The NewsHour with Jim Lehrer

JIM LEHRER: Good evening. I'm Jim Lehrer. On the NewsHour tonight: A summary of today's news; the WorldCom accounting storm, the details, the impact on investors and confidence, and a more general report on business and Wall Street ethics; then, an update of the Arizona fires; and a poem about good fences.

NEWS SUMMARY

JIM LEHRER: The Securities and Exchange Commission formally accused WorldCom of fraud today in a new accounting scandal. The civil charges were filed late today in federal court in New York City. Last night the communications firm announced it had failed to count $3.8 billion in expenses against its earnings since the start of last year. The disclosure put WorldCom on the brink of bankruptcy. It said it would lay off 17,000 workers by Friday. In the action late today the SEC also sought a court order to bar WorldCom from destroying documents. Earlier in Canada at a summit of industrial powers, President Bush said what WorldCom had done was outrageous.

PRESIDENT GEORGE W. BUSH: Those entrusted with shareholders' money must-- must-- strive for the highest of high standards. The good news is most corporate leaders in America are good, honest, open people who care deeply about shareholders and employees, and our economy is strong. But when we find egregious practices such as the one revealed today, we'll go after them.

JIM LEHRER: In Washington, Senate Majority Leader Daschle was asked why Congress has not enacted major reforms since the Enron scandal broke.

SEN. TOM DASCHLE: First of all, this is a very complicated circumstance, and I don't think that Congress ought to be judged by the speed with which it reacts as much as by the comprehensive way that we can find the policy corrections that are going to be required. I think haste does make waste. And we want to be very careful about too hastily making decisions that we'll regret later.

JIM LEHRER: Daschle did say he'll place an accounting reform bill on the fast track in the Senate. The WorldCom announcement, last night, came shortly after a major cable TV company filed for bankruptcy protection. Last month, Adelphia Communications had disclosed billions of dollars in off-the- books borrowing by the company founder and his family. The WorldCom turmoil triggered a roller-coaster day on Wall Street. Stocks fell sharply at the outset, but they bounced back later as buyers took advantage of lower prices. The Dow Jones Industrial Average ended with a loss of just six points at 9,120. The NASDAQ gained five points to close at 1429. We'll have more on all of this in a moment. The Federal Reserve today left a key interest rate unchanged. It's the rate banks charge one another for overnight loans. It remains at 1.75%, a 40-year low. In a statement, the Fed said it was unclear how much consumer and business demand would increase in the coming quarters. A federal appeals court today declared the Pledge of Allegiance unconstitutional. The ninth circuit court in San Francisco said the reference to "one nation under God." It said those two words amount to a government endorsement of religion. A Sacramento atheist had challenged the phrasing, which was added in 1954. Today's ruling drew sharp protests in Congress.

SEN. TRENT LOTT: This is obviously an unbelievable decision, as far as I'm concerned, and an incorrect ruling and a stupid ruling. Either it's got to be overturned by the ninth circuit, or by a higher court, or we will do it in the Congress. I think it's essential that this matter be addressed, and be addressed quickly.

SEN. JOSEPH LIEBERMAN: I don't see any logic. In fact, I think this decision offends logic. It will outrage the public. And if there's anything positive that comes out of it, it will unify this most religious and tolerant of people. You know, we have found a way in this country that is unique in world history to express our shared faith in God, and to do so in a way that has not excluded anyone.

JIM LEHRER: Late today, the Senate voted 99 to nothing for a resolution criticizing the appeals court action, and a White House spokesman called the ruling ridiculous. He said the Justice Department was considering an appeal to the U.S. Supreme Court. In the Middle East today, the Palestinians formally announced Presidential and legislative elections would take place in January. Aides to Yasser Arafat disagreed over whether the Palestinian leader had decided to run again. In response, President Bush today repeated his call for new Palestinian leadership. In the West Bank town of Hebron, Israeli forces besieged a Palestinian government compound for a second day. Israeli military officials said 150 Palestinians had surrendered, including a number of top fugitives. Ten Pakistani soldiers were killed overnight in a raid on an al-Qaida hideout. Two suspected terrorists also died in the four-hour firefight near the Afghan border. Most of the several dozen enemy fighters escaped. They were believed to be Chechens. Firefighters in eastern Arizona may save the small town of Show Low after all. They voiced that hope today after two days of improved weather slowed an enormous wildfire. The blaze has already destroyed more than 400,000 acres of forest, and more than 350 homes and other buildings. We'll have more on this later in the program tonight. Amtrak continued running today, as a deadline for shutting down came and went. Late yesterday, the passenger rail service said it would operate at least until the start of the July 4th weekend. Amtrak officials have been seeking $200 million. In Washington, Transportation Secretary Mineta said a deal on emergency funding could come by the end of the day. And that's it for the News Summary tonight. Now it's on to WorldCom, investor confidence, and business ethics, plus the Arizona fires, and a fences poem.

FOCUS - WRONG NUMBERS

JIM LEHRER: WorldCom: Part one of our focus on corporate America and Wall Street is the WorldCom story. Here's a report Gwen Ifill did before tonight's SEC announcement it filed civil fraud charges against WorldCo.

