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Corporate Governance Scandals


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An Effort of MSBA-I Students at NUML University.

Published in: Business
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Corporate Governance Scandals

  1. 1. Name: Qasim RazaClass: MSBA-INUML, Islamabad 1
  2. 2.  History: LTCM was founded in 1994 by John W. Meriwether the former vice chairman and head of Bond Trading at SolomonBrother. The company consisted LTCM, a company incorporated in Delaware but based in Greenwich, Connecticut. Managed long term capital portfolio. A partnership registered in the Cayman Island. Funds which accepted stakes from 100 or fewer individuals with more than $ 1 Million. In late 1993, Meriwether approved several “High net worth Individuals” to secure start-up capital for LTCM. LTCM secured hundreds of dollars from business owners, celebrities and even private universities endowments. By Feb 24, 1994, the day LTCM began trading, the company had amassed just over $ 1.01 Billion in capital. 2
  3. 3.  Trading Strategies: LTCM used complex mathematical model take advantage of fixed income arbitrage deals (Convergence Trade). Creating a splinter fund in 1996, called LTCM-X that would invest even high risk traders. Turned to UBS Bank to invest in and write the warrant for this new spin-off company. By 1998, it has extremely large positions in areas such as merger arbitrage and S&P 500 options. At the start of 1998, the firm had equity of $ 4.72 Billion and had borrowed over $ 124.5 Billion with assets around $ 129Billion.It had off-balance sheet derivative positions with a notional value (Principal amount) of $ 1.25 Trillion. In 1998, the chairman of Union Bank of Switzer land resigned as a result of a $ 780 Million loss due to problems atLTCM. 3
  4. 4.  Tax Avoidance: LTCM was found to have entered into certain tax avoidance transactions. Approximately $ 100 Million losses claimed by LTCM were disallowed by US District court of Connecticut. An e-mail dated March 10, 1995, to Jan Blaustein Scholes, Myron’s girlfriend at the and general council responsible forsetting up leasing transactions associated with the disallowed losses. Myron’s stated that he was not an expert on tax law. In a memorandum to Long Term’s management committee dated Nov 12, 1996, Myron’s Scholes wrote:we must decide in the near future;1. How to allocate these capital losses.2. How to “trade” them so that they are held in high-valued hands.3. How to plan to be able to enjoy the benefits of these losses for the longest period of time. Myron’s Scholes 4
  5. 5.  LTCM Downfall: + In May and June 1998, returns from the funds were -6.42% and -10.14% respectively, reducing LTCM’s capital by $ 461Million. Such losses was accentuated through the Russian financial crises in Aug-Sep 1998. Panicked investors sold Japanese and European bonds to buy US treasury bonds. By end of August, the fund had lost $ 1.85 Billion in capital. As a result of losses, LTCM had to liquidate. LTCM lost a $ 286 Million in equity pair trading. LTCM equity tumbled from $ 2.30 Billion at the start of month to just $ 400 Million by Sep 25, 1998. With liabilities still over $ 100 Billion, this translated to an effective leverage ratio of more than 250:1. 5
  6. 6.  Major Losses: The total losses were found to be $4.6 Billion. The losses in the major investment categories were (ordered by magnitude): $ 1.6 Billion in swaps. $ 1.313 Billion in equity volatility. $ 430 Million in Russia and other emerging markets. $ 371 Million in directional trade in developed countries. $ 286 Million in equity pair (VW, Shell). $ 215 Million in yield curve arbitrage. $ 230 Million in S&P 500 stocks. $ 100 Million in junk bonds arbitrage. No substantial losses in merger arbitrage. 6
  7. 7.  Bailout Package: Seeing no options left the Federal Reserve Bank of New York organized a bailout of $3.625 Billion by the major creditors toavoid a wider collapse in the financial markets. The principal negotiator for LTCM was general counsel James G. Rickards. The contributions from the various institutions were as follows:i. $300 million: Bankers Trust, Barclays, Chase, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, Merrill Lynch,J.P.Morgan, Morgan Stanley, Salomon Smith Barney, UBSii. $125 million: Société Généraleiii. $100 million: Lehman Brothers, Paribasiv. Bear Stearns declined to participate. 7
  8. 8.  Bailout Effect: In return, the participating banks got a 90% share in the fund and a promise that a supervisory board would be established. LTCMs partners received a 10% stake, still worth about $400 Million, but this money was completely consumed by theirdebts. The partners once had $1.9 Billion of their own money invested in LTCM, all of which was wiped out. The fear was that there would be a chain reaction as the company liquidated its securities to cover its debt, leading to a dropin prices. which would force other companies to liquidate their own debt creating a vicious cycle. 8
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  10. 10. History: HP security experts recruited private investigators who use a spying technique known as pretexting. The pretexting involved investigators impersonating HP board members and 9 journalists. The information leaked related to HP’s long term strategy and was published as a part of a CNET article in January 2006. HP hired public relations firm sitrick & company to manage their media relation during the crisis. Board member George Keyworth was ultimately accused of being the source and on Sep 12, 2006, he resigned. September 22, 2006 HP announced that Dunn had resigned as chairwoman because of the "distraction her presence on ourboard" created. 10
  11. 11. Investigation By The House Committee on Energyand Commerce: The committee requested, under rules X and XI of US house of representatives, the following information from HP by Sep18, 2006.1. The name and identity of outside consulting firm cited in HP’s Sep 6, 2006, filling with SEC and other outside consultant.2. Copies of any contracts , letter of engagement and investigative plans related to the leak investigation.3. The names and identification of third parties.4. A list of all individuals or entities that were targets, or designated as target of the leak investigation.5. A list of all individuals or entities whose telephone records were produced by the outside consulting firm.6. A list of all individuals including HP employees. 11
  12. 12. Investigation By The House Committee on Energyand Commerce: (Continued…)7. Copies of all reports prepared for the leak information relating investigation.8. A copy of letter of engagement with the law firm regarding the committee inquiry.9. Copies of all reports prepared for the committee inquiry. 12
  13. 13.  California Criminal Case:• On October 4, 2006, California attorney general Bill Lockyer filed criminal charges and asset warrant against Dunn, HP’sformer chief ethics officer Kevin Hunsaker and three outside investigator.• The complaint alleged the following four felony violations of the California Penal code;1. Conspiracy to commit crime violation of Sec 182 (a) (1).2. Fraudulent use of wire , Radio or TV in violation of Sec 538 (5).3. Taking, copying and using computer data in violation of Sec 502 (c) (2).4. Using personal , identifying information without authorization in violation of Sec 530 (5) (a). 13
  14. 14.  Federal Criminal Charges:• On January 11, 2007, Bryan Wagner was charged by the federal government with conspiracy and identity theft for allegedlyobtaining the Social Security Number of an unidentified journalist to obtain the journalists phone records.•Wagner pled guilty to the charges.• On August 12, 2009, his sentencing hearing was postponed. 14
  15. 15.  Legal Ramifications:• Partially as a result of the case, however, congress passed a law specifically prohibiting pretexting.• Since the, at least two other people have been prosecuted under law;1. Nov 2008; Nicolas Shaun Bunch was charged with using a victim’s name and last four digits of his social security number to obtain confidential phone records from T-mobile.2. Dec 2008; Vaden Anderson was indicated for using pretexting to obtain confidential phone records from sprint/ Nextel. 15
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