God Bless Standard & Poor’s

The Barometer has had its chastisements for S & P over its failure to allow the concerns of its analysts to percolate up into actually stating publicly that the subprime mortgage instruments were junk. Not exactly equipped with an itchy trigger finger, S & P did not downgrade the investment banks until December 2008. Give ‘em three months following a market collapse, and they were Johnny-on-the-spot! And it wasn’t as if those within the belly of this venerable institution did not see the issues. “Let’s hope we are all wealthy and retired by the time this house of cards falters,” was in one e-mail from and S & P employee regarding the mortgage-backed CDOs. Deals put together by cows were investment grade in S & P’s mind during the real estate boom/bubble.

But, with the S & P downgrade of the U.S. debt rating by S & P from AAA to AA-plus late Friday, August 5, 2011, means one of two things. If S & P has not internalized its lessons from the subprime mess, then Continue reading

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The Grassley Letter on Hedge Fund Connections with the Department of Education

Senators Charles Grassley and Tom Coburn have raised questions that are disturbing on so many levels. In a letter to Arne Duncan, the Secretary of Education, Senator Grassley asks whether insiders at the Department of Education tipped off hedge fund traders about the Department’s investigation results into for-profit educational institutions. Worse, Senator Grassley wants to know whether hedge fund traders exercised influence over the promulgation of rules for the for-profit schools, rules that resulted in the stock of the schools’ owner companies falling in value, a result that benefited the hedge traders. The harsher the rules, the greater the impact on the stock’s value, and the traders were positioned short to benefit from harsh rules.

Such interconnection between a government agency and the investment markets borders on banana republic tendencies. Worse, the e-mails Senator Grassley included in the letter are damning. Department employees were discussing the progress of the proposed rules in response to e-mails from hedge fund traders who indicated, “Education stocks are running because people are hearing D.O.E.is backing down” [on the regulation]. No legal lines may have been crossed with such communications, but the propriety of a government employee discussing the market position of the stocks of companies it is proposing to regulate with someone positioned to benefit from harsh regulations is fundamentally corrupt. Oh, for a Woodward and Bernstein and Deep Throat on this one. We need good investigative reporting and we need it now.

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Finally, a Company Lets the Data Speak

In June 2011, The Spine Journal let loose with its findings on Medtronic’s Infusion, a bioengineered material used in spinal fusion. The special issue of the medical journal concluded that research sponsored by Medtronic resulted in misleading conclusions – overstated benefits and understated risks. So, Medtronic is doing what the Barometer has advocated through years of writing and seven editions of an ethics textbook – let the data speak for itself. Medtronic is giving Yale $2.5 million and the data on Infusion to bring together a panel of experts to study the issue.

There is an inherent conflict when a company with a medical device or drug sponsors the research into the device’s or drug’s efficacy. Liars figure, but figures don’t lie. If the data are out there, the taint of the conflict is removed and folks can figure out the conclusions for themselves. The researchers who did the original work on Infusion could talk themselves blue in defense of their scientific integrity, but that conflict gets in the way. The data may be their exoneration.

Medtronic has proven itself a leader with this move. Other pharmas and medical device manufacturers should follow suit.

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“They Never Do Just One Thing.”

That’s an insight gained from an experienced manager who was reflecting on how to manage ethical missteps by employees. He said if you believe it’s their first offense, you are probably wrong. Check back through their work to be sure they haven’t done something similar in the past. And if it is truly their first ethical misstep, keep an eye on them because you may not curb their tendencies with graduated discipline.

The Barometer thought of this insight because Alex Rodriguez is in the news again. In 2009, Continue reading

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The Children’s Hospital of Philadelphia Embezzlement Case: Did They Miss Red Flags?

