Ethics Newsline®

“There oughta be a law!” It’s a phrase you hear more and more these days. It pops up whenever the ethical issues in the news are particularly rotten. And it’s a natural response. After all, if baseball players use steroids with impunity, Harvard applicants hack into databases to check their admission status, specialist traders on the New York Stock Exchange rip off their clients, then let’s toughen up the regulations.

Let me take a contrarian view. I’m all for vigorous efforts to identify wrongdoing, enact laws, and ensure compliance. But compliance is no substitute for ethics. Yet a look around the corporate landscape suggests that we’re galloping into a new Age of Compliance — on a horse named Sarbanes-Oxley.

Why? The rote answer is, “Because of Enron.” True, the collapse of Enron that began in the autumn of 2001 — and carried to perdition its accounting firm, Arthur Andersen — was stark evidence of unethical corporate behavior. But Enron was just the beginning: The spring and summer of 2002 saw revelations of corporate malfeasance that included WorldCom, Global Crossings, Adelphia, and a host of others. As examples piled up, markets plunged and public trust in corporations ebbed, as various polls showed:

• That summer, a Gallup Poll asked how much confidence people had that the financial information reported by companies was accurate. More than half the respondents (54 percent) said “none at all” or “not much.”
• That summer, too, the Pew Research Center for the People & the Press found the same number (54 percent) agreeing that “government regulation of business is necessary to protect the public interest” — an increase from 38 percent just eight years earlier.
• Meanwhile, a Harris Poll found nearly four in five Americans agreeing that “most corporate executives put personal values ahead of employees and shareholders.”

Little wonder, then, that on July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act, one of the most far-reaching pieces of compliance legislation in years. Hastily composed and poorly designed, it nevertheless made good that old refrain — “There oughta be a law!”

The jury is still out on the costs to corporations of Sarbanes-Oxley compliance, but it’s a safe guess that it’s already in the billions of dollars and millions of person-hours. No one doing Sarbanes-Oxley work adds value to any company. They design nothing, make nothing, and sell nothing. They make no improvements to management, marketing, or morale. They meet no demands, satisfy no necessities, create no opportunities. They simply report.

Sounds harmless? Perhaps, until you recall that Soviet Communism already tried that experiment. In an astonishing seventy-year-long drama, the world watched as an entire economy hired vast segments of its potential workforce — perhaps as much as one-quarter — to do nothing but spy on, report out, and pass judgment against the other three-quarters. Little wonder that the Iron Curtain economies collapsed. Pull a quarter of the workers in any business in the world out of productive activity — and make the remaining workers support them — and see how long the firm survives. While no companies put 25 percent of their efforts into Sarbanes-Oxley, the analogy is sobering. Carry compliance to its logical extreme, and you gut the competitiveness of business.

Nonsense! shout the regulators, who insist that it’s only through reporting that we’ll stem the post-Enron excesses. That could be true — for a while. But if compliance is all we’ve got, creative minds bent on duplicity will quickly find ways around it. When they do, how can the compliance-minded respond but by passing new laws and tightening present ones? Does anyone think those laws will reduce the cost of corporate compliance? While we may not reach the Soviets’ 25 percent, what figure will be acceptable? Two percent? Five percent? Seven percent? These begin to sound like profit margins — exactly the difference between success and failure.

What’s needed? Three things. First, let’s get clear on our goals. We’re not seeking a compliant corporate culture but an ethical one — a business climate that encourages doing things right because it’s good business to do so, not merely because the regulations say you’ve got to.

Second, let’s shatter the mesmerism that compliance exercises on the nation these days. No business ever complied its way into integrity. A climate of integrity, however, can eliminate any number of wrongs before they happen — leaving compliance with less to correct.

Third, we need to build our climate of integrity through values-based self-regulation — not in a waffling and wooly way, but through a robust, powerful application of moral reasoning and decision making to the toughest business decisions. Compliance grows out of that climate. It can never replace it.

