by Steve Priest, President of Ethical Leadership Group, a Global Compliance Company

A US Department of Justice press release this month trumpeted the $1.34 Billion it has collected in settlements and judgments in the fiscal year ended September 30, 2008. "Now, more than ever, it is crucial that taxpayer dollars aren't lost to fraud," said Gregory G. Katsas, Assistant Attorney General for the Department's Civil Division. "The billion dollars collected this year is only part of the story. By rooting out fraud and vigorously pursuing it, the Department, with the help of concerned citizens who report fraud in hotline calls and in qui tam complaints, undoubtedly saves the country many times that amount in aborted schemes and misconduct."

The government notched its belt by noting cases against Merck ($361M), Cephalon ($258M), Amerigroup ($225M), Kyphon (now Medtronic Spine LLC) ($75M), Staten Island University Hospitals ($74M), Lester E. Cox Medical Centers ($60M), Pratt & Whitney ($50M), PCC Airfoils ($2M), St. Joseph’s Hospital of Atlanta ($26M), Bechtel + PB Americas ($23M US and $40M Mass.), and CVS/Caremark ($21M). Most of these cases originated years earlier, so for those students of the field these are old news.

What is most notable about this press release, however, is the extent to which the DoJ celebrates the role of relators in these cases. Relators are the individuals, usually employees but sometimes contractors or other informed (or semi-informed) parties, who file suit on behalf of the government against those who have fraudulently claimed federal funds.

Assistant Attorney General Katsas paid tribute to Senator Charles Grassley of Iowa and Representative Howard L. Berman of California, sponsors of the 1986 amendments to the False Claims Act. "Without this important legislation strengthening the Act and, in particular, the qui tam provisions which encourage private citizens to uncover government fraud, such recoveries would not have been possible."

The DoJ highlighted the fact that almost 78 percent of this year's recoveries were associated with suits initiated by relators. They celebrated that relators received over $198 million dollars. And in most of the cases cited above, they noted the amount the relator received. (e.g., Amerigroup $56M, Merck $46M).

We don’t quarrel with the ultimate goal of the Department of Justice to minimize fraud against taxpayers. Indeed, that is one of our goals too. However, as a result of our fifteen years of work in the field, we know about the ethics and compliance efforts of some of the companies on the DoJ list. While no individual or company is perfect, some of these programs are quite good. And we wonder whether the companies involved were given the opportunity to put their own houses in order. Did these relators give the internal systems a chance? Or were they so tempted by the multi-million dollar lottery ticket offered by the government that they did not use the internal helpline or other internal systems?

That is a frightening thought for companies trying to do the right thing. Here’s one more: this press release came from the DoJ during an administration where deregulation was the animating philosophy, at least for a long while. What happens next year?

I humbly suggest that it is time to do a thorough examination of your compliance and reputational risks. A pretty small price to pay vs. the alternatives. Please contact me at steve.priest@ethicalleadershipgroup.com if you have any questions about conducting a forward looking risk assessment.

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by Steve Priest, President of Ethical Leadership Group, a Global Compliance Company

Lynn Turner, former chief accountant at the SEC, believes that effective ethics and compliance programs need to ensure that their whistleblower program has sufficient independence. Mr. Turner’s idea of independence departs from current practice by most major firms. In a September 2008 keynote speech to over 500 ethics and compliance professionals gathered at the annual meeting of the Ethics and Compliance Officer Association, Lynn Turner said flat out that “the whistleblower system cannot report to the General Counsel. It needs to be independent—and report directly to the Audit Committee.”

Our research indicates that about half of the ethics/compliance programs in corporate America report up through the Law Department to the General Counsel. This includes the whistleblower/hotline/helpline component. Yet Mr. Turner said “Employees don’t trust it (whistleblower line) if it goes to the General Counsel.” He continued “If it (whistleblower line) doesn’t report to the Audit Committee, it is worthless.”

Lynn Turner is not the first to make this argument. It was probably made most colorfully by Senator Charles Grassley in 2003 when he was corresponding with the CEO of Tenet Healthcare about an investigation his Senate panel was about to launch. “As general counsel, Ms. Sulzbach zealously defended Tenet against claims of ethical and legal non-compliance, e.g., the April 2001 qui tam suit, while as chief compliance officer, she supposedly ensured compliance by Tenet's officers, directors and employees. It doesn't take a pig farmer from Iowa to smell the stench of conflict in that arrangement.”

