The Five Dumbest Things on Wall Street

Herbalife's diploma debacle; Wachovia: crank calls and crank dealers; JPMorgan's muni bond blind-siders; Archer Daniels' ethanolism; Scotts' Gro-ing pains.
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1. Herbalife's Diploma Debacle

In his zeal to offer premiere meal-replacement shakes and herbal supplements that defend against the vicissitudes of snacking,

Herbalife

(HLF) - Get Report

Chief Operating Officer Gregory Probert has let a big fib get away from him: He never completed his MBA from California State University, Los Angeles, even though his resume claimed he did. On top of that, Herbalife claimed that Probert had earned the degree -- in as many as 19 filings with the

Securities and Exchange Commission

.

"The truth is that my vanity prevailed and I did not take action ... even though I was aware it was not accurate," said Probert.

"I suppose that some of us who have been blessed with a certain degree of good fortune are tempted to see the paths we took in romantic vs. strictly factual ways," Probert told

The Wall Street Journal

. "I was wrong for succumbing to my vanity and apologize for doing so."

Probert resigned Thursday after the board reviewed his exaggerated credentials, saying it couldn't keep him on "given the company's unwavering commitment to the highest standards in business ethics."

That a company honcho would lie about a diploma is perhaps not shocking in itself -- higher-ups at

Mylan

(MYL) - Get Report

and

RadioShack

(RSH)

have faced the third degree about their credentials. And besides, when it comes to running a multibillion-dollar company, what's one piece of university paper, more or less?

Perhaps Probert thought no one would notice.

He should have known better, especially given the corporate policeman that exposed him. The revelation comes thanks in part to the efforts of Barry Minkow, former jailbird and current Christian pastor/fraud exposer. Minkow had hired a private investigator as part of his ongoing effort to discredit Herbalife.

After serving seven years in the 1990s for check-kiting and other hijinks related to his spotty ZZZZ Best carpet-cleaning/insurance restoration/fraud company, Minkow cleaned up his act, found God and co-founded the Fraud Discovery Institute.

Dedicated to investigating only "companies ... that are currently NOT being investigated by law enforcement," the Institute's

distinctly Web 1.0 site

derides the "Herba-Lie." Elsewhere, the Institute urgently proclaims that "First and foremost, fraud detection and prevention is more than a state of mind."

We'd say so. Minkow owns Herbalife puts.

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Dumb-o-meter score: 88. "Having you on our side is one unknown variable no perpetrator could have planned for," gushes an attorney to Minkow on his efforts in a separate fraud case.

2. Wachovia: From Wall Street to Mean Streets

In tough economic times, several recession-proof strategies appear to weather even the most brutal storms, at least until they're discovered. Just ask the hoodlums hitting up senior citizens for their cash, and

Wachovia

(WB) - Get Report

, which benefited from arrangements with such shifty types.

Faced with staggering first-quarter losses and continued credit-related woe, Wachovia looks to have begun consorting with shady underworld figures, or at least people who handle their money. After self-flagellation over a costly acquisition of adjustable-rate mortgage enthusiast Golden West at the peak of the housing bubble several weeks ago, Wachovia again made headlines Monday for some extra-legal missteps.

The bank paid a $144 million settlement to the Office of the Comptroller of the Currency last week to get rid of a federal investigation of its work with several telemarketing firms. Those telemarketers rang up seniors, milking them for bank account information in exchange for identity-theft protection or travel vouchers, according to a

Wall Street Journal

report.

The phone jockeys then used "remotely created checks," which conveniently don't require client signatures, to siphon money out of the seniors' existing bank accounts to be deposited into a Wachovia account. When the telemarketers' customers found out about this service, they were less than grateful: Wachovia now faces at least two class-action lawsuits related to the calls, and many claim that they never received what they'd been offered.

Meanwhile, a separate investigation by the feds indicates that Wachovia also has had ties to shady Colombian and Mexican money-transfer companies, the kind often used to process the dusty, crumpled dollars amassed at the world's finest street corners. Also known as

casas de cambio

, these businesses are stationed along the U.S.-Mexico border to help workers transfer their earnings back home. The government apparently suspects that some of those hard-earned dollars come from less-than-wholesome forms of entrepreneurship.

To be fair, when the investigation started, Wachovia ended relationships with the firms and says, of course, that it is cooperating with the investigation. This appears to be something Wachovia knows how to do; the bank certainly is getting a lot of practice.

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Dumb-o-meter score: 93. As an added kick in the pants to its shareholders, Wacky Bank announced Wednesday it will take a charge-off of up to $1 billion in the second quarter.

3. JPMorgan's Muni-Bond Blindsiders

Douglas MacFaddin, who headed up municipal derivative sales at

JPMorgan

(JPM) - Get Report

, was fired this week.

Records at the Financial Industry Regulatory Authority indicate that MacFaddin is subject to an investigation by the Department of Justice for deals he helped broker with various municipalities and state governments.

Samuel Gruer, who worked with MacFaddin at JPMorgan and is also subject to investigation, has now found a home at

Deutsche Bank

(DB) - Get Report

.No word yet what MacFaddin will do. But his Spoke.com profileis

available

for perusal by prospective employers.

