Enron

The Enron scandal was a major corporate accounting scandal that shook public trust in large
corporations and highlighted systemic issues with corporate governance, auditing practices,
and conflicts of interest. The key points from the given text are:

1. Andrew Fastow, Enron's CFO, exploited the company's unique organizational structure to
funnel money into his personal accounts through fraudulent financial reporting.

2. Enron's collapse exposed the failure of various gatekeepers, including the board of directors,
auditors, lawyers, and analysts, to detect or prevent the fraud.

3. The scandal led to the enactment of the Sarbanes-Oxley Act of 2002, which aimed to address
conflicts of interest in the auditing profession and establish better corporate governance
standards.

4. However, the Act did not address the broader issues of corporate greed, herd behavior of
institutional investors, and the exploitation of developing countries, consumers, and
employees.

5. While some scholars viewed Enron as an isolated incident, others argued that it exposed
fundamental flaws in the corporate governance system and the need for broader reforms.

6. There were concerns about potential overregulation in response to the scandal, with some
arguing for a balanced approach that would allow for responsible experimentation and
innovation in corporate governance practices.

Overall, the Enron scandal highlighted the need for greater transparency, accountability, and
ethical conduct in large corporations, while also sparking debates about the appropriate level
of regulation and the root causes of corporate misconduct.

Here are the key points summarizing the key players and intermediaries involved in the Enron
scandal:

Key Players:

- Kenneth Lay (Founder/CEO) - The public face of Enron with deep political connections,
especially to the Bush administration and Republican party. He distanced himself from
operational details.
- Jeffrey Skilling - The driving force behind Enron's transformation into an aggressive trading
company. As head of Enron Capital and Trade, he fostered the profit-at-all-costs culture that
led to market manipulations like the California energy crisis.

- Rebecca Mark - Headed Enron's international development arm (Enron International)

focusing on energy projects, but clashed with Skilling's asset-light trading strategy.

- Sherron Watkins - A vice president who raised early warnings about accounting irregularities
involving the special purpose entities (SPEs) set up by CFO Andrew Fastow.

Intermediaries:

- Arthur Andersen (Accountants) - Complicit in structuring and approving Enron's

controversial SPEs that were used for accounting manipulation and hiding debt.

- Vinson & Elkins (Lawyers) - Enabled and provided legal approval for Enron's complex SPE
structures despite glaring conflicts of interest.

- McKinsey (Consultants) - Advised Enron's shift towards trading/deregulated markets but

failed to rein in excessive risk-taking.

- Banks (JP Morgan, Citigroup, Merrill Lynch) - Provided financing for Enron's SPEs and
questionable deals, later fined for their involvement in fraud.

The intricate web of bankers, lawyers, accountants and consultants all played enabling roles
that allowed Enron's fraudulent activities to persist unchecked for years under Lay and
Skilling's leadership.
Enron, once a celebrated company for its revolutionary business model, came crashing down
in a spectacular display of greed and corruption. While initially praised by consultants and
management gurus, Enron's shiny exterior masked a web of deceit.
The core issue? Enron's new business venture demanded massive credit lines but caused wild
swings in earnings. To appease credit rating agencies and keep the money flowing, Enron
resorted to manipulating its financial statements, painting a rosy picture that wasn't grounded
in reality.
But the manipulation didn't stop there. When they couldn't find legitimate partners to invest in
their risky ventures, Enron simply invented them. These "unconsolidated affiliates" were
essentially fake companies designed to hide Enron's debt and risky investments.
Enron's downfall wasn't just about a few bad apples. The company's board of directors, despite
boasting impressive credentials, failed miserably in their oversight duties. They trusted
management and advisors blindly, leaving the company vulnerable to financial shenanigans.
The Enron scandal wasn't just an isolated incident; it shattered public trust in the entire financial
system. It exposed the vulnerability of corporations to internal corruption and the potential
conflicts of interest with external advisors.
In response to this massive corporate failure, the Sarbanes-Oxley Act was enacted. This
legislation aimed to tighten corporate governance, crack down on accounting fraud, and restore
investor confidence.
While the Sarbanes-Oxley Act addressed some issues, it didn't cover everything. The role of
other gatekeepers like lawyers and analysts, as well as the short-term focus of some investors,
were left unaddressed.
The long-term impact of Enron remains a subject of debate. Some believe it's a turning point
for corporate governance, while others worry about overreaction and stifling future innovation.
Regardless of the perspective, Enron serves as a stark reminder of the dangers of unchecked
greed and the importance of robust corporate oversight.
 WorldCom