©2005 Institute for Global Ethics

“All you can really do with that kind of money is give it away. There’s no way you can spend it. What I’m interested in doing is setting up a medical research foundation and seeing if we can’t make a difference in the world.”

– Orthopedic surgeon Gary Michelson, discussing his plans last week for a $1.35 billion settlement payment from Medtronic, Inc. Michelson had sued Medtronic over the licensing of some of his 500-plus patents, which range from groundbreaking spinal surgery techniques to a new paper clip, reported the Associated Press. (“L.A. Doctor to Get $1.35B in Settlement,” AP, Apr. 22)

WASHINGTON
Accounting firm KPMG last week agreed to pay $22.5 million, including the return of four years’ worth of fees, to settle allegations that the company helped Xerox Corp. hide bookkeeping fraud.

KPMG will pay a $10 million civil penalty, $2.7 million in interest, and $9.8 million in disgorged revenues for its auditing work for Xerox from 1997 through 2000, reported the New York Times.

The U.S. Securities and Exchange Commission (SEC) accused KPMG of rubber-stamping false financial statements that overstated Xerox’s financial results by $1.5 billion over the span of four years.

The SEC rebuked KPMG for getting too cozy with Xerox, saying the firms’ 40-year relationship had compromised the auditor’s willingness to flag bad bookkeeping practices.

KPMG went so far as to remove a senior employee from the account at Xerox’s request after the partner raised questions and complained to KPMG’s chairman about Xerox’s accounting practices, noted USA Today.

“This is a fairly egregious fraud on the part of Xerox, and KPMG didn’t live up to its role as gatekeeper,” said Paul Berger, associate director of enforcement at the SEC.

Last week’s settlement will be set aside for restitution for investors who lost money after the fraud was revealed in 2000. Six former Xerox executives already paid $22 million into the fund when settling related charges in 2003.

The SEC still is pursuing charges against five KPMG partners involved in the audits, according to the Times.

LOS ANGELES
Manufactured timelines, fabricated details, and lazy reporting chipped away at the reputations of two of the nation’s leading newspapers last week, prompting apologies from editors caught off-guard.

In California, the Los Angeles Times fired Eric Slater, an 11-year veteran journalist at the paper, after discovering a wide range of ethical and procedural lapses in a recent story covering the 2002 death of a college student.

Slater’s story included straight-forward factual errors, quotes from sources that could not be verified by the paper, and other flaws, prompting two correction columns and an internal inquiry into the matter.

The Times last week announced it had fired Slater, saying that “beyond the specific errors, the newspaper’s inquiry found that the methods used in reporting the story were substandard.”

On the other side of the country, the Boston Globe severed relations with freelance reporter Barbara Stewart, apologizing for publishing her piece on a Canadian seal hunt that had not actually taken place.

Stewart’s story described a brutal and bloody seal slaughter in the past tense. The Canadian government, which oversees the annual event, complained, noting that the slaughter had been rescheduled due to bad weather.

Stewart told Boston Globe foreign editor Jim Smith that she had prepared the piece in advance, basing the bulk of it on extensive research, fabricating a few details that she assumed would logically happen.

“Clearly, that doesn’t in any way forgive the many errors that took place on her part and our part,” Smith told the Washington Post last week.

While the Stewart incident is embarrassing for the Boston Globe, it may not be “that big a deal,” Dan Kennedy, media writer for the Boston Phoenix, told the Post. “It was an unknown freelancer writing a fairly small story inside the paper, and they took care of it immediately.”

But “no matter how many times this keeps happening, it’s still a shock to editors,” Kennedy added. “You just don’t think people are going to do this.”

The Post notes that a similar dust-up recently hit the Detroit Free Press, which suspended star sports columnist Mitch Albom for writing about a Final Four basketball game a day before it happened.

SALT LAKE CITY
The rebellion against President Bush’s signature education law gained momentum last week with one state, eight school districts, and the nation’s largest teachers union taking aim at what they say are unfunded and illegal mandates imposed by the federal law.

The Utah Senate last week voted to reject portions of the 2002 law known as No Child Left Behind (NCLB), authorizing state officials to ignore any provisions not fully funded by the federal government.

