The new century's top 10 money messes

By Tim Middleton

For connoisseurs of scandal, the current flap over options backdating is weak tea. Greg Reyes, a former chief executive of Brocade Communications Systems (BRCD, news, msgs), isn't even accused of enriching himself. Rather than stealing from shareholders, Steve Jobs has boosted the value of Apple (AAPL, news, msgs) stock 1,000% in six years.

No, this stuff is grade school for scandal. Where are the Dennis Kozlowskis and John Rigases, the Enrons and WorldComs? These are the MBAs of swindling in the 21st century. They cost investors hundreds of billions of dollars.

And they teach a more meaningful lesson than backdating, which isn't even illegal. Swindles by their nature are secret, but swindlers often give themselves away very publicly. Two of the great financial scams of this new century -- late trading at mutual funds and bogus research from stockbrokers -- were so obvious they were exposed by a local politician.

The folks who should sniff out these scams, the money managers with billions of dollars at stake -- much of it yours and mine -- have consistently missed even the most obvious of clues. Though it's easy to blame the scammers, the so-called professional investors deserve a healthy dose of scorn, too.

Here's a look back at the top 10 money mistakes of the new century and the folks who made them.

No. 1: The big crooked E

That was Enron's logo, and it was a fitting symbol of a Texas-size swindle that took in everybody, including the president of the United States. George W. Bush's nickname for the power company's chairman, Kenneth Lay, was Kenny Boy.

Enron was the favorite utility of environmentalists because its real business wasn't distributing natural gas but rather conducting exotic (but nonpolluting) financial manipulations. But the greens weren't alone: The five largest shareholders of Enron were Fidelity Management, Alliance Capital, Janus Capital Group (JNS, news, msgs), Putnam Investment Management and Barclays (BCS, news, msgs).

In reality, what Enron did was something of a mystery; the company's own Web site called it "difficult to define." What it really did was fraud: private partnership deals that favored insiders over the company. The deals were disclosed in varying degrees in the fine print of regulatory filings.

When Enron collapsed, it erased $63 billion in shareholder equity, including the life savings of many of its employees. The financial mastermind, Jeffrey Skilling, is serving a 24-year prison sentence. Lay would be in prison, too, if he hadn't died.

No. 2: A not-so-independent auditor

In its final year, Enron paid accounting fees of $25 million to the Arthur Andersen company, but it paid even more, $27 million, in consulting fees. CPAs are supposed to be independent, but Andersen clearly was not.

Only a handful of Andersen employees were implicated in illegal activity, but prosecutors went after the company itself, especially when it emerged that Andersen was also auditing what would become the biggest accounting fraud in history, an $11 billion swindle at WorldCom. Tens of thousands of innocent Arthur Andersen employees lost their jobs when the company collapsed.

No. 3: Pumping up the revenue

The largest bankruptcy filing in U.S. history, at WorldCom, followed the largest accounting fraud, for which a court ultimately held founder Bernard Ebbers responsible, sentencing him to a 25-year prison term.

WorldCom had set public financial goals for itself during the 1990s technology boom that became impossible to meet. Failing to meet them, however, would have weakened the price of the company's stock. So Ebbers and other executives manipulated the books to inflate revenue. So did others, and the entire telecom industry was subsequently gutted.

Among the collateral damage: Citigroup (C, news, msgs). "There is no doubt that Bernard J. Ebbers, the founder and former chairman of WorldCom, was a top client for Citigroup and that his care and feeding were Job One at the firm," The New York Times wrote in late 2002. "Between heaping his plate with almost one million shares of hot stock offerings and raising billions of dollars from investors to fund his business, Citigroup worked to keep Mr. Ebbers happy."

New York's comptroller, in 2002, said Citigroup had a $679 million interest in helping WorldCom's stock price, although Citigroup disputed the accusation, according to Reuters.

No. 4: Shower power

Another emblem of the 2002 corporate scandals was a $6,000 shower curtain purchased, with company money, by Dennis Kozlowski. It was part of perhaps $400 million the former chief executive of Tyco International (TYC, news, msgs) was convicted of stealing from the company. According to news-media accounts, he is allowed three showers a week at the New York prison where he's spending a sentence of eight to 25 years.

Kozlowski's excesses included a multimillion-dollar birthday party for his second wife on the Mediterranean island of Sardinia. He was also accused of manipulating Tyco's financials to prop up the stock price, but his lifestyle wasn't hidden under a basket.

Tyco's shareholders in late 2002 included the Northern California Pipe Trades Pension Trust Fund and the IBEW Pension Benefit Fund, a national pension plan for the International Brotherhood of Electrical Workers.

No. 5: A loan, again

Adelphia Communications founder John Rigas was sentenced to 15 years for his part in his family's looting of the cable-TV company, which included taking more than $2 billion in unreported loans. Rigas was 81 when he was sentenced in June 2005, and the federal judge who presided at his trial said his punishment would have been far worse except for his advanced age and poor health.

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