Business Ethics Daily Roundup – January 15, 2010 – Chuck Gallagher Business Ethics Speaker

An interesting article appeared in the Wall Street Journal related to how business schools teach ethics and the impact of their teaching on the current state of affairs.  The article appears here:

Stop Bashing the Business Schools

Nice article on the difference between law and business ethics.  And, in my many presentations I find often that folks really didn’t know the difference at times between what the law requires and how ethics interplays.  The article is here:

The difference between law and business ethics – four flavors of the month

Across the world attention has been focused on Google and their stand with respect to operating in China.  Some question whether it’s a money grab and others suggest (and I agree) that it’s an ethics stand.  This article from India shows how others around the globe feel.  The article is here:

Premium on Business Ethics

Lastly, the Ethics Resource Center issued a new report on the state of businesses and business ethics.  With a downturn in the economy and incredible media attention, it’s not surprising that (at least on the surface) business is operating at a higher ethical level.  The article is here:

Ring in the Year with Good Business Ethics – The Innovators

It’s unfortunate but many consider business ethics a boring topic.  It reality it’s far from that.  Today – January 15th, 2010, I spoke to the International Factoring Association on business ethics.  The presentation was unique (most of mine are) and when I was at the airport, I recorded a brief video blog.  You can see it here.  We discussed the three components that move someone from ethical behavior to unethical activities.  One of the participants stated that, “If my employees knew this, I think it might cause them to think before taking an unethical action.”

Pepsi thief – James T. Hammes – Can’t be found – Suppose he’s on a beach somewhere enjoying his $8.7 million take?

Accountant James T. Hammes, of Lexington, Ky., was indicted in May on charges that he embezzled more than $8.7 million from a Pepsi bottling company in Deerfield Township. The alleged crimes spanned a decade. At last check, authorities said they couldn’t find Hammes and considered him a fugitive.

The FBI has issued an arrest warrant for a man accused of diverting millions to his own account over a five-year period while he worked for a suburban Cincinnati Pepsi bottler.  The FBI says 46-year-old James Hammes was the Lexington, Ky., controller for Deerfield Township-based G&J Pepsi-Cola Bottlers from 2004 until early this year.

The wire fraud and money laundering complaint alleges Hammes deposited G&J funds to a bank account that he controlled, and later transferred the money to other accounts he controlled.  The money was intended for a company that supplied labels to the bottler, but the FBI says the supplier had no knowledge of the account or control over it.

Hammes fled after he was served with an initial criminal complaint in February, said Keith Bennett, FBI special agent in charge, in the release. He remains at large.  “Anyone with information on the current whereabouts of Mr. Hammes is asked to contact their nearest FBI office,” Bennett said.

The follow was part of an article on Cincinnati.com about white collar crime:

Small employers often make themselves vulnerable to embezzlement because “they trust people too much,” Campbell said. They may put one person in charge of payroll, with little or no scrutiny. Then one day the employee may succumb to the temptation to steal just a little, and then a little more – and “it just snowballs,” Campbell said.

“They always say they meant to pay it back,” Ferguson said. “And the employers always say, ‘But I trusted this person. I don’t understand.’”

Sometimes people with otherwise stellar reputations turn to embezzling because they run into financial trouble and are trying to bail themselves out. Other times, they want the money to buy luxury items or to feed gambling addictions, Ferguson said.

Whatever their motivation, embezzlers have one thing in common: “They’re all smart enough to see some glitch in the system and take advantage of it,” Ferguson said.

Several Butler embezzlers were able to continue their crimes unnoticed for years, Ferguson noted. “A lot of them get caught when they go on vacation or they get sick, and someone else takes over their duties, sees something’s not right and raises a red flag,” he said. “Then they come back from vacation and find themselves confronted or fired.”

The typical embezzler has no prior criminal history, Campbell said. Embezzlers often admit to their crimes – partly because the documented evidence is often hard to dispute and because they want to clear the guilt from their consciences, he said. And, Campbell said, they do it “because it was easy.”

What reasons do you think that white collar criminals do what they do?  YOUR COMMENTS ARE WELCOME!

