Sprint executives may be suffering for sins of Enron, WorldCom

KANSAS CITY, Mo. -- No one's suggesting William T. Esrey and Ronald T. LeMay fiddled with the company's money or books. Still, Sprint Corp.'s top two executives may have lost their jobs solely for having used a questionable tax shelter for their own money.

Sprint's board has given no reason for its top-level shakeup but business experts say it shows how company officials are being held to a new, higher standard, one which encompasses how they handle their own finances.

Sprint has confirmed it is seeking someone outside the company to replace Esrey, its chief executive and chairman, but has not said if LeMay is leaving, as reported by the Wall Street Journal, citing unidentified sources. LeMay, who is president and chief operating officer, was long considered Esrey's successor.

"In a way the executives are suffering here from simply a sea change that has taken place now in public opinion, public perception since Enron," said Itzhak Sharav, an accounting professor at Columbia University's business school.

Tax shelters

Enron, which filed for bankruptcy in December 2001, collapsed after massive accounting manipulation was revealed at the energy giant.

Neither Sprint nor its board members have responded to questions about the tax shelters and the executives' status.

Both Esrey and LeMay have defended their use of the strategy that deferred the taxes on stock options they exercised in 1999 and 2000. Esrey, in a letter to employees, said he was told by Ernst & Young, the company's auditors and the firm that prepares his taxes, that the strategy was "perfectly legal," but the IRS would most likely audit his returns.

Lowell Peterson, a lawyer with the New York firm of Meyer, Suozzi, English & Klein, who specializes in compensation and labor issues, said that should have concerned the executives.

"That means that on its face it raises red flags to the IRS," Peterson said.

Esrey and LeMay acknowledged this week they are being audited by the IRS. Together, they could owe $123 million in taxes for options they exercised, but did not cash out, according to regulatory filings.

The IRS has no published guidelines on the tax strategy, but is looking into it. IRS spokesman Don Roberts would not comment further.

Generally such strategies involve placing stock options in a partnership so that when those options are exercised, the taxes are deferred, said Mark Luscombe, the principal tax analyst for CCH Inc., which provides tax and business law information and software for professionals.

Plummeting stock

Sharav said that corporate scandals have caused the IRS to take a closer look at entities that are set up to shelter taxes but seem to have no real business purpose.

"What they are doing here is looking at these entities that are set up and saying, 'What is the business reason? There is none,"' Sharav said.

Esrey has said an unfavorable ruling and low stock prices could break him financially, because most of his assets are shares of Sprint. Sprint shares have plummeted from $75.50 in November 1999 to $11.98 on Friday.

Although Esrey and LeMay's tax shelters were used for personal reasons, Sharav said Sprint could be forcing them out simply because their use of the shelters "smacks of Enron."

Enron executives were involved in a complex web of partnerships used to conceal more than $1 billion in debt from investors and the Securities and Exchange Commission. The off-the-books partnerships, improperly buttressed by Enron stock, ultimately brought down the big energy-trading company. Several top executives cashed out millions from stock sales ahead of the collapse.

Thomas Ajamie, a securities lawyer with Schirrmeister Ajamie LLP in Houston, said recent corporate scandals have led directors to scrutinize all financial transactions more carefully.

High ethical standards

"You know, like it or not, the executive sort of is the embodiment of the company. That's the reality. And I think that companies today -- now more than ever -- are looking for executives who have high ethical standards and appear to be very prudent in the financial decisions they're making," Ajamie said.

However, Paul Lapides, director of the Corporate Governance Center at Kennesaw University in suburban Atlanta, doesn't think that Sprint's board would force its executives out over the tax shelter. It's not just that it would be an overreaction, Lapides said, it would be "stupidity."

"This is about something that their own auditors recommended to them. If they're firing them for that, why didn't they announce that they're firing their own auditors at the same time?" Lapides said.

"If they're doing a good job, people shouldn't get fired for this type of mistake. ... It doesn't appear to be even an ethical issue," he said.

Peterson, however, said top corporate executives should be "above reproach," especially when it comes to finances -- even personal ones.

"It's a CEO's stock in trade to handle big financial transactions, to be able to be trusted with big financial transactions," he said.