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BADM 2133 UNIT 2

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  • 1. Business Ethics: Cases andSelected Readings, 7th Ed.Marianne M. JenningsUnit 2© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 2. What I Did in the Past Year“I let someone else at work take the blame forsomething I did.”“I used a reference during an ungraded practice exam.”“I rolled through stop sign, was pulled over by policeand did not even realize I had done it because I haddone it so frequently.”“I told relatives who called that we would not be athome so that they wouldn’t come visit.”42© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 3. What I Did in the Past Year“I signed for work performed – when another personactually did the work, although the work performedwas known to me.”“I will admit, I stole a towel here and there not thinkingit was a big deal.”“I left early for a doctor’s appointment even though Ididn’t have one.”“I left information off of my taxes.”43© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 4. More . . .• “I closed out a corrective action without havingenough supporting documentation.”• “I sold a bike to a friend and it was later stolen. Heasked me to inflate the sales price (on the claimform) so he could get a larger sum from theinsurance company.”• “I accepted a 2-liter drink willingly given to me butmistakenly delivered by pizza delivery person.”© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.44
  • 5. Carr Dilemmas• Would you dye your hair to look younger?• What about contact lenses?• What about covering up tattoos for aninterview?• Would you donate to a political candidate youdo not support personally because youremployer asked you to make that donation?45© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 6. 46Carr and Rationalizations“Everybody else does it.”“I think all teams do that. That’s been goingon forever.”Jacksonville Coach Jack Del Rio on the Patriots’videotaping to steal defensive signalsWhat is right is right even if no one is doing it.What is wrong is wrong even if everyone is doing it.Source unknown© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 7. How Leaders Lose Their Way• Even the largest missteps start with small,seemingly inconsequential, decisions• Review the “first step” and “initial decision”materials from Unit One• Review Andersen story47© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 8. How Leaders Lose Their Way• Unwillingness to tolerate dissent• Losing their good purpose• Disregard for the rules• Sense of self comes from the trappings ofsuccess• Sense of invincibility48© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 9. Defining the Issue: Define Dilemmasby Values, Not Circumstances• Avoid the either/or conundrum and its falsesecurity– The ease of resolution vs. The long-termimplications– Failure to define the issue properly49© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 10. Pressure: Probability from theFinancial Analysts InstituteP = f(x)x = amount of money involvedP = probability of an ethicaloutcome© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.50
  • 11. 51Martha Stewart, ImCloneand Omnimedia, and Ethics• Dec. 27, 2001 – Martha’s sale of ImCloneshares ($229,002)• If she had sold the shares after FDAproblems with ImClone announced:$189,495• Overall savings for Martha: $39,507• Value of ImClone shares March 5, 2004(verdict day): $164,976© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 12. 52Value – Friday,September 17, 2004• One day after Martha’s announcement thatshe would serve her sentence withoutcontinuing appeal• Martha Stewart - $12.03 (up $0.77)• ImClone - $54.10• Remember Faneuil sold Martha’s ImCloneshares for $58 each on December 27, 2001© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 13. 53Martha’s Omnimedia Shares• Martha Stewart Omnimedia: Every $1 drop in share price cost Martha $30million• December 27, 2001 – $70 per share• June 25, 2002 – $13.60• November 25, 2002 – $5.26• October 10, 2003 – $9.86• December 19, 2003 – $9.11• March 5, 2004 (pre-verdict) – $12.52• March 5, 2004 (trading halted after verdict) – $10.18• March 16, 2004 – $9.97• May 17, 2004 – $9.39• October 8, 2004 – $12.03 (prison day)Value of ImClone stock : $54.10 vs. $58 – Martha’s sale price• February 1, 2005 – $32.80• March 7, 2005 – $30.75 (get out of prison day)• April 7, 2005 – $20.92• July 26, 2005 – $28.01• August 2005 – $25.00 (post-ankle-monitor problems)• August 30, 2005 – $33.00 (no ankle monitor and “You’re Fired” starts)• September 22, 2005 – $28.31 (show falters)• November 2007 – around $12.00© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 14. 54Martha’s Omnimedia SharesDec. 27, 2001 $70.00 per shareJune 25, 2002 $13.60November 25, 2002 $5.26October 10, 2003 $9.86December 19, 2003 $9.11March 5, 2004 $12.52 (pre-verdict)March 5, 2004 $10.18(trading halted after verdict)March 16, 2004 $9.97 Nov 20 2007May 17, 2004 $9.39 $10.03October 8, 2004 $12.03 (prison day)February 1, 2005 $32.80March 7, 2005 $30.75 (prison release day)April 7, 2005 $20.92July 26, 2005 $28.01$0$10$20$30$40$50$60$7012/27/01 6/25/02 11/25/02 10/10/03 12/19/03 3/5/04 3/5/04 3/16/04 5/17/04 10/8/04 2/1/05 3/7/05 4/7/05 7/26/05 11/20/2007Martha Stewart Omnimedia:Every $1 drop in share price cost Martha $30 millionOctober 8, 2004 (prison day)Value of ImClone stock:$54.10 vs. $58 – Martha’s sale price© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 15. 