The stunning indictment and guilty plea of Roosevelt Hairston Jr., the former general counsel and executive vice president of Children’s Hospital of Philadelphia(CHOP), for embezzlement gives us pause. The pause comes from the fact that the embezzlement amounted to $1.7 million and was carried out over a 12-year period (from 1999-2011). That’s about $150,000 per year. Not bad work if you can get it, especially when you consider that Mr. Hairston’s salary topped $700,000 as of 2009.
How did so much go on for so long? The case is instructive for internal auditors in terms of using those soft clues in order to maximize their ability to ferret out thieves and hustlers.
1. Those Invoices and Vendors
The indictment indicates that all the funds were obtained using just 93 invoices over the 11-year period. That’s a chunk of change per invoice, and invoices of that level deserve some follow-up.
The indictment also indicates that the invoices were submitted by fake firms, firms created by Mr. Hairston for experts and outside counsel for the hospital’s litigation. Verifying the identity of those firms and the recipients is critical. In at least one instance, the internal auditors at CHOP did follow up with the alleged vendors, but Mr. Hairston stole the identity of a friend in order to use an e-mail to assure auditors that he was indeed the vendor and had indeed performed the services. However, the e-mail follow-up is in itself a lesson – anyone can e-mail. A face-to-face meeting, including a visit to the vendor’s office would have been in order.
That Mr. Hairston alone could submit the invoices for payment indicates a fundamental weakness in internal controls.
2. Oh, That Lavish Lifestyle!
Mr. Hairston had a yacht with a full-time captain, a 10,000-square-foot home, and staged party after party. And there was a stable of cars that would make Jay Leno blush. That level of spending is worth a look-see into accounts by internal auditors.
3. Those Investments!
The need for cash on Mr. Hairston’s part increased as his real estate investments went south. Those
complicated personal portfolios and activity there are things to watch, or at least clues as to one of the segments of the triangle of fraud – need. In this case, it was the need for cash.
4. The Generous and Philanthropic Soul
In a classic lawyerly line at Mr. Hairston’s guilty plea, his counsel noted that Mr. Hairston used the yacht primarily for raising money for the hospital and other charities. His counsel noted that his motive was not greed. Ah, when you take money in order to set the stage for raising money for charity, well, it’s different.
By all accounts, however, Mr. Hairston was a model Philadelphia citizen when it came to charitable causes. However, history has taught us that where there is a generous executive, be afraid and look more closely. Here’s a partial list of history’s most generous corporate titans, all of whom were convicted or entered guilty pleas to felonies.
• John Rigas (Adelphia)
• Bernie Ebbers (WorldCom)
• Dennis Kozlowski (Tyco)
• Jeffrey Skilling (Enron)
• Ken Lay (Enron) (his guilty verdict was vacated because he died pending its appeal)
• Bernie Madoff (Madoff Securities)
• Richard Scrushy (HealthSouth)
• Tim Donaghey (NBA referee)
• William Aramony (United Way)

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“Be on time. Treat women with respect. Play like a thug. Live like a gentleman.”

The late Houston AAU coach, David Salinas, who took his life as the SEC uncovered that his firm, Select Asset Management, founded in 2006, was a Ponzi scheme. The firm managed assets of college basketball coaches who invested from $23,000 to $1.2 million in Select. By all accounts, the money is gone.

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“He primarily used the boat and most of his free time for (hospital) business and other charitable causes.” “At sentencing we intend to bring out the other side of Roosevelt Hairston — and that is the person who devoted his time and energy to serving the community and charitable interests.” “He is not a greedy man.”

Howard B. Klein, lawyer for Roosevelt Hairston, Jr., former general counsel for Children’s Hospital of Philadelphia, who entered a guilty plea of embezzling $1.7 million from the hospital between 1999 and 2011. Mr. Hairston submitted 93 invoices for fake vendors (mostly expert witness fees) during the 12-year period. The embezzlement continued for so long because Continue reading

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“Less pressure has visibly led to higher moral standards in German companies.”

Stefan Heissner, the head of Fraud Investigations & Dispute Services at Ernst & Young. E&Y just released a survey of employees’ attitudes about corruption and ethical behavior in business in Germany. The probability of an ethical outcome is a direct function of the amount of money involved.

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New Category Added

The Barometer has added a new category for your reading pleasure — the “Under the Bus” news highlights. This category brings us those warm and fuzzy moments when friends, family, and co-workers save their own skins by finger-pointing others who were once important to them. The first entry deals with the sad tale of Danielle Chiesi and her betrayal by a lover. You never trust the people you cheat with; they will throw you under the bus.

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Danielle Chiesi Gets Longer Sentence Than Her Longtime Lover Who Threw Her Under the Bus

There have been 49 folks (hedge-fund managers and others from expert networks) charged with insider trading over the past 18 months. Of the 49, forty-six have been convicted or entered guilty pleas. Outside of the Beltway, few have witnessed such rampant finger-pointing as these interconnected financial wizards scramble to plead early and often in order to win leniency in exchange for their testimony against other. The ones who were convicted, such as Raj Rajaratnam, made the mistake of going to trial as the bus-tossers lined up to testify.

