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Ethics and the examined life

Professor Marianne M. Jennings W.P. Carey School of Business Arizona State University. Ethics and the examined life. Part I: A State of the Union on Ethics. Attorney Disciplinary Actions (2006). 54 Probations/Informal Reprimands 30 Suspensions 7 Interim suspensions 4 Restitutions

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Ethics and the examined life

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  1. Professor Marianne M. Jennings W.P. Carey School of Business Arizona State University Ethics and the examined life

  2. Part I: A State of the Union on Ethics

  3. Attorney Disciplinary Actions (2006) • 54 Probations/Informal Reprimands • 30 Suspensions • 7 Interim suspensions • 4 Restitutions • 22 Censures

  4. Attorney Disciplinary Actions (2007) • 44 Probations/Informal Reprimands • 21 Censures • 9 Disbarments • 4 Restitutions • 1 License revocation

  5. Student loan lenders: Sallie Mae and 17 universities Adelphia Boeing Cendant Computer Associates Tyco International General Electric Global Crossing Merrill Lynch Enron Qwest WorldCom Royal Shell Nortel KrispyKreme Refco UnitedHealth Group Merck Chiquita World Bank BP AT&T Titan Xerox Kmart Citigroup Lucent ImClone Arthur Andersen HealthSouth Royal Ahold Parmalat Apollo Group Marsh & McLennan AIG (Putnam)(Mercer) Fannie Mae KPMG GM Options scandals (160 companies) HP Universities and travel Siemens Countrywide Financial Société General Milberg Weiss Ethical Lapses

  6. Some Sample Fines • Boeing • Tenet • Columbia/HCA • AIG • Marsh McLennan • Fannie Mae • KPMG • Tyco • Cardinal Health • Pharmas • Siemens • $615 million • $725 million + interest = $900 M • $1.7 billion • $1.64 billion • $850 million • $400 million • $465 million • $750 million • $600 million • $2.4 billion • $463 million

  7. Shareholder Litigation • Cendant • Tyco • Apollo Group • $2.83 billion • $3 billion • $280 million

  8. Subprime Losses Merrill $22.4 billion Citigroup $19.9 billion UBS $14.4 billion Morgan Stanley $ 9.4 billion HSBC $ 7.9 billion Credit Agricole $ 3.6 billion Deutsche Bank $ 3.2 billion Bank of America $ 3.0 billion CIBC $ 3.0 billion Wachovia $ 2.7 billion AIG $ 2.7 billion Barclays $ 2.7 billion Royal Bank of Scotland $ 2.5 billion Credit Suisse $ 1.9 billion Bear Stearns $ 1.9 billion J.P. Morgan Chase $ 1.4 billion Countrywide $ 1.0 billion Others $ 4.6 billion Total $107.8 billion

  9. Percentage of GNP How Big Were the Losses? Debt Crisis 1982 bank loans to developing countries 1986-1995 S & Ls 1992-2003 Japanese bank loans 2000-2003 Tech bond bubble burst 2007- Subprime mortgages *”U.S. Mortgage Crisis Rivals Savings & Loan Meltdown,” Wall Street Journal, Dec. 10, 2007, pp. A1, A16 • 1.7% ($55 billion) • 3.2% ($189 billion) • 7.0% ($263 billion) • 0.9% ($93 billion) • 1-3% ($150-$400 billion)*

  10. Legal Counsel Played a Role • “[AIG’s] organizational approach to compliance issues has always been pay the speeding ticket. I’m pretty comfortable that our own skirts are clean but that they have issues . . .” • Robert Graham, former general counsel, General Re • Anthony Biacno, “In Trial of Former General Re Executives, Taped Calls Play Crucial Role for Both Sides,” New York Times, Jan. 17, 2008, p. C3.

  11. “How much of this sort of stuff do they do? I mean, how much cooking goes on in there?” • John Houldsworth, former CEO Cologne RE (entered plea) • “They’ll do whatever they need to make their numbers look right.” • Richard Napier, former General Re executive (entered plea) • Anthony Biacno, “In Trial of Former General Re Executives, Taped Calls Play Crucial Role for Both Sides,” New York Times, Jan. 17, 2008, p. C3.

  12. Flawed assumptions: Bad Judgment is Bad Judgment “There are payments to a woman whom the folks in finance describe a Dennis’s girlfriend. I do not know Dennis’s situation, but this is an embarrassing fact.”[1][1] Laurie P. Cohen and Mark Maremont, E-Mails Show Tyco's Lawyers Had Concerns, Wall Street J., Dec. 27, 2002, C1. The payments were made to Karen Mayo (then-girlfriend, then wife during trial, now ex-wife).