Mark Ellis, head of Indiginet Inc., Pleads GUILTY to Tax Fraud – Prison in his future?

It’s that time of year when folks begin to receive their W-2′s and organize or re-organize their data for the preparation of their tax returns – TAX SEASON.  It’s also a time for the IRS and government to become active in their pursuit of those who feel that they are above the law – tax cheaters.  And, those who face the chilling grips of the IRS will find that there is little compassion given when it comes to punishment.  My guess is – that means prison for Mark Ellis.

Mark Thomas Ellis, president and CEO of Winsted Holdings, pleaded guilty to a tax charge in U.S. District Court in Los Angeles.

The company, which was known as Indiginet before Ellis bought control in 2003, sold billions of shares of nearly worthless penny stock in an environmental care company, broadband Internet service provider, and medical spa franchiser before the Securities and Exchange Commission stepped in. In the tax case, Ellis admitted to owing $750,000 to the Internal Revenue Service.

Ellis, of Long Beach, entered his guilty plea after previously being summoned to appear to answer charges that he subscribed to a false personal income tax return for the 2004 tax year. The allegations are contained in a criminal information filed by prosecutors last year.

According to his plea agreement, Ellis admitted that, in 2004, he received over $748,000 from the company for his own personal use, providing himself with compensation in addition to his salary that he used to pay for personal expenses and to invest in an unrelated business. In addition, Ellis admitted that he did not disclose to his accountant who prepared his tax return that he had received the additional income and compensation from the company.

Now…not disclosing is blatant tax fraud and something that doesn’t play well with federal prosecutors.

In his plea, Ellis admitted that he knew that his 2004 tax return was false and that it was illegal to file a false tax return with the IRS. Ellis stated that he knew that he had received the aforementioned income and that he failed to report it on his 2004 tax return.

In addition, Ellis acknowledged that he received additional payments totaling $1,497,537 from Indiginet or Universal Broadband Communications Inc. in 2003, 2005 and 2006. Ellis admitted that he deliberately failed to report these payments on his personal tax returns for the years indicated.

In total, Ellis received $2,246,271 that he did not report to the IRS for the years 2003 through 2006.  He agreed that the resulting tax loss to the government, due to his underreporting, amounts to over $725,000.  Ellis also agreed as a part of his plea that he is liable for the fraud penalty imposed by the IRS, which amounts to 75 percent of the tax due, on the amount of tax he owes to the government.  U.S. District Judge Terry J. Hatter ordered Ellis to appear for sentencing on April 19, 2010. When sentenced, Ellis faces up to three years in federal prison and fines totaling $100,000.

Now, unlike the case with actor Wesley Snipes where the failure to report and/or file was based on a weak argument that the tax law was unconstitutional, Ellis appears to have taken the position that he just didn’t want to pay and therefore didn’t report.

While I am not proud of the fact that I, too, spent time in federal prison for tax evasion (I failed to pay tax on embezzled money), I know that many were in prison for tax crimes.  In our system of ‘voluntary’ compliance – PRISON – is an important deterrent to encourage those who might attempt to thwart the system.  For that reason I fully suspect that Ellis will spend time in federal prison – and it’s not ‘Club Fed’.  I’ve been there I know!

Ellis will be sentenced April 19, 2010

YOUR COMMENTS ARE WELCOME!

FBI Posts Warning about Haiti Relief Contribution Scams – Tips to avoid being Ripped Off

How unfortunate, but at a time when folks need help the most – at that same time – there are those who find the greatest opportunity to take advantage of those kind enough to offer help.  SCAMMERS are in full force concocting schemes to take money that you would give to help and instead help themselves.  Whether it’s 9/11 or Katrina – the disaster makes no difference – Scammers have one goal – DEFRAUD YOU.

More than 400 Internet addresses related to Haiti have been registered since Monday’s devastating quake, Internet security expert Joel Esler said. The names reference Haiti and words such as “earthquake,” “help,” “aid,” “victims” and “survivors.”

Here are tips offered by the FBI, Better Business Bureau and Scam.busters.  Also click here for a video on the subject.

