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The many extracts on these pages are from copyright material. they are owned by the reference given or its owner. They are reproduced here for educational purposes and to stimulate public debate about the provision of health and aged care. I consider this to be "fair use" in the common interest. They should not be reproduced for commercial purposes. The material is selective and I have not included denials and explanations. I am not claiming that all of the allegations are true. The intention is to show the general thrust of corporate practices as well as the nature and extent of any allegations made.


This page provides a short summary of the scandals surrounding Citigroup and Financial markets. This is followed by an overview of the issues and links to pages giving more details of the scandals and frauds.

In their November 2004 book "Critical Condition", New York Times reporters Barlett and Steele give an excellent analysis on the way in which the market has impacted on health care in the USA. They are particularly critical of the way large financial institutions turned themselves into health care experts and helped to drive the system into dysfunction. I have written a short overview of their practices on Wall Street and their role in health care. This is on a new page and I have included several quotes from this book.

Structure of Citigroup Pages
I have structured the Citigroup pages for people with different levels of interest. The summary provides the essence of the issues. The remainder of this page provides an overview of the company and the many scandals it and its subsidiaries have been involved in since 1990. The main links go to a series of pages which expand on these matters.

The linked pages present the story in the form of extracts from original articles with short outlines before each set. I anticipate that most will read the outlines and skim the extracts from articles for confirmation, interest and perhaps other points of view. They tell the story much better than I can. The researcher will read in depth.

Corporate fraud in the USA is prosecuted through civil settlements without the miscreants admitting guilt. I am not claiming that the allegations made on these pages were proven or all true. I am simply documenting allegations which have been made. They are so extensive and so well supported that they must reflect a pattern of behaviour that is totally unacceptable. With so much smoke there must be a large fire. I have commented on the basis that most have substance.




Citigroup the Story

The Big 21st Century Scandals

The Financiers and Health Care

The Settlement and The Response

Citigroup Culture and People

And in Australia



The global giant Citigroup was formed in 1998 by the merger of John Reed's Citicorp with Sanford (Sandy) Weill's Travelers and Salomon Smith Barney. Weill won a board room battle to control the company.

Citigroup became the biggest and most diversified financial conglomerate in the world. It provided every possible type of financial service, many of which created intense conflicts of interest between financial objectives and ethical responsibilities to the community. In response to corporate lobbying special legislation was passed by congress to enable conflicting combinations of services previously forbidden. The conflicts were then ignored as the company preyed on and allegedly defrauded the community on a massive scale and in multiple ways.

The conduct of financiers like Citigroup gives a deep insight into the marketplace and how it operates. Not only does ithe situation mirror health care but the dysfunctional market pressures are mediated through the financiers who advise and implement business strategies in the health care marketplace. Market pressures are directed through them. Because of its central role I have used Citigroup as the vehicle to analyse financial markets.

Our interest in Australia is not only Citigroup's presence but the involvement of its subsidiary CVC Asia Pacific in IPOs (Initial Public Offerings) and very specifically from the point of view of this web site the purchase of Mayne hospitals with the intention of making them profitable and then floating them on the market. The scandals surrounding Citigroup relate to these activities and investors have not been kept adequately informed.

Both of the groups merging to form Citigroup had tawdry track records.

Citibank (Citicorp) in the USA and the UK were accused of making large profits by laundering massive sums for criminals and dictators who raped their countries in Greece 1990, Europe 1990, Mexico 1996, Africa 1999, Russia 1999-2000 and Argentina 2001. It used its corporate power to ignore regulators. It was accused of misinforming unprofitable high risk customers in the UK in 1991 in order to close their accounts. It was accused of participating in a $1.2 billion brokerage fraud in India in 1992 and of secretly doubling its insurance fees in London in 1997.

Salomon Smith Barney (now renamed Citigroup Global Markets) has been involved in a variety of frauds and unsavoury practices dating back to the 1980s. These include the bond rigging scandal 1991, dishonest brokers 1992, municipal bond yield burning 1994, and the securities price fixing fraud 1994-99. It was a major contributor in all of these.

Citigroup and its subsidiaries continued to engage in unsavoury practices. It was penalised in Japan in 2001 for illegally covering up client's losses and in 2003 it was alleged to be complicit in the Adelphia Communications US $3 billion fraud. Both were probably related to its immoral structured finance strategies. In 2002 it paid a US $215 million fine for preying on customers seeking mortgages. It is likely to be caught up in the emerging Mutual Bonds scandal exposed at the end of 2003. In 2000 it was voted the worlds most destructive bank and in 2002 it was listed among CorpWatch's 10 worst corporations.

The Giant Wall Street Scandals of the 21st Century involved the majority of the large multinational financial giants. The scandals originated and were exposed in New York but this does not mean that they were isolated to that city or to the USA. Citigroup, particularly its Salomon Smith Barney division was central to these scandals and was the major player in a majority. The inter-linked scandals are thought to be the primary cause in US $7 trillion losses by investors.

Although many companies were involved the business philosophy and corporate practices promoted and implemented by the banks which advised them was largely responsible for what happened. Investors were systematically deceived and defrauded. They have taken to the courts looking for up to US $30 billion in compensation, much of it from the banks.

Dishonest and deceptive analysts reports made in cooperation with bankers whose business interests they served were largely responsible for the DotCom and Technology bubble and the losses sustained when it burst. The firms ultimately paid out US $1.4 billion to regulators but investors want much more in compensation. Citigroup paid the largest fine. The other frauds were related to and partly dependent on this practice.

Share spinning, the process of bribing corporate executives into putting business the bankers way by giving them privileged share options was a second major component of the fraud. Investors suffered as a consequence.

Citigroup in particular was responsible for exploiting company employees entitled to share options. The advice they gave was for Citigroup's benefit rather than for the benefit of these novice shareholders, many of whom were bankrupted as a result.

Inappropriate close Relationships with companies such as WorldCom, with a possibly deliberate blindness to their misconduct. The dramatic success of these companies, as well as their instability was largely a result of their close relationship with the giant banking institutions, particularly Salomon Smith Barney on whom they depended for advice. The banks advice was based on their own business interests. If the banks were not complicit in the misconduct by these companies then they turned a convenient blind eye to the fraud that was happening under their noses. The banks are now accused by investors of complicity in the accounting fraud perpetrated by some of these companies.

The use of Structured Finance to assist Enron and probably other companies in defrauding investors. This massive fraud would not have been possible without the active participation of the company's bankers. Citigroup was a prime offender and paid a large fine. Enron was probably representative of what happened elsewhere. This saga gives a fascinating insight into the development of the specialty of structured finance and its widespread use to circumvent the intention of the laws and regulations which protect citizens. Banks competed to employ experts in the field and marketed services to the wealthy. Morality was not an issue for them.

Health Care has been a major focus of Citigroup's Salomon Smith Barney (renamed Citigroup Global Markets after the scandals). The pages reflect on the likelihood of bankers and financiers playing a major part in the health care frauds and other matters documented on these web pages - certainly by augmenting market pressures if not by collusion. As early as 1986 a close relationship existed between Salomon Smith Barney and HealthSouth which is caught up in a US $2.7 billion fraud. It operates in Victoria. Allegations by investors suggest that similar practices by bankers and auditors to those in WorldCom and possibly Enron may have occurred in HealthSouth.

The Settlement of the fraud allegations was a complex negotiated process in which the top priority became resolution to get the matter out of the headlines and so restore investor confidence in the marketplace and bolster the US economy. As a consequence retribution sufficient to act as a deterrent, the prosecution of offenders, and regulatory reform were severely sub-optimal. Critical issues were not addressed.

