Citicorp Mutual Fund Investors Paying the Price of Sanford Weill's "Meet Your Numbers" Mentality.

It's not just investors in individual stocks who are paying the price of CEO's like Sanford Weill who pressured management to "meet your numbers." As the recent SEC investigation discussed below shows, its also the investors in mutual funds, who find that the funds are cheating them on expenses.

The New York Times > Business > Ex-Citigroup Executives May Face S.E.C. Charges

October 22, 2004
Ex-Citigroup Executives May Face S.E.C. Charges
By LANDON THOMAS Jr.

itigroup said today that federal regulators had warned the bank that an investigation of its asset management unit could result in an enforcement action against the executive who ran the division until this week.
The Securities and Exchange Commission has sent a Wells notice - a letter warning that an invidual or company will probably face a civil complaint from the commission - to Thomas W. Jones, who had run Citigroup asset management, the fund management arm of the bank, from 1997.
The notice caps a difficult week for Charles O. Prince, Citigroup's chief executive, who has been taking extra pains to prove to regulators as well as to investors that Citigroup, a mammoth financial institution with offices and businesses that span the globe, can at the same time run a clean ship.

On Wednesday, Mr. Jones and two other senior bank executives were forced to resign by Mr. Prince after an internal review concluded that they were responsible for a breakdown in oversight at Citigroup's private banking operations in Japan.

In September, Japanese regulators barred Citigroup's private banker from operating in the country, citing insufficient internal controls to prevent fraudulent trades and money laundering.

Robert B. Willumstad, the president of Citigroup, said yesterday in an e-mail message sent to employees that neither the "Wells notice nor the underlying investigation had anything to do with Tom's leaving the Company." Mr. Willumstad added that Citigroup had informed regulators in November 2003 of the infractions, which included an inappropriate and undisclosed payment made to Citigroup asset management by an outside vendor.

For Mr. Jones, a respected executive with over 20 years experience working at the top levels of financial services firms, the notice is a troubling epilogue to a long career at Citigroup.

His path to the upper reaches of Citigroup's executive suite was an unusual one.As a student at Cornell in 1969, Mr. Jones led an armed takeover of the student union building to protest the university's policies towards its black students as well as the Vietnam war, an action that led to him being featured in Newsweek.

He eventually graduated from Cornell, and after top posts at John Hancock, TIAA- CREF and Salomon Brothers, he joined Citigroup. At the time of his dismissal, Mr. Jones was responsible for $490 billion under management at Citigroup asset management.

Mr. Jones could not be reached for comment.

On the surface, the S.E.C. investigation would seem to pale in comparison to the other regulatory run-ins that Citigroup has encountered over the past three years. All the same, it raises some uncomfortable questions with regard to the quality of executive decision-making at the top tier of Citigroup's business units.

Between 1997 and 1999, Mr. Jones decided to bring in house the bank's transfer agency operations, a business which documents the ownership of securities within the firm's mutual funds.

The initiative was aimed at reducing fund fees, a goal Citigroup executives say was accomplished.

Subsequently, Mr. Jones and other executives within the unit decided to pass on a portion of the agency business to an outside vendor, First Data Corporation. The agreement with First Data included a revenue guarantee of $16 million that was paid to Citigroup asset management but that was not passed on to its mutual funds as it should have been. Nor were the payments ever disclosed.

Citigroup is repaying the amount to its funds with interest although it has offered no explanation as to why it received such a revenue guarantee.

While Citigroup itself received a notice in July, securities lawyers said today that the payment and the non-disclosure are at the heart of the S.E.C. investigation.

"The fact that only individuals are being charged make it more likely that it's the improper payment and not back office record keeping violations, that the SEC is investigating," said Thomas Dewey, a form S.E.C. lawyer at the law firm of Dewey Pegno & Kramarsky.

Also receiving notices was a lower level Citigroup executive working in its compliance division and a former employee who worked in the bank's back office. Citigroup declined to reveal their names.

The commission, as is its practice, declined to comment on the investigation.

But, while the sum of money is indeed tiny for an institution that earned $17 billion last year, the investigation highlights the two issues that analysts say continue to plague the bank.

One is the enormous size and breadth of its businesses, which allows for ethical and regulatory lapses on the part of employees to slip through the cracks. Second is the "meet your numbers mentality" that has long been the hallmark philosophy of Sanford I. Weill, the bank's chairman, which analysts and Citigroup employees say puts undue pressure on executives to cut corners as they search for extra pennies to meet their financial targets.