SUMMARY TIPS:

1. Be skeptical of email through Social Networking sites.  Don’t click on Links or attached files.
2. Ask for the name and phone number of the charity or request that they put information in writing.
3. Do Not give personal financial information – You’d be vulnerable to identity theft.
4. Don’t be mislead by a “Sound Like” Charity name
5. Ask if the Charity is registered with any organization and get the registration number.  Check with CharityNavigator.org.
6. Ask what percentage of your gift actually reaches the needy.
7. Don’t ever donate cash and DO NOT give out your credit car number to telemarketers or use it with a charity you have not checked out.
8. If the person asks for more…that may be a sign something is wrong

If there is ever a time that the Haitian people need help it is now.  That is not true for Scammers.  Don’t fall prey to a scam.  Make sure your heart felt contribution goes directly to those who need it the most.

Here’s a link to a list of charities that are providing relief to the Haiti effort and have been signed off on by charitynavigator.org.  HAPPY GIVING TO YOU!

University Ethics Presentations – A Report from the University of Florida on Business Ethics Speaker Chuck Gallagher

I must admit, as a speaking professional, I enjoy presentations to University students.  First, they are open to exploring ideas and generally eager to explore what is put before them.  Their questions are wide open and that makes the presentation fun.  But, more important, from my perspective, if a life can be changed early in a young career, then I will have paid it forward.  That inspires me!

I was privileged to speak to business students at the University of Florida and no long there after a young student wrote the following in the Greenback University blog.  His article (printed below) is a reflection of the presentation I made the reaction from the perspective of a student participant.

“I learned a lot of things in prison,” said motivation speaker Chuck Gallagher as he crossed the stage. “I found out what it meant to be Chuck Gallagher.”

Gallagher’s words to UF students rang true as he discussed the turbulence of his life in the past ten years.

Formerly a successful CPA and instructor, Gallagher was sentenced to federal prison for embezzling over $254,000 in a Ponzi scheme that later he reflected was a life-changing experience.

How might he be this week’s success profile? Simple. Gallagher’s story reflects a momentous ability to turn the tables after a horrific downfall.

On October 2, 1995, Gallagher took what he calls his “twenty-three steps” to federal prison, losing his CPA license, his relationship with his wife, and his colleagues’ trust.

“I’d absolutely considered myself an ethical person and an honest person at the time,” Gallagher said. “In the mind of a fraudster, I was always going to be able to pay it back.”

Gallagher’s life before his arrest for embezzlement can be said to be a success, built on the motivation to become educated and rise from the lower class.

“My dad died when I was two. My mother didn’t have a high school education,” Gallagher said, explaining his mother’s persistent pressure on him: “She would always say, ‘you can be somebody. Do not be concerned about your circumstances.’”

He took that lesson to heart, becoming the youngest tax partner in a CPA firm at age twenty-six.

One day while Gallagher was teaching a tax course in Boise, he noticed a note on his door from his partner asking him to call the office. During the break in between lectures, he called back. One of the clients had had an emergency. “I need the money,” his partner said.

Gallagher was quiet on stage, expressing the silent hysteria he felt in that moment almost twenty years ago.

“God and I knew the truth,” he said. “I had stolen the money.”

For months following the revealing of his Ponzi scheme, Gallagher considered suicide. “I picked up the telephone and started calling people.” Gallagher received six answering machines before reaching someone, whose immortal words lived on in Gallagher’s conscience: “You have made a terrible mistake, but you are not a mistake. The choices you make today will define your wife and children.”

Gallagher knew then that suicide would not be an option. “I had to admit to everyone, to my wife and children, that I was a liar and a thief.”

Gallagher stressed how simple it was for him to lose sight of ethics. “Everything I had created was an illusion,” he said. “I didn’t recognize it until it was too late.”

Prison is often said to turn a person’s life perspective around, and Gallagher was no exception. “After five years of a normal life, I was sent to an eight by eight holding cell made of cinder block with a toilet and a bench.”

Gallagher went on to explain his experiences in prison and his interactions and friendships with the other inmates. “I was paid twelve cents an hour. I would get up at 6:00 and clean toilets and urinals,” he explained.