The DOJ and SEC are working with the Internal Revenue Service in an effort to expose rigged bidding in the sale of interest rate swaps connected to municipal bonds.

Several local governments and institutions have met their match in the formidable and confusing world of derivatives and investment contracts. A faltering school district in Erie City, Pa., signed an ill-advised deal with JPMorgan for $750,000 that wound up costing it $2.9 million.

Erie officials later claimed they didn't understand what exactly happened -- when they closed the deal with their local banker, it'd seemed they'd be getting $750,000 for free. A similar maneuver left Jefferson County, Ala.,

near bankruptcy

in early April.

Naive country rubes have been getting swindled by slick Wall Street types before, but occasionally they were bilked legally. The federal investigation into MacFaddin's efforts implies that in this case, JPMorgan and other banks including

Bank of America

(BAC) - Get Report

,

Bear Stearns

(BAC) - Get Report

and

UBS

(UBS) - Get Report

may have broken some pesky regulations that forbid collusion over municipal contracts and other such peccadilloes.

Apparently Wall Streeters are willing to travel as far as Pennsylvania and Alabama in search of some small-town dollars. Call it back-country brokering.

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Dumb-o-meter score: 78. By colluding, bankers have shown they clearly hadn't had enough success competing with each other to dupe crafty school boards and streetwise Midwestern governments.

4. Archer Daniels' Ethanolism

Despite outcries from economists worldwide and even normally ethically agnostic Wall Street tycoons,

Archer Daniels Midland

(ADM) - Get Report

CEO Patricia Woertz is bravely standing up for U.S. ethanol policy.

In an earnings conference call Tuesday, Woertz laid down the hammer against ethanol objectors: "I actually find it sad, and maybe even a little ironic, that these misguided attacks on biofuels

are directed at one alternative we actually have today for ... increasing the fuel supply."

The attacks come in part from

Tyson Foods

(TSN) - Get Report

and

Pilgrim's Pride

(PPC) - Get Report

, two of the nation's top food producers, which are irked that government ethanol mandates are driving up food prices. They and other Street observers believe that the U.S. shouldn't convert corn into expensive, environmentally dubious fuel.

Of course, any decline in corn prices would help Tyson and Pilgrim's Pride cut the cost of feeding their chickens, so they might be just a bit biased.

Still, Woertz asserts that the prospect of reduced subsidies for biofuel is "wrong, it's foolish, I think it's dangerous, I think it's a mistake."

Curtailed subsidies certainly would be a dangerous mistake for ADM, whose first-quarter profit rocketed 42% year over year to $517 million, thanks in part to help from Uncle Sam. Some analysts estimate that ethanol accounts for less than 10% of ADM's earnings. ADM breezed past the Street's top- and bottom-line expectations for the first three months of 2008. And the company has put its money where its mouth is: Archer Daniels dropped $700,000 to lobby the government on behalf of ethanol.

In fairness, the Federal Reserve's recent rate cuts, which have turned the U.S. dollar into Monopoly money, along with recently enriched emerging markets that now have a hankering for corn-eating livestock, also contribute to soaring food costs. But to say that increased reliance on ethanol hasn't added to the pain might be a bit of a stretcher.

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Dumb-o-meter score: 82. "Retreat from biofuels is just an empty gesture," Woertz said. "That won't fill anybody's stomach and won't fill anybody's gas tanks."

5. Scotts' Gro-ing Pains

Scotts Miracle Gro

(SMG) - Get Report

got bushwhacked by an Environmental Protection Agency recall last week for improperly registering its lawn-care wares.

Bent on protecting consumers and the world from the uncertainties involved in widespread deployment of the company's "Miracle-Gro Shake 'n Feed All Purpose Plant Food plus Weed Preventer," the EPA cried foul on misidentification of the garden chemical. The government is also issuing a recall of the company's "Bonus S Max" and "Turf Builder Plus 2 Max." The EPA issued a "stop sale, use or removal order" against the products.

The recall, issued the day after Earth Day, caused a living nightmare at the company's Marysville, Ohio, headquarters. So much so that Scotts was forced to delay its first-quarter earnings statement until Monday. "Over the past week, most of our leadership team was consumed with issues related to the product recalls," said CEO Jim Hagedom. "Those events have prevented us from adequately preparing for our earnings release and conference call."

Scotts probably had its hands full tracking down the unnamed rogue employee who "deliberately circumvented company policies, caused invalid product registration forms to be submitted ... and then hid those actions from co-workers and managers," Hagedorn said.

On the other hand, Scotts was quick to remind everyone that the products in question account for less than 1% of total revenue, and the recall will cost between $5 million and $10 million.

More concerned with public safety than any impact its actions might have on the gardening supplier's earnings, the EPA issued the following advice to consumers: "Until

the EPA has more information about the contents of these products, consumers are advised not to use these products, and to store them in a safe, cool and dry place

such as a garage or utility shed

" (emphasis added).

Talk about getting ordered out of the house!

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Dumb-o-meter score: 65. The EPA put "Bonus S Max" out to pasture, leaving Scotts with a heap of fertilizer to shovel through.

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