The response of the offenders and the business community was one of denial and rationalisation. The prime motive was to put this behind them and get back to business as usual. They attacked the messenger, looked on it as isolated events, blamed investors for not being willing to accept risk and accused those who prosecuted the case of an attack on capitalism and democracy.

While Spitzer, the New York Attorney General who almost single handedly drove the investigation and prosecution won the battle, he lost the war. This was because the other parties involved in the prosecution were all derived from the marketplace - those to be penalised and regulated. While the battle was fought in the courts and the public arena, the war was won in the corridors of power where the market was well represented and where political donations and lobbying won the day.

One eyed and sociopathic conduct seems to have played a similar part to that they played in health care. I have suggested that a marketplace in areas where there are conflicts of interests specifically selects for and fosters characteristics which lead to unsavoury and socially damaging behaviour. These are the people least suited to hold these positions of power. On the pages I supply press extracts describing the nature of the individuals involved and leave you to draw your own conclusions.

The response of business groups in Australia where there have been similar large corporate failures closely mirrors that in the USA. I have supplied one example.

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On these web pages I have up till now concentrated on the visible manifestations of the corporate health care marketplace; the health care corporations themselves. I have referred repeatedly to the pressures generated by the share market but without analysing them.

The central role of financiers

In March 2003 I contributed a short piece entitled "Nay Corporate Medicine" to "Business in Practice" the new Journal of the Private Practitioners Group of the Australian Physiotherapy Association. In that I stressed the centrality of the large impersonal corporate investors and lenders in the health care marketplace - the banks and other large financial institutions.

This page explores that issue using Citigroup as the example. It fills a gap in the web pages.

It is difficult to get information about the investors themselves as they seldom speak out publicly. It is clear though that large investors particularly institutional investors are in frequent communication with senior executives. Mayne HealthCare's CEO's went off to consult them before taking any action. It seems Citigroup which this page examines was no exception. We get a rare glimpse into this behind the scenes but powerful influence from a statement made by Citigroup's largest investor Prince Walid bin Talal of Saudi Arabia.

Prince Walid said he spoke to Mr. Weill (Citigroup CEO) daily and believed that Mr. Weill would get Citigroup past the current crisis. "Sandy is a tough cookie," he said. "He will overcome this." In Two Days, Citigroup Chief Traded Halo For Headaches The New York Times July 27, 2002

The prime responsibility of those in these financial institutions is to make money for their company and its shareholders. Financiers and institutional investors may use their power to fire managers and even break up companies when they don't perform. This happened in Mayne Nickless in Australia. Financial institutions lending money or raising floats often act as advisers on business strategies and practices.

They impose rigid market formulas throughout the system. Innovation is tolerated only if it increases profits, and then often regardless of the social consequences. Manager's of health and aged care corporations survive by adapting to the demands of the market; demands set and enforced by the financial institutions. Those who do not comply go under. The consequences of this system are examined on this web site.

The consequences for health care have been described by one eminent US analysts as being trapped in a system which is "brutal and inhumane". It is excused by another as "its just business"

The mechanisms of the marketplace of the bankers is little different to the health care marketplace. It lies at a deeper level and holds the health care marketplace in its iron grasp. As Ron Williams indicated in his 1992 predictions for the Australian health system, at all levels the ruthless "care for the corporation" is cloaked in a "deceptively human face". Interestingly the problems and the outcomes are in many ways similar.

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Why Citigroup

To explore this issue I will examine the financial services giant Citigroup. There are several reasons for this.

There is much to suggest that the same scandalous financial practices exposed on Wall Street in the first 3 years of the 21st century have been applied to health. These financial groups may well have aided and abetted some of the frauds which occurred there. Citigroup operates in Australia where its health care section has been involved in dismembering Mayne.

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The Australian Medical Connection

Citigroup's wholly owned CVC Asia Pacific is one of three venture capital groups which have purchased Mayne Health's ailing hospitals through a management buyout. Mayne Health is the largest hospital owner in Australia. CVC Asia Pacific is the central group involved and the turn around specialist. They plan to make the hospitals profitable in 3 years and then float them on the market. Their target is 30% profit. None of the three buyers have any experience in health care. The outside experience lies with Salomon Smith Barney another Citigroup subsidiary. It has a wide experience in the USA.

Two web pages address these issues.

Mayne Health becomes Affinity Health:- This page describes the purchase of Mayne hospitals to form Affinity Health, the nature of venture capitalism, management buyouts, and the possible implications for health care in these hospitals.

The Companies Buying Mayne Health:- This page describes the way in which the Australian press connived in hiding CVC Asia Pacific's relationship to Citigroup and also Citigroup's conduct from the market, the public and the medical profession. It goes on to examine each of the companies involved in the buyout and their links to larger groups. None have had any experience in health care.

An article "Hazards in the Corporatisation of Health Care" which I wrote was published in New Doctor in March 2004 <available at>. It summarises Australia's disturbing record with multinationals and describes the Citigroup led purchase.

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Citigroup the Story

Citigroup was formed in 1998 by the merger of John Reed's Citicorp group which included Citibank, with Sandy Weill's group comprising Travellers Insurance and the investment bankers Salomon Smith Barney. Citicorp was an established global operator built up by Reed's predecessor Walter Wriston. Weill was anxious to use it as a base from which to expand Salomon Smith Barney and Traveller's global reach. The merger created the largest financial institution in the world, one that embraced every facet of banking and financial services.

It was an uncomfortable merger with Reed and Weill sharing the CEO position. In a boardroom battle Weill emerged as the victor and imposed his aggressive profit centred outcomes based management style on the conglomerate. The likely outcome was predictable.

Size and marketing gave both these merger groups enormous credibility, "presence" and so political influence. Their track record when contrasted with their reputation was dreadful. Both groups had been involved in unsavoury behaviour on multiple occasions.

Wriston bet the bank on technology during his 17-year reign as chair and CEO of Citicorp/Citibank. Under Wriston, Citibank set out in the 1970s to "wire" its customers into automated, online, checkless, international users of "financial supermarkets" based on CATs and ATMs. This "thin branch" of customers wired into a global network would be the engine of Citibank's financial growth. The Future of Money Wired Magazine Oct 1996

As the pre-eminent global financial services company in the world, Citigroup combines the expertise and resources of its Global Corporate and Investment Banking Group, Global Consumer Group, Private Bank and Asset Management. It has received numerous awards in the region, which include Bank of the Year by IFR Asia (2001 & 2002), Best Bank/Best Foreign Commercial Bank by Finance Asia (1997, 1999, 2000, 2001, 2002 & 2003), Best Bank in Asia by Euromoney (2000, 2001, 2002 & 2003), and Best Bank/Best Commercial Bank by The Asset Magazine (2002).
Smith Barney is the private client business of Citigroup and offers a full range of securities and funds products appropriate for retail investors.
Citigroup Australia's operations encompass a well-established consumer bank, a premier global corporate and investment bank, a leading private client brokerage service, an evolving Private Bank and focused Asset management business, as well as the eminent charge card, Diners Club Australia.
Citigroup has had a presence in the United Kingdom since 1902. Smith Barney opened its first office in London in 1968, and Salomon Brothers established its UK headquarters in London in 1971. Citigroup merged Salomon Smith Barney with Schroder Plc in 2000, creating a leading pan-European investment bank.
Citigroup web site 2003 (www addresses Citibank Hong Kong --- Citigroup Australia --- Citibank United Kingdom )

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Citicorp and Citibank

The U.S. government is moving ahead with tough new money-laundering laws in the wake of scandals that have rocked both Bank of New York and Citibank.U.S. aims to crack down on money laundering: Targets drug lords: Strategy would extend U.S. banking jurisdiction National Post (Canada) November 11, 1999

Described as "the venerable bank" it was established during the 19th century and by 1902 had international divisions across the world. I have not tracked this group of companies back to its origins. John Reed became its leader and driving force in 1984. During the 1980s it was expanding more rapidly across the globe. It acquired and partnered with local groups becoming one of the worlds largest banking groups in an aggressively competitive marketplace where little quarter was given.