When Gallagher was released after sixteen months, he had to start from the bare beginnings. “I worked for a company before prison. They hired me as a sales associate. I went door to door selling cemetery spots.”

Gallagher claims he was only able to move up because of his ability to outperform everyone else. “When you perform, you will get other people’s attention. When you get out of school, your degree will help you get that first job, but after that, it doesn’t matter. It’s all about performance.”

Gallagher is now the senior sales executive for the company, and lectures across the US not only on business ethics but on sales and marketing as well. He lives by the moral guidelines instilled in him from his experience as a white collar convict. “I learned that every choice has a consequence. If you are 100% truthful, you’ve got nothing to lose, but if you break someone’s trust either in business or in a relationship, that relationship will not survive.”

I appreciate the report, but more importantly I am thankful for the opportunity I have to share with students in both the US and Canada.  It’s funny, but in a presentation at another University a professor asked me, “What theory of ‘ethics’ do you follow?”  I pondered the question for a moment and then replied.  “I follow the theory of ethical choices that keeps you out of prison.”  Somehow that response seemed to stiffle the professor, but was incredibly well received by the students.  I guess when you get down to it, my job is to influence the students!

Here’s the link to the Greenback University blog.

YOUR COMMENTS ARE WELCOME!

On Line Education – Is this the next big Fraud Arena? Trenda L. Halton pleads Guilty!

An interesting article appeared in the Chronicle of High Education.

Seems that 38-year-old Trenda L. Halton just fit in with the working-adult students at Rio Salado. She however led a double life.  Ms. Halton used social security numbers, tax returns and high school deplomas in a scheme that defrauded the federal government of about $539,000 in student-aid dollars—a scheme that involved dozens of people recruited to pose as phony “straw” students, according to court records.

Straw students…wow this sound a lot like what we read so much about with the massive mortgage fraud scandals.

According to the Chronicle’s article:

The high-tech methods she admitted using have already set off alarms at the U.S. Education Department. Ms. Halton made her bogus recruits look like real students by assuming their identities online to “participate” in classes and collect a share of their aid money, authorities say.

The case highlights how the same technology that is expanding access to education for millions of online students may also expose the country’s $117-billion federal financial-aid system to supersize fraud.

The full article is here.

Ms. Halton pleaded guilty in federal court to conspiracy, mail fraud, and financial-aid fraud. Her lawyer has not responded to requests for comment.

Ultimately, 65 people were indicted, most in Arizona but others in Wyoming and California. In her plea agreement on Tuesday, Ms. Halton agreed to repay $581,060. She was released pending sentencing on March 29. As of Wednesday, 23 other defendants had been sentenced and ordered to repay a total of $212,013.

YOUR THOUGHTS?

Business Ethics Daily Roundup – January 13, 2010

As a business ethics speaker and author, as you can imagine, I work daily to keep up with what’s happening.  My wife asked me the other day, “well…how do you share that?”  It dawned on me, I don’t – except in my presentations and more formal writings.  So – from that simple question was birthed the idea of a daily roundup.

Here goes…and I hope it helps.

Aerospace and Defense Industry Commit to New Global Principals of Ethical Conduct – The first International Forum on Business Ethical Conduct for the Aerospace and Defence Industry (IFBEC) took place today in Berlin.  The forum strengthened exchange between industrial, institutional and state players within these key sectors, encouraging them to participate in the development of fair competition rules. It demonstrated the commitment of the aerospace and defence industry to business ethics.  Full story here.

Scrutiny of White Collar Crime Grows – About 25 embezzlers met their downfall last year in Greater Cincinnati and Northern Kentucky, particularly in Butler County, when they were busted in cases totaling $2.2 million – a record-high for the county, officials believe. Full story here.

Should ‘The Office’ Be Used In HR Training? (this is a really cool story) – The Office, a comedy about a jumble of oddball workers trying to get along in a claustrophobic environment, is a phenomenon of our times, a period when the American workforce is more diverse than it has ever been.  The question is – should this quirky comedy be used to illustrate sensitive points when doing HR training?  Full story here.

