geert lovink on Thu, 5 Sep 2002 12:15:11 +0200 (CEST)

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<nettime> from the dotcom observatory

(It's been again an exciting few months, with investigations into Enron and
WorldCom continuing. In July WorldCom filed for bankrupcy. An end to the
extensive reporting about corporate scandals seems not in sight, depite the
911 memorial business and Iraq war spectacle. /geert)

>From the Dotcom Observatory (July/August 2002)

1.   Reuters: Ex-executives plead not guilty
5.   Reuters: Greenspan: Not Much Fed Can Do on Bubbles
7.   HIH hearing: Briefcase travelling first class
9.   Sunday Times: KPMG employees expelled for trafficking prostitutes.
10. Mokhiber/Weissman: Questioning the Call for Shareholder Power
11. Ten Questions for Ralph Nader
12. Computerworld: Dotcom Jobcuts tops 1,000 for second month
13. USA Today: The nine lives of ousted corporate fat cats
14. Stephen Roach: House of Mirrors
15. NYT: Protecting Capitalism From Itself
16. LAT: Did Telecom Reformers Dial the Wrong Number?
17. Clickz Today: Susan Solomon: Scandalous Sites
18. WSJ: Stocks' Fall Upsets the Culture of Options


1. Ex-executives plead not guilty
By Gail Appleson

NEW YORK (Sept. 4) - WorldCom Inc.'s former top finance executive pleaded
not guilty Wednesday to charges of orchestrating one of the largest
accounting scandals in history by allegedly masking billions of dollars in
expenses at the big phone company.

Government prosecutors also said their probe into WorldCom's $7.68 billion
in accounting misstatements was continuing, and they expect more charges to
brought, possibly against additional defendants.

Scott Sullivan, 40, WorldCom's former chief financial officer, entered his
not guilty plea in Manhattan federal court to charges that he was behind the
alleged scheme aimed at artificially inflating WorldCom's earnings by hiding
expenses. The indictment claims that the scheme allowed WorldCom to report
earnings inflated by some $5 billion over more than 18 months.

Sullivan, who had been arrested last month, was released on a personal
recognizance bond of $10 million.



How to Get Bad News to the Top | by Scott Kirsner
There's been a lot of bad news in business lately.
And almost all of it is a result of leaders who
ignore bad news -- until it turns into worse news. It
turns out that what you don't know -- and don't even
want to know -- can and will hurt you. Ask the folks
who have worked for Enron, Andersen, Global
Crossing, Merrill Lynch, Tyco, ImClone, the FBI, the
CIA, the Catholic Church . . . you get the idea. What
exactly is it about bad news that makes leaders
want to ignore it? Here are seven tips on getting
bad news -- and getting it in time to do something
about it.



 CHICAGO -- The class was not faring well. On its accounting exam the
 average score was 32 percent. The teacher was particularly exasperated
 that so many students had missed a multiple-choice question on the
 meaning of retained earnings.

 "Don't tell me that you're on the audit committee and can't tell me what
 retained earnings are," Roman L. Weil, an accounting professor at the
 University of Chicago Graduate School of Business, said to the class.

 These were no first-year M.B.A. students. They were top executives and
 board members of some of the nation's largest corporations, at a novel
 post-Enron boot camp.

 About 80 officers and directors from companies including Pfizer,
 McDonald's, Motorola and Dow Chemical sat through three days of lectures
 to understand how to do their jobs at a time when far more people are
 watching them.

 Many students came away daunted and frustrated by the overwhelming
 message in almost every lecture: that the legal landscape is constantly
 shifting and the liabilities for directors are greater than ever.

 "We've got so many unknowns; there are no answers," James Boyd, chairman
 of Arch Coal Inc., lamented on the last day of class. "And the risk has
 changed. They are going to hold us to a much higher standard."

 The program -- the Directors' Consortium -- was developed by the Wharton
 School at the University of Pennsylvania, Stanford Law School and the
 University of Chicago Graduate School of Business. It focuses on
 everything from whether notes should be destroyed after board meetings
 (the answer: usually, but not always), to who qualifies as a financial
 expert on a board's audit committee under the strict new legislation
 approved by Congress. (The class members decided that most of them would
 not qualify, but happily determined that Warren E. Buffett would not

 "As I look around the room I'm not sure if this is an executive education
 program or a support group," said Joseph A. Grundfest, a professor of law
 at Stanford University who is a former commissioner of the Securities and
 Exchange Commission and is on the board of the Oracle Corporation. "I
 feel your pain."

 A class on directors' fiduciary duties and legal liabilities focused on
 the very basic question of whether board members' main responsibility is
 to shareholders, to all stakeholders or to the chief executive. "To whom
 do you owe the duty?" asked Richard A. Epstein, a law professor at the
 University of Chicago. (The class was divided on the answer.)

 He told the class to always think about the answer this way: "Who can sue
 whom for what?"

 "The board is like an insurance policy," Mr. Epstein said. "When things
 are good, you take your money and go to the beach. When there's a crisis,
 you're working overtime and massively underpaid."

 With executives now constantly in the firing line, in front of judges and
 Congress, part of one class explored how to prepare for a deposition.

 "You don't want to volunteer anything," Mr. Epstein said. "You have to
 have a personality vasectomy." Mr. Grundfest added: "Think slowly. Don't
 pull a Bill Clinton and ask what the definition of is is."

 Henry J. McKinnell Jr., chairman and chief executive of Pfizer, told the
 class at lunch that at a deposition recently he was asked whether the
 board minutes, which were purposely kept vague, were accurate. "I had to
 tell them the truth," he said. "I said, `No. The minutes are not a
 complete reflection of what went on there.' Our lawyer was going crazy."

 At one point, the conversation turned to how to pick an outside lawyer.
 "The real risk is that if you hire a criminal lawyer, you look guilty,"
 Mr. Grundfest said.

 Most of the lectures were about why it is so important to avoid a lawsuit
 in the first place. Of Arthur Andersen, Mr. Grundfest said: "As soon as
 it was indicted it lost. They were de facto dead."

 Board members were advised to create clear corporate governance policies
 and always to make decisions collectively to avoid serious liability. "If
 you want to get in real trouble, make a decision by yourself," Mr.
 Epstein said. "This kind of misery loves company."

 And the professors stressed over and over again to tell the truth.

 "If there are ways people in this room go to jail, it's probably through
 crimes of upholstery -- the cover-up will kill you," Mr. Grundfest told
 the class. He brought up the case in which Martha Stewart is being
 investigated for insider trading. "She might go to jail because she lied
 even though she might not have committed insider trading."

 Given the greater liability now faced and the greater time commitment
 required of board members, some students who are members of several
 boards -- while also serving as officials at their own companies -- said
 they expected that they might have to resign from one or two boards. Mr.
 McKinnell of Pfizer said board members at his company put in about 200
 hours of work a year.

 David F. Larcker, a professor at Wharton, began his lecture on
 compensation committees by acknowledging: "Once the public gets finished
 pointing fingers at the audit committee, the compensation committee is
 next. This kind of stuff is a public relations nightmare."

 He discussed how boards should arrange compensation packages among
 salary, stock options, restricted stock, benefits and perquisites and
 other items like severance agreements. Despite dozens of seemingly
 outlandish compensation arrangements for chief executives, which he
 displayed on a slide, Mr. Larcker told the class that compensation in
 corporate America is "nowhere near how out of whack as it is made out to

 Still, he reminded the class that when interviewing job candidates: "If
 the first question they ask is `How many country club memberships do I
 get,' that's probably not the best candidate."

 Steven N. Kaplan, a finance and management professor at the University of
 Chicago School of Business and a board member of Morningstar, and Steven
 Koch, a vice chairman at Credit Suisse First Boston who conceived the
 program, taught a class on finance using Enron's balance sheet as a study
 of bad oversight.

 "Look at this," Mr. Kaplan said, pointing to a line on Enron's cash flow
 statement showing that "changes in components of working capital" shifted
 from negative $1 billion to positive $1.7 billion in a year. "If you're a
 board member, there has to be a disconnect."

 Mr. Koch also warned the group of tricks bankers use to justify bad
 deals. "When someone walks in the room and starts yakking about strategic
 value, you have to ask, `What the heck does that mean?' " Mr. Koch said.
 "This is a frequent repository for games."

 For some students, the three-day program was more than enough. But
 others, like Terry L. Savage, a board member of McDonald's and Pennzoil,
 wanted even more. At the end of the accounting class, she raced up to Mr.
 Weil, the professor, and asked whether she could take his accounting
 class on Monday evenings to brush up. "After 11 years on the compensation
 committee and now going on the audit committee, I decided to make it a
 major project to become informed about the issues and the mathematics,"
 she said.

