE MAXWELL AUDITORS AND
The Maxwell story is the story of fraud and the watchdogs that routinely aped the three
unwise monkeys. In the early 1970s, government reports investigated Robert Maxwell’s
attempted take-over of Leasco Data Processing and criticized him for manipulating
They described Maxwell as “a person who cannot be relied upon to exercise proper
stewardship of a publicly-quoted company”.
But Maxwell was not disqualified from acting as a company director. He carefully
surrounded himself with well-connected politicians, bankers, financiers and accountants
and re-emerged as a leading entrepreneur. He became chairman of Mirror Group of
Newspapers (MGN) and Maxwell Corporate Communications (MCC) and controlled
more than 400 other companies.
Coopers & Lybrand became auditors of most of the Maxwell controlled companies and
their pensions funds. Then in 1990, an investigative journalist (Daily Mail, 24 October
1990) began to investigate unusual movements in the monies of the pension schemes
run by Maxwell’s businesses. A large amount of Mirror Group pension fund money was
being invested in companies in which Maxwell had an interest.
Despite letters from concerned pension scheme members, no regulator took any
Then in May 1991, it was reported that the same pension fund took some 13 months
after the year-end to issue its annual accounts (Daily Mail, 18 May 1991). The accounts
revealed that of the top twenty investments, worth £160 million, only one was held in
any of the top hundred companies, and that was Maxwell Communications. Then on
5th November 1991, Robert Maxwell committed suicide. Within days, anomalies were
discovered in the pension funds of the Mirror Group and Maxwell Communications
Maxwell’s private companies accumulated huge debts. To cover these and continue to
present reasonably healthy financial statements (always with unqualified audit reports),
Maxwell borrowed from banks against his holdings in MCC and MGN, as well as
substantial cash and other assets of these companies and various pension schemes.
This included pension fund assets that were managed by external managers. Maxwell
supported the share price of his companies by using pension fund assets. It was
estimated (see note 5) that some £458 million was missing from various Maxwell
pension funds. The fraud caused considerable financial and psychological distress to
16,000 pension scheme members (see note 6).
The public outcry led to the appointment of Department of Trade & Industry inspectors.
Some seven years later, their report has still not been published. Following the
Companies Act 1989, the accountancy profession is expected to investigate incidences
of audit failure and take appropriate disciplinary action against the auditing firms, if
In a very elaborate regulatory maze, such tasks are delegated to the Joint Disciplinary
Scheme (JDS); an organisation originally created in 1979 in response to the previous
audit failures. The JDS is financed by the accountancy profession which also
decides the cases which are referred to it.
The Institute of Chartered Accountants in England & Wales (ICAEW) asked the JDS to
investigate 35 complaints against Coopers & Lybrand and 24 complaints against four
individual partners, in relation to Mirror Group of Newspapers and other Maxwell
companies for the period 1988 to 1991.
The verdict on Maxwell auditors, Coopers & Lybrand (now part of
PriceWaterhouseCoopers) was delivered in February 1999, some seven years after
A three man panel found that a lack of objectivity in dealing with Mr. Maxwell and
his companies lay at the heart of many of the 35 complaints laid against the firm
and four of its partners.
The JDS concluded that “The complaints reveal shortcomings in both vigilance and
diligence and a failure to achieve an appropriate degree of objectivity and scepticism,
which might have led to an earlier recognition and exposure of the reality of what was
The report concludes that the “firm lost the plot” and “got too close to see what was
going on”. The firm admitted 59 errors of judgement.
Most of the blame is allocated to the main audit partner Peter Walsh, who died in 1996.
According to the JDS report, four Coopers & Lybrand partners failed to meet the
required professional standards in auditing various parts of the Maxwell empire.
The next senior partner John Cowling, against whom twenty complaints were listed, is
censured and ordered to pay costs of £75,000 and fined a total of £35,000.
The report says that Cowling had never encountered fraud before and criticised him for
too easily accepting management explanations. He failed to qualify the accounts of
London & Bishopsgate Investment; a business controlled by Maxwell, even though it
had failed to maintain proper records or adequate control systems and did not reconcile
Of the other three partners involved, two paid costs of £10,000 each and were
admonished. Another partner paid costs of £5,000....
Coopers & Lybrand have been fined £1.2 million which works out at £2,000 per
partner (Coopers had 600 partners). The firm has also been asked to pay £2.1 million
in costs. Taken together this amounts to £6,000 per partner, all probably tax
To put this in context, it should be noted that for the period under investigation, Coopers
received £25 million in fees from Maxwell. The UK fee income of
PriceWaterhouseCoopers is estimated to be around £1.8 billion and the firm’s world-wide income is around £10 billion. The major firm barons would, no doubt, be quaking
in their boots, all the way to the bank....
