This post from earlier this week addressed the wide-ranging negative effects of the Sarbanes-Oxley legislation that was supposed to curb and correct the corporate fraud that supposedly prompted the bursting of the stock market bubble earlier in the decade.
Meanwhile, Krispy Kreme‘s (previous posts here) board released earlier this week a summary of an internal investigation that detailed over $25 million in accounting errors and related management failures that occurred as the trendy company was rapidly expanding and fascinating investors. When rumors of those management failures became public last fall, Krispy Kreme’s stock price tumbled.
Before enactment of Sarbanes-Oxley, revelations of such management failures would have almost certainly resulted in an internal board investigation and a shareholders’ deriviative lawsuit. Reviewing all of this within the lottery framework of criminalizing agency costs, Larry Ribstein observes wryly:

[M]ost of the stuff at Krispy Kreme happened after Sarbanes-Oxley. And it?s getting fixed by a special committee and a derivative suit that the company has allowed to proceed. So what is it, exactly, that we are getting from Sarbanes-Oxley?

Given that American Insurance Group, Inc. restated $3.9 billion of profit earlier this year, had various government investigations wipe out about $60 billion of market capitalization, was sued by regulators, and unceremoniously dumped its longtime chairman and CEO Maurice “Hank” Greenberg, you would think that its leaders would at least acknowledge that the company’s year has been about as bad as that of Mike Lamb.
Not so, and the reason is that the cost of the foregoing setbacks was merely the price of forging a productive relationship with the Lord of Regulation and other government regulators, as current AIG interim Chairman Frank G. Zarb told AIG shareholders yesterday in the company’s annual meeting:

“A.I.G. in recent months has forged a productive, constructive, professional relationship with our regulators. This company is committed to working openly, without reservation.”

Thus, the foregoing statement makes clear that AIG has changed its tune toward regulators from the position espoused by Mr. Greenberg, who once observed that regulators turn “foot faults into murder charges.” It remains decidedly unclear whether that relationship will prove as valuable for AIG’s shareholders as Mr. Greenberg’s management of the company.

On the heels of this post from yesterday, this NY Times article reports on the plea bargain of Domenick DeGiorgio, a 42 year old former managing director at the New York branch office of Munich-based HVB, (formally known as Bayerische Hypo & Vereinsbank) under which he pled guilty to fraud, conspiracy and tax-evasion charges in the federal government’s first criminal conviction in its investigation of allegedly fraudulent tax shelters that KPMG LLP created and promoted. Here are the previous posts on the KPMG tax shelter saga.

Continue reading →