[Congressional Record Volume 148, Number 76 (Tuesday, June 11, 2002)]
[House]
[Pages H3449-H3450]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




   WHAT HAPPENS IN AMERICA WHEN CORPORATIONS VIOLATE THE PUBLIC TRUST

  The SPEAKER pro tempore. Under the Speaker's announced policy of 
January 3, 2001, the gentleman from Michigan (Mr. Hoekstra) is 
recognized for the time remaining before midnight, or approximately 41 
minutes.
  Mr. HOEKSTRA. Mr. Speaker, I want to talk about a little bit 
different issue. I want to talk about what happens in America when 
corporations violate the public trust.
  Max De Pree, a former Fortune 500 CEO, my former boss at Herman 
Miller, wrote in his book, ``Leading Without Power,'' about the 
importance of people having trust and confidence in the American 
economic system in order for it to work. He states, ``When you stop to 
think about it, it is astounding that anything as complex as the 
trading of stocks, bonds, commodities, and futures ultimately depends 
on trust; a value, not a statute, not an SEC regulation, not even a 
government mandate. The system works on trust.''
  We have been rocked during the last couple of months with revelations 
about corporate management and some of the activities that they have 
been engaged in. It all started with the actions of Enron Corporation 
and certain employees of Arthur Andersen, where the actions at Enron 
and Arthur Andersen I believe were clearly designed to do one thing: to 
deceive shareholders, customers, and employees of the true nature and 
health of the business.

                              {time}  2320

  After that we had Merrill Lynch. Merrill Lynch just settled a lawsuit 
in New York after allegations that their brokers were advocating 
investors purchase certain stocks while at the same time acknowledging 
in internal memos that these were potentially bad investments. Enron, 
Arthur Andersen, Merrill Lynch, each of these cases, I think, are 
classic examples of where leaders in the business community violated 
the trust that was placed in them by the public, including their 
customers, their shareholders, and their employees.
  The other thing that goes on here is that in my State of Michigan, 
there is even more examples. CMS Energy, a long-established and well-
respected business in Michigan, conducted round trip sales of 
electricity. My belief is that the sole purpose of this phony business 
activity was to artificially elevate the sales of one of its business 
divisions of up to 80 percent, again deceiving shareholders, customers 
and employees of the true health of the business. What is round-
tripping? Round-tripping is I will sell you $1 billion of energy at 9 
o'clock in the morning, a billion dollars of electricity at 9:00 in the 
morning, and at 9:01 you sell it back to me for exactly the same price, 
and all of the sudden you and I are now both billion dollar companies 
in the electricity commodities market. And in reality it was a phony 
sale.
  Take a look at this headline recently. Another Michigan company. 
Kmart, employees at Kmart recently allege that they were forced by 
management to adjust financial statements to hide the true viability of 
the business in 2001. The company filed for bankruptcy in 2001. Kmart 
accused of lying. Whistleblowers came, execs misled, and accountants 
knew.
  What happens when corporations betray the public trust? As we have 
seen in almost each of these cases, the financial ramifications have 
been devastating. These companies have even seen their stock values 
drop; some have been forced into bankruptcy. Worse, innocent people, 
tricked by these deceptions, have lost their retirement savings, 
employees have been laid off and investors have seen their investments 
evaporate. The end result may be that millions of honest businesses in 
America may be forced to pay a heavy price in new government 
regulations.
  It is really time for the business community and leaders in the 
business community to become self-policing and to bring forward 
proposals to address this breaking of the public trust by people in the 
business community. Remember, the system works on trust.
  And then the other thing that happens here is you almost add injury 
to insult. Many, if not most, of the management people involved in 
these deceptive activities have not only gone unpunished, they have 
been rewarded with huge severance or compensation packages. There is 
something wrong in America when business leaders break

[[Page H3450]]

