High-profile downfalls of corporate CEOs are not a new phenomenon. But that doesn't make them any less egregious, as legislation such as Sarbanes-Oxley Act —which makes corporate oversight and protection of shareholder rights by the board of directors a priority—reminds us. Here are five of the most public CEO scandals in recent times: ethics violations that have not only brought the top dog down, but in many cases landed him in prison.
- Kenneth Lay, who presided over the Enron accounting scandal, died before serving his prison sentence.
- Bernard Ebbers of WorldCom served half his prison term for fraud, dying shortly after his early release.
- After using corporate funds as his personal piggy bank, Dennis Kozlowski of Tyco went to prison.
- Conrad Black of Hollinger Inc. served part of his prison term for wire fraud; after being released, he received a pardon from President Trump.
- Scott Thompson quickly departed Tyco after false info was discovered on his resume. He has served as CEO of several companies since.
Kenneth Lay, Enron
Enron's downfall, and the imprisonment of several members of its leadership group, was one of the most shocking and widely reported ethics violations of all time. It not only bankrupted the company but also destroyed Arthur Andersen, one of the largest audit firms in the world.
The Securities and Exchange Commission (SEC) announced in 2001 that it was investigating the accounting practices of Enron after several years of questions raised by analysts and shareholders. The resulting disclosures and write-downs by the company reduced investor confidence and the company's credit rating, leading to the company's bankruptcy in December 2001. The SEC announced that it would pursue charges against Lay, former CEO Jeffrey Skilling, CFO Andrew Fastow and other high-ranking employees.
The charges related to knowingly manipulating accounting rules and masking the enormous losses and liabilities of the company. Lay and Skilling were tried together on 46 counts, including money laundering, bank fraud, insider trading and conspiracy. Skilling was convicted on 19 counts and sentenced to over 24 years in prison.
Lay was convicted on six counts of fraud and faced up to 45 years in prison, but he died in 2006, three months prior to his sentencing hearing. The resulting investigation of the Enron scandal resulted in Congress passing the Sarbanes-Oxley Act to improve corporate accountability.
Five Most Publicized CEO Ethics Violations
Bernard Ebbers, WorldCom
Even as the SEC was conducting its investigation of Enron, an even larger CEO ethics violation was brewing. WorldCom, which at the time was the United States' second-largest long-distance telecommunications company, entered into merger discussions with Sprint. The merger was ultimately quashed by the Department of Justice over concerns about it creating a virtual monopoly. The decision took its toll on the company's stock price.
CEO Bernard Ebbers owned hundreds of millions of dollars in WorldCom stock, which he margined (that is, borrowed against) to invest in other business ventures. As WorldCom's stock price dropped, banks began demanding that Ebbers cover more than $400 million in margin calls. Ebbers convinced the board to lend him the money so that he would not have to sell substantial blocks of stock. He also began an aggressive campaign to prop up the stock price by fabricating accounting entries. The scheme was ultimately discovered by WorldCom's internal audit department, and the audit committee was informed. The resulting SEC investigation resulted in the company's bankruptcy filing and the firing of Ebbersin 2002, and, a few years later, Ebbers' conviction on fraud, conspiracy, and filing false documents charges.
Ebbers began a 25-year sentence in federal prison in 2006. After he'd served 13 years of his term, a federal judge ordered his release due to health reasons. He died shortly thereafter, in February 2020.
Conrad Black, Hollinger International
Canadian Conrad Black created Hollinger Inc., the parent company of Hollinger International, in the mid-1980s with the purchase of the controlling interest in the Daily Telegraph, a British newspaper. With a number of other purchases throughout the following 15 years, Hollinger became one of the largest media groups in the world. As CEO of Hollinger International, Black had substantial control over the company's finances.
The board of directors confronted Black in 2003 over payments the company made to him and four other directors in the $200 million range. The board called in the SEC to investigate the validity of the payments and the accounting transactions created to account for them. Charges were filed against Black for wire fraud, tax evasion, racketeering, and obstruction of justice among others. In 2007, Black was convicted of four of the 13 charges against him and was sentenced to 78 months in prison, of which he served 42. He was released in 2012. President Trump pardoned him in 2019.
Dennis Kozlowski, Tyco
Kozlowski, the CEO of Tyco, a massive security and electronics company, was also caught with his hand in the corporate coffers. In 2002, the board of directors discovered that Kozlowski and Mark Schwartz, the company's CFO, had taken unauthorized bonuses and loans in the amount of $600 million. The men were brought up on charges of grand larceny and securities fraud, among others. Prosecutors charged that Kozlowski had paid for lavish parties, a Manhattan manse, a $6,000 shower curtain, and expensive jewelry with corporate funds. His first trial in 2004 resulted in a mistrial, but in 2005 he was sentenced to eight-to-25 years; after serving eight years, he was released in 2014, and began working for his wife's merger-and-acquisitions firm in Florida.
Scott Thompson, Yahoo
Compared with the other four CEO bad boys on this list, Scott Thompson's transgressions may not seem so egregious. What shocked shareholders and media alike was the brazenness of his deception and the lack of oversight that allowed it to happen. Thompson was brought in as Yahoo's new CEO in early 2012, in an attempt to reverse the struggling company's fortunes. By May, a shareholder activist group alleged that Thompson had embellished his resume by claiming he had a degree in computer science, along with an accounting degree. He had only an accounting degree.
There were two significant ramifications of the deception, which Thompson characterized as "inadvertent." The first: It indicated the board did not fully vet him before hiring. More importantly, because the false information appeared in SEC filings, the company and Thompson himself was subject to facing disciplinary or legal action.
Thompson voluntarily stepped down as CEO in May 2012. He became CEO of ShopRunner shortly thereafter—the CEO of its parent company, Kynetic, was an old friend—and worked there until 2016. He currently is CEO of Tuition.io, a firm that enables companies to provide student loans to employees as an employee benefit.
The Bottom Line
CEOs have always been expected by shareholders and investors to maintain high ethical standards. Although it doesn't always happen, today's regulatory environment makes it easier to identify transgressions and bring violators to justice.