The Ethical Barometer

This is one for the book on the human mind having no limitations on creativity when it comes to desperation. Harvard is investigating its fencing coach, Peter Brand’s, sale of his home in Needham, Massachusetts to Jie Zhao, a wealthy businessman from Maryland, for over $400,000 above the home’s appraised value of $549,300. The Needham assessor described the home as vintage 1960s in “bad shape,” and that the sale for that amount made no sense.

Ah, but the assessor did not understand that shortly after the sale took place, Mr. Zhao’s youngest son (in high school at the time) was admitted to Harvard and, for a time, was on the fencing team. Mr. Zhao, not planning on relocating from Maryland to Needham, sold the house one year later, for $665,000. So, speculating here, Mr. Zhao got his son into Harvard and was able to write off a bribe paid to a coach as a capital loss.

Harvard has indicated that it does not believe the incident was related to Operation Varsity Blue, the sting operation that has nailed coaches and parents across the fruited plain. Nah, of course not.

The Barometer would like an answer to this question: How exactly do these conversations for these schemes go? “Say, coach, I am thinking of relocating to the suburb of Needham, MA. Know any good housing opportunities?” Coach, “Have I got a place for you! And I can get it for you for just $400,000 above appraised value.”

As the topper, following their fortuitous sale to the Maryland businessman with wanderlust, Coach Brand and his wife purchased a condominium for $1.3 million, just about $300,000 above the asking price. These folks were some awfully shrewd deal makers when it comes to real estate transactions.

Now, to add to the circumstantial pile of transactions, Mr. Zhao previously made a $1 million donation to the National Fencing Foundation. Who knew there was such a charity? The next year, Mr. Zhao’s oldest son was admitted to Harvard, as a fencer. When the son enrolled in Harvard, the National Fencing Foundation made a $100,000 donation to a private foundation started by Coach Brand and his wife. The donation was only one of two donations that the Brand private foundation received before it was dissolved within two years. Speculating here again. Before the Brands realized the 1960s home they were sitting on was a gold mine, they found the world of charity and all of its tax deductible/exemption glories. Oh, what a tangled web and all that.

Harvard issued a statement saying that there was a great deal it did not know about the allegations. No kidding!

An astonishing settlement by Duke University with the federal government received minimal coverage.Duke agreed to pay $112.5 million to settle claims that it knowingly submitted false data in federal grant work that brought in $200 million to the university for research. The false data, which resulted in the retraction of 17 of 38 research articles on the grant research, came to light as a result of a whistleblower, former Duke biologist, Joseph Thomas. Mr. Thomas will receive 30% of the #112.5 million, as provided under the False Claims Act and his qui tam claim. Mr. Thomas was a former lab analyst who reported the false data submitted to obtain and retain grants from the National Institutes of Health and the EPA. The false data were submitted over a seven-year period.

Erin Potts-Kant was the pulmonary researcher involved, and the Duke internal investigation into the false data issue began when she was arrested for embezzling $15,000 from Duke. Ms. Potts-Kant entered a guilty plea and has repaid the funds to Duke.

Interestingly, when Mr. Thomas raised the issue of the false data to the federal government, it declined to be involved in the suit. Mr. Thomas and his lawyers carried the suit through on their own with the Feds stepping in only at the last minute on settlement negotiations. There were over 300 motions and other court filings in the case, which began in 2013.

You better believe that universities around the country are now taking a hard look at federally funded research grants for irregularities. Duke has established a committee to develop new recommendations for research integrity and grant administration and oversight. The panel’s work is due June 30. Duke’s leadership is going about reform all wrong.

Duke might begin by looking at its culture of research. As Ms. Potts-Kant explained in her deposition, “Everyone needed a grant. Everyone needed money,” and that she falsified data “because researchers would be more happy if they could get a grant.” She also noted that the principal investigators on the research projects were “very vocal” about the pressure they felt to get and keep grants. One researcher explained in testimony before Duke’s Ad Hoc Investigation Committee, “if she (Potts-Kant) keeps brining good data, we get funded, she keeps her job, she gets a raise, everybody’s happy.”