Its pursuit of profits and its willingness to look the other way as staff pursued every opportunity is best illustrated by its appalling track record and central role in laundering money for some of the worlds worst dictators and criminals. This was first exposed in 1990 but continued into the 21st century. Known criminals were treated as special customers and given special privileges. This was a sordid episode in banking history. Citibank refused to mend its ways in spite of repeated exposures, many adverse reports and repeated claims to have reformed.

There were a number of other allegations of less than acceptable conduct in the USA, United Kingdom and India prior to the merger.

Click Here to go to a page which explores early Citicorp conduct.

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Salomon, Smith Barney

(now renamed Citigroup Global Markets)

Robert Skirnick, one of the lawyers, said: "The evidence is strong to support the conclusion that never before in the history of stock trading have so few people taken so much money from so many." Wall Street banks close to settling $ 1bn claim The Times December 24, 1997

The fines come as part of a settlement agreed by Merrill Lynch, Morgan Stanley, Salomon Smith Barney and others that will conclude one of the darkest chapters in Wall Street's recent history.Nasdaq scandal brokers to be fined by SEC The Times (London) January 11, 1999

Skirnick's claim (above) in 1997 sounds trite after the massive scandals with US $7 trillion losses exposed between 2001 and 2003, less than 5 years later. It was simply a warning of what was to come. Salomon Brothers and then Salomon Smith Barney have had their dirty fingers in almost every nasty pie since 1990. Penalties and adverse publicity have had little impact.

Wall Street was riven with fraud in the 1980s and after ring leaders were sent to prison authorities in 1990 confidently predicted that it was over. In 1991 Salomon Brothers almost went out of business because of a massive Bond Rigging fraud. It is clear that they were not alone in their practices. Soon after in 1992 Smith Barney and others were accused of employing brokers who cheat customers to make profits.

In 1994 Smith Barney paid the largest fine in the market wide US $250 million bond yield burning scandal exposed by a whistle blower at Smith Barney.

Between 1994 and 1999 a massive price fixing racket operated on the stockmarket and Smith barney was part of this. Large fines were paid and investors sued and secured damages.

Click Here to go to the details of these Salomon Smith Barney scandals.

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Ongoing Unsavoury conduct
after the merger.

The Japanese branch of Citibank, a part of Citigroup, the world's largest financial services company, has been punished by Japan's financial services agency, the country's chief financial regulator, for illegally helping clients to conceal losses. Japanese regulator punishes Citibank Financial Times (London,England) August 10, 2001

Smith Barney, the brokerage arm of Citigroup Corp., fired four more brokers Thursday for improper trading of mutual funds, the firm's second such move in less than a month amid an expanding probe of the fund industry. Smith Barney Fires Brokers for Trades Associated Press 23 Oct 2003

The massive analyst, share spinning, Enron and WorldCom scandals were not the only scandals involving Citigroup. There were other ongoing problems in both arms of the merger.

There was a major scandal in Japan when Citigroup was penalised for using structured finance techniques to cover up client's losses. This is exactly what Citigroup did in the Enron and perhaps the WordCom scandals exposed in 2001. They paid a large fine.

In 2003 creditors of bankrupt Adelphia Communications alleged that Citigroup and other banks had helped the owners in defrauding them - a charge mirroring Citigroup's complicity in the Enron fraud.

Citigroup paid a large fine to settle charges that one of its subsidiaries exploited customers buying mortgages. It also misinformed the market about the integrity of its computer system when in fact Citigroup had been infiltrated and defrauded.

The most worrying of the other frauds is the Mutual Funds Scandal. This only became public in July 2003 after the other settlements. During the period of the other fraud investigations mutual funds had boasted of their integrity while at the same time conducting their own fraud by short changing the majority of their customers, benefiting favoured customers, and lining their own pockets. The companies turned a blind eye to the conduct. The extent of Citigroup's involvement is not known but they have hurriedly fired a number of brokers for indulging in these practices.

It has earned awards for unsavoury conduct. An environmental group awarded Citigroup a prize for being the most destructive bank in 2000. In 2002 it was listed among Corpwatch's 10 worst corporations.

As we enter 2004 US banks are being investigated in the USA for complicity in the global 10 billion Euro fraud by the Italian multinational Parmalat. Citigroup's international operations are the subject of investigation in Italy and the USA and it is accused of complicity.

Click Here for more information about these scandals.

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The Big 21st Century Scandals

"These cases reflect a sad chapter in the history of American business -- a chapter in which those who reaped enormous benefits based on the trust of investors profoundly betrayed that trust," William H. Donaldson, the new chairman of the US Securities and Exchange Commission quoted by "WALL STREET SETTLEMENT: THE OVERVIEW; 10 WALL ST. FIRMS REACH SETTLEMENT IN ANALYST INQUIRY" The New York Times April 29, 2003

If you have ever wondered how investment bankers earned so much in the late 1990s, US congressional investigators yesterday offered a satisfyingly simple answer: Wall Street is a scam. Wall Street under fire: daily, complaints grow of unfair treatment and unethical deals: Financial Times (London,England) October 4, 2002

In settling the cases, the firms neither admitted nor denied the allegations, following the standard practice in resolving such disputes with the commission. WALL STREET SETTLEMENT: THE OVERVIEW; 10 WALL ST. FIRMS REACH SETTLEMENT IN ANALYST INQUIRY The New York Times April 29, 2003

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A View of the Marketplace

The American economic system is at its best when public and private needs are balanced. The sheer magnitude of mergers is skewing the equilibrium.
Finding the right balance between markets and the public framework in which they operate is the most important issue of our times.

It was New York investment bankers who drove the mergers-and-acquisitions deal culture of the 80's and 90's and who most aggressively oversold the myth of synergy that justified it. It was New York investment bankers and their Wall Street brothers who trained a generation of obedient American C.E.O.'s (by means of stock-option-based compensation) to worry more about jacking up their share prices in the short term than about running their companies well for the long haul. City of Schemes The New York Times October 6, 2002

Financial institutions/bankers lie at the heart of the market. Large financial institutions have been the incubators, the arbiters and the disseminators of market theory and practice. In the isolation of the lofty banking world and think tanks, theory was refined and became ideology. Because of the financiers power these theories have come to dominate not only the market but the political process. They have coloured the views of much of society and many have accepted them as self-evident.

Financial success and the rapid growth of empires led financiers to an omnipotent sense of certainty prophetically described by one worried reviewer in 1998 as "malignant self-certainty".

Financial institutions set the frames of understanding and the mode of operation of the market. Health and aged care have become part of this market place. Both have been victims as they responded to the pressures this theory created.

The emphasis on consolidation, diversification, and growth rather than service, which the financiers fostered resulted in the formation of corporate giants beset by conflicts of interests and run by enormously wealthy and powerful executives, who in turn relied heavily on the financiers for marketplace advice. The companies and their executives came to exert a disproportionate and sometimes malign influence on society and on the political process which they came to dominate.