With its stock price lagging, Mr. Prince is now taking steps to address these points.

On Monday, he will hold a press conference in Japan to explain how the bank aims to improve its operations there. Today, Citigroup submitted a plan to Japanese regulators, outlining the steps it will take to strengthen internal oversight of its Japanese operations.

The plan includes measures to strengthen the management structure of the Japanese operation, the bank said. Regulators from the FSA have said they believe that one of the main reasons the violations occurred was that private bankers in Tokyo reported directly to executives in New York so there was little oversight of daily operations on the ground in Japan.

The Insurance Industry is in Denial: It's not "Fraud and Bid Rigging!" Let's Just Call It "Contingent Commissions."

Ahhhh yes. Evil Elliott has it wrong again!?! The insurance industiry's gross fraud perpetrated on it's clients is nothing more than a "contingent commission"...so they say. It kind of sound's like that practice we trial lawyers use to keep our clients from having to foot a legal bill they could never afford...a practice that put's the risk entirely on us. So, er uhm, maybe the insurance industry can make fraud and bid rigging sound legitimate too. But, uhm, just what risk is it they were taking from their clients, and just how does bid rigging help them? Ohh well, if the public won't buy the name, let's just deny that it's what we really do. See the article below and watch them squirm now that the cat is out of the bag. And I can't wait to see who will be the first to eat their words.

Business Insurance - Corporate Risk and Employee Benefit Management news

Problems outlined in Spitzer suit limited: Panelists

by Regis Coccia
Posted on Oct. 20, 2004 4:41 PM CST

CHICAGO—Allegations of wrongdoing in the insurance industry must be taken seriously but do not indicate a widespread problem, a panel of industry leaders said.
Speaking Wednesday at the annual Insurance Executive Forum hosted by Illinois State University’s Katie School of Insurance and Financial Services, the panelists agreed that New York Attorney General Eliot Spitzer’s recent lawsuit calls for strong action against anyone found guilty of criminal acts but does not require sweeping changes in industry business practices.
“I believe 99% of the men and women who get up to work in this industry are honest and do their best” to serve their clients and support their families, said John Phelan, chairman and chief executive officer of American Re-Insurance Co. in Princeton, N.J.
“In my view, to suggest that the sins of the few will change the world for the rest of us is utter nonsense.” he said. “There are just a handful of people, I suspect, involved in improper behavior.”

When asked about Mr. Spitzer’s investigation of “tying,” in which brokerage firms use leverage in placing reinsurance business, Mr. Phelan said, “In the real world, there’s a competitive environment. We have informed and intelligent buyers—we’re talking about the management of insurance companies. Maybe some of it goes, but is it a widespread practice, to the detriment of the buyer? I doubt it.”

Donna Galer, executive vp of Zurich North America in Schaumburg, Ill., pointed out that some observers have drawn “a very bright line between contingent commissions and the allegations in the (Spitzer) lawsuit.” She said that Zurich “wouldn’t bemoan” the end of contingent commission arrangements but added that “it’s not going to have a significant impact on any particular carrier.”

“I get worried about the knee jerk that sometimes take place in regard to legal actions,” said Charles Kavitsky, president and CEO of Novato, Calif.-based Fireman’s Fund Insurance Co. “Let’s see what else is going on….It gets lost sometimes that contingent commissions are legal.” He cited the 2003 outcry over mutual fund companies’ trading practices and pointed out that it led to questions of whether some activities, though legal, were appropriate.

“It’s a competitive industry. If a client doesn’t feel they’re getting what’s in their best interests, they’ll find another trusted adviser,” said David Eslick, chairman, president and CEO of USI Holdings Corp. in Briarcliff Manor, N.Y. “It’s a self-policing environment.”

“I’m a little bit angry that (risk managers) are going to get dragged into this debate” over contingent commissions, said Sheila Small, assistant treasurer-risk management and insurance at Verizon Communications Inc. in New York. “I truly believe that…brokers do do a service for the carrier. There is value in that. How that added service should be priced” is the question, she said. “I was under the assumption that (such broker compensation) was smaller than what’s being disclosed.”

In terms of economic impact on the insurance industry, Adam Klauber, managing director of Cochran, Caronia & Co. in Chicago, said companies named in the Spitzer lawsuit are likely to face investor suits, but “the overall business of brokerages won’t change, just the economics of the business.” (I nominate this as quote of the century...and we just started! Reed)

Paul D. Winston, editorial director of Business Insurance, moderated the panel.