55Areas of Ethical ChallengesI. Individual Values and the Business OrganizationA. Employee Conflicts of InterestB. Inappropriate GiftsC. Security of Company RecordsD. Personal HonestyE. Government Contract IssuesII. Individual Rights and the Business OrganizationA. Corporate Due ProcessB. Employee ScreeningC. Employee PrivacyD. Sexual HarassmentE. Affirmative Action/Equal Employment OpportunityF. Employment at WillG. WhistleblowingH. Employee RightsI. Comparable Worth© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 16. 56Areas of Ethical ChallengesIII. Business OperationsA. Financial and Cash Management ProceduresB. Conflicts Between the Corporation’s Ethical Code and Accepted BusinessPractices in Foreign CountriesC. Unauthorized Payments to Foreign OfficialsD. Workplace SafetyE. Plant Closures and DownsizingF. Environmental IssuesG. Purchasing: Conflicts and BriberyIV. Business and Its CompetitionA. Advertising ContentB. Appropriation of Others’ IdeasC. Product Pricing© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 17. . 57Areas of Ethical ChallengesV. Business and Its ProductA. Contract RelationsB. Product SafetyC. Product QualityD. Customer PrivacyVI. Business and Its StakeholdersA. Shareholders’ InterestsB. Executive SalariesC. Corporate ContributionsD. Social Issues© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 18. Steps in Ethical Analysis1. Do your numbers2. Recall and apply the categories3. Apply questions from the models4. Check for the warm language labels andrationalizations5. Consider other cases for precedent6. Bring in other areas of business to be sureyou are seeing the issues58© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 19. Some History• Founded in 1869• Partnership with Marcus Goldman and hisson-in-law, Samuel Sachs as partners• Began as a clearinghouse for commercialpaper59© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 20. Legal Issues to Discuss• What are the liabilities in a partnership?• How would that personal liability structureaffect the partnership’s strategies anddecisions?60© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 21. The Roaring Twenties• New hires felt commercial paper was stodgy• Investment trusts were launched• Small investors could purchase trustinterests in pools of securities61© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 22. 1920s and LayeringCORPORATION OR TRUST ACORPORATION OR TRUST B62IPO – $100 per share –Goldman buys 90%; publicbuys 10%Secondary sales –Goldman sells its sharesfor $110 CashusedIPO – $200 per share –Goldman buys 90%; publicbuys 10% CashusedPatternrepeats© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 23. 1990s, dot-coms, and IPOs• Standard requirement of 3 years ofprofitability before an IPO was waived• Eased back to one year• Eventually eased back to one quarter ofprofits• Public was not aware that underwritingstandards had changed63© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 24. 1990s, dot-coms, and IPOs• Underwriter (Goldman) agrees to underwrite adot-com’s initial offering• Good clients get access to IPO• Participate in the roll-out of the share initially• Have to agree to buy more after the first wave at$10-$15 per share higher• Laddering: shares are guaranteed to rise• Everyone makes money but general public doesnot know64© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 25. eToys• IPO priced at $20• Price climbed, through laddering, to $75 pershare on the first day• Goldman settled with the SEC for $40 millionafter then-chairman Hank Paulsoncondemned laddering65© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 26. 2008 and LayeringCDO Investment Pool ACDO Investment Pool B66IPO – $100 per share –Goldman buys 90%; publicbuys 10%Secondary sales –Goldman sells its sharesfor $110 CashusedIPO – $200 per share –Goldman buys 90%; publicbuys 10% CashusedPatternrepeats© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 27. Other Goldman Activities:Huddles and Client Disclosures• Trading huddles: analysts and traders discussthe market, shares, etc.• Analysts cannot contradict their internalopinions in external releases• Goldman analysts did not disclose the tradinghuddle info• They were analysts from “FundamentalStrategies Group” not the “Analysts Group”67© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 28. The Goldman Opinions in Emails• CDO securities are “junk,” “s_____”or “crappy.”Michael M. Phillips, “Senators Seek. Fail to Get an ‘I’mSorry’,” Wall Street Journal, April 28, 2010, p. A3 at A5.68© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 29. The January 10, 2010 Memo toClients from Goldman• “We may trade, and have existingpositions, based on trading ideasbefore we have discussed those ideaswith you.”Andrew Ross Sorkin, “At Goldman, E-Mail Message LaysBare Conflicts in Trading,” New York Times, January 13,2010, p.B1.69© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 30. Other Goldman Activities:Auction-Rate Securities• Touted as mutual-fund grade investments• Goldman and others bid up the price• Clients were convinced that there was avibrant market• Clients were not told about Goldman’s bidding• Clients