The driving personalities of successful acquirers and their myopic focus on economic outcomes and empire building led them to look past and ignore unsavoury profit generating behaviour which impacted adversely on others. Because of their willingness to exploit and benefit from the weakness of others I have called these people successful sociopaths.

Dishonest market analysts working for giant financial conglomerates fanned the competitive merger mania. They were richly rewarded for the business their dishonestly positive reports created for the giant financial institutions for whom they worked. Company share prices soared. At the same time the merging companies built up large debts. Because of the neglect of their businesses they had difficulty in servicing this debt. Rather than go under they resorted to fraud until their companies finally blew up.

The financial institutions, advised, arranged, funded and greased every piece of this process building marketplace bubbles, that inevitably collapsed. Not only did the financiers defraud investors in order to build the bubble, but they aided abetted, advised and assisted in fraudulent accounting by the companies they advised. This hid the corporations' debts from shareholders and protected the financiers' investments.

The financiers continued to collect large fees at every stage of the process and when it was done made more by becoming turn around agents and advising on bankruptcies. All of this money came from shareholders and not from the business of the companies in which share holders invested.

While the DotCom, WordCom and Enron debacles were far more spectacular, the hand of the financiers advising and facilitating can be seen behind the cyclical bubbles of mergers, frauds and collapses in health and aged care in the USA - most obviously in the recent HealthSouth scandal. Regulators had been sensitised and for the first time in 2003 they looked at HealthSouth's bankers.

The large financial institutions are themselves part of this marketplace and exhibit the same pattern of mergers, executive omnipotence, political power, ignored conflicts of interest, deliberate blindness to consequences for others, and immoral if not illegal behaviour.

These issues are addressed in different ways at several points as they affect health care or bankers on these web pages.

On a separate web page I have assembled some arguments and extracts examining aspects of these market processes as they affects financiers at the heart of the US system. These are the Wall Street banking and financial power-houses, and the Stock Exchange before and after the most recent scandals.

This page sets the stage for an analysis of the multiple Wall Street scandals during the first three years of the 21st century. I like to borrow the phrase and describe these extreme one size fits all market belief systems and their consequences as the "debris of the 20th century littering the 21st".

If we act with insight we might just escape this cycle of destructive belief systems and move on to something more balanced in the 21st century - like a sensible market that is tailored to the different sections of society.

The Wall Street market's response to the recent scandals shows that this will not happen if the financiers are allowed to continue their dominance of 21st century thinking and politics.

Click Here to explore these issues further.

The complex scandals are intertwined and interrelated. I will address them by looking at

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The Dotcom and Technology Bubbles
Analysts and Fraud

To critics, much of the problem with Wall Street research stems from how analysts have increasingly become tools used by their firms to help secure lucrative underwriting and investment-banking business.
The documents showed that some analysts at the firm, in candid interoffice communications, described as "junk" companies that Merrill Lynch was publicly recommending.
S.E.C. Taking Closer Look At Wall St The New York Times June 1, 2002

As Nasdaq stocks soared into the stratosphere during the late 1990s, Wall Street analysts invented ever more fanciful ways of valuing these companies and justifying one-year target prices that were 50 per cent or 100 per cent higher than those they had already reached. Lawsuits to swamp top analysts: Investors hold pundits accountable for billion-dollar losses Edmonton Journal (Alberta) March 10, 2001

An estimated $2 trillion has been lost by investors and lenders who put money into the telecommunications industry. Of the 25 largest bankruptcy filings in the United States, 10 have been made by telecommunications companies. Mr. Grubman recommended the stocks of all of them. Bullish Analyst Of Tech Stocks Quits Salomon The New York Times August 16, 2002

Federal, state and market regulators singled out three of the firms -- Citigroup's Salomon Smith Barney, Merrill Lynch and Credit Suisse First Boston -- and accused them of outright fraud in issuing bogus research. A Fraud by Any Other Name The New York Times May 4, 2003

"Because of Salomon Smith Barney's and Citigroup's record of violations, those companies face additional requirements that go well beyond the global settlement," said New York State Attorney General Eliot Spitzer. "These provisions are necessary and appropriate." Citigroup CEO Barred From Talking To Bloomberg News May 5, 2003

At the heart of these scandals was an unhealthy and unethical collusion between different sections of the banks each of which should have been directing its endeavours towards serving customers with different interests.

These duties to customers conflicted and were not in the financial interests of the banks. Instead of ethically serving their customers and maintaining confidentiality information was shared. Participants then collaborated and acted for the benefit of the financial institutions and some of their more privileged clients rather than for the benefit of the customers of the service. As a consequence of this lack of integrity citizens who put their trust in brokers and analysts were defrauded and trillions of dollars were lost.

A major component of this fraud scandal was a close relationship between financial analysts, bankers and the senior executives of the companies the financiers supported. The analysts were particularly valuable to the bankers and executives as their positive reports brought in business for the banks and success for the companies they praised. Analysts who produced the sort of reports wanted by the bankers and executives were richly rewarded for bringing business to the banks. Banks competed for analysts offering massive rewards. The system selected for those who could find ways of identifying and justifying deceptive reports and ignore the consequences.

The analysts made dishonest assessments and issued positive reports on companies whose prospects were actually poor. By issuing ongoing and repeated glowing reports the value of these companies' shares spiralled way beyond their real value. The analysts' repeated predictions of higher share prices were self-fulfilling, pushing up share prices and bringing in more business for the banks. They were lionised and became supremely confident. These share prices became hugely over inflated and when the bubble burst the value of the shares vanished.

Citigroup's successful analyst Jack Grubman is often credited with almost single handedly creating the technology bubble by his deceptive reports. Grubman was however supported by Citigroup staff, by the Citigroup system, by the Citigroup CEO, and by the wider Wall Street community. His success was widely admired.

Other financial conglomerates employed analysts and bankers who worked in similar ways to Citigroup. Competing financial conglomerates poached each others experts rendering successful but unsavoury practices infective locally and globally.

In many respects the forces driving the system, and the responses are very similar to what happened in the US health care marketplace. The conduct of the financial institutions is a good pointer to what happened in the health care frauds. These happened over the same time period and in retrospect we can see the hand of the analysts and financial advisers in the health and aged care scandals.

Click Here for an analysis of the central role of the analysts and the financial companies particularly Citigroup in this section of the fraud.

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Company CEOs
Bribery by Spinning Shares

Spinning is the practice of investment banks providing shares in popular flotations to senior executives at client companies in the hope of winning lucrative corporate finance work from them later on. FSA launches probe into share 'spinning' CITY BANKS TO BE ASKED ABOUT PREFERENTIAL IPO ALLOCATIONS Financial Times (London,England) October 24, 2002

Arthur Levitt, previous head of the SEC, told the Financial Times recently that he abhorred the IPO allocation practices and that they looked to him "like commercial bribery".
Earlier this week, documents filed by Eliot Spitzer, New York attorney- general, were even more damning. He depicted a conspiracy at Citigroup in which investment bankers, research analysts and corporate clients worked together to defraud individual investors of hundreds of millions of dollars. Wall Street under fire: daily, complaints grow of unfair treatment and unethical deals: Financial Times (London,England) October 4, 2002

"This case exposes further conflicts of interest on Wall Street," Mr. Spitzer said. "The spinning of hot I.P.O. shares was not a harmless corporate perk. Instead, it was an integral part of a fraudulent scheme to win new investment banking business Spitzer Sues Executives Of Telecom Companies Over 'Ill Gotten' Gains The New York Times October 1, 2002

For some unexplained reason investment bankers and the companies they provide services to are allowed to keep back shares from a float and offer them to selected people. The legal proviso was that these should not be used to induce the recipients to give business in return. Why else they would allocate shares in this way is not clear but the intention was almost impossible to prove. In addition to this the public were not told that large numbers of the shares they wanted to buy were being siphoned to privileged clients.

