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Archive for the ‘Walmart’ Category

A year ago we posted a number of predictions for 2013 and many proved accurate. One area in particular may be taking a significant turn for the better.

Our predictions for 2013 were:

Rebekah Brooks will go to trial. JPMorgan will further increase its reserve for bad trades by “The Whale.” No one in the investment banking industry will go to jail for anything other than insider trading. Goldman Sachs will continue to be bad. The global economy will continue to improve. Slowly. More dirt will come out regarding Walmart’s non-US operations. Somewhere in the US a bank will go under.

And there will be at least one big sex scandal.

What Did We See In 2013?

Ms. Brooks is on trial, JPMorgan did have greater Whale damage (along with several other huge financial settlements related to its business practices and flawed oversight), and several people are going to jail or being strongly pursued over insider trading. I won’t comment on the moral state of GS. The global economy has survived and is improving. Slowly. And without doing the research I am quite certain that at least one US bank somewhere was taken over by the FDIC.

I missed on Walmart’s non-US operations and a big sex scandal.

Yet the most significant change by far in terms of the financial industry is that the SEC, under new leadership, appears to have become more dedicated to putting some people in jail.

At the end of November 2012, SEC chairwoman Mary Schapiro left that office and was replaced in mid December 2012 by Elisse Walter, an SEC commissioner. Walter was an appointment by the president, who then nominated Mary Jo White as the chair. White was confirmed by the Senate and was sworn in on April 10, 2013.

Chairwoman White lost no time in tackling the challenge of prosecuting people in the financial industry. On April 22nd she named George Canellos and Andrew Ceresney Co-Directors of the agency’s Division of Enforcement. Canellos had been Deputy Director and then Acting Director of the division. Per the agency’s press release, Ceresney “served as a Deputy Chief Appellate Attorney in the United States Attorney’s Office for the Southern District of New York, where he was a member of the Securities and Commodities Fraud Task Force and the Major Crimes Unit. As a prosecutor, Mr. Ceresney handled numerous white collar criminal investigations, trials and appeals, including matters relating to securities fraud, mail and wire fraud, and money laundering.”

In particular White appears not interested in settlements that involve a fine with no admission of wrong doing. On her way in the door she got the board of the SEC to overturn a settlement with a hedge fund manager that included a no admission of wrong doing. Soon after, the individual involved signed a new settlement in which he admitted to most of the agency’s charges.  Later in the year, JPMorgan Chase reached its first settlement under the new leadership and it too included an admission of violating certain securities laws.

An article by Sheelah Kolhatkar in Bloomberg’s Business Week in mid October recaps this sea change and quotes Mr. Dennis Kelleher, president of Better Markets. “Mary Jo White has clearly changed the tone, and what she’s had to say is encouraging to anybody who wants the SEC to not only be successful, but be restored to its storied place as a protector of investors and markets.”

That’s the real story for investors coming out of 2013 and we look forward to more significantly stronger settlements in the year ahead.

Why this is important

Readers of this blog know that when it comes to ethical business behavior there is one key element that so often is overlooked to our detriment: the impact of corporate and industry culture on individual behavior. In the investment banking industry we have seen a cross company, industry level trading culture that has not only violated any sense of fair play and decency but has had tremendous real dollar impact on the global economy and investors’ trust. Alleged collusion on Libor rates was topped by collusion on foreign currency exchanges. Highly risky collateralized debt obligations were packaged and sold while the bankers made mockery of their  clients and customers. Massive bets were placed on global interest rates in a game of “top gun” between traders in different organizations.

This environment at an industry level makes it difficult for a CEO such as Jamie Dimon to totally manage his organization’s (and shareholders’ and customers’) risk. Mr. Dimon is doing all the right things in coming to relatively quick settlements and pledging to install new processes and oversight within his bank. I respect what he is doing. Yet until the industry as a whole changes its macho/top gun culture we global citizens are  not safe.

If there is one way to change that macho/top gun culture it is to prosecute, convict and sentence to jail a sufficient number of egregious individuals that the investment banking and trading community sobers up.

