Wall Street Scofflaws

By Christopher Byron
The New York Post
August 23, 2004

It's great that the Securities and Exchange Commission is able to hustle up a press release, like it did last week, alerting the public to the latest new "junk phone call" telemarketing scam for stocks. And it's equally great (or at least better than nothing) that the regulators are pretending to get tough as well with abusive hedge fund practices.

But when it comes to the stock market and gaming the system, by far and away the biggest, most obvious — and most worrisome — new trend of them all is one that the SEC doesn't even acknowledge: the growing failure of companies everywhere to get their financial reports to the SEC on time.

Yet day after day it goes on, as more and more companies that have taken money from the public on a solemn and legal promise to account for it through the regular and timely issuance of audited financial statements now discover that ignoring that obligation brings no punishment at all.

This week we'll look at one such company, a former telecom high-flier named MasTec Inc., which trades on the New York Stock Exchange and collapsed when the tech bubble popped in the spring of 2000.

Last week, MasTec was convulsed with a series of board member resignations, including the abrupt departures of Republican economist Arthur B. Laffer and environmental activist and former Congressional Democrat Joseph P. Kennedy II, son of the late New York Senator, Robert F. Kennedy.

The departures of the two men, along with that of a third board member as well as the company's acting chief financial officer, came after the company finally succeeded late last month in submitting its full-year audited financial statement for 2003, four months after its due date. As of this writing, the company is still delinquent in filing its latest two quarterly financial reports as well.

In fact, MasTec is hardly the worst offender in Wall Street's increasingly crowded field of delinquent filers; it is simply typical of a growing number of otherwise respectable companies — many with their shares listed on self-regulating exchanges like the NYSE and the American — that have stumbled their way into difficulty, then discovered that they can painlessly drag out the day of reckoning by simply not filing the required financial statements. In the jargon of the Street, they "go non-timely," the punishment for which is: nothing.

By permitting the shares of these companies to continue trading any way, which is what the SEC and Exchanges routinely now do, the regulators undercut the core premise of the stock market itself — that the buying and selling of stock is supposed to be based on reliable information, available to all the public, about the financial performance of the issuing companies.

Nearly every law and regulation governing the market, from the rules of GAAP accounting to the post-bubble passage of the Sarbanes-Oxley Act, is based on that assumption.

Just as the revenue collection system of the federal government depends on the voluntary cooperation of millions of taxpayers who turn their lives upside down to meet that infamous April 15 deadline for the filing of their tax returns, so too does all of Wall Street depend ultimately on the willingness of companies to get their financial statements in on time.

After all, what is the point of requiring CEOs to certify to the accuracy of their companies' financial reports, as Sarbanes-Oxley now does, if the sanctions of the Act can be sidestepped by simply not filing the reports?

Since January, 49 different companies on the NYSE alone have dodged the bullet, missing their deadlines for filing full-year audited financials with the SEC and "going NT." Fifty-seven more have done so on the American Stock Exchange. More than 140 are in that boat on the NASDAQ. And on the fraud-infested OTC Bulletin Board, an astonishing 873 companies have gone non-timely since the start of the year.

Worse still, the numbers are growing, and at an alarming rate, with the rolls of delinquent filers increasing by an average of 15 percent annually for the last five years, as more and more companies are coming to view the missing of a filing deadline as simply no big deal.

MasTec is not the greatest company in the history of Wall Street, but it is certainly not the worst, either. It is simply an outfit in a low-tech corner of the telecommunications sector with a stock that caught fire in the fiber optics boom of the 1990s.

"We're ditch diggers and pole climbers," said the company's investor relations man, Marc Lewis, explaining what the jargon-laced description on the company's Web site ("end-to-end infrastructure solution provider") really boils down to: digging trenches and stringing wire for the electric utility industry.

The company itself is the creation of the late Jorge Mas Canosa, a flamboyant Cuban-American businessman who came to the U.S. penniless when Fidel Castro seized power in Cuba and thereafter took part in the failed Bay of Pigs invasion, following which he led a variety of other efforts to topple the Cuban communist.

Canosa died of lung cancer at the age of 58 in 1997, and his son, Jorge Jr., took over as chairman and CEO in 1998. Thereafter, the company's prospects began to cloud over, with revenues peaking at $1.33 billion in 2000 and declining thereafter, while losses soared and the balance sheet weakened.

This was followed by a change of auditors in the spring of 2002 in which the company replaced the firm of PricewaterhouseCoopers with the firm of Ernst & Young. The company thereafter began a review of reported financial results for 2001 and 2002 and wound up becoming delinquent in filing its full-year audited financial report for 2003.

When MasTec finally filed its tardy 2003 report, in late July of 2004, the report contained close to $10 million of restated and increased losses, cumulatively, for 2001 and 2002.

The report also included an acknowledgment that MasTec's so-called 10Q quarterly report, for the January to March 2004 period, which by now was also delinquent, would wind up showing a loss "significantly greater" than the $1.8 million in red ink that MasTec had reported for the equivalent period of 2003. The company now says the 10Q is set to be released "soon."

Meanwhile, the acting CFO has resigned along with the three board members. According to the company, Kennedy departed the board "for personal reasons."

But a company press release explained that Laffer resigned because the board had refused to call a meeting to replace Jorge Jr. with an outside member as chairman. According to the release, the third board member had also left over a corporate governance issue.

In the midst of all this, both the SEC and the NYSE have permitted trading in MasTec's shares to continue uninterrupted, even though the company's audited full-year financials were eight months old, the quarterly filings are still out of date, the CFO slot is empty, and MasTec's board has been reduced by defections from nine members to six.

So, can any public investor even begin to figure out whether this company is worth anywhere close to its Friday closing price of $6.05 per share? Obviously not. Then why hasn't trading in it been halted until the company brings its financials up to date?

On America's street of dreams, it's just another of those mysteries that make investing such fun.

For public consumption the regulators will mutter some off-the-record inanity about "investigating" the situation. But in private, they'll tell you what they believe to be the truth - that anyone who visits a brothel checks his complaining rights at the door.

After all, in the Hotel Pink Sheets, isn't getting screwed the whole point of a visit?

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