S.E.C. Inquires Into Pension Accounting

We all knew it was coming. We all knew that the big corporate giants could and likely were playing games with their pension fund funding obligations to manage earnings. But we couldn't prove it without the power of the subpoena to investigate. In 1995, Congress, along with the accountants (read Arthur Anderson), the underwriters (read Citicorp), the high tech giants (read Seagate, 3Com and Sun Microsystems---who are they?) and the big corporations (read Enron, Worldcom and Disney) took away your power as an individual or member of a class to issue subpoena's to investigate suspected fraudulent activity. The act was called the "Private Securities Litigation Reform Act"----its funny how the word "reform" is used by these guys anytime they want to take your rights away. Well, at last the government is getting around to uncovering the truth we all knew was there----years later, and billions of dollars lost too late. Read this from the New York Times:

The New York Times > Business > S.E.C. Inquires Into Pension Accounting at Ford and G.M.

October 20, 2004
S.E.C. Inquires Into Pension Accounting at Ford and G.M.
By MARY WILLIAMS WALSH and STEPHEN LABATON

The General Motors Corporation and the Ford Motor Company said yesterday that the federal government had asked them to provide information about how they account for their pension funds and retiree medical benefits, suggesting that a new inquiry into an area of accounting that has long troubled both investors and pension-rights advocates will cast a broad net.
The two automakers joined the Delphi Corporation, which disclosed on Monday that the Securities and Exchange Commission had requested similar information. The commission is seeking e-mail messages and other documents that pertain to the actuarial assumptions that the companies have used since the year 2000 to calculate their pension values and other obligations to retirees.
All three companies said they were cooperating with the S.E.C., and said that they thought they had properly accounted for their pension funds and benefits.
An official of the S.E.C. confirmed that the commission had not found any violations of securities law at the companies. He said the commission wanted to examine the records to see if there was any connection between the application of pension accounting standards and effor

The official said the commission was looking at companies where small adjustments in actuarial assumptions could have a significant impact on overall financial performance - a description that would apply particularly to companies, like the automakers, with very large pension funds. The S.E.C. official also said the agency was examining companies that had been making especially aggressive actuarial assumptions.

A spokesman for Northwest Airlines, when asked whether that company had been contacted by the S.E.C., said: "Northwest Airlines will release its financial results on Wednesday. We will address this issue during our analysts' news media call."

Among large American companies with traditional pension plans, Northwest Airlines has been assuming an unusually high return on its pension investments. In 2003, Northwest assumed a 9.5 percent return on average over the long term. The median was 8.64 percent, according to an analysis by the actuarial firm Milliman USA of the 100 largest companies with pension funds.

Even though companies are not allowed to take surplus earnings out of their pension funds, a company that assumes its fund will post big investment returns can report significantly higher earnings, or narrow its losses, because the assumption artificially reduces the reported cost of providing benefits, which bolsters the bottom line.

Because pension funds and retiree medical plans are long-term commitments, actuaries routinely make assumptions about future economic and demographic trends when calculating the value of promised benefits in today's dollars. Some of their assumptions are regulated, but for others, companies and their consultants have considerable latitude.

Even when a company is found to have used an unusual actuarial assumption, it is extremely hard to prove that it did so deliberately to increase earnings or produce some other desired effect.

That was why the S.E.C. had requested e-mail records and other documents, the official said, "to see what's motivating them when they set these assumptions."

Analysts differed on whether the S.E.C. inquiry might ultimately lead to widespread changes in how companies account for their pension funds and retirement benefits.

One debt rating service, Fitch Ratings, issued a report yesterday that suggested that actuarial assumptions in the area of health care costs were unlikely to stand up under regulatory scrutiny because they have not kept pace with the real world. As a result, Fitch said, companies have been understating the size of their health care obligations to retirees for several years.

If regulators require companies to revise their assumptions, Fitch warned, the result would be "higher cost accruals that would directly reduce reported income."

The problem is likely to be most pronounced with automakers, which have promised health care coverage to vast numbers of current workers and retirees.

If General Motors increased its assumption of health care cost inflation to just 10 percent a year - still a low rate compared with the current escalation in costs - its health care obligations to retirees would increase by $10 billion. That, in turn, could depress operating income by about $750 million a year.