The state said that while it applauds the federal effort to improve educational standards, NCLB is too top-down intrusive and fails to fund itself, as required by the law itself.

Last week’s legislation, which Utah’s governor has said he will sign, turns its back on a 15-month lobbying effort by the U.S. Department of Education, which had tried to head off the rebellion, noted the New York Times.

Opening another front in the legal assault on NCLB, the National Education Association and school districts in three states — Michigan, Texas, and Vermont — last week agreed with Utah, filing suit against the federal government for allegedly underfunding the program.

The U.S. Department of Education denies the charges, insisting that NCLB’s demands are fully funded and that state analyses showing a shortfall are mistaken.

Connecticut, which says it will be forced to pay $8 million of its own funds to meet the federal program’s requirements, has announced plans to file suit as well.

COLORADO SPRINGS
Still stinging from a sexual assault scandal that erupted two years ago, the U.S. Air Force Academy confronted a new ethical issue last week, saying it is struggling to correct a climate reportedly hostile to non-Christian cadets.

The academy said it learned of the problem last May after conducting a survey of its students, 90 percent of whom are Christian — mostly Protestant, Catholic, and Mormon, reported the Los Angeles Times.

Non-Christian cadets reported being harassed or intimidated because of their beliefs — a problem that grew worse after Christian students eagerly promoted the release of “The Passion of the Christ” last year, officials said.

“We started getting people coming forward,” academy spokesman Johnny Whitaker told the Times. “Folks sent emails to the chaplain describing events — none of which were reported when they happened.”

Complaints, including 55 over the last few months, have involved people “saying bad things about persons of other religions or proselytizing in inappropriate places,” Whitaker said. “There have been cases of maliciousness, mean-spiritedness, and attacking or baiting someone over religion.”

Whitaker said the academy has moved to correct the problem, requiring a 50-minute religious-sensitivity training class for all cadets. The institution’s 9,000 staff members eventually will be required to take the training as well.

That broad roll-out is important since some of the abuses are coming from academy authorities, said Kristen Leslie, a Yale University professor of pastoral care who led a group invited by the school to review its chaplain program.

One chaplain told 600 cadets to “tell their fellow cadets that those who are not born again will burn in the fires of hell,” Leslie told the Associated Press. When such rhetoric comes from academy staff, it “suggests the cadets were supposed to assume this was the party line,” she warned.

“We’re making strides out here,” academy spokesman Whitaker said last week. “We recognize the problem.”

Tom Minnery, vice president of public policy at the evangelical Christian-based Focus on the Family, headquartered in the academy’s hometown of Colorado Springs, sees the matter differently, contending that it is the Christians cadets who are being persecuted.

“Christianity is deeply felt and very important to people à and to suggest that it should be bottled up is nonsense,” Minnery told the Times. “I think a witch hunt is under way to root out Christian beliefs.”

ATLANTA
Hoping to take a bite out of student crime, a school district in Central Georgia last week signed on with a national program that rewards students for informing on classmates who may be breaking school rules.

The national Student CrimeStoppers program and similar initiatives reward students with cash for telling on classmates who may be carrying firearms, doing drugs, smoking on school grounds, or engaging in other forbidden activities

USA Today last week profiled a number of school districts across the country that have adopted such programs, noting that school shootings — like last month’s killing of nine students by a classmate in Red Lake, Michigan — often cause a flurry of interest.

“It’s a proactive attempt from the principal’s standpoint,” said Tim Hensley, spokesman for a school district that includes Model High School in Rome, Georgia, which will pay students up to $100 for information about rules violations.

A Texas school district has paid more than $2,100 to students so far this year for information on classmates selling prescription drugs and smoking cigarettes. A North Carolina school district has paid out more than $1,000.

“This year, we’ve given out $1,100,” Cherryville High School principal Stephen Huffstetler told USA Today. “For $100, they’ll turn their mothers in.”