GWEN IFILL: WorldCom was one the telecommunications industry's biggest success stories. But the new revelations of apparently phony bookkeeping now threaten to make it the latest in a string of sudden and spectacular business collapses. Founded in 1983 as a small long- distance provider, WorldCom surprised the communications world in 1998 with its $30 billion take over of MCI, a major player in the long distance market. At the time, the deal was the largest merger in history, and WorldCom became the nation's number two long distance company behind AT&T. Another WorldCom blockbuster proposal for a $129 billion merger with Sprint fell through in July, 2000. Like many other telecom companies in recent years, WorldCom was hit hard by over building, over investment, and declining revenues from dropping long distance rates. Then in March, the Securities and Exchange Commission launched an investigation into WorldCom's finances. A month later, WorldCom President and CEO Bernard Ebbers announced his resignation. The news was coupled with reports that he owes the company more than $400 million in personal loans. Once a stock market favorite with a peak price of $62 a share, today what appears to be a $3.8 billion accounting fraud sent global markets reeling from Tokyo to London. And on Wall Street, the NASDAQ stock market halted trading WorldCom stock as it plunged to nine cents a share. The disclosure also rocked the beleaguered firm Arthur Andersen, which was WorldCom's auditor until last May.

GWEN IFILL: Now for a closer look at what happened at WorldCom, we're joined by Scott Cleland, a telecommunications analyst and CEO Of the precursor group, an investment research company.

Mr. Cleland, how could something this massive have happened?

SCOTT CLELAND, The Precursor Group: Well, what really happened here was a momentum stock. This was an acquisition machine company. They acquired 60 companies. And when you acquire that many companies, you use pro forma accounting, which is accounting that is not necessarily standard, but it's designed to explain how the company is performing as a newly-merged company. And what happened here is in the pro forma reporting, the real accounting got lost.

GWEN IFILL: There's so much talk, the word "fraud" has been bandied about so much today. Is there anyway this could have been mere sloppiness rather than intentional behavior?

SCOTT CLELAND: Inconceivable. I mean, we're talking about a $1.5 billion profit going to a $1.5 billion loss. And the allegation, if it is true, is a simple bookkeeping, you know, a first-year auditor wouldn't make the mistake in their sleep.

GWEN IFILL: Break it down for us. How is this supposed to work, this kind of bookkeeping and how did it work in this case?

SCOTT CLELAND: Well, the question is, is what is an expense and what is a capital expense? At least the charge is that there was $3.8 billion worth of real costs, which they essentially mortgaged. They put into debt. And they represented to people that they were actually profitable when, in fact, they had borrowed those profits. Those weren't real profits.

GWEN IFILL: Capital investment is supposed to be what?

SCOTT CLELAND: Well, capital investment, you know, they were spending for equipment. They were representing that they were reinvesting back into their company. And they weren't. They were essentially using the books, if these charges are true, to make it appear that they were growing profits when all they were doing was growing debt.

GWEN IFILL: So they clearly had been doing this for some time-- at least five quarters, as far as we know. How was it discovered?

SCOTT CLELAND: Well, how it was discovered is the SEC started investigating. And it's amazing the power of a subpoena and the power of the federal government asking people under oath what's going on. And I think also what happened is they had a new auditor. Somebody else came in, KPMG came in to look at Arthur Andersen and found something that was clearly obviously outrageously wrong and they came forward with it.

GWEN IFILL: We just heard about the departure of Bernard Ebbers in April. Was there a connection between his departure and the irregularities that surrounded that and what we're hearing about today?

SCOTT CLELAND: I think it's the same story, it's just that one shoe fell then, and another shoe fell today.

GWEN IFILL: So $400 million in personal loans wasn't precisely part of the $4 billions we're talking about here, but the same kind of management, you say, contributed to this? Or mismanagement?

SCOTT CLELAND: The $3.8 billion was a huge mistake. The $400 million was another, you know, mistake. And I believe they will uncover more because if there was this egregious accounting from 2000- 2001, they're going to have to go back and look at the books from '96 to 2000.

GWEN IFILL: Who was supposed to know about this? Was this the chief financial officer's job to report this sometime ago? Was it the auditor's job to report it? I saw today there was some finger pointing going on on that front.

SCOTT CLELAND: This is another example like Enron and Global Crossing. There should have been dozens of people aware that something was seriously wrong. Dozens of people within WorldCom-- the CFO and his subordinates-- the lawyers that had to sign off on it, the executives above him, CEO, operating level, the board; the outside council, the investment bankers that did due diligence on this, and then the auditors who were supposed to be checking and giving us confidence that these numbers were actually accurate.

GWEN IFILL: As someone who keeps track of companies like this for a living are you surprised by the size, by the massive size of this loss?

SCOTT CLELAND: I am surprised that they were able to hide this amount of money from all of us. Shame on all of us that this type of number could be this off. We've known for a long time that WorldCom had serious problems and wasn't being able to grow... outgrow its costs, but we didn't even think that it was this bad.

GWEN IFILL: Now, is this Andersen's fault? We've heard about so many irregularities, so far, with Andersen's accounting procedures in other cases. Can we point to that as part of the reason?

SCOTT CLELAND: I think we can point it to at Enron, Global Crossing, WorldCom, Adelphia. All of these firms are expecting that shareholders are looking to auditors for a seal of approval. The only thing auditing is worth is giving us trust that somebody else, as a third party, honestly has looked at the books and said, "Yes, these are honest, true and a fair representation." And in these instances we couldn't trust the auditors at all.

GWEN IFILL: A friend of mine said to me today, "you know, we didn't know what Enron was, we didn't know what Tyco was, but we know what MCI-WorldCom is." As a result of what people think their familiarity with the kind of business, can you anticipate it having greater reverberations, especially in the public mind?