 Perhaps some other students should have shown her enthusiasm. While the
 average score for the accounting test was 32 percent, that question on
 retained earnings -- undistributed earnings that have not been paid out
 to stockholders or transferred to a surplus account -- was answered
 correctly by fewer than 20 percent.


"You Bought.  They Sold." Fortune, September 2, 2002.

Once again Fortune raises exactly the right issue.  While investors
were losing 70%, 90% and sometimes all of their money in some
big-name stocks, their top executives were cashing out at the top and
getting obscenely wealthy.  Fortune looks at companies that lost at
least 75% of their market value, and counted insider stock sales from
1999 onward.

Of the 1,035 corporations that met this criteria, executives and
directors took home roughly $66 billion.

Fully $23 billion of that went to 466 insiders at the 25 corporations
where the executives cashed out the most.

Then Fortune lists the top 25 greedheads.

John Chambers at Cisco ($239 million).  Steve Case at AOL Time Warner
($475 million).  Executives at software maker Ariba raked in $1.24
billion while the stock was falling from $150 a share to $3.  Yahoo
executives pulled in $901 million while their company's shares fell
from $250 to $11.  John Moores of Peregrine Systems cashed out $646
million before anyone realized that his company's earnings were

Here's a link to The List:


Greenspan: Not Much Fed Can Do on Bubbles
Fri Aug 30,11:06 AM ET

By Glenn Somerville

JACKSON HOLE, Wyo. (Reuters) - Federal Reserve ( news - web sites)

Chairman Alan Greenspan ( news - web sites) on Friday defended the
Fed's lack of action during the ill-fated 1990s stock market boom,
saying there was little the central bank could do to identify and
fight emerging asset bubbles.
Greenspan said there was not a reliable enough guide to allow a
central bank to safely and slowly deflate a speculative surge in
prices. The bursting of the 1990s stock bubble erased trillions of
dollars in wealth, prompting criticism that the powerful Fed chief
should have done more to prevent it.
"It is by no means evident to us that we currently have -- or will be
able to find -- a measure of equity premiums or related indicators
that convincingly presage an emerging bubble," the Fed chief said in
prepared remarks for delivery to a symposium sponsored by the Kansas
City Federal Reserve.
"Short of such a measure, I find it difficult to conceive of an
adequate degree of central bank certainty to justify the scale of
preemptive tightening that would likely be necessary to neutralize a
bubble," he said.
The Fed chief in December 1996 famously wondered aloud if the stock
market had a case of "irrational exuberance" but he later abandoned
efforts to talk down the markets and they bounded almost unstoppably
higher until spring 2000.
Greenspan has indicated in the past that he did not believe it was
the Fed's job to second-guess the judgements of private investors
about the appropriate value of stocks.
Some critics have said he should have used his always powerful
rhetoric, interest rate hikes or even tighter margin requirements for
buying stocks to help let air out of the bubble sooner and less
Greenspan, however, contended in his speech that those methods would
not have worked and the magnitude of rate increases needed for a
less-damaging deflation of the bubble would have risked a
Fed-triggered recession.
"It was far from obvious that bubbles, even if identified early,
could be preempted short of the central bank inducing a substantial
contraction in economic activity -- the very outcome we would be
seeking to avoid," he said.
The speech, which offered no clues to the Fed's near-term outlook for
policy, was overshadowed in markets by a stronger-than-expected
reading on a Chicago-area gauge of manufacturing activity.



August 24, 2002

 The investigation into Salomon Smith Barney and Jack Grubman, its former
 star telecommunications analyst, escalated yesterday when AT&T said that
 it had received a subpoena from the New York attorney general for
 documents related to Salomon's selection in April 2000 as an underwriter
 for one of AT&T's largest stock offerings.

 The request for information appears to be a way for the attorney general,
 Eliot Spitzer, who is conducting a broad investigation into Wall Street
 research practices, to determine whether Mr. Grubman changed his rating
 on AT&T shares from negative to positive to win a role in the $10.6
 billion offering of shares that tracked the company's wireless business.
 Mr. Grubman, who had been negative on AT&T for years, upgraded his rating
 in November 1999. Although AT&T had not yet formally announced its plan
 to issue the tracking stock, the possibility of such an offering had been
 widely discussed among Wall Street firms.

 Before the recent scrutiny focused on the conflicts of interest that
 exist among Wall Street research departments and their counterparts in
 investment banking, big companies routinely assessed "research support"
 as they shopped among investment banks for advice on mergers and
 acquisitions or help in underwriting shares or debt. Companies were known
 to exclude from lucrative assignments those firms whose analysts were
 negative on their shares, steering business instead to investment banks
 where the analyst recommended the company's shares.

 People close to AT&T said yesterday that in January 2000, AT&T began a
 six-week "beauty contest" in which the big Wall Street investment banks
 competed for a leading role in its wireless stock offering. As part of
 those presentations, investment banks routinely highlighted positive
 recommendations on the potential client's stock from their designated

 The three firms that won the right to lead the AT&T offering were
 Salomon, a unit of Citigroup; Goldman, Sachs; and Merrill Lynch. The
 360-million-share deal was the largest initial public offering in United
 States history at the time. Six months later, Mr. Grubman lowered his
 rating on AT&T shares.

 AT&T does not appear to be a focus of the investigation. Eileen Connolly,
 an AT&T spokeswoman, said no executives had been subpoenaed. She said
 that internal AT&T lawyers had had discussions with Mr. Spitzer's office
 but added that those talks had not involved James W. Cicconi, AT&T's
 general counsel. The issuance of the subpoena to AT&T was reported
 yesterday in The Wall Street Journal.

 Mr. Grubman is being investigated by Mr. Spitzer's office, securities
 regulators and Congress for his dual roles as a research analyst and
 adviser to the telecommunications companies he followed. He resigned from
 Salomon on Aug. 15.

 But by issuing the subpoena to AT&T, Mr. Spitzer may also be trying to
 determine whether the relationship between Sanford I. Weill, chairman of
 Citigroup, and C. Michael Armstrong, AT&T's chief executive, played a
 role in Mr. Grubman's 1999 change of heart on AT&T shares.

 Mr. Armstrong and Mr. Weill have had a close business relationship for at
 least nine years. In 1993, the Primerica Corporation, headed by Mr.
 Weill, acquired Travelers, on whose board Mr. Armstrong sat. As chairman
 and chief executive of the new Travelers Group, Mr. Weill retained Mr.
 Armstrong as a director.

 Mr. Armstrong returned the favor. Less than a year after Mr. Armstrong
 became chairman and chief executive of AT&T in 1997, Mr. Weill joined
 AT&T's board. Mr. Armstrong remains a director of Citigroup, which was
 formed when Travelers merged with Citicorp in 1998.

 People close to the two men said yesterday that Mr. Armstrong did not
 explicitly ask Mr. Weill to press Mr. Grubman to change his
 recommendation. But, these people said, Mr. Armstrong made clear to Mr.
 Weill his frustration and disappointment with Mr. Grubman's negative
 perspective on AT&T.

 At an AT&T board meeting in 1999, according to an executive who was
 there, Mr. Armstrong pulled Mr. Weill aside and asked him to tell Mr.
 Grubman to act "like a gentleman." While Mr. Armstrong acknowledged that
 Mr. Grubman was entitled to his view, he asked Mr. Weill to make sure the
 analyst did not attack the company or Mr. Armstrong.

 "Jack was always saying that WorldCom was going to eat AT&T's lunch and
 that AT&T couldn't get out of its own way," this executive said. "He was
 very snide and, naturally, that got to Mike."

 An AT&T spokesman said Mr. Armstrong was unavailable for comment. Susan
 Thomson, a Salomon spokeswoman, said, "Mr. Weill never told any analyst
 what to write and any suggestion that he did is outrageous and untrue."

 But investors appear to be concerned about the effect the investigations
 will have on Citigroup. Its shares fell 3.4 percent yesterday, to $34.

 After Mr. Grubman shifted his stance on AT&T, he was admitted to the
 company's inner sanctum. On May 1, 2000, AT&T invited Mr. Grubman and
 another analyst, Frank J. Governali of Goldman, Sachs, to its Basking
 Ridge, N.J., headquarters and told them that the company would not meet
 its earnings projections for the year. AT&T did not tell other investors
 or analysts until the next day. Since then, the Securities and Exchange
 Commission has instituted rules forbidding companies from providing
 material information to favored analysts and investors ahead of others.

