Loser CEOs, Raking It In

By William S. Lerach
Sunday, November 11, 2007

"How come I don't get nothin'?"

In light of the massive payoffs that corporations are handing to failing executives -- most recently the ousted chiefs of Merrill Lynch and Citigroup -- that could be the legitimate lament of millions of U.S. workers whose jobs have been sacrificed of late in the name of corporate competitiveness and free trade.

Cleaned up grammatically, that question would probably express the sentiments of many of the 24,000 Merrill employees fired in recent years and the 17,000 Citi employees who are soon to get the ax. Together, former Merrill chief executive E. Stanley O'Neal and former Citigroup chief executive Charles O. Prince have lost more than $20 billion in company money. Yet they left with $360 million in their own pockets.

The American principles of responsibility, accountability and justice require everyone, even corporate titans, to pay a price when they mess up. I've dedicated my career to holding powerful corporations accountable when they victimized innocent people. CEOs such as Enron's Jeffrey K. Skilling, WorldCom's Bernard J. Ebbers and Tyco's L. Dennis Kozlowski all went to prison for their fraud. Now I'm being held accountable for overzealously pursuing these corporate scam artists.

Two weeks ago, I pleaded guilty to a conspiracy charge involving payments made to plaintiffs in lawsuits against major corporations. Under the terms of the plea, which requires court approval, I agreed to pay the government $8 million in fines and penalties and to serve at least one year in federal prison.

But what about accountability for Wall Street CEOs who line their pockets while making stupid decisions that rob shareholders and pensioners of billions of dollars? Recently, corporate boards have been fundamentally misinterpreting the phrase "the buck stops here" -- and handing the bucks over to their miserably performing bosses.

Let's see if I've got this right. To try to boost profits in the new low-interest-rate era, O'Neal and Prince plunged Merrill and Citi into the high-risk world of subprime collateralized debt. The banks peddled billions of dollars of this stuff to pension funds and institutions, pocketing more than a billion in fees for feeding the pigeons. Apparently, Merrill and Citi got stuck with more than $50 billion of the riskiest debt that they couldn't unload on their customers. O'Neal had assured Merrill shareholders that these high-stakes bets would "not add to Merrill's risk profile." And when the subprime fiasco started to unravel, Prince famously said that Citi was "still dancing."

As Merrill and Citi took on these risky assets, their balance sheets ballooned and short-term profits flowed in. O'Neal, Prince and their executive teams crowed about their successes and their risk-management skills while pocketing bigger performance bonuses based on the "profits" and cashing in stock grants and options as the stock prices temporarily advanced. Several top Merrill executives received more than $30 million each in 2006. O'Neal led the pack with $91 million. For cream in his coffee, O'Neal unloaded about 235,000 shares of Merrill stock, pocketing an additional $20 million. At Citi, top executives were given more than $10 million per year, with Prince raking in $25 million.

Then the roof caved in. A tsunami of losses has swept over many big banks -- but none comes close to matching Merrill and Citi for their folly. At first, O'Neal told investors that the Merrill loss would be about $4.5 billion. Prince initially said that Citi's would be about $6 billion. Horrifying enough. But just a few weeks later, O'Neal admitted that Merrill's real loss would exceed $8 billion -- the largest subprime loss in the world. Then Citi announced that its real subprime loss could reach $11 billion.

The previously reported profits have been wiped out, and rumors of billions more in coming write-offs abound. Who knows what the class-action suits against Merrill and Citi for stock fraud will cost? Merrill's stock has deflated from almost $100 per share to $60. Citi's stock is down from $55 per share to $36. Ironically, the Merrill stock "bounced" only when it was disclosed that O'Neal had secretly talked to another bank about buying Merrill -- a bad move for shareholders at these depressed price levels, but one that would have paid O'Neal $250 million under the company's "change of control" provisions.

