Are we looking here at a return to the kind of circus-like justice found in the Roman Colosseum two thousand years ago, designed as much to entertain as it was to penalize?
Many things come to mind with the sentencing in Manhattan federal court of Bernard Madoff for the almost incalculable fraud he inflicted upon so many victims. Unfortunately, what stands out most about yesterday’s courtroom drama is that the extravagance of the crime appears to have been surpassed only by the exaggeration of the punishment.
What U.S. District Judge Denny Chin handed down in the biggest Ponzi fraud in American history is neither an effective deterrent nor a measured response to the offense. Here is a case where not only does the punishment overshadow the crime, making Lady Justice seem like something of a carnival figure, but it will also undermine the need to take white collar misconduct and the culture that permits it more seriously.
A century-and-a-half in prison for a man in his seventies will not deter future offenders. What it will do is minimize by comparison the crimes of people like Bernie Ebbers, Dennis Kozlowksi and others who are serving 25-year terms for their frauds. That is a mistake. What has been created is a scenario where every new boardroom villain and Wall Street fraudster, no matter how atrocious their crimes, will be able to claim “at least I wasn’t as bad as Madoff,” and look for understanding from the courts and the public on that basis. And by any comparative conviction, they will be correct.
Few voices have been as demanding of reform or more alarmed about the state of ethics on Wall Street as those raised on these pages. The crimes Madoff committed, and the magnitude of the betrayal he mounted, are undeniably deserving of a sentence that will see him spend much of the rest of his life behind bars. But what does adding at least 125 years of imprisonment to a life that will never see them do for the fact, or appearance, of justice? Will they keep his embalmed body in his prison cell for a century longer? Does it bring more solace to his victims? Are we looking here at a return to the kind of circus-like justice found in the Roman Colosseum two thousand years ago, designed as much to entertain as it was to penalize? Excessive conduct in human behavior, however repulsive, cannot excuse the vice of excess in the administration of justice.
What the sentence does is give the false impression that the criminal justice system and securities regulators, like the SEC, who dropped the ball on the Madoff file and only re-discovered it after he confessed to his fraud, have really done something big about the problems of crime and greeed on Wall Street. They have not.
If Madoff is to be the benchmark by which future white collar crimes are to be judged, we are in serious trouble. We cannot permit other egregious offenders who bring down entire companies, wipe out thousands of jobs and injure millions of investors, to be viewed as petty thieves on the new Madoff scale. It is hard to make the case that Madoff’s misdeeds, monstrous though they may have been, were greater than the combined crimes of Bernie Ebbers (WorldCom), Jeffery Skilling (Enron), Dennis Koslowski (Tyco), Sanjay Kumar (Computer Associates) and Conrad Black (Hollinger). But on a punishment basis, that’s exactly what this sentence says.
The larger risk, too, is that the need to change the culture of Wall Street and those who skate close to the edge, will be obscured by the record-shattering nature of the sentence. Why the SEC did not do more to detect Madoff’s three-decade-long scam, even when presented with numerous clues, has never been adequately explained. Nor has there been any serous 9/11 type commission to examine the causes and failures leading to the worst collapse of credit and financial confidence since the 1930s. At the rate things are moving, it may take a century-and-a-half before those issues are fully addressed. Mr. Madoff does not have 150 years to be punished, as society has indicated it prefers, but neither has society or its system of capitalism anything approaching that amount of time before they come to grips with how such things can occur and what needs to be done to raise the standards of ethics in the handling of other people’s money.
The court of public opinion needs to speak on that front with a force equal to what emanated from the Pearl Street courtroom yesterday.
When Countrywide Financial’s Angelo Mozilo told a Congressional committee in 2007 that there was a lot of fraud in the subprime business, we thought at the time it might be a prophetic statement. The Securities and Exchange Commission apparently agrees, as this week it laid civil charges of securities fraud against the company’s former CEO. What we sometime ago dubbed as Mr. Mozilo’s miraculously timed stock sales, the SEC thinks could be insider trading.
In 2006, Mr. Mozilo was among America’s ten highest paid CEOs, with a paycheck that topped $142 million. Between 1999 and 2008, he pocketed some $400 million in total compensation. It will be interesting to see whether this was one of those cases where the compensation was fully justified–as Countrywide’s board always maintained during this period–and an example of aligning the interests of CEOs with those of investors, or whether it was, instead, nothing more than reward founded on sands of subprime fraud and another example of CEO pay being aligned with CEO greed.
