Siemens Bribes Ignored During NY Listing

Germany's scandal-plagued company was guilty of negligence in 2001 when it was listed on the NYSE, according to internal reports

Life has become much quieter for Heinrich von Pierer, very quiet for a man who was once CEO and then chairman of the supervisory board at Siemens. In fact, it's become astonishingly quiet for a man who is still seen as one of the captains of German industry and sits on the boards of steel giant ThyssenKrupp, Volkswagen and Deutsche Bank, and unbelievably quiet for a man who was once even considered a candidate for the office of Germany's president.

Since he resigned this spring from Siemens, not altogether voluntarily, 66-year-old Pierer has confined his public appearances to amateur golf and tennis tournaments. He was even spotted in the Himalayas not too long ago, climbing mountains at 5,000 meters (16,000 feet).

The mountain air should be nothing new to Pierer, who is used to thin air from his days as a corporate executive. But Pierer, an otherwise gregarious man, has little to say about the corruption affair that has been brewing for months in his former company. He prefers to talk about his granddaughters. "They get things from me that their mother wouldn't buy them," he recently admitted.

But the questions the former top executive will soon be forced to answer will be decidedly less pleasant. Instead of discussing his private life, Pierer will be asked about the role he played in Siemens' initial public offering on the New York Stock Exchange in March of 2001.

Like overly cocky young men, Pierer and a small group of senior executives rang the traditional bell at the New York Stock Exchange and threw baseball caps into the room. "Good timing is everything in business," he said, clearly pleased about his apparently successful coup. But it could very well lead to Pierer and his former fellow members of the Siemens executive board waking up to a true nightmare.

The IPO, now more than six years back, was a hot topic at the most recent meeting of the Siemens supervisory board. During the meeting, some members proposed (more...) that Debevoise & Plimpton, a US law firm, examine whether former members of the executive and supervisory boards at Siemens may have violated their due diligence obligations when they introduced the multinational group to the US capital market -- and whether they took sufficient steps to eliminate slush funds.

It is now clear that from an organizational perspective the group was everything but ready for the US stock markets at the time. Wall Street means more than just fame and prestige for senior managers. It also means that they are obligated to impose the toughest of standards to uncover possible corruption. This, as is now becoming evident, was clearly not the case at Siemens.

The auditors have set their sights on Pierer and the entire former Siemens management team. If it turns out that the executives are partly responsible for excessively lax internal monitoring procedures, the supervisory board would even be obligated to sue the former leadership for negligence and hold them liable for the resulting damage to the company.

Bribing foreign officials, maintaining slush funds and submitting false accounts have long been illegal in the United States. In the wake of several financial scandals, the US tightened its criminal penalties for these crimes in the summer of 2002. Siemens has paid about €190 million ($268.8 million) in legal fees alone in the past nine months. The US Securities and Exchange Commission (SEC) has the power to impose penalties ranging into the billions, and corporate executives found guilty of such crimes can even be sentenced to several years in prison.

Efforts by prosecutors in Munich could also come at a heavy financial cost to Siemens. As part of an initial case against a defendant in the company's former communications division (Com), investigators are considering confiscating any profits the company earned with the help of bribes, a figure that could be as high €200 million.

The Munich public prosecutor's office has refused to comment but expects to do so soon. There is mounting evidence that Pierer and his former entourage, under then Supervisory Board Chairman Karl-Hermann Baumann, may have at least acted negligently when they first listed the group on the New York Stock Exchange in 2001. This has emerged from memos on a political contribution scandal involving Germany's conservative Christian Democratic Union (CDU) party, in which Siemens was already associated with slush funds once before. As yet unpublished reports to the audit committee also suggest that the company's former leadership vastly underestimated the tremendous potential risks associated with the group's largely independent divisions.

"If you asked me whether large payments were made within the company without my knowledge, I would not hesitate to say that they were," Pierer told German parliamentarians during a meeting of the political contributions committee half a year after the company's US IPO. He said that he had "absolutely no idea of which accounts exist within the company." Pierer insisted then, and continues to argue today, that it was not his job to know.

Only a year before the IPO, Heribald Närger, the former chief financial officer and later chairman of the supervisory board at Siemens, admitted that bribes were paid in other countries during his tenure, but that he was never made aware of the details. "All those expenditures," he said, seeking to justify his omissions, "simply disappeared in a giant sea of numbers."

