second year report to the president: corporate fraud task force

SECOND YEAR REPORTTO THE PRESIDENT

CORPORATE FRAUDTASK FORCE

Members of theCorporate Fraud Task Force

James B. Comey, ChairmanDeputy Attorney GeneralUnited States Department of Justice

Christopher A. WrayAssistant Attorney General of the

Criminal DivisionUnited States Department of Justice

Eileen J. O’ConnorAssistant Attorney General of the

Tax DivisionUnited States Department of Justice

Robert S. Mueller, IIIDirector Federal Bureau of Investigation

Roslynn MauskopfUnited States Attorney for the

Eastern District of New York

Patrick J. FitzgeraldUnited States Attorney for the

Northern District of Illinois

Patrick L. MeehanUnited States Attorney for the

Eastern District of Pennsylvania

Debra W. YangUnited States Attorney for the

Central District of California

Kevin V. RyanUnited States Attorney for the

Northern District of California

Michael T. ShelbyUnited States Attorney for the

Southern District of Texas

John W. Snow

SecretaryUnited States Department of the Treasury

Elaine L. Chao

SecretaryUnited States Department of Labor

William H. Donaldson

Chairman

Securities and Exchange Commission

James E. Newsome

Chairman

Commodity Futures Trading Commission

Patrick H. Wood

Chairman

Federal Energy Regulatory Commission

Michael K. Powell

Chairman

Federal Communications Commission

Armando Falcon, Jr.

Director

Office of Federal Housing Enterprise Oversight

Lee R. Heath

Chief Postal InspectorUnited States Postal Inspection Service

Second Year Report To The President – Corporate Fraud Task Force

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Table of Contents

Table of Contents ..........................................................................................................i

Letter from the Chairman of the Corporate Fraud Task Force ............................iii

Chapter 1: Overview of the Corporate Fraud Task Force ....................................1.1

a. Introduction ........................................................................................................1.2

b. Background ........................................................................................................1.3

Chapter 2: Second Year Anniversary Fact Sheet ..............................................2.1

Chapter 3: Corporate Fraud Task Force Member Contributions......................3.1

a. Criminal Enforcement ........................................................................................3.2

Summary of Accomplishments ........................................................................3.2

Significant Criminal Actions............................................................................3.2

b. Civil Enforcement ............................................................................................3.15

United States Department of Labor ..............................................................3.15

Office of Federal Housing Enterprise Oversight ..........................................3.16

Securities and Exchange Commission............................................................3.17

Commodity Futures Trading Commission ....................................................3.22

Federal Communications Commission ..........................................................3.25

Federal Energy Regulatory Commission........................................................3.26

Letter from the Chairman of the Corporate Fraud Task Force

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Letter of Introduction

James B. Comey, ChairmanThe President’s Corporate Fraud Task Force

Two years ago, President Bush gave us acharge. In establishing his Corporate FraudTask Force, the President called on us to cleanup corruption in the board room, restoreinvestor confidence in our financial markets,and to send a loud and clear message that cor-porate wrongdoing will not be tolerated.Numerous high-profile acts of deception incorporate America had shaken the public’strust in corporations, the financial markets,and the economy. A few dishonest individualshurt the reputations of many honest companiesand executives. They hurt workers who com-mitted their lives to building the companiesthat hired them. They hurt investors andretirees who placed their faith in the promise ofgrowth and integrity.

On this second year anniversary of thePresident’s Corporate Fraud Task Force, Iwrite to tell you that we have met thePresident’s charge – we are cleaning up corpo-rate board rooms, we are sending the loud mes-sage that corporate wrongdoing will not be tol-erated, and importantly, the confidence of theAmerican public in the integrity of our finan-cial markets is returning – perhaps, it hasreturned.

I send this report not only to outline theaccomplishments of the Task Force during itssecond year, but also to demonstrate how wehave met the President’s charge. Let me take amoment to briefly outline the Herculean workdone by members of the Task Force on thecriminal and civil enforcement fronts.

On the criminal front, since the inceptionof the Task Force through May 31st of thisyear, Justice Department prosecutors, workinghand-in-hand with regulatory Task Forcemembers, and investigators from the FederalBureau of Investigation, the Internal RevenueService’s Criminal Investigation division, andthe U.S. Postal Inspection Service, have:

(1) Obtained over 500 corporate fraud con-victions or guilty pleas – up from 250 at thistime last year;

(2) Charged over 900 defendants and over60 corporate CEOs and presidents withsome type of corporate fraud crime in con-nection with over 400 charged cases.

In the Enron matter alone, hard workingmembers of the Enron Task Force securedcharges against 31 Enron defendants, includ-ing 21 former Enron executives. We also seizedmore than $161 million for the benefit of vic-tims of the frauds at Enron.

On the civil front, the SEC continued toaggressively combat financial fraud. Since July1, 2003, the SEC filed 614 civil enforcementactions, 143 of which involved financial fraudand issuer reporting actions. The CommodityFutures Trading Commission instituted 68enforcement actions since July 1, 2003 – a 17%increase over the prior year. FERC’s numerousinvestigations into the manipulation of theenergy markets, including anomalous biddingpractices, physical withholding of capacity,gaming practices, and violations of standards ofconduct resulted in settlements valued at morethan $500 million. The Department of Labor’sEmployee Benefits Security Administrationcontinued to aggressively protect employeebenefit plans from the effects of corporate

fraud, as we saw in the Global Crossing,WorldCom, ULLICO, and Rite Aid cases.Finally, the Department of Housing and UrbanDevelopment’s Office of Federal HousingEnterprise Oversight brought civil actionsagainst Freddie Mac executives and negotiatedwith Freddie Mac a record civil money penaltyfor a safety and soundness violation – $125million.

Although we are pleased with the work wehave done thus far, make no mistake: the workof the President’s Corporate Fraud Task Forcecontinues.

In closing, I want to remind you that thevast majority of American business leaders areresponsible, honest men and women. A fewbad actors have tainted the reputations ofmany honest business people and companies.Assuring the highest level of integrity ofAmerican businesses, however, cannot beaccomplished by the government alone. Iapplaud the efforts of many in corporateAmerica to set the highest ethical standardsand foster healthy corporate cultures, wherethe investing public and the law are respected.I hope those efforts continue and bring us evercloser to our ultimate goal of restoring full con-fidence in America’s marketplace.

James B. ComeyChairman, President’s Corporate Fraud

Task ForceDeputy Attorney GeneralUnited States Department of JusticeJuly 20, 2004

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Letter from the Chairman of the Corporate Fraud Task Force

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11Chapter

Overview of the Corporate Fraud

Task Force

Introduction

President George W. Bush created theCorporate Fraud Task Force by ExecutiveOrder 13271 on July 9, 2002. Since its cre-ation, the Task Force has coordinated andoverseen all corporate fraud matters underinvestigation by the Department of Justice andenhanced inter-agency coordination of regula-tory and criminal investigations. In his execu-tive order, the President specifically authorizedthe Task Force to:

(a) provide direction for the investigationand prosecution of cases of securities fraud,accounting fraud, mail and wire fraud,money laundering, tax fraud based on suchpredicate offenses, and other related finan-cial crimes committed by commercial enti-ties and directors, officers, professionaladvisers, and employees thereof when suchcases are determined by the DeputyAttorney General to be significant;

(b) provide recommendations to theAttorney General for allocation and reallo-cation of resources of the Department ofJustice for investigation and prosecution ofsignificant financial crimes, recovery of pro-ceeds from such crimes to the extent per-mitted by law, and other matters deter-mined by the Task Force from time to timeto be of the highest priority in the investi-gation and prosecution of such crimes; and

(c) make recommendations to thePresident, through the Attorney General,from time to time for:

(i) action to enhance cooperationamong departments, agencies, and enti-ties of the Federal Government in theinvestigation and prosecution of signifi-cant financial crimes;

(ii) action to enhance cooperationamong Federal, State, and local author-ities responsible for the investigation

and prosecution of significant financialcrimes;

(iii) changes in rules, regulations, orpolicy to improve the effective investi-gation and prosecution of significantfinancial crimes; and

(iv) recommendations to Congress re-garding such measures as the Presidentmay judge necessary and expedientrelating to significant financial crimes,or the investigation or prosecutionthereof.

The Corporate Fraud Task Force, chaired byDeputy Attorney General James B. Comey, iscomprised of a Department of Justice groupthat focuses on enhancing the criminal enforce-ment activities within the Justice Department,and an inter-agency group that focuses on max-imizing cooperation and joint regulatory andenforcement efforts throughout the federal lawenforcement community. The Department ofJustice group is comprised of:

The Deputy Attorney General

The Assistant Attorney General of theCriminal Division

The Assistant Attorney General of the TaxDivision

The Director of the Federal Bureau ofInvestigation (FBI)

The United States Attorney for the SouthernDistrict of New York

The United States Attorney for the EasternDistrict of New York

The United States Attorney for the NorthernDistrict of Illinois

The United States Attorney for the EasternDistrict of Pennsylvania

The United States Attorney for the CentralDistrict of California

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The United States Attorney for the NorthernDistrict of California

The United States Attorney for the SouthernDistrict of Texas

The inter-agency group is comprised of allmembers of the Department of Justice group and:

The Secretary of the Treasury

The Secretary of Labor

The Chairman of the Securities and ExchangeCommission (SEC)

The Chairman of the Commodity FuturesTrading Commission (CFTC)

The Chairman of the Federal Energy Reg-ulatory Commission (FERC)

The Chairman of the Federal Communica-tions Commission (FCC)

The Director of the Office of Federal HousingEnterprise Oversight (OFHEO)

The Chief Postal Inspector of the UnitedStates Postal Inspection Service (PostalInspection Service)

Since the initiation of the Task Force on July9, 2002, the Task Force has met in Washington,D.C. on seven occasions – July 12, 2002, July29, 2002, November 13, 2002, April 2, 2003,May 28, 2003, November 5, 2003, and March23, 2004. Task Force members and their repre-sentatives also attended the National CorporateFraud Conference held in Washington, D.C.,on September 26-27, 2002. At this conference,President Bush, Attorney General John Ashcroft,then Deputy Attorney General Larry Thompsonand then Securities and Exchange CommissionChairman Harvey Pitt addressed representativesfrom all members of the Task Force, in additionto nearly every United States Attorney.

Task Force member representatives meetinformally almost daily to coordinate actions onspecific investigations and prosecutions, and tocoordinate policies which apply to corporatefraud investigations and prosecutions as a whole.Much of this coordination is handled by theoffice of the Task Force’s Chair, Deputy AttorneyGeneral Comey. The Task Force Chair alsoworks to ensure corporate fraud investigations areproperly staffed and that they are progressingwith the requisite promptness and thoroughness.

Background

President Bush’s Ten-Point Plan

On March 7, 2002, President Bush an-nounced his “Ten-Point Plan to ImproveCorporate Responsibility and Protect America’sShareholders,” based on three core principles:information accuracy and accessibility, manage-ment accountability, and auditor independence.The ten points contained in the plan were:

1. Each investor should have quarterly accessto the information needed to judge a firm’sfinancial performance, condition, and risks.

2. Each investor should have prompt accessto critical information.

3. Chief Executive Officers (CEOs) shouldpersonally vouch for the veracity, timeliness,and fairness of their companies’ public dis-closures, including their financial state-ments.

4. CEOs or other officers should not beallowed to profit from erroneous financialstatements.

5. CEOs or other officers who clearly abusetheir power should lose their right to serve inany corporate leadership positions.

Chapter 1: Overview of the Corporate Fraud Task Force

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6. Corporate leaders should be required totell the public promptly whenever they buyor sell company stock for personal gain.

7. Investors should have complete confi-dence in the independence and integrity ofcompanies’ auditors.

8. An independent regulatory board shouldensure that the accounting profession isheld to the highest ethical standards.

9. The authors of accounting standardsmust be responsive to the needs ofinvestors.

10. Firms’ accounting systems should becompared with best practices, not simplyagainst minimum standards.

Following the President’s proposals, theSEC took decisive action to implement the“Ten-Point Plan” to improve the quality of cor-porate disclosure and the accountability ofexecutives and auditors. The SEC proposedrules and adopted policies consistent with allten of the President’s reforms.

The President’s Call To Congress and theSarbanes-Oxley Act of 2002

On July 9, 2002, President Bush called onCongress to give the Administration newpowers to enforce corporate responsibility andto improve oversight of corporate America,including:

Tough new penalties for mail and wirefraud.

