High profile corporate falls CEOs are not a new phenomenon. But that doesn’t make them any less egregious, because laws like the Sarbanes-Oxley Act— which makes the monitoring and protection of companies shareholder rights by the board of directors a priority—reminds us of this. Here are five of the most public CEO scandals of recent times; ethical violations that not only brought down the top dog but, in many cases, landed them in jail.
Key points to remember
- Kenneth Lay, who presided over the Enron accounting scandal, died before serving his prison sentence.
- WorldCom’s Bernard Ebbers served half his prison sentence for fraud and died shortly after his early release.
- After using company funds as his personal piggy bank, Tyco’s Dennis Kozlowski went to jail.
- Conrad Black of Hollinger Inc. served part of his prison sentence for wire fraud; after being released, he was pardoned by President Trump.
- Scott Thompson quickly left Tyco after false information was discovered on his CV. Since then, he has served as CEO of other companies.
Five Most Publicized CEO Ethics Violations
1.Kenneth Lay, Enron
The fall of Enron and the imprisonment of several members of its executive group was one of the most shocking and widely reported breaches of ethics of all time. This not only bankrupted the company, but also destroyed Arthur Andersen, one of the largest audit firms in the world.
The Security and Exchange Commission (SEC) announced in 2001 that it was investigating Enron’s accounting practices after several years of questions raised by analysts and shareholders.
The resulting disclosures and writedowns by the company reduced investor confidence and the company’s credit rating, leading to the company’s bankruptcy in December 2001.The SEC has announced it will file a lawsuit against Lay, former CEO Jeffrey Skilling, CFO Andrew Fastow and other high ranking employees.
The charges related to knowingly manipulating accounting rules and covering up the company’s huge losses and liabilities. Lay and Skilling were tried together on 46 counts, including money laundering, bank fraud, insider trading and conspiracy. Skilling was convicted on 19 counts and sentenced to 24 years in prison, which in 2013 was reduced to 14 years and he was released in 2019.
Lay was convicted of six counts of fraud and faces up to 45 years in prison, but died in 2006, three months before the sentencing hearing. The resulting investigation Enron Scandal led Congress to pass the Sarbanes-Oxley Act to improve corporate accountability.
2. Bernard Ebbers, WorldCom
Even as the SEC conducted its investigation of Enron, an even bigger breach of CEO ethics was brewing. WorldCom, which at the time was the second-largest long-distance telecommunications company in the United States, began merger talks with Sprint. The merger was eventually canceled by the Department of Justice for fear of creating a virtual monopoly. The decision had an impact on the company’s share price.
CEO Bernard Ebbers owned hundreds of millions of dollars of WorldCom stock, which he sidelined (i.e. borrowed) to invest in other business ventures. When WorldCom’s stock price fell, banks began demanding that Ebbers cover more than $400 million in margin calls.
Ebbers convinced the board to lend him the money so he wouldn’t have to sell large blocks of stock. He also launched an aggressive campaign to support the stock price by fabricating accounting entries. The scheme was eventually uncovered by WorldCom’s internal audit department, and the audit committee was informed. The resulting SEC investigation led to the company’s bankruptcy filing and Ebbers’ firing in 2002, and, a few years later, Ebbers’ conviction for fraud, conspiracy and filing forgery. documents.
Ebbers began a 25-year sentence in federal prison in 2006. After serving 13 years of his sentence, a federal judge ordered his release on health grounds. He died shortly after, in February 2020.
3. Conrad Black, Hollinger International
Canadian Conrad Black founded Hollinger Inc., the head quarter of Hollinger International, in the mid-1980s with the purchase of majority stake in the The telegraph of the day, a British newspaper. Along with a number of other purchases over the next 15 years, Hollinger became one of the largest media groups in the world. As CEO of Hollinger International, Black had substantial control over the company’s finances.
The board confronted Black in 2003 over payments the company made to him and four other directors of around $200 million. The board called the SEC to investigate the validity of the payments and the accounting transactions created to account for them.
Charges have been filed against Black for wire fraud, tax evasion, racketeering and obstruction of justice, among other charges. In 2007, Black was convicted on four of the 13 counts against him and was sentenced to 78 months in prison, of which he served 42. He was released in 2012. President Trump pardoned him in 2019 .
4. Dennis Kozlowski, Tyco
Kozlowski, the CEO of Tyco, a huge security and electronics company, was also caught in the company’s coffers. In 2002, the board discovered that Kozlowski and Mark Schwartz, the company’s chief financial officer, had taken out bonuses and unauthorized loans totaling $600 million.
The men were charged with grand larceny and securities fraud, among others. Prosecutors charged Kozlowski with paying for lavish parties, a Manhattan apartment, a $6,000 shower curtain and expensive jewelry with corporate funds. His first trial in 2004 resulted in a mistrial, but in 2005 he was sentenced to eight to 25 years; after serving eight years, he was released in 2014.
5. Scott Thompson, Yahoo
Compared to the other four CEO bad boys on this list, Scott Thompson’s transgressions may not seem so egregious. What shocked shareholders and the media was the brazenness of his deception and the lack of oversight that allowed it to happen.
Thompson was named Yahoo’s new CEO in early 2012, in a bid to turn the tide of the struggling company. In May, a militant shareholder The group alleged that Thompson embellished his resume by claiming he had a degree in computer science, as well as a degree in accounting. He only had an accounting degree.
There were two significant ramifications of the deception, which Thompson called “inadvertent”. The first: he said the board hadn’t fully vetted him before hiring him. More importantly, because the false information appeared in documents filed with the SEC, the company and Thompson himself were subject to disciplinary or legal action.
Thompson voluntarily resigned as CEO in May 2012. He became CEO of ShopRunner soon after – the CEO of its parent company, Kynetic, was an old friend – and worked there until 2016. He is currently CEO of Tuition.ioa company that allows companies to offer student loans to their employees as benefits.
Shareholders and investors have always expected CEOs to maintain high ethical standards. Although this does not always happen, today’s regulatory environment makes it easier to identify transgressions and bring offenders to justice.
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