McKinsey & Co. and the Duty to Disclose

The McKinsey RTC division of McKinsey & Co. participated in the restructuring of United Airlines, American Airlines, Edison Mission Energy, NII Holdings, Inc., Alpha Natural Resources, Inc. and SunEdison, Inc. McKinsey RTC was an adviser to those companies during their restructurings. McKinsey RTC did not disclose to the bankruptcy court that McKinsey & Co.’s retirement funds, through its hedge fund investors, held a stake in the debt or other obligations of those six companies.

The disclosure form to the bankruptcy court is a sworn statement that the adviser is a “disinterested party.” McKinsey released a statement saying that it met all legal requirements and that it has been approved for participation by the bankruptcy courts handling the Chapter 11 proceedings for the companies. McKinsey believes that the retirement fund is run separately and therefore disclosure was not required under the regulations.

McKinsey may be right. But, let’s look at it from another angle. How those companies fared in Chapter 11 restructuring had an effect on every McKinsey employee in terms of the performance of their retirement fund. The data are still out on that one. We have us a little letter of the law vs. spirit of the law situation here.

As we say in training on conflicts of interest, if there is the slightest chance of appearance or a glimmer of doubt, disclose.
Interesting how sophistication always gets in the way of being upfront.

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One of the Worst Quotes from the Justice Department Inspector General Report on the FBI Investigation of Hillary Clinton’s Private E-Mail and Server

FBI attorney Lisa Page and Peter Strzok, paramours, engaged the following in their preparation for questioning then-candidate Hillary Clinton about her e-mails, server, and destruction of both:

10:52 p.m., Page: “One more thing: she might be our next president. The last thing you need us going in there loaded for bear. You think she’s going to remember or care that it was more doj than fbi?”

10:56 p.m., Strzok: “Agreed.”

SO MUCH FOR JUSTICE BEING BLIND!

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Training Can’t Solve These Problems

Members of Congress, the broadcast industry, and Hollywood producers were removing their clothes in offices and elevators. Paul Ryan’s congressional solution is sexual harassment training for all members of congress and their staff. A Starbucks manager handles a non-paying customer issue with police escalation. CEO Howard Schultzz shuts down the enterprise so that they can all be trained on their biases. The former director of the FBI pulled an Alexander Haig and took over the Justice Department via press conference. FBI Director Christopher Wray has ordered that all FBI agents have training on avoiding bias.

Speaking as someone with a vested interest in training, allow me to share this hard truth: Training cannot fix these workplace problems. Training is salve for the conscience. Training is a checked box that can bring lower insurance rates and reduced sentencies and fines should the training not take.

Subjecting an entire workforce to training when a couple of ne’er-do-wells at the top created a public relations nightmare is one of the worst things to do. You add resentment to the emotions that frontline employees, who are already disgusted by the behaviors of a few, feel.

Fear of litigation, concerns about privacy, and visible contrition by subjecting employees to Pollyannaish platitudes drive leaders to the trainers. What leaders should be doing is firing the offenders. We once knew to keep our clothes on at work. Get rid of those who can’t. The FBI surely can muster the fortitude to fire agents who spend their time at work having affairs, texting on government phones, and using those texts to plot an overthrow of an election and mock the American people. Discipline is the training organizations need. When heads roll, behaviors change.

At the heart of every ethical and legal lapse in any organization is bad behavior. Sometimes, as in the case at the FBI, the top layer of leadership is the problem. Leaders at the FBI were accepting tickets, meals, and general camaraderie from journalists. See what happens if a field agent started that kind of nonsense. Get rid of the leaders and everyone is trained on accepting “stuff.” Starbucks fired the manager at the Philadelphia store for not following company policies. That was the right thing to do. The day of closing for training was based on an erroneous conclusion about the bias of its workforce. One manager behaving badly does not a bad culture make.

Save your money. Don’t hire the trainers. Fire the offenders, and do so before they impose the feel-goodism of a blanket one-size-fits-all prescription. The fortitude to fire is the fix.

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“Mediterranean-Diet Study Is Retracted, Then Reissued With Same Findings.”

New York Times, June 14, 2018, p. A23. Hold the olive oil — no one is clear on this one. Issue, retract, reissue, and still no one can replicate. Turns out the folks in the villages where the subjects eating the Mediterranean diet became the envy of their neighbors, who were not getting the free olive oil. So, the researchers gave out the police oil to the control groups in the villages. So, the village folks were eating the same diet. No randomness here. Still, the researchers stand behind the study. The moral of the story is to watch those grad students in the field. They can mess up a study through their generosity.

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“Bitcoin Price Was Manipulated, Fueling ’17 Boom, Study Finds”.

New York Times, June 14, 2018, p. B1. Well, la-de-da! I think we knew that.

