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Published: Tuesday, 8/3/2004

Crackdown can only slow corporate criminals

Did the guys in the white hats win? Are all the Wall Street crooks and the perpetrators of corporate scandals in jail, on the way to jail, or at least indicted?

Not a chance, some experts say. But at least the investing public got some satisfaction after a disastrous bear market that downsized American wealth by trillions of dollars.

"This stuff has gone on since the beginning of time," said Gary Zeune, founder of The Pros and The Cons, a speakers' bureau for white-collar criminals, based in Dublin, Ohio, a Columbus suburb.

"When the economy is good, there's a 'good-deal exemption.' When everybody is making money, nobody wants to look under a rock. So business executives and their lawyers push the envelope, and it seems OK at that point. But when business turns down, there's a cleanup."

The problem: The regulators and cops always lag the crooks, added Mr. Zeune, an accountant with a background in fraud detection. "We go through this [wave of scandal] every time a disruptive technology changes the rules of the game."

For example, the dot-com craze changed investors' attitudes in the 1990s, a change they regretted when the vast majority of the companies went bust, he pointed out.

But we got something good out of the stock-market disaster in recent years, Mr. Zeune reasoned. One is the Sarbanes-Oxley Act, which, among other things, forces chief executive and chief financial officers to certify the accuracy of their firms' books.

In his view, Sarbanes-Oxley has opened the eyes of many lenders, who now are demanding more accountability too.

Mr. Zeune said fines alone don't clean up corruption. "If money [penalties] would be enough, we wouldn't have had Enron," he contented. "But the reaction to Martha Stewart getting jail time is: 'Oh my God, the sky is falling.' She's going to lose hundreds of million of dollars of wealth because she couldn't pass up $44,000."

A few high-profile cases like that will go a long way to clean up the mess, he said. "Is it going to stop? The answer is a flat no. Have we made a dent in it? Yes."

Many others feel that serious jail time is the only real deterrent to investment fraud. Among them is Dave Patch,

an activist who is pressing the U.S. Securities and Exchange Commission to crack down on marketplace abuses such as "naked shorting."

"We are seeing a tremendous magnitude of fines, yet no actions against Wall Street executives," said Mr. Patch, a Boston businessman who started the Web site www.investigatethesec.com.

"These fines [totaling $1.5 billion] are mere pennies to these firms, without personal liability. [That's] why we will not see a change anytime soon."

Mr. Patch's latest campaign is a petition demanding action against naked shorting - the practice of selling short a stock that the seller doesn't own and can't "borrow" for delivery to a buyer.

There's nothing illegal, or wrong, about short-selling, which is offering to deliver shares of a stock at a lower price in the future.

That's a legitimate tactic used as a hedge, or to take advantage of an overpriced market.

(If share prices fall below the delivery price, the seller can buy on the open market, repay the borrowed stock, and make a profit.)

But Mr. Patch contends that naked shorting - sometimes involving more shares than are outstanding -drove many small companies out of business by causing precipitous plunges in their share prices.

The SEC last week rolled out a proposed new regulation involving naked shorting, but Mr. Patch said it's too little, too late.

Some of the worst offenders are hedge funds that are regulated only lightly, if at all, he said.

Mr. Patch said he lost hundreds of thousands of dollars in the bear market of the last several years, much of which he attributed to short sellers deliberately raiding small companies. "They can drive a $9 stock down to pennies, and maybe they'll only make $10 million on the deal, but they could take $90 million out of stock value, and that's $90 million gone from the American economy," he said.

He figures that only tough enforcement, including the threat of jail, will get rid of the predators.

"If you go past a speed trap every day at 85 miles an hour, and you're never stopped, there's no risk in breaking the law," he said.



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