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Does Crime Pay?

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By Congressman Gregory W. Meeks (D-NY) Member of the House Financial Services Committee

In the wake of last year's corporate crime wave, the most dangerous place in Washington was getting between a politician and television camera.

Virtually every member of Congress gushed, hyperventilating that no stone would go unturned in pursuing corporate pariahs. This stagecraft helped the problem considerably, fueling passage of the bipartisan Sarbanes-Oxley bill. Turbulence in the financial markets ebbed.

Families who invested their savings in corporate America breathed a sigh of relief, as did many employees who wondered if they'd be the next Enron.

At that time, the misdeeds of the telecom giant MCI/Worldcom were considered so egregious -- even by the corporate crime wave standards of 2002 -- that President Bush fingered the company as corporate-fraud poster-child. After all, MCI had just announced that it committed the largest corporate fraud in the history of the United States by illegally inflating its bottom line by approximately $11 billion -- more than Enron and Andersen combined.

The illegalities caused 22,000 MCI employees to lose their jobs, shareholders to lose $180 billion -- more than twice the estimated cost of the war in Iraq -- and public employee retirement funds to witness the evaporation of $3 billion. Getting "ahead" of this story, the President pledged to "hold guilty parties accountable" and that no "violation of the public's trust will be tolerated." He was lauded by Democrats and Republicans alike.

But if one ever wanted a textbook understanding of how reality departs from hyperbolic rhetoric, then MCI would be the perfect case study.

Shortly after the president's speech and passage of bipartisan corporate crime legislation, MCI was able to cajole a $300 million tax refund from the IRS on its falsely reported earnings -- a scheme that I have proposed legislation to end. The IRS also allowed the company to write-off nearly $80 billion in over-valued assets -- the approximate cost of the war in Iraq. Unless Congress closes a gaping tax loophole, MCI may well be able to avoid as much as $3.5 billion in future income taxes -- nearly all of its tax liability for years to come -- by using yet more creative bookkeeping.

Since committing its criminal acts, MCI has also hit paydirt in the federal contracting business, seeing its share of federal contract awards soar upwards to $772 million.

These lucrative government contracts include a non-competitive $45 million Pentagon contract to build Iraq‚s wireless telephone network. Indeed the relationship between the government and pariah has been a strange tango dance: merely one day after the government fined MCI for its criminal conduct, the two were popping champagne corks celebrating the award of yet one more lucrative Commerce Department contract enabling MCI to provide weather communications worldwide.

MCI has done an even better job in commandeering the bankruptcy laws, using legal rules normally used by companies falling on hard times, to reduce its debt from $41 billion to $5 billion. This is the equivalent of a getting a "get-out-jail" card with a "pass-go" one to boot.

It's not simply that the government's beneficence towards a reckless company goes against our common understanding of public morality. It's not simply that it sends a perverted, nihilistic message to the marketplace. And it's not simply that MCI‚s criminal misconduct cost thousands of jobs and bled billions from retirement and investment accounts.

But -- and this point is often overlooked -- the government's assistance to MCI is compounding the severe and quantifiable harm done to the telecom sector.

MCI's fraudulent representations funneled tens of billions of dollars of valuable investment capital into a sinking Titanic, while other viable telecom companies were starved of that needed capital. Wall Street wrongly devalued competitors on the basis of the misrepresentations, selling off stock of the rivals at artificially deflated prices. MCI's deceit may have, in fact, been the single largest cause of the telecom implosion -- an implosion that killed thousands of companies and many times more jobs.

But the government has done nothing to cure the harm done to the marketplace or the competitors by MCI. Instead, it seems, the government has embarked on a Marshall plan to reconstruct MCI, absolving it of criminal and financial liabilities, and placing the company in a better financial place than if it had never committed the fraud. To the marketplace, this is a classic case of adding insult to injury.

The Government’s assistance to MCI is based on a concept to which many of us relate: redemption. In this vein, MCI's CEO Michael Capellas recently promised a "zero-tolerance" level on company ethics.

But redemption requires honest cleansing, which, by nearly any measure, MCI has not done. Just weeks ago, the treasurer and general counsel of the "redeemed" company were forced to resign because of alleged financial manipulations and other improprieties. Shortly thereafter, MCI had to admit it over-inflated its quarterly earnings projections by nearly $3 billion. KPMG, MCI's outside auditor, then said, in sanitized parlance, that the company had "material weaknesses" in its bookkeeping.

Most recently, we've learned that MCI is under criminal investigation by the U.S. Department of Justice for alleged fraud involving saddling its competitors with "access fees" -- the costs it would normally have to pay to incumbent telephone calls for completing its customer's calls. While it's too early to judge all the relevant facts in this case, MCI's response to them has been less than encouraging: it has attacked the whistleblowers and criticized competitors who are cooperating with the U.S. Attorney -- as if the competitors should be unconcerned with the repeated injury done to them and the sector by MCI's pattern of misdeeds.

The federal government should get out of its "Stockholm-syndrome" like relationship with MCI -- a relationship in which the government continually sympathizes with those who have held hostage the telecom sector through its misdeeds. If MCI is to survive it should be because it can do so playing by the rules, not because of government subsidies and rewards for its breaches of the rules.

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