It is a curious fact. Five years after Grassley, in the wake of unprecedented scrutiny on conflicts of interest within corporations, half of our top companies leave themselves open to the criticism of people like Charles Grassley and Lynn Turner.

Are you open to this criticism? Do the benefits of having legal oversee ethics and compliance outweigh the risks? If you and senior management have not had this discussion, perhaps now is the time.

If you would like my assistance or that of another experienced professional at ELG to help you assess the pros and cons in structuring your ethics and compliance program, please let me know.

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by Steve Priest, President of Ethical Leadership Group (a Global Compliance Company)

In his keynote address to the Ethics and Compliance Officer Association in September 2008, Lynn Turner constructed his own “Seven Steps” to an effective ethics and compliance program. Lynn is worth listening to because he’s not an ethics and compliance “insider,” nor is he an attorney. In these times of financial turmoil, many in Washington and Wall Street pay attention to what he has to say.

One would think his accounting expertise might lead to seven steps quite different from the hallowed US Sentencing Guidelines elements. Yet most of his seven steps are unsurprising—indeed quite traditional.

1. Leadership matters. Watch what people do, not what they say.
2. The Code of Conduct should be high quality, including compliance, enforcement, and accountability for those who observe wrongdoing to do something about it. It should also be certified annually.
3. Establish accountability by having real enforcement and sufficient punishment for wrongdoers.
4. Train everybody—including the Board of Directors and senior leadership.
5. Ensure the whistleblower program has sufficient independence.
6. Engage the Board of Directors in the program.
7. Make sure the program includes incentives and compensation in its work—it should help employees avoid temptation.

On their face, most of Lynn Turner’s seven steps are non-controversial. They echo the Guidelines elements. One, however, is interpreted in a way that departs from many in the ethics and compliance field. I’ll discuss this step—whistleblower program independence—in a blog later this week.

About Lynn Turner
He was the chief accountant at the SEC, serves on the Standards Advisory Group of the Public Companies Accounting Oversight Board (PCAOB), a member of the FASB Investor Technical Advisory Committee, and on the Treasury Committee on the Auditing Profession. He also serves on the board and audit committee of the Colorado Public Employees Retirement Association.

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A title as vast and presumptuous as this one cries out for a weighty book of several hundred pages. It will have to wait, because the Supreme Court decisions impacting organizations and workplaces merits more immediate attention from ethics and compliance practitioners. The key cases:

MetLife vs. Glenn
In this case, a corporation that both pays for and administers a benefit plan is found to have a conflict of interest that may weigh against the firm when deciding on the legality of benefits decisions. “The employer’s fiduciary interest may counsel in favor of granting a borderline claim while its immediate financial interest counsels to the contrary,” wrote Justice Breyer explaining the conflict. The conflict may be viewed less negatively if the firm has addressed it by “walling off claims administrators from those interested in firm finances, or imposing management checks that penalize inaccurate decision making irrespective of whom the inaccuracy benefits.”

Meacham v. Knolls Atomic Power Laboratory
The Court decided that the burden of evidence that an employment action was done for reasons other than age rests with the employer not the employee. In this case, 31 people were laid off by a federal laboratory; 30 were over the age of 40. The Court decision means that the laboratory—and other employers—must prove non-age related reasons for decisions such as this.

CBOCS West v. Humphries and Gomez-Perez v. Potter
These two cases are the most important of all for ethics and compliance officers, for they appear to recognize that U.S. civil rights legislation broadly prohibits retaliation against private and public sector employees for raising concerns about employment issues that may be viewed as discriminatory. In CBOCS, a black manager at a Cracker Barrel claimed he was fired for complaining about discriminatory treatment against other black managers. In Gomez-Pearce, an employee at a federal agency claimed he was retaliated against after she complained about age discrimination. Solid Court majorities in both instances recognized the rights of the plaintiffs.

In the face of these decisions, what can organizations do to protect themselves? The answer is simple, and no longer naïve: Do the right thing in the first place.

