HAMBURG, Germany -- Gerhard Schmid, former chief executive officer of MobilCom AG, last year began transferring €70.9 million, or $69.5 million, from the publicly traded mobile-phone company to a firm owned by his wife. He didn't bother to inform MobilCom's board. An internal report concluded that he broke German law by failing to inform other executives and board members of those payments. So far, the money hasn't been returned to MobilCom. 

The German authorities don't seem to mind. The German Financial Supervisory Authority says Mr. Schmid's actions don't fall under its jurisdiction. The chief prosecutor in the state of Schleswig-Holstein, where MobilCom is based, says there is no investigation into the matter.

Mr. Schmid argues that his misdeeds were mere technicalities. "So I did something wrong but nothing happened," says Mr. Schmid, who, along with his wife, owns 50% of MobilCom's stock. "It's like you're going too fast on the street, but no accident happens. You learned that you should not go too fast, but no one got hurt."

At a time when U.S. executives are being led away in handcuffs or hauled before congressional committees, business scofflaws in the rest of the world aren't hurting much at all. In most of Asia, Europe and Latin America, regulations and enforcement are so weak that the chances of conviction are slim. Legal systems are poorly equipped to handle misconduct in the executive suite. And securities watchdogs operate under budget constraints that make the U.S. Securities and Exchange Commission look flush with cash.

For instance, Japan's Securities and Exchange Surveillance Commission, or SESC, has only about 364 employees, or about a tenth of the number at the SEC, which itself is widely considered understaffed. Unlike the SEC, Japan's SESC doesn't have the power to file civil suits or administrative actions. And it only brings about seven cases to criminal prosecutors a year, compared with the SEC's 50.

In Taiwan, the Securities and Futures Commission lacks the power to carry out its own investigations. The authorities who do have that power -- local prosecutors and the national bureau of investigation -- don't have much expertise in market and accounting fraud. Of the more than 300 cases the commission has turned over in the past five years, fewer than 20 have resulted in prosecutions, according to one senior regulator.

Meanwhile, Italy's center-right government last year actually decriminalized false accounting and made it a misdemeanor.

But such enforcement shortcomings could seriously undermine the growth and legitimacy of local capital markets. While the recent spate of accounting scandals has given U.S. business a black eye, vigorous prosecution of alleged wrongdoing could ultimately help persuade investors that it's safe to go back into the market.

There's little to reassure investors in many other countries. Frankfurt's Neuer Markt stock exchange, a Nasdaq-like market for up-and-coming companies founded in 1997, has been beset with scandal in the past two years. German investigators have opened probes into more than a dozen companies on suspicions of insider trading, misleading shareholders and fraudulent accounting. One investigation, involving Comroad AG, a supplier of technology for auto navigation, has resulted in charges against its founder. But almost all others have so far resulted in no action. Meanwhile, the Neuer Markt Nemax 50 index for growth stocks has plummeted 95% since its peak in March 2000.

"It's like the Wild West in Germany," says Ron Hoss, a salesman from Karlsruhe, who says he has lost nearly all of the €30,000 he invested in Neuer Markt stocks in mid-2000. "Executives made phony statements about their companies' earnings, but nobody does anything. If people get caught, they get nothing. But if I don't pay a parking ticket, they hunt me down."

The German Association for Shareholder Protection, a shareholder-rights group with 25,000 members in Germany commonly known as DSW, is campaigning for stricter enforcement of securities law. It regularly calls alleged abuses to the attention of the authorities. But "most cases we hand to the state prosecutor, more than 95%, end up not being investigated," says Jella Benner-Heinacher, the managing director of DSW. "The cases are often too complicated for prosecutors to handle. They've not been trained in these matters."

The case of MobilCom has been particularly galling for shareholders in the struggling company, whose stock is listed on the Neuer Markt and has lost about 97% of its value since peaking in March 2000.

Entrepreneurial Sensation

In the 1990s, as stock-market investment began to catch on among Germans, Mr. Schmid was an entrepreneurial sensation. The son of a carpenter, he worked as a manager for a car-rental company after an early career as a professional hockey player and coach in Germany. Then, in the early 1990s, he was inspired by a chat with a salesman who wanted to install mobile phones in rental cars.

"It seemed like a huge market that nobody knew much about," Mr. Schmid recalls. "If you learned faster than others, you could hit it big." So he formed MobilCom in 1992 to provide wireless phone service in competition with Deutsche Telekom AG and others. MobilCom is now Germany's No. 5 mobile-phone company, with 4.9 million subscribers. The company's stock-market value hit a peak of €9.1 billion in March 2000.