were left holding $40 billion inworthless auction securities70© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 31. Settlements• Goldman agreed to buy back $1.5 billion inauction securities• Pays $22.5 million fine• Merrill Lynch bought back $10 billion insecurities and paid $125 million fine71© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 32. Other Goldman: AbacusThe Cast of Characters72© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 33. Fabrice Tourre:The Fabulous Fab73© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 34. John Paulson: Very Rich Guy74© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 35. Goldman Agrees to Structure a Mortgage-Backed Securities Deal for Paulson• Fabulous Fab is put in charge– 32 years old– $2,000,000 per year compensation• Goldman feels it has a conflict– ACA put in charge– Input on types of mortgages is odd– ACA asks, “Why would they not want Wellsmortgages in the pool?”75© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 36. What It Looked LikeGol76Goldman puts together CDO deal for PaulsonClients buy $900 million in CDO securities fromAbacus for which Goldman was underwriterGoldmanPays AIG$11M toinsureCDOsGoldman sellsInsurance betto hedge fundACA putsmortgagepooltogetherAIG mustpayGoldmanUS bails out AIG© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.CDOs gosouth
  • 37. Key was UnderstandingGoldman’s and Paulson’s Position• They would be positioned short• That is, they would make money if the CDOsfailed (i.e., declined in value)• They did decline; Goldman and Paulson mademoney• Goldman clients and others who boughtAbacus finished with worthless instruments77© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 38. Subprime Zig vs. Zag050100150200250 Nov-06Dec-06Jan-07Feb-07Mar-07Apr-07May-07Jun-07Jul-07Aug-07Sep-07Oct-07Nov-078-Jan8-Jun8-OctGoldmanMerrillCitigroupBear Stearns© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.78
  • 39. The Emails79© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 40. Goldman Manager FabriceTourre on Mortgage Securities“The whole building is about to collapseanytime now. . . . Only potential survivor, theFabulous Fab . . . Standing in the middle ofall these complex, highly leveraged, exotictrades he created without necessarilyunderstanding all of the implications of thosemonstruosities!!! [sic]”80© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 41. E-mail from Goldman Trader, FabriceTourre, to His Girlfriend on His Salesof Subprime CDOs“I ‘m [sic]managed to sell a few abacus bondsto widows and orphans that I ran into atthe airport, apparently these Belgiansadore synthetic abs cdo2.”81© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 42. The Congressional Hearings82© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 43. Senator Claire McCaskill“It feels like you guys arebetting on the game you’replaying.”Senate hearings on financial regulationApril 27, 201083© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 44. Senator Susan Collins• "I understand that you do not have a legal fiduciaryobligation. But did the firm expect you to act in the bestinterests of your clients as opposed to acting in the bestinterests of the firm? Could you give me a yes or no towhether or not you considered yourself to have a duty toact in the best interests of your clients?"Wall Street and the Financial Crisis: The Role ofInvestment Banks, Hearings of the PermanentSubcommittee on Investigations, April 27, 2010,http://hsgac.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=f07ef2bf-914c-494c-aa66-27129f8e628284© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 45. Lloyd Blankfein,CEO of Goldman85© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 46. Did Goldman Owe a FiduciaryDuty? Blankfein Responds:• "While we strongly disagree with the SECs complaint, I alsorecognize how such a complicated transaction may look tomany people. To them, it is confirmation of how out of controlthey believe Wall Street has become, no matter howsophisticated the parties or what disclosures were made. Wehave to do a better job of striking the balance between whatan informed client believes is important to his or her investinggoals and what the public believes is overly complex andrisky."86© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 47. Lloyd Blankfein on His Role• *I am just a banker+ “doing God’s work.”John Arlidge, “I’m Doing God’s Work. Meet Mr.Goldman,” London Times Interview, The Sunday Times,November 8, 2009, p. 187© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 48. Professor John Coffee• “I think we’re seeing another one of thoseperiodic eruptions because we see this story ofinvestment bankers who seem to be playingboth sides against the middle, and the investorlooks like a sucker.”David Lynch, “Goldman Hearings Strike a Defiant Note,”USA Today, April 28, 2010, p. 1B, at 2B.88© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 49. Goldman Settles• $550-million fine• Legislative and regulatory reforms• What were the violations?• Which securities laws apply?89© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  • 50. Congress Passes Laws• Discuss United States Code and where Dodd-Frank fits• Tasks assigned to SEC• Promulgation of regulations90© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.