Siemens Stock Rides Out 'Black Money' Scandal

Munich, Germany -- When Heinrich von Pierer stepped up to the microphone in front of 12,000 shareholders at Siemens AG's annual general meeting late last month, the atmosphere was almost as frosty as the mounds of snow outside the Munich Olympia Hall. Many market watchers expected the representatives of institutional and private investors in attendance would tear into von Pierer, the former chief executive officer of Siemens who now serves as president of its supervisory board.

In the end, von Pierer drew lukewarm applause. But even that was a victory of sorts for a man attempting to explain the bribery scandal in which the German electronics giant has become enmeshed.

Indeed, the financial community seems generally unimpressed by the allegations against Siemens. While the company's stock price took a dive when reports of a corporate "black money" fund first surfaced, it later returned to an upward trend. On the day after the European Commission imposed a roughly $500 million fine on Siemens for illegal price fixing in the energy distribution business, the stock price climbed 6 percent. That was the same day, Jan. 25, that von Pierer asked shareholders not to prejudge the matter until all the facts were on the table. He also assured shareholders that the company was fully cooperating with law enforcement agencies.

Police and prosecutors allege that during the time von Pierer was CEO, the company set aside funds, mainly in the communications division, for use in bribing potential customers abroad in return for orders. The communications division has been one of the most prominent and visible branches of the conglomerate.

The system came to light in November, when police raided the Siemens headquarters here as well as other company locations in Germany and Austria, confiscating many documents and arresting five suspects. Among them were two high-profile communications division executives--the former CFO and the former head of internal auditing and accounting.

Law enforcement officials maintain that those arrested were involved in a widespread, secret bribery system, with potential beneficiaries based in the Middle East, Nigeria, China and Russia. In Greece, prosecutors allege that Siemens acquired large-scale infrastructure orders using black money. Some reports mentioned orders for telecommunications and lighting systems connected to the 2004 Olympic Games in Athens.

The German police had become watchful after receiving letters from authorities in Italy and Switzerland, where police investigating money laundering had found several suspect bank accounts. On seizing accounts in Switzerland, Austria and Liechtenstein, the German police found about $25 million.

But once they began sifting through the mountain of 36,000 ring binders and folders they had confiscated, investigators discovered that much more money was involved. According to the present state of the investigation, Siemens fed some $520 million to $540 million into the system during the years when it was active. Apparently, the black-money fund was implemented sometime in the 1990s and was in effect at least through 2004. Von Pierer's successor, Klaus Kleinfeld, was appointed CEO in January 2005.

Since Siemens is listed on the New York Stock Exchange, an investigation by the U.S. Securities and Exchange Commission is probable. At the end of November, Kleinfeld hired an outside ombuds- man to track down any cases of corruption brought to his knowledge by Siemens' employees. Kleinfeld also hired an external auditor to conduct a comprehensive investigation.

The measures did not stop the police from arresting more suspects. In December, they nabbed former central-management board member Thomas Ganswindt. And in January, former CFO Heinz-Joachim Neubürger became a "suspect." The latest wave of allegations for the first time has implicated an acting board member: CFO Joe Kaeser.

Siemens, facing potential damage to its plans for the communications division to launch a joint venture with Nokia Oy, has denied the accusations. However, the Finnish company has postponed the launch of the joint venture until the case is settled.