From Meatpacking to Insurance: Lessons in Ethical Downfalls

FROM MEATPACKING TO INSURANCE: LESSONS IN ETHICAL DOWNFALLS
Presented to North Carolina Rate Bureau
May 8, 2014
Wells & Associates
Brenda Wells, Ph.D., CPCU, AAI

Corporate Ethics Defined
The study of
howcorporations behave in terms of duty, and,
whysome actions are deemed appropriate and inappropriate.
An organization’s rules and principles for
Conduct of the individual and the organization
Decision-making
Setting policy

It’s Not Just “Today’s” Issue!
Early 20thCentury: Meat Packing in 1906
Work conditions
Low wages
Child Labor
Dangerous
Unsanitary

50% decline in beef exports!!!
BUT…. some good came out of it….
Results of The Jungle

Meat Inspection Act of 1906
Mandatory inspection of livestock
Sanitary standards for slaughterhouses and meat processing plants
Authorized monitoring of slaughter and processing by USDA

Pure Food &Drug Act (1906)
•Federal inspection of meat products
•Forbade sale of tainted meat & food
•Protected public from sale of things identified as “healthful” that had no scientific support to prove those claims
•Required labels on things containing alcohol, cocaine, etc.

Safer Workplaces
"… they fell into the vats;…. sometimes they would be overlooked for days, till all but the bones of them had gone out to the world as Durham's Pure Leaf Lard!“ --The Jungle

Awareness of Child Labor
•1916: Keating Owen Act
•prohibited interstate sale of goods produced by
•Factories that employed children under 14
•Mines that employed children under 16
•Any facility where children under 16 worked at night or more than eight hours a day
STRUCK DOWN BY SUPREME COURT AS UNCONSTITUTIONAL!

What Ended Child Labor?
The Great Depression
Adults willing to work for child’s wage, so…
…1938 Fair Labor Standards Act passed

…ABOUT 100 YEARS LATER
Meanwhile….

Corporate Scandals
Adelphia (cable)
Enron (energy)
HealthSouth (hospitals)
WorldCom (long distance)
Tyco (conglomerate)
Global Crossing (telecommunications)

Enron (2001)
December, 2000
Market capitalization is 70 times earnings
February 2001
CEO resigns and lets President become CEO
March, 2001
Fortunearticle questions the high value of Enron
Nobody really knows how they make money
August, 2001
CEO resigns for “personal reasons”
October, 2001
Company admits that earnings were overstated
December, 2001
Bankrupt

Jeffrey Skilling
President of Enron
Named CEO (2001)
Received $132 million
Instituted “mark to market” accounting
Resigned 8/14/01
For “personal reasons”
Sold off large blocks of stock
“I spent probably most of my professional life helping to build Enron Corporation. I don't think there was anyone that was as shocked by the -by the collapse of the company as I was.”
--Jeffrey Skilling

Kenneth Lay
Chairmen of the Board and CEO (before Skilling)
Said collapse was a conspiracy waged by short sellers, rogue executives, and the media
Assured employees and investors that all was well, even when company was in the tank
“I take full responsibility for what happened at Enron. But saying that, I know in my mind that I did nothing criminal.
--Kenneth Lay

Andrew Fastow
Chief Financial Officer
Created the other “entities” to hide $30 billion in debt
Personally made tens of millions of dollars
“I thought I was being a hero for Enron.”
“We were doing this to inflate our earnings, and I don't think we wanted to show people what we were doing.”
--Andrew Fastow

Summary of Crimes
Accounting fraud
Showing future unrealized profits as current assets on the books
Creation of fraudulent companies on paper to hide transactions and relationships
Manipulating price of energy in California
Insider trading (executives dumping stock)

Skilling?
Found guilty on many counts
Sentenced
24 years and 4 months
Fined $45 million
Sentence reduced by 10 years in 2013
In Colorado minimum security
Must actually work (earns about 25 cents an hour)
Eligible for release in 2017 (will be 63)

Fastow?
Pled guilty to 2 counts of securities & wire fraud.
Cooperated with prosecutors to convict others
Got lighter sentence Served 6 year sentence in Federal prison in Louisiana
Completed sentence in December, 2011
Forfeited $23.8 million in assets
Today
Lives in a $990,000 mansion in Houston
Works at a law firm as a “document clerk” (SmyserKaplan & Veselka)
July 2013: spoke to Association of Certified Fraud Examiners at their annual convention

Lay?
Not indicted for 2.5 years
Finally charged with 11 counts
Convicted May, 2006. October sentencing planned
Died on vacation July 5.
Suspicion is that he is still alive:
The timing of his death
Location (rural unpopulated area of Colorado)
Cremation after death
Close relationship with Bush family
Autopsy report contained at least one error
Judge erased all his convictions

Tyco (2002)
CEO Kozlowski builds Tyco from $40 million to $40 billion
Buys fine art to furnish a NYC apartment
Buys from NY Gallery
He had the art shipped to NH to avoid sales tax, then brought it right back to NYC
Gallery investigated for sales tax evasion
Manhattan District Attorney indicts Kozlowski on evasion of over $1 million in sales tax

