Exploration of criminality and unethical practices from a legal, organizational and interpersonal perspective. Obedience to authority and whistle-blowing

1. 1
Corporate Culture:
Abuse of Power,
Whistleblowing and Ethics

2. 2015 National Business
Ethics Survey
 43% of employees admitted to at
least one unethical act
 75% observed an unethical act and
did nothing about it
 1/3 reported that questionable ethical
practices are rewarded

3. 3
Federal Law requires codes of conduct,
training, complaint procedures and
protection for whistleblowers
Good Business Practice Minimize Legal Damages
Mitigate Criminal Liability Good Public Relations

4. 4
Codes of Conduct usually declare
that the Company will comply with
all US and International Laws
 Securities laws
 Financial reporting
 Antitrust
 Environmental
 Labor regulations
 Equal Employment laws

5. 2012 National Business
Ethics Survey
 Nearly one-third of respondents say
that co-workers condone questionable
ethical practices
 One-third report that questionable
ethical practices are rewarded

6. 6

7. Definition
A corporation is a legal entity created by
state law to accomplish a stated
purpose.
Three Types:
1. Corporations for profit
2. Corporations not for profit
3. Government owned corporations

8. Nature of A Corporation
1. Corporations are distinct legal entities
which exist separate from
shareholders
(Shareholders are owners with limited
liability)
2. Corporations can sue and be sued
3. Corporations can own property
4. Corporations may and usually have a
perpetual life.

9. 9
Role of Shareholders
 Ownership of shares grants an
equitable ownership interest in a
corporation.
 Shareholders generally have no right
to manage the daily affairs of the
corporation, but do so indirectly by
electing directors.
 Shareholders are generally protected
from personally liability by the
corporate veil of limited liability.

10. 10
Role of Corporate Officers
and Executives
 Officers and executives are hired by the board
of directors.
 Act as agents for the corporation.
 Officers are employees of the corporation and
have fiduciary and loyalty duties.
 Their employment relationships are generally
governed by contract law and employment law.

11. 11
Lessons From WorldCom

12. 12
WorldCom Timeline
1983 – LDDS (Long Distance Discount Service) goes public.
The new corporate entity is called WorldCom
1996 – Telecommunications Act is passed deregulating the
telecommunications industry
1996 – S&P 500 lists WorldCom
1998 – WorldCom merges with MCI, at the time the biggest merger in
history allowing WorldCom to capture 25% of the long distance
market
1999 – WorldCom stock reaches an all-time high of $96.75/share
2002 – WorldCom stock falls below $1/share

13. 13
In 2003, court-appointed Bankruptcy
Examiner described WorldCom as
having a “culture of greed.”
Special investigation committee
report asked why no one disclosed or
complained about management
misconduct. The report avers that
“the answer seems to lie partly in the
culture.”

14. 14
Mission Statement:
Our objective is to be the most profitable, single-
source provider of communications services to
customers around the world

15. 15
Organizational Goals were
Aligned with Mission
 Each department had financial goals to meet
 Whenever possible, individuals had financial goals to meet
 Departments were organized as cost centers
- in practice-
 Departments competed against one another –one department
wouldn’t help another department unless they could bill the
work against the other department
 If employee missed goals for 1 month – warning
 3 consecutive months of missed goals – discharge
 Performance evaluations were based on achieving the “right
results”
 No emphasis on achieving the results “the right way”

16. 16
Executive Leadership is
Authoritarian, Deterministic,
Results-Oriented
Underlying Philosophy: Ends-justify-the-means
Moral Justification: Greater good is best served
Organizational Structure: Hierarchical, command-and-control
Primary Tools: Power, external rewards and punishment

17. 17
Characteristics of
Authoritarian Leaders
 Respect power
 Rely primarily on extrinsic rewards of
money, perks and social conformity
 Lead by rewards and punishment
 Ends justify the means

18. 18
Employee Work Ethic is
Passive and Pessimistic
Underlying Philosophy: Purpose of work is a paycheck
Moral Justification: Work-life follows bureaucratic laws,
no individual free-will
Relationship to Work: Dependent, low self-worth
Primary Motivators: Money, perks and fear

19. 19
Human Resources
Management
Employees are viewed as cogs-in-the-wheel.
Emphasis is on dependence and conformity.
Employees are not expected to “rock the
boat.”

