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Companies Ignore Whistle-blower Protections

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Whistle-blowers are in the news more and more, but some organizations don’t seem to have caught up with the trend, or the fact that retaliation is illegal. They don’t seem to realize that negative reactions to a whistle-blower can make them look petty—and guilty.

Take two front page stories in our area newspaper on the same day this week. Both were about whistle-blowers who put their jobs on the line to come forward. One was fired, the other was suspended and later resigned.

In one case, The Journal News reported, a member of a New York town’s financial staff, the supervisor of fiscal services for more than 10 years, testified at a hearing that she notified several of her superiors that the town’s revenue projections were overestimated—on a financial statement needed for a bond application. She also reported improper money transfers—one made to the town supervisor. The woman was ignored, told to keep quiet, and eventually fired.

Not only did the town officials make no move to right the wrongs she reported to them, one official denied ever being told of potential corruption or fraud. Meanwhile, the town, which is also being investigated by the FBI, has filed perjury and other charges against this former employee.

The second newspaper article is about a former security expert at the Indian Point nuclear power plant in New York. Because he feared the plant was vulnerable to a terrorist attack, he voiced his concerns to supervisors. In June he was suspended.

He filed a 76-page lawsuit in the U.S. District Court alleging misconduct and retaliation against him. The Indian Point employee alleged that security was inadequate and that documents and internal reports were falsified.

Unfortunately these sound like other stories in the news over the past few years following the financial crisis. At Lehman Brothers, the company’s chief risk officer, Madelyn Antoncic warned Dick Fuld, the CEO, that their risk in mortgage-backed security bets was too great. Her warnings were ignored. Her reward was to be fired.

The knee-jerk reaction of many organizations seems to be; get rid of the employee, blame the employee and then go to court. It appears that the whistle-blower protections under the Dodd-Frank Act, such as prohibiting retaliation against whistle-blowers, is still a mystery to some organizations.

Fraud experts contend that the burden is on the organization to see that employees are comfortable in coming forward and that their concerns are addressed. They advise companies to have hotlines available for employees to provide whistle-blower tips—and to act on those tips.

Whether or not a company is guilty of fraud, firing an employee for coming forward can make the organization look guilty and cause a whole host of other problems, including risk to the company’s reputation. Public entities and corporations would do well to study Dodd-Frank and put a plan in place before an employee does come forward. Have organizations learned nothing from Watergate? The cover-up always leads to exposure of the crime.

Systemic Risk Management

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On the three-year anniversary of the Lehman Brothers bankruptcy — and with it, the beginning of the financial crisis that threatened a run on at least a dozen major global banks — a rogue trader was discovered to have defrauded his employer, the Swiss bank UBS, of nearly $2 billion.

What’s $2 billion between former friends, you might ask?

Indeed.

$2 billion isn’t going to bring down a bank of UBS’ size. $2 billion isn’t going to ignite another downward spiral of credit payments coming due. $2 billion isn’t going to hurt that badly, even if UBS is now reporting that the incident may cause it to go into the red for the third quarter.

So more than anything, what this undetected fraud highlights is just how poor the risk management still may be at one of the world’s biggest banks. And coincidentally — or perhaps not so much so — the head of risk for UBS was formerly the head of risk for Lehman.

“It’s astonishing given the technology, the systems, the emphasis on risk. UBS has been focusing on it, post-crisis they’ve put more focus on it than a lot of other banks,” the industry source said.

“I’m surprised that this many years after [previous rogue trader] Nick Leeson there are still the Jerome Kerviels of the world and now this one. How does a 31-year-old rack up a $2 billion loss without anybody noticing?”

Others said the crisis showed lax supervision at UBS and threw the spotlight on an industry that will always compel some staff to take excessive risks to keep ahead of rivals.

“No rogue trader works in a vacuum, and UBS’s management must have taken its eye off the ball to allow a trader to operate on this scale without sufficient supervision and without the systems to monitor his trades,” said Simon Morris, a partner at UK law firm CMS Cameron McKenna.

Worse still is the fact that UBS is unlikely to be the one isolated financial firm that has dragged its feet in implementing better protocols to avoid, or at least discover, threats. No, many of its peers are likely also not yet as far along as they should be — three years later.

Fortunately, some of the laws mandated by the Dodd-Frank financial sector reform act are starting to kick in. It remains to be seen if these new rules will help, but one of them mandates companies to create a plan that will help officials (namely, the FDIC) unwind and deconstruct complex transactions in the event they go belly up.

Submitting these plans, which have been called “corporate living wills,” is essentially giving the government “Tell Me How You Will Fail” blue prints.

The New York Times blog Deal Book breaks down the concept.

The basic idea is simple: big financial companies have to submit plans that explain how they would structure a future bankruptcy case or orderly liquidation authority proceeding if they were failing. The plans have to be written for two scenarios: one in which a financial institution alone fails, and one in which it fails as part of a broader crisis. In addition, financial institutions would have to disclosure their exposure to other significant financial companies.

The wrinkles start to develop when you see that the rules provide that the plans have to be made with an assumption of no governmental funding. That makes sense given how Congress has restricted the Federal Reserve’s §343 powers as lender of last resort, but it is not very appealing, especially for the systemic crisis scenario.

If not the government, precisely who is going to provide funding when the bankers are in severe trouble? And how precisely do you pay for a bankruptcy case — even a Chapter 7 liquidation case — with no funding? It probably involves the equivalent of leaving a failing bank in a vacant lot in Newark.