Ethics/compliance officers can and should be involved in making sure that their employer has reviewed structures for conflicts of interest, and put steps in place to reduce or eliminate them. (MetLife vs. Glenn) Ethics/compliance officers—not just employment attorneys—should be involved in thinking through large scale downsizing or layoffs, so that employees perceive fair criteria as guiding these difficult decisions. (Meacham v. Knolls Atomic Power Laboratory) And ethics/compliance officers not only have a critical role to play in fostering a culture of respect and non-discrimination, but in protecting from retaliation employees who have the courage to raise issues. (CBOCS West v. Humphries and Gomez-Perez v. Potter)

It is not every month that the Supreme Court provides so many ways for ethics and compliance professionals to demonstrate value. This is not a Midsummer Night’s Dream, it is the real thing. Take advantage of it.

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I don’t pretend to be a saint (I couldn’t pull it off, in any event) but as I’ve gotten older, I’ve worked hard to be more tolerant of my fellow man. With one or two notable exceptions (I won’t tell), I try hard not to wish anyone ill. So it is with no great pride that I admit to not even trying to suppress a smile when I read in the July 10 New York Times that a prominent plaintiff’s class action lawyer, David Bershad, pled guilty to conspiracy to provide illegal kickbacks to class action plaintiffs.

Let me explain what this is about. America’s legal system allows lawsuits – called class action suits – to be brought on behalf of a large numbers of plaintiffs where the individual claims would be too small to make it worthwhile for individual plaintiffs to bring their own suits. So, for example, if you paid $2 more than you should have for tube of toothpaste because the toothpaste companies conspired to raise prices, you’re not likely to sue the bastards yourself – why bother. But you can be a member of a class of plaintiffs, represented by one or more lawyers who are supposed to represent your interests. You don’t have to pay the lawyers, but you do get to share in whatever is recovered, or so the story goes.

Continue reading "Lawyers, Ethics and Karma, Oh My" »

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Most Codes out there—including the many we have helped write—often have a phrase like “Violations of the standards in this Code may result in disciplinary action, up to and including termination.” By this we have always meant “termination of employment.”

The Chinese have a different interpretation. They mean termination as in “The Terminator.” The title in a story from the July 10, 2007 New York Times says it all: China executes former food and drug regulator.

This is not the first time the Chinese government has attempted to send a message that corruption was punishable by death. Last year four bank employees were executed. And yet Transparency International (link) lists China as #70 in the perceptions of corruption index, behind clean countries like Thailand and Columbia.

One would think that the threat of execution would diminish corruption greatly. Research in the U.S., however, finds that the likelihood of major punishment is more of a deterrent than the magnitude of such punishment. That is, if there is a 90% chance that I will be jailed for committing a crime, that is much more dissuasive than a .01% chance I will be executed.

And that’s the problem in China. Taking bribes is seen as a low risk, high reward endeavor. And heretofore there has been little social disapproval to exert informal control.

Which brings us back to your company. Do employees believe that those who do something wrong receive discipline? (Not necessarily termination, in either sense of the word . . .)

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All the ink that's been spilled during the past month over the H-P scandal has caused many people inside and outside of the ethics profession to scratch their heads over many things. One of the big head-scratchers revolves around the concept of "pretexting." This concept was new to me, as I'm sure it was to most of you.

Its emergence caused me to wonder, first off, what this word could possibly mean and, more importantly, why it was created. This, in turn, inspired me to write an article that was recently published in Ethical Corporation Magazine's web newsletter. You may find the article interesting or thought-provoking or infuriating or all of the above. Here's the link. Look it over if you have a moment, and let me know what you think.

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And so another head rolls at the top of another pharmaceutical company. On September 12, the Board of Bristol-Myers Squibb accepted the recommendation of a federal monitor overseeing its business, and showed CEO Peter Dolan the door. What’s noteworthy about this event (at least to the lawyers amongst us) is that Mr. Dolan’s head was accompanied on its journey by the head of Bristol-Meyers’ general counsel, Richard K. Willard. When lawyers start being shown the door, I sit up and take notice. Particularly when the lawyer is someone with the stellar reputation of Mr. Willard.

Continue reading "Bristol-Myers Squibb – A Cautionary Tale for In-House Lawyers" »

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After marathon board discussions, the chairwoman is out. The board member who disclosed information is out. Now Attorneys General and lawyers are swooping in.

