Monday, March 27, 2000

business ethic issues

At this time, United States is experiencing many economic difficulties. It is a great time to be studying business ethic issues. In this paper, I want to explore and analyze why assumedly competent CEOs end up damaging the very company, including the company’s stake holders that the CEOs should be representing. I plan to construct a personal profile on each of the CEOs. Under each profile, I will briefly review their accomplishments, career history and provide information on their illegal activity or presumably unethical business practices that have or possibly will end their productive life as they know it. I will also provide data that is presently provided at this time, on how and what the legal system is doing to convict these CEOs. Next, I will comment on the ethical issues that were created by these CEOs. Finally, I will provide some scenarios that I believe could have been done to possibly prevent the corruption in the first place or at least lessen the impact. The CEOs that I will be focusing on, in this paper, will be the following: Richard S. Fuld. Jr. of Lehman Brothers, Tom Petters of Petters Co., John Thain of Merrilll Lynch which merged into Bank of America and Bernie Madoff of Madoff Investment Securities.
I chose unethical business practices as an ethical issue, because most of these CEOs, that I mentioned previously, are essentially immoral. It is so hurtful to people and stakeholders when the CEO endorse deceptive activities. For instance people lost as much as 33-50% of their life savings, because a couple of these CEOs, especially Bernie Madoff and Tom Petters, found a way to take advantage of their trust. The other two CEOs, Mr. Thain and Mr. Fauld Jr., avoided transparency affecting the well-being of their company's stakeholders. The main question that needs to be raised, is how these CEOs practiced their unethical behavior for so long. You wonder about the complacency of the company as a whole. Is it possible that the CEO’s honesty, fairness, and integrity were misjudged by the stakeholders who trusted their CEOs to manage their money or conduct their business in an ethical responsible manner? The answer to this question is an obvious yes! [The Techniques of Inner Leadership, pp, 5, 9, 12, 205, 206, 221, 225, 2003]
In this paper, I will show by examples, how the actions of these CEOs has negatively affected stakeholders and employees. This paper is about the illegal acts of the CEOs that either wrongfully use the tax payers money or deceived people thorough so call ponzi schemes. The CEOs should have followed the rules especially Richard Fuld Jr, who committed a transparency issue prior to Lehman Brothers declaring chapter 11 and was unable to reorganize with no money. John Thain, Merrill Lynch CEO, who also had a transparency issue, padded his office, paid bonuses to his executives and himself which were exorbitant prior to a merger. Bernie Madoff had a ponzi scheme all over the world worth $50 billion. A financial investigation by Harry Markapolos warned the SEC about Mr. Madoff in the prior 10 years and SEC didn't do anything until it was too late. Tom Petters was a local CEO who also used a ponzi scheme to line his pockets. A needed strategic tactic is in order for the Securities and Exchanges Commissions to have quicker data collection of these CEOs. [The Techniques of Inner Leadership, pp, 5, 9, 12, 205, 206, 221,225, 2003]
The #1 CEO Bernie Madoff, who, at the present time, has already admitted using a ponzi scheme in order to obtain large sums of money for fraudulent investments. He defrauded investors approximately 50 billion dollars in the largest swindle in Wall-Street history. Madoff had a degree in Political Science, and attended a short time to Brooklyn Law School, but didn't finish. Madoff is an American businessman and former NASDAQ stock exchange chairman. He served as the Chairman of the Board of Directors and Board of Governors on the NASD. He founded the Bernard L Madoff Investment Securities LLC in 1960 and was chairman since 2007. By the 1980s, Madoff Securities handled approximately 5 % of trading of over- the- counter stocks on the New York Stock Exchange. In 2000, Mr. Madoff took advantage of the internet as a vehicle to advance his trade. Madoff Securities became one of the top ranking trading and securities firms in the nation. Madoff was masterful in his scheme. His success with dealing with Non-profit charities, the elite, while investing their charitable funds, keeping secretive and the knowledge of tax law helped him keep his old ponzi scheme a secret for all this time. The charities lost millions in form of an affinity fraud. Mr. Madoff was not a new name for the Security Exchange Commission and regulatory authorities. He was investigated earlier in 1992 for reportedly being involved in illegal activity with Madoff Securities LLC before. It all started in 1992 when SEC invested one of Madoff’s feeder funds, Avellino & Bienes who didn’t invest in anyone, but Madoff. Bernie Madoff denied that he knew about the illegal activity so he wasn’t arrested. In May 1999, a financial analyst, Harry Markopolos complained to the SEC that ‘he questioned the legally of how profits were made per Madoff’s claim when using Madoff investment strategy.’ Then in 1999 and 2000, the SEC found that the firm was hiding customer orders from traders and then Madoff took corrective measures. The SEC made two inquires at that time; however, they were unable make connections to illegal activity. Again, in 2005, the SEC’s investigated Madoff and found him in violation of three activities which were as follows: ‘the strategy used for customer accounts, the requirement of brokers to obtain the best possible price for customer orders, and operating as an unregistered investment advisor.’ For this misdeed, he only received a hand slap and SEC findings were not made public. Also, in 2005, again ‘Markapolo sent the SEC a detailed 7 page memo entitled “The World’s Largest Hedge Fund is a Fraud”.’ The SEC has been accused in missing many red flags; whereby, ignoring tips that were sent to them and not probing more. When Barnie suggested to his sons to pay off 200 million dollars in assets owned by the firm two months ahead of schedule, the sons questioned their father about this, at which time, the father admitted that the whole asset management arm of Madoff Investment Securities was a ponzi scheme. It was at this time December 10, 2008 his sons told the FBI about their dad’s ponzi scheme. It was the beginning of the end of Madoff’s dynasty. At present, he is still out on bail for $10 million, and is on house arrest and wearing an ankle bracelet. However, as of March 6, 2009, Bernie has pleaded guilty and is still waiting for sentencing. (Wikipedia, 2009) (infoplease, 2009) (New York Times, 2009)
Another charismatic person, similar to Bernie Madoff is Tom Petters, CEO and Chairman of Petters Group Worldwide. Tom Petters only had a high school education. His company had offices in North America, South America, Asia, and Europe. He started out his career by selling electronics to college students. He eventually moved to Colorado to manage a chain of electronic stores that eventually went bankrupted. He moved back to Minnesota and incorporated a solo operation called Amicus Trading Wholesale Company which eventually was renamed to Petter's Company. Mr. Petters was known for buying and reviving ailing companies that included Sun Country Airlines and Polaroid Corporation. Some of his awards where Corporate Leader of the year, 2001, Distinguished Humanitarian Award, 2003, and Big Brother, Big Sister Odyssey award in 2005. In 2004, his son was murdered in Italy. Shortly after, Tom Petters established the John T. Petters Foundation and provided endowments to universities throughout the United States. One interesting endowments went to John T. Petters Center for Leadership, Ethics and Skill development in the Richard T. Farmer School of Business of Miami University.
Tom Petters, CEO of Petters Company of Minnetonka, Minnesota was indicted for fraud which he was allegedly in a large scale ponzi scheme; whereby, new investors’ money was used to pay older investor's return. Tom Petters was apparently fabricating documents in order to obtain billions of dollars in loan from various investors and this also included hedge funds. He would use falsified purchase orders to nonexistent purchases of merchandise. Apparently the story is he took a new lender's loans to pay off outstanding loans or role in new loans from the same lender. He also took the proceeds from these loans to subsidize his own life style or funneled the money from these loans into his own company. The US Attorney's Office charges Petter with wire and mail fraud, money laundering, and obstruction of justice. Tom Petters may end up in prison for the seven counts of fraud which brings twenty years imprisonment for each count. To this date, Petters is being jailed without bond until his pending trial. Since his arrest, several Petters entities including two companies are filing for bankruptcy. (Hudgefund Law Report, 2009) (UofM, 2008)
John A. Thain is Chairman and CEO of Merril Lynch Company and was on the NYSE EuroNext Inc from January 2004, as well as Co-CEO of Goldman Sachs Group Inc. He received a BS degree from Massachusetts Institute of Technology, and a MBA from Harvard University. He is a member of the MIT Corporation, the Dean's Advisory Council – MIT/Sloan School of Management, INSEAD (US National Advisory Board), the James Madison Council of Library of Management, the US Stock Exchange prior to Merrill Lynch. John Thain was designed to become a present of the global banking, securities, and wealth management of the merger, but mysteriously resigned. Bank of America lost interest in Mr. Thain when he had mounting losses at Merrill. Since December 2008, he wanted a bonus of 10 million dollars for compensation on the last day before the merger, yet never obtained that bonus. When he went to Merrill Lynch, he was given a 15 million dollar sign-on bonus, 50 million dollars a year and then based on the company’s stock price, would be paid 120 million dollars a year. In 2007, Mr. Thain was the best paid out of the S&P 500. After the Bank of America resisted his request of 10 million dollars for merger compensation, he dropped his request in December 2008. When John Thain left, other executives left as well including brokerage chief Bob McCann, investment head Greg Fleming. Mr. Thain refurbished his office at a time Merrill Lynch was failing and along with the upcoming merger with Bank of America. He also paid himself and all his top executives a cushy bonus prior to leaving. He wasn’t transparent about his company’s collapse. The company was accused of artificially inflating the value of the Collateralized Debt Obligations (CDO) and other assets backed by the subprime mortgages; whereby, the company issued false and misleading statements about the bonds. (Wikipedia, 2009)
