Cowboy Capitalism

To many europeans, revelations of false accounting tricks and bogus stock tips are proof that there's something rotten at the heart of the American way — and that the gentler brand of capitalism practiced in Europe is somehow better. "It may sound complacent, but there is no chance of a scandal like Enron or WorldCom happening here," argues George Cox, director general of Britain's Institute of Directors, a leading business association. "I'm not saying we won't have problems, but we have a different corporate culture and we don't have the same gung-ho mentality."

Cox is at least half-right; his remarks do sound complacent. But are European businesses really more virtuous than their U.S. counterparts? The Sabena story and others suggest not. Governance methods differ, but Europe has its own corporate cowboys.

Misstated earnings? Last week, Britain's largest holiday operator issued its third profit warning in five months, sending its shares down 62% in one day. About $90 million in reported MyTravel profits has evaporated, partly because of a switch to generally accepted accounting principles (GAAP), but also because auditors misstated the firm's cash position. Small wonder the chief executive, Tim Byrne, resigned under pressure from shareholders.

The publicly traded German technology firm ComROAD, which specializes in mobile Internet applications, couldn't fall back on GAAP as an excuse. It disclosed earlier this year that a whopping 96% of its reported 2001 sales were "fictitious," billed through a nonexistent Hong Kong company, landing the former CEO with a disputed charge of share manipulation. Such dodgy practices contributed to the decision in late September to shut down Germany's Neuer Markt, the once highflying technology exchange.

Dubious deals for insiders? Just as the century-old German engineering giant Babcock Borsig was going under this summer, its chairman Klaus Lederer announced a surprise deal to sell the firm's share in profitable submarine division HDW to U.S.-based One Equity Partners. Shareholders cried foul, arguing that they weren't consulted, and that the sale, for an estimated $325 million, would deprive the rest of troubled Babcock of one of its main cash-generating divisions, thus making bankruptcy inevitable.

Lederer promptly resigned from Babcock, and in July the company filed for insolvency. But Lederer went on to become head of HDW. The sale of HDW to OEP, at one point blocked by a court, is still tied up in legal tangles. Lederer resigned from HDW at the end of last month. But Guy Wyser-Pratte, an American investor who owns about 8% of Babcock, is suing the firm, claiming shareholders' interests were violated. "In America," he says, "they'd have the whole bunch put behind bars if they ignored a court's injunctions."

Stock-price manipulation? In late May, the German Internet entrepreneur Kim Schmitz got a 20-month suspended sentence and a €100,000 fine after he was found guilty of propping up shares of the Internet collective buying site Letsbuyit.com. Schmitz announced that he intended to save the troubled company last year, but he didn't have the money to buy it outright. Instead, according to prosecutors, he talked up his plans to boost the price of the shares he already owned, which he then quickly unloaded for an illegal €1.2 million gain — a classic case of 'pump and dump.'