SCOTT CLELAND: Well, I think what's happening is the successive blows where people are seeing brand names-- Enron, Global Crossing, Adelphia, Tyco, WorldCom, MCI is one of the most advertised brands-- and why people are distrustful now in the markets is many brand names have had serious problems. So the average person could conclude that there are some patterns of problems developing.

GWEN IFILL: Does the average person also wonder whether they're going to lose their phone service? What happens with this company? Is it on the brink of bankruptcy, restructuring? What has to happen?

SCOTT CLELAND: I think the average American shouldn't be worried about losing their service. I think the nation should be worried that the quality of the Internet will deteriorate. One-third of all data traffic is covered -- in the world is carried by WorldCom. If a company is going bankrupt, it does not have the money to reinvest in the network or to maintain quality standards. So, it should be expected that quality will be going down in the future.

GWEN IFILL: So how does a company like this restructure in a way that's still... I mean, we're talking 17,000 employees just so far. There's going to be... there probably will be more jobs lost. Therewill be people who are going to directly feel the effect of what happens here. What does a company do to restructure to save itself at all or is it already too late?

SCOTT CLELAND: I think they should have restructured before they let the 17,000 people off. The 20% staff cut only saves 4% of the cost. And those 20% that are cut will drive revenues down way more than 4%. And so I think this company will eventually go bankrupt, and it probably could have restructured and saved thousands of jobs.

GWEN IFILL: The President talked today about a Justice Department investigation, an SEC investigation, as you alluded to, already is underway. What is the government's role now?

SCOTT CLELAND: The government's role is to be a very serious and diligent law enforcement cop. There are obviously a lot of people in the white-collar securities business and in corporations who have not had the integrity of following the law, not only the letter of the law or the spirit of the law. And so I think you will see a very aggressive federal government pursuit of justice in this area.

GWEN IFILL: Scott Cleland, thank you very much for joining us.

SCOTT CLELAND: Thank you.

FOCUS - SHAKEN MARKETS

JIM LEHRER: Now more on how WorldCom and other corporate scandals are affecting investors and confidence on Wall Street and to Ray Suarez.

RAY SUAREZ: Well, on Wall Street the bear has been growling. The Dow Jones Industrial Average is down 22 percent from its high in 2000. The tech heavy NASDAQ Index is now down a staggering 70 percent from its April 2000 peak, all this, despite much positive news. Today, for example, there were strong reports on home sales and durable goods. So is the virtual wave of accounting scandals taking a toll on investor confidence? We put that question to Catherine Gordon, who heads the Investment Counseling and Research Department at the Vanguard Group, the nation's second largest mutual fund firm; Lynn Stout, Professor of Securities Regulation at the UCLA School of Law; and Tom Gallagher, Senior Managing Director at the International Strategy and Investment Group, a Wall Street research firm.

RAY SUAREZ: Lynn Stout, let's start with you.

What does it mean, to see the Indexes finding these new September 11 lows?

LYNN STOUT: Well, there are a number of reasons why the Indexes are lower than they were a year and a half ago that have nothing to do with the loss of investor confidence. We've had a certain amount of economic bad news. We've had the bursting of the tech bubble. I think people with concerns about investor confidence are not so much focused on what has already happened but on what might happen.

RAY SUAREZ: And what do you mean by that, when you say what might happen, more companies joining the list of those we already know?

LYNN STOUT: Exactly. When investors get a string of bits of bad news, when they start experiencing stock losses, instead of stock gains, there is always the prospect that they might decide that maybe stocks aren't such a great investment after all. They take their money out of markets, prices go down; they decide that stocks are even a worse investment. Prices go down even further. You can get a sort of a self-reinforcing process that can lead to a very long and potentially very painful bear market.

RAY SUAREZ: Catherine Gordon, are you seeing any signs of that, either this month or down the road?

CATHERINE GORDON: Actually we're not either within the mutual fund industry, industry fund cash flows are quite strong into both stock funds and bond funds, our cash flows are quite strong and balanced across the board, and even when we talk to our investors on the phone, certainly they're calling to ask questions, they have concerns, but we're not seeing any wholesale action on the part of investors to make shifts away from their original plan.

RAY SUAREZ: So everybody's hoping that this week is the week when things turn around. But so far it hasn't happened that way. You're still seeing people choosing stocks not because there's no other place for the money to go?

CATHERINE GORDON: Well, I think one of the things that investors have learned, painfully perhaps, over the past several years is the benefit of re-visiting diversification and I think that's what a lot of investors are revisiting -- their financial plans, making sure that they're investing for the right reasons, and that's leading to the balance that we're seeing in the markets. No doubt, we're in a bear market, but for the investors that we're seeing, they seem to be staying the course.

RAY SUAREZ: Tom Gallagher, do you see something more dangerous at hand than perhaps your two colleagues?

TOM GALLAGHER: Well, I think it is important to know just how unprecedented a situation the stock market is in. We're now nine months from the low of the stock market during the recession. On average, of all the recessions in the last 30 years, the stock market's up 37 percent; we're up about 1 percent now. You can take the analysis back to the beginning of the 1900's, and you find the same thing. We've never had such a weak stock market during an economic recovery, so there is something unique going on here. I do think the accounting issues aren't the most important thing. I just think stocks were too highly valued, especially tech stocks, but the accounting issues are an important factor. I think the economy is doing well enough to generate profits that were good according to last year's rules, but we don't know what the new rules are. We don't know what re-statements are going to be. Geopolitical issues are a factor, and I think last we have to put some concerns about the strength of the economy.