While such programs are lauded by some school authorities, Russ Skiba, professor of educational psychology at Indiana University in Bloomington, cautioned that there may be a downside as well.

“There’s a balance here between creating a society of snitches and creating a sense of community responsibility,” warned Skiba, who helped review violence prevention programs for the U.S. Education Department.

Special to Newsline from Canadian correspondent Errol P. Mendes

NEW YORK
Canadian businessman Maurice Strong, the former United Nations envoy to North Korea and a longtime adviser to Canadian Prime Minister Paul Martin, has been linked to a key person charged in the U.N. Oil for Food corruption scandal.

Strong has acknowledged publicly that in 1997, a South Korean man, Tongsun Park, invested in an energy company with which he was associated. The company has no relationship with Iraq according to Strong.

Park is suspected of funneling bribes to U.N. officials in the Oil for Food scandal, according to the Reuters news agency.

According to the unsealed indictment, the South Korean businessman acted as an unregistered agent for Iraq in the United States during the 1990s when Iraq was under U.N. sanctions for invading Kuwait.

The indictment alleges that Park received millions of dollars from Iraq to bribe U.N. officials to violate provisions of the Oil for Food program, which allowed Iraq to export oil only if it used the proceeds for humanitarian efforts within Iraq. Investigators allege that U.N. officials were bribed to look the other way as Saddam Hussein and other Iraqi officials enriched themselves from the program.

Strong also is alleged to have invested $1 million in a Canadian company set up by the son of an unnamed senior U.N. official.

Strong, who has denied any involvement in the scandal, has stepped down from his role as the U.N. secretary-general’s envoy to North Korea while investigators look into his links with Park.

WASHINGTON
The U.S. government last week sent conflicting signals on clean-up plans for a dangerous gasoline additive called MTBE, with a federal judge okaying a massive lawsuit against MTBE’s makers while Congress moved to shield the industry from liability.

Between 80 and 100 lawsuits have been filed against the makers of methyl tertiary-butyl ether (MTBE), a gasoline additive that helps cars run cleaner, but also easily contaminates groundwater.

MTBE has fouled more than 1,800 community water systems in 29 states and poses a potential clean-up cost of $29 billion, according to U.S. House Rep. Lois Capps (D-Calif.).

Water providers, towns, counties, cities, and at least one U.S. state have filed suit against the compound’s manufacturers, accusing them of knowing about MTBE’s dangers but hiding them from the public.

Last week, a federal judge in New York said those suits — now consolidated into one federal legal action — can proceed, setting up a massive legal fight for firms including ExxonMobil, BP, and Sunoco.

“Innocent water providers — and ultimately innocent water users — should not be denied relief from the contamination of their water supply if defendants breached a duty to avoid an unreasonable risk of harm from their products,” ruled Judge Shira Scheindlin of the Federal District Court in Manhattan.

That decision, however, would be rendered moot under legislative action approved last week by the U.S. House of Representatives, which moved to shield MTBE’s makers from liability for the contamination.

Under the House’s approved energy bill, MTBE manufacturers would be immunized from most lawsuits, would be given $2 billion to wean themselves of the product, and would have until 2014 to phase it out completely.

That waiver, approved by a narrow 219-to-213 vote, was championed by Rep. Tom DeLay (R-Tex.), whose state is home to some of the lawsuits’ lead defendants, noted the Associated Press.

“They’re not giving MTBE manufacturers a slap on the wrist. They’re giving them a pat on the back,” criticized Rep. Nancy Pelosi (D-Calif.), according to the Associated Press. “It is the taxpayers who are stuck with the bill.”

Unlike the House, the U.S. Senate has balked at immunizing the MTBE industry from liability, quashing the energy bill in 2003 over concerns about the waiver and possibly setting the stage for a similar battle this year, according to the New York Times.

From the Pew Research Center:

“Americans have ambivalent views about the appropriate role for government in curbing sex, violence, and indecency in the entertainment media. They have doubts about the effectiveness of government action, and believe that public pressure — in the form of complaints and boycotts -¡ is a better way of dealing with the problem. They also blame audiences more than the media industry for objectionable material. Significantly, Americans see greater danger in the government’s imposing undue restrictions on the entertainment industry, than in the industry producing harmful content (by 48 percent vs. 41 percent).

