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Personal Investment Project

Winter 2004



Corporate Scandals

Regulation Fair Disclosure

Fair Disclosure, adopted in the United States on October 23, 2000 aims to eliminate selective disclosure by instructing companies to distribute information to the public before or at the same time the information is being sent to selected groups.  It requires that a company must release certain information or face the consequences of injunctions or fines.  Fair Disclosure must have seemed appealing to the Canadian side because soon after, the Canadian Securities Administrators (CSA) released their draft policy statement on disclosure standards, somewhat similar to regulation FD. 

The Canadian securities administrators have maintained that Canada already had the same basic restrictions against selective disclosure that are covered in Regulation FD.  The new policy was more of a practical guideline for companies to follow.  The two policies however are extremely alike and intertwine quite a bit.  The policy itself has within it a direct comparison to the Regulation FD.  The CSA are of the view that existing insider trading and tipping rules already took into account the provision of Regulation FD.

The Canadian policy of disclosure aims to help make certain that investors have equal access to information that would dictate their investment activities as well as help steer companies in the right direction in regards to legislative requirements, providing guidelines to follow.  The goal is to ensure that there is a "level playing field" for all investors from the Bay Street fund manager to the independent investor holding stock in a self-directed RRSP. 

The Policy identifies certain practices as precarious and risky, including private briefings with analysts or institutional investors, and commenting upon draft analyst reports. Unlike the United States, the Policy does not allow for exceptions to the tipping prohibition for disclosures made to an analyst under a confidentiality agreement.

Sarbanes Oxley Act

The Sarbanes-Oxley Act was signed into law on 30th July 2002, and introduced highly significant legislative changes to corporate and accounting areas. It established stringent new rules with the stated objective of protecting investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws.  The law was named after Senator Paul Sarbanes, one of the masterminds behind the act, and came after a series of scandals such as that of Enron.  The act was meant to punish those involved in fraud and corruption and restore public confidence in business markets.

This crisis of confidence within the US markets leading to the Sarbanes-Oxley act had a profound effect in Canada.  For companies wanting to access the US market, the Sarbanes-Oxley Act has brought about new rules and regulations that need to be followed.  Canada, a close neighbor of the United States cannot ignore the effect the act will have on its’ economy.  If a Canadian firm for example issues securities in American markets or is a legal, accounting or other advisor to a US firm, they will likely face changes in regulation requirements because of the act.

On June 27, 2003, the Canadian Securities Administrators (CSA) published three draft rules that would require public companies in Canada to provide CEO’s and CFO’s certifications and comply with a system quite similar to those in the Sarbanes-Oxley Act.  The rules of course have not been completely copied and instead have been altered to meet the needs of the Canadian markets.  The planned rules which apply to all CSA jurisdictions except British Colombia include an Audit oversight and a certification of disclosure in company’s annual and interim filings.

Corporate Governance

Corporate governance is the system by which business corporations are directed and controlled. The distribution, rights and responsibilities of managers, shareholders, the board and other stake holders are all outlined in the corporate government structure outlining the rules on making decisions in regards to corporate affairs.  Such an outline tends to provide a solid framework in which the company’s objectives and goals may be set and a means of monitoring its performance. Canada like the USA and many other countries has had similar regulations implemented.

Market timing and Late Trading


According to the trade association Mutual Fund Education Alliance:

A mutual fund is a company that pools the money of many investors classified as its shareholders, to invest in a variety of different securities. Investments can take the form of stocks, bonds, money market securities or some combination of these. Such securities are managed on behalf of the shareholders by a professional and each investor holds a ‘pro rata’ share of the portfolio, entitled to any profits when the securities are sold but also subject to any losses that may occur.

Late Trading

Late trading is placing a buy order for a mutual fund after 4 p.m. ET and getting it at the day's closing net asset value. An illegal practice, late trading allows an investor to reap benefits from events that happen after the closing bell, changes which aren't reflected in the stock's closing price.

4.5     Market Timing

Market timing involves the short-term in and out of a mutual fund, which in the long run harms the long-term shareholders in which the mutual funds were designed for. Market timing is a legal practice unless forbidden or discouraged by a mutual fund's prospectus. Watchdogs worry that since fund managers have to pay commissions on buying and selling, this practice could lead to charges that could affect the investor.