 
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The Wrapper On 2012

What a year it was. I started this blog and its associated Twitter account, @ethicsbite, in March and since that time have covered and commented on an amazing number of stories. When I scroll down the list of tweets I realize first hand the extent of ethically questionable (and many times illegal) corporate behavior in our country. Ponzi schemes, insider trading, money laundering and (in the UK) phone hacking are among the illegal. Providing financial advice to clients while your own firm profits by the reverse position is unprofessional. Manipulating the rate determination for an international banking benchmark is likely a violation of regulations. I’ll stop there as the full list would no doubt cause my readers to move on. So we’ll switch to sex.

The Petraeus sex scandal seemed to dominate the corporate ethics news at the end of the year. The New York Times story regarding Walmart’s Mexico operations was more significant in scale.  But all of that was eclipsed by juicy, titillating tales from Washington, Tampa and Afghanistan.

2012 Awards

In addition to being amazed at the plethora of unethical activity, I have marveled at the crassness of the people involved. One has to wonder how they would explain their actions to Mom.

In terms of sheer and utter crassness, the 2012 award truly has to go to the News of the World, whose employees allegedly hacked into the cell phone of a young British girl who had disappeared, then proceeded to delete some of the messages on her cell phone so they could capture potential new incoming messages. Her parents detected that something was going on and informed the police. That case led to the demise of one Rebekah Brooks, a Rupert Murdoch “protégé” and the editor of News of the World. Ms. Brooks and her husband’s relationship with David Cameron, the British Prime Minister, tainted 10 Downing Street and created a political situation that could not be ignored. As the investigation continued, Rupert found himself testifying at Parliament and Ms. Brooks was formally charged in May, together with her husband and four others, with conspiring to interfere with the investigation. She allegedly attempted to carry off the evidence in boxes she took out of News of the World’s offices. Moreover it has turned out that phone hacking may have been a relatively common tool at News of the World as close to 200 individuals, many of them celebrities and political figures, have filed suit over the hacking of their personal cell phones. News of the World was shut down by Mr. Murdoch and he subsequently re-organized the News Corp. entity.

A close second place in crassness would be Chesapeake Energy’s founder, Aubrey McClendon. Mr. McClendon showed little bounds in his use of the company’s money and making a name for himself with it. From such relatively small amounts as corporate payment of his personal staff (to be reimbursed at year end without interest on the amounts advanced) to the millions of dollars he authorized be invested in a local NBA team and the construction of a shopping mall that just happened to have eateries owned by Mr. McClendon, the CEO continually used corporate funds to “match” expenditures from his personal wealth to foster his interests. Chesapeake by this time was a publicly held company traded on the NASDAQ and the CEO’s use of money in this manner should have been overseen by the Board. But as is often the case, the Board was beholding to the CEO.  Chesapeake’s stock fell on bad times (from around $34 on 8/1/2011 to around $17 on 12/14/2012), four new independent board members were elected and McClendon was stripped of his Chairman title. But those who paid the cost were the shareholders, of course.

What Will We See In 2013?

Here are our predictions: Rebekah Brooks will go to trial. JPMorgan will further increase its reserve for bad trades by “The Whale.” No one in the investment banking industry will go to jail for anything other than insider trading. Goldman Sachs will continue to be bad. The global economy will continue to improve. Slowly. More dirt will come out regarding Walmart’s non-US operations. Somewhere in the US a bank will go under.

And there will be at least one big sex scandal.

As the French say, “the more things change, the more they stay the same.”

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Corporate ethics news the past few weeks has been just like a soap opera.  Here we go.

Walmart:  Two congressmen announced that they will launch an investigation into the bribery allegations reported by The New York Times. The Washington Post reported that the federal Department of Justice has been investigating this case since last December. And a major pension fund has filed a suit against the company, claiming “gross misconduct” by the board of directors and executive officers.

BP’s Deepwater Horizon Gulf of Mexico Oil Spill: A former BP engineer was arrested for obstruction of justice. I believe this is the first BP (ex) employee placed under arrest in connection with the oil spill.

News Corp. Phone Hacking Scandal: Testifying under oath, Rupert Murdoch dismissed phone hacking as a “lazy way of reporters not doing their job properly.” He apparently didn’t comment on whether or not it was illegal too.