The fines and costs will go to the JDS instead to being used to compensate the
victims of audit failures.
This in turn reduces the financial contributions that the accountancy profession is
obliged to make towards the running of the self-regulatory structures.
The JDS report is a major disappointment for a number of additional reasons as well.
In addition to acting as auditors, Coopers & Lybrand sold a variety of non-auditing services to the Maxwell empire. This increased the firm’s income
dependency on Maxwell and must have, at least in the eyes of the outside world,
compromised auditor independence. Yet the JDS report makes no effort to
investigate the ‘‘independence’’ aspects.
Will the paltry fine and the adverse publicity do anything to curb audit failures? The
answer has to be no. No doubt, the auditing industry would argue that complex frauds
are difficult to unravel, and that no one can stop a determined fraudster. Such
comments are designed to disarm critics, journalists, politicians and academics alike.
They deflect attention away from the economic and cultural context of auditing.
The truth is that audit failures are not brought to public attention through any vigilance
by audit firms, professional bodies or the regulators. They came to light because the
stench of scandal became too strong. One can only wonder how many others are
waiting to be discovered. If by hook or by crook a business survives, audit failures
Overall, the verdict on the Maxwell auditors amounts to the usual feather-duster
approach to auditor regulation. The punishment will not curb audit failures. The JDS
has squandered another opportunity to examine the institutionalisation of audit
* * *
COOPERS FACES RECORD FINE
FOR MAXWELL AUDIT FAILURES
COOPERS & LYBRAND, long-time adviser to Robert Maxwell, is to pay a punitive
£3.5 million in fines and costs over failings in its audit work on the late publisher's
The fine against Coopers, which has since merged to become
PricewaterhouseCoopers (PwC), is the largest ever levied by the accountancy
The profession's Joint Disciplinary Scheme (JDS) is expected to hand down the fine
today after the firm, it is understood, admitted all 35 charges levelled by the tribunal.
The report by the disciplinary tribunal, headed by Roger Henderson, QC, and Ian
McNeil, former president of the Institute of Chartered Accountants in England and
Wales, will say that in its opinion, "Coopers & Lybrand lost the plot".
Coopers is expected to be castigated in the report for a lack of planning and vigilance in
The report cites two instances where Coopers has admitted that it should have ''whistle-blown'' to the authorities and another instance in which the firm admits that it should
have qualified the accounts of an investment trust that had no books or records
detailing assets lent to Robert Maxwell.
The report is also expected to show that work on the Maxwell account was conducted
by inexperienced staff. One of the partners had only been a partner for two weeks
before taking on the job. The manager on the job had just qualified as an accountant
and the rest of the staff were trainees.
The JDS action comes as a serious reputational blow to Coopers, which has long been
criticised over the ''cosiness'' of its relationship with Maxwell. Neil Taberner, the senior
audit partner, worked closely with Robert Maxwell for nearly 15 years, in what became
one of Coopers's longest client relationships.
The firm was paid about ££4 million for its audit work in 1991 alone. Mr Taberner
remains a PwC partner.
Peter Walsh, another senior partner, now dead, appeared as a witness in the Maxwell
fraud trial. Mr Walsh denied that the firm's standards had been allowed to slip because
of Maxwell's domineering personality. A colleague, Stephen Wootten, also giving
evidence, denied turning a blind eye to cash movements between Maxwell companies.
Coopers argued that Maxwell's raids on the pension funds occurred after March 1991,
when it signed off the books. Maxwell died in November 1991.
Brandon Gough, then senior partner of the firm, said Coopers had never contemplated
dropping Maxwell as a client. He said: "You can take it for granted there were some
fairly intensive discussions about accounting methods. But if we had any major
differences, we would have qualified the audit."
Coopers was appointed auditor to the Maxwell group of companies in 1971, shortly
after a report by Board of Trade inspectors into Pergamon Press said Robert Maxwell
"could not be relied upon to exercise proper stewardship of a publicly quoted company".
Coopers tried to have the JDS investigation postponed, arguing that it would "impose
intolerable strains on the few individuals within Coopers actively involved in the relevant
audits". The High Court ruled in December 1994 that the investigation should proceed.
The previous highest penalty levied by the JDS was for £600,000 in costs plus
£150,000 in fines against BDO Stoy Hayward over its auditing of Astra. Recoveries are
used to bolster the JDS ''war chest'' to investigate alleged miscreants in the profession.
The JDS is separately investigating complaints against two Coopers partners who led
the audit team working on Barings at the time it was laid low by the Nick Leeson
"rogue trader" scandal.
