Wall Street Justice III: Fraud Pays in Healthcare Industries

One of my students forwarded me a link to an article describing numerous pharmaceuticals that have committed fraud only to have the CEO receive a hand slapping and a multi-million dollar bonus on the way out the door. Here are a few of the cases mentioned in the Forbes article:

Bank of America charged with fraud in Merrill deal

This is hot off the press (see today's WSJ). NY Attorney General, Andrew Cuomo has charged Bank of America (BofA) and its executives with fraud in regards to BofA's purchase of Merrill Lynch in December 2008. Cuomo argues that BofA knew of but did not disclose the ($16 billion) losses at Merrill to shareholders when it was seeking approval to purchase Merrill.

Today's WSJ says that Cuomo is claiming that BofA also defrauded the U.S. Government (i.e., you and me) by exploiting "the economic fear that existed in late 2008" so that it could get $20 billion in aid from the U.S. Government by saying the losses at Merrill were worse than anticipated.

This quote from today's WSJ summarizes Cuomo's claims:

"We believe bank management understated the Merrill Lynch losses to shareholders to get shareholders to approve the deal then overstated their ability to terminate the agreement to get $20 billion from federal government," Mr. Cuomo said on a conference call.

Sounds like those BofA executives deserve a hefty bonus don't you think?!

Great follow-up on yesterday's post...

Changing trends in executive compensation

In Europe, shareholders have started rejecting the large executive compensation plans that have become so commonplace in the last decade or two. The Wall Street Journal reports:

Shell is the largest among a growing group of British companies whose shareholders have voted down compensation plans in advisory votes, including Royal Bank of Scotland Group, Bellway PLC and Provident Financial PLC.

In the U.S. however, shareholders are still very generous to executives. In comparing Europe to the U.S., the article states:

European investors are angry over bonuses that are relatively modest by U.S. standards. At Exxon Mobil Corp., the largest U.S. oil company, Chief Executive Rex Tillerson received a 2008 compensation package valued at $23.9 million, including $1.87 million in salary, a $4 million bonus and stock grants initially valued at $17.6 million, according to the company's latest proxy.

Shell Chief Executive Jeroen van der Veer was awarded 78,889 shares, worth about €1.3 million ($1.76 million at current prices), in addition to his salary, bonus and benefits of €5.7 million.

The enormous stock grants that executives have received have been blamed for creating the pressure and incentive behind many of the financial statement frauds. In many cases, executives can make millions if they can get their stock to move a few dollars. Beating analysts' expectations by reporting fraudulent financial performance is the means that some executives have used to drive their stock price up.

Warren Buffet has been outspoken about his view that executive compensation is broken. I've heard that Buffet actively works to eliminate incentive for fraud at his companies. In any case, he has long been a critic of current compensation arrangements.

Some proposals floating around should lessen the incentive to commit fraud. For example, a recent MarketWatch article lists proposals to eliminate annual equity awards and make executives wait until two years after retiring to cash in their stock options. It will be interesting to see how executive compensation packages change in the near future and whether the changes will reduce incentives to commit fraud.