Canadian and US Firms Involved

New York Attorney General Eliot Spitzer, who made legal history with his Wall Street lawsuits and $1.4 billion resulting settlement last year, has turned his attention to the mutual fund industry. The investigation pays special attention to the practices of "late trading" and "market timing."

In the case of Putnam Investments in the United States both market timing and late trading were used.  The victims of such fraudulent practices were long-term regular investors of mutual funds.  Each of these illicit trading practices weakened the value of shares held by these investors instead transferring funds that could have been theirs to those investors allowed to use the illegal tactics.  That is the profits made to these illegal investors were made at the expense of those investors who played by the rules.

The SEC looks down upon such practices and Putnam along with Bank of America Nations Funds, Invesco Funds, and Strong Funds, just to name a few are undergoing close scrutiny with lawsuits pending for many. The company’s president and chief executive officer of Putnam investments could not take the pressure and dropped out of his positions resigning from the firm.  In November, the company settled with SEC while never actually admitting to any of its wrongdoings. The accusations seem not to have hurt Putnam too badly for the fund that was part of the accusations at the end of 2003 after settling the dispute with SEC stood at $1.27 billion, 12% greater than a year earlier.

Although Canada has not seen half as many scandals as the United States we still have our share of problems that if not taken care of could cause serious damage.  Just recently charges against Canadian Imperial Bank of Commerce were laid accusing the company of supporting inappropriate trading practices by some of its investors. Furthermore, criminal charges were laid against Paul Flynn a former executive of CIBC. 

Raynor Burke, an analyst with National Bank Financial, says the Canadian landscape is very different from that of the United States. Through FundServ, a company that time-stamps orders as it is electronically processed firms will find few instances of late trading. In spite of this, the Ontario Securities commission takes both late trading and market timing quite seriously.

In light of the scandals both in US and Canada the Commission in February 2004 began conducting an initial survey on possible misconducts in relation to mutual funds.  Findings from these reports will then lay a foundation for the OSC’s next step if necessary.  Early results have not uncovered any systematic abuses according to the commission.

Other companies involved in similar Scandals

U.S Firms Canadian Firms
Canary Capital Partners     Manulife Financial Corp
Citigroup Inc             Royal Bank of Canada
Fidelity Investments ATI technologies
Franklin Resources  

A series of scandals have surfaced within the country following the demise of Enron.  From the energy industry, to retail chains, to Wall Street, corruption and lawlessness seem to be growing within the foundations of the American economy. Such scandals although ranging vastly between categories, share certain characteristics common to all; financial manipulation, accounting fraud, greed and criminality



The following entails the scandals involving Dennis Kozlowski, Martha Stewart, Richard Grasso, Calisto Tanzi and Mikhail Khodorkovsky.


Dennis Kozlowski:

Following revelations regarding corrupt practices Tyco International Ltd, one of the worlds largest corporations with 240,000 employees have sent shockwaves throughout the global economy finding themselves in a grave predicament.  Dennis Kozlowski has now resigned as CEO of the company and Tyco stock has dropped to an ultimate low leaving the company on the brink of bankruptcy. 

The company in numerous handlings one could say demonstrates the current state of American business. Tyco like many other growing companies has registered huge profits over the past decade largely by means of acquisitions and financial manipulations.  Pulling off accounting scams and fraud, Tyco managed to grow immensely in earnings and stock value.  Kozlowski himself used the company for such things as a 2.1 million dollar trip to the Italian island of Sardina and is accused of transporting $13 million dollars worth of art to Tyco’s operating headquarters in New Hampshire to avoid paying more than $1 million dollars in taxes in New York City, the list goes on an on.  It has been said that over the past four years Kozlowski obtained over $400 million US dollars in pay and share options.  Tried in court, Kozlowski has pleaded not guilty and has been released on a 3$ million dollar bond.  The prosecutors not only are looking into the actions of Kozlowski but also at other executives within the company that may have been practicing similar routines.