Culture trumps integrity, ethics, and even federal regulations. Start there, not with new platitudes on research integrity.

Barbra Streisand, once a “Funny Girl” and not so “Funny Lady,” now channeling Che Guevara (see her appearance at the Oscars), does not understand apologies. Her apology regarding her bizarre remarks about Michael Jackson and the documentary, “Leaving Neverland,” were an act of moral disengagement, not remorse, “I am profoundly sorry for any pain or misunderstanding I caused by not choosing my words more carefully about Michael Jackson and his actions.”

Choosing your words carefully? Ms. Streisand said that the boys in the documentary who spoke of their molestation (something a bit more than actions) were at least not killed by what happened. Ah, escaping death is the measure for appropriate conduct. Then there was the passing judgment on the parents — their fault for allowing the kids to stay overnight. And the kids? Well, in Ms. Streisand’s mind and words, they were “thrilled” to be with them.

An apology means that you are sorry for what you said because it was wrong. You are not sorry for misunderstandings that resulted. You say you were wrong in what you said because “deep remorse” is not possible unless and until you acknowledge the errors. Saying you did not choose your words carefully does not address content.

Meanwhile, Diana Ross is tweeting her song titles to end the conversation, “STOP IN THE NAME OF LOVE.” It is not clear that halting discussion of what these men say happened to them as young boys in Mr. Jackson’s home is a resolution. The failure to review whether the criminal justice system and we as a society responded appropriately at the time awards an escape from the uncomfortable introspection we need to do. Ms. Streisand and Ms. Ross surely understand, as women who have portrayed victims of injustice, that films serve as a force of reckoning, review, and change. Denial and plugging our ears while humming tunes from the Supremes do not get at the issue of pedophilia and what we are doing or perhaps not doing to address it.

Martin Tobin, a Los Angeles finance guy, was the one who tipped off federal authorities about the Rick Singer bribes-for-admission scandal. Mr. Tobin was being questioned by federal authorities about a pump-and-dump scam. Pump-and-dump scams are the stuff of induced hype. Folks buy a stock and then pump up its values through touting the stock’s value, the company, or potential earnings, and then when they have pumped the value up sufficiently, they sell the stock and move along. Mr. Tobin admitted to authorities that he had already paid a bribe to Rudy Meredith, the head women’s soccer coach at Yale in order secure admission at Yale for one of his daughters. One of Mr. Tobin’s daughters graduated from Yale in 2015, and two other daughters are currently there, expected to graduate in 2019 and 2020.

Federal authorities asked Mr. Tobin to pretend to be interested in paying another bribe to Mr. Meredith for his last daughter, a high-school senior, in order to complete the family ties to Yale. Mr. Tobin’s meeting with Mr. Meredith in a Boston hotel room was recorded, and in the recording, Mr. Meredith allegedly agreed to designate the Tobin daughter as a soccer recruit in exchange for $450,000. In exchange for his help with the Varsity Blue operation, Mr. Tobin was not charged in that scandal, and entered a guilty plea to one count of conspiracy to commit securities fraud, and one count of securities fraud.

You never trust the people you cheat with — they will throw you under the bus.

The Barometer sees the charts in the newspapers. Charts to be filled out for March Madness, Sweet Sixteen, Elite Eight, and Final Four. The alliterations are clearly clever. Then there is the language of sportscasters: “Sky-walking with a big-time push.” Until the Barometer got the translation the assumption was that the TV had been switched to the space walk and a drive to finish the repairs.

As devoted as the fans are and as colorful as the shoes seem, there is that ethical cloud that hangs over this college sport. Yesterday’s Wall Street Journal provided the proverbial straw on the camel’s back. The players and staff are swiping the rugs from their locker rooms. Bless the NCAA’s heart, they were trying to make things “homey” for the players with area rugs here and there in the locker rooms. The NCAA has no idea with whom they are dealing.