Strengthened laws to crack down onobstruction of justice.

New authority for the SEC to freezeimproper payments to corporate executiveswhen a company is under investigation.

Congress answered the President’s call bypassing the Sarbanes-Oxley Act of 2002, themost far-reaching reform of American businesspractices in sixty years. The legislation, signedby the President on July 30, 2002, includedaction on all of the President’s proposals, andgave important new tools to prosecutors andregulators to improve corporate responsibilityand protect America’s shareholders and workers.Among other reforms, the legislation:

Created a new accounting oversight board topolice the practices of the accounting pro-fession.

Strengthened auditor independence rules.

Increased the accountability of officers anddirectors.

Enhanced the timeliness and quality offinancial reports of public companies.

Barred insiders from selling stock duringblackout periods when workers are unable tochange their 401(k) plans.

Created a new securities fraud provision witha 25-year maximum term of imprisonment.

Directed the Sentencing Commission to reviewsentencing in white collar crime, obstruction ofjustice, securities, accounting, and pension fraudcases.

Required CEOs and Chief Financial Officers(CFOs) to personally certify that financialreports submitted to the SEC fully complywith the securities laws and fairly present, inall material respects, the financial conditionof the company.

Made it a crime to willfully certify any suchfinancial report knowing the same to be falseor non-compliant, punishable by up to 20-years in prison.

Criminalized the alteration or falsificationof any document with the intent to obstructthe investigation of any matter within the


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jurisdiction of a United States department oragency.

Criminalized retaliatory conduct directed atcorporate whistleblowers and others.

Required that audit papers be retained forfive years and criminalized the failure tomaintain such records.

Chapter 1: Overview of the Corporate Fraud Task Force

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2.1

22Chapter

Fact Sheet on theSecond Year Anniversary of

President Bush’sCorporate Fraud Task Force


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FOR IMMEDIATE RELEASE CORPORATE FRAUD TASK FORCETUESDAY, JULY 20, 2004 (202) 514-2007

FACT SHEET

SECOND YEAR ANNIVERSARY OF PRESIDENT BUSH’S

CORPORATE FRAUD TASK FORCE

President Bush’s Leadership in Restoring Confidence to the Marketplace

“[I]t is time to reaffirm the basic principles and rules that make capitalism work – truthful booksand honest people, and well-enforced laws against fraud and corruption.”

– President George W. Bush, announcing the Task Force’s formation on July 9, 2002

“The President’s Corporate Fraud Task Force ... can, however, do one thing, and that is what weare here today to do: to restore public confidence in our financial markets and in our criminaljustice system – to make people know we will continue to work like crazy until we have broughtall corporate crooks to justice.” – Deputy Attorney General James B. Comey, announcing chargesfrom the Enron investigation on July 8, 2004

The Task Force’s Second-Year Anniversary. During its second year, the President’s CorporateFraud Task Force improved on its strong first year record in combating corporate fraud and punish-ing corporate wrongdoers. Not only did Task Force members equal their efforts and accomplish-ments from the year prior, in many instances, they far surpassed them. On the criminal enforcementfront, federal prosecutors began to try a number of high profile cases resulting in important convic-tions in the Adelphia, Craig Consumer Electronics, Dynegy, Martha Stewart, Frank Quattrone,Unify, Graham-Field Health Products, and U.S. Technologies matters. On the civil enforcementfront, the SEC obtained a $2.25 billion penalty, the largest in SEC history, against WorldCom, andsettled significant financial fraud, reporting, and disclosure cases with companies includingGemstar-TV Guide International, Lucent Technologies Inc., and Vivendi Universal, S.A. The SECalso brought and settled significant cases against mutual funds and their executives, financial servic-es providers, and brokers for alleged fraudulent conduct relating to market timing and late trading infund shares, including settlements with Alliance Capital Management L.P. and MassachusettsFinancial Services Co.

President Bush created the Corporate Fraud Task Force by Executive Order No. 13271 onJuly 9, 2002. It is chaired by Deputy Attorney General James B. Comey and includes seniorDepartment of Justice officials, the heads of the Departments of Treasury and Labor, and the headsof the Securities and Exchange Commission, Commodity Futures Trading Commission, FederalEnergy Regulatory Commission, Federal Communications Commission, Office of Federal HousingEnterprise Oversight, and United States Postal Inspection Service.

Through fair, swift and decisive actions, the Task Force continues to remove suspicion,doubt, and uncertainty that pervaded the marketplace only two years ago. Investor confidence is

Chapter 2: Second Year Anniversary Fact Sheet

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returning and the public is recognizing that the vast majority of corporate leaders are honest and eth-ical stewards of their shareholders and employees. The Task Force’s actions are successfully work-ing to:

• Restore confidence to the marketplace;• Provide fair and accurate information to the investing public;• Reward shareholder and employee trust; and• Protect jobs and savings of hard-working Americans.

Prosecuting Corporate Fraud Criminally. Justice Department prosecutors throughout the country,working hand in hand with regulatory Task Force members and investigators from the FederalBureau of Investigation, Internal Revenue Service’s Criminal Investigation division, and U.S. PostalInspection Service, have responded to President Bush’s call to get tough on corporate crime. Sincethe inception of the Task Force through May 31, 2004, prosecutors and investigators had:

• Obtained over 500 corporate fraud convictions or guilty pleas;

• Charged over 900 defendants and over 60 corporate CEOs and presidents with some typeof corporate fraud crime in connection with over 400 filed cases; and

• Obtained charges against 31 Enron defendants, including 21 former Enron executives, obtained the convictions of 11 Enron defendants including its former CFO and treasurer, andseized over $161 million for the benefit of victims of the frauds at Enron.

Aggressively Pursuing Civil and Regulatory Enforcement Actions. During the Task Force’s sec-ond year, civil and regulatory Task Force members, often in actions parallel to criminal actions, andin coordination with criminal investigators and prosecutors, actively pursued enforcement actions toprotect investors and consumers from corporate fraud.

Securities and Exchange Commission: During fiscal year 2003 (October 1, 2002-September 30, 2003), the SEC filed 199 financial fraud and reporting cases. From October1, 2003 through June 21, 2004, the SEC filed 350 enforcement actions, 72 of whichinvolved financial fraud or reporting. Thirty-two companies have been suspended fromtrading, and the SEC has sought asset freezes against individuals and companies in 36 cases.In addition, the SEC has sought to bar 110 corporate executives and directors from againserving in publicly traded companies. The SEC has used its new enforcement authorityunder the Sarbanes-Oxley Act, which the President signed into law on July 30, 2002, to it’sfullest extent in seeking to improve corporate responsibility and protect America’s share-holders and workers, including using the "Fair Funds" provision in many recent settlements.The SEC has collected over $432 million to be returned to victims of the Enron fraud, pur-suant to this authority.

Last fall, when a number of disturbing scandals involving mutual funds came tolight, the SEC responded. During fiscal year 2003 through the present, the SEC filed 41mutual fund-related enforcement actions and obtained orders for close to one billion dollarsin penalties and disgorgements related to mutual funds, all of which will be returned toinvestors. Moreover, the SEC has proposed some 15 new mutual fund reforms, all inresponse to these mutual fund scandals.


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Commodity Futures Trading Commission: From July 1, 2003 to June 30, 2004, the CFTC insti-tuted 68 enforcement actions – a 17% increase over the prior year – against 193 defendants. Itobtained permanent injunctions against 58 defendants and restraining orders to freeze assets and pre-serve books and records against 77 defendants. It also obtained cease and desist orders against 51respondents in administrative proceedings. The CFTC secured nearly $315 million in civil mone-tary penalties, an increase of nearly 137% from the prior year, and over $67 million in restitutionand disgorgement. It obtained trading prohibitions against 18 individuals during this time.

Much of the CFTC’s enforcement activity over the last year centered around the energymarkets. The CFTC focused on the widespread practice by energy companies – most of them publicentities – of falsely reporting the prices and quantities of natural gas or electricity transactions toreporting services, often to influence the prices reported by these services and to consequently bene-fit energy derivative positions held by these companies.

Federal Energy Regulatory Commission: FERC’s numerous investigations into the manipulationof energy markets, including anomalous bidding practices, physical withholding of capacity, gamingpractices, and violations of standards of conduct resulted in settlements valued at in excess of $500million. Energy companies entering into settlements with FERC included Reliant Energy Services,Duke Energy and Trading, Williams Power Company, Dynegy, Inc., Portland General Electric, ElPaso Electric, Avista Corporation, Cleco Corp., Nicor Gas, National Fuel Gas Company, and CenterPoint Gas Transmission Company. FERC still has underway several proceedings in which it is pur-suing refunds of up to $3 billion for sales in California, as well as additional disgorgement of profitsfrom sellers who are found to have violated FERC tariffs.

Employee Security Benefits Security Administration (Department of Labor): EBSA continuesto aggressively protect employee benefit plans from the effects of corporate fraud. Since the incep-tion of corporate fraud as an investigative priority, EBSA has identified 44 civil investigations ashaving potential corporate fraud issues including investigations into Global Crossing, WorldCom,and ULLICO. In May 2004, EBSA announced the filing of settlements (which must be approved bythe court) to restore at least $66.5 million to the Enron savings and employee stock ownership plansand to restrict the ability of named corporate officers, directors, and administrative committee mem-bers from future service as ERISA fiduciaries. In July 2004, EBSA entered into settlement agree-ments with five former officers and directors of Global Crossing significantly restricting their abilityto serve as fiduciaries of ERISA plans for a period of five years without the Department's approval.EBSA also secured $25 million for the plan from Gary Winnick, the former chairman of GlobalCrossing's Board of Directors and was instrumental in facilitating the recovery of an additional $54million for the plan through the private class action settlement, bringing the total recovery for work-ers and retirees to $79 million. In September 2003, EBSA obtained a consent decree against formerRite Aid CFO and plan trustee, Franklyn M. Bergonzi. The court’s order permanently barredBergonzi from representing any employee benefit plan in any capacity.

Office of Federal Housing Enterprise Oversight (Department of Housing and UrbanDevelopment): OFHEO brought civil actions against Freddie Mac executives for, among otherthings, their failure to maintain adequate internal controls and negotiated with Freddie Mac a recordcivil money penalty for a safety and soundness violation – $125 million – as well as entering into aconsent order that required the Board and senior management to address corporate governance and

Chapter 2: Second Year Anniversary Fact Sheet

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culture at Freddie Mac. OFHEO continues its oversight of Freddie Mac while currently conductinga review of accounting and controls at Fannie Mae.

Restoring Investor Confidence. The Task Force’s swift, fair and decisive actions are helping torestore confidence to the marketplace. CEOs and other executives who fudged the numbers anddeceived their investors and workers are being held accountable. The actions of the Task Force arehelping to demonstrate something equally important to the American people: the vast majority ofcorporate leaders are honest and ethical who work hard to earn the trust of their shareholders andemployees.

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33Chapter

Corporate FraudTask Force Member

Contributions

Criminal Enforcement

Summary of Accomplishments

Justice Department prosecutors, workingwith the FBI, Postal Inspection Service, InternalRevenue Service - Criminal Investigations(IRS-CI) and other Task Force members, haveobtained more than 500 corporate fraud convic-tions1 during the Task Force’s two years of exis-tence.2 By comparison, as of September 2002'sNational Corporate Fraud Conference, dis-cussed below, only 46 convictions had beenreported. By way of further comparison, at thewriting of last year’s First Year Report, the TaskForce reported that over 250 convictions wereobtained. On May 31, 2004, corporate fraudcharges were pending against over 900 defen-dants and over 60 corporate CEOs and presi-dents, in connection with over 400 filed cases. Inthe Enron matter alone, prosecutors hadobtained charges against 31 Enron defendants,including 21 former Enron executives, obtainedthe convictions of 11 Enron defendants includ-ing its former CFO and treasurer, and seizedover $161 million for the benefit of victims ofthe frauds at Enron.

Significant Criminal Actions

Set forth below are a number of the signifi-cant cases that were prosecuted criminally dur-ing the second year of the Task Force. It bearsnoting that while these cases are identified bythe particular U.S. Attorney’s Office or divisionof the Justice Department that prosecuted thecase, such prosecutions would not have beenpossible without the outstanding investigativeefforts of the FBI, Postal Inspection Service,and IRS-CI, in coordination with other civiland regulatory Task Force members.

