The Corporate Mafia How excess greed turned a number of seemingly respectable bankers and businessmen into nothing more than a band of Wall Street mobsters—and your nest egg into worthless fugazis.
Maxim, May 2003
By Ian Mount
Stop whining. You’re not the only guy who’s seen his 401k statement tank in two short years. During the Internet boom and bust between March 2000 and July 2002, Americans were fleeced of a staggering $7 trillion, or 25 grand each. That means instead of golfing at 65, we’ll all be filing TPS reports for an extra three years on average.
“Main Street America has been swindled by Wall Street hucksters in pinstriped suits,” Christopher Bebel, former Securities and Exchange Commission prosecutor and an attorney with Shepherd, Smith & Bebel. “It was well known on Wall Street that analysts were issuing opinions to help bring in lucrative investment business. The SEC knew this. The brokers knew this. But the average person didn’t know this.”
Let’s follow the dirty-money trail. Wall Street’s La Cosa Nostra–esque scam was remarkably intricate. As with any organized crime syndicate, there was an elaborate hierarchy of fealty at work, which tied street-corner soldiers (brokers) and wiseguys (I-bankers) to the consiglieres (CFOs) and dapper dons (CEOs). As for the Feds, in this case regulatory agencies like the SEC, “As long as share prices were going up, no one wanted to know what was going on,” says Michael Wolff, media columnist and author of Burn Rate. “Nobody in the middle of a hot market wants to say the market shouldn’t be hot. No one wanted to step in and be the downer.” Meet the members of the Corporate Mafia, the cons who made investors an offer they couldn’t refuse.
Stockbrokers
THE SOLDIERS
The lowdown: These are the bottom feeders of the Wall Street food chain. On celluloid their jobs are portrayed as all glam and glitz. But on the Street a lot of brokers are looked upon as two-bit hustlers. Crammed into cubicles, they spend their days cold-calling suckers from Squedunk, U.S.A. hoping to make a sale. For every one they make, soldiers get a meaty commission. Starting brokers pull in $70K per year, but during the boom the shadiest ones raked in five times that much.
Con Games
The hard sell: Overly aggressive brokers, like Mafia soldiers, will say just about anything to push their goods. And during the boom these guys were relentless. Armed with glowing stock reports—which are issued by Wall Street eggheads (analysts) and tell investors whether they should buy, hold, or sell a given stock—brokers tricked clients into gobbling up or clinging onto dot-com stinkers. Says former SEC prosecutor Bebel: “And brokers were in on the scam, using the optimistic ratings to sucker poor rubes into betting it all. It was criminal.”
Just before the market kissed its ass good-bye in March 2000, only .8 percent of ratings were sells. “My broker kept foisting stocks on me with lines like, ‘This is the future. This can’t miss. It’s a strong buy,’” says Alton Richards, 68, a retired schoolteacher from Atlanta who watched his broker flush his $300,000 life savings down the crapper.
Side dealing: When the hard sell didn’t work, brokers flat-out lied to clients. And Laura Brandel, a 48-year-old lonely heart from Cliffside Park, New Jersey, says she was prey. In a bizarre deal made in 1996, Brandel claims she was charmed into handing over most of her life savings to a Salomon Smith Barney broker. In exchange the broker (his name is being kept confidential by the National Association of Securities Dealers) agreed to impregnate her. According to Brandel, the broker not only lost most of her investment but also reneged on his promise to knock her up. In January 2003, SSB settled with her for an undisclosed sum.
Public Enemy: UBS’ Hanspeter Walder
Plenty of brokers gave their marks bad advice, but Swiss-born broker-to-the-rich Hanspeter Walder was an outright crook. For one thing, this UBS money manager brazenly stole his clients’ cash by shifting money from their accounts into his own. From 1994 to 2001, he nicked $56 million from clients. (He used a chunk to buy a Tarrytown, New York hotel, The Castle.) In September 2001, as he and his wife celebrated their 30th wedding anniversary, cops busted into their home to arrest him. “We couldn’t make ends meet,” Walder later explained to the court—after all, he only raked in $300,000 per year. Sweet justice: On January 10, the same day Walder was sentenced to eight years in prison, his wife’s divorce went through. Ah, timing.
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Investment Bankers
WISEGUYS
The lowdown: Meet the muscle of this Mafia. Investment-banking goombahs are the middlemen between the dons (CEOs) and the brokers. Bankers mastermind mergers and take stocks public, and their banks get a fat cut (two to six percent) of each deal. I-bankers moved as much as $218 billion in “merchandise” between ’99 and ’00—more than the previous five years combined. For their efforts wiseguys got seven-figure bonuses. With so much cash at stake, bankers did everything possible to keep up the racket.