“Nonetheless, there is broad public support for several proposals now being considered for curbing indecent material in the media. Fully 75 percent favor tighter enforcement of government rules on TV content during hours when children are most likely to be watching. Sizable majorities also back other anti-indecency proposals currently before Congress, including steeper fines (69 percent) and extending network standards for indecency to cable television (60 percent).

“The latest Pew Research Center nationwide survey, conducted among 1,505 Americans from March 17-21, finds that the tug of war in public opinion about government regulation of entertainment reflects political and religious divides about the issue.

“For example, on the fundamental question of whether undue government restrictions ¡ or harmful content ¡ presents the greater danger, a solid majority of conservative Republicans (57 percent) cite harmful entertainment. Liberal Democrats, by contrast, overwhelmingly believe excessive government restrictions are the larger concern (by 72 percent-21 percent). Similarly, while 51 percent of white evangelical Protestants say offensive entertainment presents a greater danger than undue government restriction, just 27 percent of seculars agree.

“There also is a significant generation gap, both in attitudes toward government regulation and in opinions about what constitutes offensive content. Americans 50 and older register much higher levels of personal concern than do younger adults about different types of TV material, and are more likely to view harmful content as a bigger problem than intrusive government restrictions. By contrast, those under 30 view excessive government restrictions as a far greater danger than harmful content.

“Despite these divisions, however, there are a number of points of broad national agreement on issues relating to entertainment and the government’s role in reducing offensive content:

“Most Americans say parents are primarily to blame when children are exposed to explicit sex or graphic violence. Fully 79 percent say inadequate parental supervision ¡- rather than inadequate laws -¡ is mostly responsible for children being exposed to that sort of offensive material; there are no significant political or religious differences on this point. And by more than ten-to-one (86 percent-8 percent), the public believes that parents, rather than the entertainment industry, bear the most responsibility for keeping children from seeing sex and violence in TV and movies….

“Pew’s survey on entertainment also highlights the changing nature of the public’s concerns over media content. Americans these days are troubled by much more than sex and violence ¡- in fact, sex and violence do not even top the list of people’s personal concerns over TV. Nearly half (46 percent) say they are personally bothered a lot by TV programs showing depictions of illegal drug use, while 38 percent voice a high level of concern over reality programs in which real people are tricked or made fun of….

“Despite the recent string of controversies over sex and violence in the media, however, the overall image of the entertainment industry has not eroded in recent years. Currently, 60 percent say they have a favorable opinion of the motion picture and TV entertainment industry, which marks little change from 2001 (58 percent) or 1999 (60 percent). A comparable majority (55 percent) has a positive opinion of the recording and music industry.

“But the public continues to have low regard for video games manufacturers. Only about a third (34 percent) have a favorable view of the makers of video games, about the same as in June 1999….”

“A lie told often enough becomes truth.”

– Vladimir Lenin (Russian Communist leader, 1870-1924)

Judging from the crowds swirling through Prague Castle last month, tourism is booming in the Czech Republic. Golden Lane, whose tiny sixteenth-century houses abutting the castle wall would have astonished Walt Disney, is so popular you pay extra now to get in. Down in Old Town Square, crowds were elbow to elbow among Easter week hawkers of pasties, porcelains, and painted eggs.

Prague no doubt owes some of this popularity to the Czech Republic’s entrance into the European Union in 2004. The move from second-world status into equal partnership with its Western European neighbors gives extra comfort to skittish travelers. So Czechs should be fans of the EU, eager to ratify its proposed constitution, right?