The American justice system, which Conrad M. Black disparaged before, during and after his conviction on fraud and obstruction of justice charges in 2007, has taken a surprising turn today -surprising to Mr. Black, especially. The U.S. Supreme Court announced this morning that it will hear his appeal.
A few years ago, there were not many who would have refused to listen to whatever Mr. Black wanted to say. He was courted, honored, praised and saluted throughout North America and Europe by presidents, prime ministers and princes. Now, the only people who matter are the nine justices of the top court of the land. This is not the best time, still, for Mr. Black, who remains in prison, and some of his friends, who have their own travails with various forms of the legal system.
Garth Drabinsky was found guilty of fraud in a Toronto court earlier this year. Former Canadian prime minister Brian Mulroney is even now at the center of a commission of inquiry looking into the circumstances which saw his receiving envelopes of cash, beginning just after he retired from office, from a shady arms dealer who is wanted by the German government. Conrad Black served on the board of Livent, the company founded by Mr. Drabinsky, who was a close friend. Brian Mulroney elevated Conrad Black to membership in Canada’s privy council, a rare honor for those who do not hold public office. Conrad Black was a long-time friend of Mr. Mulroney and a major financial backer of the Conservative party under his leadership. All of these men are members the Order of Canada and were trained in the law.
Mr. Black has frequently opined on the failings of the U.S. justice system. But as he now begins to set his gaze upon the only remaining nine citizens of planet Earth who hold the key to his future in their hands, one can soon expect to hear that institution trumpeted, in true Blackarian form, as the Founders’ purest and most noble of creations. It’s not entirely a virtueless view, and it is a marked improvement from his lordship’s previous line about the prosecutors with toilet seats around their necks.
We have received a number of emails from readers who were shocked at the revelation, first brought to light on these pages, that, between them, the boards of Livent and Hollinger had seven directors who became convicted felons. Here’s another gem: three of them were trained as lawyers. The number of felon directors on these boards sets a record for modern publicly traded corporations. For those interested, here’s how the total was calculated:
A. Alfred Taubman, Director (convicted of price fixing, 2001)
Conrad M. Black, Director (convicted of mail fraud, etc., 2007)
Garth H. Drabinsky, Director (convicted of fraud, etc., 2009)
Myron I. Gottlieb, Director (convicted of fraud, etc., 2009)
A. Alfred Taubman, Director (convicted of price fixing, 2001)
Conrad M. Black, Director (convicted of mail fraud, etc., 2007)
F. David Radler, Director (convicted of mail fraud, 2007)
Peter Y. Atkinson, Director (convicted of mail fraud, 2007)
John A. Boultbee, Director (convicted of mail fraud, 2007)
Black, Drabinsky and Atkinson were trained as lawyers.
Gottlieb and Boultbee were trained as professional accountants.
Both Black and Drabinsky, during the time of the crimes for which they have been convicted, were members in good standing of the Order of Canada, the country’s highest civilian honor. They remain so today. There is no indication if or when they will be stripped of that prized decoration, which, as we have long maintained, is a sad commentary on the distinction, on the men and women or who hold it and, especially, on those who are entrusted with maintaining the integrity of the award.
The descent to criminal status of Livent’s founder, like that of his friend and former board member Conrad Black, was stunning but not entirely surprising, given the contempt both men showed for modern corporate governance practices. Between the boards of these now defunct stock market icons, Livent and Hollinger, there stands a roster of seven directors who became convicted felons.
They shared a taste for the finer things and reveled in the image of being larger-than-life figures. They were also good friends. One served on the other’s board. Both were members of the esteemed Order of Canada and held numerous honorary degrees and other accolades. And when they fell into legal difficulties, they were represented by one of Canada’s most respected criminal lawyers, Edward Greenspan. Now they share another label: convicted felon. Soon Garth Drabinsky will follow his friend Conrad Black, now serving a 78-month sentence in a Florida federal prison, to a new address with a very tall fence and rather drab clothing. Earlier this week, Mr. Drabinsky and his long- time colleague, Myron Gottlieb, were convicted in a Toronto court on all charges of fraud and forgery in connection with their management of Livent, a once- thriving theatrical production company.