Con Games
Leaning: To kiss ass with their valued corporate customers, it was routine for I-bankers to bully their brokerage arm’s stock analysts into hyping crappy stocks, particularly those sold by sketchy Internet start-ups. “I have several analyst buddies who said they were leaned on by I-bankers into giving worthless stocks a buy rating,” says Brian Blair, a former analyst at Credit Suisse First Boston. “Everyone knew analysts didn’t cross the bankers. Why would you when they controlled the purse strings?”
Kickbacks: Bankers operated another lucrative scam called laddering, which allowed an institutional investor (think 401k fund) to get in on the bottom rung of an initial public offering (IPO)—but only if he agreed to buy more of that stock later at a higher price. “It was used to artificially inflate demand for these IPO shares,” says Paul Wilcox (name has been changed), an I-banker with a small bank in New York. “Making one sale contingent on another in this way is illegal, but these guys did it and got away with it.”
Spinning: You’d call this bribery anywhere else, but on the Street it’s “spinning.” I-bankers promised CEOs (whose business they desperately wanted) dibs on shares of hot IPOs like Yahoo.com. The CEOs would buy these shares for peanuts just before they began trading publicly. As soon as the price skyrocketed—often within minutes of trading—CEOs would sell their shares (an action called “flipping”) and pocket the cash. In exchange for this favor, the CEOs would give their buddy bankers future business. “It was a win-win situation,” says M.R., a former VP at an investment bank whose clients included seedy telecoms. “The CEOs got richer, but the bankers made out proportionately, landing multibillion-dollar deals that sent their bonuses into the stratosphere.”
Public Enemy: CSFB’s Bill Brady
Honors could’ve gone to Brady’s old boss at CSFB, Frank Quattrone, but he “resigned.” Brady’s group at CSFB is being scrutinized for allegedly hawking bad analysis and demanding huge kickbacks from investors (up to 65 percent of their profits). In 1998, even as CSFB peddled stinkers like fogdog.com, Brady purchased a $6.3 million pad in San Francisco with a nine-car garage that boasts a car-turnaround system, so he never has to back out. “He’s a real slimeball,” says one former longtime coworker of Brady’s who asked for anonymity. (Can you blame him?) “He’d throw parties with call girls. I’ve done coke in the red suede elevator. I’ve seen coworkers naked in the hot tub. His parties made Caligula look like a Disney movie.”
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Chief Financial Officers
CONSIGLIERES
The lowdown: Behind every CEO lurks a trusted advisor, a number-cruncher who handles the logistics. CFOs cooked the books just long enough for stock prices to surge and for the dons to cash out. Take the case of WorldCom’s former CEO Bernie Ebbers and his consigliere, Scott Sullivan. On the Street the wheeler-dealer pair was dubbed the Scott ’n’ Bernie Show. “Sullivan was known as the guy who could make the numbers dance,” says Patrick McGurn, vice president at Institutional Shareholder Services, an investor research company. “He could say whatever he wanted because CFOs could make up anything.”
Con Games
Illegal swapping: This balance-sheet sham was popular with consiglieres for its sheer simplicity. In 2001 telecom network companies Global Crossing and 360 Networks couldn’t hit sales targets, so management teamed up and swapped fiberoptic capacity. The deal showed $350 million in sales between the two, enabling Global Crossing to meet expectations. Roy Olofson, a finance department VP at Global, says that when he questioned the shady deal, he got sacked and was defamed by Global’s chairman, Gary Winnick. “They buried him,” says Olofson’s lawyer, Paul Murphy. “That’s what happens to honest guys in corporate America. It’s also why no one came to his defense.”
Three-card monte: You’re in the market to buy a hot new ride, but you have crap credit? Don’t sweat it. Get a friend to take out a loan to buy the car for you and then pay him back off the books, plus a little fee for his troubles. This way nobody knows you’re on the hook. In essence that’s the way it’s said that Andrew Fastow, the notorious Enron CFO, managed to help hide more than $1 billion of the energy trader’s debt. Bonus: Fastow allegedly dealt himself $30 million between 1997 and 2001. But U.S. prosecutors have smacked him with 78 counts of fraud, money laundering, obstruction of justice, conspiracy, and other charges. If convicted, Fastow faces up to 860 years in the can.
Public Enemy: Scott Sullivan of WorldCom
After WorldCom announced that Sullivan helped hide about $3.8 billion in company debt (the number later ballooned to $9 billion, forcing the company to file for the largest bankruptcy in history), massive layoffs followed, and Sullivan was arrested and indicted on seven counts of fraud and conspiracy last year. He could face up to 65 years in the slammer. Sullivan is rumored to be building a $15 million compound in Boca Raton, Florida. His lavish estate, by the way, would be protected by Florida’s Homestead Act of 1862, which prevents the government or courts from taking one’s property to pay off civil fines or debts.