"It's like WorldCom," says Mr. Schmid, wearing a black shirt and black trousers with gray sneakers. "They also grew big fast."

The CEO flew around Europe in a turbo-prop plane he dubbed "Idea." At one MobilCom Christmas party, Mr. Schmid says, he handed out 1,000-mark bills to employees (then equivalent to about $450). Drawing from leadership lessons he learned as a hockey coach, Mr. Schmid says, he tried to be a fair boss. When nonsmoking employees complained about the length of smoking breaks taken by colleagues, Mr. Schmid provided a clock for the nonsmokers to time those breaks. He told the nonsmokers they could take equivalent amounts of time off work.

His public profile grew. Last year, he served on a committee advising the German ministry of justice on corporate-governance issues.

Surfing the Internet in his office one day in early 2000, Mr. Schmid landed on a German Web site of France Telecom SA, which at the time was eager to obtain a license for third-generation, or 3G, mobile-phone services in Germany. He sent an e-mail to a France Telecom executive whose name he found on the Web site, asking whether the company wanted to team up with MobilCom. A day later, he got a call back: The French were interested.

After just two weeks of negotiations, France Telecom committed itself to paying as much as €10 billion to build a jointly owned 3G network with MobilCom in Germany and to pay €3.74 billion for a 28.5% stake in MobilCom.

It was 4 a.m. when the French side called him down to the lobby of the Ritz Hotel in Paris to sign the deal. He says he ordered a bottle of champagne to celebrate on the spot with the French Telecom people and his wife.

France Telecom's timing was unfortunate. Within weeks, shares in telecommunications companies were sagging all over Europe as investors began worrying about the huge amounts being spent on new networks and questioning whether those investments would ever pay off. MobilCom shares sank with the rest through much of 2000 and early 2001. German papers reported rumors that MobilCom was short of cash, though the company denied it.

Then something remarkable happened. Between mid-July and December 2001, MobilCom's thinly traded shares skyrocketed 85%, to €24 each from €12.99, even as the Dow Jones Stoxx index of its European telecom peers declined 3.6%.

Investors began murmuring about a mystery buyer last summer and German papers in July reported that Mr. Schmid himself was increasing his stake. Both France Telecom's chief financial officer, Jean-Louis Vinciguerra, and smaller shareholders in MobilCom asked Mr. Schmid repeatedly to identify the buyer. He declined.

This February, Mr. Schmid finally announced the identity of the mystery buyer: Millennium GmbH, a company owned by his wife, Sybille Schmid-Sindram. Millennium had bought a stake of about 10%, according to MobilCom.

Mr. Schmid says that he didn't identify his wife as the buyer earlier because she had asked him not to do so. Nor was he legally required to do so. U.S.-style regulations mandating the disclosure of shareholders with stakes of 5% or more in companies listed on the Neuer Markt went into effect only on April 1 of this year.

The share buying wasn't the only link between MobilCom and the CEO's wife. An audit report by BDO Deutsche Warentreuhand AG, commissioned by MobilCom's supervisory board in March 2002, says that over a six-month period Mr. Schmid authorized the transfer of a total of €70.9 million from MobilCom to Millennium without seeking approval from MobilCom's other top executives or supervisory board.

Mr. Schmid says that €68.4 million were transferred to Millennium as part of an options program on MobilCom stock. He says the options were to be awarded to certain dealers and sales partners as an incentive for hitting sales targets.

MobilCom's board was aware of his intention to start a program, but it didn't authorize the issuance of new shares for holders who exercised options, the shares had to be bought on the open market, Mr. Schmid says. As it turned out, Millennium already owned enough MobilCom stock to provide shares to anybody who exercised options, he adds. The payments from MobilCom were intended to provide a financial cushion to Millennium should MobilCom shares rise sharply in value and spark the exercise of lots of options, Mr. Schmid says.

In its audit report, BDO offered one possible alternative scenario: that "payments were made to Millennium GmbH to enable it to purchase Mobilcom AG shares."

'Independently Wealthy'

Mr. Schmid declines to speak officially for Millennium or for his wife. But he dismisses the notion that she would take MobilCom's money and use it to buy shares for herself. "She's independently wealthy," he says. "She has some 100 homes and condominiums she owns."