WorldCom: A Tale of Telecom Boom and Bust

WorldCom, a once-mighty US telecommunications giant, rose to prominence during the

deregulation wave of the 1990s. They offered a wide range of services, from long-distance
calling to internet infrastructure.
Here's a closer look at their rise and fall:
Capitalizing on Deregulation:
 The breakup of AT&T's monopoly created opportunities for new players like WorldCom.
 Deregulation, intended to increase competition and lower costs, backfired. It became easier for
companies like WorldCom to exploit loopholes and avoid stringent regulations.
Riding the Bull Market:
 The dot-com boom fueled a bullish stock market. Telco companies, including WorldCom, saw
their paper profits soar.
 This bullish market fueled a spending spree. WorldCom used inflated stock prices to acquire
numerous companies, aiming for rapid expansion.
Cooking the Books:
 To maintain high stock prices and meet analyst expectations, WorldCom resorted to accounting
irregularities.
 They made false claims about internet traffic, exaggerating revenue to mislead investors and
government officials.
Acquisition Frenzy over Integration:
 WorldCom prioritized acquiring new companies over integrating existing ones.
 This resulted in a patchwork of unintegrated businesses and subsidiaries, creating a complex
system ripe for manipulation.
The Downfall:
 WorldCom's house of cards came crashing down when they attempted a massive merger with
Sprint in 1999. Regulators blocked the deal fearing a monopoly.
 The accounting irregularities were eventually exposed, leading to bankruptcy in 2002. It
became the largest corporate accounting fraud case in US history at that time.
Aftermath:
 WorldCom's executives faced legal repercussions. The company's assets were eventually
acquired by Verizon.
 This case highlighted the dangers of deregulation without proper oversight and the importance
of corporate accountability.

WorldCom's Demise: A Web of Fraudulent Reporting (2001-2002)

WorldCom's downfall wasn't sudden. Even before the massive earnings restatement in 2002,
cracks were starting to show.
Fraud Beyond Numbers:
 Sales Misconduct: From 2001, reports surfaced of commission fraud, subscription fraud, and
contract fraud. Sales reps inflated their commissions, accounts were set up with stolen
identities, and business customers were overcharged.
 Customer Complaints: WorldCom had a reputation for terrible customer service, with twice
the complaints of other telecom companies.
 Refund Obstruction: By 2002, billions of dollars in billing credits owed to customers were
being held up by company policies designed to make refunds difficult.
The Accounting Charade:
 Cooking the Books: In 2001, WorldCom began a scheme to exaggerate earnings by $3 billion.
They achieved this by:
o Capitalizing Expenses: The CFO improperly classified operating expenses (like phone line
fees) as assets, hiding them from the expense report.
o Fake Revenue: WorldCom also inflated revenue with bogus entries in their accounting system.
 Misstated Profits: While they reported a $10 billion profit in their final year, internal records
showed a $1 billion loss. This discrepancy also resulted in them receiving tax overpayments.
 Restatement Avalanche: The initial $3.8 billion restatement in 2002 was followed by another
$9 billion later that year, revealing a wider web of accounting errors, false reporting, and hidden
costs.
The Dot-Com Bubble Burst:
 Industry-Wide Decline: The collapse of the dot-com bubble severely impacted the entire
telecom industry. Excess capacity and low demand led to massive losses across the sector.
 WorldCom's Fall: As the most extravagant spender, WorldCom filed for bankruptcy. Their
stock price plummeted, and they were delisted from the NASDAQ.
 Investor Confidence Shattered: WorldCom's fraud eroded investor trust in the accuracy of
financial reporting, further damaging the telecom industry and the broader economy.
The Human Cost:
 Job Losses: The industry-wide downturn led to massive job losses across the telecom sector.
 Investor Losses: Domestic and international investors lost billions of dollars invested in
telecom companies like WorldCom.
WorldCom's fraudulent reporting stands as a stark reminder of the dangers of corporate greed
and the importance of strong financial oversight. Their actions not only brought down their
own company but also had a ripple effect throughout the economy.
The Cast Leading to WorldCom's Downfall: A Deeper Look