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Clint Walker: A Good Guy on “Cheyenne” and a Good Guy in Real Life

Clint Walker was a struggling young actor in the 1950s, securing minor parts in Bowery Boys’ films. Then came an opportunity to meet with Cecil B. DeMille about his film, “The Ten Commandments.” On the way to his chance-of-a-lifetime meeting, he spotted a woman on the side of the road with a flat tire in her car. He stopped to change the tire and sent the woman on her way. He cleaned himself up a bit and headed for the studio. When he walked into the meeting, Mr. DeMille said, “You’re late, young man.” Mr. Walker, in recounting the story said, Uh-oh. My career is ended before it began.” Mr. Walker explained the stop for the tire-change, and Mr. DeMille responded, “Yes, I know all about it. That was my secretary.”

Thanks to the New York Times for this part of its obituary for Mr. Walker, may this gentleman who had his priorities and values clear no matter the cost, rest in peace.

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In the “You Got Some Nerve” Department: The Professor Behind AIG’s 1996-2008 Risk Models

Professor Gary Gorton of Yale University served as a consultant for AIG from 1996-2008. Professor Gorton’s job was to devise computer models for AIG to use to gauge the risk in those delightful derivatives — credit-default swaps. The Barometer could have helped on that risk model — betting on whether over-mortgaged Americans were going to default on their mortgages, home-equity lines of credit, second mortgages, and new-home mortgages was a big mistake. The only issue was when they would all default.

AIG ended up with a bailout from the federal government of $185 billion. Where is Professor Gorton now? Well, following a bad few years in which he received death threats and had additional security at Yale for his part in the 2008 financial crisis, Professor Gorton is teaching a finance class at Yale on . . . the 2008 financial crisis. That’s a course that would be fun to audit. When Professor Gorton was queried in a 2011 conference as to whether he might have missed anything in his computer models he said, “I didn’t miss anything.”

Accountability, where is thy sting?

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This Stuff Just Comes Out: Matt Patricia and Luke Heimlich

For both Matt Patricia, the new head coach of the Detroit Lions, and Luke Heimlich, an Oregon State baseball player with amazing talent, the sudden emergence in the media about their alleged sexual misconduct, 22 years and 6 years ago, respectively, the revelations hit hard. For Patricia, the Detroit Newsreported that he, along with another young man, had been indicted for aggravated sexual assault of a woman during their spring break on Padre Island. The victim was “unable to testify” because she could not face the “pressure” of a trial, and the indictment was dismissed. For Heimlich, the allegations, which he denies despite his guilty plea at age 15, involved charges of “child molestation in the first degree” of his young niece. Heimlich was just weeks away from completing all the requirements of his sentence to have his record expunged when The Oregonian ran a full story on the case.

These are the cases that try our souls. These are the cases where enviable athletic talent resides in a person whose pasts, whether true or false, make us uncomfortable.

And then there are the ethical issues, most of which have not been considered in the year of MeToo. What does become of those who have made mistakes? Does it make a difference if they acknowledge their mistakes? Do we sentence them to the life of a pariah? How do the victims cope with success of those who harmed them? The stomach churns, but you can’t help the empathy that swells for both sides. Forgiveness and judgment are not our jobs. Thank goodness. These are the times when we are glad to surrender accountability to a higher authority and let the sports teams grapple with the issues. We leave the NFL franchise, the Oregon State administrators, and the major league baseball teams to make decisions about their future with little guidance from us because no matter which way you turn, it feels wrong and more wrong and then the empathy returns. Oh, why can’t they all be like Joseph Profumo? Go away and devote your life to charity.

Perhaps what we can do is learn from these troubling events in the lives of others. These two lives and the events in them, current and past offer a lesson for all. This stuff just wants out there. The NFL, the Patriots (where Patricia was an assistant coach, and the Detroit Lions say they did not know and the background checks did not bring up the information. Oregon State? Well, Sports Illustrated struggled mightily to find what they knew about Heimlich and when they knew it, but the answers are not clear or forthcoming. Which leaves us with Patricia and Heimlich. They should have gotten all of this out there, take their pain, and get it over with because it is coming out anyway. And “It” has the worst timing. After 22 years for one, just at the peak of an NFL career as a head coach, and weeks before a juvenile record is expunged. Uncannily impossible? No, not when truth wants out there. it will find a way. Perhaps it is the nondisclosure that finds us wondering about their character. We can forgive and forget, but maybe we just want the right to have it on the table, and the earlier the better, and sooner rather than later.

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It Depends on the Meaning of Default When It Comes to Student Loans

Educational institutions can lose their federal funding if they have an excessive number of loan defaults among their graduates. An excessive rate is measured using the figure of how many of an institution’s graduates default within 3 years of graduation (called the cohort default rate). The intent is to measure whether the institutions are producing graduates who can earn a living and repay their loans.