20. 20
Bureaucracy

21. 21
Passing the Buck

22. 22
Abuse of Power

23. 23
External
Rewards and
Punishments
Increase
Shareholde
r Value
Results-
Oriented
Ends-
Justify-
Means
Passive
and
Dependant
Workers
Corporate Values Command and Control
Leadership
Bureaucratic
Organization
Meaningless Work
• $100 invested in 1989 returned $6,000 by 1998
• WorldCom posted a 137% stock price appreciation in 1998 alone
• Declared a “Success” by Wall Street Journal in 1999

24. 24
Buford Yates
Assistant Treasurer explains that Scott Sullivan,
WorldCom’s CFO, wants to tap a reserve fund to
inflate revenue for the quarter. Yates suggests that it
will only have to be done once, although he orders the
transfer three more times.
Yates claims that Sullivan threatened him, “show
those numbers to the damn auditors and I’ll throw you
out the f****ing window.”
Betty Vinson
Senior manager of accounting department. Under
Yates direction, she authorizes tapping the reserve
fund multiple times.
Vinson claims she was fearful of losing her job and
her six-figure salary.
Her position is “untenable” she says. She states that
she was “a victim of unscrupulous higher managers”.

25. 25
Yates and Vinson
Victims or Conspirators?
What were their choices?

26. 26
Hierarchy of Needs

27. 27
Autonomy
Dependence
Moral Development

28. 28
Tentative Conclusion: The WorldCom disaster is not only
about “greed.” Instead, its about a corporate culture that
fostered dependent workers with low self-esteem, who
could not exercise free-will, and who performed for
external rewards or to avoid punishment.
Tentative Conclusion: WorldCom’s code of conduct, ethics
training and compliance programs were ineffective
because the organization’s values were deterministic and
material.
Tentative Conclusion: WorldCom’s executive leaders used
power, fear and intimidation to lead and, therefore,
autonomous individuals, with high self-esteem were
viewed as a threat to the organization’s mission.

29. 29
Pew Foundation Research (2012)
78% of Americans believe there are
“absolute standards of right and wrong”.

30. 30
o 43% of employees admitted to at
least one unethical act
o 75% observed an unethical act and
did nothing about it
o Price Waterhouse Coopers (2012)

31. 31
 The real lesson of WorldCom is that
employees believed that they had “no
choice,” that they “were victims,” that they
were merely “following orders.”
 The real lesson of WorldCom is that
employees were expected to behave at the
moral level of children.

32. 32
Conclusion
Authoritarian organizations are
incompatible with individual dignity
and respect.
Bureaucratic, command-and-control
organizations breed ethical dilemmas

33. 33
Ethical Dilemmas
Managers owe a duty of loyalty to the
employer to 1) carry out its policies faithfully
and 2) to advance the employer’s interest.

34. 34
Faced with unethical or illegal
practices, what are your choices?

35. 35
The Ethical Dilemma
Fear of losing status, rewards, acceptance
Fear of punishment and rejection

36. White Collar Crime and
Securities Fraud

37. What is a crime?
 Actus reus (action or conduct that is a
constituent element of a crime)
 Mens rea (mental state, “evil intent”)
 Higher burden of Proof – beyond a
reasonable doubt

38. What is “white collar crime”?
 Typically, a violation of law by a
corporation or one of its managers.
 Some waive the mens rea requirement
 The “white collar” can be the perpetrator or
the victim
 Examples include:
• Embezzlement
• Racketeer Influenced and Corrupt Organizations
Act (RICO)
• Wire and Mail Fraud
• Fraud
• Economic Espionage
• Antitrust
• And last but not least, Securities Law Violations