WorldCom's Internal Circle of Greed:

 Bernie Ebbers, the Relentless CEO: Ebbers was fixated on driving WorldCom's stock price
to $100 per share. He pressured his team to meet unrealistic financial targets, regardless of the
company's actual performance. This relentless pursuit of a high stock price fueled the
environment that allowed fraudulent accounting to flourish. Furthermore, Ebbers owed
WorldCom a massive personal loan exceeding $400 million. When the company started to
falter, his inability to repay this loan further pressured him to maintain the illusion of financial
health.
 Scott Sullivan, the Architect of Fraud: As WorldCom's CFO, Sullivan was the mastermind
behind the accounting scheme. In January 2001, he initiated the fraudulent practice of
capitalizing operating expenses (like phone line fees) as assets. This essentially hid these costs
from the expense report, making WorldCom appear more profitable than it truly was. Sullivan
kept this scheme going for over a year, manipulating financial entries to meet analyst
expectations and keep the stock price from collapsing.
 David Myers, the Enforcer: WorldCom's controller, Myers, played a crucial role in executing
Sullivan's fraudulent strategy. He directly implemented the instructions to manipulate financial
records by reducing reported line costs and inflating reported earnings. While Myers later
claimed he saw no justification for these actions, his compliance was essential in perpetuating
the accounting fraud. 1
 Stiles Kellett, the Self-Serving Chairman: Kellett, who headed the company's compensation
committee, displayed a blatant disregard for ethical conduct. He approved the hefty loan and
generous retirement package for Ebbers, despite the company's worsening financial situation.
Additionally, Kellett secured a highly preferential lease on the company jet for personal use,
highlighting his focus on personal gain over responsible leadership.
 John Sidgmore, the Short-Lived Successor: While not directly involved in the accounting
fraud, Sidgmore's actions as the short-lived CEO raised concerns. He entered into questionable
 contracts with investment banks, raising suspicions about his commitment to ethical business
practices. These contracts, made without board approval, involved hefty fees paid to investment
bankers, casting a shadow on Sidgmore's judgment.
The External Enablers:
 Salomon Smith Barney, the Investment Bank with a Conflict: Salomon Smith Barney
(SSB), a major investment bank, had a close and potentially problematic relationship with
WorldCom. One issue was their analyst, Jack Grubman, who issued overly optimistic
recommendations on WorldCom stock. Additionally, SSB was accused of providing unsuitable
investment advice to WorldCom employees, pushing them towards company stock that
ultimately lost significant value. This behavior raises questions about whether their
recommendations were truly in the best interests of investors or simply aimed at generating
fees for the bank.
 Jack Grubman, the Analyst with Questionable Judgment: Grubman, once considered a
telecom expert, had an inappropriately close relationship with Ebbers. This close association
raises concerns about the objectivity of his stock recommendations. Despite mounting evidence
of WorldCom's financial troubles, Grubman continued to tout the company's stock, potentially
misleading investors. His reluctance to issue "sell" recommendations, even as the company
spiraled downward, further highlights his questionable judgment.
 Arthur Andersen, the Auditor Who Missed the Red Flags: WorldCom's auditor, Arthur
Andersen, the same firm implicated in the Enron scandal, failed to detect the fraudulent
accounting practices. Despite internal reports expressing concerns about "maximum risk" and
"overly aggressive revenue targets," Andersen issued clean bills of health for WorldCom's
financial statements. This failure to identify the massive accounting scheme raises serious
questions about the competence and integrity of the auditing firm.
 The FCC, the Regulator Caught Off Guard: The Federal Communications Commission
(FCC), tasked with regulating the telecom industry, missed the accounting fraud entirely. Their
reliance on self-reported data from companies made them vulnerable to manipulation. This
incident highlights the potential for regulatory capture, where a regulatory agency becomes too
close to the industries it oversees, hindering its ability to effectively enforce regulations.
WorldCom's Whistleblower Trio: Shining a Light on Corporate Greed

