Scandal of the year
The Washington Mutual Implosion
I was just following orders, even if they were mine….”
While
Kerry Killinger didn’t actually say these words, they pretty much
convey the gist of what he told a Rotary Club meeting in mid-June, a
few months before Washington Mutual’s sudden crash and burn. According
to reporters with The Seattle Times, Killinger said he wasn’t to blame
for WaMu’s precipitous fall, even though he had served as its CEO for
17 years.
Although the Times pointed out that he was happy to
be associated with the acquisitions that made Washington Mutual one of
the Northwest’s top banks, he was surprisingly reticent to accept
responsibility for the institution’s fall from grace. Instead, he
pointed fingers at the Federal Reserve, the government and Wall Street.
He was especially frustrated that the bank’s high lending
standards failed to prevent large loan losses. “When housing prices
decline by up to 35 percent, even conservatively underwritten loans can
perform poorly,” the Times quoted him as saying. What he neglected to
mention was that a majority of the bank’s loans were the ones most
likely to go south if the boom imploded.
Rotarians may have
listened courteously, but contentious shareholders weren’t buying it.
After seeing a major investor service lower WaMu’s credit rating to
near junk status, hearing reports that the bank was expected to lose
more than $21 billion in mortgage defaults and watching the stock drop
85 percent in a year, they called for his head in June.
His
eventual departure in September didn’t help, however, as the plunge
continued. New CEO Alan Fishman tried to shore up the sagging thrift,
but he lasted all of 18 days before a run on the bank forced the feds
to seize WaMu and sell most of its assets to JPMorgan Chase for the
bargain-basement price of $1.9 billion.
Both CEOs laughed all
the way from the bank—with a $7.5 million signing bonus for Fishman and
a fat severance package for Killinger. On the plus side, much of the
value of Killinger’s package was based on WaMu stock, now worth next to
nothing. —David Volk
Biggest Losers
WaMu’s Shareholders
When federal regulators seized WaMu on Sept. 25 and then, within minutes, sold the bank to JPMorgan Chase, everyone appeared to get paid off. That is, everyone except for the bank’s investors. Taken by surprise and left holding the bag, shareholders and bondholders literally lost billions of dollars in the blink of an eye.
Lawsuits are flying and, at press time, Sen. Maria Cantwell was mulling whether to hold hearings over the timing, decisions and sequence of events that led to WaMu being seized by the Office of Thrift Supervision.
Cantwell and an army of investors want to know why the bank wasn’t given more time to find a buyer before it was seized. The whole process also seemed arbitrary as to which institutions the federal officials decided to save and which they seized or let go bankrupt.
The feds defend the move, saying that about $50 billion in deposits had been removed during the previous few months before WaMu was seized. They didn’t want to wait and end up being responsible for paying for the remaining deposits.
The verdict on this financial quagmire will most assuredly be decided in court over the next decade. —Jeff Bond
Strangest Hiring
WaMu’s David Schneider
Now, wouldn’t you think, if you are buying a bank that just imploded in large part due to mounds of toxic home loans and practices that are currently the subject of an FBI investigation, that you would fire all the people who managed the home loan operation and—oh, I don’t know—start over?
Apparently not if you’re JPMorgan Chase. While it cleaned house of many top officials, these wise men of Wall Street have chosen David Schneider, the president of WaMu’s home-loan operations for the past three years, to lead WaMu’s retail banking operations and its 2,207 branches. Perhaps JPMorgan officials are hoping he can do for WaMu’s branch operations what he did for the home loan department? —J.B.
Least Effective E-mail
"Think Happy Thoughts"
You have to hand it to Bob Bjorklund, an executive in the Capital Strategies department at Washington Mutual. As the bank’s toxic loan exposure ballooned to 11 digits, this fella’ let a smile be his umbrella and turned his frown upside down. On Sept. 12, he sent an e-mail to his staff with “Think Happy Thoughts” in the subject line. “It’s going to be ugly out there today and over the next several weeks,” the memo said, “but when in doubt, repeat after me: ‘$50 billion dollars!’ ”—a figure that represented WaMu’s remaining liquidity. There was even some trash-talking of short-sellers: “We’ll have the satisfaction of wiping out those shorts and they can taste some of their own medicine.” The best part was Bjorklund’s summation: “WaMu is going to come out the other end of this craziness in great shape.” —Randy Woods
Silver Lining Department
‘Whoo Hoo,’ R.I.P.
