Corporate and Shareholder Fraud

Corporations have an interest in maintaining a successful front in the eyes of shareholders and securities analysts because investors buy shares of companies that are healthy and growing. Corporate fraud, also known as shareholder fraud, occurs when, to maintain this front, corporations deliberately conceal or skew information.

The Ten-Point Plan

To prevent corporate fraud, President George W. Bush instated a "Ten-Point Plan to Improve Corporate Responsibility and Protect America's Shareholders." This plan was proposed in March of 2002 and has been implemented since by the SEC.
The overriding aims of this plan are to:

  • Improve the accessibility and accuracy of company and shareholder information
  • Make auditors independent
  • Increase management accountability

To put the plan into practice, a number of measures have been taken:

  • An oversight board will ensure that SEC standards for auditing and accounting are being met. Members who have no ties to the accounting profession will run the board. In addition, reports will be made to the public.
  • A newly created Corporate Fraud Task Force will investigate corporate criminal activity and bring charges against guilty parties.
  • Consequences for corporate fraud have been heightened: prison time for criminal fraud has been lengthened, and suspicious activities are being investigated more intensely.
  • CEOs and CFOs are being required to personally certify that their corporation's quarterly reports are accurate. This requirement aims to make CEOs and CFOs personally responsible for actions affecting their corporation's shareholders.
  • CEOs and directors will be required to disclose to the public complete, clear information on their benefit and compensation plans. Further, compensation committees have been asked to limit loans made to directors out of company funds.

Examples of Corporate/Shareholder Fraud


During the yearlong investigation into WorldCom's accounts, nine billion dollars in discrepancies were found. The SEC levied charges against the corporation's CEO and several executives. Among these, Scott Sullivan (WorldCom's CFO) was indicted on counts of securities fraud, and David Myers (WorldCom's controller) pled guilty to committing securities fraud and falsifying SEC filings. In order to present a successful face to investors when company profits began to wane, former CFO Scott Sullivan led a series of accounting adjustments. Over five financial quarters Sullivan masked $3.8 billion in WorldCom operation costs. Another charge against WorldCom centers on the fact that the corporation's CEO, Bernard Ebbers, took 408 million dollars in personal loans from the corporation's funds.


Former top executives of Enron have been accused of hiding the company's debts by falsely adjusting financial records. Enron's accounting firm, Arthur Anderson, also began a process of shredding incriminating documents weeks before the SEC could investigate. The corporate fraud committed by Enron had huge repercussions for employees who had invested most of their savings and 401k retirement funds in presumably secure company stock. The investigation against Enron continues, and charges are being filed against the company's directors and leading accountants.


Tyco CEO Dennis Kozlowski and CFO Michael Swartz face criminal charges for taking private loans from Tyco in excess of 170 million dollars. The loans, many of which were interest free or fully forgiven, were not revealed to shareholders. Mark Belnick, Tyco's former General Counsel, has also been charged for receiving fourteen million dollars in loans for houses he purchased in New York and Utah. The corporation has removed Kozlowski, Swartz, Belnick and other members of its board of directors, and replaced them with outside professionals. Edward Breen, David Fitzpatrick, and William Lytton have begun to reestablish Tyco's management board and the company is moving toward recovery.

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