Tweet
Ex-Computer Associates CEO Draws 12-Year Sentence
November 2, 2006 (Kit R. Roane - U.S. News)
Sanjay Kumar, the once highflying former CEO of Computer Associates International, was sentenced to 12 years in prison today and ordered to pay $8 million in fines and restitution for his part in a massive accounting fraud that came to exemplify the lack of oversight and excess of the Internet-bubble era.
In sentencing Kumar, U.S. District Judge I. Leo Glasser said that Kumar had "been the embodiment of the American dream" but that his downfall had been of his own making. Speaking of the fraud and Kumar's later obstruction of justice, Glasser said that his "cupidity" called for a meaningful sentence and that he must send a message that "the law's reach is long."
...the lead federal prosecutor on the case, Eric Komitee, responded that while Kumar had done many other good things in his life, it did not take away from the fact that he was responsible for what was "the most brazen, comprehensive obstruction of justice in the modern era of corporate crime." Komitee added that Kumar had repeatedly lied to the government, had directed employees to lie to the government, and had had a witness bribed. He called Kumar's obstruction "elaborate and detailed."
AntiSpin: US markets don't need new laws. What is needed is enforcement of existing laws. While Sarbanes-Oxley has been a boon to auditors, information technology risk assessors, accountants, compliance analysts, and so on (see the 17 pages of job listings at the Sarbanes-Oxley web site), the new rules have increased the minimum regulatory overheard of running a small public company to more than $1 million while doing nothing to reduce the number of large public company options pricing and other scandals that are eroding public faith in US equity markets. To restore vitality to small business in the US, we need more and longer prison terms for law breakers and to repeal Sarbanes-Oxley.
Meanwhile, back in the land of the USIP–iTulip's term to replace the inaccurate term "hedge fund" to refer to unregulated speculative investment pools–rules continue to be stretched (broken?) while the SEC dithers, according to ex-SEC chairman Harvey Pitt.
The longer the SEC takes to step in an fix the risk of market dysfunction if an event occurs to cause a short squeeze among "naked short sellers," the greater the chances we will, as ex-SEC chairman Harvey Pitts says– paraphrasing Will Rogers–"have to be content to live with even more government than they're already paying for." Imagine a time in the future, after the USIPs that are making naked short sales bets blow up, where we have Sarbanes-Oxley style regulation for all manner of private capital markets, including venture capital and so-called "private equity." Guess we didn't learn our lesson from the dot com bubble: more Kumars in prison, less new regulation.
Beyond the market risks of future over-regulation that we are likely to see after naked short selling sets off some future market havoc, there is the even greater risk that we refer to as Risk Pollution. Today's USIPs are the modern equivelant of 1920s investment trusts–exclusive to the very wealthy, non-transparent, highly leveraged, and borrowing heavily from commercial banks. The banking system is financing the USIP bets, providing loans the banks believe to be safe, giving the USIPs the leverage they need to make their bets. As John Plender wrote recently in "The credit business is more perilous than ever" for The Financial Times:
November 2, 2006 (Kit R. Roane - U.S. News)
Sanjay Kumar, the once highflying former CEO of Computer Associates International, was sentenced to 12 years in prison today and ordered to pay $8 million in fines and restitution for his part in a massive accounting fraud that came to exemplify the lack of oversight and excess of the Internet-bubble era.
In sentencing Kumar, U.S. District Judge I. Leo Glasser said that Kumar had "been the embodiment of the American dream" but that his downfall had been of his own making. Speaking of the fraud and Kumar's later obstruction of justice, Glasser said that his "cupidity" called for a meaningful sentence and that he must send a message that "the law's reach is long."
...the lead federal prosecutor on the case, Eric Komitee, responded that while Kumar had done many other good things in his life, it did not take away from the fact that he was responsible for what was "the most brazen, comprehensive obstruction of justice in the modern era of corporate crime." Komitee added that Kumar had repeatedly lied to the government, had directed employees to lie to the government, and had had a witness bribed. He called Kumar's obstruction "elaborate and detailed."
