U.S. ECONOMIC/FINANCIAL NEWS
U.S. Stocks Crumble in Largest Two-Week Drop Since October '87 Crash
The Dow Jones plunged 390 points, or 4.6%, to 8019.26, its lowest level since October 1998, and the seventh-biggest one-day point drop ever. Standard & Poor's tumbled 3.8% to 847.75, the lowest level since June 1997; the Nasdaq lost 2.8%, sliding to 1319.15.
For the week, the Dow dropped 7.7%, the ninth straight weekly decline; S&P plummeted almost 8.0%, and Nasdaq fell nearly 4.0%.
During the past two weeks, the Dow plunged 15% and the S&P dropped 14%the biggest losses for any two-week period since the October 1987 crash.
More "psychological Black Death," as one analyst put it, is in the offing. Companies in the S&P that expect their third-quarter earnings to be lower than forecast, outnumber by more than 2:1 those that will surpass estimates.
European and Asian stock markets also nosedived: London's FTSE fell 4.63%, France's CAC dropped 5.4%, Germany's DAX plunged 5.44%, and Japan's Nikkei slid 2.82%.
The Wall Street 'Police Blotter'
It has been three weeks since our last "Wall Street Police Blotter," but as this week's developments indicate, there was quite a bit going on behind the scenes in the continuing outbreak of corporate crime and corruption.
Federal prosecutors are planning to indict Adelphia Communications founder John Rigas and his three sons, who were former executives, on criminal charges of bank, mail, and wire fraud, according to an unnamed source close to the investigations, reported USA Today on July 15. The criminal charges are expected to be filed in conjunction with a civil lawsuit by the Securities and Exchange Commission. The Rigases had used the cable company's assets as collateral for $3.1 billion in loansto a private, family-run partnership.
The U.S. Attorney's office in Denver and the Federal Bureau of Investigation have launched a criminal probe of Qwest Communications, the Wall Street Journal reported on July 5, citing unnamed sources and giving no details. The telecommunications firm already faces a SEC investigation into use of "swap" trades to inflate revenue.
The Department of Justice is seeking to halt WorldCom's internal probe, to allow the Department to conduct its own inquiry into the company's accounting fraud, amid worries about possible witness-tampering. DOJ investigators want to interview executives and other potential witnesses before anyone from WorldCom talks to them, according to unidentified sources cited by the Wall Street Journal, as the Feds try to determine whether executives in addition to the company's former CFO, Scott Sullivan, knew of the improper booking of $3.85 billion in expenses, hiding $1.2 billion in losses.
Duke Energy received subpoenas on July 15 from the U.S. Attorney's office in Houston and the Commodity Futures Trading Commission, as part of a grand jury investigation; the subpoenas requested documents and information on Duke's trading activities.
El Paso Corp. has received similar subpoenas.
Samuel Waksal, former CEO of the biotech firm ImClone Systems, was charged by Federal authorities with illegal trading on inside information, allegedly warning a family member to sell company stock on Dec. 28, just before the Food and Drug Administration (FDA) rejected ImClone's application to market Erbitux, an experimental cancer drugan FDA rejection which sent the stock price plummeting.
Four former and current top executives of the pharmacy giant Rite Aid were indicted June 21 by the U.S. Attorney for the Middle District of Pennsylvania, following an investigation by the SEC into "one of the most egregious accounting frauds in recent history." The SEC was looking into allegations that Rite Aid boosted profits by improperly claiming credits from suppliers to remove supposedly damaged or outdated goods from its stores. Last year, the drugstore chain agreed to a $200-million settlement of shareholder suits over its accounting practices.
After Tyco's former CEO Dennis Kozlowski was indicted June 4 by New York authorities for evading state sales taxes, he was again indicted June 26 on charges that he tampered with evidence in an effort to impede the tax-evasion investigation, by removing a bogus bill of lading from a file of documents at Tyco's offices. He faces up to four years in prison for avoiding $1 million in taxes and falsifying business records.
The Justice Department has launched a probe of Enron for manipulating California's power market during 2000, by rigging wholesale electricity prices by exploiting loopholes in the power system. Enron could face criminal charges of wire and mail fraud, obstruction of justice, racketeering, and other violations.