We don’t want to trivialize the loss of a 119-year-old institution, but we can’t help but celebrate the lone positive aspect of the WaMu debacle: the death of the “Whoo Hoo” ads. We know WaMu and ad agency TBWA\Chiat\Day just wanted to portray something positive and fun in light of the subprime crisis, but the campaign came off as confusing, silly and just plain weird. If WaMu really was lending money to people who dreamed of racing in pink rocket cars or riding in giant kangaroo pouches (ew!), well, it’s no wonder they went belly up. —R.W.
The Worst Image Reversal
Starbucks
Although
it may be too early to tell if the problem is tall-, venti- or
grande-sized, there’s no question that the great white whale of the
coffee world ran into difficulty this year.
Starbucks Coffee
suffered its first quarterly loss since it went public in 1992. It also
had to close more than 600 stores due to a decline in sales and
suffered the greatest indignity of all when it found itself competing
with McDonald’s and Dunkin’ Donuts.
To make matters worse,
even its smaller competitors said they no longer feared the
caffeine-peddling retail behemoth, which is akin to kicking Godzilla in
the foot and telling him he doesn’t frighten you any more.
While
part of the downturn could undoubtedly be attributed to consumer
belt-tightening, the coffee chain wasn’t taking any chances. It not
only brought founder and CEO Howard Schultz back to lead the fight, it
cut back its music business, renewed its search for its soul and even
closed all of its stores for an hour in late February to retrain its
baristas.
Schultz said the company had run into trouble
because it added businesses that had nothing to do with coffee and then
was surprised to discover that these side projects interfered with its
main focus. Which is not unlike selling a professional sports franchise
to out-of-town buyers and then being surprised when they say they want
to take the team with them. —D.V.
Biggest Anticlimax
The Sonics’ Settlement
Although
we could have predicted the outcome once an out-of-town ownership group
bought Seattle’s NBA franchise, the endgame of the Sonics saga was made
even more bitter by a last-minute settlement between the city of
Seattle and the team’s Oklahoma City ownership, ending months of
breast-beating, sackcloth-wearing and ash-sifting.
On July 2,
District Court Judge Marsha Pechman was set to decide whether the new
owner, Clay Bennett, would be forced to abide by the last two years of
its lease at KeyArena. Just hours before Pechman’s decision, however,
Mayor Greg Nickels stepped in and announced that the city had struck a
deal with the owners, giving them the right to move the franchise to
scenic Oklahoma City in exchange for a measly $45 million. Sonics fans,
who had been waiting anxiously for a miracle buzzer-beater, couldn’t
even get the satisfaction of a definitive ruling from the courts.
But
Seattle didn’t walk away empty-handed. The city has the chance to get
an additional $30 million from those infernal Okies if the Legislature
agrees to pay for either remodeling Key- Arena or building a new arena,
and also if the city fails to attract a new NBA team by 2013. Seattle
also boldly stopped Bennett & Co. from being able to use the name
Sonics or the team’s colors... Yeah, that’ll show ’em. —D.V.
Worst Timing Award
Boeing's Management
When 84,000 jobs are being lost nationwide each month, banks are closing, brokerages are failing and the economy is in a tailspin, most people wouldn’t consider this an ideal time to go on strike. But, apparently, machinists at The Boeing Co. aren’t most people.
On Sept. 6, just days before the U.S. government opted to bail out mortgage giants Fannie Mae and Freddie Mac and a week before the Treasury brought AIG back from the brink, the International Association of Machinists voted to strike over a range of issues, including outsourcing, inadequate pay raises and increased costs of the company’s medical benefits plan.
The strike ended after more than 50 days of interrupted production at an estimated cost to Boeing of $2 billion in delayed deliveries and other expenses. At first glance, the agreement appears to be a huge win for the employees, with the union getting most of its demands. But analysts continue to question whether Boeing will build its next jetliner in a region that has gained a reputation as a “strike zone.” —D.V.
Longest Caffeine Headache
Tully’s Coffee
Tom Tully O’Keefe can’t seem to manage his way out of a paper bag, but he always finds a way to keep his ragtag company alive.
O’Keefe, who has spent most of this year trying to sell all or part of his coffee company announced in September that Green Mountain Coffee Roasters of Vermont would pay $40 million in cash for the Tully’s brand and its wholesale business, which includes office, event and grocery-store coffee sales. According to published reports, the money may have saved Tully’s from filing for bankruptcy.
But whether or not O’Keefe can somehow keep his company, which has racked up losses in excess of $100 million during the past 16 years, from folding is anybody’s guess. The problem is that the wholesale operation was the firm’s fastest-growing division and the only part of the business that was really making any money. Now, O’Keefe has a new headache: He and his long-suffering investors are stuck with 151 company-operated and franchised stores in a down economy. —J.B.
