[Congressional Record Volume 148, Number 92 (Wednesday, July 10, 2002)]
[House]
[Pages H4472-H4473]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                         PUNISH UNETHICAL CEOS

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from Iowa (Mr. Ganske) is recognized for 5 minutes.
  Mr. GANSKE. Mr. Speaker, I am outraged by the corporate scandals that 
are causing so much pain to Americans. I have listened to fellow Iowans 
who worked for the natural gas company that merged into Enron tell me 
with tears in their eyes that most of their pensions were wiped out in 
the Enron collapse.
  Workers are taking it on the chin. WorldCom is laying off more than 
17,000 people. Many more at other companies are legitimately worried. 
Besides the workers and pensioners directly affected, almost 50 percent 
of Americans now invest in the stock market and some are looking at 
their lifetime investments become pennies in a matter of days. The 
stories of greedy executives who cut corners to make themselves a 
profit at the expense of everyone else are becoming a daily occurrence. 
This has become such a problem that the loss of faith of investors in 
the capital markets threatens our Nation's security.
  So how did the capitalist threaten capitalism? For the CEO's victory 
is measured in profits to boost stock prices to enable them to cash in 
options. It is clear that some CEOs overaggressively pursued paper 
profits, even if it meant cheating the investors who provided the 
capital. These CEOs used various strategies to cheat others. Let me 
simplify their executive self-dealing.
  I am indebted to columnist Paul Krugman of the New York Times for 
this example. Imagine the manager of an ice cream parlor who wants to 
get rich the easy way. First there is the Enron strategy. The ice cream 
manager assigns contracts to provide customers with an ice cream cone a 
day for the next 30 years. He deliberately underestimates the cost of 
providing each cone. This ice cream CEO then books all the projected 
profits on those future ice cream sales as part of this year's bottom 
line. Suddenly he appears to have a highly profitable business and 
sells shares in his store at inflated prices.
  Then there is the Dynegy strategy. Ice cream sales are profitable. 
But the ice cream manager convinces investors that they will be 
profitable in the future. He enters into a quiet agreement with another 
ice cream parlor down the street, each to buy hundreds of ice cream 
cones from the other every day or, rather, pretend to buy, no need to 
go to the trouble of actually moving all those cones back and forth. 
The result is that this ice cream manager now appears to be a big 
player in the ice cream cone business world and sells shares at 
inflated prices.
  There is the Adelphia strategy. The ice cream scam artist signs 
contracts with customers and gets investors to focus on the volume of 
contracts rather than their profitability. This time he does not engage 
in imaginary trades. He simply invents lots of imaginary customers. 
With his subscriber base growing so rapidly, analysts give his ice 
cream business high marks and he sells his shares at inflated prices.
  Finally there is the WorldCom strategy. Here the greedy ice cream 
manager does not create imaginable sales. He simply makes real costs 
disappear, pretending the operating expenses like the cost of cream, 
sugar and flavorings are part of the price of the new refrigerator. So 
his unprofitable business looks like it is highly profitable and is 
borrowing money only to purchase new equipment. Once again, the ice 
cream executive sells his stock options at inflated prices.
  Mr. Speaker, back in the Great Depression Congress passed the 
Securities and Exchange Act of 1933 and 1934. We created the SEC to 
enforce those laws. The results were protections like boards of 
directors, independent accounting firms, government regulators. But the 
system still relied on trusting the competence of the directors, the 
integrity of the CEOs, the accuracy of the accountants and the 
abilities of regulators.
  It is clear that today the foundation of personal integrity has been 
eroded by the lure of huge personal profits.
  I have been concerned about the need to separate an accountant's 
consulting function from his auditing work for several years. I 
supported former SEC chairman Arthur Levitt on his proposal to do that 
2 years ago.
  So, you ask, what is Congress doing to fix this serious problem? 
Well, we have held a series of hearings in my committee. Most of time 
the CEOs take the Fifth. But the House of Representatives has now 
passed two important pieces of legislation. First, we passed the 
Pension Security Act, and I will amend this statement with the details 
of that. Then we passed in the House in a bipartisan fashion the 
Corporate and Auditing Accountability,

[[Page H4473]]

