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Old Cloud Darkens Wall Street

Ethics: Recent business scandals elicit memories of the 1980s, renewing demands for reform.


NEW YORK — Allegations of illegal and tawdry behavior by executives have become an almost weekly spectacle, shaking investors' trust in the nation's business leadership and prompting criticism that a new era of greed has tainted corporate America.

The arrest Wednesday of ImClone Systems Inc. co-founder Samuel D. Waksal on insider-trading charges is the latest in a spate of scandals involving high-profile executives. It comes a week after the indictment of former Tyco International Ltd. Chief Executive L. Dennis Kozlowski on charges of tax evasion, which in turn followed revelations of questionable behavior by top brass at Adelphia Communications Corp., WorldCom Inc. and, of course, Enron Corp.

Boards of directors have begun to take action, sweeping out executives at these companies and others. But critics say it has been too little, too late to dispel the cloud of mistrust darkening America's executive suites.

Investor discontent can be seen in the slumping stock market and in the remarkable success during this season of annual meetings of a number of shareholder initiatives taking direct aim at lavish CEO pay packages and attempting to boost director independence.

Legislators, regulators and prosecutors at the federal and state levels have ramped up investigative activity to a pitch not seen since the savings-and-loan and Wall Street scandals of the 1980s. Some say the current disenchantment even surpasses that of the Decade of Greed as symbolized by Gordon Gekko, the villain of the 1987 movie "Wall Street," who was modeled in part on inside trader Ivan Boesky.

"In my lifetime, American business has never been under such scrutiny," Henry M. Paulson Jr., chairman of the investment bank Goldman Sachs, told an audience at the National Press Club in Washington last week. "To be blunt, much of it is deserved."

Business scandals always have been an unwelcome byproduct of an economic system that rewards the pursuit of self-interest, said Daryl Koehn, director of the Center for Business Ethics at the University of St. Thomas in Houston.

What's new and disturbing, she said, is that corporations and boards of directors are "showing a tendency to cater to the personal greed of their executives and are turning a blind eye to conflicts of interest."

Enron directors, for example, explicitly voted to suspend the company's conflict-of-interest policy so that Chief Financial Officer Andrew S. Fastow could run outside partnerships that enriched him personally, Koehn noted.

At Adelphia, WorldCom and Tyco, top executives received huge personal loans from the companies in addition to their hefty salaries and stock options.

All three companies are reeling financially and embroiled in scandal. All three also recently ousted their top managers--John Rigas and his three sons at cable TV operator Adelphia, Bernard Ebbers at phone giant WorldCom and Kozlowski at Tyco, the manufacturing conglomerate.

In the case of ImClone, authorities charge that Waksal got early word of a devastating Food and Drug Administration ruling against the biotech firm's top drug prospect. Waksal allegedly tipped off family members so they could dump millions of dollars in ImClone stock before the news reached the public.

Waksal, reportedly under pressure from ImClone's board, stepped down as chief executive three weeks ago and was replaced by his brother and company co-founder Harlan W. Waksal--who is himself the subject of questions regarding his trading of ImClone stock.

Samuel Waksal's lawyer said the charges were based on "entirely circumstantial" evidence, and Harlan Waksal's attorney described the timing of his client's stock sales as "coincidental."

Do the abrupt departures of Samuel Waksal and the others mean corporate directors are finally getting tough with management? Not necessarily, experts said.

"The fact you're seeing more exits than before is a good thing, but it's too bad these boards didn't act decisively before so much damage was done," said Charles Elson, director of the Center for Corporate Governance at the University of Delaware.

Pressuring Kozlowski to resign a day before his indictment was not exactly a stern test for Tyco directors, said Jamie Heard, chief executive of Institutional Shareholder Services in Rockville, Md., which advises pension funds and other institutional investors on issues of corporate governance.

Kozlowski's resignation voided his multimillion-dollar severance package, but Tyco said it had entered into "good-faith negotiations" with him on a new deal. Those negotiations will be a better test for the board, Heard said.

"If they vote him even a penny of severance, it will be a penny too much," he said.

Whether or not they are reacting quickly, directors are feeling the heat from shareholders. Of 174 nonbinding corporate governance resolutions submitted by shareholders this year, 40% passed, shattering the previous record of 25%, according to the Investor Responsibility Research Center, a Washington-based proxy advisory service.

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