Cases Prosecuted by DOJ’s Criminal Division

Enterasys

Three former Enterasys Network Systems,Inc. officers were charged in the District ofNew Hampshire with conspiracy, securitiesfraud, wire fraud, and mail fraud stemmingfrom a revenue recognition scheme thatinvolved altering and backdating contracts,entering into secret side deals, and makingfalse representations in filings to the SEC,company press releases, and to the company’s


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1 Though the term “corporate fraud” is subject to different interpretations, it has been defined internally within theDepartment of Justice to include the following conduct:

(1) Falsification of corporate financial information (including, for example, false/fraudulent accounting entries,bogus trades and other transactions designed to artificially inflate revenue, fraudulently overstating assets, earnings andprofits or understating/concealing liabilities and losses, and false transactions designed to evade regulatory oversight);

(2) Self-dealing by corporate insiders (including, for example, insider trading, kickbacks, misuse of corporate proper-ty for personal gain, and individual tax violations related to any such self-dealing);

(3) Fraud in connection with an otherwise legitimately-operated mutual or hedge fund (including, for example, latetrading, certain market-timing schemes, falsification of net asset values, and other fraudulent or abusive trading prac-tices by, within, or involving a mutual or hedge fund); and

(4) Obstruction of justice, perjury, witness tampering, or other obstructive behavior relating to categories (1) - (3)above.

2 This number includes convictions and guilty pleas during the period from the inception of the Task Force on July 9, 2002through May 31, 2004.

outside auditors. Two other former executives ofEnterasys have pleaded guilty to relatedcharges. This matter was the result of the coop-erative efforts of the Criminal Division’s FraudSection, the United States Attorney’s Office forthe District of New Hampshire, and the PostalInspection Service, in close coordination withthe SEC.

HealthSouth

The former CEO and Chairman of theBoard of HealthSouth was charged in an 85-count indictment in the Northern DistrictAlabama with conspiracy, mail and wire fraud,securities fraud, false statements, willfully filinga false certification of financial records with theSEC, and money laundering. The Indictmentalso seeks forfeiture of more than $278.7 mil-lion in property derived from the illegal pro-ceeds traceable to the alleged offenses. Thismatter is pending trial. Seventeen (17) formerofficers of HealthSouth have pleaded guilty tofelony charges in connection with the scheme toartificially inflate HealthSouth’s publicly report-ed earnings and the value of its assets and to fal-sify reports of HealthSouth’s financial condi-tion. The success of the investigation is attrib-uted to the close cooperation of the UnitedStates Attorney’s Office for the NorthernDistrict of Alabama, the Fraud and AssetForfeiture and Money Laundering Sections ofthe Criminal Division, the Postal InspectionService, the FBI, and IRS-CI.

PurchasePro.com

Two senior executives of PurchasePro.com, adefunct, publicly traded company headquar-tered in Las Vegas, Nevada, pleaded guilty inthe Eastern District of Virginia to conspiracy tocommit wire fraud stemming from a scheme toinflate the company’s sales revenue and toimpeding and obstructing a federal criminal

investigation. PurchasePro was engaged in thesale of computer software, including a so-calledbusiness-to-business marketplace license. Thislicense allowed small and large businesses to buyand sell products on the Internet, to participatedirectly in PurchasePro’s own web-site basedmarketplace, and to create their own brandedmarketplace using PurchasePro’s software. Theinvestigation of this matter continues; its suc-cess to date results from the close working rela-tionship between the Criminal Division’s FraudSection, the United States Attorney’s Office forthe Eastern District of Virginia, and the FBI.

Just For Feet

Guilty pleas to felony charges were obtainedin the Northern District of Alabama from threeformer executives of Just For Feet, Inc. ( JFF), apublicly traded corporation, which was head-quartered in Shelby County, Alabama, andwhich filed for bankruptcy in 1999, and fromfour former executives of JFF’s vendors of ath-letic footware and apparel. The JFF executivespleaded guilty to charges ranging from conspir-acy to commit wire and securities fraud, submit-ting false statements to JFF’s auditors and mak-ing false statements to federal agents. The ven-dor defendants had been charged with conspir-acy to submit false statements to JFF’s auditorsand causing false entries to be made in JFF’sbooks and records. The false financial informa-tion submitted to JFF’s auditors was included inthe company’s annual financial reports for pub-lic filing with the SEC. As a result, JFF’s earn-ings, as stated in its annual audited financialstatements and SEC filings, were overstated by$13.6 million, thereby defrauding the share-holders of JFF. The case is the result of collabo-rative efforts by the Fraud Section, the UnitedStates Attorney’s Office for the NorthernDistrict of Alabama, and the FBI.

Chapter 3: Corporate Fraud Task Force Member Contributions

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Cases Prosecuted By DOJ’s Enron Task Force

Since its inception, the Enron Task Force(“ETF”), which is overseen and supervised bythe Justice Department’s Criminal Division,has brought criminal charges against 31 defen-dants, including 21 former Enron employees,including the former Chairman of the Board,two former CEOs, the former Chief FinancialOfficer, a former Treasurer, three formerCEOs of prominent business units withinEnron, and a former corporate secretary.Eleven of those defendants have pleaded guiltyor been found guilty after trial. With the assis-tance of the Criminal Division’s AssetForfeiture and Money Laundering Section, theEnron Task Force has seized over $161 millionin ill-gotten proceeds of crimes. Some of theETF’s principal work includes:

Jeffrey Skilling, Kenneth Lay, and RichardCausey

Charges were brought in January andFebruary 2004 against Enron’s former CEOJeffrey Skilling and former Chief AccountingOfficer Richard Causey. In July 2004, formerChairman of the Board and CEO KennethLay was charged in a superseding indictment.The defendants are charged with engaging in awide-ranging scheme to deceive the investingpublic, including Enron’s shareholders, theSEC, and others about the true performance ofEnron’s businesses. According to the Indict-ment, the defendants manipulated Enron’spublicly reported financial results and madefalse and misleading public statements andrepresentations about Enron’s financial per-formance and results. The defendants arealleged to have used secret oral side-deals,back-dated documents, disguised debt, materi-al omissions, and outright false statements tofurther the scheme. The charges include con-spiracy to commit securities fraud and wire

fraud, securities fraud, wire fraud, money laun-dering, insider trading, and bank fraud. Theindictment also seeks forfeiture, and over $50million in proceeds have been frozen for thatpurpose.

Andrew Fastow, Leah Fastow, and BenGlisan

Former CFO Andrew Fastow pleaded guiltyin January 2004 to criminal activity stemmingfrom various self-dealing schemes and tomanipulation of Enron’s financial transactionsto create a false appearance of business success.Fastow will serve at least 10 years in custody aspart of his cooperation agreement with the gov-ernment. Former Treasurer Ben F. Glisan, Jr.,pleaded guilty in September 2003 to manipulat-ing Enron’s financial statements through severalillegal financial vehicles, and is currently servinga five-year term of incarceration.

Lea Fastow, Andrew Fastow’s wife and a for-mer Assistant Treasurer at Enron, was chargedwith participating in a tax scheme with her hus-band. She pleaded guilty in January 2004 to atax misdemeanor and was sentenced to a year injail, which she is currently serving.

Enron Broadband Services

Seven former executives of Enron’s failedInternet division, Enron Broadband Services(EBS), are charged with conspiracy to commitsecurities and wire fraud, insider trading andmoney laundering. The indictment charges thedefendants with a long-running scheme todefraud the investing public by portraying EBSas a resoundingly successful business through aseries of false public statements and pressreleases about the products, services and busi-ness performance of EBS. As alleged in theIndictment, the defendants falsely portrayed


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EBS as a commercial and business success andclaimed that EBS had developed a revolution-ary network control software. In fact, as allegedin the Indictment, EBS’ business never movedbeyond the development stage. EBS failed togenerate significant recurring revenue and expe-rienced losses that far exceeded publicly dis-closed targets. The case is scheduled for trial inOctober 2004.

U.S. v. Bayly, et al.

Two former Enron and four Merrill Lynchexecutives, including Merrill Lynch’s head ofGlobal Investment Financing, are charged withparking Enron assets with Merrill Lynch in ayear-end 1999 deal in order to inflate falselyEnron’s earnings. The defendants are chargedwith, among other things, conspiracy to commitwire fraud, wire fraud, making false statements,perjury and obstruction of justice. The case isscheduled for trial in August 2004.

Merrill Lynch & Co. and CanadianImperial Bank of Commerce

In addition to bringing the obstruction caseagainst the accounting firm of ArthurAndersen, the ETF has also entered intodeferred prosecution agreements with twomajor financial institutions – Merrill Lynch &Co. Inc. and Canadian Imperial Bank ofCommerce – which aided and abetted the fraudat Enron. Those agreements imposed a sweep-ing array of innovative institutional reforms thathave served as a model for corporate agreementsthroughout the Justice Department. The agree-ments include the appointment of and oversightby Justice Department-approved corporatemonitors to assure compliance with the reformsmandated under the agreements.

Cases Prosecuted By DOJ’s Tax Division

Brett Tollman

In a case involving massive corporate self-dealing, an executive in a private company thatowned and managed more than 50 Days Innhotels was sentenced in the Southern District ofNew York on March 12, 2004 to 33 months inprison and fined more than $75,000. Mr.Tollman and his parents were charged with atax-evasion scheme in which tens of millions ofdollars in unreported income was channeledthrough secret offshore bank accounts. Thedefendant pleaded guilty in September 2003 totwo tax fraud charges, involving tax losses total-ing more than $3.5 million. His parents remainfugitives. Four other defendants, including alawyer and two accountants, were convicted inJanuary 2003 for taking part in a relatedscheme.

Hawaiian Isles Enterprises

On March 31, 2004, Nathan Suzuki, amember of the State of Hawaii House ofRepresentatives at the time of his indictment inJune 2002, pleaded guilty to participating in aconspiracy to defraud the United States byimpeding the IRS during the years 1993through 2000 while he served as comptroller ofHawaiian Isles Enterprises, Inc. (HIE), a com-pany owned by previously convicted co-conspir-ator Michael H. Boulware. HIE and its relatedentities generated gross sales of roughly $80million yearly and were engaged in the sales oftobacco, coffee, and vending machine productsthroughout the State of Hawaii. Mr. Suzukihelped create offshore corporations and bankaccounts in the Kingdom of Tonga and theHong Kong Special Administrative Region(HKSAR) to obstruct a criminal investigation


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then being conducted by the IRS-CI. He alsohelped Mr. Boulware fraudulently transfer andconceal in HKSAR accounts approximately $3million belonging to HIE.

Stanley Joseph

In another self-dealing case, StanleyJoseph, an accountant, was sentenced to 27months in prison on March 18, 2004 in theSouthern District of New York after pleadingguilty to conspiracy to file fraudulent taxreturns and evade the payment of taxes totalingat least $1.4 million. Joseph was involved witha co-defendant operator of four medical diag-nostic facilities in the New York City area whocaused the medical diagnostic facilities to payapproximately $11.8 million in fraudulentbillings and purported “management fees” tosham entities controlled by himself. The co-defendant pleaded guilty in July 2000 to con-spiring to evade $3.2 million in taxes and filefalse tax returns and was sentenced to 37months in prison.

Purchase Plus

On March 10, 2004, after a three-week trialin the Southern District of Ohio, EverettEugene Arnold was found guilty of two countsof filing false income tax returns for failing toreport almost $4 million in income fromPurchase Plus, a company he promoted as apurchasing club. Members, who paid a $400fee for discounts on phone cards, travel servic-es and other products, were promised commis-sions of up to $11,000 for recruiting others.Mr. Arnold sold Purchase Plus in April 2000,and it closed five months later, resulting inlosses to investors of more than $100 million.Mr. Arnold awaits sentencing.

Strategic Technologies

On May 11, 2004, Marc Cooper, the presi-dent of Strategic Technologies, Inc., pleadedguilty in the District of New Jersey to mailfraud and income tax evasion charges forembezzling more than $80 million from thecompany and its customers. The businessaudited and paid freight bills incurred by itscustomers for services rendered by various car-riers. Mr. Cooper used the embezzled moniesfor personal luxuries, including chartering pri-vate jets for family vacations, paying for rela-tives' travel on the Concorde, expensive sports-related activities and memorabilia, and pur-chasing a 7 percent interest in the New JerseyDevils professional hockey team. Robin Nesti,who was Cooper’s office manager and admit-ted to embezzling $1.2 million, pleaded guiltyto aiding and abetting the mail fraud and to taxevasion. Mr. Cooper’s sentencing is scheduledfor September 9, 2004; Mr. Nesti’s sentencingis scheduled for September 8, 2004.