Let's not forget that Merrill was one of the key architects -- while O'Neal was a top insider -- of the unsurpassed Enron rip-off of thousands of investors. Merrill managers were indicted and convicted. While Prince was Citi CEO Sandy Weil's consigliere, Citi was also a "tier one" bank for Enron and was forced to pay $2 billion to settle lawsuits by Enron stockholders as part of the largest fraud settlement with stockholders in history.

Prince and O'Neal have admitted to "mistakes" and "flawed risk models." These "mistakes" and "risks" are reminiscent of those of Andrew Fastow, Kenneth L. Lay and the other Enron boys in their "structured" "off balance sheet" deals -- contrivances that were really designed to put shareholders at risk while lining the insiders' pockets. The more things change, the more they stay the same on the "Street."

One would think that having engineered these catastrophes, O'Neal and Prince would be in for some real financial reckoning. Some working stiff on the assembly line who forgot to tighten the lug nuts on the cars going past him or some clerk in the risk department who forgot to file an insurance claim would surely suffer some penalty. Like being fired without a huge going-away gift. But O'Neal got to pocket $160 million in stock-based compensation as his departure present -- on top of the more than $100 million he received during the past couple of years. Prince, it is said, left with $100 million, on top of the $100 million he got as Citi's CEO.

How can this comport with notions of fairness? If some Merrill or Citi lower-level manager lost $2 million -- let alone $100 million -- you can bet that the board would come down on that poor soul like a ton of bricks. And these boards would no doubt sue a defaulting counter-party who cost their corporation $800 million -- let alone these billions in losses -- because of a "mistake."

It would be one thing if this were an isolated incident reflecting just terribly bad judgment by these CEOs' pals on their boards. But it's not. It's a way of life in American executive suites, aided and abetted by lax regulations and politically compromised regulators at the Securities and Exchange Commission. Executive failure is consistently rewarded with giant payments -- or, really, payoffs -- to keep the parting sacrificial lamb quiet so that he or she won't bleat to the stockholders, lawyers and the media that the others at the top of the company (and in the boardroom) knew what was really going on.

Similar examples of excess abound. Take Morgan Stanley, where a few years ago, top executives Philip J. Purcell and Stephen Crawford were ousted after a series of managerial missteps swamped that bank with losses and crushed its stock. Their reward? More than $100 million -- as they were shown the door. Jerry Levin was pushed out as chairman and CEO of AOL Time Warner (oops, now it's just Time Warner; the AOL name is gone but not forgotten) after engineering the worst acquisition of the past century, which cost his shareholders $100 billion and sank the stock from $58 to $9. His going-away payoff -- $600 million. After Carly Fiorina ran Hewlett-Packard into the ditch, she was sent packing with a $100 million gift for her "leadership." Dick Grasso, New York Stock Exchange, $140 million. Michael Ovitz, Walt Disney Co., $135 million. And dozens more.

The real frustration is that there's so little that can be done. Shareholders supposedly have access to the courts for a remedy, but they won't get far. A stockholder suit filed more than two years ago challenging the Morgan Stanley payoffs languishes in court. The CEO-and-director club knows that pro-business judges in the corporate haven of Delaware and elsewhere in the legal system will protect them. Shareholder suits against Time Warner's Levin got nothing back from him.

The government -- forget it. The SEC, and even Congress, appear to be getting ready to cut back shareholder rights and court access even more. And the Justice Department is busy defending waterboarding and targeting Democratic activists. Why do you think corporate bigwigs behave so badly so often?

One great virtue of the American free-market capitalist system is that to date, it has been able to withstand all forms of excess. But "quis custodiet ipsos custodes?" -- "Who will guard the guards?" wrote the Roman poet Juvenal. How corporate boards treat the shareholder owners of the corporations they oversee is simply intolerable. And even the strongest camel's back can ultimately be broken.

Someone told me recently that Lenin was wrong about communism but right about capitalism. Maybe he was. I'm on my way to prison because, in my zeal to stand up against this kind of corporate greed over the years, I stepped over the line. It turns out that the legal system is a lot tougher on shareholder lawyers than it appears to be on Wall Street executives.


William S. Lerach is a longtime shareholder advocate and plaintiffs' lawyer.

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