However, educational institutions have found a way to game the metric. They are contacting their graduates and asking them to put their loans in forbearance (i.e., on ice), which means that the borrowers can avoid default. They are not paying their loans, but loans on ice do not count against the institutions’ co-hort rate. The forbearance rate has doubled since 2009. Graduates face consequences for the forbearance option. Their loans accumulate interest, their credit ratings are affected, and they cannot obtain loans for houses. The educational institutions benefit by talking graduates into forbearance, but the graduates suffer. Taxpayers foot the bill for forbearance too. The likelihood of a loan being repaid after forbearance is reduced substantially because the amount of the loan continues to grow. Graduates find themselves in a hole and the interest keeps digging them in deeper.

Legislation has been proposed to close the forbearance loophole and provide graduates with new options, including a longer 25-year repayment plan with lower monthly payments as well as government service loan forgiveness programs.

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Wells Fargo: Another Problem

Apparently in their haste to meet the requirements for a consent decree on its anti-money laundering controls, Wells Fargo employees improperly altered information on documents related to corporate customers. The employees were adding Social Security numbers, addresses, and dates of birth to customer information for corporate clients. Such information should be added or altered only after following specific processes, including customer permission. Fear of regulatory reprisal was the motivation. An employee spoke up about what was happening. Wells disclosed the activities to its regulator once it determined that the alterations were made without customer consent and were not isolated. Haste makes waste. Now Wells faces oversight on creating “more robust processes” for the entry and alteration of information. The irony is that this activity occurred in 2017 and 2018, even as Wells was running ads on its re-founding since the accounts falsification issues. Customer permission message not yet received.

Here is the statement Wells released following this latest problem:

“This matter involves documents used for internal purposes. No customers were negatively impacted, no data left the company, and no products or services were sold as a result.”

Quite a disclaimer that must be issued. The Barometer is starting to feel sorry for Wells — the stage-coach bank that can’t shoot straight.

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Hundreds of Cryptocurrencies Show Hallmarks of Fraud

Do you think? Another “No Surprises Here” headline. Fake founders. Fake photos. Ah, the world of Internet currencies.

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Wells, Again. This Time? Keeping Client Rebates

Even as Wells continues to run its two-page ads that explain how much it has changed, the more things remain the same. The latest ethical issue is Wells’ admission that it pocketed client rebates that the clients had coming from mutual funds. Under revenue-sharing plans that Wells had with mutual funds holding client investment funds, Wells was supposed to return those funds to the clients. For example, the Chattanooga Fire & Police Pension Fund board questioned Wells for months about its practices in the Wells institutional retirement and trust unit. Wells finally admitted the error to the board and refunded $15,000 of the $47,000 discovered to the Chattanooga pension fund.

Attributing the failure to return the rebates to clients, Wells explained that a “system set-up error” caused the mistake. Wells also acknowledged that other clients were affected. The Chattanooga fund has decided to fire Wells as its manager, “The Board has lost confidence that the answers provided by Wells to date are complete.” The Board also filed a whistleblower complaint with the SEC outlining its concerns about Wells and has filed a suit seeking an accounting from Wells. Because Wells has managed the Chattanooga fund since 2005, the rebates could be as much as $2 million. The Board of the Tennessee fund had a former SEC attorney conduct the investigation into the Wells management of the fund. The lawyer received four answers from Wells in asking the questions about the rebates:

1. That information was confidential and could not be disclosed.
2. That there were not rebates,
3. An acknowledgement of a problem and partial payment of $5,000
4. An admission of the set-up error and more rebate payments.

There’s that tangled wen thing again.

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When You Can’t Sell Your Mansion, Check with the Help

The owners were asking $10 million for their Los Angeles home. They had plenty of interest and traffic, but no one who looked at their home ever made an offer. After months of no interest, the couple’s wise real estate agent began checking with the other agents who had brought in the prospective buyers to see why the disdain for what should have been a desirous and primo property. It turns out that the couple’s housekeeper, fretting that she would lose her job if the house sold, was offering asides to the touring prospective buyers to warn them away from a purchase. Barking dogs, canyon echoes, and raucous neighbors were just a few of the housekeeper’s yarns spun in the name of job security. The couple’s real estate agent told them that as long as the housekeeper was there, their house would not sell. The advice? Make sure the house is vacant when prospective buyers come. The house sold within weeks once the housekeeper was not around to offer fake warnings. Children, neighbors, and relatives have all been known to sabotage sales for a variety of reasons but all the same goal: make the sellers stay put.

Watch your back when selling your home: from offspring to the keepers of the castle, these third parties are good at brutal sabotage.

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16% of employees have made something up or embellished facts in their performance reviews

We all had figured that out sometime ago, but are surprised the number is so low. However, the real surprise in the survey is the reason the embellishers embellish — they knew that their bosses would not know the difference. Now that’s crackerjack management. Thanks to USA Today for this data in its May 14, 2018 edition. p. 1B.

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