Cases Prosecuted By Task Force United StatesAttorney’s Offices

U.S. Attorney’s Office for the Central District ofCalifornia

Credit Lyonnais

The French financial institution CreditLyonnais, a former corporate subsidiary, amajor French insurance company, and severalFrench corporate executives pleaded guilty tocriminal charges that they made false state-ments to U.S. banking regulators. The falsestatements concealed the illegal acquisition ofassets that belonged to a California insurancecompany. In addition to these pleas, the indi-viduals and entities in this case paid over $770


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million to resolve the case. Over $500 millionfrom the settlement will be used to compensatepolicyholders from the defunct Californiainsurance company. Four other foreign individ-uals have been indicted and are fugitives. Thiscase was the result of a joint investigation withthe FBI and the Federal Reserve.

NewCom

The former CEO and Executive VicePresident of NewCom, Inc., a defunct comput-er parts manufacturer in California, pleadedguilty to numerous criminal charges on the eveof trial. The executives admitted that they con-spired to file inflated quarterly reports with theSEC, faked millions of dollars of product sales,and created bogus accounting records. They alsopleaded guilty to defrauding NewCom as partof a wire fraud scheme, and subsequently laun-dering the proceeds of their fraud. This case wasinvestigated by the FBI and IRS, in close coor-dination with the SEC’s Washington, D.C.office.

Craig Consumer Electronics

The CEO of Craig Consumer Electronics, apersonal electronics manufacturer, was convict-ed after a ten-week trial. The jury convicted theCEO of improperly recording transactions toinflate the company’s revenue in its periodic fil-ings with the SEC in order to borrow moneyfrom lenders. Craig’s former CFO previouslypleaded guilty to charges related to this scheme.This case was investigated by the FBI and IRS,in close coordination with the SEC.

Financial Advisory Consultants

The fund manager of Financial AdvisoryConsultants (FAC) of Orange County,California, was indicted for mail fraud, wirefraud, and money laundering arising out his

misappropriation of over $100 million frommore than 3,000 investors. FAC held itself outas a mutual fund with over $800 million inmanaged assets. The Indictment was returnedonly a few weeks after FAC's offices weresearched pursuant to a search warrant. Afterfleeing from California, the fund manager wasarrested in a hotel in Texas with a map ofMexico and cash in his possession. The matter,which is pending trial, stemmed from closecoordination and cooperation between the FBIand the SEC.

Manhattan Bagel

The former chairman of Manhattan Bagel, apublicly-traded restaurant and bakery chain,and the president of a subsidiary companypleaded guilty to conspiring to inflate the rev-enue of the subsidiary as part of a corporatemerger. These defendants also pleaded guilty toobstructing an SEC investigation by assaultingand threatening witnesses. In addition, thechairman pleaded guilty to defrauding investorsin separate initial public offerings, tax fraud, andmoney laundering. The district court sentencedthe bagel company’s chairman to 90 months inprison. The investigation was conducted by theFBI-CI, Postal Inspection Service, and IRS-CI,in close coordination with the SEC.

L90

The former CFO of L90, a publicly tradedinternet advertising company, pleaded guilty toconspiring to commit securities fraud. TheCFO admitted that the company created aseries of fraudulent transactions designed toinflate L90's publicly reported revenues. L90'sCEO and two other executives previouslypleaded guilty. This case was the result of aninvestigation by the FBI and the SEC in LosAngeles.


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Genesis Intermedia

The former president of RBF International,a stock lending “finders” firm, pleaded guilty toconspiring to commit securities fraud and wirefraud and to a substantive wire fraud count. Theconspiracy involved fraudulently manipulatingthe price of stock in Genesis Intermedia, Inc., aNasdaq-traded company, and using the artifi-cially inflated stock as collateral to obtain loansfrom various securities broker-dealers. Theconspiracy netted defendant and his co-con-spirators over $130 million; caused the bank-ruptcy of two brokerage houses, NativeNations Securities, Inc., and MJK ClearingInc; and resulted in the largest bailout of a bro-kerage firm in the history of the SecuritiesInvestor Protection Corporation. The ongoinginvestigation in this case is being conducted bythe FBI and the SEC.

U.S. Attorney’s Office for the Northern District ofCalifornia

McKessonHBOC

In March 2004, a former McKesson CFOwas charged with conspiracy, securities fraud,and making false statements to auditors. Sixother former executives of McKessonHBOCwere previously charged for their roles in a wide-ranging accounting fraud scheme, including aCFO and two Senior Vice Presidents, all three ofwhom pleaded guilty and are cooperating withthe investigation. Three defendants charged inJune 2003, including the Chairman of theMcKessonHBOC Board of Directors, the gener-al counsel to McKessonHBOC’s InformationTechnology Business, and the President ofMcKessonHBOC’s Information TechnologyBusiness await trial. McKesson, the 22nd largestcorporation in the United States, acquiredHBOC in January 1999. The scheme to defraudbegan at HBOC in early 1998 and continued

through the first combined quarter followingthe merger. When the fraud was disclosed,McKessonHBOC lost $9 billion in sharehold-er value.The U.S. Attorney’s Office and the FBIhave closely coordinated the investigation withthe SEC, which has brought parallel civilcharges.

Enron

The manager of Enron’s real-time electrici-ty traders was charged with wire fraud andconspiracy, and his trial is scheduled forOctober 2004. This manager is the thirdEnron energy trading executive charged withfraud in connection with Enron’s criminalmanipulation of the California energy markets.Previously, Enron’s vice president in charge ofall energy trading, pleaded guilty to conspiracyto commit wire fraud and agreed to cooperatewith the investigation. The manager of Enron’sshort-term electricity traders, also pleadedguilty to conspiracy and making false state-ments to the FBI during its investigation.

Informix

Following a parallel investigation conductedby the U.S. Attorney’s Office in San Franciscoand the SEC in Washington, D.C., the formerCEO, President, and Chairman of InformixCorp. was indicted in November 2002 forcriminal and civil securities and wire fraud vio-lations. In December 2003, he pleaded guiltyto filing a false registration statement with theSEC. The U.S. Attorney’s Office is workingclosely with the SEC on this case.

Network Associates

On June 10, 2004, the former CFO ofNetwork Associates, a Santa Clara, Californiasoftware company, was indicted on 20 countsof conspiracy and securities fraud for his


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involvement in causing the company to makemillions of dollars in payments to distributorsfalsely disguised as discounts, rebates, and mar-keting fees, all in order to convince the distrib-utors to hold excess inventory, not return unsoldproducts, and purchase more products than thedistributors could actually sell to customers dur-ing a given quarter. Previously, in June 2003, theformer acting CFO and controller of NetworkAssociates pleaded guilty to securities fraud andwas simultaneously sued civilly and agreed tocooperate in the ongoing, parallel DOJ/SECinvestigations into widespread accounting fraudat Network Associates between 1998 and 2000.No trial date has been set in the case. The U.S.Attorney’s Office is working closely with theSEC on this case.

Ernst & Young/Thomas Trauger

A former Ernst & Young partner was indict-ed by a federal grand jury on October 14, 2003,for conspiracy to obstruct the examination of afinancial institution, obstruction of the exami-nation of a financial institution, and falsificationof records in a federal investigation. The defen-dant was the engagement partner for NextCard,Inc., a publically traded internet bank. Theindictment alleges that the defendant alteredand deleted portions of the Ernst & Youngworking papers for the 2000 and 2001 Next-Card audit and then produced the altered ver-sion of the working papers to the Office of theComptroller of the Currency. The defendant’strial date is set for September 27, 2004. A sen-ior manager on the NextCard engagement pre-viously pleaded guilty to one count of obstruc-tion, and agreed to cooperate with the govern-ment. Another member of the audit team previ-ously pleaded guilty to providing false state-ments to the FBI during the investigation ofthis case.

Unify Corporation

On November 20, 2003, a jury convictedGholamreza Mikailli (also known as RezaMikailli), the former President and CEO ofUnify Corporation, on ten counts of securitiesfraud following a ten-week trial. Unify was apublicly traded software company based in SanJose, California. Mikailli was indicted in May2002, for his role in Unify’s overstatement ofrevenue from April 1999 until June 2000. Hissentencing is pending.

U.S. Wireless

The former General Counsel of U.S. WirelessCorporation pleaded guilty in December 2003 tomoney laundering and conspiracy. He admittedembezzling over $10 million in U.S. Wirelessstock through forged contracts and offshoreaccounts. The General Counsel is cooperatingagainst the former CEO, who remains in Israel.The government is seeking his extradition. Thecompany went bankrupt in 2001.

Reliant Corporation

As the result of an investigation, by the FBI,DOJ’s Antitrust Division, and the U.S.Attorney’s Office, in close coordination withthe CFTC, a federal grand jury returned a six-count indictment on April 8, 2004 againstHouston-based energy company Reliant EnergyServices, Inc., and four of its officers. The defen-dants were charged with conspiracy to commitwire fraud and commodities manipulation, wirefraud, and manipulation and attempted manip-ulation of the price of a commodity in interstatecommerce, for their involvement in the manip-ulation of the California energy markets. TheIndictment alleges that the defendants devised ascheme to defraud the California electricitymarket and its participants, and to manipulate


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and attempt to manipulate upwards the priceof electricity in California by shutting off themajority of the company’s power generationplants, intentionally creating the appearance ofan electricity shortage, and that the defendantsdisseminated false and misleading informationto the market that wrongly attributed the shut-downs to environmental limitations and main-tenance problems. The Indictment alleges thatonce the defendants achieved the artificialinflation of prices, Reliant Energy Servicesproceeded to turn certain of the company’splants back on in order to sell its power toCalifornia’s grid manager, the ISO, for as muchas $750 per megawatt hour (the federally-imposed price cap at the time).

U.S. Attorney’s Office for the Northern District ofIllinois

Mercury Finance Company

The former Treasurer of Mercury FinanceCompany pleaded guilty to wire fraud andbank fraud in connection with his participationwith other former officers of the company inan extensive accounting fraud scheme at thecompany. The scheme included fraudulentlyinflating income and receivables while under-reporting loan delinquencies for this subprimeloan company. Before the fraud was discovered,the company’s stock was traded on the NewYork Stock Exchange at approximately $15 pershare. After the fraud was discovered, the com-pany’s stock fell to about $2 per share, causinga market capitalization loss of over $2 billion.The Treasurer is scheduled to be sentenced onJuly 21, 2004. This case is the result of the jointefforts of the U.S. Attorney’s Office and FBI,in close coordination with the SEC.

Anicom

The former Chairman of Anicom, Inc.,which was a national distributor of wire and cable

products, was indicted for his role in a massiveaccounting fraud scheme. The scheme involvedfraudulently inflating revenues, net income,and earnings, and fraudulently understatingexpenses, in part by creating more than $24million in fictitious sales. The overall marketcapitalization loss from the scheme exceeded$80 million. Five other defendants have plead-ed guilty to engaging in the scheme to defraud.The former Chairman and CFO are scheduledto go to trial on October 4, 2004. This case isthe result of the joint efforts of the U.S.Attorney’s Office and FBI, in close collabora-tion with the SEC.

Nicor Energy

Three former executives of defunct NicorEnergy L.L.C. and an outside lawyer for theretail energy marketing company, establishedas a joint venture by Nicor Inc. and DynegyInc., were indicted for engaging in an account-ing fraud scheme designed to defraud NicorEnergy out of $400,000 in bonuses and othercompensation. They attempted to accomplishthis, according to the Indictment, by fraudu-lently inflating revenues and understatingexpenses to make the company appear moreprofitable than it actually was. The three exec-utives have pleaded guilty to engaging in thefraud. No date has been set for the trial of theoutside lawyer. The case resulted from the jointefforts of the U.S. Attorney’s Office and FBI,in close coordination with the SEC.

