MANAGEMENT COMMUNICATION - Pearson Learning Solutions

90 Chapter 3 ● Communication Ethicsindustry and earned an estimated $20 millionper year. In ten different deals, he helped SSBearn $24 million in fees from investmentbanking with WinStar Communications. 9In January 2001, Grubman assigned a$50 price target and classified WinStar with a“Buy” rating. With the stock subsequentlytrading at $13, Grubman’s assistant e-mailed alarge investor stating, “Buy here and sell in thelow $20’s.” However, Grubman did not changehis price target or rating in public. In fact, hemaintained the status quo even when WinStarshares were trading at less than one dollar andthe company was on the eve of bankruptcy. Helater noted in e-mail, “we support our bankingclients too well and for too long.” 10The National Association of SecuritiesDealers alleged that SSB’s research wasmaterially misleading after investigating theWinStar incident. SSB agreed to pay $5 millionto settle the charges.Deceptive Lending PracticesCitigroup acquired Associates First CapitalCorporation and Associates Corporation ofNorth America in November 2000. Theysubsequently merged the acquired entity intothe Citifinancial Credit Company division.The Associates were one of the nation’slargest subprime lenders. Subprime lendingserves borrowers who cannot obtain credit inthe prime market. The loans carry highercosts due to the additional risk taken by thelender and are frequently held by lowincomefamilies.In March 2001, the Federal TradeCommission filed suit against Associates fordeceptively inducing consumers to refinanceexisting debts into home loans with high interestrates and fees. They also alleged thatAssociates tricked borrowers into purchasinghigh cost credit insurance without their knowledge.In some cases, the fees were included inmonthly payments and added thousands ofdollars in additional cost. When consumersnoticed the fees, the employees of Associatesemployed various tactics to discourage themfrom removing the insurance. The FTCdescribed the activities as, “systematic andwidespread deceptive and abusing lendingpractices.” The result was the largest consumerprotection settlement in FTC history andrequired Citigroup to pay $215 million. 11Helping Enron Corporation CommitFraudOn December 2, 2001, Enron filed forbankruptcy protection from its creditors.Investors later found that the companyused highly complex special purpose entitiesand partnerships to keep $500 millionoff of the consolidated balance sheet and tomask significant deficiencies in cashflow. Citigroup was one of the financialinstitutions that helped Enron design thesetransactions.The Securities and Exchange Commissioninitiated enforcement proceedings withCitigroup for assisting Enron in producingmisleading financial statements. The Commissionalleged that loans to Enron were disguisedas commodity trades. The transactionswere essentially loans because they eliminatedthe commodity price risk. Underthese transactions, commodity price riskwas passed from Enron to Citigroup andback to Enron. Without regard for thechange in price of the underlying commodity,Enron was required to make repayments ofprincipal and interest. The commission alsoalleged that Citigroup helped Enron designtransactions that transferred cash flow fromfinancing into cash flow from operations.There was further evidence of similar deceptivetransactions with Dynegy. Citigroupagreed to pay $120 million to settle the allegationsthat it helped Enron and Dynegy commitfraud. 12000200010270582216Management Communication: A Case-Analysis Approach, Fourth Edition, by James S. O'Rourke, IV. Published by Prentice Hall. Copyright © 2010 by Pearson Education, Inc.