Coopers is also being investigated over its role as auditor to Resort Hotels, the
collapsed hotels group.
Coopers was previously being sued over its auditing by Price Waterhouse as
administrators of Maxwell Communication Corporation but that role was transferred
to the accountant Grant Thornton because of the two firms' merger....
Source: The Times February 2, 1999
Contributed by Andrew Priest, Edith Cowan University
* * *
From MediaGuardian.co.uk by Jill Treanor and Charlotte Denny, Monday February
MAXWELL SCANDAL REIGNITES
DTI report into former MGN owner will
unsettle top City and political figuresThe Department of Trade and Industry's potentially explosive report into the collapse of
Robert Maxwell's business empire will be published by the end of next month,
reopening the controversy sparked by the sudden death of the former owner of the
Almost a decade after Mr Maxwell disappeared off his yacht, the inspectors recruited by
the DTI to examine his complicated web of companies are finalising their detailed
inquiry, which many figures in the City and in politics would probably prefer to keep
away from the printing presses.
The inspectors, according to a report this weekend, highlight the iron fist with which
Robert Maxwell controlled his business empire, looting money from the Mirror Group
Newspaper's pension fund soon after taking over the paper in 1984. It outlines the role
played by the then investment bank Samuel Montagu, which floated MGN on the stock
market in 1991, and Coopers & Lybrand, which acted as accountants to the Maxwell
While the inspectors conclude that some of the firms involved could have blown the
whistle on Maxwell, they also argue that he was often the only person who really knew
what was going on inside his sprawling business empire.
The report is said to give details of money channelled from MGN and private Maxwell
companies. It is also said to show deals Robert Maxwell conducted by using the
assets of the Mirror's pension funds to trade in shares and channel the profits into his
The investigators are reported to have concluded that companies and executives
dealing with Robert Maxwell, who was also investigated by the DTI 30 years ago,
should have treated him with caution. He is also said to have courted politicians in a bid
to boost his credibility.
Leading investment bank Goldman Sachs is said by the report to have played a crucial
part in ensuring that the flotation of one of Maxwell's other companies was a success.
Coopers & Lybrand, now part of PricewaterhouseCoopers, has already been fined by
the accountancy profession's policing body for its role in the Maxwell affair.
Goldman Sachs was unavailable for comment while HSBC, now owner of the former
Samuel Montagu, was unable to comment.
PricewaterhouseCoopers also declined to say anything.
Walt Disney Company - You know – the company that makes Mickey Mouse movies.
March 23, 1998
Disney's Real Magic
by Abraham Briloff
The Walt Disney Co.'s acquisition of Capital Cities/ABC, by Wall Street's lights, has
been a resounding success. Any misgivings about the movie and theme-park giant
shelling out $18.9 billion for control of the television network have been dispelled by
Disney's ability to continue reporting brisk earnings gains, and investors have
Disney's shares, which closed at 58 on July 31, 1995, the day the companies' betrothal
was announced, not long ago topped 115. Even Disney's public disclaimer, a couple of
weeks ago, of the Street's more exuberant expectations for its earnings had only a
slight dampening effect. The shares closed Friday at 107.
A spate of ho-hum movie releases during the second fiscal quarter (ending March) was
the official explanation for the caution. Analysts dutifully trimmed a nickel or so a share
from their forecasts, bringing the consensus to $3.17 for fiscal 1998, ending September.
That still represents a healthy rise from last fiscal year's $2.75, and the stock is trading
at better than 35 times earnings.
In truth, however, the gains in Disney's reported results over the past five quarters have
been significantly enhanced by creative accounting. Indeed, the fact that Disney has
now virtually exhausted the source of this stimulus largely explains the anticipated
The accounting treatment accorded the merger by Disney, and signed off on by its
certified public accountants, Price Waterhouse, allowed the entertainment company to
create what amounts to an undisclosed reserve of as much as $2.5 billion to absorb
costs and expenses incurred subsequent to the February 9, 1996, close of the merger -- costs that otherwise would have flowed through its income statement and reduced
Disney's reported earnings.
In fiscal 1997, the device permitted Disney to show a glitzy 25% earnings gain instead
of what would have been a not-quite-10% gain. In its most recent quarter, ended
December, the company's merger accounting exertions transformed what otherwise
would have been essentially flat earnings into a double-digit increase.
In a letter to this author dated Friday, John J. Garand, Disney's senior vice president
for planning and control, strenuously defends the company's accounting treatment of
the merger as "appropriate" and says it was mandated by generally accepted
accounting principles (or GAAP).