Like Mr. Black, Mr. Drabinsky travelled in a rarified circle of the rich and famous, occasionally bumping into more common mortals. There was a rather eerie period a few years ago when Mr. Drabinksy and I frequently found ourselves standing just behind or in front of each other at some pleasant dining establishments in New York and Toronto. At one point, a maître d’ at the Four Seasons asked if we were together. The New York coincidences ended when Mr. Drabinsky was charged with securities fraud by the Manhattan U.S. Attorney and became a fugitive from justice when he failed to surrender himself. For a while, we shared the same tailor. Mr. Drabinksy had an understandable preference for Italian Brioni custom-made suits. His appearances were always considered something of a theatrical production themselves by my tailor, who would boast frequently that the impresario had just picked up four or five new suits. Helping me pick out an on-sale, off-the-rack Brioni must have seemed like a real off-Broadway production to this impressionable fellow.
More than once I have found myself standing in front of the pastry counter at what some think to be a chichi grocery store when Mr. Drabinsky has popped up to inquire about the freshness of a chocolate layer cake.
A couple of summers ago, we wound up on the same road in the middle of nowhere in Ontario’s cottage country. But there was Garth, in his black Porsche Cayenne Turbo, dawdling and weaving on the road in front of me, looking like something of the Phantom of the Highway. I think he may have been looking for property on which to build his new $5 million cottage, which I thought at the time was quite a display of chutzpah, given that a number of friends had just put together a legal defense fund for him after Canadian authorities charged with fraud and forgery.
I gave a short blast of my horn as I moved around him, fearing that he might wander into the passing lane. He managed a pleasant smile and a wave, not realizing once again that it was the fellow who was the first to raise red flags in a major publication about Livent’s corporate governance.
Therein lies another interesting trait Mr. Drabinksy and his corporate empire shared with Conrad Black and Hollinger: a board of directors where management dominates and controls. Mr. Black was CEO, chairman and president, as well as chairman of the executive committee, of Hollinger. Mr. Drabinsky held the same posts at Livent. Perhaps he took his cue from Hollinger’s structure and confirmed it by placing Conrad Black on his board. When Mr. Drabinksy fell into legal difficulty, Mr. Black was part of a group who came to his rescue. Order of Canada members stick together, it seems, inside and outside the law. (There is still no indication that Canadian officials seek to strip Mr. Black of that country’s highest honors or of the membership he holds in Canada’s Queen’s Privy Council).
What boggles the mind is the stellar board of directors that Livent boasted. The names follow below in my original op-ed piece published in the Financial Post in 1998. One name, in addition to Mr. Black’s, stands out in Technicolor: A. Alfred Taubman. Mr. Taubman, who was also a director of Hollinger, served on Livent’s audit committee. In 2002, he served one year in federal prison for criminal violation of antitrust laws.
Thus the following fact is now revealed for the first time in the context of the criminal convictions this week in Toronto. At Livent, five individuals who held the post of director have at one point or other been convicted of criminal conduct. At Hollinger, five directors in the company were also found guilty of white-collar crimes. Two -Black and Taubman- sat on the boards of both Hollinger and Livent. Between the boards of these now defunct stock market icons, Livent and Hollinger, there now stands a roster of seven directors who became convicted felons. Odd, too, is the shared training both Mr. Drabinsky and Mr. Black had as lawyers. Both earned a well-established reputation for their inclination toward litigation. It is in the most serious kind of litigation, the fight for one’s freedom, that both lost their reputations.
When I used to make observations about the risks posed by so many insiders on the boards of Livent and Hollinger, many in the business press and market analysts would often skoff at my concerns and point to the stellar performance of the companies and the trophy names on their boards. Now it seems that this structure was a convenient cover for the perpetration of accounting frauds in two orgnizations where the CEO had little trouble mesmerizing even big name directors, who ultimately showed little knowledge of, or sympathy for, modern corporate governance practices. One wonders if the board thought it was viewing a theatrical event rather than governing a publicly-traded corporation. At Livent, directors gave Mr. Drabinsky and Mr. Gottlieb bonuses even when the company was losing money, and allowed Mr. Gottlieb to sit on the board’s audit committee. Even the recurring statement in Livent’s proxy circular that the board was viewed by management as something of an advisory group did not seem to bother these directors. One phrase especially caught my attention a decade ago when the company claimed that the board preferred to rely on the “specialized expertise” of Drabinsky and Gottlieb. We learned the meaning of “specialized expertise” this week.
