Three Unethical Business Decisions/Scandals & How Steven Covey Would Have Prevented Them

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  • These project slides were created as part of a group project for a Management Principles course at Fort Hays State University. The authors are Bobby Martinez, Aubrey Hodges and Ashley Heimbouch.
  • This slide is titled the “Common Differences between a pyramid scheme and a ponzi scheme” and it defines the characteristics for identifying a ponzi scheme.
  • This slide details the Enron scandal as it unfolded in chronological order
  • Listed on this slide is an overview of how Facebook CEO Mark Zuckerberg was sued by fellow Harvard classmates over the rights to the popular social networking site. This story spawned the movie “The Social Network” which was nominated for several awards including Best Picture at the 83rd Annual Oscars.
  • Three Unethical Business Decisions/Scandals & How Steven Covey Would Have Prevented Them

    1. 1. Fort Hays State UniversityMGT301 - Management Principles Authors: Bobby Martinez, Aubrey Hodges & Ashley Heimbouch 1
    2. 2.  Slide 3 & 4 – Understanding a Ponzi Scheme Slide 5 – How Steven Covey Would Prevent The Bernie Madoff Ponzi Scheme Slide 6 – The Madoff Affair (Video) Slide 7 & 8 – Enron Scandal Timeline Slide 9 – How Steven Covey Would Prevent The Enron Scandal Slide 10 – The Smartest Guys in the Room (Video) Slide 11 & 12– Facebook Lawsuit Slide 13 – How Steven Covey Would Prevent The Facebook Lawsuit Slide 14 – The Social Network movie trailer (Video) 2
    3. 3. Pyramid Scheme Ponzi Scheme Typical “hook”  Typical “hook” ◦ Earn high profits by making one payment ◦ Earn high investment returns with and finding a set number of other little or no risk by simply handing distributors of a product. The scheme over your money; the investment typically does not involve a genuine typically does not exist. product. The purported product may not exist or it may only be “sold” within the pyramid scheme. Payments/profits  Payments/profits ◦ Must recruit new distributors to ◦ No recruiting necessary to receive receive payments payments.  Interaction with original Interaction with original promoter promoter ◦ Promoter generally acts directly with ◦ Sometimes none. New participants may all participants. enter scheme at a different level. Source of payments  Source of payments ◦ From new participants-always ◦ From new participants-never disclosed. disclosed. Collapse  Collapse ◦ May be relatively slow if existing ◦ Fast. An exponential increase in the participants reinvest money. number of participants is required at each level. 3
    4. 4.  High investment returns with little or no risk. Be highly suspicious of any “guaranteed” investment opportunity. Overly consistent returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions. Unregistered investments. Registration is important because it provides investors with access to key information about the company‟s management products, services, and finances. Unlicensed sellers. Most Ponzi schemes involve unlicensed individuals or unregistered firms. Secretive and/or complex strategies. Avoiding investments you don‟t understand or for which you can‟t get complete information is a good rule of thumb. Issues with paperwork. Ignore excuses regarding why you can‟t review information about an investment in writing, and always read an investment‟s prospectus or disclosure statement carefully before you invest. Also, account statement errors may be a sign that funds are not being invested as promised. Difficulty receiving payments. Be suspicious if you don‟t receive a payment or have difficulty cashing out your investment. Keep in mind that Ponzi scheme promoter sometimes encourage participants to “roll over” promised payments by offering even higher investment returns. 4
    5. 5. How Would Steven Covey HABIT 1: Be Prevent The HABIT 4: Think Proactive Bernie Madoff Win/Win What are going to Ponzi Scheme? Is this a win/win situations for all involved? be the effects of this investing? HABIT 2: Begin with If not, then it is perfectly the End in Mind acceptable to walk away Be proactive by from it. gathering all theinformation you can on the „investment‟. Can this investment Does this investment continue on sound too good to be long-term? true? Mostly likely not. 5
    6. 6. 