You get the news and standard analysis of this story—front page in many cases—from the New York Times, Wall Street Journal, Financial Times, Newsweek, etc. In my last blog about Hewlett Packard, I outlined seven main issues for exploration from the perspective of a business ethics practitioner. An alert ethics officer added an eighth “What is the role of an ethics officer in all of this?” And a lawyer added a ninth “What about the job of the lawyers?” Let’s look at a few of the issues today.

Continue reading "Exploring the issues at Hewlett Packard" »

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As predicted in yesterday’s blog, the story at Hewlett-Packard continues to unfold, making front page news in the New York Times and the Wall Street Journal. As we often do when dissecting a case study with a corporate audience, let’s step back and identify the issues in this case. Over the next few blog entries, we will examine these issues:

Continue reading "Dissecting the issues at Hewlett Packard" »

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In a story breaking today, but sure to reverberate in corporate boardrooms for months to come, Hewlett Packard acknowledged in a filing to the SEC today that California’s Attorney General is investigating the firm for the way it conducted an investigation into its own Board members. The preliminary story is available at Newsweek online. (http://www.msnbc.msn.com/id/14687677/site/newsweek/)

Continue reading "H-P investigates own Board Members for leaks" »

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Last week the Wall Street Journal ran a story about a Chicago lawyer named Matthew Farmer, who quit the prestigious law firm of Holland and Knight because he believed a senior partner inflated his billable hours on client invoices. (“Lawyer's Charge Opens Window On Bill Padding, August 30, 2006).

Continue reading "Labor Day Reflection: A Fair Day’s Pay for Lawyers and Consultants" »

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In another unbelievable episode from the nonprofit world, an ex-University President indicted for improper use of university funds is now teaching . . . . Accounting!

Continue reading "Do as I say, not as I do (the Texas Southern University version)" »

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In a scandal of incredible magnitude, Kim Woo Choong, founder and long time CEO of the giant Korean conglomerate Daewoo, was convicted this week of fraud and embezzlement.

According to a New York Times story, the presiding judge wrote in his verdict: "A severe punishment is inevitable for Mr. Kim because he abandoned corporate ethics and circumvented the law, pushing Daewoo Group to bankruptcy." The detailed list of issues includes helping to falsify Daewoo's books to inflate its assets 41 trillion won. This is roughly $43 BILLION US dollars at today's exchange rates.

Continue reading "Daewoo Founder Makes American CEO Scandals Look Minor League" »

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I tried to restrain myself. What more could be written about Enron and Lay and Skilling in the week of the conviction of the devasted duo? The news dominated most news outlets, although a few were still relentlessly covering the critically important news out of American Idol.

In the end, it was the commentary out of two of my favorite newspapers, The Wall Street Journal and The New York Times, that compelled me to add my few cents. From totally different angles, both used Enron to call into question the efficacy of the Sarbanes-Oxley Act.

Continue reading "Enron: Shorthand for Scandal, Foil for Polemicists (including me?)" »

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Boeing's $615 million dollar settlement with the government was prominently featured in the news this week. Today, it even made it to the editorial page of the Chicago Tribune, where Boeing CEO Jim McNerny's speech to the Conference Board's Business Ethics Conference (which we organize) was dissected in an editorial titled "The cost of corrupt business."

Continue reading "The Cost of Corrupt Business" »

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Finally. After years of reading about Jeff Skilling and Ken Lay, I attended a bit of the trial today, Lay's last day on the stand. We have all read a lot about the trial, so no boring readers with that. But I did leave with a few questions:

Continue reading "Skilling and Lay Trial with My Own Eyes" »

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I have had the honor of directing The Conference Board's annual Business Ethics and Compliance Conference for the past five years. (Truth be told, the last few years my colleagues Carrie Penman and Ed Petry have done 98% of the work.)

This Conference has been held (almost) annually in New York City since 1988. This year, for the first time, we are holding two conferences: one in La Jolla ended today, and one in New York starts May 10.

At the session today, we surveyed 50 ethics officers about the trial of Jeff Skilling and Ken Lay.

Continue reading "Ethics Officers Predict Lay and Skilling Going to Jail, and Deserve It" »

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