Corporate Fraud 2004 In Review

NewJersey.com summarizes this year in corporate fraud with the following article by Lewis Krauskopf. Are we really becoming numb to it all?

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Corporate fraud continued in 2004 Sunday, January 2, 2005

By LEWIS KRAUSKOPF
STAFF WRITER

The insurance industry is rocked by kickback accusations. A mortgage giant is found to have cooked its books. And, of course, a domestic diva is convicted of obstructing justice and lying to the government.
In New Jersey, a drug maker agrees to pay nearly $350 million to resolve allegations of giving kickbacks and other inducements to keep its allergy drug in favor with HMOs. And a Bergen County-based bank coughs up $5 million to resolve a federal money-laundering probe.
In all, 2004 made its share of corporate malfeasance headlines. Across the country and in New Jersey, industries, companies large and small, and individuals all found themselves under the government's microscope. More accounting shenanigans emerged, as did other schemes to defraud the government. Some companies paid big fines, and some executives ended up behind bars.
The drumbeat of corporate scandal that began several years ago with frauds at Enron and WorldCom continued last year, stretching into health care and other arenas.
But at this point, the public may be becoming numb to the fact that the business section often reads like the crime pages, said Steven Chanenson, associate professor of law at Villanova University.

"The really earth-shattering effects of Enron and WorldCom are unlikely to be repeated because we've been through that experience as a society," Chanenson said.

Indeed, several corporate-crime watchers say scandal is cyclical, with frauds often uncovered during tough economic times, as people are more willing to turn a blind eye when everyone is prospering.

Still, as new companies joined the ranks of the fraudulent or criminal, it became harder to say that bad acts were being committed by only a few, said Robert Weissman, editor of the Multinational Monitor, a Washington-based monthly that looks at corporate behavior.

"There's more and more evidence that the problems are pervasive," Weissman said. "It's no longer remotely plausible that it's confined to individual bad actors. The problems are really systemic and systematic."

When it comes to systemic or systematic corporate problems, the name at the center was again Eliot Spitzer. After shaking up stock research on Wall Street and the practices of mutual fund companies, the New York attorney general trained his eye on the insurance industry.

Spitzer targeted insurance brokers and the payments they received from insurers to promote their coverage. The probe already has had fallout: Jeffrey Greenberg, the chairman and CEO of the nation's largest insurance broker, Marsh & McLennan, was ousted from his job in October.

While Spitzer again was the big story in corporate fraud investigations, the federal government is developing a more coordinated approach, said Chanenson, himself a former federal prosecutor. "What you begin to see is a more developed approach from the government, particularly from the federal government, which had to scramble somewhat to get a national strategy in place," he said.

Boards under scrutiny

Chanenson said federal prosecutors are coordinating efforts more, and that they are more likely to bring cases in pieces - to move more quickly - as opposed to waiting to develop one master case that ties everything together.

Another legacy of the Enron-era scandals is a greater scrutiny on oversight by boards of directors, who represent shareholders, said Richard Ottaway, associate dean for academic affairs at Fairleigh Dickinson University's college of business.

"The comfortable board member ... that sounds like retirement is over. These are working people," Ottaway said.

As scandals go, McLennan's Greenberg wasn't the only one to fall. Franklin Raines, chairman and CEO of Fannie Mae, was forced out last month under heavy government pressure once the mortgage giant was found to have violated accounting rules.

No scandal could top the one enveloping Martha Stewart, at least in terms of notoriety. The founder of Martha Stewart Omnimedia was found guilty in March of lying about a sale of stock she owned in a biotechnology company. Stewart began serving her five-month sentence in a minimum-security prison in West Virginia in October.

She could be followed to prison by other notorious former captains of industry. One, former Enron CEO Kenneth Lay, was indicted in July by a grand jury investigating the collapse of the former energy behemoth. In September, onetime star investment banker Frank Quattrone was sentenced to 18 months in prison for obstructing an investigation into allocations of hot technology stock offerings.

Companies with strong New Jersey ties also faced punishment for running afoul of the government. Several pharmaceutical houses doled out huge dollars.

Schering-Plough Corp. agreed to pay $345.5 million to resolve allegations in connection with a scheme to defraud Medicaid, including giving kickbacks to keep its onetime blockbuster allergy drug Claritin in favor with large HMOs. Pfizer Inc. paid $430 million to settle charges that its Warner Lambert unit illegally promoted Neurontin for "off-label" uses, while Bristol-Myers Squibb said it would pay $150 million to settle civil charges involving a massive earnings-management scheme. Bristol may also face criminal charges, as the U.S. Attorney's Office in Newark convened a grand jury last year to look into the case.

'Business plan fraud'

James Moorman, president and CEO of Taxpayers Against Fraud, said the settlements regarding allegations of pharmaceutical manufacturers bilking Medicare and Medicaid strike him as "business plan fraud."

"This is really the cream of American industry just feeling it's their God-given right just to steal" from Medicare and Medicaid, Moorman said.

Outside the pharmaceutical industry, employees of New Jersey companies that fell amid controversy faced the music in 2004. A former operations manager of Suprema Specialties of Paterson pleaded guilty in January along with three customers to creating fictitious sales. The sales allegedly inflated company revenue by millions of dollars at the defunct cheese company.

Three former officers of Medi-Hut Co., a small South Jersey pharmaceutical and medical device maker, were given prison sentences in November for falsely inflating its performance and obstructing an SEC investigation.

Elsewhere, Mahwah-based Hudson United Bank in March agreed to pay $5 million to settle charges it failed to monitor accounts for possible money laundering, leading to a government overhaul of its compliance program. In July, Knight Trading Group, the Jersey City-based matchmaker of buyers and sellers of Nasdaq stocks, reached a $79 million settlement with the SEC and NASD over its trading practices.

Federal investigations

Heading into 2005, pharmaceutical companies could make headlines again. Merck & Co., for example, faces federal investigations by the SEC and Department of Justice into the withdrawal of its Vioxx painkiller. Federal prosecutors in Philadelphia have also accused Medco Health Solutions of defrauding a federal employee health benefits program, and the case against the pharmacy benefits manager could go to trial this year.

Bankrupt telecommunications reseller Norvergence also faces a slew of federal probes, including investigations by the FBI and the IRS as well as at least 20 state attorneys general. The Federal Trade Commission has accused the Newark-based company of defrauding its 11,000 customers.

And any day now, Connecticut jurors could return with their verdict in the accounting fraud trial of former Cendant Corp. Chairman Walter Forbes and former Vice Chairman E. Kirk Shelton.

In 2005, protecting investors and maintaining confidence in the financial markets remains a priority, said Michael Chagares, a former federal prosecutor in Newark and a Hackensack attorney with the firm Cole Schotz. Chagares predicts that prosecutors will continue to focus on corporate accounting and corporate governance cases.

Despite the number of high-profile cases, Weissman, the editor of the corporate watchdog publication, said weak federal enforcement in other areas has opened the door for schemes. He said federal enforcement has lapsed in areas such as the environment, occupational safety and antitrust scrutiny.

"If the enforcement agencies don't do their job, the wrongdoing continues, and we just don't know about it," Weissman said.

E-mail: krauskopf@northjersey.com

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