The Foreign Corrupt Practices Act: An Overview – Corruption poses a significant legal and economic risk for corporations doing business around the world, particularly in developing and transitioning countries.  Because of this increased enforcement activity, managers and directors who run multinational corporations are rightfully concerned about their compliance efforts.  Full story here.

More to come tomorrow.  Meanwhile, for more ethics information and discussion – join me on Facebook – link here.

Make A DIFFERENCE! Red Cross Raises $1,000,000+ for Haiti Through Text Message Campaign

Susan Watson, director of marketing and visibility for the Red Cross, tells us that they’re getting reports every half hour with the latest donation numbers, and the current total — as of 4:30 p.m. EST — is greater than $800,000 (LATEST UPDATE – CONFIRMED OVER $1,000,000) for text message donations alone. Watson says, “The needs are so tremendous in Haiti, and we are honored that people continue to give to the American Red Cross. Raising this amount of money, $10 at time, is a true testament to the American spirit.”

If you want to help the cause you can text “Haiti” to 90999 to send a $10 donation to the Red Cross. There’s also this collection of organizations that are accepting donations online.

For more information click here…

MAKE A DIFFERENCE…Help those who need it the most.  The choices you make today will shape the future of tomorrow.

Business Ethics Speaker Chuck Gallagher provides White Collar Crime Update Links

HEALTH CARE FRAUD:  http://stlouis.bizjournals.com/stlouis/stories/2010/01/04/daily49.html

Five St. Louis nursing homes operated by Cathedral Rock of Texas pleaded guilty to felony health-care fraud and agreed to pay $1.6 million.

The majority owner of Cathedral Rock, C. Kent Harrington, 60, of Fort Worth, Texas, also entered into a criminal deferred prosecution agreement for a period of two years, Acting U.S. Attorney Michael Reap said Thursday.

Under the plea and deferred prosecution agreement, the five nursing homes and Harrington will jointly pay $1 million in criminal fines and penalties.

CANADIAN ATTORNEY SENTENCED TO PRISON:  http://toronto.ctv.ca/servlet/an/local/CTVNews/20100107/lawyer_sent_100107/20100107/?hub=TorontoNewHome

Toronto lawyer Stan Grmovsek has been sentenced to 39 months in prison for his role in a massive insider trading scheme that netted him and a friend about US$9 million.

The sentence Thursday at the Ontario Court of Justic is the first insider trading conviction under new federal laws that came into place in 2004 and the largest prison sentence ever in Canada for such an offence.

INTERNET GAMBLING EX-CEO SENTENCED TO PRISON:  http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a_vQFyv1c8uw

David Carruthers, the former Betonsports Plc executive who pleaded guilty in a U.S. government investigation that shut the online gambling company, was sentenced to 33 months by a federal judge.

Carruthers was chief executive officer of the London-based Internet gambling business when he and 10 other people including founder Gary S. Kaplan were indicted by a grand jury for violating federal laws banning the placement of wagers by wire in 2006.

HOMESTORE EX-CEO PLEADS GUILTY:  http://www.justice.gov/usao/cac/pressroom/pr2010/002.html

The former chief executive officer and chairman of the board of Homestore.com has agreed to plead guilty to conspiring to commit securities fraud through a scheme that artificially inflated the company’s on-line advertising revenue to make the publicly traded company appear to be more profitable to Wall Street analysts.

Stuart Wolff, 46, of Westlake Village, agreed to plead guilty to one count of conspiracy to commit securities fraud in a plea agreement filed today in United States District Court in Los Angeles.

COMMENTS WELCOME

“Honest-Services Fraud” law – taking ethics and fraud deterrence too far?

Is it possible that in our quest for improved ethics and fraud deterrence that we’ve created a capture net that is too broad and too easy to be caught in?

Years ago I spent time in federal prison.  I am not proud of that fact, but it’s a fact that I cannot change.  Like Bernie Madoff, I defrauded clients (through the creation of a Ponzi scheme) and, when the card was pulled from the house of cards I created, I found myself facing that dreaded walk into federal prison.  Those 23 steps from the curb into federal prison were the longest 23 steps of my life.