Until last week, it might have seemed so. Then, in a morality play on how one person’s ethical fumbling can change the world, the shoe dropped. Prime Minister Stanislav Gross — handsome, youthful, canny, and the nation’s most popular politician when he came to office last summer — offered his resignation amid a drumbeat of corruption charges. With him would go the nation’s most visible supporter of the EU constitution. Left in power would be his political opponent, President Vaclav Klaus. Alone among the 25 EU heads of state, Mr. Klaus is an implacable and determined foe of the constitution who, given the prime minister’s distraction in recent months, has argued almost unopposed in his own nation.

Leave aside, for the moment, the case for and against that 332-page document — arguments formidably joined last week as France’s pro-constitution President Jacque Chirac strode onto television to gin up the yeas for his country’s May 29 referendum on the EU constitution. Prague’s morality play has a different plot, showing the way that an issue of global importance may be determined by one man’s inattention to ethical details.

Those details began emerging on January 17, when a Czech newspaper said that the amount Mr. Gross paid, in cash, in 1999 for an upscale apartment was more than he had earned throughout his entire career. Questions then arose about his wife’s business dealings with a woman who owned a building that housed a brothel. The ensuing scandal — which the English-language Prague Post says is “almost universally regarded as ‘the murk’” — probably could have been contained by a rapid and convincing rejoinder from the prime minister. Unfortunately, he tried serial explanations as to the source of his cash, none of them convincing. While his foes admit that nothing illegal has been proved against him, the moral murkiness may have finally forced him from office.

Such murk is not new to Prague, as Czechs sadly admit. Castle guides regale tourists with historical tales of intrigue, bribes, and deaths by tossing top leaders from high windows or from the Charles Bridge. More recently, the Communist era only deepened the corruption, says Jiřina Novßkovß, chair of an international legal organization, the CEEL Institute, and head of a small opposition party. Over tea last month at the Palace Hotel, she recalled that living under Communism without giving or taking bribes was actually possible, but only if you were content with the most minimal standards. If you wanted to improve in any way — through travel, better housing, or a better-than-average education for your children — corruption was your only recourse.

With the election of playwright Vaclav Havel to the presidency following the student uprisings in 1989, one of the world’s most visible moral leaders came to power. Havel did what he could to diminish corruption, aided by public disgust with the Communists and a growing realization that enjoying Western standards meant engaging Western values. The change hasn’t been easy. Prague hoteliers still warn you to determine the price of taxi rides in advance, lest cabbies lead you on a merry chase. But the pall of corruption, so palpable in pre-1989 Russia and its satellites, does seem to be lifting.

That it didn’t lift Mr. Gross is unfortunate. He may be innocent of wrongdoing. But in that fact lies one of the great lessons of this morality play, which is that public life requires the avoidance not only of wrongdoing but of the appearance of wrongdoing. Suppose France votes for the constitution. Suppose the Czechs then raise the dissenting voice that sends the document back to the drawing boards for a few more years. Will the constitutional moment pass? Will more doubts begin to surface? Will the result be a European Union without a constitution, scuttling one of the world’s most ambitious experiments in transnational unity? Will historians trace that failure to a decision in 1999 by a young Czech who never dreamed that failing to avoid the appearance of wrongdoing could affect the course of history?

That may be a long-shot scenario, but that’s the point. The chain of character gets welded link by link, with each as important as the others. Moral murk corrodes that chain wherever it’s weakest — a lesson worth noting these days not only in Prague but in Washington, London, and the rest of the world’s capitals.

©2005 Institute for Global Ethics

“He never lost power, even though he stepped down from Boston. In any other corporation if you lost your rank and left, you’d lose your power and you’d be stripped of your title. (But) here he is in Rome, still as powerful as he was before.”

– Bernie McDaid, an alleged victim of sexual abuse by a Catholic church official, criticizing the Vatican’s decision to let former Boston Cardinal Bernard Law play a prominent role in presiding over a funeral mass for Pope John Paul II. Law, the former archbishop in Boston, was forced to resign in disgrace after it was discovered that he had transferred and provided job endorsements for priests accused of sexually abusing children. (“Cardinal Law, Ousted in U.S. Scandal, Is Given a Role in Rites,” New York Times, Apr.