Apart from the banished coaches, the X-rated recruiting scandals, and the bribery, there is the underlying erosion of the original noble goal of college sports scholarships: to provide the financial means to talented athletes to obtain an education. Today, colleges and universities provide future NBA players with a place to park it for a year before they turn pro. They are not in school long enough to even have to worry about grades for eligibility the following season. The academic world is now the farm club for the NBA. The problems with bribery, corruption, and hedonistic behaviors spring from the loss of the original soul and virtue of college sports programs. The NCAA is no longer running the show when it comes to ethics. Their little investigations and sanctions could not handle the level of misconduct. The Justice Department has stepped in with prison time as the punishment because the loss of post-season play or scholarships just was not doing the trick. The schools have adopted the CEO defense when fraud gallops through their organizations: “I knew nothing.” Okay, maybe an assistant coach here and there, but not the rest of us.

When it comes to playoffs and championships, we dutifully fill out the brackets and pretend for 4-5 weeks that none of the terminations, the shootings, the suspensions, and payments to parents matter. There may be corruption, but, man, can those guys play basketball. At least for a year.

The title of William “Rick” Singer’s, dynamic and now criminally indicted college counseling coach, presentation done in the financial services sector. One expert characterized Singer as someone with a seemingly “magic elixir” for parents on getting their kids into college.

The magic elixir for the affluent was affluence — you pay to get your child into school and Mr. Singer developed the method for cheating.

Why didn’t the affluent just give a building to the college? That’s the way the affluent usually get their kids into school. Saves the expense of the Singer middle man.

If you are looking for an investment, not to worry. Jeffrey Skilling is meeting with former Enron executives to form a new energy venture. He’s looking for backers. Get out your wallets!

2 Chainz and Cardi B have had a harsh reality. Like the Beatles and their “Tax Man,” the successful artists have learned that the IRS does take a chunk once you land in those higher income brackets. They are upset that they have to pay, but fear the Wesley Snipes treatment, “Don’t let ’em try to Wesley you. You get rich, they got’ try to Wesley you.” Along the lines of George Harrison’s lyrics:

Let me tell you how it will be
There’s one for you, nineteen for me
‘Cause I’m the taxman, yeah, I’m the taxman

The rappers also question where the money is going: There are rats on the trains, and “y’all not spending it in no damn prison.” Harrison saw the same issue all those yers ago:

Don’t ask me what I want it for
(Ah, ah, Mr. Wilson)
If you don’t want to pay some more
(Ah, ah, Mr. Heath)
‘Cause I’m the taxman

Wilson was the British prime minister at the time.

Interesting that artists see the same issues over the decades. However, Mr. Harrison’s lyrics can be reproduced in the family hour — the full content of the rappers’ choice of words and turns of phrases cannot be shared with a “G” audience. Fascinating, however, that views and talking points on taxes change once success comes and the tax bills come in. Welcome to the highest brackets of talent and taxes.

The Summer Olympics will be held in Japan in the summer of 2020, a selection that was made in 2013. The head of the Japanese Olympic Committee will resign in June because investigators have uncovered a vote-buying scandal that swayed the members of the International Olympic Committee to vote for Tokyo over Madrid and Istanbul.

Tokyo and IOC members have short memories. Salt Lake City officials engaged in all types of vote-buying to get the 2000 Winter Olympics to Utah. Everything from shopping sprees to medical care to college admissions were used to win the hearts and minds of IOC members. Japan used a simpler strategy and just funneled $2 million through a consulting firm owned by a son of a former IOC member who then tossed his influence around with the current IOC members from Africa to win their votes to Tokyo.

AH, the lessons of history — there are few scholars when it comes to bribes.

The late Karl Eller, former CEO Circle K Corporation and Combined Communications.

Mr. Eller has a life story worth a study. His father left his mother and his two siblings when Mr. Eller was five years old. He began his business life with a billboard company and then bought Circle K. Without retail experience, that chain of gas stations and retail stores went into Chapter 11 bankruptcy. Mr. Eller was 61 years old at the time and he had $100 million in debt from the retail foray due to personal guarantees. Rather than declare bankruptcy he told his creditors that he would pay them back. Some creditors wanted cash straight away, and he paid them 10 cents on the dollar. The remaining creditors who hung in there with him were paid in full. He was able to do so because he started another billboard company, which he eventually sold to Clear Channel for over $1 billion.

