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--- Begin Message --- -Caveat Lector- Independent Media Center
http://www.indymedia.org:8081
BUSH/ ENRON ARISTOCRACY
lawlessness compared to 1930s New Deal:
JAIL TIME 4 them!
http://www.washingtonpost.com/ac2/wp-dyn/A1182-2002Aug9?language=printer
By Dan Morgan
Sunday, August 11, 2002;
Page B01
On April 13, 1938, Richard Whitney -- president of the New York Stock Exchange and personification of Wall Street aristocracy -- entered New York's Sing Sing Prison in handcuffs to begin a five- to 10-year sentence for embezzling millions of dollars from his clients. On the same day, his wife was reduced to begging a bankruptcy referee to return a few items of her personal jewelry taken to satisfy creditors. Justice for corporate crooks was swift and severe in those middle years of the New Deal. Whitney went to prison just five weeks after the Exchange announced it had found evidence of misconduct. Even before he was behind bars, authorities were moving to sell off his Manhattan town house, New Jersey hunt country estate and thoroughbred horses to pay those he had cheated.
For me, the harsh standards of corporate accountability then in force remain unusually vivid to this day. Whitney loomed like a shadow over my childhood and youth, for my father was one of his partners and suffered the consequences. Though my father did not know Whitney was engaging in embezzlement, he was fully liable for Whitney's debts under the prevailing partnership and bankruptcy laws. All my parents' assets, down to many of the dresses and coats in my mother's closet, were seized and sold at a bankruptcy auction to raise money for Whitney's creditors (including widows and orphans of former Stock Exchange employees whose benefit fund Whitney raided for his own investments). In those days, being "ruined" meant something. For the rest of his life, Whitney, once a commanding figure, was shunned by his business associates, as well as his silk-stocking friends from the New York Yacht Club, the Essex Hunt in New Jersey and the Porcellian Club at his alma mater, Harvard. After being freed, he tended a herd of dairy cows in Massachusetts and later was a clerk in an armaments factory.
My father was ruined too, merely because of his association with the scandal. He was never able to get another job on Wall Street. It is hard to observe the latest crop of corporate scandals involving Enron, WorldCom and others without wondering what happened to the tough treatment once meted out to white-collar malefactors and their associates.
"No more easy money for corporate criminals, just hard time," said President Bush when he signed the corporate accountability act last month. So far that is mainly talk. To be sure, the Justice Department and the Securities and Exchange Commission have opened numerous criminal probes. Targets include Adelphia Communications founder John Rigas and his three sons, who allegedly hid $3 billion of company debt and who used company money for their own safaris, private golf courses and Manhattan apartments. Justice has filed securities fraud charges against WorldCom executives Scott D. Sullivan and David F. Myers, who inflated company profits. David B. Duncan, Arthur Andersen's former chief auditor of Enron, has pleaded guilty to obstructing justice when he directed colleagues to destroy Enron documents. Samuel Waksal, former CEO of ImClone Systems Inc., has been charged with insider trading and bank fraud, which carries a sentence of up to 30 years. Other charges could be on the way. Since last October, the SEC has opened investigations into 122 alleged instances of fraudulent corporate reporting. Citing schemes to artificially inflate stock prices, the SEC is seeking to recover stock options, bonuses and performance pay from officers of Waste Management, Rite Aid and IGI.
Yet these cases have netted only a fraction of the corporate bigwigs who have pillaged their companies and shareholders over the past few years, and it remains unclear how much of these executives' ill-gotten gains will ever be handed back. The icon of this corrupt era, Enron, remains untouched. Nine months after the first revelations about phony financial reporting and document shredding involving Enron, not a single official of that company has been criminally indicted. Not one cent has been transferred from top Enron executives to the employees or shareholders who lost billions of dollars.
The Financial Times, in a recent series of articles about the "barons of bankruptcy," estimated that senior executives and directors of the 25 largest U.S. public companies to go bankrupt since January 2001 pocketed $3.3 billion. They did it by selling shares at the top of the stock market "bubble," before the true condition of their firms became known to the investing public and their own employees. "Survivors who laughed all the way to the bank," was the headline on one of the Financial Times stories. Among them was Kenneth Lay, former Enron chairman, who grossed $247 million. One of the others, Global Crossing's founder and chairman, Gary Winnick, who grossed $512 million in stock profits before his company collapsed, proves that there are indeed second acts in American life.
