Buy at your own risk

Published: Monday, January 27, 2003 at 6:01 a.m.
Last Modified: Monday, January 27, 2003 at 2:09 a.m.

The interests of ordinary investors and stock-market "insiders" often clash.

For example, stock-owning corporate executives have incentive to artificially inflate stock prices because higher prices increase their personal net worth.

Similarly, brokerage firms that want to dump dogish stocks have incentive to advise investors to buy them.

Enron's fall in 2001 should not have shocked anyone. In the 1980s and 1990s, corporate-fraud cost the taxpayers and investors billions. Now, WorldCom is setting new records.

In 2002, WorldCom was investigated for the largest corporate fraud scheme in U.S. history. In July, WorldCom restated its artificially inflated earnings by $3.8 billion and filed the biggest ever corporate bankruptcy.

In November, WorldCom announced another restatement, for a combined total of $9 billion. Shares once valued at $60 had become worth a few cents.

Roughly 17,000 WorldCom employees were laid off by July. Investors and employees watched their children's college funds shrivel by a collective $140 billion, yet one WorldCom executives reportedly parachuted out with $77 million in cash and benefits.

Forbes magazine dubbed the WorldCom scandal as "The Harmonic Convergence of Sleaze," and it has other facets.

For example, brokerage firm Salomon Smith Barney is reportedly being investigated for mishandling WorldCom employees' accounts (i.e., giving bad advice). WorldCom execs reportedly had ties to Salomon and had recommended the firm to employees.

Corporate fraud is neither new nor unique. Still, newspapers continue to quietly reveal corporate scandals in their back pages, and politicians continue to act surprised. The federal government must rethink its approach.

Consider government's responses to the WorldCom scandal:

  • In June, the Securities and Exchange Commission (SEC) filed charges against WorldCom.

  • In June, President Bush said that he would "hold all people accountable" for misleading shareholders. He said that "those entrusted with shareholders' money must strive for the highest of standards."

  • In November, the SEC expanded its charges, alleging that WorldCom had "misled investors starting as early as 1999." The SEC and WorldCom entered settlement talks. No surprise; quiet settlements are common, which may be why the public is unaware of how common corporate fraud has been over the last 20 years.

    Incidentally, WorldCom is a huge government trough feeder, with federal contracts accounting for 8 percent of its revenue in 2001 ($1.7 billion).

    WorldCom is also a huge political campaign donor, giving $2.5 million from 1999-2002, according to the Center for Responsive Politics.

    How can government fight corporate fraud with one hand, while the other hand gives money or friendlier regulations?

    Make no mistake; ultimately, the taxpayers, consumers and ordinary investors suffer the consequences of such half-hearted efforts.

    In his book "Take on the Street," former SEC Chairman and small-investor advocate Arthur Levitt said that most investors are "solidly middle-class," with 49 percent of U.S. households owning stock in 1998.

    Despite their considerable numbers, Levitt said that ordinary investors are "the most under-supported and under-represented constituency in this country."

    One way to get better representation is to communicate with your representatives in Congress (e-mail addresses are at and If they hear from enough citizens, they might begin better prioritizing citizens' interests.

    Until officials truly reform securities regulation, investors may be better off not playing the stock-racket.

    For citizens who insist on playing: Learn more about the game. Course work and books such as Levitt's are also a good start. Until the game is straightened out, ordinary investors are on their own. Buyer beware!

    Deborah Cupples is a free-lance writer living in Gainesville.

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