Shadiest CEO of the Year
Paul Johnston of Entellium
From all indications, Paul Johnston was one heck of a boss.
Known to everyone as “PJ,” the CEO of software firm Entellium drove a sports car, lived in a nice home and traveled around the world. He was also generous to employees, offering great bonuses and developing intricate reward programs that would send chosen workers on all-expenses-paid trips to Malaysia, where the business had offices. The company’s practices were good enough to earn Entellium a place on Seattle Business’ 2008 Best Places to Work list.
There was just one little problem: Federal officials say Johnston and Entellium’s CFO, Parrish L. Jones, had been cooking the books for years. Federal prosecutors add that the two were inflating sales figures and faking financial statements in order to defraud investors of an estimated $50 million during a four and a half-year period. Authorities are still trying to find $10 million that was wired to the company’s Malaysia office but can’t be accounted for.
According to The Seattle Times, the fraud was discovered when a human resources employee found a set of financial records while cleaning out the desk belonging to another Entellium executive. The books, apparently, detailed the discrepancies in the company’s accounting process. Entellium’s lawyer took the books to the U.S. Attorney’s Office. [Note to PJ: The next time you plan on conducting an elaborate and massive fraud, be smart enough not to leave the evidence sitting around in the drawer of an abandoned desk.] —J.B.
2008’s Worst Entrepreneur
Robert “Spam King” Soloway
Did Seattle’s Robert Soloway, better known as “the Spam King,” pull one over on the nation’s prosecutors or is he just a small-time cyberspace grifter that the cops blew completely out of proportion?
It’s not clear what the answer is to that question. But one thing is for sure: He is definitely the entrepreneurial type. Soloway, who was known for living the life of a playboy, is responsible, according to federal prosecutors, for making a fortune sending millions of unwanted e-mails around the globe. There were even rumors, so far unproven, that he was behind the “penis enhancement” ads that have flooded cyberspace in recent years.
Everybody was after this guy, from individual businesses, such as Microsoft, to state and federal prosecutors. Unfortunately, no one seems able to prove much against him. In a strange twist to the case, federal prosecutors dropped almost all of the 37 charges against Soloway earlier this year and allowed him to plead guilty to a handful of lesser crimes, including mail and e-mail fraud, and failing to file a 2005 tax return. He was sentenced to four years up the virtual river.
This is just the latest chapter in the Soloway saga, which has been going on for years. In 2005, he was court-ordered to pay an Oklahoma man $10 million and Microsoft $7 million for his cyber-pirate ways. —Manny Frishberg
2008's Worst Employee
Carolyn Gudmundson
Microsoft has made many employees wealthy with generous stock options. But that was not how employee Carolyn Gudmundson made her fortune. She did it the old-fashioned way—by padding her expense reports.
The MSN program manager was charged with 18 counts of fraud and mail fraud for claiming more than $1 million in illegal reimbursements from the software giant and online travel leader Expedia. Gudmundson, who was responsible for managing and registering Microsoft’s internet domain names from 2000 to 2004, apparently used various tactics to inflate her reimbursement costs, such as making Microsoft and Expedia pay for domain names multiple times. She even had companies write checks to fictitious Microsoft employees and cashed the checks herself. With that kind of ingenuity, Gudmundson might have had a nice career as an Entellium executive. —M.F.
Worst Stock Split
Cell Therapeutics
While we admire the dogged determination of Cell Therapeutics’ (CTI) management to keep its company alive, it’s time to “call it” and unplug the machine. In terms of publicly traded stocks, this patient has flatlined.
The last few years have been brutal for the biopharma firm, topped off by the bizarre moves of the company’s Italian investors who refuse to come to shareholder meetings and have even discussed a quiet revolt against management.
But the saddest strategies of all have been the reverse stock splits. In April 2007, CTI announced a one-for-four reverse split, so every four shares owned by an investor became one share at four times the price. The move was aimed at boosting CTI’s anemic share price.
Almost as soon as the split was announced, the stock’s price plummeted. Then, at the end of August of this year, CTI announced a one-for-10 split. So, every 10 shares (which had dropped to a price of about 25 cents) would become one share at 10 times the value, or about $2.50. Sadly, that price hike also disappeared. At press time, CTI’s price was 38 cents a share.
This stock debacle means that a single CTI share that was worth about $1.38 before the mid-April 2007 stock split was worth less than a penny by October 2008. —J.B.