Perot Systemsthe Texas firm headed by former Reform Party Presidential candidate H. Ross Perotfaces a Justice Department investigation into charges it showed Enron and other energy traders how to "game" California's power system and manipulate prices.
Pricewaterhouse Coopers will pay $5 million to settle charges of improper accounting and independence standards violations, in an agreement with the Securities and Exchange Commission, who charged that the world's largest accounting firm provided financial advisory services to clients for a fee that depended on the success of the transaction the client wanted.
Daimler Chrysler is under criminal investigation by the Justice Department into whether the company's Mercedes-Benz subsidiaries took part in a price-fixing scheme among New York-area car dealers, from February 1992 through August 1999. The case arises from a 1999 proposed class-action lawsuit against Mercedes-Benz USA and Mercedes-Benz Manhattan, which were served with grand jury subpoenas, with possible prison terms for participants.
Johnson & Johnson is under criminal investigation by the FDA and the Justice Department, for allegedly falsifying data to cover up manufacturing lapses at a Puerto Rico factory that makes Eprex, the firm's anemia drug that has been linked to a spate of blood disorders. The probe is linked to a whistleblower lawsuit filed by a former utility worker at the plant, who was fired in March 1999. J&J shares fell 14% July 19, the biggest drop since the 1987 stock market collapse.
The preceding is adapted from an article by Arthur Ticknor in The New Federalist, July 22, 2002.
America Online Used 'Unconventional' Deals To Boost Revenue
America Online, staring at the face of the global dot.com meltdown, used "unconventional" deals to boost advertising revenue by a cool $270 million, from July 2000 to March 2002the period of its takeover of Time Warnerto meet Wall Street's estimates of growth in ad and commerce revenue, thereby keeping up its stock price, the Washington Post reported July 18.
The media giant's chicanery included: converting legal awards into ad deals; negotiating a shift in revenue from Time Warner to AOL; selling ads on behalf of eBay, and then, booking the sale of eBay's ads as AOL's own revenue. And, renegotiating long-term ad contracts it risked losing as dot.coms went belly up, into short-term gains that inflated its quarterly revenue.
"The bubble had clearly burst, but senior management was under enormous pressure to hide the [financial] numbers and close the Time Warner transaction, which would diversify the revenue base and lower the risk profile of the company," said James Patti, a former senior manager in AOL's business affairs division, the unit that was the driving force behind the deals.
AOL was "at risk" to lose more than $108 million in ad revenue in fiscal 2001 (July 2000-June 2001), due mainly to the dot.com collapse, according to internal company documents from September 2000, obtained by the Post; the company also risked losing more than $140 million in ad revenue in 2001. Weekly emergency meetings were held to discuss the status of the failing contracts.
AOL booked $56 million from dot.com deals that were terminated or restructured, getting one-time payments from clients who could no longer meet their obligations, from July 2000 through March 2001.
The Golf Channel had agreed in June 2001 to pay $200 million over five years to have its sports programming carried on Time Warner Cable, but AOL's online unit asked for a piece of the deal. Time Warner Cable told the Golf Channel to spend about $15 million for advertising on the online unit. "We told them where and when" the ads ran, said a source cited by the Post.
In a deal with eBay, the online auction site, AOL served as an advertising broker, selling the site's ad space, but rather than simply charging commission, AOL counted all of the eBay revenue as if it were AOL's owneven though AOL carried no financial penalty if it did not sell eBay's ads. AOL booked $80 million in revenue in 2000 and 2001, and $15 million in the first quarter of 2002.
Similar shenanigans were carried out with the British enterntainment company Wembley, involving $23.8 million in online ads.
AOL Time Warner Management Shakeup; CEO Resigns
AOL Time Warner Chief Operating Officer Robert Pittman resigned July 18, three months after being named to head the AOL online unit, while Time Warner executives were given more power after a meeting of the company's board of directors. HBO chairman Jeff Bewkes and Time chairman Don Logan were promoted.