U.S. Attorney’s Office for the Eastern District ofNew York

Symbol Technologies

In June 2004, seven former senior execu-tives of Symbol Technologies, Inc., one of theworld’s leading manufacturers and distributorsof wireless and mobile computing and bar codereading devices, were indicted for securities


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fraud and other crimes arising out of their par-ticipation in a $200 million accounting fraudscheme. Among those indicted were Symbol’sformer CEO, CFO, and Senior Vice Presidentsof Finance, Operations, and Worldwide Sales,all of whom were charged for their participationin a long-running scheme to misrepresentSymbol’s revenues, expenses, and earningsthrough the use of bogus transactions andfraudulent accounting entries in order to meetprojected quarterly revenues and earnings. TheIndictment also alleges that an eighth defen-dant, Symbol's former General Counsel,orchestrated a scheme by which he and othersenior executives fraudulently exploited thecompany's stock option plans to enrich them-selves and illegally minimize their tax obliga-tions.

In June 2004, Symbol signed a writtenagreement in which it accepted responsibilityfor the fraudulent conduct of its former execu-tives, adopted significant corporate reforms,agreed to continue its cooperation with the gov-ernment's ongoing investigation of the fraud,and agreed to pay $139 million to compensatevictims of the fraud and to help fund the PostalInspection Service's Consumer Fraud Fund.The charges in June followed the earlier guiltypleas of Symbol’s former Chief AccountingOfficer and its former Vice President ofWorldwide Sales and Finance.

Computer Associates International

In January and April 2004, four former sen-ior executives of Computer AssociatesInternational, Inc. (CA), the world’s fourthlargest computer software company, includingCA’s former CFO, Vice President of FinancialReporting, Vice President of Sales Accounting,and Senior Vice President of Global SalesOrganization, pleaded guilty to securities fraud

and obstruction of justice charges. The securi-ties fraud pleas were based on the defendants’roles in a long-running, company-wide schemeto backdate and forge licensing agreements inorder to allow the company to meet or exceed itsquarterly earnings projections during multiplefiscal quarters. The obstruction of justice pleasarose out of the defendants’ lying to governmentinvestigators and concealing evidence of thesecurities fraud. Also in April 2004, CA issueda $2.2 billion restatement of earnings based onthe results of an internal investigation whichconfirmed the existence of the accounting fraud.

Allou Healthcare

In June 2004, numerous top officers of AllouHealthcare, Inc., a publicly-traded companywhich was a major distributor of pharmaceuticaland health products, were charged with partic-ipating in a wide-ranging conspiracy to defraudAllou’s creditors and investors of approximately$200 million. The defendants, which includedAllou’s Chairman and CEO, were charged withrecording hundreds of millions of dollars ofbogus sales and inventory purchases in Allou’sbooks in order to fraudulently inflate theamounts it could borrow under its line of creditwith a syndicate of banks, and to manipulate itsquarterly and annual earnings reported to theSEC and investors. The Indictment also allegesthat, in order to conceal their massive fraud,Allou’s Chairman, its CEO, and several co-defendants were involved in a September 2002arson at Allou’s major warehouse, which des-troyed a reported $80 million of goods. Whenfire officials determined the fire was deliberate-ly set, thus jeopardizing Allou’s ability to collecton its insurance claim, the defendants allegedlysought to bribe a New York City Fire Marshalto change the Fire Department’s conclusionthat the warehouse fire was an arson.


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Graham-Field Health Products

In June 2004, the former CEO of Graham-Field Health Products, a publicly-traded man-ufacturer and distributor of health care prod-ucts, was convicted after a jury trial of securi-ties fraud and conspiracy to commit securitiesfraud in connection with his falsification of thecompany's earnings statement and SEC filingsfor the third fiscal quarter of 1997. The fraudinvolved fabricating documents which pur-ported to show marketing fees and rebate cred-its owed to Graham-Field in the amount of$1.1 million. In addition, an independent busi-nessman not employed by Graham-Fieldpleaded guilty to conspiracy to commit securi-ties fraud for his role in the creation of the doc-uments, and he testified against the CEO attrial. Sentencing is scheduled for October 1,2004.

American Tissue Corporation

In May 2004, a superseding indictment wasfiled charging the former CEO of AmericanTissue Corporation, a manufacturer of paperproducts, with obstruction of justice, conspira-cy to commit perjury, and interstate trans-portation of stolen property. The defendantwas originally charged in March 2003 withbank fraud and conspiracy to commit bank andsecurities fraud. The new charges relate to theCEO's alleged fraudulent attempt to obtainseveral million dollars worth of equipmentfrom the now bankrupt American TissueCorporation by submitting fabricated docu-ments to a bankruptcy court in Delaware, andhis continuing possession and transportation ofpaper manufacturing equipment he obtainedby fraud while still CEO of American Tissue.

U.S. Attorney’s Office for the Southern District ofNew York

WorldCom

The former CEO of WorldCom, Inc. wascharged with conspiracy, securities fraud, andmaking false filings with the SEC, arising fromhis participation in a scheme to disguiseWorldCom’s true financial condition throughartificial manipulation of its revenues andexpenses. Trial of the former CEO is sched-uled for November 8, 2004. In addition,WorldCom’s former CFO became the fifthformer WorldCom executive to plead guilty toconspiracy and securities fraud charges as aresult of his participation in the same account-ing fraud scheme. The former CFO agreed todivestiture for purposes of restitution of his$15 million Florida home. The matter is beinghandled by the U.S. Attorney’s Office and FBI,in close coordination with the SEC.

Frank Quattrone

Frank Quattrone, the former ManagingDirector and Head of the Global TechnologyGroup at Credit Suisse First Boston Corp., aglobal investment banking firm, was convictedof obstruction of justice, obstruction of agencyproceedings, and witness tampering followinga one-month jury trial. The charges arose fromthe defendant’s efforts to obstruct grand juryand SEC investigations into Credit Suisse’spractices in allocating shares of initial publicoffering securities. Sentencing is scheduled forSeptember 8, 2004. The matter is being han-dled by the U.S. Attorney’s Office and FBI, incoordination with the SEC.


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Martha Stewart

Martha Stewart, the former CEO of MarthaStewart Living Omnimedia, a NYSE-tradedmedia company, was convicted of conspiracy,obstruction of justice, and false statementcharges, following a six-week jury trial and sen-tenced to five months in prison and five monthshome confinement. The charges arose fromStewart’s efforts to obstruct federal investiga-tions into her trading in the securities ofImClone Systems, Inc., on the eve of that com-pany’s announcement of extremely negativenews. The matter is being handled by the U.S.Attorney’s Office and the FBI, with assistancefrom the SEC.

C. Gregory Earls

C. Gregory Earls, the former CEO of U.S.Technologies, Inc., a NASDAQ-traded internetcompany, was convicted of securities fraud, wirefraud, and mail fraud charges, following a six-week jury trial. The charges arose from Earls’misappropriation of funds he raised through acompany he created exclusively for the purposeof investing in U.S. Technologies stock.Although he raised over $20 million fromdozens of investors, the defendant divertedapproximately $13.8 million for his own use.Sentencing is scheduled for August 3, 2004.The matter is being handled by the U.S.Attorney’s Office and Postal Inspection Service,in coordination with the SEC.

Adelphia

Following a four-month trial, the formerCEO and CFO of Adelphia CommunicationsCorp., were convicted of conspiracy, securitiesfraud, false filings, and bank fraud, arising fromtheir participation in a highly complex financialstatement fraud and embezzlement scheme thatdefrauded Adelphia’s shareholders and creditors

out of billions of dollars. The trial was amongthe longest and most complex securities fraudcases ever presented to a jury. The case was han-dled by the U.S. Attorney’s Office and PostalInspection Service, in close coordination withthe SEC.

U.S. Attorney’s Office for the Eastern District ofPennsylvania

Independence Blue Cross

In a significant case of corporate self dealing,the former Director of Real Estate andDevelopment for Independence Blue Crosspleaded guilty and was sentenced to 54 monthsin prison, $4 million in forfeiture and $14.1million in restitution in a multi-year scheme toembezzle over $14 million from the companythrough inflated and fictitious invoices fromthird party vendors and nonexistent companies.Two co-conspirators pleaded guilty and twoother co-conspirators were convicted after trialand sentenced to 97 months imprisonment, $9million in restitution and $2 million in forfei-ture. The case was investigated by the FBI.

Integrated Foods Technologies

A former director of Integrated FoodsTechnologies pleaded guilty to securities offer-ing fraud in the sale of stock to investors.Investors were misled about the existence offoreign contracts, registration of the securities,and the imminence of a public offering. Trial forthe firm’s CEO in the $50 million fraud isscheduled for October 2004. The case wasinvestigated by the FBI.

Dantone, Inc.

After being convicted at trial, Dantone, Inc.was sentenced to forfeiture of $418,000, restitu-tion of $408,000, and a fine of $800,000 in a


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scheme involving falsification of corporaterecords in the sale of auctioned automobiles.The General Manager and Operations Managerof the auction were also convicted and sen-tenced to 42 months and 36 months imprison-ment, respectively. The case was investigatedby the FBI.

Ambassador Eyewear

The CEO and CFO of AmbassadorEyewear were indicted in a scheme to falsifycorporate records to claim fictitious sales andinflate profits reported to banks, investors, andthe SEC. Banks lost $14 million and investorsin the newly public company lost millionsmore when Ambassador collapsed. This matteris pending trial and was investigated by theFBI in coordination with the SEC, which alsobrought civil charges.

U.S. Attorney’s Office for the Southern District ofTexas

Duke Energy

On April 21, 2004, two former DukeEnergy vice-presidents and a former DukeEnergy trader were indicted. The 18-countIndictment charges the defendants with rack-eteering, wire fraud, mail fraud, falsification ofcorporate books and records, and money laun-dering. The Indictment alleges the defendantsschemed to manipulate the books and recordsof Duke Energy’s Houston trading subsidiary,Duke Energy North America, in order to cre-ate the appearance of profitable trading activi-ty which generated substantial bonuses forthemselves. A trial date has not been sched-uled. The investigation was conducted by thePostal Inspection Service and FBI, in coordi-nation with the SEC and CFTC.

Dynegy

Following a trial and guilty verdict, onMarch 25, 2004, Dynegy’s former SeniorDirector of Tax Planning/International Taxand Vice President of Finance was sentencedto more than 24 years for his role in a corpo-rate fraud scheme. The defendant was convict-ed of conspiracy, securities fraud, mail fraud,and wire fraud for a scheme to borrow $300million from various lending institutions whilepublicly misrepresenting the proceeds of thoseloans as revenue from operations rather thandebt. The plan, called “Project Alpha,”involved a complex series of gas sales that wereto take place over a 60-month period betweenDynegy and a specially-created third companycalled “ABG Gas.” It was also part of the con-spiracy to prevent disclosure of those sideagreements to their auditors, the SEC, theshareholders and the investing public. Whenthe fraud was publically disclosed, Dynegy’sstock fell 52 percent in two days.

Dynegy’s former Vice President of Tax anda member of its Risk Control Group and DealStructure Groups, previously pleaded guilty onAugust 5, 2003. Both admitted to having in-tentionally concealed improper accountingpractices from Dynegy’s auditors, the SEC,rating agencies, lenders, market and securitiesanalysts, and the investing public. Their sen-tencings are set for August 19, 2004. Theinvestigation was conducted by the FBI andthe Postal Inspection Service. The SEC con-ducted a parallel investigation.

El Paso Corporation

On December 11, 2003, a natural gas trad-er and former Vice President of El PasoCorporation pleaded guilty to false reporting.The defendant admitted that in November


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2001, he ordered a false trade report used to cal-culate the “index” price of natural gas to be sentvia e-mail. He fabricated the list of 48 tradesand caused El Paso to report the trades to InsideFERC Gas Market Report for use in calculat-ing the December 2001 price index for naturalgas. The defendant is scheduled to be sentencedon October 8, 2004. The investigation was con-ducted by the FBI and Postal InspectionService, in coordination with the CFTC.

Civil Enforcement

United States Department of Labor

The Employee Benefit SecurityAdministration (“EBSA”) of the Department ofLabor continues to protect employee benefitplans aggressively from the effects of corporatefraud. Since inception of corporate fraud as aninvestigative priority in November 2001, EBSAhas identified 44 civil investigations as havingpotential corporate fraud issues. EBSA is alsocooperating with other federal enforcementagencies including the Justice Department, FBI,SEC, and IRS-CI.

Significant Cases

Enron

In May 2004, EBSA announced the filing ofsettlements (which must be approved by thecourt) to restore at least $66.5 million to theEnron 401(k) and employee stock ownershipplans. EBSA opened its investigation of Enron’semployee benefits plans on November 16, 2001,based on information reported in the mediaconcerning financial difficulties of the company.As a result of EBSA’s intervention, State Streetwas previously appointed to be the independentfiduciary for the Enron ESOP, Savings Planand Cash Balance Plan.