RAY SUAREZ: And you mention how a bounce back has historically started. What about the Indexes as a leading indicator, sort of giving us a sign for when individual investors are confident that a recovery is underway?

TOM GALLAGHER: Well, the role of the stock market in the economy is a complicated one. Sometimes it's anticipating what the economy is going to look like, and I think if you look at the data, the economy looks fine, and that's what the Federal Reserve said in their statement today. It's not a robust recovery but it's not - I think fears of a double dip in the economy - another recession - are overblown. So I don't think that the stock market is predicting what the economy is going to do, but it can also be a cause. It can cause a weaker economy if shareholders decide to cut back on their spending or if the weak stock market causes companies to make cutbacks, it can cause a weaker economy. So far, I don't think that's likely to happen. I think the stock market has to go further down before we worry that it's going to lead to a double dip.

RAY SUAREZ: Well, Professor Stout, you heard Tom Gallagher's analysis. Maybe you could help us out a little bit on understanding how this all happens. There are plenty of companies still making money, plenty of companies that are fundamentally sound and not in the throes of restating past earnings or having their leaders indicted, yet, they get pulled down with everybody else. Why?

LYNN STOUT: I think it's important to recognize that stock prices are determined not just by economic fundamentals but also to a certain extent by investor sentiment and particularly by whether they have trust in the market. I think there are some interesting lessons to be learned from history here, although many people don't know it, after the crash of '29, the stock market actually recovered almost all of its value within the next year. It was only after 1930 that prices started going down and down and down until eventually they bottomed out at 15 percent of the 1929 values, and then they didn't recover their value, they didn't return to 1929 levels until 1954. I think one of the lessons we can learn from this is that investors are willing to stay the course for some time, but if you hit them repeatedly with bad news and in this case I think a combination of the bursting of the tech bubble, some relatively modest problem with economic fundamentals and then the accounting bad news, you do run the risk they will essentially just lose faith. When that happens, you can get the self-fulfilling prophecy that I've discussed, and it can take a long time-- years or even decades-- for confidence to come back. I'm not saying we're anywhere near there yet, but I am saying that it is reasonable to worry about it.

RAY SUAREZ: Well, what do you make of Tom Gallagher's example of previous bounce-backs from lows happening a lot faster than this one?

LYNN STOUT: I would - I think he's right that it's actually odd that we don't see some more strength in the stock market following a recession, and I think that's actually a sign that investor confidence has been eroded somewhat. I actually think a more instructive example might also be the bear market of 1973. Now that was a situation where the economy was in trouble, but it wasn't in nearly enough trouble to justify stocks that were trading at P/E ratios, ration of stock prices to corporate earnings of 5 to 1 that were 7 to 1. It's more than just investors... it's more than just the economic fundamentals. Investors' level of faith or trust does matter, does affect prices. Again in the 1970s it took almost a decade for stock prices to recover their levels.

RAY SUAREZ: Catherine Gordon as a mutual fund representative maybe you can help us understand the role of small individual investors, since the 1973 bear market that Professor Stout was talking about, one big change that's happened is that a lot more regular people own stock. How do they play a role in what's happening now?

CATHERINE GORDON: Well, I think you're right. The '73/'74 market was dominated by large institutions running pension plans because we really hadn't -- the 401(k) hadn't been born yet, and today we have a large majority of people responsible for their own retirement assets as well as those assets outside of their retirement account. So there's been a much more ... a broadening of the market, if you will, in terms of people making decisions about individual stocks. And we think that people are making decisions based on their own circumstances and are very involved in making investment decisions and taking responsibility for those investment decisions and wanting to get educated and wanting to know more. So we've seen certainly a lot more written about the whole topic of investment and investment information is much more readily available to individual investors over the past several years. I would point out that, you know, particularly when we look at the market, we encourage people to think about their total portfolio, rather than an individual holding in a particular stock or a particular fund. Even within the market itself, although we can talk about the market being down, you know, 12% looking at the Wilshire 5000, almost 12%, there are sectors within the market that have done quite well. So it's not -- and individual stocks that have done quite well. So... and then you pair that up or match that up with bonds, when people look at a diversified portfolio, the news may not be as bad as just looking at the individual stocks or the market we've been talking about.

RAY SUAREZ: Tom Gallagher, how do individual investors and small investors in particular fare in a market like this?

TOM GALLAGHER: I'm not sure...

RAY SUAREZ: Are they hurt in a different way?

TOM GALLAGHER: Well, they've obviously lost money but I don't know that I'd go so far as to say they're going through a crisis. There's a lot of evidence, a lot of it anecdotal that they're shifting their investments into housing and away from the stock market. They feel that the house isn't going to do to them what the NASDAQ did. It is not going to go down in value by 3/4s over a few years. In some ways they're responding in a natural way. They're calling their realtor more and their stockbroker less. I also think the broadening of the market you're talking about though is reflected in the political response today. You had President Bush commenting on this. You had the Senate Majority Leader, Senator Daschle, scheduling accounting reform for after the July 4 recess. A number of House Committee and Subcommittee chairmen were on the tape today. You had the New York attorney general saying he's going to be looking into this. I think that the policy response plays a useful role or can play a useful role in restoring investor confidence; if they feel that most of the wrongdoing has been uncovered and you've got a new set of rules that everybody agrees on, I think that speed the time when the average investor feels that it's safe to get back in the market on a long-term basis.