 Although Salomon was hardly one of AT&T's favored investment banks before
 Mr. Grubman's positive report, the bank was not shut out of AT&T's deals.
 In February 1999, for instance, while Mr. Grubman was still lukewarm on
 the company, AT&T sold $8 billion in bonds, at the time the largest
 corporate debt offering in the United States. Salomon was one of that
 deal's lead underwriters along with Merrill Lynch. After Mr. Grubman
 became negative on AT&T in October 2000, AT&T included Salomon in a top
 role in five of its six subsequent major stock and debt sales.


7. Briefcase travelling first class

This comes straight out of the Australian investigation into the collapse of
the HIH insurance firm. HIH Royal Commission day 131. Wayne Martin QC
examining former director Raymond Reginald Williams:

Martin: "Could you tell us please if, on your frequent first-class trips to
London, you booked the seat next to you for your briefcase ?"
Williams: "I don't recall specifically. But that may have been the case, on
some occasions. "
Martin: "That your briefcase was also travelling first class?"
Williams: "That may have been the case."
Martin: "Did you express the view to Qantas that this briefcase should be
eligible for frequent flier points ?"
Williams: "I can't recall that."
Martin: "And were you subsequently informed that said briefcase would not be
eligible for such points on the grounds that it was not, in fact, a person
Williams: "That may have been the airline's position on that issue."
Martin: "Was that briefcase, from that point on, booked under the name of
Casey Williams ?"
Williams: "Casey Reginald Williams, AM."



SUNDAY AUGUST 18, 2002 20:40:09




 Embattled media mogul Martha Stewart is said to see a political
 conspiracy behind the deepening investigation into her questionable stock
 trades, the DRUDGE REPORT has learned.

 "Martha really believes it is the Republicans who are behind this -- and
 they are chasing her for purely political reasons," a Stewart intimate
 said this weekend.

 "Martha told me that she believes they are doing the very same thing to
 her, they did to President Clinton. What Ken Starr did. She believes it
 is nothing short of a witch hunt! They are even digging into her private
 e-mails! They are demanding to know who she's dated. Martha said to me,
 'Can you believe they want to know who I'm dating?' Republicans on
 Capitol Hill are probing her sex life!"


 The close Stewart friend, who demanded not to be named out of fear of
 being dragged into the investigation, spoke just hours after Justice
 Department officials sacked her stockbroker's offices - removing boxes of
 evidence related to the ImClone stock scandal.

 "Who runs the Justice Department? Republicans. Who runs the House of
 Representatives, and these committees looking into Martha? The
 Republicans," said the Stewart friend. "Guess who is a major force in
 raising money and contributing to Democrats?"

 [Last year Billionaire Stewart contributed $125,000 in soft money to
 Democratic accounts, records show.]

 The close Stewart friend predicted Americans will rally behind Stewart
 the same way many did with President Clinton during his impeachment.

 "Once all the facts come out about this abuse of power, about these
 subpoenas, which ask for every detail on Martha's very private life,
 people will come to her side."

 A spokesman for the House Energy and Commerce Committee strongly denied
 congressional investigators are being motivated out of any political
 concern and noted questions about a subject's personal contacts with
 other individuals are standard.


9. KPMG employees expelled for trafficking prostitutes.

Sunday Times (London) August 11, 2002, Sunday

Bosnia expels executives in sex traffic scandal
BY: Maurice Chittenden

   TWO executives working for KPMG, one of the world's biggest accounting
   firms, have been expelled from Bosnia over an alleged sex trafficking
   scandal. One was allegedly importing prostitutes to Sarajevo claiming
   that they were his girlfriends. The other was accused of turning a
   blind eye to the activities. The men, both Americans, were expelled
   after a British-based banker working on the same project to help
   Bosnian banks to manage their assets complained to the US State

   A videotape recording was obtained of one of the executives using a
   USAID agency car to collect prostitutes from Sarajevo airport after
   they had flown in from Romania and Slovakia. The car's Sfor badges,
   indicating it was part of the Nato-led stabilisation force, gave it
   diplomatic status.

   The prostitutes were paid up to Pounds 500 a day. Some are said later
   to have used the same car to lure girls from a Muslim high school in
   Sarajevo into prostitution on the pretext of helping them start
   "modelling careers".

   After an inquiry by a criminal investigator, the American ambassador
   ordered the executives to return to the United States and they have
   since left the company. The British whistleblower, who has asked not
   to be named for fear of losing contracts, said last week: "The
   Americans were behaving as if it was Vietnam all over again."

   It is the second scandal involving aid workers and the use of
   prostitutes in Bosnia. Last week Kathryn Bolkovac, a policewoman from
   Nebraska, won an industrial tribunal case against being demoted and
   removed from frontline policing in Bosnia after she revealed that
   women and teenagers forced into prostitution were being abused by
   United Nations police officers who were employed to protect them.
   At least 13 employees of DynCorp, an American recruitment agency, have
   been sent home for prostitution-related activities.

   USAID is facing an industrial tribunal in Sarajevo in the latest case,
   after the driver used by the KPMG executives was dismissed when he
   complained about what he was asked to do.

   The driver, Edin Zundo, a former Bosnian amateur boxing champion, said
   one of the executives trawled the internet for prostitutes and then
   hired them to come to Bosnia.

   "He kidded me they were his girlfriends but I realised what was going
   on when he didn't even recognise them at the airport," said Zundo.
   KPMG Consulting in Washington said: "The request (for the two to
   leave) came before the investigation was complete. We were informed by
   the authorities that none of the allegations was substantiated."

   Additional reporting: Philippe Deprez in Sarajevo


10. Questioning the Call for Shareholder Power
By Russell Mokhiber and Robert Weissman

If nothing else, the still-unfolding corporate scandals should free us
to think freely and creatively about corporate power, corporate form and
the rules governing corporate behavior.

A common diagnosis of the current scandals is that they can be traced to
company executives' ability to function with little accountability to

An alternative view is that the problem was that executives were
thinking too much about what shareholders want. Of course, shareholders
did not want CEOs to steal from their companies and arrange bogus loans
to themselves. But the more serious accounting crimes -- projecting
inflated profits and revenue streams -- were arguably a result of what
shareholders did want: short-term profits and other indicators that
raise share prices, especially in the short term.

Marjorie Kelly is an adherent to this second interpretation. Kelly is
the author of The Divine Right of Capital: Dethroning the Corporate
Aristocracy (, and editor of Business
Ethics magazine.

Starting in the late 1980s, she points out, "shareholders got precisely
what they wanted. The Enron and attendant scandals hold some interesting
lessons. We think of this as a situation where shareholders got harmed,
but forget that leading up to it, shareholders got precisely what they
wanted. The financial elite got complete alignment between CEOs and
shareholders through stock options, they got the removal of a regulatory
regime to a large extent, and they got a rising stock market -- all the
things that they wanted -- and yet it imploded."

"People are saying we need to align executives closer to shareholders,"
she says. "I believe their alignment was too close. We need a
corporation that is accountable to someone besides shareholders."

Moreover, Kelly says, shareholders do not deserve to exert control of
the corporation. Shareholders contribute very little to the company. But
for initial public offerings (IPOs) and other sales of new company
stock, none of the back-and-forth trading on the stock exchanges
contributes new money to the company. Indeed, Kelly notes, in 15 of the
last 20 years, corporations have spent more on stock buybacks than
shareholders have invested in new equity.

For the one-time contribution to corporations at their founding, or at
the placement of shares on the market, shareholders gain perpetual
absolute control of the corporation.

Recognizing the minimal contribution of shareholders, says Kelly, leads
away from questions about enhancing shareholder power, and instead to,
"Is any amount of return ever enough for a one-time hit of money? Or
must a company have as its single-minded purpose, forever, that it will
move heaven and earth to create return for that one-time gamble?"

Kelly suggests a range of alternatives to the entrenchment of
shareholder power and privilege.

One of her most provocative suggestions is time-limited shareholding.

One approach would be to dilute shareholder control progressively over
time. Residual control could be lodged in employees, or a public entity.
Or the for-profit corporation could morph over time into a non-profit
enterprise -- a reversal of the current trend to convert not-for-profit
and mutual insurance companies (such as Blue Cross) to for-profit

All of this is far from immediate enactment, of course.

But it is nonetheless worth assessing as a conceptual tool, and perhaps
as a long-term project, to move business enterprises out of the
shareholder-dominated and for-profit paradigms, to a place where new
values may govern their operations.

