INVESTIGATING WHISTLEBLOWER COMPLAINTS PART II

In March 2009, Bernard Lawrence Madoff pleaded guilty to 11 federal felonies and admitted to turning his closely held wealth management business into a massive Ponzi scheme that defrauded thousands of investors of nearly $65 billion dollars.i Allegedly, Madoff began the Ponzi scheme in the early 1970s making it one of the longest run and largest Ponzi schemes in history. On June 29, 2009, Madoff was sentenced to 150 years in prison, the maximum allowed.

However, Madoff and his family were not the only beneficiaries of the enormous scheme. Jeffry Picower, rather than Madoff, appears to have been the largest beneficiary. Pursued by a court appointed trustee, his estate settled the claims against it for $7.2 billion. It also appears that possibly J.P. Morgan Chase & Co. may have also benefitted from the scheme—through interest and fees charged—to the tune of a billion dollars. Trustee Irving Picard has filed suit seeking the return of $1 billion and damages of $5.4 billion. Morgan continues to deny complicity. According to the same lawsuit, New York Mets owners Fred Wilpon and Saul Katz received $300 million from the scheme. Wilpon and Katz have both categorically rejected the charges and as of this writing, continue to oppose Picard’s charges. According to the Wall Street Journal, Irving Picard’s fees for his services now exceed $27 million!

While such scandals have shaken investors and destabilized the markets, Congress has not remained idle. With almost $1 trillion in shareholder equity wiped out, law makers had enough. With much debate, the Sarbanes-Oxley Act of 2002 re-defined corporate ethics and governance. Combined with the Federal Sentencing Guidelines (enacted in 1991) and the Racketeer Influenced Criminal Organization Act (RICO) the nation’s top cops have the tools they now need to stop greedy corporate elitists and bring them to justice. But Sarbanes-Oxley puts most of the compliance burden on the organization. Ominously, it provides for stiff criminal penalties for CEOs and CFOs of public companies who cheat and steal. Specifically:

 

Section 301

Requires audit committees to provide a mechanism for employees to remain anonymous when reporting concerns about questionable accounting or audit matters. Additionally, the audit committee must provide a process for the “receipt, retention and treatment” of complaints regarding financial irregularities.iI

 

Section 404

Requires that the organization’s annual report must contain a statement regarding the effectiveness of it internal controls.

 

Section 806

Prohibits whistleblower retaliation and permits employees to sue their employer if retaliated against.

 

Section 1107

Allows criminal sanctions against managers found guilty of retaliation with sentences up to 10 years in prison.

 

In addition to stiff criminal penalties, noncompliant organizations may be delisted. With indictments now starting to be handed down, the message has been lost on no one; unethical behavior will not be tolerated.

There is no equivalent of Sarbanes-Oxley for private companies and nonprofit organizations. Legal authorities however, suggest that they too will be held to a higher standard because of Sarbanes-Oxley. It has become the stick by which organizational ethical behavior been enforced. Here are some of the more common unethical workplace behaviors (in no particular order):

  • Misuse (and falsification) of a reimbursed expense account
  • Backdating stock options and manipulation of capitalization tables
  • Manipulation of financial reports or records for any purpose
  • Failure to disclose actual or potential conflicts of interest
  • Dirty dealing and collusion

 

Peter Drucker said it best. He said “No professional, be he a doctor, lawyer, or manager, can promise that he will indeed do good for his client. All he can do is try. But he can promise that he will not knowingly do harm. And the client, in turn, must be able to trust the professional not knowingly to do him harm.”iii Like it or not, ethics plays a role in every aspect of business. Correctly, it ought to govern the way we behave and treat others.

Some commonalities among these types of offenses:

  • They are most often perpetrated by insiders with access. Frequently, these are people with control and power (or have stolen control and power with the assistance of otherwise trusted insiders). By the nature of their jobs, they influence the outcome of many business transactions and how they are accomplished.
  • Perpetrators are typically greedy and care little about others.
  • Secretive relationships, unusual business dealings, and questionable behaviors.

To be continued…

 


i A Ponzi scheme is a fraudulent investment operation that pays returns to its investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors. The Ponzi scheme usually entices new investors by offering greater returns than other investments can offer. Usually these are in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going. Thus, the lack of sufficient new investors usually caused the scheme to collapse. In part: http://en.wikipedia.org/wiki/Ponzi_scheme, June 2011.
ii Interestingly, it was Harry Markopolos, a whistle-blower who first uncovered Madoff’s Ponzi scheme. Markopolos claims it was he who alerted regulators 10 years before Madoff’s two sons went to the authorities and revealed to them the biggest financial fraud in history.
iii Drucker, Peter F., Management, Tasks-Responsibilities-Practices, Harper & Row, New York, NY, 1974, 369.