As Deal Book blogger Stephen Lubben notes, the schedule of this whole exercise means that finalized plans may not be on file with the FDIC until 2014. That, as well as more fundamental issues some have raised, make this an imperfect method to manage systemic risk in the financial system.

But considering that the government was making no attempt to manage systemic risk in any systematically way prior to the crisis, this can at least be considered progress.

As for whether or not it is a solution to the next global financial crisis that threatens to drag the world into a replay of the Great Depression, hopefully we will never have to find out.

Corporate Malfeasance From Enron to Lehman

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The world has seen its share of bad business ethics ever since citizens began offering goods or services for a stipend. The effects of such wrongdoings have been magnified, however, as businesses have prospered and the greed of some has grown. Greed which can sometimes drive people to forget their morals. Some may think of Lehman Brothers as the the worst case of corporate malfeasance to ever rock the business world, while others may claim it was Enron.

One website has published what it claims are the “10 Great Moments in Corporate Malfeasance.” I’m not so sure the word “great” aptly describes these 10 moments. I would guess “worst” or “reputation-ruining” would be more appropriate. Nevertheless, after introducing the piece with the Enron scandal, the site says “what follows are 10 more examples of what a person might do if given the chance to make more money.”

It lists pharmaceutical maker Roche (#10) as refusing to sell its HIV drug Fuzeon at $18,000 (what it was valued at by South Korean health officials) as opposed to $25,000. Even though the drug maker would still make a hefty profit, it refused to sell at the discounted price with the head of Roche’s Korean division claiming, “We are not in the business to save lives, but to make money. Saving lives is not our business.” That’s one people won’t soon forget.

WellPoint (#7) didn’t fair so well in the spotlight after the U.S. health care debate raged this year. It was found that the insurance company was severely abusing recission (the policy of finding ways to cancel insurance contracts). Whose contracts were they canceling?

Women who were diagnosed with breast cancer.

WellPoint was using a computer algorithm that automatically targeted them and every other policyholder recently diagnosed with breast cancer. The software triggered an immediate fraud investigation, as the company searched for some pretext to drop their policies, according to government regulators and investigators. Once the women were singled out, they say, the insurer then canceled their policies based on either erroneous or flimsy information. WellPoint declined to comment on the women’s specific cases without a signed waiver from them, citing privacy laws.

Getting to what most people think of when they think “corporate malfeasance,” the list mentions Goldman Sachs (#5) and its “doomed-to-fail” fund.

Investment banking house Goldman Sachs created Abacus 2007-ACI, a fund of mortgages it sold to investors. What Goldman didn’t tell Abacus fund investors was that the mortgages they were betting would succeed had been handpicked by a favorite Goldman investor to actually lose.

That investor was John Paulson, who eventually made $1 billion from the fund.

IBM (#1) and its tech support garnered the unattractive top spot on the list. The tech giant sold some of its earliest model computers to Nazi Germany, with its founder, Thomas Watson, receiving the highest honor the country could bestow upon non-Germans, the Grand Cross of the German Eagle.

IBM admits that the company’s computers were used to carry out the logistics of the Holocaust, but denies awareness of this use at the time.

Thankfully, there are organizations in place that act as watchdogs for major corporations. CorpWatch is a nonprofit that works to expose corporate malfeasance and “advocate for multinational corporate accountability and transparency.” And probably more well-known is Corporate Accountability International, an organization that has fought against abusive corporations for more than 30 years. They have an impressive track record; from the infant formula campaign of the late 70s and early 80s to the nuclear weaponmaker’s campaign that spanned a decade, they work to bring to light wrongdoings of big businesses. Something Lehman and Enron could have used.

We are a capitalist society, which is only wrong when greed comes before humanity.

Economic Crisis Advances Risk Management in India

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According to the Times of India, risk management has come into much greater in focus in India ever since the financial collapse rocked the global economy twelve months ago.

The global shockwaves following Lehman Brothers’ collapse have woken India Inc to the importance of sound risk management system to tide over future crises.

Despite the fact the India was less affected by the meltdown, companies here are pulling up their socks as the slump has demonstrated that risks are entwined and cut across boundaries.

It’s a brief article without many specific examples, but it touches on the fact that risk management in something that many companies now expect from all their units — and they expect them to report their findings to the CFO. All this looks like many businesses in the country are beginning to see that there are real benefits to holistic risk management.

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Much like their U.S. and European counterparts, Indian companies will undoubtedly struggle to turn this good idea into good practice, but the underlying concepts have to come first, and this looks like a positive sign in that a key driver of the developing world economy is moving towards incorporating better forethought throughout its private sector.

Most big players have sought international risk advisory firms like Marsh, to step up the internal control process of their portfolio companies.

“The global credit crisis has driven home the point that although US was the epicentre, its effect has been felt elsewhere too, in today’s inter-connected world. Risk management must factor inter-linkages and remote possibilities,” said Marsh India head Sanjay Kedia.
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“Low-probability and high-severity catastrophes like the recent financial turmoil or the Mumbai terror attacks do happen,” he said.

And when they do, hopefully many companies in India will be able deflect the blow.

bangalore risk management

Bangalore, or The Silicon Valley of India, has seen large-scale economic expansion in recent years. Now, a focus in risk management is expanding there as well.