Indeed, when Disney took over Cap Cities/ABC, it did so -- in strict accordance with
GAAP for business combinations -- as a "purchase." Which meant that the $18.9 billion
Disney paid for the television network ($10.1 billion of it in cash, the remainder in 155
million Disney shares) was accounted for by first allocating the cost to Cap Cities/ABC's
identifiable assets and liabilities, based on estimates of the fair value of those tangibles.
Then, whatever remained of the purchase price was allocated to the intangible asset
known as goodwill.
According to Disney's accountants, goodwill was virtually the only thing Disney got
for its $18.9 billion. A footnote in Disney's annual report for the fiscal year ended
September 1996 shows that the fair value of the Cap Cities/ABC assets it acquired, at
$4.8 billion, was nearly matched by the value of the liabilities it assumed, $4.4 billion -- leaving precious little, obviously, in the way of net tangible assets.
In fact, an additional $749 million ABC liability, for deferred income taxes, was booked
in the March 1997 quarter, reducing the total value of the net tangible assets that
Disney acquired in the Cap Cities/ABC transaction to less than zero.
As a result, more than the $18.9 billion purchase price was ultimately dumped into
goodwill. Paying $19 billion for goodwill is essentially equivalent to forking over $30
billion for, say, TV and film properties, because the cost of goodwill is not tax-deductible
(in contrast to normal business expenditures), making the after-tax impact of a
deductible $30 billion expenditure roughly equal to a $19 billion nondeductible outlay.
Striking, too, is the dramatic divergence between Disney's assessment of the fair value
of Cap Cities/ABC's net tangible assets and the balance sheet developed for the
network by Ernst & Young, its independent certified public accountants, as of
December 31, 1995 -- just 40 days prior to the closing of the merger.
Indeed, Disney put Cap Cities/ABC's shareholder equity on the financial equivalent of
a miracle diet, making the TV network's $4.5 billion of pre-acquisition
shareholders' equity essentially disappear in the translation onto Disney's books.
What happened to those billions? Let's take Cap Cities/ABC's assets first. A $2.8
billion reduction, to $4.8 billion from $7.6 billion, was attributable principally to the
elimination -- routine in these circumstances -- of goodwill that had been carried on the
network's books. Thus, that $2.1 billion intangible asset presumably was subsumed into
the $19 billion of goodwill added to Disney's balance sheet by the transaction.
The remaining $700 million reduction in Cap Cities/ABC's assets represents downward
adjustments to the carrying values of its film properties as well as to property, plant and
equipment. While a haircut of that size might ordinarily attract critical scrutiny, there are
far more daunting issues involved here.
Not least among them is the $1.7 billion increase, to $4.4 billion from $2.7 billion, in
the network's liabilities. In fact, it is the key to unraveling the unorthodox purchase-accounting maneuvers that provided Disney with its reserve of as much as $2.5 billion
to absorb post-merger costs.
Disney's $700 million writedown of ABC's tangible assets and $2.9 billion increase in its
liabilities, at the time of the merger, were merely book entries, and didn't entitle it to a
current tax deduction.
But as that $3.6 billion ripens into tax-deductible business expenses, the
company will derive a $1.2 billion tax benefit.
This contemplated entitlement is dubbed a "deferred tax asset" and is netted against
Disney's deferred tax liabilities -- and thereby reduces the $2.9 billion gross increase in
liabilities to $1.7 billion.
The $2.9 billion of additional liabilities was poured into the "accounts payable and
accrued liabilities line" on Disney's balance sheet in connection with the merger and
represents loss reserves and other liabilities added in the name of purchase
John Giesecke who, until leaving last month was Disney's vice president for corporate
controllership -- was consulted a number of times, by phone and fax, during the
preparation of this analysis. When he was asked whether the entire $2.9 billion addition
to Disney's liabilities represented the reserve booked on the Cap Cities/ABC takeover,
he indicated that the $2.9 billion figure was on the high side for the "loss reserve."
Some of the accruals, he pointed out, were related to the fact that Cap Cities/ABC's
package of perquisites had to be sweetened to bring them up to Disney standards....
How did Disney's accountants justify the creation of that huge reserve -- justify
adding some $2.5 billion in liabilities to its balance sheet? Especially liabilities that,
40 days before, hadn't existed on Cap Cities/ABC's balance sheet?
Basically, by asserting that Cap Cities/ABC's accountants had ignored the impact of
timing on anticipated cash flows from future programming that the network had agreed,
at least in part, to finance.
As Disney's Giesecke explained, under the historical cost-accounting rules the network
followed before the merger, Cap Cities/ABC wasn't required to record a liability for
losses on programming that it was committed to acquire in the future, as long as
anticipated revenues were expected to recover the network's cost.