* * *

“It would be a natural selection. The choice was certainly not made for any reason except to honor St. Mary Major…. We look at the light rather than the darkness.”

– Washington Cardinal Theodore McCarrick, defending Law’s role as natural given his awarded position as head of Rome’s St. Mary Major Basilica, one of four basilicas under direct Vatican jurisdiction (“Vatican Gives Cardinal Law Role of Honor,” AP, Apr. 7)

NEW YORK
Federal prosecutors last week hit 15 current and former New York Stock Exchange (NYSE) traders with criminal charges for allegedly cheating clients to enrich themselves and their employers.

The traders — all of them specialists who handle designated stocks — are accused of engaging in fraudulent and improper trading practices that allowed them to pocket a few thousand dollars at a time.

“Over time, these small thefts accumulate into large profits that translate into higher compensation and bonuses for specialists who execute the trades,” U.S. Attorney David Kelley charged last week.

“These defendants broke the rules repeatedly, they cheated the markets, and they cheated the investors who relied upon them” of more than $32 million, Kelley said.

In addition to the criminal charges filed by the Justice Department, the 15 specialists and five of their colleagues face related civil charges filed last week by the U.S. Securities and Exchange Commission (SEC).

The traders “showed a disregard for their legal duty that was both profound and at times, profane,” said Mark Schonfeld, director of the SEC’s Northeast regional office.

The NYSE itself was charged also by both agencies for failing to properly supervise the trading floor. It immediately settled the civil charges by the SEC, agreeing to improve video and audio surveillance of trading and spend $20 million on audits.

The SEC said the NYSE “routinely ignored scores of likely violations” and then “routinely failed to take disciplinary action or imposed only the most minor of sanctions,” reported the Post.

“When they found it, they didn’t investigate it — and when they investigated it, they didn’t punish it,” Schonfeld charged.

The Justice Department’s decision to file criminal instead of civil charges against the traders may be designed to send a signal to brokerages and the exchange itself that the rules are changing, observers said.

“What prosecutors are recognizing is that across the financial field, the one weapon that seems to work, frightening as it is, is the criminal sanction,” Columbia University law professor John Coffee, Jr., told the Washington Post.

If convicted, the traders face maximum prison terms of 10 to 20 years and fines of $1 million to $5 million, noted the New York Times. Of the 14 arrested to date, all have pleaded not guilty.

The papers note that last week’s lawsuits stem from a two-year investigation by federal prosecutors, who settled related civil charges against the traders’ employers last year for $247 million.

Firms implicated in the scandal include the specialist units of Banc of America, Bear Wagner, Fleet, LaBranche & Co., Leeds & Kellogg, and Van der Moolen. Performance Specialist Group and SIG Specialists Inc. were not involved in last week’s suits, but were part of the 2004 settlement, noted the Post.

LONDON
British insurance giant Equitable Life last week filed suit against 15 of its former directors, accusing them and accounting firm Ernst & Young of negligence and breach of duty for failing to warn the firm of financial problems that nearly caused the company’s collapse in 2000.

Equitable is seeking $3.9 billion from Ernst & Young in the lawsuit that went to trial last week. In a new filing, the company also took aim at 15 former board members, demanding $3.2 billion in restitution.

The insurer has accused Ernst & Young of signing off on its books without warning about impending financial problems that left Equitable $1.6 billion in the red after a lawsuit by short-changed investors.

The former directors named in last week’s suit are accused of failing to monitor the balance sheets and get legal advice before the court case that nearly sunk the firm, reported the Associated Press.

All targeted parties have denied any wrongdoing, with Ernst & Young calling Equitable’s claim “misconceived and entirely without merit.”

Last week’s action follows an unfavorable determination by Britain’s House of Lords, which wrapped up a two-and-a-half-year inquiry with the conclusion that Equitable was the “author of its own misfortunes,” noted the AP.

LONDON
Data broker LexisNexis last week revealed that thieves may have stolen personal data on 310,000 people, upping the number of potential victims tenfold from an earlier estimate and sparking renewed calls for legislated reforms.

