by Tom Taulli | June 8, 2012 11:50 am
InvestorPlace’s Jonathan Berr recently wrote that Chesapeake Energy (NYSE:CHK) CEO Aubrey McClendon might soon be without a job.
Maybe it’s because he was able to secure more than $1 billion in loans that were backed by his interest in the company’s wells. Or maybe because it’s because McClendon’s personal lender also is a major funder of Chesapeake — a huge conflict of interest.
As Berr says: “Indeed, given McClendon’s extensive personal investments, it’s hard to see how he was able to devote sufficient time to being CEO, the job shareholders expected him to do.”
Sure, McClendon had the board’s approval for many of his shenanigans, but the fact remains that his reign appears peppered with serious conflicts of interest and self-dealing, and his antics have helped fuel a roughly 20% slide in CHK shares this year.
It seems like no one ever reads the history books. These kind of antics are nothing new in the C-suite, and they often end in disaster. For instance …
In the 1950s, John Rigas started a regional cable company called Adelphia. Through shrewd dealmaking, he eventually created one of the largest operators in the U.S. And one of the world’s biggest personal piggy banks.
Rigas and his family had other side businesses that liberally used the property of the parent company. In 2005, Rigas and a host of executives, as well as his sons, were charged with various frauds — billions of dollars were thought to have been sucked out of Adelphia. Rigas was convicted and sentenced to 15 years in prison, and Adelphia had to file for bankruptcy.
Richard Scrushy was a rags-to-riches-to-rags story. Scrushy was a high school dropout who lived in a trailer park and did manual work. Being tired of this life, he then earned a GED and went to college. By the mid-1980s, he co-founded hospital owner HealthSouth (NYSE:HLS), which quickly would become a Wall Street darling.
But much of the company’s performance was a façade. That is, Scrushy was effective in hiding expenses for some time, but he couldn’t keep it up indefinitely. By 2005, HealthSouth was embroiled in an accounting scandal, and Scrushy eventually was convicted of money laundering and obstruction of justice. He currently is in jail, serving out a roughly seven-year sentence.
A civil court also ordered Scrushy to pay $2.87 billion in restitution. To recover some of the money, the bankruptcy estate has been selling off Scrushy’s personal assets. Just last year, it auctioned off more than $1.5 million in jewelry.
Once a basketball coach, Bernie Ebbers got into the long-distance reseller business in the early 1980s. He had a knack for raising capital as well as pulling off acquisitions. By the late 1990s, his company had evolved into telecom titan WorldCom, which eventually would grow to a market value around $60 billion.
With his wealth, Ebbers bought lots of real estate, such as ranches, farms and timberland (he owned the largest ranch in Canada, about 500,000 acres). He also purchased a chain of hotels and a trucking operation.
However, around the time the dot-com boom imploded, WorldCom’s growth came to a halt — and Ebbers had a solution: accounting fraud. In all, shoddy bookkeeping amounted to about $11 billion, and in 2005, Ebbers was convicted of various white-collar crimes. His sentence: 25 years in prison, which means he’ll be 85 by the time he gets out.
Dennis Kozlowski joined Tyco (NYSE:TYC) in 1975 and became the company’s CEO in the early 1990s. He wasted little time with an aggressive acquisitions strategy, which helped to produce consistent earnings growth and drew Wall Street’s adoration.
Unfortunately, Kozlowski also played fast and loose with the company’s accounting.
While CEO, Kozlowski lived like a 17th century French monarch. For example, he outfitted his $30 million New York apartment with $6,000 shower curtains and a $15,000 dog umbrella stand. He also threw a $2 million 40th birthday party for his second wife — on the Italian island of Sardinia. Tyco paid for half the costs because it was considered a “shareholder meeting.”
In 2005, he was convicted of several crimes, including unauthorized bonuses, and he was sentenced to 8 to 25 years in prison. To top it off, in 2006, the aforementioned second wife filed for divorce.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.
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