  13. Chiquita Banana and the Colombian Terrorist Contractors • Payments for Protection • Switched to Cash • Met with Justice Department • Took 2 years to resolve issue

  14. Options Summary • 200 companies under some level of Justice Department and/or SEC scrutiny • Internal probes in 250+ companies • 17 officers indicted • 8 guilty pleas • One CEO convicted • One HR VP convicted • General counsel pleas: three/10 charged • Executives or directors who have resigned: 42 • Amount of overstatement of income because of options (to date): $5.3 billion James Bandler and Kara Scannell, “In Options Probes, Private Law Firms Play Crucial Role,” Wall Street Journal, October 28, 2006, p. A1, A2, and Marianne M. Jennings, “Stock Options: What Happened Here,” 11 Corp. Fin. Rev. 48 (2006). And 2007-2008 sources

  15. It Is a Flawed Assumption to Say That We’re “Shocked! Shocked!” Wilmer Cutler to in-house counsel at Tyco “We have found issues that will likely interest the SEC . . . creativeness is employed in hitting the forecasts . . . There is also a bad letter from the Sigma people just before the acquisition confirming that they were asked to hold product shipment just before the closing . . .”[1][1] Laurie P.. Cohen and Mark Maremont, E-Mails Show Tyco’s Lawyers Had Concerns, Dec. 27, 2002, C1. (on Tyco)

  16. Flawed Assumptions Continued Tyco’s financial reports suggest “something funny which is likely apparent if any decent accountant looks at this.”[1][1] Id.

  17. Hewlett-Packard “How does Ron [Ron DeLia, Boston PI] get cell and home phone records? Is it all above board?” H-P senior counsel and ethics officer, Kevin Hunsaker “We are comfortable there are no Federal [sic] laws prohibiting the practice.” Anthony Gentilucci, H-P global security officer “I shouldn’t have asked.” Hunsaker in response

  18. We’re back to the Sporkin question. "Where were these professionals ... when these clearly improper transactions were being consummated? Why didn't any of them speak up or disassociate themselves from the transactions?" Judge Stanley Sporkin Lincoln Sav. & Loan Ass'n v. Wall, 743 F. Supp. 901, at 920 (D.C.Cir.1990).

  19. Culture has slipped.

  20. Cheating in College 11% reported cheating in 1963 49% reported cheating in 1993 75% reported cheating in 2003/2005/2006/2007 50% graduate students reported cheating (2006)

  21. Schools that discovered cheating scandals • Duke • San Diego State • Naval Academy – Annapolis • Air Force Academy – Colorado Springs • West Point • UNLV • Berkeley • Dartmouth • Columbia • ASU

  22. A recent résumé study • 50% had false information • The false information was material: degree; job title; previous employment • Dean of Admissions at MIT and the 28-year-concealment

  23. Part II: The Ethics Principles

  24. A. The Role of a Personal Credo • Personal identity • The lines you would never cross to be successful, to gain a client, to keep a client, to meet the numbers . . .

  25. Probability of an Ethical Outcome (P) (Financial Analysts Institute) P = f(x) x = amount of money involved

  26. The Gum, the Grocery Store, and Integrity A Case Study

  27. B. Being Ethical Means You Have to Speak Up.

  28. C. Watch the Gray Area • Why is it important that it be gray to you? • Is it legally gray? • Is it ethically gray? • Is it a good-faith disagreement? • Interpretation vs. loophole vs. nondisclosure of relevant information • Descriptors: “Aggressive opinion” “Aggressive accounting” “Financial engineering” “Deseasonalized data” “Periodic look backs”

  29. The Remarkable Qualcomm Case: Oh, Is That What You Meant! • Qualcomm’s failure to turn over thousands of e-mails that bolstered Broadcom’s case • Broadcom’s counsel had made repeated requests for such evidence • Broadcom counsel, acting on continuing tips, continued to make the request post-trial (verdict was in Broadcom’s favor) • 200,000 e-mails eventually turned over, with over 200 of them directly contradicting Qualcomm employees’ testimony at trial and in depositions • Qualcomm counsel apologized to the federal court • But . . . .

  30. The newspaper heard a different story from counsel: However, in an interview with the San Diego Union-Tribune about this post-trial production, Mr. Lupin reportedly stated that these newly discovered documents “ ‘on the whole’ bolstered Qualcomm's arguments during trial” and that “ ‘[w]e kind of hurt ourselves' by not finding them before trial.” Kathryn Balint, Another face-off in patent battles, The San Diego Union-Tribune, May 31, 2007, at C1. The Court finds, in sharp disagreement to Mr. Lupin's characterization of the new evidence, that the documents in fact fully bolstered Broadcom's waiver arguments and completely refuted Qualcomm's waiver defenses at trial. Qualcomm v. Broadcom, 2007 WL 2296441 (S.D.Cal.)

  31. On Slipping . . . “You slip-slide into evil, he thought. You cross the line for just one moment. You cross back. You feel safe. You change things, you believe, for the better. The line is still intact. Okay, maybe there’s a smudge there now, but you can still see it clearly. And the next time you cross, maybe that line smudges a little more. But you have your bearings. No matter what happens to that line, you remember where it is. Don’t you?” Harlan Coben, Chapter 32

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