RAY SUAREZ: Professor Stout, do you think regulation is part of the answer?

LYNN STOUT: Well, I think that our approach to restoring investor confidence has got to be two pronged. The first part is enforcing the laws that we have on the books already. I give great credit to SEC Chairman Harvey Pitt, who has started a sort of rather massive investigation of the accounting techniques of the largest Fortune 500 companies, really looking very closely. And that's the first time that's happened in many years. For many years the SEC has simply not been given the budget or the priority to do this sort of thing. I do think we should also look perhaps at reforming the laws themselves, however, in particular. In 1995, Congress passed the Private Securities Litigation Reform Act, which was deliberately intended to make it harder for defrauded investors to sue. And that was a benefit of hind sight. I'm not so sure - and many of us are not so sure - that that change was a good idea. Perhaps we should toughen the laws themselves, as well as making sure we enforce the ones that we have.

RAY SUAREZ: Catherine Gordon, what's your industry doing on the regulatory front? Are you making WorldCom's, Enron's and Global Crossing, are you urging them to be less likely, less possible to happen?

CATHERINE GORDON: Well, I think I would agree. I mean, we clearly have a regulatory system in place that can deal and should deal with a number of these issues. I think we also have to - and the mutual fund industry clearly supports that - I think we also have to recognize that we live in a free market economy and economies in free markets self correct, and this is clearly an extreme in terms of how accounting principles have been applied, but I think if we step back and look at the long-term that we have to have - we continue to have confidence that free markets - free markets correct - and I go back to a point made earlier, that we are talking about a handful of companies that have abused shareholder trust and have issues. The vast majority of companies in the American economy are well run, are managed, and, if anything are probably redoubling our efforts in this kind of environment to make sure they are doing the right thing.

RAY SUAREZ: Guests, I'm going to stop it there. Thank you all for joining us.

JIM LEHRER: Still to come on the NewsHour tonight: Business ethics; the Arizona wildfires; and a poem about fences.

SERIES - MONEY & ETHICS

JIM LEHRER: Our business correspondent Paul Solman of WGBH Boston has been looking into the growing problem of ethics and corporate America and Wall Street. Here is the first of his reports.

PAUL SOLMAN: For six years, the University of Maryland's business school has been sending its MBA students to prison, for a "scared straight" field trip in white-collar crime. Suppose your boss asks, "Can't you fudge the financials?

DNAIEL COLTON: Can't you pick up a million dollars so we can do this?" And your answer should be, "unequivocally, absolutely, no."

PAUL SOLMAN: Just say no, advises former developer Daniel Colton, or you may wind up like him, serving a three-year sentence for conspiracy. His audience, students just days away from entering a business world where morals may be looser than ever.

BARBARA TOFFLER, Business Ethicist: The big joke is that business ethics is an oxymoron. You can't simply talk about ethics when you're talking about business. There are none.

PAUL SOLMAN: Barbara Toffler is a professor of business ethics, and thus thinks it isn't a contradiction in terms. Though she admits, stock scams, like the ones that have made Enron a household name, are as old as the market itself. Consider this poem: "Some inclandestine companies combine, erect new stocks to trade beyond the line, with air and empty names beguile the town and raise new credits first, then cry 'em down, divide the empty nothing into shares, and set the crowd together by the ears." That's Daniel DeFoe, of Robinson Crusoe fame, writing in the early 1700s. Here's the French artist Daumier, in the mid-1800s, depicting a speculator in the stock market, planting false rumors to manipulate prices. And we're all old enough to remember the insider trading and junk-bond scandals of the late 1900s, starring Ivan Boesky, Mike Milken, and the like. But Barbara Toffler thinks ethics now are actually worse than ever. At least the 1980s, she says...

BARBARA TOFFLER: It was a big-boys' game. And in fact, much of the history of unethical behavior if you will in business has been kind of a big-boys' game.

PAUL SOLMAN: So, in a sense, it was them against themselves.

BARBARA TOFFLER: Exactly. And obviously stock prices were affected, obviously the stock market was affected, obviously the institution and the individual investor were affected, but we did not have the kind of impact on you and me and the general population that we now do.

PAUL SOLMAN: Where more vulnerable investors are the ones getting disproportionately hurt, like the blue-collar phone workers we interviewed recently at Global Crossing. The modern business ethics industry was born in the late 70s, part of the post-Watergate reform movement. Business ethics became so hot, a firm like Arthur Andersen, yes, that Arthur Andersen, spent millions to be identified with the topic, making and distributing videotapes to explain why morality was vital to U.S. corporate success. Here's one of their stars, Stu Leonard, Sr., CEO of a discount dairy chain.

LEONARD: The most important thing of success in business is to build your house on a solid foundation of integrity, on a solid foundation of ethics.

PAUL SOLMAN: One hint that things were getting worse, though Andersen hired Barbara Toffler in 1995, it was to help them make money, not clean up their act.

BARBARA TOFFLER: They hired me to sell services to clients; they didn't hire me to do work with them.

PAUL SOLMAN: So you were going to sell -

BARBARA TOFFLER: I was hired to set up a consulting practice in ethics and responsible business practices. I was not hired to do internal work at Arthur Andersen.

PAUL SOLMAN: Did you ever expect that Arthur Andersen's internal culture would be at odds with what you were trying to teach?