Yet, while I was there…(as you can imagine) I became acquainted with many folks – most of whom had, in fact, done the crime.  They, like I, were paying the price for our crimes by doing the time (so to speak).  From that experience, one thing I learned was the broad sweeping power to convict of the word – CONSPIRACY.

It became clear that the government could use CONSPIRACY laws to capture “would be” criminals or make it easy to win convictions for those who committed crime, but otherwise would walk. Now it would appear that the broad bush word CONSPIRACY has been replaced with an even broader bush (or criminal capture net) called “HONEST SERVICES.”

HERE’S THE CONCEPT – according to an article in Fortune Magazine:

If a judge or governor accepts bribes, for instance, he is not necessarily stealing money from anyone, but he is depriving the public of the “honest services” they have a right to expect from him. Likewise, if a corporate purchasing officer accepts secret kickbacks from vendors, he’s depriving his employer of his “honest services.”

“Look around at all the high-profile cases today,” says Richard Craig Smith, a former federal prosecutor now with the law firm Fulbright & Jaworski. “Ninety-five percent of them are charged under honest-services fraud. That’s not just an accident.”

In fact, recent defendants in such cases compose a white-collar rogues’ gallery for our times, featuring such tarnished luminaries as former governor Rod Blagojevich of Illinois; former U.S. congressman William Jefferson of Louisiana; newspaper magnate and former Hollinger International CEO Conrad Black; lobbyist Jack Abramoff; and former Enron CEO Jeff Skilling.

HERE’S THE RUB – Just about anything that someone might perceive as wrong could be captured with the very wide net of the “Honest-Services” doctrine.  The Fortune article goes on to say:  “The feature that prosecutors love about honest-services fraud is precisely what critics say dooms it constitutionally: its nearly infinite adaptability. “There’s almost no fact pattern that cannot be fit around 1346,” says Smith, referring to the section of Title 18 of the U.S. Code that defines the offense. Read literally, it seems broad enough to catch any deceit at all. If so, then who among us is not guilty?”

If the law is so vague, broad and ill defined that you could commit a crime without knowing that you’ve committed one…then it is possible that the law that prosecutors love could be struck down as unconstitutional.  In fact thee are two cases before the Supreme Court on that very issue.

The law “invites abuse by headline-grabbing prosecutors in pursuit of local officials, state legislators, and corporate CEOs who engage in any manner of unappealing or ethically questionable conduct,” wrote U.S. Supreme Court Justice Antonin Scalia.  “Carried to its logical conclusion,” he continued, it “also renders criminal a state legislator’s decision to vote for a bill because he expects it will curry favor with a small minority essential to his reelection; a mayor’s attempt to use the prestige of his office to obtain a restaurant table without a reservation; [or] a salaried employee’s phoning in sick to go to a ball game.”

“If you defraud someone out of money,” explains Susan Necheles, a white-collar defense lawyer at New York’s Hafetz & Necheles, “there’s clearly a crime, and there are plenty of statutes that cover it. When the government resorts to honest-services fraud, on the other hand, it’s almost always because there’s a real question whether this was a crime or just aggressive business behavior.”

SO HERE’S THE QUESTION:

As an ethics and fraud prevention speaker, I wonder, in the governments efforts to rein in fraud – have they gone too far in their efforts to broadly define “Honest-Services” for purposes of prosecuting and convicting those accused of (shall we say) “ethical” crimes?  The Fortune Magazine article provides an outstanding framework for this law’s background (read here).

In December the Supreme Court signaled, hearing an “Honest Services” case that the law was ambiguous and therefore likely to be struck down.  “A citizen is supposed to be able to understand the criminal law,” Breyer said, yet it was unclear what the law in question branded as a crime.

Early next year, the justices will hear a third case testing the honest-services fraud law, brought by former Enron Chief Executive Jeffrey K. Skilling.  The justices hinted that they would put off ruling on the issue until they had considered Skilling’s case, since his lawyers argued most directly that the entire law should be thrown out as too vague.

QUESTION:  Do you feel that this statute should be struck down for being too vague?  If so, what should replace it?

COMMENTS ARE WELCOME!