Many Siemens executives could have interpreted such statements as carte blanche to continue the practice of paying bribes as part of their global effort to secure contracts, even though bribes became illegal under German law in 1999.

Part 2: 'A Lax Approach to Monitoring Corrupt Practices'

"The existing system was continued, even after international anti-corruption laws were tightened and after the US IPO," says Heinz Hawreliuk, the chairman of the Siemens supervisory board for many years.

The former Siemens executives' lax approach to monitoring corrupt practices has also emerged from reports that Chief Compliance Officer Albrecht Schäfer, who was recently let go, presented to the audit committee. According to the reports, Pierer and his successor as CEO, Klaus Kleinfeld, were even required by the SEC to certify under oath that the financial figures they had submitted were correct.

By the end of 2004, Schäfer was complaining that the group's internal anti-corruption rules and procedures were not always being adequately implemented in 16 countries, including Italy, France and Great Britain. By that point the group had already been listed in New York for than three and a half years and was in fact considering bidding farewell to Wall Street -- like other companies that had grown weary of rigid US regulations and overly zealous regulatory agencies.

Some Siemens employees apparently joked about the corporate code of conduct, dubbing it the "read, laughed and filed" code. They called the documents Siemens' "PYA" -- "protect your ass" -- rules.

Schäfer issued renewed warnings five months later. He insisted that it was not enough to quietly get rid of employees caught violating the rules of good conduct. The group, he said, should avail itself of the "entire range of sanctions available to it under labor law, including warnings, rebukes and termination."

The group's handling of so-called consulting agreements, which play a central role in the current bribery accusations, was nothing short of negligent. In April 2005, Schäfer wrote in an internal report that all such contracts in Italy were currently being reviewed and that the use of "helpful intermediaries" in bidding for contracts would be banned from then on.

However, the issue was not "regulated comprehensively" until two months later -- more than four years after the IPO on the New York Stock Exchange. The guidelines approved at the time included, in addition to sample contracts, anti-corruption clauses and a questionnaire on the reliability of outside consultants, a few platitudes. One, for example, was that "suitable legal quid pro quo" had to be provided for payments.

Former Chief Financial Officer Heinz-Joachim Neubürger, who resigned in 2006, had pushed for a rule that would have required division managers to sign off on all consulting agreements, but he was unsuccessful. The managers of Siemens offices abroad rebelled against the Neubürger proposal, and it was eventually watered down so that only the local anti-corruption officials were required to sign off on the agreements.

The testimony of a defendant in the scandal suggests the true extent of Pierer's and his successor Kleinfeld's negligence in navigating the extremely slippery US stock markets. The defendant claims that too little attention was paid to the issue of compliance at the annual meetings of senior management. In his opinion, the published guidelines were "half-hearted" and, as a result, "easy to circumvent."

A Siemens spokesman has declined to comment on the defendant's claims, but he does defend the former management team and quotes the current CEO, Peter Löscher. According to Löscher, the regulations were formally thorough but were not "adequately implemented" by employees.

Pierer himself has declined to comment on the details of the affair. However, he does point out that the financial officers, the operating groups and the individual companies were principally responsible for accounts and payment transactions.

At some point -- though it was already far too late -- Pierer, who was chairman of the supervisory board by then, and his impetuous CEO Kleinfeld took steps that were long overdue. On Nov. 6, 2006, in his report for the 2005/2006 fiscal year, Schäfer announced another milestone in Siemens' internal fight against corruption: Beginning in September 2006, about 37,000 employees in Germany were to be enrolled, for the first time, in an electronically supported training program that research had shown would make them immune to engaging in bribery. That was already more than five years after the US IPO adventure. "Following its successful completion in Germany," the report states, the IT training program will be expanded to other countries. It sounds as if someone had been driving a car blindfolded for years and was suddenly pleased to have discovered a driving school.

At the time, Schäfer, concerned about the risks of "monotony," announced that the training programs would be repeated and updated once every two or three years. Since then monotony is probably the last thing Siemens' 475,000 employees worldwide are likely to be complaining about.

Translated from the German by Christopher Sultan.

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