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Heard Off the Street: No winking at bad practices in tough times

Monday, June 24, 2002

By Len Boselovic, Post-Gazette Staff Writer

Once upon a time, there was a hard-working Greek of humble origin who went into business. With the help of his sons, the bootstraping entrepreneur's business prospered. Investors grew rich on the company's stock. The patriarch and his sons became pillars of the community, admired for their contributions to economic development and philanthropy. Their success affirmed the belief that hard work and perseverance make anything possible in America.

Then one day, investors discovered the Greek had lied to them.

Many readers are jumping to the conclusion that this is yet another tirade about what John J. Rigas and his three sons did to Adelphia Communications. The nation's sixth-largest cable television provider teeters on the verge of bankruptcy because of billions in off-balance sheet loans, over-inflated subscriber counts and Julia Childs accounting.

It's a logical conclusion, but it is not correct. The self-made Greek millionaire I have in mind is John G. Rangos Sr., founder of Chambers Development, formerly the nation's fourth-largest waste disposal company. In March 1992, the Penn Hills company astounded Wall Street by disclosing an accounting problem that would eventually wipe $362 million in profits off its books. Chambers shares tumbled from $33 to $2 as the scandal unfolded.

According to the Securities and Exchange Commission, Rangos had a fatally flawed grasp of generally accepted accounting principles. When it came to booking the millions of dollars they were spending to develop landfills, Rangos flew by the seat of his well-pressed pants, relying on Wall Street's earnings expectations and other irrelevant factors to determine how much of the expense would be included in the results for a given quarter. Earnings would appear to be much better than they actually were if Chambers delayed recording those expenses. That's what Rangos did.

I resurrect Rangos only because investors need to appreciate that what's happening at Adelphia, Enron, Arthur Andersen, Tyco International and ImClone Systems is neither unheard of nor unprecedented.

Before Rangos, there was Robert Buckley's Allegheny International, a conglomerate that collapsed into bankruptcy because of deceptive accounting, lavish executive salaries and perquisites, a passive board of directors and auditors who failed to curb corporate misdeeds.

What remained of AI when it emerged from bankruptcy eventually fell under the purview of "Chainsaw Al" Dunlap, Corporate America's pre-eminent downsizer. Dunlap was sacked in 1998 after an accounting scandal surfaced at Sunbeam, the successor to AI. Along with five other Sunbeam executives and Sunbeam's Arthur Andersen auditor, Dunlap is facing civil charges by the SEC for inflating the company's results.

Meet the new boss, same as the old boss. So it goes in Corporate America.

"I don't know if it's any more widespread than it was 20 years ago and we just didn't know about it 20 years ago," says Geoffrey Gerber, president of TWIN Capital Management of McMurray.

Many investors have known for years about the conflict of interest inherent in a Wall Street firm providing investment banking for a company and its analysts providing advice to investors on those companies. The same investors have read account after account of exorbitant executive compensation, of companies such as Adelphia and Chambers doing business with family-controlled entities.

When the stock market was producing more winners than losers, it was easy for investors to snicker at such indiscretions and for the misdeeds to be buried behind the good news. That doesn't make them any less serious. But in crime, as in investing, timing is everything. Once the market turns sour, the malefactions provoke a more visceral response from investors. In short, there will be hell to pay.

Which is where we find ourselves today.

On June 4, former Tyco Chairman Dennis Koslowski was indicted on charges he tried to evade $1 million in sales taxes.

On June 12, former ImClone chief executive Sam Waksal was arrested on insider trading charges, accused of tipping off family members, to the fact that the Food and Drug Administration was about to reject ImClone's cancer drug.

On June 15, a jury found Andersen guilty of obstructing justice by deleting and shredding files in order to hamper a federal probe of Enron, the accounting firm's client.

Some pundits speculated that last Monday's short-lived rally was based on investor confidence that regulators would restore trust in the market.

"You start hauling some of these people off to jail, that's the best thing that can happen to the system," says Chris Wiles, president of Rockhaven Asset Management, Downtown.

It's a start, but the process is going to take a lot longer than many people think, says Charlie Smith, chief investment officer for Fort Pitt Capital. Regulators spent much of the 1930s sorting through the recriminations of who was to blame for the 1929 crash, he points out.

As the wheels of justice slowly turn, keep in mind what the SEC said about Chambers: "The tone set by top management ... is the most important factor contributing to the integrity of the financial reporting process." That's as true today as it was seven years ago or 70 years ago.

There will always be executives such as Rigas and Koslowski who set the wrong tone. Rogues in the boardroom may seem as if they are in the majority.

But perhaps that's only because finding true north on our moral compasses is a lot easier than it was in the days of easy money.

Len Boselovic's e-mail address is lboselovic@post-gazette.com.

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