The U.S. government is taking steps to restore confidence in financial markets following a series of scandals that has weakened investors' trust and harmed stock valuations around the world. This week, U.S. federal agents arrested five men accused of looting their now-bankrupt company of millions of dollars. The men will probably spend time in jail -- and lose the money the government says they stole. The U.S. Congress this week also put the final touches on legislation that would crack down on questionable accounting practices at some corporations.
Washington, 26 July 2002 (RFE/RL) -- The U.S. government is showing that it intends to take tough action against corporate officials who use accounting schemes and other illegal means to enrich themselves.
On 24 July, federal law-enforcement officials in New York arrested the founder of the nation's sixth-largest cable television company and two of his sons on fraud charges. John, Timothy, and Michael Rigas -- and two company officials who are not part of the Rigas family -- are accused of stealing hundreds of millions of dollars from their now-bankrupt company, Adelphia Communications.
If convicted of all charges, the defendants could be imprisoned for up to 30 years and fined millions of dollars. The federal government also is suing the men in hopes of reclaiming the money they are accused of stealing.
On the same day in Washington, members of the U.S. Congress reconciled the Senate's and House of Representatives' versions of legislation that would take action against corporate fraud and questionable accounting practices. Both houses are expected to pass the unified version of the bill, and President George W. Bush has said he will sign it.
The most prominent part of the measure would establish a private, independent board of experts to oversee the nation's accounting industry, which has been called into question recently because of irregularities that inflated the values of some corporations.
Accountants stand accused of manipulating the books of high-profile companies like Enron and WorldCom to deceive investors. Both companies have since filed for bankruptcy -- the two largest bankruptcies in U.S. corporate history.
The measure also would increase prison terms and fines for corporate executives found guilty of corporate fraud. And it would create an account to reimburse investors who lost investments due to fraud. This fund would gather proceeds from civil fines, reimbursements, and assets seized from those convicted of enriching themselves through wrongdoing.
The attempt to reclaim and return lost money is aimed at blunting popular perception that so-called "white-collar" criminals -- businessmen who enrich themselves through fraud -- are frequently permitted to keep the money they steal, even if they do spend time in prison.
The U.S. already has laws on the books that require corporate criminals to reimburse stolen money, but the perception is that these laws are not uniformly enforced and the funds, in any event, go to the government. The new legislation would establish a permanent fund for investors.
Investors appear to have taken notice. On 24 July, the main index that tracks stock prices of 30 large companies, the Dow Jones Industrial average, rose by more than 6 percent. It was the index's largest one-day gain in 15 years -- and followed a month of almost straight losses.
Margaret Blair, an economist at the Brookings Institution, a Washington think tank, says investors were at least, in part, encouraged by television images of Adelphia officials being led off in handcuffs, as well as news that Congress had agreed on clear legislation to crack down on corporate wrongdoing.
She says the dramatic stock market rise "might not have happened without a strong signal from Congress that they were going to take action and [that] the president was going to sign the bill that would force the accounting profession to become more independent."
To be sure, any effort to recover the money lost to fraud and bad investments can only hope to recoup a small fraction of the losses. Investors poured $60 billion into Adelphia before it declared bankruptcy. The losses to investors at Enron and WorldCom were even bigger.
Gerald O'Driscoll -- an economist at the Heritage Foundation, an independent policy research center in Washington -- told RFE/RL that investors would only ever recover a tiny part of their lost capital. "That's just a drop in the bucket of the problem," he said.
It's not clear if the 24 July market rally can be sustained, but Blair says she believes there is reason for optimism. She says the U.S. economy appears to be continuing its recovery.
She also points out that stock prices appear to be more realistic after soaring in the late 1990s -- an era she refers to as an insubstantial "bubble." Since reaching their highs in 2000, stock prices on average have fallen 30 to 60 percent. "With the [U.S.] economy still going strong, the fundamentals are there. And I think by yesterday, what had happened is that the [stock prices] had just gotten back into some sort of a reasonable historical position, and people began to say, 'This looks like a buying opportunity.'"
Blair says there is a limit to how low stock prices can go. The only question that remains, she says, is when they will reach the point at which they can only rise.