Perhaps the most diabolical of these finger-pointing situations involves Danielle Chiesi, a former hedge-fund consultant who entered a guilty plea and was sentenced to 30 months in prison, a $25,000 fine, and $540,000 in civil settlements. The irony is that the person who threw her under the SEC bus was her longtime lover, Mark Kurland. He entered his plea last year and got 27 months in prison. At her sentencing hearing, Ms. Chiesi’s lawyers argued that “He [Kurland] flattered her information-getting ability. At the same time, he belittled her understanding of complicated financial concepts.” Then later he offered his statements about her in exchange for a lesser sentence. It worked – he is serving less time. You never trust the people you cheat with; they will throw you under the bus.

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The “Whys” Behind Rules: The Photo-Op Tragedies in Yosemite and Guatemalan Zoo

In the news this past week were two events that could be used to drive home to employees those seemingly bureaucratic and overly cautious rules do have important purposes. The first was the tragic loss of three lives in Yosemite National Park. Three young men climbed to the top of the 317-foot Vernal Fall and, upon reaching the top, climbed over the guard rail to trod the slick rocks over to the middle of the Merced River for a better photo op. In doing so, they disregarded the barricades, the warning signs, and the pleas from fellow hikers to stop. Just 25 feet from the precipice the three young people were swept away by the swift-moving waters that were in extra heavy flow mode because of high snowfall this past winter. All three were killed. The second event involved a young missionary from the Church of Jesus Christ of Latter Day Saints serving a mission in Guatemala. On a day trip to the Guatemala City zoo, the young man climbed Continue reading

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So Not Worth It, Or Is it? Clemens, Armstrong, & Anthony

Jonathan Mahler, he of the New York Times, and a host of others who crowd the web and bend the Barometer’s ear, wonder why the federal government pursues cases such as those against Roger Clemens, Barry Bonds, and, now, Lance Armstrong. Mr. Clemens’ recent mistrial finds glee among, well, the Barometer is not really sure who to count among those who like to see prosecutors fail, except a goodly portion of defense lawyers employed as commentators on the Casey Anthony case.
Be that as it may, the issue is not that prosecutors failed or the troubling expressions of glee from the ha-ha-you-can’t-catch-and-convict-me crowd, led my Casey Anthony wherever she may be. The issue is one raised by Mr. Mahler, “Is it worth trying to prove?”

When a toddler disappears without explanation by anyone or notification of authorities by cherub’s mother, it is indeed worth a murder trial because we care about innocent victims. Sometimes you win, sometimes you lose, and sometimes you get a jury that finds reasonable doubt in a scenario that requires a willing suspension of all reason. A tot grabbed two Hefty trash bags, couple of Care Bear stickers, and some duct tape, and toddled down to the swamp where she met her fate?

Likewise, when someone such as Mr. Clemens, who was thrown under the bus by everyone except his media constituency, denies use of HGH to the point of a comedy routine, it is worth pursuing. Also, when someone such as Lance Armstrong, who managed to have his media constituency and the gullible all wearing yellow “Live Strong” bracelets, is also under the bus by those swirling around him for crossing a line, well, it is worth it.

So, when and why exactly is it worth it? It’s worth it if the prosecutors and investigators are applying the same standards to Clemens, Armstrong, and even Anthony that they apply in those cases that never see a smidgeon of media coverage. This nation has as a cornerstone, “And justice for all.” Sometimes the justice comes from court proceedings. Sometimes the justice comes from having to be held accountable for actions after a long-term sports existence that found immunity from the rules because, well, “I’m me.” And the latter brings some justice even in mistrials and acquittals.

Mr. Mahler concludes, “Our nation’s values are not at stake.” Actually, yes, they are if investigators and prosecutors do not apply the same standards to all. The Barometer could walk Mr. Mahler threw a few low-profile cases that seemed to be a great deal of work for the end results. Mr. Mahler missed the big picture. Justice is this nation’s grand value. We pursue it even when it proves elusive. Heaven help us when we lose sight of that because we want to move on and “it’s just not that important in this case.” Justice is important in every case. We pursue that goal, regardless of cost, defeat, or, thankfully, the opinion of the masses and media.

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“Stealing is stealing whether you use a computer command or a crowbar, and whether you take documents, data or dollars. It is equally harmful to the victim whether you sell what you have stolen or give it away.”

United States Attorney Carmen M. Ortiz in announcing the indictment of formal Harvard ethics fellow Aaron Swartz for allegedly hacking into MIT’s massive journal and article data base and then turning the articles and journal over for free downloading. Mr. Swartz’s friend responded, in a not-so-apt analogy, “This makes no sense. It’s like trying to put someone in jail for allegedly checking too many books out of the library.”

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“Reliable operations come first, whatever the cost.”

Former BP CEO, Tony Hayward, in a deposition taken as part of the civil suits BP faces for the explosion at the Deepwater Horizon oil rig

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