Tyco BOD investigates and finds….(among other things)
Manhattan apartment furnished with
$6,000 shower curtain
$15,000 doggie umbrella stand
$2 million birthday party for his wife (Tyco paid for half)
Short swing stock trades (buy/sell company stock within 6 months, which is against SEC for insiders to do)
$19 million interest-free loan from company funds
Ultimately charged with
stealing $170 million
pocketing $430 million through illegal sale of stock
Falsifying records to conceal loans
Evading >$1 million sales tax on fine art purchases

Sentence: up to 25 years
Grand larceny
Falsifying business records
Conspiracy
Securities Fraud
Over $200M in fines and restitution
Paroled January 2014 (age 68)

The Accountant’s Role
Arthur Andersen history
Founded in 1913 by Andersen and DeLany
Andersen’s Philosophy:
“Think straight, talk straight.”
Felt responsibility was to investors, not client
Company even “fired” clients in the 1970’s
1980’s:
Accounting firms wanted to be consultants
Conflict between accounting standards & “happy” clients

1990’s:
Consulting boom = tripledcompany’s per-share revenue
Consulting wing was advising accounting clients how to beat accounting standards and rules!
Early 2000’s:
Consulting wing sues and separates from audit
Has to pay $1.2 billion to Andersen
Andersen CEO resigns because he did not get $4 billion, in the deal (and was told that he should)
Implicated for shredding Enron documents, plus other faulty audits were discovered

Common Themes?
Service-based industries (few “tangible” goods)
Executive greed
Accounting fraud
Conflicts of interest
Lack of transparency
No system of checks and balances
Most industries involved were regulated, but, the regulator did not prevent losses

INSURANCE INDUSTRY ETHICS?
What About

ELIOT SPITZER
NY Attorney General
2004 Financial services crack down
Wall Street (mutual funds)
Insurance
Elected Governor of NY in 2006

Broker represents the insurance buyer
Procures insurance for buyer
Legal duty to represent buyer’s best interest
Must disclose commissions to buyer
Marsh (broker) was steering clients to favorite insurers (especially AIG and ACE)
Evidence of bid rigging
Broker also received “service fee” for creating customized policies, handling premiums, etc.
Spitzer felt this was misleading the client, since broker already received a commission for service
Broker also got, after year end, a bonus override commission from the insurer that was not disclosed to client

What was The REAL Scandal?
Companies
CEO’s?
Maurice Greenberg, Sr.
Evan Greenberg
Jeffrey Greenberg
AIG
ACE
Marsh & McLennan

What Happened?
Marsh settled for $850 million
Two executives convicted
Sentenced to 16 weekends in prison (appealed and never served) Later overturned.
Hank and Jeff Greenberg forced to resign
No criminal charges filed
Hank paid $15 million fine but was still worth over $3 billion. And then…..

Karma Kicked In….
US financial disaster of 2008.
Greenberg’s AIG stock went from $700 to $28 million

Positives
No more bid rigging
More transparency
More emphasis on corporate ethics
Negatives
Many small producers hurt by elimination of fees
Lost jobs
AIG shareholders and retirees lost big
Results of Spitzer Investigation??

MetLife (1994)
Advertised “personal pension plans” to nurses
Were really just selling whole life insurance
Whole life insurance has very high transactions costs
Also pays very high commissions to sales people
Often convinced people to give up existing policies at a loss
“Churning” or “illegal replacement”

Health Net (1993)
Who Was NeleneFox ?
38 year old woman with Stage IV breast cancer
Denied a high-dose chemo/bone marrow transplant procedure by her HMO, Health Net
Said it was experimental and not a proven treatment
Raised $212,000 and got treatment, but died at 40
Trial showed
Health Net had end-of-year profit sharing for doctors to avoid high-dollar procedures
Health Net had approved the procedure for two other women previously, both of whom survived (and testified)
Jury awarded $89 million verdict (not really a lot for a $2 billion company
Settled for undisclosed amount, estimated to be $5 million

Health Insurers (2010)
7 Health insurers in California
Aetna Inc.
Anthem
Blue Cross/Blue Shield of California
Cigna Corp.
Health Net Inc.
Kaiser Foundation Health Plan
UnitedHealthcare/PacifiCare
Fined nearly $5 million. Why?
Systematically failing to pay doctors and hospitals fairly and on time.

Unapproved Rates(Jan. 2012)
Washington state insurance officials fined Unicare(Indiana) $100,000
Sold thousands of medical policies with unapproved rates to students at the University of Washington and other collegessacross thestate.

Plus another follow-up
Conclusions

A FEW CONCLUSIONS
For your consideration…

What Did All Scandals Have in Common?
Service-based industries
Regulated industries (ironically the regulator did not prevent the issues!)
Executive greed
Accounting fraud
Conflicts of interest
Lack of transparency
No functioning system of checks and balances

Advice
If it sounds too good to be true…
Be vigilant about appearances
Lack of transparency? RUN!
Ask why
Do not shoot the messenger
Document, document, document!

THE GUY IN THE WHITE HAT
Epilogue

WHAT ABOUT ELIOT SPITZER?
Elected Governor of NY in 2006
Resigned in 2008

Emperor's Club VIP
High-dollar escort service founded in 2004
The company of one of their “models” could cost up to $31,000 per day
March 2008….guess who is revealed to be a client?

Where is Spitzer Today?
Still married
Writes for Slate
Had tvshow on CNN

From Meatpacking to Insurance: Lessons in Ethical Downfalls

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