With the recent rash of chief executive indictments and a new financial scandal erupting daily, has the government declared open season on New York’s elite?
This story first appeared in the June 28, 2002 issue of WWD. Subscribe Today.
Corporate governance has become the cause celebre. The tabloids are having a field day, and everyday Americans who lost money when the dot-com bubble burst are finding the revenge quite sweet. But for his part, Rep. Billy Tauzin — who once appeared as a guest chef on Martha Stewart’s cooking show and heads up the House Energy and Commerce Committee — says his investigation into whether wealthy ImClone investors like Stewart participated in insider trading doesn’t signal a targeting of the city’s most prominent citizens.
“I don’t think it’s a war against the wealthy so much as just exposing what happens. If a broker unfairly discriminates in favor of some of his clients, I would think the other clients would like to know,” Tauzin says, likening the situation to what would happen if “you or I would walk into a store and see the sales clerk giving discounts to some and not to other customers.”
But then, taking advantage of insider access is a capitalist tradition. “Get place and wealth, if possible with grace; if not, by any means get wealth and place,” Alexander Pope counseled climbers in the 18th century. These days, however, those who gain by any means necessary are facing the consequences.
“The seemingly endless drumbeat of Enron, Global Crossing, Tyco, ImClone, Xerox, Andersen, Adelphia and now WorldCom have caused investors around the globe to lose confidence in American business and to question its basic integrity,” Securities and Exchange Commission chairman Harvey L. Pitt told members of the Economic Club of New York on Wednesday night. “The problems we’ve inherited reflect the irrational exuberance of the Nineties and the longest sustained bull market in history. Alas, sometimes the main thing bull markets give us is a lot of bull!”
In Washington, populist Republican senator John McCain echoes the battle cry, saying the financial scandals “all seem to cascade, one after another. It’s an argument for increased attention to corporate reform. It’s disgraceful. There’s got to be reform. Consumer confidence is at an all-time low. Guess why?”
And Pitt and McCain probably weren’t even thinking of the real and potential scandals in the worlds of retailing and fashion. The government is investigating the finances of bankrupt Kmart Corp. and the contracts of some of its former executives, has recently indicted three former executives of Rite Aid for accounting fraud and has found shoe magnate Steve Madden guilty of securities fraud and money laundering and sentenced him to 41 months of jail time. It’s understandable. Face it, none of those scandals have the sexiness of Martha Stewart or the scale of WorldCom.
For the once powerful, redemption used to be simply an endowment away. In 1873, controversial businessman Commodore Cornelius Vanderbilt, who was once thought to have watered down New York Central Railroad stock, founded a university in order to maintain his social standing. But those implicated in today’s corporate scandals like Alfred Taubman, Tyco’s Dennis Kozlowski and — pending a decision on her guilt or innocence — Stewart, could find winning their way back into society as difficult as financier Jay Gould did in the 1890s. “He bought companies and destroyed them. He ran a printing press in the basement, printing stock certificates. He ruined railroads. He ruined communications companies,” says M.H. Dunlop, the author of “Gilded City,” who is currently at work on a book about the Gould clan. “It got so bad that when he tried to redeem himself through charity, people would not take his money. Of course, other rich people were much more willing to give to the charities that refused Gould’s money.”
Just as the rich and famous, like Gould, were celebrated and lampooned during the 19th century, so today’s masters of the universe both shock and fascinate their public. “This is a familiar pattern that has played out over the years,” says Columbia law professor John Coffee Jr., who is currently a member of the SEC’s advisory committee on the Capital Formation and Regulatory Processes. “The bubble market crashes, and in the wake of the crash, there is the discovery of colorful villains. In 1929, after the stock market crash, for instance, we found villains who completely outraged Congress.”
And there are plenty of would-be heros on Capitol Hill who have made it their mission to take today’s villains down. Rep. Jim Greenwood (R., Penn.), Tauzin’s point person on the ImClone investigation and that of Enron, appears exasperated by the scandals, which he sees as an assault on the way capitalism should work. “To an increasing number of investors, the `Who’s Who’ of American corporate executives is beginning to look more and more like a rogues gallery,” Greenwood says.
Tauzin can’t say where the committee’s ImClone inquiry will lead — U.S. prosecutors are also on the case and have the actual power to bring charges — but at the very least he hopes small investors will feel empowered by the ImClone inquiry. Of course, as Tauzin — a.k.a. the Ragin’ Cajun — and his troops well know, prosecuting every wealthy New Yorker who makes good on a stock tip is next to impossible. “Wouldn’t you sell if someone told you at a party that you’ve heard your stock’s in trouble?” asks Tauzin. “You probably would.”
“There is a fine line between insider trading and trading on information that’s commonly held,” he continues. “The difference, of course, is the people who are privy to information because they are insiders in a corporation and use that information to help their friends or themselves. That crosses that line.”
So what to do when someone offers you a hot tip while you’re busy mingling in the Hamptons? Just say no? “People talking at a cocktail party about the ups and downs of life is completely different from someone knowingly saying, `Tomorrow, it’s going to hit the fan, so you better get out of that one now,”‘ says etiquette expert Peter Post of the Emily Post Institute. “If somebody started to say something like that to me, I would say, `Whoa! Back up! We should not be going here. You are talking about stuff that isn’t appropriate for me to know about. Don’t go any further right now, please.”‘ The “please” is important.
But while the idea of refusing a seemingly harmless stock tip seems unlikely, if not ridiculous, Fran Lebowitz, for one, takes the matter seriously. “Anyone who is guilty of insider trading should go to jail,” she snaps. “It’s profoundly anti-democratic. It’s a terrible crime. I know everyone laughs it off because no one gets hit in the head. But Americans just don’t understand. Calling it white-collar crime makes it sound like something snappy in linen for summer. These crimes are enormous in how many people they affect.”
Lebowitz also believes that the current investigation of Martha Stewart and her Merrill Lynch broker Peter Bacanovic is politically motivated. “Martha Stewart is a celebrity. It’s a way to distract people from the complicity of the Bush administration in the deals that were made in energy business, which are far greater crimes. It’s quite selective. When was the last time we heard about Ken Lay or the partners in this administration? They’re not in New York, are they? It’s what a magician does: `Don’t look over here, look over there!’ It’s truly despicable.”
Philanthropist Dayssi Olarte de Kanavos agrees that the public’s fascination with the current spate of ceo scandals is a passing distraction. “If there’s a terrorist threat, everyone will forget about the scandals instantly,” she says. “On a global scale, things fall into perspective very quickly when something like that happens. Everyone realizes all of this other stuff is meaningless.”
But such is the nature of scandal itself, according to Jane Stanton Hitchcock, author of “Social Crimes,” a novel that links Marie Antoinette’s misadventures to those of New York’s elite. “The bigger the discontent within a society — Oh, the economy’s not good, oh, these people are always smiling; meanwhile, they’re robbing us — the more people will focus on a particular scandal,” she says. “Clearly, people are really sick of the rich getting away with murder and smiling all the way through. It’s become such a process now. You get caught, you hire a lawyer and you get off. Until now. Look at Michael Skakel: `Too bad, Michael, you didn’t get off.”‘
Sometimes a scandal, however, provides just the perfect antidote to the world’s real problems. “Scandal offers a relief. If you look at the Austro-Hungarian Empire, there was the great Mayerling scandal. In the 1920s, there was the Teapot Dome scandal — there was the Gloria Vanderbilt scandal — all of these take you out of and away from much deeper and bigger problems,” says Stanton. “I mean, all of these people are interchangeable.””