the public trust and harm many but they walk away with a golden 
parachute. What do I mean here?
  Well, we know what happened at Enron, deceptive business practices. 
Ken Lay, former chair, chief executive and director, sold 1.8 million 
shares for about $50 a share. Jeffrey Skilling, former chief executive, 
director, sold 1.1 million shares for $66.9 million, roughly $66 a 
share. Rebecca Mark, vice chairman, director, 1.4 million shares. She 
sold them for about $58 a share. Robert Belfer, director, member of 
executive committee, sold a million shares for $51 dollars a share. 
Steven Kean sold 64,932 shares for around $70 a share. John Duncan, 
director of the executive committee, sold 35,000 shares, netted $2 
million or around $60 a share. They walked out very, very wealthy. We 
know that many did not do as well.
  After the Enron collapse, to track exactly the dialogue that Enron 
management would have with their shareholders, I bought 50 shares. I 
did not have to pay $50. I did not have to pay $66. I did not have to 
pay $68. I think I paid around 20 cents a share. I bought 50 shares for 
$10. Lots of investors were hurt because of the deceptive practices at 
Enron and at Arthur Andersen. But the people at the top, 101 million, 
66 million, 79 million, 51 million, 5 million, 2 million, they did not 
end up selling their shares for 20 cents a share.
  The president of CMS Energy, here is how one shareholder described 
what happened here. Referring to the resignation of the lower ranking 
Pallas, the shareholder said it was analogous ``to kicking the cat when 
the dog messed on the carpet.''
  Again, the share prices declined. I think the executives are going to 
do just fine.
  Bernard Ebbers, chairman and CEO, WorldCom. Worldcom is being 
investigated by the SEC for possible fraudulent accounting practices. 
Its credit rating has been reduced to junk status and it has been 
removed from the Standard and Poors 500 index, the Wall Street Journal, 
6/5 of this year.
  Bernard Ebbers will receive $1.5 million a year for life. If his wife 
survives him, she will receive $750,000 a year for life as long as she 
lives. The company's credit rating has been reduced to junk status. 
Bernard Ebbers resigned under pressure in April, but I believe he may 
do better than the rest of the company.
  Richard McGinn, CEO, Lucent Technologies. The SEC is investigating 
possible fraudulent accounting practices while Lucent employees are 
suing the company for breach of fiduciary responsibility by 
inappropriately allowing employees to add company stock to their 
retirement plans. Richard McGinn, ousted in October of 2000, will 
receive $5.5 million in cash, pay off a personal loan amounting to $4.3 
million, annual pension of $870,000 for life.
  Here is an interesting one. CEO for TYCO. TYCO is a company that we 
in my district are fairly familiar with. They came in and bought a 
healthy small little business in Zeeland, Michigan, said we will leave 
things the same. The day after the sale was consummated, the doors were 
locked. The employees were gone. Dennis Kozlowski made about $334 
million over a 3-year period. He resigned earlier this month, indicted 
on charges of evading $1 million in sales tax. Think about it, making 
more than $100 million per year, and you got to ask the question, when 
is enough enough, or does it simply just become greed? $100 million a 
year and you would do anything to evade $1 million in sales tax so that 
the rest of us could pick up his tax burden.
  TYCO is negotiating a severance package that experts believe will be 
less than the $135 million he would have received if he had been fired.
  Let us talk about the performance of TYCO under Mr. Kozlowski's 
leadership. TYCO lost $86 billion in market value, faces $27 million in 
corporate debt. It is now under investigation.
  Here is a quote, according to Reuters, ``A pattern of lucrative 
payoffs to board members and top executives at the troubled 
manufacturer raises questions about whether they had incentive to keep 
tabs on the spending of disgraced former chairman Dennis Kozlowski and 
others.''

                              {time}  2330

  Reuters continues citing the Wall Street Journal: ``The criminal 
indictment has triggered a widening probe into whether Tyco paid for 
homes and artwork for several corporate officials without telling 
shareholders.'' Wall Street Journal, series of articles, 6-4 through 5-
2.
  It is just sad that that is what we are seeing in so much of the 
business world today. People who are entrusted by the public with a 
certain element of responsibility have taken that, and in many cases 
have enriched themselves, while their shareholders, their employees and 
their customers are paying the long-term price.
  Here is another case that just came up in the last couple of days. 
This is The Washington Post via the Dow Jones, publication date June 
2002. A company that was looking for FDA approval for a drug, ImClone, 
learning that the Food and Drug Administration would not accept its 
application for a promising cancer drug, driving its share price down. 
It appears that that word leaked out through the corporation to a 
number of individuals. The end result is they sold their stock before 
it collapsed. They came out all right.
  The American public has a right to expect and demand more. Companies 
need to be held accountable. The business community should step up and 
make recommendations as to what should happen, because when public 
officials or corporate officials abuse the public trust, the whole 
sector suffers. In this case, corporate America suffers because of the 
excesses of a few. It is a painful process to watch and to observe.
  The end result now will be that either the private sector will come 
up with recommendations in how to effect change in the private sector 
or government will step in. I am not real optimistic about that. I 
believe that more government regulation of business is a poor 
replacement for integrity and trust. However, we must face the fact 
that some in business have abused this trust.
  The end result is millions of honest businesses in America may be 
forced to pay a heavy price in new government regulations. I believe 
that we must hope that the individuals who failed in their leadership 
responsibilities are held accountable by their management, their board 
of directors, their shareholders, or by the laws of our land. They need 
to be held accountable.
  This whole list of companies where millions of individuals got hurt 
but a few walked away with a golden parachute, here is a quote out of 
the Wall Street Journal that I find kind of appropriate: ``I don't know 
that anyone gave a bonus to the captain of the Titanic.''
  In many of these cases, that is exactly what we saw, that after the 
misdeeds and the wrongdoing, whether it is at Enron or any of these 
other companies or Tyco, their market value plummeted. They sank like 
the Titanic. Yet their captains, their CEOs, walked away with a bonus.
  We need to make sure that we prevent that from happening in the 
future. Yet the systems or laws do not exist to exercise true 
accountability. Then systems and laws will need to be changed, but let 
us not forget that, in the end, this is about integrity and trust, 
common sense and decency; all leadership qualities that cannot be 
legislated.

                          ____________________