BARBARA TOFFLER: I learned that as I was trying to sell services, and found people asking me if Arthur Andersen was doing internally those things that I was trying to sell to them, and they weren't.

PAUL SOLMAN: Meanwhile, the ethics of Arthur Andersen, once the purest of pure auditors, sank to new lows. Why? Well, perhaps we should use the famous words of Watergate: "Follow the money," or as white-collar criminal Daniel Colton puts it:

DANIEL COLTON: Money is the hugest intoxicant there is.

PAUL SOLMAN: Barbara Toffler says that intoxicant became the drink of choice even to the top accounting firms.

BARBARA TOFFLER: Everybody was making money. They were jumping on the bandwagon. They forgot what they were supposed to be doing. They forgot that they were watchdogs; they forgot that they were protectors of the investor; and they became hotshot firms. You know, we're a big name, we can play with the big boys and we can make big money. And they did start making big money. So they, too, were seduced. I'll be honest with you - I stayed at Arthur Andersen probably longer than I would have, because I liked the money that I was making.

PAUL SOLMAN: By the late '90s, Andersen's ethics consulting had petered out for lack of clients. And Andersen's ethics tapes, despite their lofty ambitions and earnest hosts, don't seem to have had much impact.

SPOKESMAN: Over the years, our family, our religion, our community, schools, have helped to shape our values. "Thou shalt not steal."

PAUL SOLMAN: But maybe it's a good thing that these tapes never became bestsellers, seeing as how the one with Stu Leonard might be a better guide to sin than sincerity.

SPOKESMAN: People that look for the short cut, the prisons are filled with them.

PAUL SOLMAN: But just two years after this tape was sent to schools all over the country, Stu Leonard, Sr., pleaded guilty to skimming $17 million in profits, much of which he carried, the government reported, on tens, if not hundreds, of trips to St. Martin, in the Caribbean, in amounts ranging from $10,000 to upwards of $250,000, in suitcases or even wrapped as baby gifts. It was the largest tax fraud in Connecticut history, and Leonard was sentenced to 52 months in prison. Two brothers-in-law received sentences? Son Stu Jr., The store's president, also admitted involvement, but was granted immunity as part of his dad's plea bargain, which makes the ethical rule-of-thumb, with which this tape ends, almost surreal.

LEONARD: Would the boy you were be proud of the man you are? And Iwould say that the boy I was would be proud of the man I am, and I would wish that on anyone. If my father were alive today, he'd say, "'Atta boy, Stu."

PAUL SOLMAN: Today, Leonard is out of jail and Stu Leonard's chain is expanding. If any stigma remains, it hasn't seemed to hurt business. But the biggest surprise may be that anyone did jail time at all, because according to Justice Department data, U.S. Attorneys prosecuted only 187 defendants over the last decade for white- collar crimes. And while 142 were found guilty-- a healthy 76% conviction rate-- only 87 did time, usually at a minimum security, so-called "Club Fed." Attorney Jake Zamansky believes lenient sentencing has helped create the current climate.

JAKE ZAMANSKY, Attorney: There needs to be some serious jail time for analysts who are caught committing fraud, CEO's that are looting their companies. Until we send somebody away for a long period of time in real prison, nothing is going to change.

PAUL SOLMAN: Now, Zamansky used to represent defendants: Penny stock scam artists like those seen in the film "Boiler Room."

ACTOR: Let me close the door to my office. One second, all right? ( Door slams )

ACTOR: I remember you saying something about wanting to buy a house, right?

ACTOR: Yeah.

ACTOR: Well, how would you like to pay for it tomorrow-- in cash?

JAKE ZAMANSKY: I said I was the devil's advocate. And I was revolted by my clients. I didn't like going to work and doing what I was doing; getting brokerage firms away with murder, and it got to me.

PAUL SOLMAN: So in 1998 Zamansky switched sides.

JAKE ZAMANSKY: I am now representing public customers in claims against major Wall Street firms like Merrill Lynch and Smith Barney. And unfortunately, I have seen at major Wall Street firms the same type of boiler room tactics that I saw in the '90s at these other firms.

PAUL SOLMAN: This is a business ethics class for MBA students at Babson College, in Wellesley, Massachusetts.

SPOKESMAN: If they're committing fraud, then that's a crime and that's punishable by five years, ten years, fifteen years.

SPOKESMAN: If you go and you punish people just because the stock ended up taking and the market ended up not performing, then you go punishing people for taking risks.

SPOKESMAN: But I think where we get into trouble, and firms should pay the price, are when there's ulterior motives and there's other funding going on by the company.

PAUL SOLMAN: After several hours of heated, knowledgeable debate, I asked whether they would have touted stocks they didn't believe in.

PAUL SOLMAN: How many of you would have knuckled under, essentially?

PAUL SOLMAN: Not a single hand went up. But then one student suggested pushing the hypothetical a bit further.

STUDENT: So, if you ask this question again, how many people would put that by if it got them $20 million in the bank? I think you'd see a lot of hands go up.

PAUL SOLMAN:$20 million for one buy recommendation. How many people? Honestly, now. Honest answers. The class's professor had been there for the vote. The Reverend Tom Sullivan is a Presbyterian minister.

PAUL SOLMAN: What would Jesus have thought of it?

REV. TOM SULLIVAN: ( Laughs ) Jesus would have said, "Oh, come on, you can't do that, and you know you can't do it." He would have been a good Jew in saying that, he'd be a good Christian in saying that; he'd be a good Hindu, he'd be a good Buddhist; nobody who takes any kind of spiritual values seriously is going to say, "oh, yeah, that's fine."