Richard Fuld Jr. was a CEO of Lehman Brothers who could face civil lawsuits for overseeing the bank’s collapse in Chapter 11 while transferring his 3.3 acre $13 million seaside home to his wife for $100. Richard Fuld Jr. earned a BS from the University of Colorado at Boulder in 1969 and his MBA from New York University's Stern School of Business. He trained at the Naval reserves Officer Training Corps and later became an Airforce pilot for a short time. Mr. Fuld Jr. joined Lehman Brokerage firm since 1969 as an intern and worked his way to the top and was known to pick up the company out of crisis four times prior to this event. Mr. Fuld. Jr. mislead investors in the state of the company prior to the Lehman Brothers’ collapse and the 700 billion dollar stimulus bill made to counter that. He was criticized for not being transparent on his failing bank to his stakeholders. (Wikipedia, 2009) (Reuters, 2009)
The facts are both Tom Petters and Barnard Madoff used large-scale fraudulent activity through ponzi schemes. Richard Fuld Jr. and John Thain both were not transparent in the well-being of their companies; whereby, has not only caused bankrupt, but also bailout issues to their companies. All of these CEOs were knowledgeable and experienced in their line of work; however, all the companies they worked for eventually went bankrupted. Not one of these CEOs had a conscience for their misdeeds. All of them didn't think twice in providing their financial needs first. So in other words, the greediness or ‘I deserve it’ attitude, became their philosophy instead of promoting ethical concepts such as the following: honesty, where stealing and theft is not a part of their makeup; fairness where having justice, equality, and morality plays in the forefront and lastly, integrity, where one is whole and sound; thereby, would not knowingly harm customers, clients, employees and other competitors through deception. Instead, all of these executives promoted unethical acts for greed, allowed their company to go bankrupt without transparency and finally for a couple CEOs, their willingness was to continue their fraudulent activities at all costs. Not even the Federal Sentencing Guidelines for Organizations (FSGO) or the Sarbanes-Oxley Act without the assistance of whistle blowers could have stopped them even though the SEC investigated the companies in question at prior times. (Business Ethics, pp 60-63, 2008) (Ferrell, O. C., LeClair D.T., Ferrell, L., PDF, 1998)
One ethical issue is executive compensation. Both Mr. Thain and Mr. Fuld Jr. had an extraordinary payout for their positions; whereby, the justification for the payouts where scrutinized by both the the media and the Congressional Panel. Secondly, the ineffectiveness of SEC monitoring the fraudulent activities of Tom Petters and Bernie Madoff without the use of internal reporting done by whistle blowers. Thirdly, the missing concepts of character in each one of these CEOs somehow were inhibiting good habits to be ethical. As in the quote from Admiral Larson, “true leaders know that characters is not about never failing; it is about never quitting the effort to be ethical regardless of the cost” (, 2008)
The primary alternatives for CEOs should have strong personal character in which they have moral values and ethical reasoning while living it and treat others the way they want to be treated. These CEOs have to have a passion to do right; whereby, they're able to face challenges and make tough choices with an ethical point-of-view. They also have to be proactive in which they are continuously reviewing potential ethical issue and trying to resolve it. They also have to have the stakeholders interest in mind where they're transparent and communicating to all about the status of their corporation. And lastly, they need to be role models for ethical behavior and they need to embrace an ethical culture in order for others to follow. “Leadership is a potent combination of strategy and character. But if you must be without one, be without the strategy” – General H. Norman Schwarzkopf, 1991 Gulf War. To apply to The Gramm-Leach-Bliley Act and Sarbanes-Oxley Act and have the SEC infiltrate faster an no procrastinating. Gramm-Leach Bililey Act was passed so that companies keep financial records and backups of those records else they face criminal charges. I believe the SEC should be more expedient and more aggressive when they have