Tyco’s economic activity involved more acquisitions rather than production perhaps, making it easy to take part in criminal practices.  Kozlowski expanded the middle sized engineering company into a giant by absorbing hundreds of smaller companies.  The deals were mostly funded through the stock market by financing debts from the acquisitions by stock, in turn allowing for further buyouts. 

To Tyco ltd, the value of stock because of such practices were quite important, therefore things such as accounting fraud were steps taken in order to insure a high stock value.  Practices included ‘Spring loading” in which the earnings of an acquired company were under reported in order to greater advance merged companies soon after. As well the accumulation of good will, used to cover the difference between the actual value of an acquired asset and the amount paid for it was also a common practice. Through such procedures Tyco, by the middle of the year 2000, accumulated over $20 billion of good will on companies that it acquired for $24 billion with actual hard assets of less than 4 billion.  The deceitful practice was quite simple where instead of paying a high price for a company Tyco would write it off as an expense instead hence creating a large amount of goodwill 

Since practices at Tyco have been revealed, the company itself seems to be plummeting into darkness.  Falling stock prices from a high of $60.09 per share to $13.49 per share have hurt investors and employees alike. 

Graph of Tyco's plunging share price

Figure  7:  Tyco Stock Return in US Dollars

Employees have suffered due to plans made to lay off more than 13,000 people and shut down over 240 facilities.  The company is slowly dying with almost 12 billion dollars in debt this year and a collapsed stock, the future of the company looks quite bleak

Investors must demand disclosure, which in my opinion would lessen the occurrence of such practices. They must demand disclosure as well as take an active interest in such companies to obtain the needed information, and not wait until it’s too late to take action.  As well governments need to take a closer look at the growing amount of companies that deal with such financial acquisitions with perhaps a need for greater guidelines and regulations.


Richard Grasso

Richard Grasso presided over the stock exchange during the greatest boom in history.  From a climb of less than 1000 points in 1968 to a high of 11,000 Grasso was well known and respected within the business world.  He implemented a number of polices encouraging corporate responsibility and was also highly applauded for organizing the comeback for the stock exchange just six days after the September 11th terrorist attacks.  Yet Grasso’s record is not as clean as it seems. 

Richard Grasso who worked for 35 years at the stock exchange received a one-off cash payment of $140 Million US in salary and benefits.  This was in addition to the $48 million dollars Mr. Grasso earned but did not claim and, his $1.5 million dollar salary.  His pay came from the exchange boards idea to grant Grasso a new contract taking him to the year 2007.  With the new contract in hand, Grasso was allowed to take all the retirement savings and investment profit he had accumulated over the past 35 years of which he immediately took US$140 million.  With Grasso forced to retire soon after and his benefits package in hand, people on wall street were astounded and shocked to hear of the numbers especially because it had never become public knowledge of how much Grasso really earned.    

Grasso's compensation package the past eight years at the NYSE:



















The numbers itself are astounding but should not in my opinion point only to Richard Grasso but also to the NYSE itself who allowed such a contract to be entered into.  What could possess them to give out so much money is beyond me. Many after learning about Grasso’s enormous pay claimed to be hurt by rising costs and falling profits at the same time that Grasso enjoyed his hefty pay package.

The Grasso story although shocking in numbers should not only then focus on Richard Grasso himself, but also on the NYSE and it’s internal practice. The NYSE exchange is a place where publicly held shares of almost 3000 companies are traded.  The system is based on the premise that the public has access to all companies on the exchange so that each investor can make intellectual investment decisions.  This policy however should also be applied to the NYSE for they are the ones that manage the whole affair. 

Just like any company that one deals with, the public has the right to know how the NYSE earns its money and how it is managed.  The NYSE had always operated under a form of discreetness in comparison to the companies listed on the floor.  While those on the floor have had to disclose detailed information about their company, the NYSE had been exempt for such rules, this is one of the reasons they failed to disclose Grasso’s benefit package.  In fact in their recent annual report the 40 billion dollar bonus that Grasso received was not to be seen anywhere in the account.

Punishment wise, one could say that Richard Grasso should go to jail or in the very least pay a generous fine.  However I strongly believe that actions should be taken against the NYSE in the form of a fine.  As well I believe that a committee should look into the practices of NYSE and form recommendations on how they can open up their activities to the public avoiding such an issue again.