The WorldCom scandal wasn't just about cooked books and a plummeting stock price. It was
a story of courageous individuals who dared to challenge a culture of corruption. Here's a closer
look at the whistleblowers who brought down a giant:
 Cynthia Cooper: The Persistent Investigator
Cynthia Cooper, WorldCom's VP of internal audit, wasn't one to shy away from a hunch. When
red flags started popping up in the company's financial records in 2002, she refused to back
down. Despite pressure from management and initial skepticism from auditors, Cooper
persisted. Leading her team on late-night secret investigations, they meticulously retraced the
steps, uncovering a web of manipulated accounts. This relentless pursuit of the truth, fueled by
a strong sense of responsibility, proved pivotal in exposing the fraud.
Troy Normand: The Mid-Level Watchdog
Not all heroes wear capes. In Troy Normand's case, it was a keen eye for detail. Working in
WorldCom's wireless division, Normand noticed questionable accounting practices and
became the first to raise concerns with Cooper. Despite initial intimidation from superiors and
the fear of losing his job, Normand's courage in speaking up set the wheels in motion for a
wider investigation.
Steven Brabbs: The Reluctant Accomplice
Steven Brabbs, director of international finance, found himself in a moral quagmire. Instructed
to manipulate financial records, Brabbs refused to be a pawn in the company's game. He not
only questioned the directive but also took a critical step – creating a separate record
documenting his objections and linking them to CFO Scott Sullivan. While Brabbs' actions
initially went unnoticed, his meticulous record-keeping became crucial evidence later on.
A Collective Effort that Brought Down a Goliath
Individually, each whistleblower faced immense pressure and personal risk. However, their
combined efforts exposed the depth of the accounting fraud at WorldCom. Their stories
highlight the importance of speaking up against wrongdoing, even in the face of adversity. The
courage of these individuals not only exposed a massive scandal but also led to reforms in
corporate governance and accounting practices.
Fallout from the WorldCom Scandal: A Ripple Effect

The collapse of WorldCom wasn't just an accounting nightmare. It triggered a chain reaction
that impacted various stakeholders:
Government Scrutiny and Ethical Concerns:
 The US government reacted swiftly, questioning the decline in ethical conduct during the
1990s. Executives were accused of prioritizing personal wealth by manipulating finances,
jeopardizing the trust in American markets.
 WorldCom's reliance on government contracts added another layer of complexity. The
government, needing their services, continued awarding contracts even after the scandal,
highlighting the company's crucial role in communication infrastructure.
Shareholder Losses and Lawsuits:
 State pension funds, major shareholders, suffered significant losses. The California Public
Employees' Retirement Fund lost hundreds of millions, prompting lawsuits against WorldCom.
Industry Rivalry and Market Turmoil:
 Competitors like AT&T and Sprint saw WorldCom's downfall as a correction, believing their
aggressive accounting practices had distorted competition in the industry.
 The financial community, reeling from the dot-com bubble burst, blamed WorldCom for
further market declines in the telecom sector. The fraud eroded investor confidence and wiped
out billions in shareholder wealth across telecom companies.
Employee Layoffs and Lost Benefits:
 WorldCom responded to the scandal with drastic cost-cutting measures. Over 22,000
employees lost their jobs, with many losing vital benefits like healthcare and pensions.
A Catalyst for Change:
 The WorldCom debacle exposed the vulnerabilities of the financial system. It served as a wake-
up call, leading to stricter regulations and the Sarbanes-Oxley Act, aimed at strengthening
corporate governance and accounting practices.
WorldCom: A Catalyst for Corporate Governance Reform