One place where such conversions might be contemplated first is at the
point of least shareholder power, in bankruptcy -- a place where more
and more corporations are sure to find themselves in the months ahead.
Russell Mokhiber is editor of the Washington, D.C.-based Corporate Crime
Reporter. Robert Weissman is editor of the Washington, D.C.-based
Multinational Monitor, They are
co-authors of Corporate Predators: The Hunt for MegaProfits and the
Attack on Democracy (Monroe, Maine: Common Courage Press, 1999;

(c) Russell Mokhiber and Robert Weissman

This article is posted at:


11. From the August 5, 2002 issue of TIME magazine

10 Questions for Ralph Nader

TIME's Matthew Cooper talks to the presidential spoiler about greed,
corruption and why he hates golf


Wednesday, Jul. 31, 2002

For almost four decades, Ralph Nader has been the scold of corporate
America. Now the man and the moment have merged as America recoils at CEOs'
behaving badly. TIME's Matthew Cooper spoke to Nader about greed, corruption
and why the presidential spoiler won't even think about playing golf.

Did you think there was this much corporate corruption?

No. And isn't it saying something that it exceeded my anticipation? It is
impossible to exaggerate the supermarket of crime. It's greed on steroids.

Why didn't we know about it all sooner?

What amazes me is that there are thousands of people who could have been
whistle-blowers, from the boards of directors to corporate insiders to the
accounting firms to the lawyers working for these firms to the credit-rating
agencies. All these people! Would a despotic dictatorship have been more
efficient in silencing them and producing the perverse incentives for them
all to keep quiet? The system is so efficient that there's total silence. I
mean, the Soviet Union had enough dissidents to fill Gulags.

Congress passed a Corporate-Accountability Act last week. Was that enough?

In this bill they ducked the stock-option expensing; they ducked the past
disgorgement, where you have to pay it back and go to jail; and they ducked
corporate governance in any fundamental way. The election of corporate board
members is a Kremlin type of election. It's a self-perpetuating system, with
the shareholders having no real power. That has not been touched. And basic
problems of conflict of interest have not been dealt with. You have all the
watchdogs in the private sector getting commissions from all the people they
are supposed to be watching. The companies pay the auditors who are supposed
to be auditing.

Which party is more to blame for all this?

It's equal-opportunity corruption. It's campaign cash. And what campaign
cash produces is a convergence of culpability.

What would help?

You need to have a Federal Bureau of Audits to monitor the top 1,000
companies. For more ideas, check out

You say that Progressives got to the polls in 2000, helping Democrats win
Senate seats and making a Democratic Senate possible. Got any regrets,
though, about throwing the presidency to Bush?

No, because it could have been worse. You could have had a Republican
Congress with Gore and Lieberman.

O.K., what about 2004? You going to run?

Too early to say. Let's wait until after the 2002 election.

What about Bush? He's for corporate reforms that he once opposed. Do you
have any hope that he can be Nixon-going-to-China on these issues?

Bush came right out of this < the sweetheart loans, dumping the Harken stock
before it tanked even though he was on the audit committee. Maybe he can
stand up and say it takes one to know one, but he's not going to do that.

Are you ever going to slow down? Somehow I don't picture you playing golf.

I never envisioned the purpose of life as taking a piece of metal and
pushing it toward a hole. People ought to be pushing children out of

O.K., no retirement. Ever read a trashy novel or take a vacation?

What do you think talking to reporters is?


12.  Dot-com job cuts top 1,000 for second month
By Linda Rosencrance (
28 August, 2002 7:15 FRAMINGHAM, U.S.

Outplacement firm Challenger, Gray & Christmas Inc. said US dot-com job cuts
exceeded 1,000 for the second month in a row.

In August, dot-com companies announced plans to cut 1,193 jobs, just 557
fewer than the 1,750 cuts announced in July, according to Chicago-based
Challenger, which tracks job cut announcements daily.

Challenger said it was the first time this year that dot-com job cuts topped
1,000 for two consecutive months.

Still, the August figure was 76 percent lower than the 4,899 job cuts
recorded in the same month a year ago, the firm said.

Dot-coms have announced 10,550 cuts so far this year, well below the 87,795
posted through August 2001, Challenger said. By the end of last year,
dot-com job cuts had reached 100,925; this year, however, cuts are on track
to stay below 16,000.

"It is too early to tell if the two consecutive 1,000-plus months are the
beginning of higher dot-com job cuts," said John A. Challenger, CEO of
Challenger, Gray & Christmas. "There is certainly the potential, as
companies that survived the dot-com collapse are now struggling to survive
the overall downturn in the economy."

Challenger said the majority of dot-com job cuts were announced by companies
offering consumer and business services, as well as firms specializing in
Internet-related technology. Consumer services posted 885 cuts, and
technology firms announced 275 job cuts, Challenger said. Together, those
two fields posted 97 percent of the month's total, the firm said.


13. The nine lives of ousted corporate fat cats


Tainted executives often find new jobs at top firms

By Matt Krantz

President Bush has denounced corporate chicanery. Congress is legislating
reforms. Lurid details on scandals keep surfacing nearly every day.
Yet despite the tidal wave of criticism, investors who have watched their
nest eggs melt away would be shocked to know that former executives of
companies involved in some of the USA's largest cases of corporate
malfeasance, Xerox, Waste Management and Sunbeam, still serve as senior
executives and directors at public companies.
In fact, executives linked to five of the 10 largest earnings restatements
in U.S.  history hold high-ranking positions at other prominent companies,
according to a USA TODAY analysis.
Some even sit on audit committees, acting as watchdogs against accounting
deceit. In one case, an ex-president's involvement with alleged fraud isn't
even disclosed in his current employer's regulatory filings.
"If someone is involved with a problem, it certainly is relevant," says
Charles Elson, director of the Center for Corporate Governance at the
University of Delaware.
Defenders of Corporate America say management and directors are a key part
of a system of checks and balances that keeps companies running honestly.
But when past accounting problems don't seem to have any bearing on who
holds such vital jobs, it only adds weight to the criticism that board
seats and top executive positions at some companies are really still just
part of an old-boys' network, says Stephen Holbrook, retired supervisory
special agent of accounting for the FBI.

In any case, investors looking for something to restore their faith in
Corporate America probably hope that cases such as these are the exception,
rather than the rule:

Phillip Rooney
Ex of Waste Management
The Securities and Exchange Commission has alleged that Rooney, the former
president of Waste Management, played an active role in fraud that took
place at the company from 1992 to 1997 and that he overruled accounting
decisions that would have revealed the alleged fraud.
Yet Rooney serves on the board of Illinois Tool Works and is executive vice
president of ServiceMaster. His involvement with Waste Management is not
listed in his biography in Illinois Tool Works' latest proxy filing.
So how'd Rooney get the jobs? While at Waste Management, Rooney became
friends with ServiceMaster CEO William Pollard after the two companies cut
a deal in 1990, according to James McLennan, a member of ServiceMaster's
audit committee.
As part of the deal, Waste Management became a 20% owner of ServiceMaster
after selling Waste Management's lawn-care business to the company. Shortly
after Rooney left Waste Management in 1997, he was hired to head
ServiceMaster's business-development arm.
It's been a good deal for Rooney. Before last year, he was the
second-highest paid executive at the company next to Pollard. Even last
year, his $525,000 salary was $100,000 higher than that of the chief
financial officer.
In addition, Rooney doesn't need to fear being fired because of a lucrative
retention bonus ServiceMaster agreed to after selling the unit Rooney was
in charge of in November. If Rooney, 57, is fired, ServiceMaster would have
to pay him an amount equal to twice his salary and annual bonus until age
63 or two years after his termination, whichever is later.
Steve Bono, ServiceMaster spokesman, says such contracts were offered to
most executives at the unit that was sold. However, most of those
agreements ended because most of the workers, except Rooney, were hired by
the company that bought the unit.
Bono says ServiceMaster hired Rooney because he was already familiar with
ServiceMaster, having become a board member when it bought Waste
Management's lawn-care business. He adds that Rooney doesn't have access to
the company's books and that Rooney plans to retire next year.
Rooney's network also helped him land the director job at Illinois Tool
Works in 1990. He was handpicked by former CEO John Nichols, who was one of
Rooney's "contemporaries," says John Brooklier, a spokesman for Illinois
Tool Works.
Brooklier says the SEC's allegations are still unproved. He adds that
Rooney's involvement with Waste Management was not mentioned in his proxy
biography only because all the directors' biographies in the filing were
reduced this year to save space.
Rooney did not return calls for this story.