Not surprisingly the bankers and Salomon Smith Barney in particular offered large allocations of low priced stocks to favoured customers on the understanding that these customers would direct business to the bankers and also to the company whose shares were being sold. The consequence was that a much smaller proportion of shares was available for allocating to the investing public.

Fanned by glowing analysts reports these shares commonly jumped by 50 to 100% within days, when the preferentially allocated shares would be sold to an unsuspecting public at a price far exceeding the original offer. The favoured customers made millions by selling. Ebbers, WorldCom chairman made US $11 million in personal profit from preference allocations in other companies. These were allocated to him by Salomon Smith Barney. Most of these companies subsequently collapsed and many wet under.

Jack Grubman once again played a major role in this. He vetted the list of planned recipients and made changes as he saw fit.

Click Here to explore the spinning scandal further

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Company Employees
Exploiting Novice Investors

Rather than provide investment advice to the WorldCom workers based upon each one's circumstances or appetite for risk, the dozen or so brokers in the office seemed to push as many clients as they could to use the same strategy: exercise their options, hold onto the WorldCom shares and borrow from Salomon to pay the costs of the transactions and the taxes that were generated. That not only put the clients at substantial risk if Worldcom shares declined but also, because of Salomon's compensation system, generated big fees to the brokers who recommended them. Outrage Is Rising as Options Turn to Dust The New York Times March 31, 2002

One of the businesses gained in return for positive analysts reports and spinning share was the exclusive right to manage share options for employees.

All of the companies offered employees stock options as a major incentive to keep them motivated. WorldCom employees therefore had no choice but to go to Smith Barney to take up their options. All calls from Worldcom employees were transferred to a single office in Atlanta.

The allegations are that when employees phoned they were urged not only to take up their options but to hang on to them. There were additional taxes to pay.

Employees were strongly urged to borrow from Smith Barney in order to fund the purchase of the share options and the taxes. Some were allegedly encouraged to mortgage their houses to do so. Even when prices were falling Smith Barney urged past and present employees to hold on using Grubman's reports as persuaders. Smith Barney made a lot of money through these transactions.

As a consequence when WorldCom collapsed these employees not only lost their entire investment in the stock but also had to pay back the loans to Smith Barney. Some entered bankruptcy. They claim that the advise they were given was for Smith Barney's benefit and not their own, and they were not told of any risk. The same occurred at many other companies.

In addition to this large purchases or sales of stock by employees impacted on the price of the stock. Bankers with information about employee's plans each year could benefit the company through their own buying and selling. This information was apparently shared around but it is not known how it was used by the company.

Click Here for more information about this.

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The WorldCom Collapse
Citigroup's Guiding Hand

"But the real story behind WorldCom's stunning rise and fall is more sinister. It's a story of pervasive corruption here on Wall Street." TELEVISION REVIEW; Creating the WorldCom Mirage The New York Times May 8, 2003

The WorldCom story is as much about Citigroup's Salomon Smith Barney who were largely responsible for marketing and building the company using the close relationship between their analyst Grubman and WorldCom chairman Ebbers. WorldCom's share price was based on Grubman's reports and was used in takeovers and mergers, which generated more debt. It was not based on real profits or prospects. WorldCom is representative of what happened at other technology companies advised by Grubman and Salomon Smith Barney. Similar strategies were adopted by other financial groups on Wall Street.

The pressure to report profits that met analysts predictions and so keep share prices up was irresistible. Successful takeovers depended on maintaining the share price.

To hide its losses and increasing debt WorldCom fraudulently hid US $11 billion in its books. This was not detected by due diligence processes when the banks arranged loans, although one would have expected them to do so. Unlike the earlier Enron fraud there was no paper trail pointing to the banks' complicity in the fraud. WorldCom's chief financial officer took all the blame claiming that he had acted independently.

Grubman, ever loyal to his mate advised Ebbers on the crisis speech he gave to the market ridiculing stories of fraud and possible bankruptcy. At the same time Grubman as an "independent analyst" lent support with positive reports until WorldCom collapsed.

The story of multiple other technology collapses and Salomon Smith Barney's role in these is similar.

Click Here for more detail

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Structured Finance
The Enron Debacle

The collapse of Houston-based Enron destroyed the retirement savings of thousands of employees and damaged outside investors and pension funds across the nation. Banks Pay $289M in SEC Charges Officials say J.P. Morgan Chase, Citigroup knew Enron was trying to mislead investors Associated Press July 29, 2003

The Fraud

It is two completely different tales -- the public image, polished by its most senior officers, of an innovative powerhouse on the verge of reshaping the world, and the hidden truth of a company plagued by secrets, whose executives were struggling to hold it together. ENRON'S MANY STRANDS: The Company Unravels; Enron Buffed Image to a Shine Even as It Rotted From Within The New York Times February 10, 2002

The headline grabbing story of a greedy corporate giant systematically exploiting and defrauding those who invested and supported it before going bankrupt in the biggest collapse in history caught headlines around the world. In fact the collapse and the fraud were typical of the times and similar to many other companies. It was just bigger. A small startup supported by financial institutions, neglected its business and went on a takeover binge. It became a mammoth and overreached. With too much debt and not enough income it resorted to fraud and then went bankrupt.

Enron's story is a very interesting one for other reasons. Once again the real story is not Enron but the other groups who were involved with Enron in the fraud - the banks, the accountants and the lawyers. It is their conduct that gives real insight into the marketplace, its morality and its thinking. Without them this could not have occurred.

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Structured Finance

Over the past decade or so, an industry has emerged of corporate advisers that use complex financial instruments to help companies find ways around the types of safeguards being adopted.

Relying on transactions involving derivatives and other complex investment tools, this business -- part of "structured finance"-- has allowed some corporations to transform financial reports effectively into marketing material, masking evidence of earnings volatility and indebtedness. It is the financiers in this business who helped Enron create its off-the-books partnerships -- vehicles called special-purpose entities -- which can allow corporations to pretty up financial reports. A Higher Standard for Corporate Advice The New York Times December 23, 2002

They were instead dreaming up and selling financial products to allow Enron to mislead. Some of those products appeared to squirm within accounting rules, but even then the banks found themselves engaging in practices that they knew should invalidate the accounting.Bankrupt Thinking: How the Banks Aided Enron's Deception New York Times August 1, 2003

The Enron story is the story of structured finance. This was the banking speciality of deceit. It was a specialty that built its influence and its credibility by arranging complex deals designed to circumvent the laws controlling markets and the conduct of corporations. It was the enemy of transparency and was designed to hide real transactions behind phony ones which appeared legitimate. The transactions were carefully vetted to ensure they were legal. The ethics or morality were clearly not vetted.

Structured finance was developed during the 1970s and 1980s probably to assist in money laundering and in tax evasion schemes. One of its most common and lucrative uses in the 1990s was the manipulation of balance sheets. Transactions were arranged which hid debt, and even made it look as if debt was income. Companies like Citigroup marketed these structured financial packages to companies.

Citigroup and other banks connived in and assisted in the defrauding of the investing public using structured finance to create deals for Enron. Citigroup was one of the three main culprits. They knew what they were doing and why they were doing it. They believed that what they were doing was legal and that there was therefore nothing wrong with it. They were indignant when accused of complicity in the fraud. The morality of what they were doing was not considered. Structured finance had become a lucrative part of recognised banking practice - so lucrative that experts were poached from competitors.