The WorldCom scandal exposed glaring weaknesses in corporate governance. Recognizing

this, regulators took a strong stance to restore trust in the market:
 Swift Action by the SEC: The Securities and Exchange Commission (SEC) moved quickly,
filing charges against WorldCom immediately upon the discovery of accounting problems.
This signaled a shift towards a more proactive regulatory approach.
 The Corporate Monitor: The SEC also implemented a novel solution – a court-appointed
corporate monitor. This independent oversight ensured WorldCom remained accountable and
prevented further misconduct.
 Financial Penalty and Affirmative Relief: The SEC imposed a hefty fine, the largest of its
kind at the time. However, they also went beyond punishment, by requiring extensive corporate
governance reforms.
The WorldCom Settlement: A Blueprint for Change:
 The settlement between WorldCom and the SEC mandated a multi-pronged approach to
improve governance:
 Company-wide Training: WorldCom was required to implement comprehensive training
programs in accounting, financial disclosure, and business ethics. These measures aimed to
instill a culture of integrity within the organization.
 Internal Controls Review: A thorough assessment of WorldCom's internal controls was
mandated. This review aimed to identify and address any loopholes that enabled the fraud to
occur.
 Corporate Governance Overhaul: The most significant reform involved a comprehensive
review of WorldCom's entire corporate governance structure. This included:
o Benchmarking against Best Practices: An evaluation of WorldCom's governance practices
against established best practices in the field. This ensured they were adopting the strongest
available governance models.
o Board and Committee Structure and Power: A review of the powers, structure, and
composition of the Board of Directors and its committees (Audit, Compensation, etc.). This
aimed to ensure these bodies were empowered to effectively oversee management and prevent
conflicts of interest.
o Code of Ethics and Compliance: An evaluation of WorldCom's code of ethics and business
conduct, along with its compliance mechanisms. This ensured the company had a clear
framework for ethical behavior and a system to enforce it.
o Safeguards against Violations: The review focused on implementing measures to prevent
future violations of securities laws.
WorldCom's scandal served as a stark reminder of the importance of strong corporate
governance. The reforms implemented in its aftermath became a blueprint for future
regulations and helped rebuild trust in the financial system.
Royal Ahold

The key points regarding Ahold's accounting fraud scandal are:

1. Ahold's strategic mistake was diversifying into the low-margin food service business by
acquiring second-tier retailers in slow-growth markets.

2. Executives at Ahold's US Foodservice subsidiary manipulated vendor payments known as

"promotional allowances" to artificially inflate revenues and operating income.

3. Promotional allowances are rebates paid by vendors to retailers for committing to purchase
a certain volume of goods. These rebates should be accounted for as a reduction in the cost of
goods sold, not as revenue.

4. US Foodservice executives recorded fictitious promotional allowances, overstated the actual

rebate amounts, and booked them in the wrong time periods before required sales targets were
met.

5. This accounting fraud resulted in an overstatement of Ahold's operating income by $880

million between 2000 and 2002.

6. US Foodservice executives persuaded some suppliers to confirm the overstated rebates to

Ahold's auditors, Deloitte.

7. Two major suppliers, Sara Lee and ConAgra, acknowledged that their employees assisted in
the fraud.

8. The US authorities suspected that US Foodservice used its market dominance to force
suppliers to participate in the fraudulent scheme.

In summary, Ahold's accounting fraud centered around the improper recognition of vendor
rebates as revenue instead of a reduction in cost of goods sold, enabled by collusion with
suppliers and deception of auditors.

The summary of Ahold's accounting fraud related to improperly consolidating joint ventures is
as follows:

1. Ahold fully consolidated the financial results of several joint ventures in its financial
statements despite owning only 50% or less of the voting shares and lacking management
control as per shareholders' agreements.
2. To justify the full consolidation, Ahold provided its auditors, Deloitte, with signed "control
letters" from its joint venture partners stating that Ahold controlled the joint ventures' decisions.

3. However, soon after signing these control letters, Ahold and its partners executed separate
undisclosed "side letters" retracting the control agreement.

4. This deceptive practice of using contradictory letters was orchestrated by Ahold executives
Michael Meurs and Michiel Meurs, without the auditors' knowledge.

5. As a result of improperly consolidating joint ventures, Ahold overstated its revenues by

€27.6 billion and operating income by €222 million from 1999 to 2001.

6. In 2003, Ahold announced an investigation into the fraud and uncovered further potentially
illegal transactions in Argentina.

7. The Dutch public prosecutor fined Ahold €8 million in 2003 for this fraudulent practice of
providing misleading control letters to auditors.