Paul Allaire
Ex of Xerox
Allaire was CEO of Xerox from 1990 to 1999 -- and ran the company in the
period during which the SEC says Xerox used a "wide-ranging, four-year
scheme to defraud investors." Despite the alleged problems at Xerox under
his watch, Allaire now sits on the boards at Sara Lee, GlaxoSmithKline and He also heads the audit committee at Lucent.
Being the head of Xerox, a well-known tech company, made Allaire a
sought-after board member for Lucent. Shortly after being spun off from
AT&T in 1995 -- and before the allegations against Xerox surfaced, Lucent
courted Allaire for its board of directors, according to people familiar
with his recruitment. The following year, Allaire accepted the post and the
payment of $55,000 a year.
Allaire has remained on the board even though it since has become apparent
he presided over a massive accounting blowup. Xerox was forced to pay an
unprecedented $10 million to the SEC to settle charges of inflating revenue
and pretax earnings by $1.5 billion from 1997 to 2000. Xerox settled with
the SEC without admitting or denying guilt, but it did agree to restate
earnings for the years in question.
Priceline didn't return calls for comment, and Sara Lee declined to comment.
Lucent confirmed Allaire has been on its board since 1996. Glaxo
spokeswoman Patty Seif says, "We are fully supportive of Mr. Allaire, who
has been a valuable member of our board of directors."
Messages left for Allaire through the companies whose boards he serves on
were not returned.

Richard McGinn
Ex of Lucent
McGinn was ousted as Lucent's CEO in October 2000 -- just before Lucent
admitted it inflated its revenue by $679 million in the quarter ended Sept.
30, 2000 (with Allaire heading Lucent's audit committee). That restatement
has led to the current investigation of the company's accounting by the
SEC, according to Lucent's regulatory filings.
Yet McGinn serves on the audit committee of American Express. AmEx
spokeswoman Molly Faust says, "Mr. McGinn is a conscientious director who
makes valuable contributions to the company."
People close to the AmEx board say that McGinn was recruited because he was
considered an up-and-coming executive. McGinn, a former AT&T executive, was
51 in 1998 when he was appointed to the AmEx board. He became well known
for helping spin off Lucent from AT&T. In addition, Drew Lewis, former head
of Union Pacific and a member of the committee at AmEx that chose board
members at the time McGinn joined, was also on the board of Lucent.
McGinn did not return calls.

Donald Uzzi and David Fannin
Ex of Sunbeam
Uzzi was a vice president at Sunbeam in the period during which the SEC
says a "massive financial fraud" was committed at the appliance maker.
Uzzi, along with four other former Sunbeam executives, has been charged
with fraud by the SEC for allegedly using "improper accounting techniques
and undisclosed non-recurring transactions to meet promised sales and
earnings figures."
Uzzi is now a senior vice president of global advertising, marketing,
communications and strategic alliances at Electronic Data Systems, a
publicly traded computer-consulting firm.
According to Uzzi's biography on EDS' Web site: "Uzzi previously served as
executive vice president of Worldwide Consumer products for the Sunbeam
Corporation, where he significantly reduced costs from a $1.5 billion
Uzzi says he is fighting the SEC's civil action. "My short time at Sunbeam
is long in the past. It is a matter of public record that I am vigorously
contesting the civil complaint. I have moved on to new challenges, applying
the marketing skills I've developed over 25 successful years in business,"
he says.
Jeff Baum, EDS spokesman, says: "Don Uzzi is a respected, valued and
trusted EDS employee. EDS supported Don's decision to contest the civil
complaint and sees no cause for concern."
Fannin served as executive vice president and general counsel at Sunbeam,
where the SEC alleges he helped in the "drafting of certain Sunbeam press
releases in early 1998 that presented a misleading picture of the company's
results of operations." In May 2001, Fannin settled with the SEC without
admitting or denying guilt.
Now, Fannin serves as executive vice president and general counsel for
Office Depot. Office Depot confirmed Fannin's employment and past at
Sunbeam. A person close to the situation says Office Depot was willing to
recruit Fannin because he cooperated with the internal Sunbeam
investigation that led to the firing of CEO Al Dunlap and also aided the
SEC probe.
Fannin didn't return calls.

Not everyone has escaped their pasts.
Scott Sullivan was fired on June 25 as WorldCom's chief financial officer
for allegedly crafting the company's accounting fraud. On July 3, he
stepped down from the board of Digex, an Internet consulting services firm.
Digex spokeswoman Secret Wherrett says, "We didn't expect him to fulfill
the seat on the board" after the implosion at WorldCom.
And at Conseco, the new management team brought in to clean up problems at
the financial services firm is not honoring the three-year "consulting
agreement" ex-CEO Stephen Hilbert and ex-CFO Rollin Dick were given after
being forced out in April 2000, spokesman Mark Lubbers says. Hilbert and
Dick were fired after the company was forced to make one of the
largest-ever financial restatements because of the use of aggressive
accounting in 2000.
But the company can't completely cut these executives off, because of deals
they got while still in office. For instance, Conseco is still on the hook
for $285 million in loans that were given to Hilbert and Dick but never
repaid, Lubbers says. Hilbert and Dick didn't return calls for comment. "As
messes to clean up go, this is a big one," Lubbers says.


14. Global: House of Mirrors

Stephen Roach (New York)

Lest I be accused of piling on, read no further if you're looking for
the next WorldCom. I don't have a clue. But I do know that Corporate
America is not alone in cooking its books. Washington statisticians seem
poised to join the restatement sweepstakes with a stunning rewrite of
the recent performance of the US economy. So much for the boom!

Each July, when many of us head to the beach, the guys with the green
eyeshades are hard at work in Washington. They are compiling the
so-called benchmark revision of the national economic statistics -- an
annual restatement of recent economic history based largely on more
complete (and presumably more accurate) samples of underlying activity.
This particular benchmark revision is slated to be released on 31 July.
Mark that day on your calendar.

There are already some important straws in the wind that hint at what
can be expected in the upcoming benchmark revision of the national
statistics -- a significant downward adjustment to GDP growth over the
three-year revision period, 1999-2001. The government actually
pre-releases some of the source data that form the basis of this
statistical exercise. Based on this intelligence, downward revisions are
likely on three fronts -- capital spending, foreign trade in services,
and personal income. The reworking of capital spending seems likely in
light of a downward revision to shipments of nondefense capital goods,
as recently reported in the 2000 Survey of Manufacturers. The lowering
of the surplus in services trade was telegraphed by the just-released
revisions of the US Census Bureau. And the downward revisions in
personal income come from the US Bureau of Labor Statistics' so-called
ES-202 survey -- the primary benchmark for wage and salary

Rest assured of one thing -- these downward revisions are not likely to
be trivial. For example, shipments of nondefense capital goods are now
estimated to have increased only 5% in 2000, half the previously
estimated 10% gain. In addition, the surplus in services trade for 2001
was lowered by more than 10%, from $79 billion to $69. Moreover, the
reductions in private wage and salary disbursements could be at least
$100 billion in 2000, enough to slice more than one percentage point off
the growth rate of total personal income. The precise magnitude of the
revisions, insofar as their impact on overall GDP growth is concerned,
is hard to determine at this point. The real GDP growth rates of record
currently stand at 4.1% for both 1999 and 2000. Based on
back-of-the-envelope calculations, it wouldn't surprise me at all if
aggregate growth were lowered by at least one percentage point in either
or both of these years.

Of equal importance is what the prospective revisions are likely to say
about the character of the US economy as it neared the end of the
now-fabled boom. The income revisions hint at a downward adjustment to
the already anemic level of personal saving. Dick Berner informs me
there is some possibility that a downward adjustment in retail sales may
imply an offsetting reduction in personal consumption. That may well be
true, but my experience tells me that income revisions typically
outweigh those on the spending side of the equation -- especially since
the retail sales sample has had such a difficult time measuring the
rapidly growing e-commerce portion of consumption. As it currently
stands, the personal saving rate is estimated at a near rock-bottom 1.6%
in 2001, up fractionally from the record low of 1.0% in 2000. I wouldn't
be surprised to see both numbers pruned significantly.

The foreign trade revisions could up the ante on America's
current-account conundrum -- a key point of tension in the US and global
economy that I have been stressing for some time. That would dovetail
nicely with the likely downward revision in personal saving. After all,
a saving-short US economy has no choice but to rely on foreign capital
to close its saving-investment gap. A wider current-account deficit
implies an even greater capital-account surplus than we had previously
been led to believe -- underscoring the distinct possibility that
America has been even more dependent on foreign capital inflows than we
had previously thought. Little wonder the dollar is now under such
pressure, as foreign investors reconsider their once seemingly voracious
appetite for dollar-denominated assets.