Mr. Eller wrote a book called, “Integrity Is All You’ve Got.” He repaid his creditors because, as he explained, he wanted to preserve his reputation. The Barometer served with Mr. Eller on a corporate board — he never missed a meeting. He had his detractors. The grass didn’t grow where Al Neuharth spat after talking about Mr. Eller, wheeler-dealer. But, he was married to Stevie for 66 years. On balance, this man left this life with honor. RIP.

Martin Winterkorn, former CEO of VW in 2015 when the VW falsified emissions test scandal emerged. Mr. Winterkorn resigned shortly thereafter. VW settled the emissions scandal with the EPA for $25 billion. However, on March 15, 2019, the SEC filed a civil suit against VW and Mr. Winterkorn for misleading bond investors about the emission scandal. The complaint alleges that Mr. Winterkorn was told of the emissions falsification as early as 2007, just after he became VW’s CEO.

The Barometer believed that the phrasing of the Winterkorn. See post on September 17, 2015 for these denials:

“I am shocked by the events of the past few days. Above all, I am stunned that misconduct on such a scale was possible in the Volkswagen Group.”
“I am not aware of any wrongdoing on my part.”
“I am stunned that misconduct on such a scale was possible in the Volkswagen Group.”

According to the SEC complaint, which lawyers for VW call “legally and factually flawed,” and VW will offer a vigorous defense. However, the complaint highlights Mr. Winterkorn’s management style of micro-management and noted this quote in the 2010 annual report of the company:

The Volkswagen Group is so successful today because this notion of ‘digging deeper’ has become part of our corporate culture. . . . As an automotive manager, it is not enough simply to enjoy driving cars—you have to understand them right down to every last detail. Many things in our Group today only work because my Board of Management colleagues and I are extremely well versed in all aspects of the business. If developers say that a solution is not possible from a technical, timing, or financial point of view, I am able to challenge them. And everyone knows that.

And the complaint also alleges:

Winterkorn and other VW executives were made aware of the defeat device as early as November 2007, during a meeting with VW engineers, to discuss the emissions problems with VW’s “clean diesel” vehicles. Although at least one meeting participant warned that putting the existing vehicles on the road in the U.S. would damage VW’s reputation if the vehicles’ high emissions were later discovered, those concerns were ignored.

And the bonds were sold based on the representations of a successful clean diesel vehicle. The case will continue to highlight what the SEC has uncovered and strengthens the bond holders’ civil suit for recovery of their losses.

Three incidents in the news caught the Barometer’s eye that involve “parenting,” and bad judgment.

1. The kiddos storming Senator Diane Feinstein’s office, demanding action on climate change. Most analyses of the video focused on Senator Feinstein’s alleged arrogance in responding to the lads and lassies. The Barometer watched the video and wondered in awe at what kind of parents allow their children to experience that level of fear. Visions of sugar plums do not dance in these kids’ heads — they have had apocalyptic tales tossed hither and yon so much that what they seem to know, with great conviction, is that death, destruction, and dogs and cats living together (to quote the Ghostbusters) are a mere 12 years away. The cherubs have turned out to be a litigious bunch, bringing suit to halt their nightmares, via judicially imposed green dreams, plans, or beheadings. One, brought by Our Children’s Trust, is headed to the U.S. Supreme Court.

As Paul Tice pointed out in the Wall Street Journal, the last time kids took the lead on moving social policy the kids got hurt. The crusades of children through Germany and France to liberate Jerusalem ended badly — many of the children died and many were sold into slavery.

How about a little parenting that allows children to spend their time amongst the flora and fauna that we do have or even experience the concrete of an urban skate park before we offer them up as plaintiffs and activists in Senate offices? How about if we parents provide them with a secure environment, a solid education, and the assurance that society has the both the capacity and [some] adults to address dangers.

2. The slapping your child in the face with cheese squares. You have no doubt seen the videos of the toddlers having a slice of cheese hurled at them. The poor tots are visibly stunned by what has hit them. Several of them cannot see and do not yet have the motor skills to reach up and remove the Velveeta or Kraft square from their noses and foreheads.