Enron lied to investors about its financial condition, but it could not have done so without active help from its friendly bankers. And that help constituted fraud. A Warning Shot to Banks On Role in Others' Fraud The New York Times July 29, 2003

The deals may have been legal but implementing them with the intention to defraud was not and Citigroup knew what the deals they structured were for. The banks ended by settling the action taken by the US Securities and Exchange Commission (SEC) for some hundreds of millions of dollars. Investors are now pursuing the banks for US $25 billion in compensation.

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Close Relationships

Citigroup and other bankers had close relationships with Enron going back to the founding of the company. They had advised and assisted all along the way to its success and profited royally. They continued to do so as Enron started on the slide to bankruptcy, making large sums by organising the deals which deceived the investing public.

JP Morgan will pay $135 million and Citigroup will pay $101 million as part of the settlement, the Securities and Exchange Commission said. The banks also agreed to pay $50 million total to the state and the city to settle a similar charges. JP Morgan Chase, Citigroup to Pay in Enron Case Associated Press July 28, 2003

Market analysts played much the same role in Enron's rise and fall as they played in the other scandals. They supported Enron and the banks to the bitter end, neglecting their responsibilities to the investing public.

Arthur Andersen, Enron's accountants also supported Enron to the bitter end and connived in the fraud. They were multiple offenders with a track record of fraud. The Enron fraud was the last straw. The SEC enforced a criminal conviction and drove Andersen out of business.

Enron's lawyers also reviewed the various deals and found no fault with them. They were heavily criticised and are included among the targets in investor's law suits.

Political power and influence are important components of the Enron story. As in almost every corporate sector large sums were spent bending the democratic process to meet corporate objectives. Enron, Citigroup, Andersen, and the lawyers were all major donors to politicians. They spent large sums employing lobbyists to put their position. These were often past politicians with direct links to those on power.

Relevance. While health care does not feature anywhere in the Enron story, the story gives another excellent insight into the operation of the financial institutions and in particular structured finance. These practices were not isolated to Enron, and structured finance involved multinational deals. It was not isolated to the USA. Structured deals have been used in the health care marketplace.

Structured Finance and Affinity Healthcare in Australia. CVC Asia pacific, Citigroup's vehicle in Australia plans to generate a 30% profit from the Mayne hospitals it has purchased. It will be almost impossible to develop this sort of profit providing care ethically given the funding constraints in Australia.

A possible solution would be to develop short term profits through structured finance. If loans were to appear on the balance sheet as profits, as happened with Enron then analysts could promote the float of Affinity Health on the stock market at a very considerable profit for CVC Asia Pacific. If Australia's laws are similar to the USA then these transactions would be quite legal. That the company's profits would fall later after it was floated would not be a consideration.

This is not of course to suggest that the company will adopt this approach, but merely to draw attention to this possibility and Citigroup's track record in this regard.

Click Here to go to the Enron page which explores these issues in more depth.

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The Financiers
Health Care

Looking Back

It is interesting to look back at the past fraud to see where the bankers and their analysts may have played a part. In the NME early 1990's scandal in which large numbers of children were imprisoned in psychiatric hospitals for long periods of time to generate large profits we can see a feedback cycle between analysts, bankers and corporate executives each reinforcing the other and legitimising what happened. With the market loudly praising its practices NME saw nothing wrong in persuading vast numbers of children needlessly into psychiatric hospitals and keeping them there for long periods. They saw themselves as meeting demand.

In the 1997 Columbia/HCA US $1.7 billion fraud the analysts and the press got behind Thomas Frist. They promoted his image as the kindly saviour from an ethical past who rescued the company from its newer aggressive chairman Richard Scott. Scott had made himself and the company very unpopular. He became the scapegoat.

That the vast majority of the fraudulent practices originated in HCA long before the merger of HCA with Scott's Columbia and while Frist was HCA's chairman and CEO was conveniently ignored. This information was readily available and had been extensively reported in the press. It was more important for them that the company be rescued than that those responsible pay for their crimes and the causes of the fraud be addressed.

The greasy fingers of the analysts can be seen lubricating the nursing home bubble developed in the early 1990s on the back of the step down care revolution in the USA. It was a strategy designed to get around DRG payments and so continue to milk Medicare. Vast fortunes and corporate empires were built. When government stopped the rorting of Medicare the bubble burst and most entered bankruptcy

When the Dot.Com bubble burst in 1999, the financiers needed business and switched back to health care. They started developing their next money making bubble. Health care analysts and bankers were suddenly in demand. There was a scramble to poach those with experience from other bankers. Those with corporate health care skills were suddenly able to command exorbitant salaries.

Investment banks are engaged in a ferocious bidding war for health care specialists, convinced that the graying of America will be a boon for health-related companies. HEALTH CARE GETS HOT ON WALL ST.: BIDDING WAR ON FOR SPECIALISTS Crain's New York Business August 9, 1999

Investors had been burned by the previous frauds and the DotCom scandals. There was little enthusiasm for floats and those that did flopped. In 2001 structured finance was used to generate the money needed for the mergers and takeovers which the financiers and their analysts prescribed in their advice to the companies. This is where they made money.

Tenet Healthcare (the new name for NME) and HealthSouth became the new market favourites. Tenet generated massive profits by manipulating Medicare and by treating people who did not need treatment. HealthSouth was manipulating its books. By early 2003 both companies had blown up in smoke. Tenet was drowned in allegations of Medicare fraud and unnecessary cardiac procedures.

The Bankers and HealthSouth

The co-heads of UBS's healthcare investment banking team were at least eight HealthSouth board meetings between late 1999 and late 2002, and advised the company on financing, investor sentiment, and strategic alternatives, the Journal reported. Records Show UBS, HealthSouth Ties REUTERS May 14, 2003

The minutes, which were released in a court proceeding in Alabama, show bankers Benjamin Lorello and William McGahan helped guide the company on financing and investor relations, and gave a "detailed overview of strategic alternatives" for HealthSouth's "long-term objectives," The Wall Street Journal reported. They also had a role in a September 2002 plan to split the company into separate parts and sell off divisions. Some have labeled that plan an effort to cover up the surgical rehabilitation company's accounting problems. UBS Bankers Had Bigger Role at HealthSouth May 14, 2003

The US $2.7 billion fraud by HealthSouth follows the standard pattern we have seen in all these other companies but it started in the 1980's. Once again there was a close liaison between a Salomon Smith Barney banker named Benjamin Lorello, his analysts, and senior HealthSouth executives.

HealthSouth's phenomenal success and total dominance of the rehabilitation sector was based on meeting the extravagant projections of the Smith Barney and UBS analysts every time. Its share price kept spiralling, as did the profit projections and HealthSouth's success in meeting them.

The analysts success in so accurately predicting HealthSouth's future profits earned them many followers among investors and huge bonuses from their bankers. Their banks did billions of dollars of HealthSouth business, and floated a number of HealthSouth initiated companies which made money for HealthSouth executives and the banks but lost investors most of their investment.

The entire process was based on fraud. HealthSouth simply responded to the pressures generated by the analysts reports. It added enough paper profits to its books to meet analysts projections. It then hid the fraud in the takeovers it accomplished using its artificially inflated stock price and additional floats in the marketplace. After the Enron, WorldCom and other collapses investors became skittish and the fraud fell apart.