39. Securities Law Violations
 10(b) of the 1934 Act
 10b-5 disclosure
 Elements:
• Interstate commerce component
• Material Misrepresentation
• Scienter (mens rea)
• Omission in connection with the purchase or sale
or securities
• Reliance
• Misrepresentation the causation of the plaintiff’s
losses

40. How does punishment
work?
Federal Sentencing Guidelines
• Individuals
• Corporations
• Liability for others’ actions?
• Works like respondeat superior/ vicarious
liability

41. 41

42. 42
The Deferred Prosecution
Agreement
United States v. Bristol-Myers Squibb

43. 43
When employees expressed doubts
about “hitting the numbers” and that
sales targets were too aggressive, they
were transferred or demoted.
According to the Department, the
culture “is a web of attitudes and
practices that tends to replicate and
perpetuate itself…[It] may instill respect
for the law or breed contempt and
malfeasance.”

44. 44
In making a decision to seek an indictment against a corporation, the US
Department of Justice, will consider the corporate culture, as measured by:
 Its response to regulatory action,
 Its reaction to the criminal conduct committed by its
employees, including the cooperation with the Government’s
investigation
 The level within the corporation at which the crimes were
committed or conducted,
 The pervasiveness of the criminal behavior within the
organization
According to the Department, the culture “is a web of attitudes and practices
that tends to replicate and perpetuate itself…[It] may instill respect for the law
or breed contempt and malfeasance.”

45. 45
Failure to have a whistleblower protection
policy or to train supervisors may constitute
“willful indifference” to corporate crime and
fraud.

46. 46
Whistleblower Policy
 Summarize the law
 Establish a complaint procedure
 Identify the person who receives complaint
 Person who receives the complaint should
not be the decision-maker
Note: In-house counsel, HR Managers and
Supervisors can also be whistleblowers.

47. 47
Disclosures or objections can take the
form of writing reports, filing a charge or
an internal complaint.

48. 48
ALL employees are required
to cooperate in implementing
the company policy.

49. SARBANES-OXLEY ATTORNEY’S
OBLIGATION TO REPORT ILLEGAL
ACTS
Standards of professional conduct for attorneys, including an
“up the ladder” reporting rule:
 Requiring an attorney to report evidence of a material violation of
securities law or breach of fiduciary duty or similar violation by the
issuer or any agent thereof, to the chief legal counsel or the CEO of
the company; and
 If the counsel or officer does not appropriately respond to the evidence
(adopting, as necessary, appropriate remedial measures or sanctions
with respect to the violation), requiring the attorney to report the
evidence to the audit committee of the board of directors or to another
committee of the board of directors comprised solely of directors not
employed directly or indirectly by the company, or to the board of
directors

50. “NOISY WITHDRAWAL” RULE
 Where an attorney files a notification with the SEC as part of a
“noisy withdrawal,” no violation of the attorney/client privilege
occurs
 As an alternative process for considering attorneys’ reports of
material violations, an company may (but is not required to)
establish a qualified legal compliance committee (QLCC)
comprised of at least one member of the audit committee and
two or more other members of the board of directors who are
independent.
The QLLC would be authorized to require the company to take
remedial action. If the company were to fail to act as directed,
each QLLC member would have the responsibility to notify the
SEC.

51. 51
NJ Conscientious Employee
Protection Act
Highlights:
 Enacted in 1986
 Creates a private right of action
 One year statute of limitations
 Provides a jury trial
 Remedies include compensatory and punitive damages
 Prevailing plaintiffs may be awarded attorneys’ fees
 Employer may be awarded its attorneys’ fees for frivolous
complaints
 Poster is required (in English and Spanish)
 Employer may translate poster in any other language
 Policy must be distributed annually
 Gives greater employee protection than any federal or
state law

52. The purpose of CEPA is “to protect
and encourage employees to report
illegal or unethical workplace activities
and to discourage employers from
engaging in such conduct”
52