LexisNexis, which is owned by London-based Reed Elsevier, last month said that the personal data — Social Security numbers, driver’s license information, and other data — from roughly 32,000 people probably had been compromised.

Last week, the firm raised the figure to 310,000, saying an internal investigation into two years’ worth of transactions at U.S. subsidiary Seisint Inc. had found 59 separate breaches, reported the New York Times.

The announcement prompted calls from the U.S. Senate for a crackdown on the practices of the data brokering industry, which generates $5 billion in annual revenues by selling data to landlords, employers, the government, and other clients.

“When a company like LexisNexis so badly underestimates its own ID theft breaches, it is clear that things are totally out of hand,” Sen. Charles Schumer (D-NY) told the Times last week.

Schumer is cosponsoring legislation that would ban the sale of Social Security numbers and ratchet up the regulations governing data brokers like Seisint and ChoicePoint, which recently said the data of as many as 145,000 of its customers may have been poached.

TOKYO
A Japanese firm being bailed out by the government revealed last week that it had inflated profits by $1.37 billion over the past four years in what may be the country’s largest accounting fraud involving a non-financial firm.

Kanebo Ltd., a household goods giant, said an internal investigation launched last year had uncovered a lengthy run of bogus bookkeeping, reversing recorded profits to losses for four of the past five years.

The move caused the company’s stock price to plunge and sparked an investigation by the Tokyo Stock Exchange, whose rules require a firm to be de-listed after posting a negative net worth for more than three years, reported the Japan Times.

Kanebo’s overstatement means that the company actually had a negative net worth for fiscal years 1999 through 2003, chairman Akiyoshi Nakajima conceded last week, saying the company was considering suing its former management.

The government-owned Industrial Revitalization Corporation of Japan (ICRJ), which agreed to pump funds into Kanebo two years ago, last week said it would continue to bail out the company, reported Bloomberg.

“The revision is related to inappropriate management practiced by Kanebo in the past,” the IRCJ said, according to a report from the Reuters news agency. “Kanebo now has an appropriate management system in place.”

BEIJING
Freedom-of-expression issues took a front seat in China last week, where the government was accused of both sanctioning and suppressing violent demonstrations. Among the developments:

Japan lodged a formal protest against the Chinese government following a wave of violent demonstrations by Chinese people who broke windows at the Japanese embassy in Beijing and vandalized Japanese-owned businesses.

Crowds in several Chinese cities, including a throng of 10,000 in Beijing, apparently were angered by new Japanese junior-high textbooks that allegedly play down Japan’s wartime abuses, including its use of Chinese sex slaves and the massacre of 100,000 to 300,000 Chinese people at Nanking.

While the Chinese government said it did not endorse the demonstrations, observers noted that such violent and visible public displays would not be possible without government approval, tacit or otherwise, noted the BBC.

Also last week, the Chinese government barred reporters from visiting a village in the Zhejiang Province where an apparent riot targeted police and government officials who had turned a deaf ear to the townspeople’s complaints about pollution from nearby factories.

While a state-controlled newspaper blamed “agitators” for the disturbance, which left police cars smashed and government workers hospitalized, local accounts said the violence was the last resort of a populace frustrated by choking pollution from chemical plants in a nearby industrial park.

“The villagers will not give up if there is no concrete action to move the factories away,” a villager who said he witnessed part of the confrontation told the New York Times.

China’s efforts to suppress information on the Internet also made headlines last week with the release of a report analyzing the country’s increasingly sophisticated methods of curbing citizens’ access to online content.

The analysis by the Open Society Institute found that while some Chinese people are able to reach forbidden information, the authorities are staying ahead of the curve, reported the Associated Press.

“China has been more successful than any other country in the world to manage to filter the Internet despite the fast changes in technology,” John Palfrey, one of the study’s principal investigators, told the AP.

Under China’s content-blocking system, “You don’t know what you don’t know. It’s more effective than if you see it but know you can’t access it,” added Palfrey, who serves as executive director of Harvard Law School’s Berkman Center for Internet and Society.