George Mannes

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Fleecing the Shareholder: How They Did It

George Mannes

Remember the good old days? Those simpler times, back when the biggest complaint you could scare up about a CEO was that he missed the occasional earnings estimate and the stock tanked as a result?

The days of the simple mistake are over -- gone the way of MCI's quarterly dividend.

Yes, back in the days when people said the words New Economy without irony, corporate executives were pretty straightforward in how they disappointed their investors.

Now, unfortunately, we live in a more complex world -- one in which industrious executives have devised a multitude of ways to provoke, mislead and betray shareholders, not to mention enrich themselves at expense of workers and equity investors. It's so confusing that we thought it high time to survey the landscape of transgressions now in fashion. Read on.

But first, let's try to quantify the damage. Start with a handful of companies facing various allegations of financial chicanery or questionable accounting practices: Global Crossing, Enron, WorldCom, Qwest(Q Quote - Cramer on Q - Stock Picks) and Tyco (TYC Quote - Cramer on TYC - Stock Picks). Just by themselves, according to TheStreet.com's back-of-the-envelope calculation, those five companies are responsible for vaporizing $320 billion in market capitalization since the end of 1999.

Think about it: Those companies alone amount to 8% of the $4 trillion in market capitalization that the S&P 500 has lost since the end of 1999. What appear to be corporate misdeeds, unfortunately, are not victimless crimes.

So now, investors are faced with the unpleasant task of sorting through lesser evils and greater ones. As they sift through each day's financial news, they ask themselves: What's the newest executive plot to be alleged by law enforcement authorities? And how does this rank in comparison with all the other allegations afoot?

In other words, executives haven't merely gone bad. They've gone bad in ways that render past understanding of badness obsolete. They go bad in ways that force us to make subtle distinctions between degrees of badness.

It's no fun wading through this river of misdeeds. At one end of the range, the activities under scrutiny are unseemly but legal, such as borrowing big bucks at low interest from a company you run. At the other end, they cover allegations such as out-and-out stealing that are worth multiyear jail sentences if proven in court. It's a testament to the last bastion of creative capitalism: finding new and imaginative ways to transfer wealth from shareholders to executives.

So how have chief executives managed to disappoint us? Let's catalog some of the ways.

• Borrowing from the company. For the longest time, it has been legal for an officer or director to borrow from a company. But at WorldCom, to use a prominent example, things got out of hand. Arguably, the telecom giant was justified in lending CEO Bernie Ebbers money so he wouldn't have to dump his shares on the market, further depressing the stock. But given the souring business, the layoffs of mass destruction and Bernie's penny-pinching elimination of free company coffee, you might ask yourself this question: Were more than $400 million in low-interest loans to Bernie the best use of WorldCom's dwindling capital?

• Borrowing from the company and forgiving the loans. This, allege the feds, was the strategy employed by Dennis Kozlowski at Tyco. Yes, strategic erasure is an effective way to rid yourself of those pesky loan repayments that borrowers are supposed to make.

• Skipping the paperwork altogether. This tactic, allegedly, was the one favored by the Rigas family that once ran Adelphia Communications. Rather than taking out formalized loans from Adelphia, the Rigases threw all the money into the same piggy bank -- their money, Adelphia's and that of numerous related business entities -- and withdrew cash as necessary.

But enough with blurry lines between a company's money and its executives' dough. Let's move on to blurry numbers in financial statements.

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• Aggressive revenue recognition. Just like borrowing $400 million, there's nothing illegal about recognizing advertising sold as part of a legal settlement as revenue. Whether it should have been recognized -- whether it was part of an America Online effort to gloss over weakness in the online advertising market -- well, that's another issue.

• Really aggressive revenue recognition. Harder to defend are some of the circular strategies allegedly practiced by Enron and Dynegy (DYN Quote - Cramer on DYN - Stock Picks) in the energy-trading business and by Qwest and Global Crossing in telecom. Just this month, for example, Dynegy settled SEC charges that it engaged in misleading round-trip energy trades simply to inflate its transaction volume.

• Unbelievably aggressive revenue recognition. Forget about engineering complex transactions to inflate revenue. Just make the stuff up. At Peregrine Systems, that supposedly meant classifying a loan as revenue and reaching "side deals" that turned ostensible sales into sham sales. At HPL Technologies, the CEO allegedly cut through the complexity by just forging purchase orders.

• Extracurricular activities. To screw up things at your company, you don't even have to go into your office these days. Just ask Martha Stewart. All she had to do was to sell stock in someone else's company under circumstances that have yet to be completely explained. That's been enough to power-sand more than 60% of the value off the shares of Martha Stewart Living Omnimedia (MSO Quote - Cramer on MSO - Stock Picks).

So does all this make you nostalgic for good, old-fashioned underperforming management? Well, for this standby, there's no one better to turn to than Walt Disney (DIS Quote - Cramer on DIS - Stock Picks). No huge loans. No inflated revenue. Just a plain old stock decline from $40 into the teens over the past two years.

Trust Disney to deliver on the promise of traditional values.

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