PAUL SOLMAN: Indeed, spiritual values may explain the results of one last vote. How many of you would imagine that your parents think your generation is less ethical than theirs? Every single one of you?

PAUL SOLMAN: Now, not everyone thinks we're going to hell in a hand basket. Ed Petry, who runs the nation's largest group of in-house corporate ethics officers, says that in some areas, ethical standards have improved.

ED PETRY: Conflict of interest inside the organization, gifts and gratuities, time charging, sexual harassment issues, diversity issues, vast improvement on those fronts inside the organization.

PAUL SOLMAN: But nobody was paying much attention to things like corporate governance; reporting your financial statements.

ED PETRY: Well, I won't say people weren't paying attention to them. But part of the problem is, that the expectations are much higher than they used to be. And you also have far more employees who are willing to come forward with allegations. And you have the public who is... who is looking and eager to hold companies to a higher standard, and want them to be accountable.

PAUL SOLMAN: But is corporate America responding by hiring ethicists like Barbara Toffler?

BARBARA TOFFLER: Do I have a lot of work as a business ethics consultant? No.

PAUL SOLMAN: Instead, Toffler's writing a book on her years at Arthur Andersen, and teaching ethics at Columbia Business School -- easier, perhaps, than teaching them in the real world of recent years, since in economic terms, the bigger the payoffs became for playing fast and loose, the greater the cost of being ethical in terms of risks not taken, opportunities foregone. Of course, that's true of any boom, not just this one, suggesting that, in the end business ethics may just be at one of its cyclical ebbs. But whether we've hit new lows or not, Daniel Colton's words ring equally true.

DANIEL COLTON: Please, please, be vigilant, be careful, be honest, be open. Do not expose yourself to these kinds of dangers.

PAUL SOLMAN: Words easier to say than to live by, it seems, when you get down to business.

JIM LEHRER: In coming reports, Paul Solman will look at the latest scandals involving stock market analysts, and he'll talk about Wall Street and corporate ethics with a group of veteran business journalists.

UPDATE - FIRESTORM

JIM LEHRER: Now, coping with the wildfires in Arizona. They have consumed almost 400,000 acres about 125 miles northeast of Phoenix. Tom Bearden reports from near the threatened town of Show Low.

TOM BEARDEN: From a distance, the smoke from eastern Arizona's fires looks like the mushroom cloud from a hydrogen bomb. Closer up, the fire boils out of the pine-covered canyons, incinerating everything in its path. Helicopters dart in and out, carrying huge buckets of water. Slurry bombers drop their loads along the fire's front, an increasingly familiar and disheartening sight across the West this summer. 20 large fires in nine states have already consumed 2.5 million acres, and it's still early in the fire season. But despite all these efforts, nearly 400 homes have been destroyed in Arizona, and whole towns are still threatened with complete destruction. The so-called Rodeo-Chediski fire has burned over a third of a million acres, and it could get much larger before it's contained. Most of the attention has been focused on firefighters frantically setting backfires, trying to protect the resort town of Show Low. The fire is just a half a mile from the edge of town. Over the last several days, officials have shifted from optimism to pessimism, and back several times; the outlook at themercy of unpredictable winds. About 700 people, many of them from Show Low, are sleeping in a domed football stadium in the town of Eagar, 60 miles east. They're among an estimated 30,000 people who have fled their homes. The Red Cross has set up cots on the field's artificial surface, and families have staked out their spaces. People of all ages are here, from the very young to the very old. The days go slowly because there isn't much to do. The boredom is broken by three daily briefings by the U.S. Forest Service on the progress of the fires.

FOREST SERVICE SPOKESPERSON: They have major back-burning plan tonight, and I want to try to find out along which line, you know, where that is in relation to Pinetop Lakeside. So, those are the kinds of things I'm going to try to get better information about this afternoon.

TOM BEARDEN: As the day wears on, some turn to sports. Others try to sleep, despite the constant noise generated by so many people.

SPOKESMAN: At noon, it was 17, 18 miles an hour, and then gusting to 18 miles an hour. Again at 4:00, that in the Show Low area.

TOM BEARDEN: People cluster around the single television set whenever there are reports on the fire and the weather. After the late newscasts, shelter operators start turning off the glaring lights of the sports complex, and people try to settle in for the night. Expectant mother Sonia Magoon regrets the loss of privacy, but is grateful to the Red Cross for providing her with food and shelter.

SONIA MAGOON, Show Low Evacuee: It's pretty comfortable here. Everything I need is here. You know, it's better than sleeping out in the car, not being able to shower, and eat, and so on and so forth.

TOM BEARDEN: She's also worried about the fact that she's likely to go into labor long before she would be allowed to return home. When are you due?

SONIA MAGOON: Today. ( Laughs )

TOM BEARDEN: You nervous about that?

SONIA MAGOON: Yes, I am. Very much.

TOM BEARDEN: What happens if you go into labor here? Are you going to get the medical attention you need?

SONIA MAGOON: Yeah, they have a hospital in town like a mile and a half away, so it's pretty close.

TOM BEARDEN: Show Low resident Craig Haines has other worries.

CRAIG HAINES, Show Low Evacuee: Mother Nature's got it. We don't know if we're going to have homes left, or where we're going to go. Our jobs, are they gone? Who knows? We're just going to have to wait and find out.