Parents today clearly have too much time to spare. How on earth did this activity start? Now there is not only the fear that polar bears will be roaming their Santa Clara neighborhoods foraging for small children because of melting ice but that somewhere out there is a cheese slice with their name on it (both thanks to their parents).

3. The college admissions cheating. Words have not yet been invented to describe the parents who did this “for their children.” With this parental activity, the three examples come together into one common theme. Children are not props, children are not our entertainment, and children are not trophies that we hold up to show the world what we have produced. However, in this case, photo alterations, cash, and grad students changing exam scores produced the results. Vanity, vanity, all is vanity. Ecclesiastes 1:2. At some point, these sad youth will awaken and realize that the accomplishments their parents had painted, plastered, and baling wired on to them did not give them the skills, knowledge, or fortitude they needed to survive in a rugged world. In the quest to give their children everything, these parents deprived their children of what they needed most — work, resiliency, and humility born of the blessing of failing once in awhile.

As in business, the quest to make the numbers at any cost and by any means, gets you the numbers, but it kills the company.

Climate change, American cheese, and cheating — all with the common thread of parents who forgot to nurture, support, and set an example.

David Middendorf, the former national managing partner for audit quality at KPMG, was convicted of four of five counts of conspiracy and wire fraud. Mr. Middendorf’s strategy waster audit qualify was an interesting one: obtaining information from employees of the federal Public Company Accounting Oversight Board (PCAOB) as to which companies that KPMG audited would be on the agency’s list for governmental review of audits. KPMG would then pull out the big audit guns (although the Barometer is not sure what that metaphor means when it comes to auditing) when conducting its audits of those companies. Quality is much easier when you get a heads-up on where the regulators are headed.

Jeffrey Wada, also convicted of three of four counts of conspiracy and wired fraud, was the PCAOB employee who passed along the information to KPMG. KPMG fired all of its employees involved in the activities, and three of those four entered guilty pleas. Mr. Middendorf’s attorney indicated that he will appeal because “what happened was not are fraud.” What happened was wrong, however. Just because we cannot find a crime to fit the activity does not mean the activity was ethical. What a defense! I cheated on the exam, but it was not a crime. Oh, but it was, plainly, and simply, dumb. Funnily enough, when PCAOB went back and did a REALLY thorough check of KPMG’s audits, it found “serious deficiencies” in half. Looks like the audit quality title was a misnomer for Mr. Middendorf. Amazing how so many convicted executives allowed pressure (financial, for goals, for recognition) be the sole processing mechanisms for their decisions and actions, which then actually defeated the very purposes of their jobs and their companies.

Gordon Caplan, private equity lawyer and co-chairman at the law firm, Wilkie Farr & Gallagher LLP, named “Dealmaker of the Year,” by American Lawyer, who was arrested in the Varsity Blue admissions scandal for his efforts with William “Rick” Singer to get his daughter into college.

Not really sure if we can measure honesty here. Mr. Caplan is accused of paying Mr. Singer $75,000 to improve his daughter’s test scores. However, Mr. Caplan had to have a psychologist certify his daughter as having a learning disability so that his daughter could take the ACT exam at one of the locations where Mr. Singer had bribable test administrators. Mr. Caplan and his daughter flew out to California, Ms. Caplan took the ACT, and, thanks to the administrator who changed her answers, her previous score jumped from the low 22 to 32, thanks also to the cash and Mr. Singer’s efforts. Mr. Singer wanted to go to a score of 33, but Mr. Caplan felt it was too much of a jump. In a phone conversation following the successful cheating, the content is damning:

Mr. Singer: “It’s the home run of home runs,” Singer later said.

Mr. Caplan: “It works every time?”

Singer: “Every time.”

Interestingly, the ACT balked twice at the daughter’s request for extra time on the exam based on a disability classification, but the Feds asked ACT to cooperate because they were running the sting.

However, assuming arguendo Mr. Caplan is being honest, he missed a thought — he may be finished too.