Investors Pay for Dubious Corporate Ethics

Sam E. Antar says he still has a criminal mind, only now he puts it to better use.

Antar is a convicted felon and the former chief financial officer of his now-defunct family business, the consumer electronics retailer Crazy Eddie. If you lived in the New York area in the 1970s and 1980s, you probably remember Antar’s cousin, Crazy Eddie chief executive Eddie Antar, screaming in TV ads about insane prices.

As Antar details in his blog, Crazy Eddie went public in 1984, selling its stock at inflated prices. Ultimately, the company’s 18-year, multifaceted crime spree bilked investors out of $145 million, which might not seem like much compared to the modern-day, multibillion-dollar ripoffs, most notably by Enron and Bernie Madoff. (See: Digging Into Unethical Corporate Behavior.)

Antar told Investor Uprising that if he had to live his life over again, he’d be a teacher. That’s what he does now. He teaches about the criminal mindset and preventing white-collar crime. He’s taught at colleges, government and law enforcement agencies, companies, and other groups. People are intrigued with the criminal mind, he said. And the topic is relevant these days, with a series of minor to major ethical lapses by business executives that make you wonder: What were they thinking?

The "forcibly retired" Antar offers some insight: We all live with sin and temptation, but that "doesn’t mean you’re a criminal" like him. In an April 2011 interview with Reuters, he said, "The only reason I stopped was because I got caught." He never served time, because he testified against his cousin, Eddie Antar, who spent eight years in prison.

Antar says there are two kinds of criminals. The crossover criminal is the person with a conscience who gives in to temptation, slips up, and commits a crime. The career criminal (the category in which he puts himself) is a person whose morals are absent.

Joan Pastor, a psychologist and the chief executive of JPA International Inc., told us that about 5% to 7% of white-collar criminals are of the hardcore variety -- and companies within the financial sector have a greater proportion of hardcore criminals. Pastor characterized the hardcore criminal mindset as a psychological disorder. These people have difficulty being accountable or seeing when they’re at fault. They tend to blame others. They’re good at manipulating people. They may be nice to their bosses, but they’ll treat their peers or those they supervise in a condescending manner. And there may be some genetic basis for this behavior.

Antar says he’s not sure if he was born with a criminal mind, but he says his mind was ripe for crime. He began working at Crazy Eddie when he was 12. And though he says he felt no morality, he was loyal to his family. He compared the family business to a gang -- a criminal group bound by loyalty and a subculture of crime. Unlike street gangs, the family business "stole with a smile rather than a gun."

White-collar criminals typically exploit other people's desire to be liked. In his seminars, Antar likens them to a guy trying to pick up a girl by appealing to her vanity. "We measure our effectiveness by the comfort level of our victims. I can’t lie to you unless you like me first."

Pastor says brilliance and charm can help white-collar criminals get high-level roles at public companies. They seek out a company’s weak spot, so that they can create opportunities for themselves. How can companies protect themselves?

Guarding against crossover criminals is easier than dealing with amoral people, Antar said, since you can appeal to a sense of morality. Ethics training and creating a corporate culture that emphasizes ethics will help prevent crossover types from being tempted. It’s much harder for a company to fortify itself against the criminal without a conscience. "An ethics course with me would’ve been a joke." One thing that does help is strong internal controls.

These days, Antar spends time digging into the accounting practices of companies, and he writes about them at his blog (an unpaid endeavor). He regularly analyzes financials of companies like Green Mountain Coffee Roasters Inc. (Nasdaq: GMCR) and Overstock.com Inc. (Nasdaq: OSTK). He has found alleged accounting errors with both the coffee company and the Internet retailer.

Investors have to look for patterns of inconsistency, he said. Did a company mess up once, or does it happen with regularity? Groupon Inc. (Nasdaq: GRPN), for example, has had to restate its financial statements a few times, which could be a red flag. As of today, the company’s stock is trading at half its IPO price of $20. A shareholder has sued Groupon, alleging weak internal controls. But what is the real problem with Groupon -- management and accounting issues or questionable ethics? In the Grumpy Old Accountants blog, professors Anthony Catanach and J. Edward Ketz have written numerous posts about Groupon. In fact, Groupon has faced an onslaught of criticism.

But Antar said many investors don’t want to hear about company errors or unethical practices. Negative press can cause a stock price to fall. On the flip side, investors who are considering buying or short selling the stock might view negative news as an opportunity to get the stock cheaper, as long as the news doesn’t have a long-lasting or permanent effect on the company.

One of the best ways for investors to be more knowledgeable about the stocks that they own or that interest them is to start at the bottom of an annual report or other financial statement and read the footnotes first. "If people read the footnotes in Crazy Eddie before they read the financial reports, they may have been able to spot the fraud," he said. Changing the wording in one of its footnotes enabled the company to inflate its profits by $20 million.

Footnotes also can have some entertainment value. They let you peer into the perks and extravagant lifestyles of chief executives. Las Vegas Sands Corp. (NYSE: LVS) paid $2.6 million in 2011 on security for CEO Sheldon Adelson and his family, according to Footnoted.com, part of Morningstar Inc. (Nasdaq: MORN). Adelson is perhaps best known these days as the man who funded Newt Gingrich’s failed bid for the GOP presidential nomination. The family security expense rose 8% from 2010. The Sands proxy statement also revealed that an unnamed son-in-law of Adelson's, billed as a "vice president of corporate strategy," was paid $596,000 in 2011.

One of Footnoted’s latest posts looks into the perks that Deepak Chopra (the executive, not the spiritual guru) received as chief executive of OSI Systems Inc. (Nasdaq: OSIS), a vertically integrated provider of specialized electronic systems and components for the homeland security, healthcare, defense, and aerospace industries.

CEOs get all kinds of perks as part of their compensation. But excessive perks and sweetheart deals can shrink profits, and they could warn of something more shady.

(Wednesday: Tips to protect yourself from unethical companies.)

Related posts:

• Digging Into Unethical Corporate Behavior
• When Stockbrokers Were Customers’ Men
• 5 Exercises to Work Ethics into Your Investments