Finally, there's the Holy Grail of the recent bubble to consider --
productivity growth. Lower GDP growth likely reduces the numerator in
the productivity equation -- the output portion of output-per-hour. As
currently estimated, productivity growth averaged 2.6% over the 2000-01
period. Inasmuch as one of those years (2001) is still considered a
recession year, this increase has been widely judged as nothing short as
astonishing. I've never been too sympathetic to that argument -- mainly
because the so-called recession was the shortest and mildest on record
(see my 21 February 2002 dispatch, "Productivity Noise"). But that's
really beside the basic point: A downward adjustment is probably in the
works for the recent productivity trend. The accompanying reduction of
capital spending fits this revisionist script quite nicely. To the
extent that the recent productivity bonanza was nothing more than the
arithmetic by-product of "capital deepening," there should be a close
correspondence between a reduced pace of capital spending and lower
growth in output-per-hour. And so another key building block of the New
Economy gets called into serious question.

The US accounting profession has a lot of egg in its face right now. As
the numbers get restated, the great earnings bonanza of recent years is
being questioned as never before. While the government's national income
accountants are hardly in the same boat as those at Arthur Andersen,
both groups of professionals appear to be guilty of having overstated
much of what was supposedly so glorious about the New Economy. We have a
saying in America, "What goes around, comes around." Sadly, the numbers
we were all told to trust have simply turned out to be wrong -- wrong
for companies, wrong for the economy at large, and wrong in the eyes of
financial markets. I guess the words of Benjamin Disraeli will always
haunt me, "There are three kinds of lies: lies, damned lies, and
statistics." Such are the painful excesses of any bubble. WorldCom is
not the end of this saga.


15. NYT: Protecting Capitalism From Itself
July 26, 2002

Back when financial markets were soaring, analysts marveled at the
phenomenon of "panic buying" on Wall Street - the desperate snatching up of
any stocks within reach by investors who felt they could not afford to stay
on the sidelines. Yesterday's nearly unanimous passage by both houses of
Congress of sweeping corporate governance reform legislation was the
political equivalent of panic buying. We are in a bull market for reform,
and even the most adamant foes of regulation realized they could not afford
to stay on the sidelines.

However, the bill itself, unlike some of the stocks snatched up by investors
in the late 1990's bubble, has real underlying value. It is essentially the
legislation introduced in the Senate by Paul Sarbanes, the Maryland
Democrat. Until a few weeks ago it seemed to have little chance of being
approved by the Senate Banking Committee, let alone by the
Republican-controlled House of Representatives, which initially passed a far
weaker reform bill. Now, within days, President Bush is expected to sign
into law a reform he could not quite bring himself to endorse explicitly as
recently as July 9, when he came to Wall Street.

The legislation creates an independent oversight board with strong
disciplinary powers for the accounting industry. It was in the 1930's that
private accounting firms were formally entrusted with certifying
corporations' financial statements on behalf of the public, but the
profession has proved incapable of policing and disciplining those of its
members who betray that trust.

The new measure rightly forbids auditors to provide many kinds of lucrative
consulting services to companies whose numbers they are checking on the
public's behalf. It also requires firms to rotate their lead partners
involved with a client, and directs the Securities and Exchange Commission,
which will oversee the new accounting board, to review a greater number of
financial statements.

Top corporate executives will become more liable for any misleading
information provided by their companies, although an opportunity was missed
to make them liable not only for misstatements they know to be such, but
also for those they should reasonably be expected to know are untrue. This
leaves open the door for continued plausible deniability in the boardroom,
and may be an issue for Congress to revisit soon.

The self-congratulatory rhetoric in Washington cannot hide the fact that
much of what this legislation ostensibly does accomplish - both in terms of
policing accountants and cracking down on companies' own malfeasance - will
be undone in the absence of vigorous and effective enforcement by the S.E.C.
The current commission chairman, Harvey Pitt, has proved to be the wrong man
at the wrong time for the job. News of his absurd quest to obtain cabinet
status and a salary increase has further undermined confidence in the
judgment of Mr. Pitt, a former lawyer for the accounting industry who took
office last year ominously pledging to preside over a gentler, friendlier
S.E.C. The bill proposes a needed boost in funding for a commission long
hobbled by insufficient resources as well as by delays on the part of the
White House and the Senate in seating the four other commissioners.

The American economy is still trying to get past the damage done by greedy
executives - and their facilitators in the accounting and other professions
- who believed that making a company's performance look good was more
important than actually performing. If President Bush and Congress produce a
law empowering the S.E.C. to crack down on false accounting and corporate
malfeasance without ensuring that the commission has the will and resources
to do so, this seemingly ambitious bill will turn out to be just another
illusion, a short-lived reform bubble on Capitol Hill.


16. Did Telecom Reformers Dial the Wrong Number?

 July 24 2002


         Times Staff Writers

 As the wreckage of once-highflying telecommunications companies such as
 WorldCom Inc. and Global Crossing Ltd. piles up, attention is turning to
 whether the root of the disaster lies in the sweeping deregulation set in
 motion in the mid-1990s that was expected to usher in a golden age of

 Prices would fall, service would improve and everyone would make more
 money. Anticipation ran high that the industry was on the verge of
 explosive growth, fueled by the still-nascent Internet, wireless phones,
 satellite television and other telecommunications services that would
 keep the public in a state of constant connection.

 Much of that vision was flawed, leading to more than $2 trillion in
 investment, much of it squandered in ways that may cause lasting economic
 damage. On Tuesday, two major telecommunications firms reported quarterly
 losses of more than $20 billion and said they would cut more than 7,000

 The telecommunications industry is awash in red ink and tens of thousands
  of jobs have been lost. Some analysts believe the bankruptcy filings of
 WorldCom and Global Crossing, two of the most aggressive new companies to
 arise during deregulation, presage more to come. Since their peak in
 March 2000, telecommunications stocks, as measured by the American Stock
 Exchange index of 16 North American companies, have fallen more than 74%.

 The meltdown has occurred under the legal structure set up by the
 Telecommunications Act of 1996. Critics complain that the act has led to
 poor service and higher costs for consumers, with some of those costs
 hidden in a proliferation of oddball fees.

 "Telecom deregulation from '96 until now has been an abysmal failure,"
 said Gene Kimmelman, director of the Washington office of Consumers
 Union, publisher of Consumer Reports magazine.

 The telecom industry bust adds support to critics' contentions that
 deregulation has failed to live up to its promise in this industry, as it
 did in airlines, banking, energy and cable television.

 In each of those, the original expectations that huge numbers of new
 companies would increase competition, improve service and reduce prices
 have given way to the reality of oligopolies controlling large chunks of
 the marketplace in ways that leave customers discontented.

 More than two decades after the airlines were deregulated, for example,
 only eight airlines carry the vast majority of passengers and dictate
 where they'll provide service. Dozens of new entrants have tried to
 compete and failed, and many of the survivors remain chronic money
 losers. The industry lurches from one crisis to the next -- labor
 discord following fuel price hikes following security debacles. Consumers
 constantly grouse about airline service. Leisure fares have continued to
 drop, but business fares have surged.

 But whether the same scenario is playing itself out in communications --
 and whether the 1996 act has been a failure -- is still open to debate.
 There is little question that deregulation has led to dramatic changes in
 the nature of the U.S. telecommunications industry, but there also is
 little question that those changes have unfolded in ways the law's
 backers and the industry's investors never expected.

 When the reform act was written and passed, it seemed that all
 telecommunications services were about to converge. It would not matter
 whether one got one's phone service from a local or long-distance phone
 company, a cable television or Internet service, even via satellite. All
 that was missing was a way for all these providers to compete with each
 other on an even keel, ignoring geographic boundaries, technical
 specifications or regulatory traditions.

 Three key assumptions underlay the law. The first was that the lucrative
 prize for most competitors would be long-distance service. The drafters
 reasoned that local phone companies -- General Telephone and the seven
 Baby Bells created by the 1984 breakup of AT&T -- would be so eager to
 move into long-distance that they would willingly open their local
 monopolies to competition to earn the right to offer it to customers.

 The drafters also assumed that the Baby Bells would jump at the chance to
 compete for local customers in one another's markets, triggering even
 more consumer savings. Finally, they assumed that falling prices would
 lead to an explosion in telecommunications traffic.

 All these assumptions turned out to be fundamentally wrong.

 The long-distance market, which had been deregulated earlier, was already
 experiencing ferocious price competition, with per-minute rates dropping
 and profit margins shrinking by the day. Instead of the Baby Bells
 wanting to get into long-distance, companies such as MCI and AT&T were
 desperate to start providing local service.

 But the local phone companies, often supported by their state public
 utilities commissions, resisted opening their markets.

 "No one anticipated the [Baby Bells'] willingness and ability to play the
 game and play it well," said Courtney Quinn, telecom analyst at Yankee
 Group, a Boston research firm.

