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Divorce Court Offers a Peek at Companies' Dirty Laundry

October 20, 2002|Rachel Beck | Associated Press Writer

NEW YORK — Here's some advice to corporate America: If you want to make sure proprietary information about your companies stays that way, you better add marriage counselors to your staff.

If what's happened in the last month is any indication, divorce court is becoming the place to look for juicy details about the finances of top executives and the businesses they operate.

It goes like this: A high-powered marriage breaks up, and after settlement talks fail, a scorned mate makes public through divorce proceedings all sorts of company secrets -- from lavish executive pay and perks to corporate dealings.

Forget regulatory filings and annual reports. This is public disclosure of a different kind, with powerful repercussions.

"There are many adverse consequences of divorce, not just for you, but for your company too," said Jerry Reisman, an attorney specializing in corporate finance in Garden City, N.Y.

The estranged wives of General Electric's former chairman, Jack Welch, and Ernst & Young's current chief executive, Richard Bobrow, have gone to court to fight for higher-paying divorce agreements.

These women -- Jane Welch and Jan Bobrow -- want a portion of the big money that they say their husbands make. They say they are entitled to keep the lifestyle they have grown accustomed to and helped earn.

Both women first tried to get respectable divorce settlements from their husbands, but when that didn't happen, they chose to disclose the magnitude of their spouses' wealth. And that's sure been revealing, not just for readers of gossip columns and society pages, but for investors and competitors too.

In the Welch case, investors were surprised to learn that the former executive was still being showered with costly perks by GE, which even picked up his dry-cleaning tab. Details of this extravagance weren't spelled out in the proxy statement mailed to shareholders.

Jane Welch's disclosures generated so much criticism of Welch and GE that the former chairman decided to give up most of his perks and to reimburse the company for the special services provided since his retirement last year.

The Bobrow case is different, with perhaps more serious implications for the company: Ernst & Young is privately held and does not have to disclose details of its financial performance. The divorce did that anyway.

Judge Steve Nation of Hamilton Superior Court, outside Indianapolis, recently issued an opinion that put a value of $5.53 billion on the accounting firm as of March 2000, when the couple separated. According to the court papers, Bobrow's stake in the firm was 0.22%, and this earned him $2.75 million in 2000 and $3.125 million last year.

That's far more informative than what was in the company's annual report. Released Oct. 14, it said only that revenues for the year ended June 30 were $10.1 billion, up $300 million from the previous year.

Judge Nation awarded Jan Bobrow just over $14 million -- or 60% of the couple's net worth as he valued it. The husband is appealing.

What makes the revelations so damaging are their usefulness to competitors. They now know not only the salary and other earnings of its chief executive, but the value of the firm's client relationships, which also was outlined in the judge's opinion. With that insight into Ernst & Young's finances, they can better map their own strategies.

"Accounting firms are breaking up these days and splitting off various segments," said Shannon Pratt, managing director at business valuation company Willamette Management Associates in Portland, Ore.

"This would be very useful to anyone who is looking to make acquisitions or sell."

Other spouses of Ernst & Young's thousands of employees could use the information in their own divorce proceedings. It also might spur some employees, now armed with details of what their chief executive and other company partners make, to lobby for bigger paychecks for themselves.

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