On June 26, 2003, EBSA filed a lawsuitagainst Enron, Kenneth Lay, Jeffrey Skilling,Enron’s former Board of Directors, and theAdministrative Committee of the ESOP andSavings Plans in the U.S. District Court for theSouthern District of Texas. The lawsuit wasconsolidated with other ERISA actions alreadyconsolidated in Tittle v. Enron. The crux of thecase is that the plans’ fiduciaries never seriouslyconsidered the prudence of the plans’ invest-ment in stock or took any action to protect theplans’ participants from tremendous lossesdespite numerous warning signs, many of themwell-publicized. On May 20, 2004, a Houstonfederal district judge approved three consentdecrees with all members of Enron’s former out-side board of directors, as well as all the mem-bers of the ESOP and Savings Plans’ adminis-trative committee that were named in the law-suit. EBSA continues to pursue its lawsuitagainst Kenneth Lay, Jeffrey Skilling, andEnron, the only remaining defendants in thelawsuit.

Rite Aid

EBSA obtained a consent decree in U. S.District Court for the Middle District ofPennsylvania on September 3, 2003, againstFranklyn M. Bergonzi, Rite Aid Corporation’sformer Executive Vice-President, Chief Fin-ancial Officer and a former plan trustee to RiteAid employee benefit plans. Mr. Bergonzi exer-cised discretionary authority or discretionarycontrol respecting management of the Rite AidCorporation Employee Investment Opportun-ity 401(k) Plan. Rite Aid’s financial statementsin 1997, 1998, and 1999, contained misstate-ments that resulted in Rite Aid stock trading atartificially inflated prices. During 1997, 1998,and 1999, the plan purchased Rite Aid stockand Mr. Bergonzi knew or should have knownthat the plan was overpaying for the Rite Aidstock. Mr. Bergonzi did not make any effort toprotect the plan and allowed it to buy stock at


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prices significantly higher than its actual value.The plan suffered significant losses when theprice of Rite Aid stock plummeted after thepublic learned in late 1999 that Rite Aid’s priorfinancial statements needed to be restated.

The court’s order permanently enjoinedBergonzi from serving as an administrator,fiduciary, officer, trustee, custodian, counsel,agent, employee, or representative in anycapacity to any employee benefit plan; as aconsultant or advisor to any employee benefitplan; or in any capacity that involves decision-making authority or custody or control of themoneys, funds, assets, or property of anyemployee benefit plan; and permanentlyenjoined Mr. Bergonzi from violating Title I ofERISA.

Global Crossing

In July 2004, EBSA entered into settlementagreements with five former officers and direc-tors of Global Crossing significantly restrictingtheir ability to serve as fiduciaries of ERISAplans for a period of five years withoutDepartment of Labor approval. EBSA alsosecured $25 million for the plan from GaryWinnick, Global Crossing’s former Chairman,and was instrumental in facilitating the recov-ery of an additional $54 million for the planthrough the private class action settlement,bringing the total recovery for workers andretirees to $79 million. Prior to the settle-ments, EBSA’s investigation focused on allega-tions that Global Crossing artificially inflatedits revenues by engaging in swap transactions(quid pro quo capacity exchanges). The inves-tigation also focused on whether the companymisstated its true financial condition to planparticipants through the company’s filings withthe SEC and information provided to theinvesting public.

Amicus Briefs Filed By EBSA

EBSA filed amicus briefs in Tittle v.Enron, in the Southern District of Texas onAugust 30, 2002, In re Williams ERISALitigation, in the Northern District ofOklahoma on August 20, 2003, In reWorldCom, in the Southern District of NewYork on January 16, 2004, and in Agway v.Magnuson, in the Northern District of NewYork on June 18, 2004. All four cases involvedallegations of misrepresentations in relation tothe decline in company stock and resultinglosses to the company-sponsored 401(k) plansand/or ESOPs.

Office of Federal Housing EnterpriseOversight

Since joining the President’s CorporateFraud Task Force in July 2003, the Office ofFederal Housing Enterprise Oversight(OFHEO) has sought to avoid rather thanmerely remediate corporate fraud through itsefforts to address corporate activities that donot meet safety and soundness standards.During the second year of the President’sCorporate Fraud Task Force, OFHEO hasbeen active in meeting its regulatory responsi-bilities for oversight of Fannie Mae andFreddie Mac ("the Enterprises").

In 2003, OFHEO took a number of actionsaimed at deterring conduct that could lead tofraud. In particular, OFHEO brought civilactions against Freddie Mac executives for fail-ures to maintain adequate internal controls,negotiated a record civil money penalty, andentered into a consent order that required theBoard and senior management to address cor-porate governance and culture at Freddie Mac.OFHEO continues its oversight of FreddieMac while currently conducting a review ofaccounting and controls at Fannie Mae.


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In particular, OFHEO took the followingactions aimed at avoiding or reducing the likeli-hood of corporate fraud:

Promulgated a rule on corporate governanceto assure that Fannie Mae and Freddie Macboards are attentive to their duties, includingoversight of legal compliance by the enter-prises.

Proposed a rule further elaborating on thecorporate governance responsibilities of offi-cers and directors at the enterprises, includ-ing proposals for (1) mandatory officer anddirector training on legal responsibilities onan annual basis, (2) enhanced rules providingfor director independence, (3) executivecompensation standards to be tied not onlyrevenue production, but to law and regulato-ry compliance and operational stability, (4)mandatory review and updating of conflictof interest standards, and requiring auditpartner and audit firm rotation.

Undertook an investigation of Freddie Macaccounting and internal controls that led tothe largest civil money penalty for a safetyand soundness violation by a financial regu-lator – $125 million – and to a consent orderthat required major changes to board andofficer operational and cultural actions.OFHEO also initiated actions against cer-tain former officers of the company.

The Freddie Mac consent order required (1)creation of the positions of chief risk officerand chief compliance officer, (2) enhancedfunding for accounting function, (3)improved systems to provide informationrequired by government regulators, (4)review of corporate codes of conduct andbylaws, (5) improvements in board access toinformation, and (6) major review of internalcontrols. The Board and senior management

must review annually the legal, regulatoryand compliance obligations place upon themand the company.

Initiated actions against former officers tolimit compensation and other benefits aftertheir separation from Freddie Mac. This wasbased on an explicit policy of not permittingcorporate executives to benefit from unsafeand unsound conduct, particularly wheresuch behavior led to millions of dollars inharm to the corporation and an ongoingthreat of civil litigation and criminal actions.

Initiated a review of Fannie Mae accountingand internal controls that is currently under-way.

Created a new Office of Compliance andOffice of Chief Accountant to reinforceOFHEO's supervisory and examinationfunctions with "audit-like" resources, whileat the same time doubling the size of theexamination staff over a multi-year timeframe.

Enhanced the focus of all OFHEO exami-nation and oversight groups on accounting,corporate governance, and internal controls,including maintenance of effective "Chinesewalls" to segregate and limit access to infor-mation and to assure effective internal secu-rity systems.

Securities and Exchange Commission

The SEC oversees the conduct of all of thekey participants in the securities markets,including public companies, stock exchanges,broker-dealers, investment advisers, mutualfunds, and public utility holding companies.Since last year’s report, the SEC has continuedto aggressively combat financial fraud. The SEChas brought significant actions against compa-


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nies that have committed accounting fraud, aswell as the firms and individuals that helpedthem do so. The SEC recently obtained sig-nificant penalties in financial fraud and report-ing cases, including the largest civil penaltyimposed in SEC history – a $2.25 billionpenalty against WorldCom in July 2003, andhas continued to vigorously pursue wrongdoersin connection with the Enron fraud. InOctober 2003, the SEC obtained federal courtapproval of the $1.4 billion landmark globalresearch analyst settlement relating to allegedundue influence of investment banking inter-ests on securities research at brokerage firms.

The SEC has used its new enforcementauthority under the Sarbanes-Oxley Act of2002 to the fullest extent of the law in seekingto improve corporate responsibility and protectAmerica’s shareholders and workers, includingutilizing the “Fair Funds” provision under theSarbanes-Oxley Act in many recent settle-ments. In the past year, the SEC has alsobrought and settled significant cases againstmutual funds and their executives, financialservices providers, and brokers for allegedfraudulent conduct relating to market timingand late trading in fund shares, and has settledseveral significant cases with broker-dealersthat sell mutual fund shares. The SEC contin-ues to coordinate efforts, and share its securi-ties expertise and knowledge, with other TaskForce members in a substantial number ofcases.

Though the SEC has undertaken steps toprotect our financial markets through its regu-latory arm, this portion of the report focuses onthe efforts of its enforcement arm. Here is abrief breakdown of its enforcement numbers:

Total enforcement actions filed:

- In FY 2004 through 6/30/04: 378

- In FY 2003: 679

- In FY 2002: 598

- In FY 2001: 484

Financial fraud and issuer reporting actionsfiled:

- In FY 2004 through 6/30/04: 81

- In FY 2003: 199

- In FY 2002: 163

- In FY 2001: 112

Officer and director bars sought (in all cat-egories of cases):

- In FY 2004 through 6/30/04: 113

- In FY 2003: 170

- In FY 2002: 126

- In FY 2001: 51

Temporary restraining orders filed (in allcategories of cases):

- In FY 2004 through 6/30/04: 27

- In FY 2003: 35

- In FY 2002: 48

- In FY 2001: 31


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Asset freezes sought (in all categories ofcases):

- In FY 2004 through 6/30/04: 36

- In FY 2003: 39

- In FY 2002: 63

- In FY 2001: 43

Trading suspensions ordered:

- In FY 2004 through 6/30/04: 32

- In FY 2003: 13

- In FY 2002: 11

- In FY 2001: 2

Subpoena enforcement proceedings filed:

- In FY 2004 through 6/30/04: 7

- In FY 2003: 12

- In FY 2002: 19

- In FY 2001: 15

The Story Behind The Numbers:

Significant SEC Cases from July 1, 2003 throughJune 30, 2004

During the second year of the Task Force’sexistence, the SEC brought a number of signif-icant actions involving corporate or accountingmisconduct, including:

WorldCom: The SEC continued to pursue sig-nificant actions against WorldCom and itsexecutives related to WorldCom’s accountingfraud. In July 2003, the SEC obtained court

approval of a $2.25 billion penalty, the largest inSEC history. The penalty was satisfied in May2004 by the company’s payment, post-bank-ruptcy, of $500 million in cash and ten millionshares of common stock in the reorganizedcompany (valued at $250 million under theCompany’s bankruptcy plan). The penalty willbe distributed to victims of the company’s fraud,pursuant to the SEC’s authority under the FairFunds provision of the Sarbanes-Oxley Act of2002. In March 2004, the SEC brought its fifthcivil enforcement action related to the WorldComfraud, against Scott D. Sullivan, WorldCom’s for-mer Chief Financial Officer who, in connectionwith the same conduct, also pleaded guilty tocriminal charges filed by the U.S. Attorney’sOffice for the Southern District of New York.The SEC entered into a settlement with Mr.Sullivan, which included, among other things,the entry of a court order permanently enjoin-ing Mr. Sullivan from violating numerous pro-visions of the federal securities laws and perma-nently barring Mr. Sullivan from serving as anofficer or director of a public company, anadministrative order barring Mr. Sullivan fromappearing or practicing before the Commissionas an accountant, and potential monetary reliefin the civil action.

AIG: In September 2003, the SEC entered intoa settlement with American InternationalGroup, Inc. (AIG) in connection with an allegedaccounting fraud committed at Brightpoint, Inc.The fraud charges against AIG were based onAIG’s alleged role in fashioning and selling apurported “insurance” product that Brightpointused to report false and misleading financialinformation to the public. In settling the SEC’scharges, AIG agreed to pay a $10 million penal-ty, disgorge the $100,000 fee it chargedBrightpoint for putting the “insurance” producttogether, as well as other relief. The SEC alsobrought charges in connection with the


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accounting fraud against Brightpoint; PhilipBounsall, Brightpoint’s former chief financialofficer; John Delaney, Brightpoint’s formerchief accounting officer; Timothy Harcharik,Brightpoint’s former director of risk; and LouisLucullo, an AIG assistant vice president, all ofwhich were settled except for the action againstMr. Harcharik. In connection with these set-tlements, among other relief, Brightpoint, Mr.Delaney, and Mr. Bounsall agreed to pay civilpenalties of $450,000, $100,000, and $45,000,respectively.