Responsibility and Transparency Act. I will also add some material to 
my statement on the details of that legislation.
  These bills, Mr. Speaker, wait to be acted on by the Senate.
  President Bush has also outlined a plan and many of his suggestions 
we need to look at. Those that cannot be implemented by SEC regulation 
we should act on.
  I think that the rule of law requires that those CEOs who have 
committed malfeasance, who are no better than street thugs, should 
spend time in jail. Now that would send a real message. Those 
responsible for fraudulent strategies like the hypothetical ice cream 
manager I have talked about should end up in the slammer.
  I am outraged by the corporate scandals that are causing so much pain 
to Americans. I've listened to fellow Iowans, who worked for the 
natural gas company that merged into Enron, tell me with tears in their 
eyes that most of their pensions were wiped out in the Enron collapse. 
Workers are taking it on the chin. WorldCom is laying off more than 
17,000 people. Many more at other companies are legitimately worried.
  Besides the workers and pensioners directly affected, almost 50% of 
Americans now invest in the stock market and some are looking at their 
lifetime investments become pennies in a matter of days. The stories of 
greedy executives who cut corners to make themselves a profit at the 
expense of everyone else are becoming a daily occurrence. This has 
become such a problem that the loss of faith of investors in the 
capital markets threatens our nation's security.
  How did the capitalists threaten capitalism? For the CEOs, victory 
was measured in ``profits'' to boost stock prices to enable them to 
cash in options. It is clear that some CEOs over-aggressively pursued 
paper ``profits,'' even if it meant cheating the investors who provided 
the capital. These CEOs used various strategies to cheat others. Let me 
simplify their executive self-dealing. Imagine the manager of an ice 
cream parlor (example courtesy of Paul Krugman, New York Times) who 
wants to get rich the easy way:
  First there's the Enron strategy: The ice cream manager signs 
contracts to provide customers with an ice cream cone a day for the 
next thirty years. He deliberately underestimates the cost of providing 
each cone. This ice cream CEO then books all the projected profits on 
those future ice cream sales as part of this year's bottom line. 
Suddenly he appears to have a highly profitable business, and sells 
shares in his store at inflated prices.
  Then there's the Dynegy strategy. Ice cream sales aren't profitable, 
but the ice cream manager convinces investors that they will be 
profitable in the future. He enters into a quiet agreement with another 
ice cream parlor down the street: each to buy hundreds of cones from 
the other every day. Or rather, pretends to buy--no need to go to the 
trouble of actually moving all those cones back and forth. The result 
is that this ice cream manager now appears to be a big player in the 
ice cream cone business world and sell shares at inflated prices.
  And there's the Adelphia strategy. The ice cream scam artist signs 
contracts with customers, and get investors to focus on the volume of 
contracts rather than their profitability. This time he doesn't engage 
in imaginary trades, he simply invests lots of imaginary customers. 
With his subscriber base growing so rapidly, analysts give his ice 
cream business high marks, and he sells shares at inflated prices.
  Finally, there's the WorldCom strategy. Here the greedy ice cream 
manager doesn't create imaginary sales. He simply makes real costs 
disappear by pretending that operating expenses, like the cost of 
cream, sugar, and flavorings, are part of the price of the new 
refrigerator! So his unprofitable business looks like it is highly 
profitable and is borrowing money only to purchase new equipment. Once 
again, the ice cream executive sells his stock options at inflated 
prices.
  Back in the Great Depression, Congress passed the Securities Exchange 
Act of 1933 and 1934 and created the SEC to enforce those laws. The 
results were protections like boards of directors, independent 
accounting firms to ensure that the numbers were correct and government 
regulators to supervise the rules. But the system still relied on 
trusting the competence of the directors, the integrity of the CEOs, 
the accuracy of the accountants, and the abilities of regulators.
  It is clear that today that foundation of personal integrity has been 
eroded by the lure of huge personal profits.
  Most corporations are honest, but the bad apples have severely 
damaged the reliability of the reported data upon which people make 
investment decisions. There is no question that the malfeasance of 
Arthur Anderson, the schemes of CEOs, and the ineptitude of the boards 
of insular directors of huge companies like Enron, Global Crossing, 
Xerox, Dynegy, and our second largest long distance carrier WorldCom, 
has spooked investors.
  I have been concerned about the need to separate an accountant's 
consulting function from his auditing work for several years and 
supported former SEC Chairman Arthur Levitt on his proposal to do that 
two years ago.
  What you ask, is Congress doing to help fix this serious problem? 
Well, my Committee has held numerous hearings on these scandals, even 
taking testimony under oath from these CEOs (most have taken the 
Fifth).
  The House of Representatives has now passed two important pieces of 
legislation with bipartisan votes to address the security of retiree's 
pensions and to help secure the financial future of America's investors 
and employees.
  First we passed the Pension Security Act (H.R. 3762). This bill:
  Bars company insiders from selling the own stock during ``blackout'' 
periods when workers can't make changes to their 401(k)s.
  Give workers new freedoms to sell their company stock within three 
years of receiving it in their 401(k) plan.
  Fixed outdated federal rules that discourage employers from giving 
workers access to professional investment advice.
  Empowers workers to hold company insiders accountable for abuses.
  Requires that workers be notified 30 days before the start of any 
``blackout'' period affecting their pensions.
  Then we passed in the House, in a bipartisan manner, The Corporate 
and Auditing Accountability, Responsibility and Transparency Act (H.R. 
3763). This legislation works to end abuses like those made by Enron 
and Global Crossing. It strengthens corporate responsibility, reforms 
accounting oversight, and increases corporate disclosure. It will:
  Restore confidence in accounting standards.
  Increase corporate disclosure and responsibility.
  Protect 401(k) plan participants.
  Reduce analyst conflicts of interest.
  These bills wait to be acted on by the Senate.
  President Bush has also outlined a plan that Congress should act on 
such as requiring corporate CEO's to personally vouch for the veracity 
of their companies' financial disclosures, prohibiting CEO profit from 
false financial statements, setting up an independent accounting 
regulatory board and requiring accounting best practices, not simply 
minimum standards. Where these proposals can't be implemented by SEC 
regulation, Congress should act to do so.
  Capitalism will survive this latest onslaught. It is clear, however, 
that government has a hand in making sure that the average investor 
gets information that isn't ``cooked.'' Honesty is, ultimately, the 
best policy.
  I also think that the rule of law requires that those CEOs who have 
committed malfeasance, who are no better than street thugs, should 
spend time in jail. Now that would send a real message to CEOs, CFOs, 
boards, and accountants in the future that these types of schemes will 
not be tolerated. Those responsible for fraudulent strategies, like the 
ice cream manager I hypothesized earlier in this letter, should end up 
in the slammer.

                          ____________________