Son of a rich beer executive, Lord Conrad Black is a widely known newspaper mogul. His company named Hollinger in the 90’s owned 60% of Canadian newspapers including the Daily telegraph, The Chicago Sun-Times, the Jerusalem Post and much more.  In 1999 alone Hollinger created revenues exceeding $2 billion dollars. 

Such a successful man unfortunately has been accused of many wrongful actions including ‘misappropriating’ $200 million dollars according to a shareholders lawsuit.  Tweedy Browne and Cardinal, both institutional investors initiated a suit accusing senior management of taking part in many transactions solely for the purpose of money in their pocket.  Executives from the company would look for opportunities with Hollinger that would directly profit their own livelihood.  Each time an opportunity was found consent from the board was provided routinely.

The Cardinal lawsuit estimates that Hollinger’s executives took as much as $300 million dollars from the company and argues that the board should not find ways to shift the blame to others or try to put all blame on Conrad Black as they have been trying to do thus far. 

Although accusations have not been proven in court the lawsuit boldly relays a story of deals involving senior management making decisions with little or no authority from the board of the company.  According to the suit, the company failed to evaluate assets before their sale and often no effort was put in to recruit the market for other potential buyers.  In one instance for example the lawsuit details a startling transaction in 2001 of the approval of a sale of some U.S newspaper assets to Conrad Black’s private firm for a merely $1 dollar, claiming that directors did not even raise an eyebrow when asked to approve such a transaction. 

Following the Cardinal lawsuit Hollinger’s special committee board has reported very few newspaper transactions.  The lawsuit argues that the real problems lie in the daily insider deals that were approved by the board. 

Such a lawsuit brings to light the many problems that Canadian shareholders, directors and regulators are facing today. Although our corruption scale is much smaller than our American counterpart it still exists and requires stringent regulations and severe penalties in order to keep corporate moguls such as Lord Conrad Black in Line.  The United States after their series of corruption scandals such as Enron and WorldCom enacted in 2002 the Sarbanes-Oxley Act, a strict set of laws on corporate governance.  The Canadian government have taken similar steps in order combat such crimes. 

There must be a severe punishment handed to Conrad Black and his surrounding executives involved to set an example of the in-acceptance of cooperate fraud in Canada. 


Calisto Tenzi

The trend seems to be that with success comes both deceit and fraud as illustrated by the above examples.  Parmalat is no exception.  Parmalat, once one of the largest companies in Italy, came to a collapse a short time ago through its massive accounts of fraud.  The company recently filing bankruptcy protection confessed to the billion-dollar crack in its balance sheets.  Calisto Tenzi once chief executive of the company building it up to see much of it’s success was arrested and has admitted to prosecutors of the shift that he made of roughly $620 million dollars from Parmalt to Parmatours a travel company controlled by his family. 

The SEC has accused Parmalat of involving themselves with one of the ‘largest corporate financial frauds in history’. In doing so SEC has claimed repayment of any unwanted gains with interest for U.S investors who hold some 1.5 billion dollars in bonds and notes. 

Unfortunately for Calisto and his family, two major changes occurred in regards to Parmalat exposing its dreadful schemes.  The first change was that of Parmalat’s outside auditor, which according to Italian law must be replaced every nine years.  Parmalat changed from Grant Thorton to the popular DeLoitee and Touche thereby exposing their malpractices. 

The second event leading to Parmalats fraudulent activities was incurred by the top executive himself along with his son when at a meeting with a private equity firm they let it slip that the cash on hand was really less than 3 billion Euros listed in the companies annual report.  They even admitted that in fact the company was 10 billion euros in debt.

The effects of such fraudulent behavior had grave effects for all involved.  For one, 36,000 employees had jobs that were in danger.  Secondly producers of the raw materials also suffered with the latest reports stating that dairy farmers in Brazil and Australia are waiting for payment on milk already delivered.  Finally investors for Parmalat both large and small are suffering because of the now useless stock as well as the $1.5 billion dollars in outstanding bonds.

If it were up to me I would have banned Parmalat from selling any of it’s products within the North America thereby hurting much of it’s income.  Calisto Tanzi  and all the other executive members should be fined and sent to jail.


