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Madoff and Clawbacks

Is Corporate America Over-Regulated?

Germans Flee Then Try to Take Over the NYSE

You may have read that the German stock exchange -- Deutsche Borse AG -- is involved in a deal to acquire the New York Stock Exchange. If approved by the various regulatory authorities, the combined company would trade more stocks and futures than any rival in the world and more options than any U.S. exchange. For the U.S., the move would be symbolic of our fading dominance as the world's economic powerhouse and continue the trend of companies delisting their stocks on the NYSE.

On June 18, 2010, the symbol of the German company Deutsche Telekom, DT, made its last run across the ticker at the New York Stock Exchange.  Europe's largest telecom company left the world's biggest and most recognizable exchange after nearly 14 years of trading. The company is currently in the process of delisting from all foreign exchanges and will soon only be traded on its home stock market in Frankfurt. Deutsche Telekom is just the latest German blue chip to say goodbye to the American capital market.  In an emblematic departure, Daimler, the first German firm to be listed in New York in 1993, officially quit trading on the NYSE on June 4, saying that it no longer needed a presence in New York to attract international investors. And Munich-based insurance and financial services giant Allianz abandoned the NYSE last fall.

So what's causing the flight from our capital markets? Many in the corporate world blame it on over-regulation of businesses in the U.S. Tighter regulations under the Sarbanes-Oxley Act introduced by the U.S. government in the wake of the accounting scandals in the early 2000s brought extra oversight and added costs for foreign companies listed on the NYSE. German companies consider the U.S. to be over-regulated.

Ofcourse, Sarbanes-Oxley is just just the tip of the iceberg. The Dodd-Frank Financial Reform Act recently passed by Congress extends the regulatory arm of the government to areas including consumer protection, systemic risk oversight, executive compensation, and capital requirements. It is estimated that the act mandates nearly 250 regulations and 70 studies. The Foreign Corrupt Practices Act that has been on the books since the 1970s following disclosures of massive international bribery by U.S. companies establishes recordkeeping and internal control requirements. I could go on but you get the picture.

The fact is that corporate America has no one to blame but itself. Cap mkts We've gone from one period of business fraud to the next since the 1980s when companies like ZZZZ Best were cooking the books to falsely inflate earnings, artificially drive up their stock price, and enhance lucrative stock option plans. The cost to clean up 1,043 failed thrift institutions with total assets of over $500 billion during the 1986-1995 period was reported to be $152.9 billion. In the late 1990s and early 2000s we witnessed companies like Enron and WorldCom engage in massive fraud that cost shareholders and employees billions of dollars. The financial crisis of 2008 was due in part to efforts by banks and financial institutions, including giants such as Citibank, Bank of America, the now-defunct Countrywide and others that financially engineered transactions to sell off mortgage-based assets to unwitting buyers, and even insure their own investments against loss by exercising credit default swaps with AIG. We also learned about fraudulent practices such as encouraging homebuyers to take out loans with questionable or no credit; forced bankruptcy proceedings after foreclosures; and generally failing to meet their fiduciary obligations to investors and the general public. 

In March 2009, Bernie Madoff pleaded guilty to 11 federal crimes and admitted to turning his wealth management business into a massive Ponzi scheme that defrauded thousands of investors of billions of dollars. The amount missing from client accounts, including fabricated gains, was almost $65 billion. The court-appointed trustee estimated actual losses to investors of $18 billion. On June 29, 2009, Madoff was sentenced to 150 years in prison, the maximum allowed. Then there is insider trading. Just last week the SEC announced an investigation into the activities of hedge funds that  gave improper tips about sales figures, earnings and the financial performance of some of the nation's leading technology companies. The SEC said the scheme allegedly generated at least $5.9 million in illicit gains, but you can bet the figure will go much higher.

Corporate America needs to look in the mirror and it will discover why so many regulations are needed. A free market system depends on ethical behavior by those entrusted with the capitalistic ethic of laissez-faire. U.S. businesses have failed miserably to live up to this standard.