AntiSpin: US markets don't need new laws. What is needed is enforcement of existing laws. While Sarbanes-Oxley has been a boon to auditors, information technology risk assessors, accountants, compliance analysts, and so on (see the 17 pages of job listings at the Sarbanes-Oxley web site), the new rules have increased the minimum regulatory overheard of running a small public company to more than $1 million while doing nothing to reduce the number of large public company options pricing and other scandals that are eroding public faith in US equity markets. To restore vitality to small business in the US, we need more and longer prison terms for law breakers and to repeal Sarbanes-Oxley.
Meanwhile, back in the land of the USIP–iTulip's term to replace the inaccurate term "hedge fund" to refer to unregulated speculative investment pools–rules continue to be stretched (broken?) while the SEC dithers, according to ex-SEC chairman Harvey Pitt.
The longer the SEC takes to step in an fix the risk of market dysfunction if an event occurs to cause a short squeeze among "naked short sellers," the greater the chances we will, as ex-SEC chairman Harvey Pitts says– paraphrasing Will Rogers–"have to be content to live with even more government than they're already paying for." Imagine a time in the future, after the USIPs that are making naked short sales bets blow up, where we have Sarbanes-Oxley style regulation for all manner of private capital markets, including venture capital and so-called "private equity." Guess we didn't learn our lesson from the dot com bubble: more Kumars in prison, less new regulation.
Beyond the market risks of future over-regulation that we are likely to see after naked short selling sets off some future market havoc, there is the even greater risk that we refer to as Risk Pollution. Today's USIPs are the modern equivelant of 1920s investment trusts–exclusive to the very wealthy, non-transparent, highly leveraged, and borrowing heavily from commercial banks. The banking system is financing the USIP bets, providing loans the banks believe to be safe, giving the USIPs the leverage they need to make their bets. As John Plender wrote recently in "The credit business is more perilous than ever" for The Financial Times:
The mechanics of moral hazard in the exponentially growing newer financial markets entail the destruction of the old relationship between banker and borrower. This is because banks no longer retain the credit risk in much of their lending. They originate and distribute; and where the intention is to distribute, the lender is inevitably less bothered about loan quality.
Readers may recall how well this all turned out last time. The U.S. Securities and Exchange Commission (SEC) was created by section 4 of the Securities Exchange Act of 1934 in response to the havoc created by the collapse of investment trusts, that took the banking industry down with them, to prevent a recurrence. We've seen this movie before:"We have seen security prices soar out of sight of earnings, brokers' loans swell till they absorb a third of the banking resources of the country, and the blind pools of ancient days return and multiply by endless crossing and pyramiding as the investment trusts of today. Banks merge and emerge in chains, trailing trusts and holding companies, while industrial corporations pay dividends not by producing goods but by buying each others' stocks and by borrowing and lending everybody's money in the market. But of all these things can anyone say with surety what they signify, whether they are safe and sound, or what they are leading to? We do not even know, or cannot agree, whether inflation exists, what it means, or how it shall be measured."
Business Week - September 7, 1929
And we have all been warned repeatedly, such as in "Somebody Turn on the Lights" by Martin Mayer, 1999:Business Week - September 7, 1929
Derivatives markets guarantee a winner for every loser, but they will over time concentrate the losses in vulnerable sectors. Nature obeys Mayer's Third Law, which holds that risk-shifting instruments will tend to shift risks onto those less able to bear them, because them as got want to keep and hedge while them as ain't got want to get and speculate. The logic behind margin requirements in stock markets and capital requirements in banking also holds in the derivatives markets. Permitting highly leveraged institutions to hold private parties behind closed doors is the political version of selling volatility: the predictable likely gains will one day be overwhelmed by an equally predictable disastrous loss.
The 1995 to 2000 bubble wasn't the rhyme of the 1920s bubble; the 2001 to 2006 echo-bubble is closer to that period, in terms of risks posed to the financial system and economy. What we got last time when it ended was a nuclear meltdown of the financial and banking systems. Future heavy regulation may be the least of our problems.
Comment