How loud the thud when oversized egos come crashing to the earth, which they otherwise rarely touched before. No matter how often the sound is heard -Conrad Black, Bernard Madoff, R. Allen Stanford and, recently, Peter Pocklington, one-time owner of the Edmonton Oilers who gave Wayne Gretzky his first NHL season, come to mind- it is impossible not to wonder what might have been if they had been imbued with a lesser ego and a larger sense of integrity and perspective that might have kept their feet more firmly planted on the ground.
One of my articles on Livent did manage to make its way into the Financial Post some years ago. I have reprised it below. Incidentally, this was my final contribution to the Post, which had been running my Op-Eds since the 1970s and on a number of occasions called on me to help write editorials in the newspaper. Shortly after the article was published, Mr. Black bought the paper. I was told later by editors that he did not appreciate the article about Livent. My by-line did not appear in the Post again. Mr. Black’s successors -who continue to cheerlead for him and run the occasional columns produced from his prison cell, and have expressed the view that his crime was of a minor nature- prefer to keep it that way. The Financial Post ran a retrospective of the key articles it had published about the Livent saga going back to 1998. It did not include the article below, which ran in August of 1998.
Saturday, August 15, 1998
Livent shakeout raises issues about how boards work
By J. RICHARD FINLAY
The Financial Post
The guns of August are booming again. Four summers ago, the blue-chip board of Confederation Life Insurance Co. came under fire for its failure to prevent that company’s collapse. This time, the target is Livent Inc., where assertions of financial irregularities have led to the suspension of company founders Garth Drabinsky and Myron Gottlieb. On their face, the accusations seem implausible. If true, they would mean there had been a systematic juggling of the books under the noses of some of the most prominent figures in Canadian business. Once again, troubling questions would be raised about whether boards really work, or whether they are just relics of the past.
It will likely be some time before all the facts come to light, but the recorded corporate governance practices of Livent give important insights into the nature of board supervision in the company.
For the period in which the irregularities allegedly occurred, Livent had a board that varied between 13 and 14 directors. Toronto Stock Exchange guidelines, as well as best governance practices elsewhere, recognize that there should be no more than two insiders on the board — usually the chief executive and chief operating officer. In Livent’s case, three senior company officers were also directors in addition to Drabinsky and Gottlieb. Five insiders on a board of 14 is a rarity in Canadian business these days, and not an admirable one at that.
Interesting, too, is the fact that Drabinsky held the dual positions of chief executive and board chairman up to June. It is widely believed that having a non-executive director as board chairman provides for better accountability and board oversight of management.
The most notable feature of Livent’s board, however, is the fact that it is composed of such high-profile names. Conrad Black has been a director since 1993. Joseph Rotman has been on the board since 1995. Jim Pattison joined the board in 1997. Indeed, in some ways it would be difficult to find a more distinguished board. Black, Rotman, Pattison and Drabinsky are all members of the Order of Canada.
Could such respected and experienced business leaders have been duped? Did the audit committee of the board, which included Rothschild Canada chief executive Garfield Emerson, Sotheby’s chairman and shopping centre king Alfred Taubman and polling guru Martin Goldfarb, fail in one of the director’s most solemn duties: to, as Harvard board scholar Myles L. Mace observed, “ask the right questions”? Or were they given the wrong answers? Livent also claims outside directors on the board’s audit committee have a procedure for meeting independently with the auditors, if they so choose. It will be interesting to learn in the weeks and months ahead if they ever did.
The company has declined to follow TSE recommendations and form a nominating committee composed of outside directors for the selection of new board members. Instead, company documents as recent as May state it prefers to rely upon the “specialized expertise” of Drabinsky and Gottlieb, who, along with unnamed outside directors, look for board members who will “supplement” management. That concept alone, where directors are viewed as some kind of appendage of management, ought to have set off alarm bells among professional investors.
The same philosophy might explain why the board felt no need to follow TSE guidelines in forming a corporate governance committee to examine ways of ensuring board effectiveness. Perhaps now they might wish they had.
Much is resting on the outcome of what happened here, not the least of which is Canada’s already tarnished reputation in global investment circles over the Bre-X Minerals Ltd. and YBM Magnex International Inc. scandals.
If financial irregularities did occur, it may be hard for the investing public and policy makers to resist concluding high-profile boards are little more than ornaments on management’s Christmas tree, and sweeping change is needed.
A Canadian court found Livent founders Garth Drabinsky and Myron Gottleib guilty (on all counts) of fraud and forgery in one of the most high profile white collar criminal cases in recent Canadian history. We will have more on this stunning development in an upcoming posting.