Shares of the company fell 5%. The stock is down 60% since the beginning of 2002, and has fallen 72% in the past year.
FCC Chair: Telecom Sector in 'Utter Crisis'
The telecommunications sector is in a state of "utter crisis," declared Federal Communications Commision chairman Michael Powell, adding that the FCC could allow one of the former "Baby Bells" (regional phone companies that were split off in the 1984 breakup of AT&T) to take over WorldComa merger once seen as unthinkablebecause the sector's meltdown leaves regulators little choice but to consider such options.
"The real problem is that there was a collapse in this sector, a crisis in this sector," even before lenders became hostile to telecom companies, Powell said in an interview with the Wall Street Journal. "That's why this is so painful to the telecom markettalk about something that was down on its knees and didn't need to be kicked in the gut," he said.
Powell also called for the government to continue its billions of dollars in Federal contracts with WorldCom, to maintain phone and data service to the company's 20 million customers.
In the understatement of the decade, Powell admitted that the government bore some responsibility for the sector's troubles, by encouraging the frenzied creation of new companies, following the 1996 Telecommunications Act deregulating the industry.
WorldCom is finalizing a debtor-in-possession funding pact with Citigroup, J.P. Morgan Chase, and G.E. Capital, to give the company the money to operate under a bankruptcy reorganization. A New York Supreme Court judge will rule July 16 on whether 25 banks could prevent WorldCom from spending $2.65 billion in loans. If so, WorldCom would face immediate bankruptcy.
Fannie Mae Bailout 'Too Big To Contemplate'
"The size of a taxpayer bailout is too large to contemplate," the Wall Street Journal editorialized on July 15, adding the explanation, "since we prefer to sleep at night." Headlined, "Fannie Capitulates, Sort Of," the lead editorial observed that, although the mortgage-loan giant has agreed to some financial disclosures, Fannie still doesn't comply with the Securities Act of 1933. The Act required companies to register debt-backed and mortgage-backed securities with the Securities and Exchange Commission. Fannie Mae and Freddie Mac "have grown at Mach speed with heavy leverage," said the Journal, and hold most of the housing-market risk.
Fannie Mae said its exposure on derivatives contracts was about $958 million as of June 30, and that it had a net unrealized loss of $498.2 million from marking derivatives to market prices in the second quarter of 2002. Profit rose 4.4% to $1.46 billion, while operating earnings (excluding derivatives) jumped by 20% to $1.57 billion in the second quarter.
U.S. Dollar Falls Below Euro Parity; Hits Post-Sept. 11 Low vs. Yen
The U.S. dollar fell below parity with the euro July 15, for the first time in over two yearsand hit a post-Sept. 11 low against the yen, as investors pulled their money out of U.S. assets. The euro, which last traded at the one-to-one level in February 2000, finished U.S. trading at $1.0035amid dollar gloom, rather than "euro-phoria"bringing the dollar's decline to almost 15% in the past five months.
"What we are seeing from our custodial flows is outflow of portfolio investment, from both the euro zone and the United States, but ... it is just coming out of the United States faster," said Michael Woolfolk, a strategist at the Bank of New York.
"This is about capital flows into the U.S. drying up," said an analyst at Fleet Global Markets in Boston.
The dollar tumbled to a low of 115.65 yen, its weakest since February 2001, before ending down 0.45% at 116.32 yen.
Pensions, Health-Care Funds Slashed by Stock Swoon
The plunging stock market is taking a toll on the securities held by corporations for their pensions and health-care funds, according to securities analysts. General Motors, for example, has seen the value of its pension fund decline from $80 billion two years ago, to $67 billion today, and it is underfunded by at least $9 billion, while GM's health-care trust fund has a potential $47-billion shortfall. Ford is expected to run a pension fund deficit of $6.5 billion this year. All airlines, except Southwest, also have underfunded pension funds.
Some money managers are worried that the decline in GM and Ford stock prices, triggered by concerns over their pension-fund problems, could spread to other firms, the Washington Post reported July 12. The Post quotes Wells Capital Management CIO James Paulsen as saying: "I see that as a potentially big issue for 2003 if we don't get a recovery."
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