After the merger, however, the controller maintains that Disney was required, under the
dictates of purchase accounting, to evaluate those same commitments on a fair-value
basis. In other words, Disney had to discount the expected future revenues and costs
related to the network's programming commitments at an appropriate rate.
Disney engaged Price Waterhouse to carry out those evaluations, Giesecke said, and
when the work was completed, "We determined that the fair value of a certain number
of these commitments was negative and we recorded a corresponding liability."
"Commitments" is a generic term; all undertakings are commitments. Most are so
ordinary, ongoing and of relatively modest proportions that no special attention is given
to them by accountants. Where, however, they are long-term and substantial some
notice may be given to them, generally in the footnotes to the financial statements.
For example, long-term leases, or -- in the case of Cap Cities/ABC -- commitments to
purchase future programming. Still, they're only claims that may occur if a contract is
performed upon, in the future. The mere signing of a contract doesn't result in a
completed transaction -- much less a liability.
That's because "liabilities," in accounting parlance, are recognized obligations to pay
money, provide services or transfer specific assets, and are tallied as such in the
accounting cycle. They must be fully disclosed in financial statements and are
subtracted from a firm's assets to derive its shareholders' equity.
Cap Cities/ABC programming commitments totaled $4.1 billion at year-end 1995. The
network's final audited financials (submitted to the SEC in a Disney 8K report dated
March '96) disclosed that these consisted of contracts to purchase "broadcast rights for
various feature films, sports and other programming" during the next five years.
There was nary a hint in ABC's financials, however, of anxiety on the part of ABC
management or its auditors regarding the economics of those programs or projects. To
the contrary, all were deemed to have been undertaken in the normal course of ABC's
business -- there was nothing contingent about them.
Indeed, the plain truth that Disney ignored in applying a discounting factor to future
revenues anticipated on programming Cap Cities/ABC was committed to purchase (and
in thereby creating those $2.5 billion of "liabilities") was that there was nothing novel
about those contracts.
Over its half-century of existence, the network's ordinary operating cycle had always
encompassed both commitments to purchase future programming and current income
representing the "ripening," or coming to fruition, of past programming outlays. In short,
the network's programming commitments were simply a consequence of the ordinary
operating cycle of a going concern.
In fact, in this author's view, Disney's booking of those $2.5 billion or so of additional
liabilities related to the network's future programming commitments as part of
accounting for the merger as a purchase was simply not permissible under GAAP.
Only liabilities which are identifiable as such for the acquired enterprise, or
contingencies that may have "ripened" into liabilities as of the acquisition date, should
properly have been booked as liabilities by Disney....
Clearly, had Disney not been able to use its reserve to shield its bottom line from major
chunks of costs related to its foray into television network ownership, its recent results
would have had considerably less luster. Indeed, the 25% earnings surge Disney
reported in fiscal '97 would have come to 10%, without benefit of the accounting device.
And, far from an 18% earnings increase in the December quarter, net would have been
Disney, through the agency of accounting, has adeptly masked the negative impact of
its Cap Cities/ABC acquisition on its earnings over the past two years.
But even accounting magic has its limits: From here on, the true picture will become
very much clearer.
For more, GO TO
BrokenTrust: The Book
Conseco: Birds in the Trailer Park
Claims By Harmon
The Chubb Group
Dirty Gold in Goldman Sachs?
~ ~ ~
Dirty Money, Dirty Politics & Bishop Estate
Part I - Part II - Part III - Part IV - Part V - Part VI - Part VII
~ ~ ~
The Downfall of Dow-Corning
The Firing of Evan Dobelle
How to Cook a Golden Goose
How to Pluck a Non-Profit
The Office of the United States Trustee vs. Harmon
Prudential: A Nest on Shaky Ground
P-s-s-t...wanna buy a good audit?
The Accountants’ Hoedown
RICO in Paradise
The Eagle Hooded
The Indonesian Connection
Marsh & McLennan: The Marsh Birds
Marsh & McLennan’s Mercer Human Resource Consulting
NASA...and the ‘War on Truth’
Nests Along Wall Street
The Strange Saga of BCCI
The Story of Enron
Tracking the Tyco Flock
Harmon’s Letters to Hamilton McCubbin
The Morgan, Lewis & Bockius Report
The Myth & The Methane
Harmon’s Letter to the SEC
The Xerox Conspiracy
Tracking the Peregrines in Cisco Systems
Sitting of Top of the WorldCom
Vultures in The Nature Conservancy
Zeroing In On Zurich Financial Services
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Last update June 13, 2010, by The Catbird
April 10, 2001: Originally posted on www.the-catbird-seat.net
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