53. 53
The “Whistleblower” Case
 Reasonable belief that employer violated a
law, rule, regulation, was fraudulent or
criminal, or violated a “clear mandate of
public policy”,
 Whistleblowing activity, i.e.: disclosure or
objection, or refusal
 Adverse employment action
 Causation

54. 54
Employee’s “ReasonableEmployee’s “Reasonable
Belief”Belief”
Employee should have some objectiveEmployee should have some objective
rationale for her belief that employer’srationale for her belief that employer’s
conduct violates law, is fraudulent or isconduct violates law, is fraudulent or is
incompatible with a clear mandate ofincompatible with a clear mandate of
public policy. Generally, an employeepublic policy. Generally, an employee
should be able to articulate a law,should be able to articulate a law,
regulation or code.regulation or code.

55. 55
Generally speaking, whistleblowing
must protect the public or further
some important public interest.

56. Lippman v. Ethicon
N.J. Supreme Court (July 15, 2015)
Issue presented:
Whether an employee, whose job duties
entail knowing or securing compliance
standards and knowing when an employer
deviates from standards is protected by
the Conscientious Employee Protection
Act (CEPA)
In other words, can an employee be “blowing
the whistle” when such actions are part of
her normal job duties?
56

57. Who may fall into this
category?
 In-House Counsel
 Finance and Accounting
 Safety Personnel
 Security Officers
 IT Compliance
 HR Compliance
 Health Personnel
 Ethics Personnel
 Client/Patient Safety
57

58. Lippman v. Ethicon
The Facts:
 Ethicon is a manufacturer of medical
devices used for surgical procedures
 Lippman is a doctor who serves on
the Quality Board, which has the “final
say” on decisions to re-call, delay or
correct a product.
 Lippman offers strong opinions on the
Board regarding safety issues.
58

59. Facts (continued):
 It is Lippman’s job to offer his opinions
about product safety.
 The Board sometimes accepts his
recommendations and sometimes
they are rejected.
 There is sometimes strong
disagreement among Board members
– marketing – and often heated
debate.
59

60.  Following Lippman’s recommendation
the device is recalled.
 It was Lippman’s opinion that the device
was dangerous.
 No law, rule, or regulation pertaining to
the medical devices is violated because
company voluntarily recalled product
 Lippman is later fired for secretly dating
a subordinate contrary to Ethicon’s
internal policy.
60

61. Court finds that watchdog employees
can blow the whistle even if objections
or disclosures are part of the normal
job duties
61

62. “Watchdog” employee is an employee, by
virtue of doing their job is in the best position
to:
1) Know the relevant standard of care, and
2) Know when the employer is violating that
standard of care
62

63. Who watches the watchdog?
Watchdog employees have access to
company information, including confidential
company information and often to legal
counsel

64. Quinlan v. Curtiss-Wright Corp.
(N.J. Supreme Court, 2010)
 Employees can be fired for disloyalty,
i.e.: stealing confidential information
 But some acts of disloyalty may support
the employee’s whistleblower lawsuit

65. Fraud Enforcement and
Recovery Act of 2009
Rewards whistleblower (“Relator”) with a
portion (usually 15-25%) of the government's
monetary recovery when the whistleblower:
1. Provides material information about fraud,
2. The government could not have uncovered the information
on its own,
3. The government relies on the information for monetary
recovery
65

66. In 2010, a J&J subsidiary
agreed to pay $81 million to
settle off-label marketing
charges in connection with
government health care
plans. Relators received
20.5% or $16.6 million.
66

67. N.J. False Claims Act
 Enacted 2008
 Creates penalties for submitting a
“false claim”
 Provides for a suit by the N.J.
Attorney General to recover losses,
 Treble dangers
 Whistleblower protection
 Monetary reward for whistleblowers
67

68. Six-year statute of limitations
after fraud was committed or
three-years after its discovery.
68

69. 69
Questions?
Thank YouThank You
John J. Sarno, 2015 – All rights reservedJohn J. Sarno, 2015 – All rights reserved