Lorello worked for Smith Barney helping HealthSouth since it went public in 1986 and bringing it US $8 billion in business. In 1999 he and his team were poached by UBS Warburg and they took HealthSouth's business with them. While suspicion about the auditors Ernst and Young, and Lorello's team remain high they have not yet been proven to have known of or participated in the fraud. They certainly turned a convenient blind eye. Investors have now launched a lawsuit claiming that both were active participants in the fraud. One of the HealthSouth accountants who have traded cooperation for leniency has implicated Lorello by describing a phone conversation with him.

The importance of HealthSouth is not the fraud or the bankers actions but the fact that it shows that the same financial practices which we have seen in all of the recent Wall Street frauds were introduced into health care and that this happened as long ago as the 1980's. Once again it is morality rather than legality which concerns me.

It is very unlikely that HealthSouth was the only health care company where this sort of thing happened. It also shows that even though UBS got all the recent publicity it was Smith Barney that initiated these practices and introduced them into health care.

The other important point is that HealthSouth still owns and operates a rehabilitation hospital in Melbourne and this could be a jumping off point for expansion in our region.

Click Here for a page dealing more fully with Citigroup and health care

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The Settlement
The Response

"Firms are not contrite and simply consider the fines and penalties as a means to make a problem go away," said Richard C. Shelby, Republican of Alabama, at a Senate Banking Committee hearing on the settlement that was made final last week with 10 firms. Senators Question Effectiveness of $1.4 Billion Settlement The New York Times May 8, 2003

This section describes only the settlement of the analyst and spinning frauds. The WorldCom, Enron and a host of other related frauds were settled separately and a few of these are referred to on other pages (eg Enron page).


Large numbers of documents were subpoenaed by congressional committees and made public. Separate from the congressional investigations there were four parties involved in the prosecution of the analyst and spinning frauds. Elliot Spitzer the New York Attorney General was a Democrat with no ties to big business. The other three regulators were bodies largely comprised of business appointees most of them made by the pro-business Bush government. Spitzer drove the investigations and dragged the others along.


This was a negotiated settlement in which the companies bargained for the best deal they could get. This was soon bogged down. The damage the ongoing revelations and drawn out process was doing to the marketplace, the New York Stock Exchange and the US economy became prime considerations. Mr Grasso chairman of the New York stock exchange stepped in and used his powerful influence to drive all parties into a settlement so that they could "put this behind them" and get back to business. Getting it done became more important than what was done.

The US $1,4 billion settlement was totally inadequate as a deterrent and the conditions imposed on the companies did not address the key problems. It was clear that many of the firms did not see this as making real changes in the marketplace. Only two relatively junior people were penalised. No one went to prison. Articles in the press were critical and regulators responded by promising the conviction of individuals. This has not happened.

Mr. O'Neal's (Merrill Lynch) essay is only one of several signs that Wall Street remains in deep denial about the degree to which it betrayed investors' trust. On Tuesday, Philip Purcell, chief executive of Morgan Stanley, insisted there was nothing improper about revelations that his firm and others had paid one another to issue bullish research reports on their investment-banking clients.

No less cavalier was the New York Stock Exchange's recent nomination of Sanford Weill, Citigroup's chairman, to join its board. - - - - -- but one is still left wondering where Richard Grasso, head of the exchange, has been in the past year.

Investors should keep a wary eye on this self-denial and lack of contrition. It may suggest that the revisionists are on to something when they say that nothing will change on Wall Street. Wall Street Revisionism The New York Times May 1, 2003

Corporate Response

The responses of the companies to the investigation and the fraud settlement was interesting. There was initial denial and an attack on Spitzer followed by early Mea Culpas by some financiers. After the settlement attempts were made to shift the blame to investors by claiming they were not prepared to accept risk, to the prosecutors whose efforts were described as a threat to marketplace democracy - a higher goal. Some attempted to deny their culpability even though they had agreed not to do so in the settlement. Others including Grasso seemed to have no idea of the social impact of all this and behaved inappropriately.

It soon became clear that the real power lay with the big corporate lobby and the political support it enjoyed. While Spitzer won a few battles the bad guys won the war. We saw exactly the same thing happen in managed care.

There is, alas, only one Eliot Spitzer. And while you want to stand up and cheer when Mr. Spitzer, New York's attorney general, wins another round against malefactors of great wealth, his side -- our side, unless you happen to be a corporate insider -- is losing the war.
Indeed, last week Stanley O'Neal, the chief executive of Merrill Lynch, wrote an op-ed article caricaturing the likes of Mr. Spitzer -- though without naming him -- as enemies of capitalism who teach investors that "if they lose money in the market they're automatically entitled to be compensated."
But it's revealing that Mr. O'Neal felt empowered to write that piece in the first place. - - - - -- Mr. O'Neal overreached. But he clearly knows which way the wind is blowing.
But right now the bad guys, though they lose an occasional battle, are winning the war.
The Acid Test The New York Times May 2, 2003

Only Citigroup seemed to take the matter seriously. It set out to fire staff and restructure. Perhaps Weill's personal escape from prosecution because of his own involvement was contingent on his doing so. The problem for new staff will be that unless they are prepared to find ways around the new regulations and so maintain profitability they will be replaced by someone who will. That is how the market works.

Click Here for a web page which describes the settlement and explores the corporate response further.

Life in Financial institutions

Much as in health care, financial services are beset by conflicts of interest and conflicting responsibilities. They have depended on a degree of professionalism and a set of values.

As in health care the conflicts of interest have been increased by consolidation so that each financial company and its staff are required to serve competing interests and have contradictory responsibilities. Some are profitable and others are not. Protecting the interests of the community and serving them is not profitable. Deceiving them is.

As in health care professionalism has buckled under the pressures generated by an excess of competitiveness and an overemphasis on economic outcomes. These in turn are the products of fashionable economic thinking and the support it gets from the political system.

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Culture and People

"Only capitalists can destroy capitalism," said Felix G. Rohatyn, the financier and a former ambassador to France. "Populist capitalism of a type is very beneficial to the vast majority in our system, but an ethical tradition is needed to make it all work. When you have senior people walking away with hundreds of millions, leaving everyone else in the dirt, that is hugely depressing and very dangerous."
"This is not about a bunch of rogue C.E.O.'s. Once this sort of thing gets to the establishment of the financial community, then you'd better stop and say, 'Wait a minute, what's happening here?' "
Doing away with the Glass-Steagall Act -- which forced financial institutions to choose between banking and investment banking -- helped get us to where we are today, but building up new barriers to eliminate the conflicts of interest now rampant in the largest financial institutions will be difficult indeed.
"Does the system work to spread the wealth in some way that's reasonably fair?" Mr. Rohatyn asked. "Clearly at this point, the answer has to be no, and that's not tolerable."
Rebound From Ruin, if Not From Distrust The New York Times September 8, 2002

I have suggested that intense market competition in an area where social responsibility and duty to others conflicts with competitive priorities then the system will select for individuals and establish a culture which will ignore responsibilities and duties. I have used terms like closed minded or one eyed to describe these individuals. When others are harmed I have called it sociopathy.

Just such a situation existed in the financiers marketplace. Many of these features can I believe be seen in the marketplace culture and in Citigroup's in particular.

On a separate page I review my theoretical perspective, the market pressures affecting the financial institutions, Citigroups culture, and the individuals who have been prominent at Citigroup.

I have also looked at behaviour on the New York Stock Exchange and examined Richard Grasso's downfall. None of this is savoury.

Finally I have used two Citigroup employees to examine the revolving door involving analysts and government regulators, and the relationships between big business and politics.

For obvious reasons I have not accused any individuals of being closed minded or sociopathic. This page consequently contains extensive extracts describing the people and you are left to draw your own conclusions.

