Deck 11: Legal and Ethical Issues in Finance

Question 1

What unusual step did the Board of Directors at WorldCom take to avoid lowering the stock price?

Answer 1

They agreed to cover CEO Bernard Ebbers' margin calls on WorldCom stock.

Question 2

What legal accounting tool did Enron's CFO use to make earnings look better than they were?

Answer 2

Special purpose entities (SPEs).

Question 3

What other firm did the Enron scandal bring down, and for what reason?

Answer 3

The auditing division of the accounting firm Arthur Andersen surrendered its license to practice as CPAs for signing off on fraudulent financial statements.

Question 4

What circumstance made it possible for Charles Keating to quintuple Lincoln Savings and Loan's assets in a short period of time?

Question 5

Who were the Keating five?

Question 6

In what way was Proctor and Gamble's interest rate swap deal unethical?

Question 7

What particular form of debt did Robert Citron use to leverage up the returns to the Orange County Investment Pool?

Question 8

What circumstance in the economy made Robert Citron's investment strategy change from a winner to a loser?

Question 9

What circumstance allowed Robert Citron to put the Orange County Investment Pool's funds at risk?

Question 10

What circumstance allowed Nick Leeson to put Barings Bank's funds at risk?

Question 11

What strategy that Nick Leeson tried only made things worse?

Question 12

What part of the strategy made things worse for both Orange County and Long Term Capital Management when returns started going negative?

Question 13

What situation that arose due to the S&L crisis caused the federal government to bail out Wall Street and the big banks in the 2007 financial crisis?

Question 14

What risk metric proved insufficient for Long Term Capital Management?