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Chief Executive Officers
THE DONS
The lowdown: CEOs are the Vito Corleones of the biz world. They’re the guys who farm out the plum jobs, order the layoffs, squeeze the competition, and rake in the serious dough (on average, $15.5 million in 2001). But that’s nothing next to their stock market scores. With their inside track, CEOs and other top execs made $66 billion in the boom.
Con Games
Free money: When you were the boss, you could lend yourself as much cash as you could carry. You could also convince the board to forgive the loan, so you wouldn’t have to pay it back. Best part: Until a few month ago, this game was totally legit. John Rigas, indicted former CEO of the cable company Adelphia, wrote himself a check for $150 million to purchase the NHL’s Buffalo Sabres. And disgraced former WorldCom CEO Bernie Ebbers “borrowed” $408 million.
Bribery: These guys weren’t above good old graft, either. Take the now-infamous case of Citigroup CEO Sanford I. Weill and his star telecom analyst Jack Grubman. Grubman upgraded AT&T stock, then Weill allegedly tried to land Grubman’s twins a spot in a ritzy N.Y.C. preschool, via a million-dollar donation. Shortly after, Citigroup landed a big AT&T wireless deal. “The Citigroup scandal was a sordid tale of greed, with ethics ignored,” says Larry Soderquist, a professor of law at Vanderbilt University. “It was one of many that, taken together, helped destroy market confidence and trash the economy.” Once word got out on the scam, the kids were rejected.
The sting: Even as the market tanked, corporate dons kept rallying the troops and telling them not to sell stock. Meanwhile, CEOs like Enron’s Kenneth Lay were dumping stock by the boatloads. In August 2001, Lay sent a company-wide “buck up” note: “Our performance has never been stronger.” Then he locked them out of their 401k plans for two months. “We got a company e-mail saying the accounts had been frozen while they switched fund managers. It wasn’t true,” says Jim Brigham, an Austin-based former Enron computer security worker. “We watched our stock go down the tubes.” In December 2001, Enron officially declared bankruptcy, and its employees lost a whopping $1.3 billion in 401k life savings.
Public Enemy: Tyco’s Dennis Kozlowski
He’s fat. He’s greedy. He weirdly resembles a pig. Koz’ corporate money trail includes receipts for a $15,000 umbrella stand and a $6,000 shower curtain. To top it off, he spent $2.1 million on a 40th-birthday party for his wife on the Mediterranean island of Sardinia, with a cake with exploding breasts and an ice sculpture of Michelangelo’s David that dispensed Stoli from its slowly melting prick. The message to investors: Drink my piss.
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SEC and Co.
THE LAW
Time to answer your final burning question: Is it safe to invest again? “Going forward, the key for investors and the media is not treating the market as sport,” says SEC spokesman John Nester. “I think people forgot that it entails risk. You need to diversify and not put your life savings in stocks alone.”
As for the rampant corruption, Eliot Spitzer, New York’s ambitious attorney general and one-man wrecking crew, is on the job. “When my office uncovered the first hard evidence of conflict of interest, many people dismissed the problem as being caused by a few rogue analysts,” says Spitzer of his investigation, which began in the summer of 2001. “But in the weeks that followed, it became clear the system was flawed.” That’s the understatement of the century. In the 94,000 pages of Merrill Lynch e-mails subpoenaed, wrongdoing was rampant. An e-mail from analyst Henry Blodget about a positive dot-com rating read: “I can’t believe what [a piece of shit] that thing is. Shame on me.”
For its crimes, Spitzer hit Wall Street where it hurts: in its wallet. By the time Spitzer was through levying fines, 10 of the largest brokerages had forked over $1.4 billion—payment for their boom-era shenanigans. Regrettably, it’s being dumped into government coffers, but will be used, in part, to educate investors about the market’s many pitfalls. But take comfort in the number of Wall Street suits that will be wearing orange jumpsuits by year’s end. Meanwhile, the SEC is substantially rewriting rules to try to protect the little guy. “The SEC laws in place now are the best ever,” says Nester. “However, no law can ever protect absolutely against someone who sets out to defraud you.” Bottom line: As long as there are crooks, keep your eyes open, because the Wall Street saga continues…
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Crime Pays
See how salaries stack up against the one-year payday of Oracle’s CEO, Larry Ellison. It’s OK to cry.
Joe Millionaire: $19,000
Hazmat removal worker: $28,000
Rocket scientist: $68,000
Air-traffic controller: $83,000
Orthopedic surgeon: $240,000
Dubya: $400,000
UNICEF funds for Ethiopia: $16 million
Entire cast of Friends: $108 million
GDP of Burundi (2001): $690 million
Oracle CEO Larry Ellison (2001): $706 million |