Click Here to examine cultural and personal characteristics

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And in Australia

NEW Business Council of Australia president Hugh Morgan has slammed the Government's crackdown on corporate misbehaviour as an attack on the rule of law and claimed the likes of HIH and One.Tel were the inevitable flipside to business success.

In his first public speech as president, Mr Morgan, - - - - -, hit out at the proposal to allow public companies to be fined for breaches of the continuous disclosure rules while also allowing the legal pursuit of the individuals responsible.

"This proposal is, in my view, a serious attack on the rule of law in Australia," he said. "This is, in its present form, bad law."

He said it would put employees in conflict with the interests of their organisations and would turn them into "state informers".
Business has been furiously lobbying for parts of the bill to be watered down.
"The most important present problem, which the members of the BCA face - and with them, everyone involved in commercial and business life in Australia - is the attack on the corporation as a vital institution in our economic life," Mr Morgan said.
He (Morgan) suggested corporate misbehaviour was an inevitable outcome of the rapid growth in capital markets, with the owners or shareholders of a company becoming more numerous and distanced from the managers - the so-called "agency problem" identified by economist Adam Smith.

"Every 20 years or so we have what seems to be an eruption of corporate malfeasance," Mr Morgan said. "There will always be corporations, somewhere, sometime, in which directors and/or management, put their own interests far above the interests of the shareholders, or who will deliberately defraud the shareholders, customers, and suppliers, for their own benefit."
"The agency problem is built into the very fabric of the corporation and the only thing that keeps corporations going is the engine of our economy, is the cultural and moral standards which prevail within the community at large," he said.

Mr Morgan also signalled the BCA would be more widely involved in political debates about the country's direction. Laws an attack on way of life. The Australian December 2, 2003

Australia has had its share of corporate scandal over the last 2 years, much of it emulating what has happened in the USA. At this time there are no reports implicating the investment banks including Citigroup in this but neither have they been investigated. Some financiers would have been involved in advising and facilitating in the various deals which ended in so many tears.

Particularly revealing is the response by die hard businessmen to the governments attempts to make business more accountable and encourage staff to report unsavoury behaviour. (see above)

Hugh Morgan, member of the Reserve Bank and the new chairman of the Business Council of Australia went on the attack calling the new regulations an attack on business. In one of the most one eyed outbursts I have seen he says it is bad law. He criticised turning employees into "state informers". Experience in the USA shows that the vast majority of corporate fraud has been exposed by employees using whistle blower legislation. Regulation has been ineffective. Without whistle blowers most health care fraud would go undetected.

Probably no government has been as supportive of the marketplace and as close to business as the Howard government. Yet the paranoid business community feels it is threatened by the wider community's response which Morgan describes as "interest groups succeed in imposing their agendas on the body politic". This of course is what the business council and corporate lobbyists have been doing for years and Morgan plans to intensify it. We see the vast wealth of corporate Australia pitted against a struggling community with limited resources.

Morgan sees this criticism as an "attack on the corporation as a vital institution in our economic life" when it is in fact an attack on the dysfunctional thinking and the unsavoury practices which corporations have adopted. Most recognise that a sensible marketplace is essential for our economic well being. We don't see what we have as sensible or balanced.

Morgan's response mirrors that of diehard financiers in the USA to their failures. According to Morgan periodic episodes of fraud are infrequent but inevitable and occur about every 20 years.

The facts are that in those competitive areas where conflicts of interest occur, it is regular and ongoing. Detection and prosecution is intermittent but as the public becomes more incensed increasingly frequent. Because of the current one size fits all market thinking the problem is getting worse. Sooner or later the public's tolerance will evaporate. This is well illustrated not only in health and aged care but also by the recurrent Wall Street scandals. Like his colleagues in the USA Morgan simply does not get it. The public is stirring and it is business that must change.

Contrary to Morgan's assertion greed is not the prime problem. The prime problem is the need to survive and dominate in a marketplace where not being a winner amounts to corporate death and personal failure. All too often winning means unsavoury behaviour. The more corporate markets intrude into humanitarian services the greater these conflicts will be and the more problems we will encounter.

I partly agree with Morgan that regulation is not the whole answer and "the only thing which controls this is the cultural and moral standards which prevail within the community at large". The problem for that argument is that values and norms need to be exercised in order to develop them. Without exercise they atrophy and there is less and less opportunity to exercise.

This presupposes a civil society in which humanitarian services are community driven so that the community exercises its morality and reaffirms its values through this activity. Increased marketisation radically reduces these opportunities. This is why health, aged care, schooling and other services should not be corporatised and traded on the share market. They should remain the province of community organisations and dedicated individuals.

Corporate executives are so driven by the pressures of the market that they have little opportunity to involve themselves directly in activities where they can display and affirm values such as integrity and trust.

There seems to be a balance between competitive pressures and social responsibility and that balance is currently severely distorted by excessive competitiveness. A more sensible market system with less competitive pressure in those areas where conflicts exist would be more responsive to community standards.

Professionalism with its highly developed ethical structures has traditionally been the mainstay of such services and consequently should be more highly valued and more closely tied to community. As Dr Peter Arnold, past chairman of Australia's Medical Association's Federal Council stressed in the MJA a few years ago experience shows that professional values do not survive strong market pressures. The community should not expect it to do so.


Bucking the trends:- At the same time as the problems of large diversified giants are exposed in the USA , and as the failure of this strategy for Mayne Health is reported, financiers are beating up mergers and acquisitions in Australia. This is where the quick money for these groups lies. As we now know the benefit of frenzied merger and acquisitions for ordinary investors is highly problematical. The most unsuitable people come to dominate the marketplace and people are hurt.

Under former CEO Peter Smedley, Mayne attempted to integrate its hospitals with medical clinics and drug distribution businesses - a strategy that led to resignations and doctors referring patients away from Mayne hospitals, as well as significant profit downgrades by the company. Australia's Mayne Group Sells Ailing Hospitals Dow Jones International News October 21, 2003

Corporate Australia is bracing for an expected surge in takeover activity in 2004 as the bumper equity market and strengthening global economy give boards greater confidence to pursue major deals.

Takeover activity in 2003 rose 33 per cent on 2002 but is still down on the record set in 2001, according to Bloomberg. Equities shone last year, with some 94 floats hitting the stock exchange.
Equity markets in Australia have delivered their best returns in years and corporations have the strength in their share prices to issue scrip to fund acquisitions.

Sentiment is also swinging to aggressive rather than defensive strategies.

Credit Suisse First Boston's head of investment banking, Rob Stewart, says the favourable global economic conditions, coupled with the booming equity markets, are likely to push merger and acquisition activity above that achieved in 2003.
"There is a feeling that growth by acquisition is being endorsed by the fund managers again," Cook says.

"The mood change has been quite marked. It has moved from quite sombre 12 months ago to being relatively buoyant at the moment." M&As Take Over Centre Stage Australian Financial Review January 5, 2004

Brief Update Sept 2004

Citigroup has settled the action taken by Worldcom shareholders for a little under US $3 billion. It has set aside another US $6 billion to resolve the actions taken by Enron and other shareholders. Its involvement in the Parmalat fraud has received a lot of attention and authorities in the USA have commenced an action accusing it of complicity.

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Central Map ..... Initial Map ..... USA Map ..... Australian Map ..... International Map ..... Corporate Practices Map..... (to print)
 Home Page ..... US Health Corporate page ..... (Mayne Health)
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Marketplace ... Analysts ... Spinning ... Employees ... WorldCom ... Enron ... Health ... Settlements ... Culture
This page created January 2004 by Michael Wynne
Update September 2004