 Instead of invading one another's turf as expected, the Baby Bells simply
 merged with each other. Within a year after the act's passage,
 Texas-based SBC took over Pacific Telesis, the California-based Baby
 Bell. Even more disturbing to observers, however, was the 1997 merger of
 Philadelphia-based Bell Atlantic with Nynex, the Baby Bell serving
 neighboring New York and New Jersey.

 "That was a critical moment," said Mark Cooper, research director for the
 Washington-based Consumer Federation of America. "There were 10 million
 people living within 50 to 60 miles of the border between those
 companies. It was the ideal place for cross-border competition."

 The deal's approval by the Justice Department's antitrust division and
 the Federal Communications Commission heralded a trend of consolidating
 local Bell companies. The country had eight local phone companies in
 1996; today it has four -- SBC Communications Inc., Verizon
 Communications Inc., BellSouth Corp. and Qwest Communications
 International Inc.

 Before 1996, the largest four local companies served 48% of all the phone
 lines in the country; today these four companies serve more than 85%,
 according to a study by Consumers Union.

 Still, in retrospect the most dangerous assumption behind the
 deregulation bill by far was that communications traffic would mushroom
 at unprecedented rates.

 The overall U.S. market for data, wireless and voice communications
 services has grown rapidly since 1996, to an estimated $277 billion from
 $164 billion.

 "In 1993 there were 10 million wireless subscribers in the country and
 revenues were $24 billion," said Blair Levin, a former chief of staff at
 the FCC who is at investment firm Legg Mason Inc. "Now there are 137
 million users, and this year they'll pay $75 billion. There's a lot of
 gain there."

 But even that growth pales in comparison with the wild expectations of
 the mid-1990s.

 "The financial community anticipated a huge increase in demand that would
 be never-ending," said Reed E. Hundt, who was FCC chairman from 1993 to
 1997 and is now a consultant at McKinsey & Co. "Many people knew these
 growth rates were not sustainable."

 But those rates inspired a historic investment spree. From 1996 to 2000,
 telecom companies assumed more than $1.5 trillion in bank debt and issued
 $600 billion in bonds.

 "There were too many people throwing too much essentially free money at
 the industry," said Tom Evslin, chief executive of ITXC Corp., a
 wholesaler of international phone capacity. "At ITXC we had to beat off
 the people who wanted to sell us a bond issue when we didn't need the

 Industrywide, most of that money was squandered, and the resulting
 hangover is exemplified by the WorldCom and Global Crossing collapses.

 "A lot of the failure can be attributed to financial markets that funded
 hundreds of competitors when the market demand [for their services and
 equipment] wasn't there to support them," said Yankee Group's Quinn.

 For all that, the Baby Bells have not escaped scot-free. In the last few
 days, both SBC and BellSouth have reported sharply lower profits and dim
 prospects for the near future. Both cited increasing competition, among
 other challenges.

 Among the most troublesome trends, experts say, is a decline in multiple
 residential phone lines. This was one of the leading growth factors
 throughout the 1990s, as homeowners put in second lines to accommodate
 dial-up Internet modems or children's phones.

 Internet service is now increasingly provided by digital subscriber
 lines, or via cable TV companies. And wireless phones have become
 ubiquitous substitutes for additional home phone lines.

 "Losing the second line is a very big deal for the Bells," Hundt said.
 "For them to be relegated to just primary residential line service is not
 the future they envisioned."


17. Susan Solomon: Scandalous Sites

Clickz Today, July 23, 2002.

It's every corporate communicators' nightmare. You're humming along,
creating a really cool Web site for Martha Stewart, Enron, or Arthur
Andersen. Then, suddenly you wake to see your company all over The Wall
Street Journal, and not in that "yippee, we made the Journal!" way.

How do you redesign your site to handle a truly nasty scandal? It doesn't
hurt to take a look at what public relations guru Don Middleberg suggests in
his still-useful book, "Winning PR in the Wired World." Middleberg makes a
case "for instantly and globally communicat[ing] up-to-date information," a
lesson learned from companies, such as airlines, that must jump into action
within minutes following a disaster.

Middleberg suggests a "contingency site" to provide "an oasis of
information" while freeing most of your home page of highly negative
material. On this site, he recommends using news releases, contact
information, images and photos, video footage, legal documentation,
chronologies, and links to other helpful sites.

For negative stories about to break, it's suggested organizations try to
jump ahead of the game, posting a position a day or two before the
muckraking begins. Such action helps make an actual published piece old news
before it hits the stands.

Good ideas? Absolutely. Too bad few of the current scandal-plagued companies
take the guru's advice. A review of some of the most beleaguered
organizations' sites shows tactics ranging from posting dry-as-dust legal
papers to completely ignoring the encircling storm. Here are some recent
examples from companies in the hot seat that can't leverage the power of the
Net in hard times.

Over at Enron, it's evident the Webmasters were among the first to receive
pink slips. Currently, the company offers links to bankruptcy papers and
some bleak information for former employees. It's all very functional,
offering few insights for anyone seeking anything resembling a company
position statement. One gets the sense the site has all but shut down for
the time being. The only hint Enron may someday return is the statement,
"Enron is in the midst of restructuring its business with the hope of
emerging from bankruptcy as a strong and viable, albeit smaller, company."
Sounds like we shouldn't hold our breath for any big breakthroughs or
informative content anytime soon.

Arthur Andersen, the beleaguered accounting firm convicted of obstruction of
justice by shredding Enron-related documents, has all but made its site
"scandal central." True, the site maintains an image of two conversing
professional women on its home page. From the content of the site, one can
only guess these ladies are discussing the best ways to eviscerate a really
juicy document. The rest of the site is dedicated to "clarifying" the
position of an organization that was once an accounting titan. In most
cases, the clarifications are straightforward. A few clinkers stand out. A
statement issued after a guilty verdict in a criminal trial makes the
petulant lead statement, "Today's version is wrong." One can only hope the
PR agency behind that release has yet to be paid. If you're going to set up
a site to "clarify issues," you need to speak intelligently.

The Martha Stewart Web site, the palest site I've seen in years (those
pastels may do well for bedcovers but not computer screens), has no easily
located mention of troubled times. A search of the word "stock" produces
pictures of nifty dog and cat Christmas stockings, now available for a cool
$10. Clearly, it's business as usual on the site. This may come as a relief
to those who want only to challenge themselves with a fancy cabbage salad at
the end of the day. Of course, the Save Martha! brigade is rallying the
forces elsewhere on the Web.

Even stranger than Martha's site is the one for former Ohio Rep. James
Traficant. Convicted of bribery and racketeering, Traficant is likely to
become the first member of Congress to be expelled since the Civil War. His
boisterous site features a corny image of the former lawmaker wielding a
stick and "banging away at Washington." The site is far from a paragon of
content and design, even without the darkening shadow of scandal. Worse, the
fact the site was last updated late last year seems to tell it all.
Traficant isn't using his Web presence to aid in his communications crisis.

What's a communications professional to do? Certainly, learn some lessons
from the mistakes being made. If (heaven forbid) that communications crisis
lands on your side of the inbox, come up with content far better than what's
currently out there. The Net can truly help communicate your position during
a crisis. All it takes is a little savvy.


18. For Silicon Valley, Stocks' Fall
Upsets the Culture of Options

July 18, 2002


Stock options were the near-magical currency of Silicon Valley,
financing much of the huge success of companies such as Cisco Systems
Inc. and Sun Microsystems Inc. For years, tech companies didn't have
to give employees much in the way of real money, because options, tied
to the value of the companies' stocks, were so valuable.

To employees, options were better than cash, offering the chance for
riches far beyond any salary. Options inspired creativity, fiercely
hard work and enough loyalty to stick around for the payoff.

But that formula depended on a surging stock. Now, U.S. stocks are in
a dismal retreat, with tech stocks among the biggest losers. Employees
of tech companies hold millions of options that have lost all of their
value and may never regain any, because their exercise price is far
above the price of the stock itself.

With little prospect of a tech rebound soon, the rip-roaring
stock-option culture of Silicon Valley is another casualty of the
worst stock slump in three decades. Says George Paolini, a former Sun
vice president: "The options culture of the 1990s is dead."

The implications are far-reaching, for employer and employee
alike. Technology companies such as Cisco, Sun and Microsoft
Corp. relied heavily on stock options for compensation, a nearly
cost-free way to both attract and retain top talent. Employees were
reluctant to leave, because they often held newer options that were in
the money but couldn't yet be exercised. Quitting would mean
forfeiting the gains. But for tech employees today, the prospect of
riches through corporate loyalty is greatly diminished.