Analyst Research Global Settlement: In October2003, the SEC obtained federal court approvalof the $1.4 billion landmark global researchanalyst settlement with ten of the nation’s topinvestment banking firms and two individualsrelating to alleged undue influence of invest-ment banking interests on securities research atbrokerage firms. Under the terms of the FinalJudgments and Orders approved by the court,the ten firms and two individuals paid a total of$894 million in penalties and disgorgement,consisting of $397 million in disgorgementand $497 million in penalties. Half of the $775million payment by the firms (other thanMerrill Lynch, which paid $100 million inconnection with a prior settlement with thestates) was paid in resolution of actionsbrought by the SEC, NYSE, and NASD andwas put into distribution funds to benefit cus-tomers of those firms. The firms were alsorequired to make additional payments andundertake reforms to their research practices.

Morgan Stanley: In November 2003, the SECentered into a settlement with Morgan StanleyDW Inc. in connection with the company’salleged failure to provide its mutual fund cus-tomers with information about a MorganStanley program in which a select group ofmutual fund complexes paid Morgan Stanleysubstantial fees for preferred marketing of their

funds, and incentives to Morgan Stanley regis-tered representatives and branch managers tosell shares of those funds. The SEC alsoalleged that Morgan Stanley failed to ade-quately disclose at the point of sale the higherfees associated with large purchases of Class Bshares of certain of its proprietary mutualfunds, and the incentives for Morgan Stanley’ssales force to sell Class B shares of those funds.As part of the settlement, Morgan Stanleyagreed to pay $50 million in disgorgement andpenalties, which will be distributed to harmedcustomers.

Vivendi: In December 2003, the SEC enteredinto a settlement with Vivendi Universal, S.A.,the company’s former CEO, Jean-MarieMessier, and its former CFO, GuillaumeHannezo, relating to the company’s allegedfraud between December 2000 and July 2002,which included the company’s issuance of falsepress releases, improper adjustments to earn-ings, and failure to disclose future financialcommitments. As part of the settlement,Vivendi agreed to pay a $50 million penalty,which will distributed to harmed investors; Mr.Messier agreed to relinquish a 21 million Euroseverance package; and Messrs. Messier andHannezo agreed to not serve as an officer ordirector of a public company for, respectively,10 and 5 years.

Enron: During the past year, the SEC contin-ued to pursue numerous actions relating to theEnron accounting fraud, including bringingsignificant actions against Enron’s former offi-cers and directors, and firms and individualsalleged to have aided and abetted, or caused,Enron’s fraud. Since August 2002, the SEChas brought twelve separate Enron-relatedactions involving twenty-two individuals andfour entities, including the SEC’s ground-breaking actions against four counter-partyfinancial institutions for aiding and abetting


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Enron’s fraud. All four of the institutions(Merrill Lynch & Co., Inc., Citigroup, Inc., J.P.Morgan Chase & Co., and Canadian ImperialBank of Commerce) entered into settlementswith the SEC and have paid a total of $396 mil-lion to be distributed to Enron fraud victimspursuant to the Fair Funds provision of theSarbanes-Oxley Act of 2002. Eight of the indi-viduals, including Enron’s former ChiefFinancial Officer, Andrew S. Fastow, haveentered into settlements with the SEC and col-lectively have paid an additional $36.4 million.The remaining individuals are litigating theSEC’s allegations. Each of these actions had aparallel criminal component involving eitherthe Justice Department’s Enron Task Force orthe Manhattan District Attorney.

Mutual Fund Breakpoint Actions: In February2004, the SEC, in conjunction with NASD,announced enforcement and disciplinaryactions against seven firms, including WachoviaSecurities, LLC, UBS Financial Services, Inc.,American Express Financial Advisors, Inc.,Raymond James Financial Services, Inc., LeggMason Wood Walker, Inc., Linsco/PrivateLedger Corp., and H.D. Vest InvestmentSecurities, Inc., for failure to deliver mutualfund breakpoint discounts during 2001 and2002. Breakpoint discounts are volume dis-counts applicable to front-end sales charges onClass A mutual fund shares. The firms agreed tocompensate customers for the overcharges, payfines in an amount equal to their projected over-charges that total over $21 million, and under-take other corrective measures.

Lucent: In May 2004, the SEC entered into asettlement with Lucent Technologies, Inc. inconnection with company’s alleged $1.1 billionaccounting fraud. The SEC alleged that Lucentfraudulently and improperly recognized approx-imately $1.148 billion of revenue and $470 mil-lion in pre-tax income during its fiscal year

2000. The SEC also charged nine current andformer Lucent officers, executives and employ-ees, three of whom settled with the SEC, andone former Winstar Communications Inc. offi-cer, in connection with the alleged fraud. Aspart of the settlement, Lucent agreed to pay a$25 million penalty.

Gemstar: In June 2004, the SEC entered into asettlement with Gemstar-TV Guide Inter-national, Inc. in connection with charges thatthe company materially overstated its revenuesby nearly $250 million in its financial state-ments from 1999 through 2002. Gemstaragreed to settle the case by, among other things,paying a $10 million civil penalty, which will bedistributed to harmed shareholders pursuant tothe SEC’s authority under the Sarbanes-OxleyAct of 2002. The SEC also filed securities fraudcharges against three former senior executives ofthe company, including members of Gemstar’sboard and the company’s general counsel, fortheir roles in connection with the company’saccounting fraud. These charges brought to fivethe number of former Gemstar executives suedby the SEC in connection with the company’sfinancial fraud.

Market Timing and Late Trading Actions: In thepast year, the SEC has brought and, in somecases, settled significant cases against 19 mutu-al funds and their executives, financial servicesproviders, and brokers for alleged fraudulentconduct relating to market timing and late trad-ing in fund shares, and selective disclosure ofmutual fund portfolio information. In connec-tion with these allegations, the SEC enteredinto a $250 million settlement with AllianceCapital Management L.P., a $225 million set-tlement with Massachusetts Financial ServicesCo. and two of its executives, as well as signifi-cant settlements with Strong Capital Manage-ment and its founder Richard Strong, PilgrimBaxter & Associates, Putnam Investment


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Management LLC, and Banc One InvestmentAdvisors Corporation and one of its execu-tives.

Commodity Futures TradingCommission

Summary

During the past twelve months, theCommodity Futures Trading Commission(CFTC), through its Division of Enforce-ment, continued to file enforcement actionsand obtain monetary relief at a record pace.Among those actions have been a substantialnumber of actions against energy companiesand their employees that contribute to the mis-sion of the President’s Corporate Fraud TaskForce. Also contributing to that mission havebeen the CFTC’s cooperative enforcementefforts, including assistance and training pro-vided to other federal and state authorities, andthe detail of staff to criminal authorities inSouth Florida and U.S. Attorneys pursuingenergy-related investigations. Most notableamong the CFTC’s results for this second yearof the Task Force have been its 137% increasein civil monetary penalties ordered (furtherenhancing that year’s record increase of 400%in monetary awards over the prior year, whichpreceded the formation of the Task Force).

The CFTC has continued to actively inves-tigate possible violations of the CommodityExchange Act (the “Act”) committed in theenergy markets, relating to, among otherthings, false reporting, attempted manipula-tion, and “round-trip” trading by numerousother energy companies, including Enron andits affiliates. The investigations center on thewidespread practice by energy companies –most of them public entities – of falsely report-ing the prices and quantities of natural gas or

electricity transactions to reporting services,often to influence the prices reported by theseservices and to consequently benefit energyderivative positions held by these companies.To date, the CFTC has filed 17 major enforce-ment actions against 23 companies and indi-viduals as a result of its ongoing investigationof wrongdoing in the energy markets; fourteenof these actions were filed in the second year ofthe Task Force.

Thus far, the CFTC’s energy actions haveresulted in civil monetary penalties totalingover $215 million against 20 companies andindividuals, among other sanctions. TheCFTC has assisted the Justice Department ininvestigations, including detailing staff mem-bers to three different U.S. Attorneys Offices,leading to five indictments; and has presentedenergy and other training to fellow members oflaw enforcement.

Quantitative Review of the CFTC’s Efforts

As noted above, for the time period fromJuly 1, 2003, through June 30, 2004, theCFTC saw a dramatic increase in theirenforcement efforts, to wit:

Enforcement actions: The CFTC instituted 68enforcement actions — a 17% increase over the58 actions filed in the same period last year.

Restraining/freeze orders: The CFTC obtained17 restraining orders freezing assets and pre-serving books and records, the same number asthe previous year.

Permanent Injunctions/Cease and Desist Orders:The CFTC obtained 58 permanent injunc-tions in civil actions, and 51 cease and desistorders in administrative proceedings.


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Civil Monetary Penalties: The CFTC wasawarded $314,870,392 in civil monetary penal-ties, an increase of nearly 137% over the priortwelve-month period (which itself was nearly a400% increase over the prior twelve months).The breakdown, with the numbers for the priortwelve months in parentheses, is as follows:

Restitution and Disgorgement Awarded: TheCFTC obtained over $67 million in restitutionand disgorgement ordered.

Industry registrants subjected to trading prohibi-tions: The CFTC obtained trading prohibitionsagainst 18 individuals.

Significant Cases

Enron

On May 27, 2004, the U.S. District Courtfor the Southern District of Texas entered aconsent order against Enron Corporation in anaction filed by the CFTC against Enron andone of its former natural gas traders. The con-sent order provided for a permanent injunctionand other equitable relief against Enron and a$35 million civil monetary penalty, which issubject to Enron’s pending bankruptcy proceed-ing in U.S. Bankruptcy Court for the SouthernDistrict of New York.

In its complaint, the CFTC alleged thatEnron and its former traders used EnronOnline (EOL), a web-based electronic tradingplatform, to engage in a manipulative scheme bybuying an extraordinarily large amount ofHenry Hub (HH) natural gas next-day spotcontracts in a short period of time, thereby caus-ing artificial prices in the HH Spot Market andimpacting the correlated NYMEX natural gasfutures contract. The complaint also alleged thatEnron operated EOL as an illegal futuresexchange from September through December2001 and offered an illegal agricultural futurescontract on EOL.

Aquila Merchant Services

On January 28, 2004, the CFTC filed anadministrative order simultaneously settlingcharges of attempted manipulation and falsereporting against Aquila Merchant Services,Inc. The order stated that from at least January1999 through May 2002, Aquila reported falsenatural gas trading information, including priceand volume information to certain reportingfirms in violation of the Act. The reportingfirms use price and volume information in cal-culating published surveys or indexes of naturalgas prices for various hubs throughout theUnited States. Aquila knowingly submitted falseinformation to the reporting firms in an attemptto skew those indexes for its financial benefit.Aquila specifically intended to report false mar-ket information concerning, among other things,trade prices and volumes, in an attempt tomanipulate the price of natural gas in interstatecommerce. The order required Aquila to pay acivil penalty of $26.5 million, as well as to ceaseand desist from further violations of the Act.


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In civil injunctive actions$152,956,392 ($ 99,164,153)

In administrative proceedings$161,914,000 ($ 34,536,000)

Total$314,870,392 ($133,700,153)

Reliant Energy Services

On November 25, 2003, the CFTC filed anadministrative order simultaneously settlingcharges of attempted manipulation, falsereporting, and wash trading against ReliantEnergy Services, Inc. The order stated thatfrom at least February 1999 through May2002, Reliant reported false and/or misleadinginformation, including price and volume infor-mation, concerning natural gas cash transac-tions to certain reporting firms in an attemptto benefit Reliant. Reliant’s conduct constitut-ed an attempted manipulation under the Act,which, if successful, could have affected pricesof NYMEX natural gas futures contracts. TheCommission’s order required Reliant to pay acivil monetary penalty of $18 million as well asto cease and desist from further violations ofthe Act, and to continue to cooperate with theCFTC.

American Electric Power and AEPEnergy Services

On September 30, 2003, the CFTC filed acomplaint in federal district court inColumbus, Ohio, charging American ElectricPower Company, Inc. (“AEP”) and its sub-sidiary AEP Energy Services, Inc. (“AEPES”)with violations of federal law for false reportingand attempted manipulation of natural gasprices. The complaint charges that from atleast November 2000 through October 2002,AEP and AEPES reported false natural gastrading information, including price and vol-ume information, to certain energy indexfirms. The complaint further alleges that AEPand AEPES attempted to manipulate naturalgas prices by knowingly delivering false or mis-leading or knowingly inaccurate trade pricesand volumes. The CFTC is seeking varioussanctions against AEP and AEPES, includingpermanent injunctive relief, monetary penal-ties, and other remedial and ancillary relief.

