Shades of Gray
The fine line between honesty and
criminality in corporate America
Greg Farrell
• Reporter USA TODAY
– Enron
– Arthur Andersen
– WorldCom
– HealthSouth
– Cendant
Character references
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Ken Lay
Jeff Skilling
Bernie Ebbers
Richard Scrushy
Walter Forbes
Martha Stewart
Corporate Crooks
• Destruction of $200 billion
• Congress helped it happen
– Penalized salaries over $1 million
– Underfunded the SEC
– Made it more difficult for investors to sue
– Allowed auditors to act as consultants
Corporate Crooks II
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What is a crook?
Bad guys lie
Bad guys steal
Easy to recognize
Good guys?
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Successful
Innovative
Charismatic
Media stars
White House
Davos
What unites these men?
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Jeff Skilling, fraud at Enron
Walter Forbes, fraud at Cendant
Paul Bilzerian, securities fraud
Alan Bond, investment fraud
Harvard Business School
White-collar crime
• It’s not “black or white”
• The world is gray
Statistical Ethics
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Normal distribution
Pure evil?
Unadulterated good?
Most in middle
Case studies
• Middle manager at WorldCom
• Senior manager at Enron
WorldCom
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Born during the breakup of AT&T
Incremental growth (1984-1996)
Stunning growth (1997-1999)
Acquisition of MCI, $5 billion income
Correlation with Internet bubble
Trouble in 2000
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CEO Bernie Ebbers’ stock
Sinks from $1 billion to $500 million
CFO Scott Sullivan’s millions
Ebbers tells Sullivan to fix numbers.
Cooking WorldCom’s books
• Impossible for one
• Sullivan recruits four
• Conspiracy is born
Betty Vinson
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Careful bookkeeper
Married, one daughter
Family breadwinner
1996 salary: $50,000
2000 salary: $80,000
Sullivan’s scheme
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Reverse accrual accounts
Appalled, but colleague convinces her
Threatens to resign a few days later
Conversation in Sullivan’s office
Sullivan’s scheme II
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Vinson comes around
Sullivan’s stellar reputation
Vinson’s salary tough to replace
Finding a new job difficult, arduous
WorldCom’s slide gets worse
• $544 million shortfall
• No more accruals
accounts to raid
• Desperate tactics
• Capitalize line costs
Vinson’s dilemma
• Knows that capitalization of line costs is
wrong
• Resolves to put her resume together and
seek new job
• Participates in conspiracy
• Does it for 3 more quarters
Meet the New Betty
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By 2002, an innocent no more
She’s part of the conspiracy
What happened to “resume,” “new job”?
Rationalized each step
Focused on loss of $80,000 job
Never saw bigger threat ahead
Planet Enron
• Most elaborate fraud
in US history
• Pervasive greed
• Criminal company?
Brief history
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Natural gas pipeline (1985)
At the mercy of gas prices
1990: creation of the “gas bank”
Creation of new market
Enron becomes leading innovator
Enron in the 1990s
• Total focus on stock price
• Attempts to duplicate “gas bank” strategy:
– Deregulation of electricity markets
– Enron Energy Services
– Enron Broadband
Enron: 1998
• Trouble maintaining 15% growth rate
• Need to buy/sell assets at quarter’s end
• Problem finding third parties
Fastow to the rescue
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CFO forms partnership
No pesky “3rd party”
Buys lousy assets
No questions asked
Never loses money
Stole $30 million
Other tricks
• Disguised bank loans as “sales”
• Hid California profits in “cookie jar”
• Assigned bogus values to assets
– $80,000 lemonade stand
Fraud at Enron
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Systemic
Not just 3 or 4 people
16 guilty pleas
5 convictions
100 unindicted co-conspirators
Criminal trial of Lay, Skilling
• Government alleges massive conspiracy
• Lay, Skilling accused of lying to investors
• Parade of cooperating witnesses
Defense argument
• Enron was actually making money
• Implausibility of conspiracy
• Logic: someone would have objected
David Delainey
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Rising star
Named head of EES
EES losses worsen
Skilling’s solution
March 2001 meeting
EES losses hidden
Conspiracy
• No guns required
• Tacit support
• Difficult to resist
Whistleblowers
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Sherron Watkins
Special personality
Ostracized
Demeaned by defense
Lonely role
Conclusions
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Nobody intends to break the law
Compliance techniques vary
Rationalizations
Are you willing to walk?