Winnick previously was a close adviser to [criminal] Michael Milken at Drexel Burnham Lambert, and was prepared to testify against Milken in return for immunity in 1989. Milken's case contrasts sharply with Whitney's. Milken, the central figure in the insider trading scandals of the 1980s, served only 22 months in prison and was able to retain a personal fortune of $125 million. His brother, wife and children were allowed to keep another $300 million to $400 million. "Where is the justice?" asked Henry Kaufman, then chief economist of Salomon Bros. But many of Milken's clients and friends did not share Kaufman's revulsion. Whereas Whitney was shunned when his fraud was uncovered, Milken was mobbed by 2,000 supporters and admirers at his 1986 junk bond convention at the Beverly Hills Hilton Hotel, even as rumors of his indictment circulated. And in contrast to Whitney, who slunk off into oblivion after his guilty plea, Milken has reemerged as the head of a foundation and works as a consultant. On Aug. 1, WorldCom execs Sullivan and Myers were forced to do the "perp walk" in handcuffs. But under Florida's bankruptcy law, Sullivan may be able to shield a home in Boca Raton said to be worth at least $15 million. The question raised by this is whether the delicate balance between financial risk and reward went awry sometime after the Whitney scandal. Initially, the ruination of Whitney's partners created immense fear in the financial community, according to Georgetown University Law Center professor Donald Langevoort. Like Richard Whitney & Co., most law, accounting and brokerage firms were general partnerships, in which partners could lose all their personal assets if there was negligence or malfeasance by one bad apple. Higher taxation discouraged formation of limited liability partnerships, in which only a partner's direct investment in the firm could be reached by creditors. Well-heeled groups, therefore, set about lobbying for a more "comfortable" setting in which to do business, Langevoort says. Too much personal risk, they argued, could chill the entrepreneurial spirit -- although that was hardly a problem during the technological and industrial boom of the 19th century. "The pressure built to find a way for entrepreneurs to have their cake and eat it, too," said Langevoort. They made little headway under the New Deal and the Democratic Congresses of the decades after World War II. But the pro-business climate after the election of President Reagan in 1980 provided a new opportunity. Limited liability partnerships spread like wildfire in the 1980s and 1990s, encouraged by new state laws and more favorable tax treatment from the Internal Revenue Service. Changes in criminal enforcement, strengthening the rights of defendants, have also provided comfort to corrupt executives, legal experts say. Although there is wide disparity between jurisdictions, about half of those convicted of white-collar crimes receive nothing more than probation, Columbia Law School professor John C. Coffee Jr. said. Langevoort believes the pendulum may have swung too far. The current system, he said, "allows risky activities that cause immense social harm while the participants walk away having lost only their investments." Meanwhile, the lives of employees and small investors are thrown into disarray. The recently enacted corporate accountability law stiffens sentences for securities fraud. In a significant change, stockholders who get civil judgments against corporate executives for securities violations would get a priority claim on assets if an executive filed for bankruptcy. The new law won't apply retroactively to the malefactors of the bubble era, but prosecutors still have many weapons in their arsenal if they wanted to get tough on past wrongdoing. These include the possibility of seeking consecutive sentences and restitution of ill-gotten gains, legal experts say. Courts wishing to send a cautionary signal to financial markets would do well to remember the Whitney case.
Although the Whitney debacle was on a far smaller scale than the vast, accounting-driven scandals of 2002, there are interesting parallels. Both came after the bursting of speculative bubbles -- and after a long period of business resistance to regulation.
The country then was "thirsty for the blood of millionaires," wrote John Brooks in his book, "Once in Golconda," about Wall Street from 1920 to 1938. Much the same could be said today. Whitney's ability to borrow millions in unsecured loans from people all over the Exchange -- and get away with using his clients' funds to speculate on stocks for years -- revealed deep rot in the system. And, like today's scandals, it revealed misplaced trust in the integrity of leading business figures, who got a pass on oversight. Whitney was more than just a rich man; like many of the chieftains of today's bankrupt companies, he symbolized a period in which business was unencumbered by tough government oversight. From the Crash of 1929 onward, Whitney had been Wall Street's principal spokesman in Washington, arguing tirelessly before congressional committees that the markets could police themselves. He opposed the Securities and Exchange Act of 1934, which was a landmark piece of New Deal legislation. And he fought efforts to regulate short-selling -- in which a trader sells stock he doesn't own with a promise to deliver it later, when its price may have fallen. Whitney battled the new SEC chairman, Joseph P. Kennedy, and sparred with congressional committees. His demise strengthened reformers on Wall Street and in Washington. Even before his disgrace, the industry in 1936 set up a self-policing organization, the National Association of Securities Dealers. Afterward, the SEC pushed through new anti-speculative rules limiting the use of borrowed funds to buy stock. "Wall Street could not have been more embarrassed if J.P. Morgan had been caught helping himself from the collection plate at the cathedral of St. John the Divine," cracked the Nation magazine. In fact, even the respected Morgan, no relation to my family, was tarnished by the affair. Whitney's brother was a partner in the Morgan firm and told Morgan months before it was publicly known that Richard was in financial straits. My parents, in their forties when their world crumbled, slipped away to live out their years as best they could. My mother put down her thoughts in writing soon after the Whitney affair, and they still make for poignant reading, if only because she and my father had so far to fall. Her note speaks for itself about the personal toll exacted by white-collar crime. First and foremost, she wrote, there was "the shame and horror of being a formal partner to such dishonesty, a dreadful fact to swallow. . . . We saw that life for us would move into an unknown world and that we must take great care and make every effort to survive." What they faced was routine for most less-fortunate Americans, especially in those trying economic times. But it was daunting to people like my parents, who had known little but privilege. The cook, the maid and the nanny that had run the household were quickly dismissed, and then my mother asked, "What next?" "The kitchen filled me with fright and my own incompetence maddened and upset me. I had never cooked in my life. I had never cleaned a bathtub or emptied a sink of dirty dishes or swept a carpet or mopped a floor. I had never counted the laundry or washed the baby's things. How does one handle garbage and house dust and pots and pans and poverty when one has not tried it before?" She learned to handle all those things very well in the years that followed. When my father was unable to get another job, a few loyal friends chipped in to help him make a down payment on a somewhat rundown dairy, hog, chicken and wheat farm on Maryland's then-remote Eastern Shore. My mother rolled up her sleeves, took over the hayloft, shoveled manure and helped with the wheat harvest. The only bitterness I ever heard them express was that Whitney had been paroled after only three years and four months for "good behavior," despite his five- to 10-year sentence. He and my father never spoke again. At Sing Sing, newspapers reported, Whitney was "treated like a gentleman" by other inmates. They let him get hits in prison yard baseball games. But Sing Sing, a maximum security penitentiary, was still no picnic. Whitney lived in a tiny cell and wore the same gray prison garb as other inmates. One can only hope that executives convicted of breaking the law in the latest corporate bust will be treated with no more deference than he was.
Washington Post researcher Carmen Chapin contributed to this article. Dan Morgan covers Congress for The Post.
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