Duke Energy

On September 17, 2003, the CFTC filedan administrative order simultaneously settlingcharges of attempted manipulation and falsereporting against Duke Energy Trading andMarketing, L.L.C. The order stated that fromat least January 2000 through August 2002,Duke Energy reported false natural gas tradinginformation, including price and volume infor-mation, to certain reporting firms in violationof the Act. The order finds that Duke Energyknowingly submitted false information to thereporting firms in an attempt to benefit DukeEnergy 's trading positions. The order requiresDuke Energy to pay a civil monetary penaltyof $28 million as well as cease and desist fromfurther violations of the Act.

WD Energy Services

On July 28, 2003 the CFTC filed andsimultaneously settled an administrative actionagainst WD Energy Services, Inc., the UnitedStates-based energy trading unit of EnCanaCorporation. The settlement required WDEnergy to pay a civil monetary fine of $20 mil-lion. The CFTC’s administrative actionstemmed from WD Energy’s attempts from atleast June 2000 through at least August 2001to manipulate various natural gas price indicesby reporting false trade information to certainnatural gas trade publications in violation ofthe Act.

The Williams Companies and WilliamsEnergy

On July 20, 2003, the CFTC filed anadministrative order simultaneously settlingcharges of attempted manipulation and falsereporting against The Williams Companies,Inc. and its subsidiary, Williams EnergyMarketing and Trading. The order stated thatfrom at least January 2000 through June 2002,


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the companies reported false natural gas tradinginformation, including price and volume infor-mation, to certain reporting firms in violation ofthe Act. The order stated that Respondentsknowingly submitted false information to thereporting firms in an attempt to skew thoseindexes for their own financial benefit. TheCFTC order required Respondents to pay acivil penalty of $20 million, as well as to ceaseand desist from further violations of the Act andregulations.

Operation Wooden Nickel

The CFTC played a major collaborative rolein the 18-month “Operation Wooden Nickel”undercover investigation into foreign currency,or “forex,” fraud conducted by the U.S.Attorney’s Office and FBI in the SouthernDistrict of New York. On November 19, 2003,criminal charges were filed against 47 defen-dants. At the same time, the CFTC filed sixseparate federal injunctive actions against 31persons and entities. As part of the undercoveroperation, federal criminal agents infiltrated aforex boiler room in the World Financial Centerallegedly operated by corrupt sellers of illegalforex futures contracts. The agents capturedhundreds of hours of video and audio recordingsof defendants allegedly scheming to deceiveunsuspecting customers and steal millions ofdollars. Operation Wooden Nickel is one of thelargest undercover operations in which theCFTC has collaborated.

In its complaints, the CFTC charged thedefendants with, among other things, fraudu-lent solicitation of customers to purchase illegalforeign currency contracts, acceptance of cus-tomer funds for the purchase and sale of thosefutures contracts, and subsequently misappro-priating those funds by using them for personalexpenses.

Federal Communications Commission

The Federal Communications Commission(“FCC”) is committed to protecting againstmisconduct by common carriers, whether it befinancial fraud or other misconduct that affectsconsumers or investors.

On the initiative of FCC Chairman MichaelPowell, staff from the FCC and JusticeDepartment drafted a Memorandum of Under-standing to enhance coordination effortsbetween the two agencies on corporate fraudmatters. Chairman Powell and then AssistantAttorney General for the Criminal Division,Michael Chertoff, signed the Memorandum inMay 2003. This agreement continues to facili-tate coordination between the agencies of fraudreferrals to the Justice Department.

In September 2002, the FCC established theFederal-State Joint Conference on AccountingIssues (“Joint Conference”). The Joint Confer-ence's purpose is to provide "for an ongoing dia-logue between the FCC and the states in order toensure that regulatory accounting data and relat-ed information filed by carriers are adequate,truthful, and thorough." The Joint Conferenceconsists of two FCC Commissioners and fivestate utility commissioners.

The Joint Conference has met at least fourtimes since its inception. At its September 2003meeting, the Joint Conference began a dialoguewith staff from the SEC on corporate account-ing and responsibility issues. On October 9,2003, the Joint Conference recommended tothe FCC that it adopt a number of newaccounting requirements for incumbent localexchange carriers.

In an order released June 24, 2004, the FCCadopted several of the accounting recommenda-


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tions made to the agency by the JointConference. In the Matter of Federal-State JointConference on Accounting Issues, FCC 04-149,2004 WL 1416512 ( June 24, 2004).

Federal Energy Regulatory Commission

The Federal Energy Regulatory Commis-sion’s (“FERC”) numerous investigations intothe manipulation of energy markets, includinganomalous bidding practices, physical with-holding of capacity, gaming practices, and vio-lations of standards of conduct, resulted in set-tlements over the last year valued in excess of$500 million. Energy companies entering intosettlements with FERC included ReliantEnergy Services, Duke Energy and Trading,Williams Power Company, Dynegy, Inc.,Portland General Electric, El Paso Electric,Avista Corporation, Cleco Corp., Nicor Gas,National Fuel Gas Company, and Center PointGas Transmission Company. FERC still hasunderway several proceedings in which it ispursuing refunds of up to $3 billion for sales inCalifornia, as well as additional disgorgementof profits from sellers who are found to haveviolated FERC tariffs.

Significant Cases – Anomalous Bidding andPhysical Withholding of Capacity In California

Pursuant to a June 25, 2003 order, FERCdirected its Office of Market Oversight andInvestigations (OMOI) to investigate potentialanomalous bidding behavior and practices inthe California Power Exchange (Cal PX) andCalifornia Independent System Operator (CalISO) markets during the time period May 1,2000 through October 1, 2000. Specifically, itinstructed OMOI to determine whether anyentities that bid above $250 per megawatt inthe Cal PX and Cal ISO markets during May1, 2000 through October 1, 2000 violated the

Market Monitoring and Information Protocols(MMIP) of the Cal ISO and Cal PX tariffs.The background that led to the Order is setforth in chapter six of the March 26, 2003 StaffFinal Report in Fact-Finding Investigation ofPotential Manipulation of Electric and NaturalPrices (Docket No. PA02-2-000).

Information discovered in Docket No.PA02-2-000 and allegations by various partiesalso suggested that some generators engaged inphysical withholding of power from the CalISO or Cal PX. OMOI launched an investiga-tion among generators in California during theperiod May 2000 to June 2001.

Settlements have been reached with severalcompanies with respect to the investigations ofanomalous bidding and physical withholdingand are being negotiated with others. Settle-ments have been reached in the followinginstances:

Reliant Energy Services

On October 2, 2003, FERC issued its orderapproving the agreement between ReliantEnergy Services and OMOI. In addition toresolving all outstanding issues in the anom-alous bidding investigation and the physicalwithholding investigation, the agreement re-solved all outstanding issues with respect toReliant arising from the investigation inDocket No. PA02-2-000, including issues con-tained in the Final Report, and all issues inDocket No. EL03-59-000 (Show Cause Orderrelating to trades between BP Energy andReliant). The primary terms of the agreementrequire Reliant to pay up to $50 million overthree years; $15 million was paid at the time ofsettlement. In addition, Reliant must filemonthly reports of all its sales into the Westernmarkets with OMOI for 12 months and must


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retain all telephone conversation tapes for threeyears.

Duke Energy

On December 19, 2003, FERC issued itsorder approving the agreement between DukeEnergy Trading and OMOI. The agreementrequired Duke to pay $2.5 million and resolvedall issues relating to Duke in the anomalousbidding investigation, the physical withholdinginvestigation, and any issues raised in the FinalReport (PA02-2-000).

Williams Power

Williams Power Company entered into anagreement with the California investor-ownedutilities in which it settled all claims, includingthe anomalous bidding investigation and thephysical withholding investigation. In addition,the settlement includes the refund proceeding(EL00-95-000 and El00-95-000) in whichFERC held that the prices for wholesale elec-tricity in the Cal ISO and Cal PX from October2, 2000 through June 20, 2001 were not just andreasonable. The total settlement is valued atmore than $140 million, with $8 million allo-cated to resolve the anomalous bidding investi-gation. The offer of settlement and the settle-ment agreement was filed with FERC on April27, 2004.

Dynegy

Dynegy, the California public utilities andstate agencies, and OMOI reached a global set-tlement that, like the settlement with Williams,covers all claims including the anomalous bid-ding and physical withholding investigationsand the refund proceeding. The offer of settle-ment was filed with the FERC seekingapproval, on June 25, 2004. Under the terms of

the settlement, Dynegy will forego certainreceivables due it and pay additional cash, suchthat the settlement is valued at approximately$281 million plus interest.

Significant Cases – Gaming Activities in theCalifornia Energy Markets

FERC’s investigation of gaming practicesthat manipulated energy markets has yielded anadditional $26 million in payments. Settlementsof three separate investigations involvingPortland General Electric, El Paso Electric, andAvista Corporation resulted in $23.5 million inpayments.

Other Significant Cases

Cleco

After substantial investigation, FERCapproved a settlement in which Cleco Corp.andits affiliated electric wholesale generator werefound to have engaged in anticompetitive prac-tices favoring their affiliates. As part of the set-tlement, Cleco paid a civil penalty of $750,000,the first ever imposed for improper affiliatepreferences by an electric wholesale generator.In addition, the settlement: (1) revoked market-based rate authority for the power marketer fora one-year period; (2) required Cleco to refundall improperly gained profits, approximately$2.1 million, to retail customers; and (3) sub-jected Cleco and its affiliates to a new stringentcode of conduct and a stringent compliance planfor three years.

Nicor

Following investigation, FERC approved asettlement resolving several of Nicor Gas’ con-tracts and negotiated rate contracts that did nothave FERC authorization or improperly went


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beyond blanket certificate authorization.FERC required Nicor to refund to its cus-tomers approximately $2 million, plus a pay-ment of $60,000 to cover the costs of theinvestigation, and to implement a complianceprogram.

National Fuel

A FERC investigation revealed that NationalFuel Gas Company improperly shared certaininformation with its marketing affiliate andcertain other customers and had failed to postcertain required information on its Internetwebsite. FERC approved a settlement thatrequired National Fuel to comply with a strictcompliance plan for three years and to pay$300,000 to cover the costs of the investiga-tion.

CenterPoint

Following an investigation and audit,FERC approved a settlement with Center-Point Gas Transmission Company regardingCenterPoint’s failure to file with FERC anddisclose to the public via its Internet websitevarious information regarding certain negotiat-ed rate agreements. Under the terms of the set-tlement, CenterPoint posted and/or filed all ofthe previously unreported terms and condi-tions in the negotiated rate contracts and madea $75,000 payment to cover the costs of theinvestigation.

FERC Corporate Fraud-Related Rulemakings

Electric and Natural Gas Behavior Rules

On November 17, 2003, FERC amendedall electric market-based rate tariffs andauthorizations to expressly prohibit a number

of market behaviors. These behaviors involve(1) electric generating unit operation; (2)actions that are without legitimate businesspurpose and that are intended to or foreseeablycould manipulate market prices, conditions orrules; (3) communications to FERC, marketmonitors, and others; (4) reporting transactiondata to publishers of indices; (5) record reten-tion; and (6) applicable codes of conduct andstandards of conduct. On November 17, 2003,FERC also amended the blanket certificatesfor natural gas sales to prohibit actions that arewithout legitimate business purpose and thatmanipulate or attempt to manipulate marketconditions, and to require sellers to adhere to acode of conduct addressing, among other things,reporting transaction data to publishers ofindices and record retention.

Electric Market-Based Rates

On April 14, 2004, FERC adopted a newgeneration market power test to be used in theinterim to determine whether sellers should begranted authority to make sales at marketbased rates. On April 14, 2004, FERC also ini-tiated a proceeding to evaluate its currentanalysis for evaluating requests for market-based rate authority, to ensure that market-based rates remain just and reasonable underthe Federal Power Act.

Improved Financial Reporting

On February 11, 2004, FERC issued a finalrule amending its financial reporting require-ments to provide new, quarterly financialreporting by FERC-jurisdictional entities, pro-viding more timely and transparent financialinformation by, among other things, requiringthe reporting of the economic effects of signif-icant transactions and events.


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second year report to the president: corporate fraud task force

Documents