It isn't clear why there is a difference of €2.5 million between the sums cited by Mr. Schmid and BDO. When asked what happened to the €2.5 million, Mr. Schmid said: "It's an accounting error. That's not my job. It's stupid. Perhaps you should ask the financial officer." Thorsten Grenz, who was MobilCom's chief financial officer at the time of the payments and is now chief executive, declined to comment, according to a MobilCom spokesman.

In its report, BDO alleged that Mr. Schmid broke the law by authorizing the payments without informing other company officers and without having a legally binding contract with Millennium. Though a large chunk of the money was transferred by Sept. 7, 2001, Mr. Schmid and his wife signed a legally binding contract covering the payments only on Dec. 7, 2001, the BDO report says. Payments made before that date were "without legal grounding," the BDO report says.

After receiving the BDO report in May, MobilCom's supervisory board canceled the option plan and demanded the return of the money. So far, according to MobilCom, that money hasn't been returned. While he says that he doesn't speak officially on Millennium's behalf, Mr. Schmid says the money will be paid back if there is an agreement with France Telecom to secure MobilCom's financial viability.

At MobilCom's annual shareholder meeting on May 30 in Hamburg, the company's supervisory board chairman, Klaus Ripken, read the conclusions of the BDO report, saying, "Mr. Schmid has infringed his duties as chief executive under German share laws." Mr. Schmid apologized to the attendees. "I regret what has happened and will do everything I can so that it doesn't fall back on MobilCom," he said.

On June 21, MobilCom's supervisory board fired Mr. Schmid.

Anja Schuchhardt, a spokeswoman for the German Financial Supervisory Authority, says that the agency isn't investigating Mr. Schmid's conduct. She says the board's allegation that Mr. Schmid violated securities laws is an internal company matter and outside the jurisdiction of the financial watchdog. The BDO report "isn't relevant, isn't necessary for our purposes," says Ms. Schuchhardt.

Uwe Wick, the chief prosecutor in Schleswig-Holstein, MobilCom's home state, says he isn't investigating Mr. Schmid even though he has received several requests to do so. He declined to say who made those requests. Mr. Wick describes the requests as "settling of scores." In a brief telephone interview, Mr. Wick adds that he doesn't know much about the case.

Mr. Schmid is vague when asked to explain Millennium's activities. The BDO report says Mr. Schmid acquired the company in December 1997 and sold it to his wife in February 2001 for 50,000 marks. But during an interview, Mr. Schmid says he can't remember whether his wife bought the company from him or his lawyer. When asked about Millennium's purpose, Mr. Schmid describes it as a company "without activities." He says it has "not many" employees, then corrects himself, saying it has no employees. Later, he says the company serves primarily as a vehicle for his wife "to buy and sell shares tax-free." Such an arrangement is "normal in Germany," he says.

Ms. Schmid-Sindram -- who wholly owns Millennium, according to her husband -- declined to comment.

Mr. Schmid says he decided to pay Millennium to underwrite the option plan because two German banks had refused to do so. He concedes that he erred in not seeking approval from the MobilCom board. "I regret not following the formal rules," he says. But he argues that his actions didn't harm the company.

That is debatable. For one thing, MobilCom has been unable to recover the money paid to Millennium so far. It's not an insubstantial figure, considering that MobilCom reported a 2001 loss of €205.6 million on revenue of €2.59 billion.

In addition, when MobilCom's supervisory board criticized Mr. Schmid's actions in May, investors also took a hit: The stock price fell 13.5% on the day of that public reprimand.

By not disclosing that his wife's company was buying shares in MobilCom, he also deprived the market of information that might have been useful to other investors in assessing the company's value.

Now MobilCom's future is in doubt. France Telecom is in talks to restructure €5.8 billion of MobilCom's debt. But the restructuring won't proceed unless France Telecom reaches an agreement for it or another buyer to purchase the MobilCom stake controlled by Mr. Schmid and his wife. France Telecom warns that MobilCom could be forced into bankruptcy if no agreement is reached with creditors.

Mr. Schmid accuses France Telecom of complaining about his actions in an attempt to push down MobilCom's stock price so that the French company can buy the rest of the company more cheaply. France Telecom has repeatedly denied that charge.

Now that he has been ousted from the company he founded, Mr. Schmid says he is enjoying seaside walks with his wife. "I try to stop myself from talking about Millennium," he says.

-- Phillip Day and Phred Dvorak contributed to this article.

Write to Almar Latour at almar.latour@wsj.com⁵ and Kevin J. Delaney at kevin.delaney@wsj.com⁶

Updated August 16, 2002