1985Ken Lay is appointed CEO of ENRON, a company that was created as a result of mergers of gas and pipeline companies in the USSoutheast. His performance is weak and his business principles questionable.1987Lou Borget of Enron Oil Trading is convicted of money laundering and fraud costing Enron shareholders about sixty-four milliondollars.1990Jeff Skilling joins Enron Corp after leaving the failed bank, First City Bank of Houston which was seized for insolvency.1993Enron launches investments in South America and India. An agreement was reached to build the massive Dabhol power plant inIndia which never operates when Enron is still in business.1994Enron starts trading electricity1996CFO Andrew Fastow constructs off-book entities in which Enron would make deals with these companies and then Enron wouldtransfer its debt into those companies while at the same time, Fastow and other Senior execs, with their respective companies, wouldalso be taking money out of those companies from the Enron transactions.1997Andrew Fastow creates Chewco (managed by Enron’s Michael Kopper) in an effort to hide debt and inflate profits, but Chewcodoesn’t meet requirements to keep it off Enron’s balance sheet.1998Enron enters into several capital intensive ventures that turn into financial disasters including a water distribution scheme andpower plants in Brazil.1999Enron board of directors waive conflict of interest rules in order to allow Andrew Fastow to run private companies that do businesswith Enron. He creates LJM that buys poorly performing Enron assets. In reality, LJM is used to hide debt and inflate profits for Enronin order to prop up its stock price. It is believed that this is the beginning of the complex and questionable accounting practices thatlead to Enron’s demise.Enron withdraws from oil and gas productions and announces the launch of EnronOnline, its internet-based commodity trading site. 6
    7. 7. 2000Enron launches EnronCredit.com which buys and sells credit risk to help companies manages the risk in trading.Enron and Blockbuster announce a 20 year deal to provide video-on-demand service over high-speed internet. Eight months laterthe deal was terminated.Ken Lay files fraudulent financial documentsJeff Skilling signs fraudulent financial reports to Arthur AndersenEnron publishes a comprehensive ethics codes2001Enron causes rolling blackouts in CaliforniaJeff Skilling commits securities fraud by omitting bad news and lying to investors. He makes a false presentation to investors.Enron executives receive million dollar bonusesEnron is named “most innovative company in America” for the sixth consecutive year by Fortune MagazineSkilling is named CEOArthur Andersen tells the Enron board of directors audit committee that they have no concerns.Enron announces a first quarter profit of $536 millionLay and other Enron officials meet with the energy task force of Vice President Dick CheneyThe energy task force issues its report, which endorses some of Enron’s proposals.Enron announces a quarter profit of $536 million.Fortune Magazine issues a story titled “Is Enron overpriced?”Enron’s stock price closes below $59.78, a critical point for one of the partnershipsExecutives start selling Enron stocks.Enron’s stock price closes below $47, a critical point for the Raptor partnerships.Citing “personal reasons, “Skilling resigns as CEO. Lay replaces him, stating “Absolutely no accounting, no trading issue, noreserve issue, no previously unknown problem issues” are involvedVice president for corporate development Sharron Watkins puts a one-page letter in Lay’s suggestion box, questioning Enron’saccounting practices.Lay tells employees that Enron’s accounting practices are “legal and totally appropriate”Arthur Andersen start document shreddingEnron announces a third quarter loss of $618 million.Enron’s assets (shareholder equity) are reduced by $1.01 billion.The Enron 401 (k) retirement plan is frozen for administrative changes.Andrew Fastow (CFO) is forced to leave ENRONThe SEC starts investigation Enron and Arthur AndersenEnron declares bankruptcy and Ken Lays is forced to lay off 21,000 employees Information from http://www.washingtonpost.com/wp-dyn/articles/A25624-2002Jan10.html 7
    8. 8. Think of how breaking the Realize that law and defauding the Integrity and free market would Equality are jeopardize your company more important & cost many people their than profit HABIT 2: Begin jobs with the End in Mind HABIT 3: Put First Things How Would HABIT 4: First Steven Covey Think Win/Win Prevent The HABIT 1: Be Proactive Enron Scandal? Understand that your company can generate HABIT 5: Seek First to revenue without breaking the law Be proactive by Understand seeking to understand theethical approach torunning a business decisions 8
    9. 9. Mark Zuckerberg  Founder of Facebook  Sued by fellow Harvard classmates, Tyler and Cameron Winklevoss and also Zuckerbergs best friend Eduardo Saverin  Both cases settled outside of court 9
    10. 10. Winklevoss case Saverin case Claimed they came up  First to invest money in with the Facebook Facebook, $15,000.  Cofounder and business idea. manager for Facebook. Said that Zuckerberg  His share was diluted lied about making their from 34% to 0.03% ConnectU site. because it was said his Settled for $65 million involvement decreased. in 2008.  Settled out of court for an undisclosed amount. 10
    11. 11. Habit 6: SynergizeGreat things can happen whenworking as one cohesive unit rather than independently How Would Habit 5: Steven Covey Think First to UnderstandRather than to seek the glory for yourself, create a Prevent The Facebookpartnership which fosters new ideas for the final product Lawsuit? By understanding the goals and perspectives of your stakeholders prevent conflict later on Habit 4: Think Win/Win 11

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