But the report noted that relatively large revisions might turn out to be necessary at other companies as well.

Analysts have also noted that pension accounting still presents ample opportunities to manipulate corporate financial results unobserved, despite recent changes requiring companies to provide more detail about their pension funds.

Analysts have long complained that inflated earnings help to keep share prices higher than they might otherwise be, which in turn can raise executive bonuses. At the same time, advocates for retirees say the current standard motivates companies to invest in riskier assets than employees and retirees might want.

In addition to Northwest Airlines, companies using above-average pension investment assumptions include Baxter International, a medical products company, and Freeport McMoRan, a mining and oil exploration company, both of which assumed in 2003 that their pension funds would return an average 10 percent on investments over time.

General Motors and Eastman Kodak have pension-earnings assumptions that at 9 percent seem high relative to the rather conservative asset allocation of their pension funds. A spokesman for Eastman Kodak, Gerard Meuchner, said his company had not been contacted by the S.E.C. He said the earnings assumption was justified by the pension fund's above-average performance.

A spokeswoman for Baxter said that its pension fund works on a fiscal year that ends on Sept. 30, so changes in its actuarial assumptions tend to come later than others.

"Any update we would report in our next public filing," she said, adding that this filing would be made tomorrow. She declined to explain how Baxter arrived at its pension figures and said that the company had not been contacted by the S.E.C.

Jack Ciesielski, publisher of The Analyst's Accounting Observer, said he was not optimistic that S.E.C. interest in pension accounting would lead to broad changes.

Even relatively conservative companies, he said, are following rules that do not reflect financial reality. But while fundamental changes are needed, the issue is so complex, he said, "it ain't going to happen anytime soon." Just about every important regulatory effort dealing with financial reporting, he said, "is just in quicksand.''

Why Executives Lie: "Just Promoting!"

The Wall Street Journal, and other news sources, reported on October 4, 2004, that Oracle put on evidence, at the first day of trial in a suit agianst it by Peoplesoft over Oracles takeover attempt, that Peoplesoft CEO, Craig Conway lied to investors about the impact of the takeover.

On the stand, PeopleSoft director Steven Goldby said Peoplesoft fired Conway for telling analysts that the Oracle takeover bid was no longer a factor in PeopleSoft's ability to write new business. In a deposition taken to prepare for the trial, Conway admitted he had not told the truth to analysts about the impact of a continued Oracle takeover threat on PeopleSoft's sales.

"I was promoting , promoting , promoting ," Conway said at the deposition. Conway said off-the-cuff statements to analysts that the Oracle impact was over were made at a time when he was "hoping for a self-fulfilling prophecy ."

Goldby said the deposition discussion of what he called Conway 's "situational ethics" contributed to the decision to fire the CEO, but was not the sole cause. "We knew that Conway had misspoken and what he had said was untrue," said PeopleSoft director Goldby. Mr. Goldby said the board hadn't considered Mr. Conway's original misstatements to be cause for dismissal. But he said he was surprised by Mr. Conway's "situational ethics," as disclosed in the deposition.

See PeopleSoft Saga Described at Trial

Director Testifies Behavior

Of CEO Led Board to Mull

Dismissal Several Times

By PEG BRICKLEY and DAVID BANK

Staff Reporters of THE WALL STREET JOURNAL

October 5, 2004; Page A3

Shell settles securities fraud violations for $1 in disgorgement.

According to a press release issued by The "Shell" Transport and Trading Company, P.L.C, Royal Dutch Petroleum Company and the Shell Group of Companies (Collectively "Shell"), the United Kingdom Financial Services Authority ("FSA") and the United States Securities and Exchange Commission ("SEC") today announced the final settlements that they have reached respectively with Shell. These settlements resolve the FSA's and SEC's investigations into the reserves recategorisation issues for the Shell companies. Consistent with the terms of the previously-announced agreements in principle, Shell settled without admitting or denying the findings and conclusions in the FSA's Final Notice and the SEC's Cease and Desist Order issued today. Shell also agreed to pay penalties of GBP17 million and $120 million in the FSA and SEC settlements, respectively, and committed in the SEC settlement to spend an additional $5 million for the development and implementation of a comprehensive internal compliance programme.

Not mentioned in the press release, but in the SEC announcement, Shell only has to pay $1 (one dollar) in disgorgement. Once again we see that the SEC's function in not to obtain releif for defrauded investors. For more detail see the Cease and Desist Order.