In essence, Ahold deliberately misled its auditors through fabricated control letters to
improperly consolidate joint ventures and materially overstate its financial performance.

Here are the key points regarding the aftermath of the Ahold accounting scandal:

Share Price Collapse:

- When Ahold announced "significant accounting irregularities" in February 2003, its share
price plunged 60%.

- Ahold's credit rating was cut to junk status.

- The company had to rely on an emergency credit facility to pay bills.

Restating Accounts:

- In October 2003, Ahold restated accounts back to 1998, erasing nearly €1 billion from profits.

- 2003 was called a "lost year" and 2004 the "year of transition".

- In 2004, Ahold recorded a net loss of €443 million.

Legal Charges:

- American regulators investigated Ahold for fraud.

- Three lawsuits were filed on behalf of shareholders.

- Dutch prosecutors demanded jail sentences up to 20 months for former top managers.

- The prosecutor stated the scandal seriously damaged trust in Dutch business.

Convictions:

- In May 2006, former CEO Cees van der Hoeven and former CFO Michiel Meurs were
convicted of fraud.

- However, they received only fines of €225,000 each and 9-month suspended sentences, seen
as lenient punishments.

- Dutch shareholders criticized the light sentences compared to potential harsher U.S. penalties.

The scandal severely impacted Ahold's financials, share price, credit rating and reputation,
though critics felt the penalties for those responsible were too lenient.
Parmalat

Here are the key points about ownership and governance structures in Italian companies,
particularly relating to the Parmalat case, based on the provided information:

- Italian companies tend to have concentrated ownership with little separation between
ownership and control. Control is often achieved through pyramidal groups headed by families
or coalitions.

- This ownership structure was prevalent in Italy, with over 50% of industrial companies
belonging to family-controlled pyramidal groups. It was recognized and favored by regulators.

- Parmalat exemplified this structure - it was controlled by the Tanzi family through a
pyramidal holding company setup. The Tanzi family was the ultimate majority shareholder.

- Italian corporate governance is relationship-based, with weak capital markets and limited role
for institutional investors. Companies are often centered around a charismatic founder/family
like the Tanzis in Parmalat.

- Corporate boards lack independence, with insiders/family members dominating. There is little
oversight from boards or auditors who lack independence from controlling shareholders.

- While codes tried to improve governance, issues persisted like combining CEO/Chair roles,
lack of board committees, complex cross-shareholdings obscuring control structures.

- The key concern in the Italian system is potential abuse of power by blockholders/families
rather than by management, contrasting the Anglo-American model's focus.

In essence, Parmalat's corporate governance failures stemmed from the pervasive

family/blockholding ownership model and lack of independent oversight mechanisms in Italian
companies at the time.

Here's a summary of the key points about Parmalat's financial engineering and fraud:

- In 1987, Parmalat spent heavily on acquiring Odeon TV but it failed, leading to a "reverse
merger" to go public in 1990 and raise funds to cover losses.
- From 1990-2003, Parmalat borrowed heavily from banks by inflating revenues through
fictitious sales.

- By 1995, facing huge losses in Latin America, Parmalat started moving debt off its books
through a network of over 260 offshore shell companies in tax havens like the Caribbean.

- These shells pretended to sell Parmalat products, allowing Parmalat to book fake revenues
and raise more debt against them.

- Parmalat's lawyer helped establish this network of embezzlement involving Luxembourg

entities like Olex, Satalux and funds in Cayman Islands used to circulate/conceal cash and debt.

- Parmalat invented $16.2 billion in fake assets to secure bonds and engaged in complex
derivative deals with banks like Citigroup to disguise borrowing costs.

- Double-billing customers and inventing a fictitious Singapore subsidiary also helped inflate
revenues and receivables.

- By 2003, Parmalat had accumulated $6.9 billion in high-risk derivatives despite being deeply
insolvent, in an audacious 15-year fraud masterminded by executives like Tanzi and Tonna.

In essence, Parmalat used a sophisticated web of offshore entities, fake transactions and
derivative deals to perpetrate one of the biggest corporate frauds in history over 15 years.

