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Lecture 9

CC212 Lecture 9: cc 212 week 9 prosecution

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Wilfrid Laurier University
Christopher Anderson

CC 212 WEEK 9 PROSECUTION Problems with prosecution • Proof of fraud and intent is difficult • Did executives lie about material fact sophisticated investor should know the risks • US department of justice would hurt the economy if we pressure WCCs, too big to fall argument – still have to generate jobs for the community, if these businesses like banks fail, there is a trickle down effect that effects almost everybody. People need jobs, massive economic loss, US dollar will tank, and businesses that borrow money from the bank will fail Why not even an indictment • Priority issues, less resources (US 90% indictment rate, Canada 60%) • Government embarrassment – cover up the mess by forcing mergers between banks • Prosecutorial arguments (plea deals): deferred prosecution agreements (fines) over jail time Insider trading • Confidential information is used for profit • You buy or sell stock based on this privileged information • Illegal because the stock mart should be a level playing field Martha Stewart case • ImClone stock sold based on information a cancer drug would not be approved by the FDA in two days time • Martha Stewart saved $200k from the sale before the FDA decision was made public • Irony: she had been appointed to NYSE board of directors that year • Later did jail time Key: not a level playing field • Privileged information means that the stock mart is not truly a free market • Securities laws prevent it • Cheats investors, employees who invest in their employer, loss of investor confidence Pump and dump • Promote a stock while selling it at its peak price • Outside investors lose value of their stock • Ex. “” craze in 2001 WorldCom • Telecommunications provider (1985) • Bernie Ebbers (CEO) • Later merged with MCI • Had $30 billion in debt: broke by 2002 • Embezzlement by CEO and improper accounting (cookie jar accounting) • High salaries and bonuses to executives Enron • Largest energy trader in US (natural gas) • Went from stock high of $90 a share to 20 cents in 18 months • Loss of $50 billion Enron’s deception • Used various methods to appear profitable • Debt was concealed (cook the book), artificially boosted their revenues Why would Enron executives destroy their company? • Role of stock options • 15% annual growth meant utilization of options (huge, top in the world) • Performance tied to compensation • Opportunity to cheat Example: market to market scams • Accounting methods where you record revenue and profit in current quarter rather than over time period of contract • Other scam: conceal $10 billion in debt • The healthier picture creates optimism • Execs sold off stock at profit ($1.1 billion) • Employees lost savings in Enron stock • Investors lost savings Ponzi schemes • Fraud is the claim of high rate of return on investments • Scam involves “front loaders” to put money into fund more than “cash outs” who want out Problem with Ponzi schemes • In 2008 recession, the schemes fell apart • More people need access to money than are investing • Sales people can’t find investors to make up loss • Bernie Madoff case $65 billion scam • He skimmed off money to support his lifestyle • Scammed investors for 45 years Effects of financial crime • Erodes public trust in institutions • Investor loss in confidence in stock market • Loss of assets for investors, discrepancy economy for older adults • Corporations are suspect by media and public (problems in branding and loyalty) Reasons why pubic doesn’t recognize WCC • Information comes from the media • Unaware of WCC as a crime • Consumer advocacy groups – ex. Better business bureau keep registries on businesses about complaints • Social movements and too radical – people don’t really listen to this ex. Ralph Nader wasn’t paid much attention at first when he said cars dangerous, now, recalls happen • Social distancing from WCC • Comfort zone: why are so few activists? • Role of labour unions Public reactions: when does WCC matter? (Punch) • Some questions about legitimacy of corporate • Increased inequality • Precariousness nature of work • Do politicians protect our interests? Reasons for changing attitudes (Punch) • Some businesses cross over into illegal activity • Connection between politics and WCC • WCC undermines “trust” and “legitimacy” essential to economic transactions • The costs of accepting (tolerating) WCC becomes too high Why the perception of WCC is still not clear • Certain types of WCC are thrown, while others are not • We do know what street crime is when we see it but with W
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