It's an unfamiliar and potentially worrisome situation for the tech
companies. Boosted by outsize grants in the top ranks, Microsoft
employees averaged a whopping $416,353 in stock-based compensation in
2000, according to a study by Banc of America Securities analyst Bob
Austrian. That plummeted to $131,525 last year and is expected to fall
further this year. "If Microsoft continues to linger in this [stock]
trading zone, I think there is a substantial risk for employee flight"
when the economy picks up and creates more jobs, says Samir Bodas, a
seven-year Microsoft veteran who quit three years ago. "Their loyalty
isn't there."

The unsettling question this change in incentives raises is what
effect it could have on America's technological miracle. Tech
companies increasingly have to compensate workers the same way other
employers do -- with paychecks. Salaries are an expense that, unlike
stock options, companies can't avoid deducting from their
earnings. It's also a stepped-up burden they certainly don't need at a
time when their businesses are substantially weaker than two years

Tech-company staffers are becoming more like salaried workers
elsewhere: dedicated, to be sure, but less willing to walk through
walls for their employers. "People are not as motivated," says Joe
Uemura, a 41-year-old programmer who left Cisco last year. "They lost
a little of bit of their sense of direction. ... Now, a lot of folks
are just sitting around." Cisco executives say employees remain
motivated despite the slump.

Mr. Uemura made plenty of money on his Cisco options before the
tech-stock crash. When he came aboard in 1998, he got options giving
him the right to buy thousands of shares of Cisco at about $70 each,
before subsequent splits. Cisco's recruiter helped him calculate their
potential value by extrapolating from the stock's spectacular track

Until 2000, Cisco's stock kept pace with Mr. Uemura's expectations. He
kept a window with a stock ticker open on his computer screen and
checked it constantly, happily adjusting it for several splits. But
when Cisco's market value topped $500 billion, briefly making the
networking-equipment maker the most valuable company in the world,
Mr. Uemura says staffers started wondering, "How much further can it

None, as it turned out. Cisco's market value today is just over $100
billion. Its shares are off 82% from their peak in March 2000.

Cisco's most recent annual report indicates more than half of
outstanding employee options were "under water," meaning the price to
convert them into shares was more than the open-market price of those
shares. At Microsoft, more than a third were out of the money as of
the fiscal year ended June 30, 2001. And nearly 60% were under water
at Sun at the end of its fiscal 2001.

Sun's stock, at $5.68, now is about 91% off its September 2000
high. Unless tech stocks somehow get back to bubble prices, many of
these options will remain worthless until they expire, generally seven
to 10 years after issuance.

At Sun, business meetings once began with the question, "What's the
price at?" says Mr. Paolini, the former vice president. Now, there's
little reason to check the quote. "Expectations have been reset," he

The steep stock drops have created a rift at some tech companies
between new and old employees. During the boom, even a new employee
could expect someday to see the same kind of lush gains as the veteran
at the next desk. Now, many who joined in the past three or four years
have never made a penny from their options, creating a society of
haves and have-nots. "There are two separate companies," says Ashwani
Sirohi, a 37-year-old marketing manager who joined Microsoft in 1999.

When he was hired, Mr. Sirohi received a grant that gave him the right
to buy Microsoft shares at $76. A recruiter from the human-resources
department provided a dense spreadsheet -- a "Seven-Year Performance
Based Compensation Modeling Tool" -- and pointed out that the stock
had been soaring 40% to 60% a year.

Early Birds

The riches never materialized. Mr. Sirohi remembers listening to
colleagues discuss "how they're putting a new addition on their house
on Lake Washington or Lake Sammamish," while he worked to pay down his
mortgage and care for his two young children. Searching for an even
greater fortune than what he thought he could earn at Microsoft,
Mr. Sirohi left just eight months into his job. But the startup firm
he joined folded and his next company was sold, leaving Mr. Sirohi
only his salary. Even so, he says, it beat what the Microsoft options
would have brought him, given what has since happened to Microsoft's
stock. It's at less than half its late-1999 high.

Deborah Willingham, Microsoft's senior vice president for human
resources, acknowledges the class distinction among employees, though
she says it has existed ever since the company went public in
1986. "The earlier you joined, the better off you were," she says. "It
is different to have a lot of people who joined in the last few years
have the strike prices of their options be under water. I'm sure it
has impacts on morale...." But she says few people join Microsoft with
the sole aim of amassing option wealth.

At Sun, executives say it isn't the company's fault that longtime
employees made money on the company's options while newer hires have
never had the chance to. "That's problematic, but rational people
understand that we didn't do that to them," says Crawford Beveridge,
Sun's chief human resources officer.

To be sure, technology giants like Microsoft and Cisco and Sun aren't
seeing significant employee flight. With the tech economy in a funk,
many people feel lucky to have a job, and big companies remain far
more stable than startups. Microsoft's attrition rate has never been
lower, the company says.

"Everyone's options are down," says Kate DCamp, Cisco's senior vice
president for human resources. "We're in a level playing field."

The upside of the tech-stock rout, if there is one, is that options
granted today have far lower exercise prices. So if the stock rebounds
significantly in the decade or so before the options expire, they
could still reward employees handsomely.

That means options can still be a recruitment tool. But companies
clearly are concerned that the tool they used liberally in their
heyday to recruit and motivate may never again be as powerful.

"The employee contract used to be real simple. It was, 'Come work for
us a couple of years and we'll make you rich. End of story,"' says Ted
Buyniski, a principal with the human-resources consulting firm
iQuantic Buck, in Southborough, Mass. "Now, companies can't say that."
That options no longer bind employees like glue will be clearer when
the economy improves and competition for talent heats up, say
compensation experts.

As technology companies respond to the new circumstances for retaining
and recruiting talent, they're finding that every solution brings with
it new problems. If they ratchet up cash compensation, they increase
their expenses, potentially hurting earnings and maybe depressing
share prices further. That could send even more options under water in
a vicious downward cycle. But lowering the exercise price of existing
options can mean companies have to record the value of options as an
expense, which hurts earnings and sends a pessimistic signal to
outside investors.

So companies are trying a little of this and a little of that and
hoping their businesses and stocks rebound. "There is a lot more
pressure on us to know when ... we can start paying bonuses and give
salary increases because cash becomes more important," says
Mr. Beveridge of Sun, which hasn't given salary increases or paid
bonuses since October.

Microsoft has boosted cash compensation four times over the past
several years, with some employees seeing raises of more than 20%,
says Ms. Willingham. She says Microsoft now believes its salaries are
higher than those at two-thirds of comparable companies, versus half
of them in 1999.

In April 2000, after Microsoft's stock had fallen precipitously, the
company tried to placate employees by doling out options to buy an
additional 70 million shares at the company's lower stock price. It
hoped the new options would allow employees to reap profits. But even
those grants, priced around $66 a share, are under water. Microsoft
stock closed Wednesday at $52.

Breaking Away

Cisco hasn't given merit raises for several years, though it has a
small budget to reward top performers. Last year, it made two
supplemental options grants as part of an initiative dubbed
"Breakaway" (as in let's break away from the rest of the pack). "We
said, 'We believe we have a great future,' " says Ms. DCamp. "'Let's
focus on getting there. You're betting with us.' "

The bet has yet to pay off. The first Breakaway options, issued in May
2001, were priced at $18.57. The second batch, from August 2001, was
priced at $16.01. Cisco shares closed Wednesday at $14.80.

Some tech companies have canceled out-of-the-money options and issued
new ones at lower prices. The move faces an accounting hurdle. Despite
a high-profile move by Coca-Cola Co. this week, most companies still
want to avoid treating options as an expense and deducting them on the
income statement. That means they have to wait six months after
canceling old options before they issue new ones. The gap creates a
perverse employee incentive to keep the share price low in the

Lucent Technologies Inc. announced such a swap of options in
April. Employees, excluding senior executives, gave up options on
about 213 million shares. They'll get new options on about 123 million
shares in November at the stock price then. "It is important to make
this offer to retain our employees and to motivate them to continue to
perform on behalf of our shareowners," a spokeswoman says.

But a survey of 122 tech companies by Mr. Buyniski's firm in April
found that a third hadn't done anything to address the problems
created by having under-water options. The main reason: pressure from
outside shareholders, who are never eager for companies to make more
option grants that further dilute existing shares. Companies also are
wary of making large new grants without knowing the fate of reform
proposals that could require them to account for options as an

Mr. Buyniski predicts that when the economy improves and jobs become
more plentiful, companies that did nothing "are going to find that was
pretty short-sighted." Just listen to Mr. Uemura, who left Cisco last
year to join a networking startup in San Jose, Calif. "I thought there
was much more of an upside," he says. "I was just going after a bigger

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