Here is a summary of the key players and intermediaries involved in the Parmalat fraud:

The Key Players:

- Calisto Tanzi (Founder) and his family were at the center, with Tanzi accused of building
offshore companies to hide liabilities. His son, daughter, brother and niece were also involved.

- Succession of Chief Financial Officers (CFOs) - Fausto Tonna helped create vehicles to hide
losses, followed by short tenures of Alberto Ferraris and Luciano del Soldato as the fraud
unraveled.

The Intermediaries:
- Banks - Italian banks like Capitalia, Intensa, San Paolo IMI were major creditors. Bank of
America blew the whistle initially. Foreign banks like Citigroup, Merrill Lynch faced
investigations for bond sales.

- Brokerage Houses - Continued recommending buy on Parmalat shares even as the scandal
broke.

- Auditors - Deloitte and Grant Thornton failed to detect the fraud for years as auditors.

- Lawyers - Like Gianpaolo Zini, aided in setting up the offshore network.

- Regulators - Parmalat obstructed regulators, concealed statements, and destroyed documents

hampering investigations by Italian Consob and U.S. SEC.

The deep involvement of the Tanzi family, aided by complicit CFOs, banks, auditors and
lawyers in an extensive offshore corporate network allowed Parmalat's fraud to go undetected
for over 15 years despite regulatory oversight.

Here are the key points regarding corporate governance issues exposed by the Parmalat scandal
and its aftermath in Italy:

- The Parmalat case highlighted the "weak managers, strong blockholders and unprotected
minority shareholders" reality of Italian corporate governance, where the Tanzi family as the
blockholder abused its power for personal interests over minority shareholders.

- It exposed gaps and conflicts of interest in Italy's corporate governance system overreliant on
ruling families running companies with little outside monitoring.

- However, the swift arrests of Parmalat executives by Italian authorities somewhat stemmed
investor dissatisfaction compared to cases like Enron/WorldCom.

- The response of regulators like CONSOB and Bank of Italy in monitoring Parmalat's activities
was criticized as being too slow and lacking coordination.

- This spurred calls for wide-ranging reforms to strengthen financial regulation, insulate the
watchdog from political interference, and enhance transparency in family-controlled listed
companies.

- There were unsuccessful attempts to reduce the influence of major banks as shareholders over
the Bank of Italy which was supposed to regulate them.
- The Milan bourse introduced new rules requiring family-owned listed firms to appoint
independent lead directors after Parmalat exposed weaknesses.

- With billions missing from Parmalat, there were systemic fears about impacts on Italy's
financial system, corporate bond market and investor confidence that required government
intervention.

In essence, Parmalat laid bare the corporate governance vulnerabilities arising from
concentrated family ownership, lack of independent oversight and ineffective regulation in
Italy at that time.
Nomura

Here is a summary of the key points regarding the two major scandals that rocked Nomura
Securities in Japan during the 1990s:

The 1991 Scandal:

- It was revealed that Nomura had been compensating favored institutional clients for losses
incurred during the asset price crash.

- Nomura also engaged in excessive trading ("ramping") of shares it was underwriting and
money laundering for yakuza (Japanese mafia) members.

- The scandal exposed systemic issues in Japan's banking system and lack of transparency,
leading to criticism from foreign investors.

- Nomura's top two executives resigned, but were later reinstated in 1995, exemplifying
Japanese cultural emphasis on seniority and reluctance for dramatic change.

The 1997 Scandal:

- Nomura paid $400,000 to a corporate racketeer (sokaiya) to avoid disruptions at its 1995
shareholder meeting.

- This payment came to light when it was revealed two Nomura executives funded the sokaiya's
brother's real estate firm using unauthorized trading profits.

- 16 Nomura directors, including former top executives, resigned when the scandal broke.

- The sokaiya admitted receiving $50 million in illegal profits from Nomura over the years.

- Unlike 1991, Nomura faced a prolonged customer boycott this time, with major losses in
profits as pension funds and corporations took business elsewhere.

The scandals exposed deep-rooted issues like lack of governance, transparency and illegal ties
with racketeers that had permeated Japan's financial system during its economic boom years.
Nomura's sluggish response also highlighted corporate Japan's resistance to reform.
Here are the key points regarding corporate governance reforms and challenges in Japan,
particularly related to the influence of sokaiya (corporate racketeers), after the Nomura
scandals:

- There was reluctance in Japan to fully adopt Anglo-American corporate governance practices,
as the Japanese system emphasizes powerful stakeholders rather than just shareholders.