Martha Stewart

The final scandal discussed and the most recent is that of Martha Stewart.  Stewart, one of the most well known figures of our time created a billion dollar company called Martha Stewart Omnimedia Inc.  The company deals with everything from television programs to magazines to home furnishings.  Since the scandal exploded back in June holdings have fallen more than 50% !

On Friday March 5th a jury found Stewart guilty on all four counts of obstructing justice and lying to investigators about a ‘just in time’ stock sale and now faces up to five years in prison and $250,000 in fines.  Stewart came out lucky when just the week before a judge threw out the charge of securities fraud, which carried a maximum penalty of 10 years in prison and a 1 million dollar fine.  

The scandal was as follows; ImClone Systems founded by Sam Waksal asked the government to review Erbitux, a new cancer drug. Waksal was tipped that the government would deny the application.  Martha Stewart ended up selling all 3,928 shares of ImClone stock, the day before ImClone dropped 18%.  On June 4th 2003 Stewart was indicted on nine federal counts in the ImClone scandal accused of insider trading, that is, having information that the public did not.  The prosecutor claimed that she sold the stock based on a secret tip and then tried to cover it up by lying.  Stewart ended up resigning as chairwoman and CEO of the company but remains chief creative officer and board member. 

The case of Martha Stewart has affected everyone in the country due to the sheer popularity of her products. Perhaps the innocent homemaker look that envisioned Martha caught everyone’s attention and brought about the broad amount of public coverage on this scandal.  Or, perhaps people are getting tired of giant business taking advantage of the laws and in this case insider trading thus, paying more attention to such scandals.

One possibility for punishment would be that the commission forces Martha to step down from the reigns of the company and pay a hefty fine. However because the business has been based solely on Stewart, unless the entire company shuts down she will always be a part of it and probably continue to guide many of the company’s important decisions.  Although jail time is an option, the odds that Stewart will face the inside of a jail seem highly unlikely.  Whatever does end up happening to the infamous Martha Stewart one just has to wait till the June court hearing to find out.


Mikhail Khodorkovsky

Cooperate fraud is not limited to North America, but in fact is all over the world.  Last year, Russian President Vladimir Putin detained Mikhail Khodorkovsky a former Community youth leader turned Russian billionaire, chairman and CEO of Yukos Oil Company.  Khodorkovsky was charged with tax evasion and grand theft and resigned from the company on November 3rd in order to ‘protect’ his business. While some say that Khodorkovsky is guilty in illegal dealings others report that his business is one of the most open operations in Russia. 

The arrest itself has been greatly scrutinized by many economists and politicians alike because of the manner in which the arrest was made as well as the fact that Khodorkovsky is a political opponent of Putin.  The personal dislike for one another was demonstrated on a televised verbal brawl last winter. 

In my opinion the events involving Yukos Oil Company and Khodorkovsky has definitely grown into a full blown political and economic scandal with consequences for both sides.  Economically the market has suffered because of the fiasco. When Khodorkovsky’s advisor for example, was held without bail in Moscow for four weeks, the Russian stock market dropped about 15 percent with a cost of approximately $20 billion in lost stock value.

40 years of age and one of Russia’s richest men according to Forbes Magazine Khodorkovsky gained control over Yukos in a shady 1995 privatization paying only a tiny portion of the companies actual worth.  Some say that he tried to straighten out the firm’s practices and that this lawsuit against him is merely a ploy to keep him away from politics.  In fact Khodorkovsky supports this opinion and has been heard on numerous occasions to be painting the lawsuit as a struggle between various factions surrounding Putin.  In fact Khodorkovsky goes even farther by claiming that one such group tried to blackmail him into financial support. Politically perhaps Russia really hasn’t changed with many investors deeply insecure with a deep concern for property rights.  The scandal has also exposed a sort of divide with the administration itself.  Dmitry Medvedev for example head of the Presidential Administration expressed great doubts in the way the arrest of Yukos stock took place and had called officials to weigh out the economic outcomes with their decisions. 

Russia has gone through vast political changes within the last decade that has influenced how it operates both economically politically and socially.  We are lucky that Canada has a form of checks and balances to ensure that one is not punished for their political beliefs or personal rivalries.

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