Government required free credit report

"I'm extremely disappointed say Mansie Booker Jr. of the steady stream of corporate misdeeds that have rocked the stock market. Booker, a 58-year-old television production coordinator for the city of san Bernardino, California, says his wife, Mary, 60, is almost ready to pull out of stocks. "You don't know which company is going to be next in terms of scandal." A few years ago, the heat of the tech sector was firing up the market. Now it appear the only thing cooking in corporate America is the books.

The Bookers' sentiments echo that of most investors who, after witnessing a slew of reports and allegations of corrupt accounting practices, are reluctant to pour any more money into the stock market, no longer accepting Securities-and-Exchange-Commission--required financial information as gospel. Corporations ranging from Adelphia Communications to Xerox Corp. are finding themselves under scrutiny, as skeleton after skeleton is uncovered in corporate closets.

And all the while, the market continues to free-fall (see chart). The Dow Jones industrial average index opened at 9,379.20 on Oct. 23, 2001--the day after Enron announced that the SEC was investigating its accounting practices with its partnerships. By July 11, 2002, the Dow would shed 6%, to open at 8,800 amid a steady stream of accounting scandals from corporate America.

Desperate to repair investors' shattered trust in the battered equity markets, President George W. Bush proposed a series of actions that include:

* Longer, harder jail time for executives convicted of mail and wire fraud, document shredding, and other transgressions

* Steps by the SEC to freeze questionable payments to executives from companies under investigation

* An end to executives receiving personal loans from corporate boards

* The creation of a "financial crimes SWAT team" at the Justice Department headed by Deputy Attorney General Larry Thompson, an African American

* Requirements that most corporate directors be independent

At the root of it all is greed. The overuse of stock options has been a "root cause" of corporate excess, according to B. Kenneth West, senior consultant of corporate governance for TIAA-CREF in New York City. "When executives have a carload of options; they may do anything to get the public to think the company's stock price should go up" he says.

Now that stricter oversight of public companies is in the headlines, what's likely to come to pass? "One is that [the U.S. government] is clearly going to call for more corporate governance measures," says Shawn Baldwin, chairman and CEO of Capital Management Group Investments L.L.C. (No. 9 on the BE ASSET MANAGERS list with $1.8 billion in assets under management). He says that although individual investors may fear the market at this point, asset managers and other institutional investors will continue to play the stock market. "Institutional money has to be placed somewhere, so the fiduciary stewards of these plans are going to start looking for strong governance measures at the companies before investing in its stock."

Baldwin says that although he hasn't lost any clients as a result of investor distrust in the equity markets, he and other asset managers have been reassuring clients, "making sure they know we're looking at the books, looking for anomalies, and delving into more intrinsic analysis"

Dennis Kroner, president of Pitt, Ryan & Linnear, an accounting firm in Chicago, says that a recently-passed law requiring CEOS and CFOs to personally sign off on corporate financial statements will have a major impact. "Most CEOs don't have an accounting background. They'll want some assurance that these statements aren't misleading."

That assurance, according to Kroner, may come from independent directors--but only if the process is revised dramatically "Today," he says, "some directors sit on many boards, in addition to holding a full-time job. A week or so before each board meeting, a director might get a 200-page packet of materials describing what's on the agenda."

Kroner believes government measures will help to restore investors' confidence, "but it will take awhile. It will probably be a year or so before professional directors are sitting on many boards and another couple of years before investors realize what a difference [the directors] make, in terms of corporate reporting This issue is not going to go away quickly," he says. Capital Management Group's Baldwin, on the other hand, says the public will need an example made of a corporate executive before trust is restored--a CEO like Enron's Kenneth Lay; Tyco's Dennis Kozlowski; or World, Com's Bernard Ebbers sentenced to hard time if found guilty of criminal activity,

Rex Jackson, a money manager with Integrity Planning, a subsidiary of a credit union in Redlands, California, agrees that these issues will bedevil investors for some time to come. "Companies are still doing things the old way," he says. "Any improprieties that are under way now won't come out until 2003."

Eventually, tougher oversight and harsher penalties will have an effect, "The scandal headlines will become fewer and farther apart," says Jackson. "People have short-term memories once an issue is off the front page."

In the near term, though, Jackson is far from bullish. "We follow an active asset allocation model that monitors current market conditions," he says. "Now that model is telling us that our clients Should be out of stocks with their money in cash. That could change quickly, though."

In addition to cash, Jackson recommends that clients hold alternative investments such as real estate investment trusts (REITs) and managed futures funds, which can invest in a broad range of commodities, currencies, stock indexes, etc.

Market historian and money manager Steven Leuthold, who claims that stocks are still overvalued, suggests a slightly different tack: Investing in the stock market in stages while increasing diversification to limit exposure.

But for now, average investors like Booker remain worried about committing additional funds to stocks.

"Now, conservative is the key word when it comes to investing. I don't want to lose money I'll need in retirement," he says. As long as investors continue to worry and stay on the sidelines, it's unlikely the market will see any sustained upward movement.

7/31/01: 10,539.10

9/10/01: 9,605.50

9/21/01: 8,235.80

10/22/01: 9,377.00

Shares of Enron plummet $5,40, or 21%, to close at $20.65 after announcing that the SEC requested information about the company's ties to outside investment partnerships set up by the oil trader's CFO.

3/27/02: 10,426.90

Adelphia Communications Corp.'s stock plunges $3.69. or 18%. to $16.70 due to reports that the company failed lo disclose billions in off-balance-shoal loans to the company's founders.

4/8/02: 10,249.10

New York Slate officials accuse Merrill Lynch of giving biased stock-picking information which cost their clients millions of dollars. Over the next two months, Merrill Lynch stock would go on to Jose 30% over the next three months, closing at 36.64 on July 11.

6/28/02: 9,243.26

Xerox Corp. admits to certain accounting improprieties, inflating revenues by more than 51.9 billion from 1997-2001 and restates results for 2001. Shares of the copy machine giant dropped 51.00. or 14.2%, to close at $6.00,

6/25/02: 9,126.82

WorldCom shares slip 11% to close at $0.83 following word that financial statements for the previous five quarters contained some $3.8 billion of fraudulent capital expenses.

The day before shares of Martha Stewart Living Omnimedia drop some 20% amid investigations that CEO Martha Stewart sold 4000 shares of Imclone stock on Dec. 27--the day before the FDA announced that it would not he approving a highly-touted experimental drug, causing Imclone's stock lo shed $5.19, or 8% to

7/9/02: 9,096.09

Merck & Ca. postpones the planned IPO of its Merck-Medco unit following a series of lawsuits prompted by allegations that Medco reported $12.4 billion in revenues from 1999-2001 that it never received, Merck shares slip $1.36, or 2.8%, to close at $45.75.

Major indexes--Daw, Nasdoq, and S&P 500 plummet after President Bush's speech on corporate responsibility end reform.

7/10/02: 8,813.50

Two watchdog groups call for an investigation of Halliburton Inc.'s accounting practices while vice president Dick Cheney was its CEO. Shines of the energy services company slide $0,67 or 4.7% to close at $13,55.

7/22/02: 7,784.58

After WorldCom files for chapter 11 bankruptcy, Dow closes below 8 000 for the first time since 1998.