Worst PR
Jeff Hawn’s Hunting Spree
It’s one thing to get angry when your neighbor’s dogs tear up your lawn. But when the offending animals are one-ton bison, a person could be forgiven for overreacting.
Still, Jeff Hawn clearly took matters a bit too far last winter, when he finally got sick of his neighbor’s herd finding its way onto his Colorado ranch. Hawn, the CEO of Seattle’s Attachmate, had filed a lawsuit in March asking his neighbor for compensation for damages caused by the animals. Nine days later, a hunting party that had been invited by Hawn to take part in a bison hunt on his property began firing at the herd. By the time the smoke had cleared, 32 of the wayward bison had been killed and Hawn faced 32 counts of aggravated animal cruelty in what the Colorado press is calling “a contract massacre.” At press time, no trial date had been set. —D.V.
Longest Do-Over
Boeing’s Botched Air-Tanker Bid
Considering how badly botched the seven-year bidding process has been for the U.S. Air Force refueling tanker contract, we wouldn’t be surprised if the poor pilots finally gave up and landed at the nearest interstate exit.
First, Boeing was expected to win a 20-plane lease and an 80-plane purchase deal until it was revealed that an Air Force acquisitions officer had been steering business toward Boeing. After the dust settled on that scandal, the flyboys shocked the aviation industry in February by awarding the $35 billion tanker contract to Boeing’s European rival, Airbus, and its partner Northrop Grumman; the bid for the first batch of planes was about $3 billion cheaper than Boeing’s.
Not willing to give up, Boeing appealed the decision to the Government Accountability Office, which further flummoxed the experts by siding with the once-and-former-Seattle-based company, pointing to seven key errors made in the decision process. By September, Air Force officials said they would not seek revised bids or make a final decision until a new president had taken office.
Make that an eight-year process. —D.V.
Scam of the Year
CellCyte
Things were going well for CellCyte Genetics Corp. until the biotech firm got a little unwanted attention in the Seattle Times last Christmas. The article questioned how a four-year-old struggling Bothell biotech firm could turn into a high-flying company worth $440 million, even though it hadn’t yet brought a product to market.
The surprise coal-in-the-stocking story revealed that CellCyte’s value had only grown after it had used venture capital to buy an all-but-dead mining company whose stock was traded on the over-the-counter market.
CellCyte then benefited from what appeared to be an unsolicited spamming campaign to inflate the stock’s value artificially.
Later, it was discovered that the company had made changes to its website after the Times questioned the accuracy of items in the bio of the firm’s CEO, Gary Reys. It wasn’t long before the stock tanked, shareholders filed suit, the Securities and Exchange Commission launched an investigation and CellCyte announced that it had stopped paying its employees. —D.V.
Worst Decision-Making by Politicians
The Alaskan Way Viaduct… Again
About a year after voters were asked to choose between a tunnel and another elevated roadway to replace the aging Alaskan Way Viaduct, the state was considering 10—count ’em—10 more options. Around late June, the number had dropped to eight, but no decision had been made whether the route should even be a tunnel or a raised structure.
Not a single shovel of earth has been moved, but already $1 billion has either been spent or promised on this phantom project. Ron Paananen, the Department of Transportation’s viaduct project manager, told The Seattle Times that each month of delay adds an additional $10 million to the project. —D.V.
Most Dispiriting Sale
Cranium
After all those years of sales at Starbucks, it was inevitable that someone would notice the success of local game company Cranium. Resistance was futile against Hasbro, so “the Borg” assimilated Cranium for $77 million.
At the time of the purchase, The Seattle Times quoted an analyst as saying the Hasbro would gain “Cranium’s successful creative team.” But upon taking over, Hasbro immediately fired two thirds of the company’s workforce. So much for doing something different with your noggin. —D.V.
Biggest Marketing Flop
The Gates-Seinfeld Comedy Team
A TV show about nothing may have a nine-year shelf life, but a commercial about nothing is only good for about two weeks. That’s the lesson Microsoft learned when it paired its retired founder Bill Gates and retired master of his domain Jerry Seinfeld.
In the first ad, produced by the Crispin Porter + Bogusky agency, Seinfeld and Gates banter as the software titan tries on shoes. An even stranger follow-up shows the pair living with a real family so they can understand “real people” because they’re so rich and famous.
And the third spot… well, they never got to a third Seinfeld ad. Although techie bloggers claim the ads were so awful that Micorsoft put the hammer down, saying “No ads for you!” a company spokesman claimed that the two spots were only “teasers” and that a shift to the vastly superior “I’m a PC” campaign had been planned all along. —D.V.