Chesapeake Energy: One hardly knows where to start on this matter as it is far more complicated than a simple case of allegedly violating the Foreign Corrupt Practices Act. Chesapeake Energy’s co-founder and CEO, Aubrey McClendon, was found to have taken out loans against his personal interest in the company’s various oil and gas wells, as reported by Reuters. We are not talking about borrowing money to buy a house – this was about $ 1.1 Billion with a B over 3 years. This in itself raises various questions, not the least of which is how much does one have to spend per day to need $1.1 Billion in only three years. But the more important questions are how did the board allow this to go on? Where was the oversight? Chesapeake was no longer a privately held Oklahoma based oil-catter where co-founder loans against interest in well sites are just part of the glamour. It became a Publicly Held company, with stock traded on a major exchange.

But the story gets more juicy by the day. First the company argued that there was no conflict of interest as the company had first lien on the wells and McClendon’s loans were his own problem. Sure. So I am the CEO making decisions every day as to which wells to invest more money in and which to shut down and the fact that I have over a BILLION dollars of personal debt collateralized against my ownership interest in those same properties is not a conflict of interest? Holy Muckraker!

Then it also turned out that

  • McClendon ran a separate business of his own, a $200 million hedge fund that, guess what, traded in the very same commodities that are produced by Chesapeake.
  • McClendon sold $88 million of his interests in company wells to Wachovia for use as investment vehicles only a few weeks after committing (with his CEO hat on) to a similar deal with Wachovia for $600 million of company well interests.

Of course none of these activities were conflicts of interest either.  Now the company has taken some action with respect to its co-founder and CEO. They have removed him from the Chairman of the Board position and they have eliminated the program under which the two co-founders could participate in direct investment in company wells.  In the meantime, the company has announced that the SEC has begun an “informal inquiry” with respect to both McClendon and the company.

Commentary: If I had ever done anything like this at any company I have worked for I would have been out the door that very day. Where is the board? If I had ever spent as much time running an outside business from my employer’s office as McClendon allegedly did with his hedge fund, I would have been dismissed immediately. He even had the hedge fund’s mail coming to his Chesapeake office. Where is the board?  I’ll tell you where they are going to be – spending lots of hours in their attorneys’ offices.   As a dear departed friend of mine used to say, “It’s better than TV.”

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Walmart was in the news this week big time. First an extensive report in Sunday’s New York Times examined the company’s Mexico subsidiary, painting a picture of corruption and bribery related to the approvals required for opening new stores in Mexico. The article presented the case that the top echelon of Walmart initially investigated the matter then decided to turn the case over to the very executive(s) who were being investigated by their internal team. The net result was that nothing was ever released on this story until the Times’ investigation, which took place a few years later.

Faced with the Times’ story, the company announced it was re-opening the examination. Significantly, the key figure in the Mexico saga, Eduardo Castro-Wright, then chief executive of the Mexican subsidiary, was promoted to be in charge of all of the U.S. stores and is now a Vice-Chairman of the corporation, according to the New York Times.

Now two Congressmen have decided to launch an investigation and the Washington Post reported that Walmart participated in “an aggressive and high-priced lobbying campaign to amend”  the Foreign Corrupt Practices Act, the very law that applies to this situation.  The Post also reported that Walmart may have been under investigation by the Department of Justice since late last year.

This will be a significant story in the months ahead. Stock in the company’s Mexican subsidiary was down around 5% on the Monday after the New York Times broke its story.

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In this weekend’s Sunday New York Times, the lead article concerns an investigation of bribery and corruption in Wal-Mart’s Mexican subsidiary. Read that article and then read this one from Sports Illustrated on the Jerry Sandusky scandal*.

The Sandusky Penn State scandal and this expose involving Wal-Mart are just two of many examples of the impact of corporate culture on the ethical behavior of individuals and the organization itself. In both cases, when faced with the fundamental question of “What is the ethical thing to do?” executive management appears to have decided to “protect” the organization rather than report the situation to law enforcement. In Penn State’s case that would have been the local police; in Wal-Mart’s case it is the federal government. I placed the word “protect” in quotes because in so many of these major scandals the truth eventually surfaces and more damage has been done to the organization by that very attempt to protect than if they had turned the issue over to legal authority at the outset. The same is true of the major church who hid its child abuse problem from view for decades only to have it out in the open in the end. So when someone says to you “we must protect the organization” race to the nearest exit. In terms of keeping secrets, we have been in the digital age ever since Ollie North’s attempt to erase his emails failed.

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*btw, Sports Illustrated had the best investigative journalism article on that scandal.

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