- However, there were calls for reforms to improve transparency, accountability and disclosure
to stakeholders after the scandals exposed governance flaws.

- A major challenge was dismantling the systemic influence of sokaiya, who had entrenched
themselves in networks binding corporations through longstanding shareholdings and
relationships.

- The Nomura scandal brought unprecedented scrutiny on the shady ties between corporations
and sokaiya, pressuring companies to conduct shareholder meetings without sokaiya
interference.

- The Japanese Supreme Court made a ruling aimed at diminishing sokaiya influence at
shareholder meetings by restricting preferential seating arrangements typically afforded to
them.

- There were growing calls for Japanese firms to sever ties with sokaiya and build a governance
system truly oriented towards shareholder interests to regain foreign investor trust.

- However, widespread corporate governance reform in Japan faced cultural resistance and
doubts over adopting any single "optimal" model imposed through legislation.

In essence, while the scandals catalyzed momentum for governance reforms to enhance
transparency and accountability to stakeholders, dislodging the deep-rooted sokaiya influence
presented a unique hurdle for Japan.

The key points regarding the Nomura scandals, their links to the sokaiya (corporate racketeers)
issue in Japan, and the broader implications are:

The First Nomura Scandal (1991):

- Exposed widespread compensation paid by brokerages like Nomura to favored institutional
clients for losses, shocking regulators.

- Prompted the establishment of the Securities and Exchange Surveillance Commission (SESC)
to better regulate the industry.

- Served as a catalyst for policies to liberalize and open up Japan's financial markets to foreign
players.

The Second Nomura Scandal (1997):

- Revealed illegal payments by Nomura executives to sokaiya racketeers to avoid disruptions

at shareholder meetings.

- Drew harsh penalties from regulators - trading ban, criminal charges against Nomura officials.

- Seen as an embarrassment that damaged trust in Japan's financial industry globally.

- Provided further impetus for financial deregulation in Japan in the late 1990s.

The Sokaiya Issue:

- Sokaiya were corporate racketeers with deep historical ties to Japan's corporate world,
including Nomura.

- They would extort companies by threatening to disrupt shareholder meetings unless paid
"protection money".

- Most major Japanese firms felt compelled to pay off the sokaiya regularly to avoid scandals.

- The ties between corporations and sokaiya symbolized lack of transparency and
accountability in Japanese governance.

Overall, the Nomura scandals exposed the unholy ties between corporations, regulators and
racketeers that permeated Japan's relationship-based corporate system, catalyzing pressures for
reform towards Western-style governance focused on transparency.

Here are the key points regarding the aftermath and reforms at Nomura following the scandals:

- In 1998, Nomura's profits shrank dramatically to $320 million as a direct result of customer
boycotts sparked by the scandals, damaging its global reputation.
- The appointment of Junichi Ujiie, who spent most of his career outside Japan in Nomura's
U.S. operations, as the new president was seen as a step towards reform and breaking ties with
the insular corporate culture.

- Ujiie took several major steps:

1) Severed longstanding ties with sokaiya racketeers by cancelling journal subscriptions

owned by them.

2) Dismissed 11 of 34 board members linked to the previous tainted leadership.

3) Appointed outside independent directors, including a corporate governance expert,

facilitated by regulatory changes.

4) Moved towards performance-based compensation away from seniority-based systems.

- By 2004, Nomura's revenues rebounded to $10 billion and its share price recovered
somewhat, suggesting the reforms were largely successful in transforming its corporate culture.

- However, fears of retaliation from former sokaiya ties persisted, necessitating 24-hour
bodyguards for Ujiie initially.

- Ujiie oversaw one of Japan's most publicized corporate reorganizations, transitioning

Nomura's insular, homogenous board to a more diverse and independent governance structure
compared to peers.

In essence, the scandals paved the way for an outsider leadership to implement unprecedented
reforms at Nomura to overhaul its corporate governance, compensation and culture towards
Western standards of transparency and meritocracy.