A corrupted market
6/6/2002
A BOSTON GLOBE EDITORIAL
STOCK PRICES have foundered this week as investors signal persistent concerns about corporate ethics. And no wonder: On Tuesday the CEO of the giant conglomerate Tyco, L. Dennis Kozlowski, was indicted on criminal charges of tax evasion. A jury is hearing closing arguments in the government's case against accounting giant Arthur Andersen for obstruction of justice in the Enron investigation. On Monday the senior vice president of troubled Houston energy trader El Paso Corp. was found dead, an apparent suicide. And Microsoft agreed to settle civil charges brought by the Securities and Exchange Commission that it had misstated earnings.
Not to mention the hangover from last week's news: The estwhile blue-blood stock broker Merrill Lynch paid a $100 million fine after a New York state investigation found analysts recommending stocks they actually believed were ''dogs'' or ''junk'' in order to bid up their prices. And vice president Dick Cheney's former company, Halliburton, admitted it was being investigated by the SEC for reporting ''unbilled collectibles'' as revenue during the years Cheney was CEO. The company's accountant at the time: Arthur Andersen.
So it is no surprise that most stock indexes are mired in the doldrums or that on Monday the once invincible Nasdaq index hit its lowest point all year.
With all the hand-wringing on Wall Street, however, it is easy to forget that shareholders are not the only ones harmed by corporate malfeasance. Indeed, employees, consumers, and ordinary taxpayers often take a proportionately bigger hit in cases of shady boardroom dealings.
Loyal employees from Enron to Polaroid lost their life savings when pension plans locked into company stock collapsed. California utility customers were fleeced by Enron, Dynegy, and other energy traders who, documents show, manipulated supplies and prices during the state's energy crisis in 2000. And all taxpayers are hurt when a company like the Stanley Works, a Connecticut tool manufacturer, decides to reincorporate in a (perfectly legal) Bermuda tax haven.
Meanwhile, the government is blithely pushing ahead to enact some of the 17 energy and environmental policy changes Enron lobbied for in meetings with Cheney's secret energy commission last year.
The free market and especially the stock market depend for their success on transparency, reasonable regulation, and consumer confidence. The first two were neglected during the bubble years, resulting in serious damage to the third. The combination of deregulation, defanged watchdog agencies like the SEC, and destabilizing incentives to pump up stock prices created the conditions for an exuberant fraud. Only honest, independent oversight can bring the trust back.
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This story ran on page A20 of the Boston Globe on 6/6/2002.
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