TOM BEARDEN: Elaine Szemesi has similar concerns. She's the executive director of the Pinetop-Lakeside Chamber of Commerce, two more resort towns near Show Low. Both are ghost towns, completely evacuated. The streets are empty at a time when the population should have swollen ten-fold with summer visitors.

ELAINE SZEMESI, Executive Director, Pinetop-Lakeside Chamber of Commerce: It's going to have a big impact on our economy. We're getting ready for a huge festival season, the ski lifts are open, you know, taking people up and down during the summer. This is when we need our economy.

TOM BEARDEN: The dome in Eagar is just one of several large shelters in the area. A high school gym in Holbrook, about 50 miles north of Show Low, has also been pressed into service. Kim Christensen fled his home over the weekend, a house he bought just two months ago. He was feeling the effects of the smoke that has blanketed the area for more than a week.

KIM CHRISTENSEN, Show Low Evacuee: My head was throbbing, and my stomach was hurting, and I didn't want to eat, and I laid down in the air conditioning, near close to it where it brings in good air, and now, I'm starting to feel recovered, now, as long as I don't go out there.

TOM BEARDEN: Christensen was also angry. Like a number of state and federal politicians, he blames the fires on environmentalists.

KIM CHRISTENSEN: The environmentalists shouldn't get in our lives to keep us from logging it. I'd rather see the loggers come in 20 years ago and log this. We wouldn't have this fire. And it... I'm having a hard time dealing with that.

TOM BEARDEN: Environmental organizations deny opposing measures that might have mitigated the fires. Evacuees James McFloy and his wife Ila come to the shelter each day for information. McFloy is retired, having spent 30 years with the U.S. Forest Service. He says the problem with the forests is far more complicated than environmental opposition to timber sales.

JAMES McFLOY, Show Low Evacuee: It's a much larger, more complex story that has to be discussed when emotions settle down, when the fires are out and the smoke clears, because there's too much emotion and too much misinformation.

TOM BEARDEN: One thing McFloy is sure of: Preventing future conflagrations will be costly.

JAMES McFLOY: There has to be more money spent by the federal government doing basic forestry: Thinning, fuel removal, this sort of thing. And there hasn't been the funds adequate to the task.

SPOKESPERSON: One, two, three...

TOM BEARDEN: There is little relief in sight for the evacuees. No one can give them any estimate on when they might be able to go home. And for some, the shock of being displaced was still strong, even nearly a week after being forced to flee.

KIM CHRISTENSEN: I do miss my bedroom.

TOM BEARDEN: It's got to be tough to be here and lose your privacy.

KIM CHRISTENSEN: Yeah. Yeah, it is. It really is. This is the first time this has ever happened in my life. I see it on TV, you know, the last 30 years, earthquakes, floods, now we got fires. (Laughs nervously) I'm just shocked. I didn't think it'd be like this.

CRAIG HAINES: Who would have thought, a little fire miles away, 25 miles out, causes all this? And then, of course, there was the Denver fire. Jeez, who would have thought that's going to happen?

TOM BEARDEN: As firefighters continue to set back burns, the Forest Service is opening three more command centers and will have almost 6,000 firefighters in place by next week trying to corral this nearly 400,000 acre fire that remains almost completely out of control.

FINALLY - GOOD FENCES

JIM LEHRER: Finally tonight, some poetry about the walls between us. Here's former Poet Laureate Robert Pinsky.

ROBERT PINSKY: Here's a shrewd and mysterious poem about boundaries: "Mending Wall," by Robert Frost.

Something there is that doesn't love a wall,

That sends the frozen-ground-swell under it,

And spills the upper boulders in the sun;

And makes gaps even two can pass abreast.

The work of hunters is another thing:

I have come after them and made repair

Where they have left not one stone on a stone,

But they would have the rabbit out of hiding,

To please the yelping dogs. The gaps I mean,

No one has seen them made or heard them made,

But at spring mending-time we find them there.

I let my neighbor know beyond the hill;

And on a day we meet to walk the line

And set the wall between us once again.

We keep the wall between us as we go.

To each the boulders that have fallen to each.

And some are loaves and some so nearly balls

We have to use a spell to make them balance:

'Stay where you are until our backs are turned!'

We wear our fingers rough with handling them.

Oh, just another kind of outdoor game,

One to a side. It comes to little more:

There where it is we do not need a wall:

He is all pine and I am apple orchard.

My apple trees will never get across

To eat the cones under his pines, I tell him.

He only says, 'Good fences make good neighbors.'

Spring is the mischief in me, and I wonder

If I could put a notion in his head:

'Why do they make good neighbors? Isn't it

Where there are cows? But here there are no cows.

Before I built a wall I'd ask to know

What I was walling in or walling out,

And to whom I was like to give offense.

Something there is that doesn't love a wall,

That wants it down.' I could say 'Elves' to him,

But it's not elves exactly, and I'd rather

He said it for himself. I see him there

Bringing a stone grasped firmly by the top

In each hand, like an old-stone savage armed.

He moves in darkness as it seems to me,

Not of woods only and the shade of trees.

He will not go behind his father's saying,

And he likes having thought of it so well

He says again, 'Good fences make good neighbors.'

RECAP

JIM LEHRER: Again, the major developments of the day. The Securities & Exchange Commission filed fraud charges against WorldCom this evening. The company disclosed last night it failed to count $3.8 billion in expenses. We'll see you online, and again here tomorrow evening. I'm Jim Lehrer. Thank you and good night.