Police Ignoring Laws in Florida: A Case of Systemic Corruption

Systemic corruption means not only that a department or agency has an organizational culture that allows for and may even laud corruption, but also that a city hall, as well as larger jurisdictions such as member-states and even federal agencies may be enabling the corruption by looking the other way and even lying to cover-up the lower-level corruption. A study at Florida Atlantic University published in the Journal of Criminal Justice identifies 24 categories of police misconduct in Florida from 2012 to 2023. Even though it is tempting to highlight violent illegal acts by police employees, lying regarding criminal law and refusing to take reports of criminal activity may be more detrimental because such misconduct is probably more common than is the violent sort. If so, the extent of corruption and the underlying false sense of entitlement by police patrol-employees and even their supervisors may be vastly understated in the United States.

The full essay is at "Local Police Enabled in Florida."

Speculators and Price Volatility: The Case of Gasoline

According to The Huffington Post, “Oil prices took a nosedive [on May 5, 2011] in a historic selloff, erasing weeks of gains and indicating that the months-long climb in energy prices may have hit a ceiling. Crude oil plunged 10 percent as startled investors unloaded their positions and a weeklong decline accelerated into an outright freefall. The price of U.S. crude went from triple digits to double digits, falling below $100 after opening at close to $110. Brent crude, a European benchmark, lost $12 at one point in a sell-off that exceeded the one following Lehman Brothers' collapse.”[1]  The question, for course, is why, the answer of which can lead us to consider some public policy recommendations. Understanding the previous price rise is a first step both to answering this question and for evaluating public policy solutions.

The full essay is at "Speculators and Price Volatility."

1. William Alden, “Oil Prices Plunge in Record Sell-Off,” The Huffington Post, May 5, 2011.

Undermining the Dodd-Frank Act: An Incessant Desire for Profit

In the Dodd-Frank financial reform Act of 2010, financial firms in the U.S. are required to set aside higher reserves to cover losses on trades of securities, including those that “swap” the risk of default of a given security, such as bonds based on subprime mortgages. Almost immediately, the Wall Street bankers set about minimizing the new hindrance.  

The full essay is at "Undermining the Dodd-Frank Act."

Jack Lew at his confirmation hearing for U.S. Treasury Secretary. Lew had been the chief operating officer at units at Citibank.     NPR

Wall Street Snuffed Out President Clinton's Goal of Homeownership for the Poor

It is one thing for the head of a government (or a government’s executive arm) to set a praiseworthy goal that is in the public interest, and quite another thing to rely on the financial sector to implement it. Finance has its own means tied to its own goals, with plenty of greed in the mix. Governmental officials may tend to minimize the potential damage from ego-laden greed to the goals of public policy. Such policy ideally strives for the good of the whole, whereas the goals of a private sector of a part. This could account, at least in part, for the financial crisis of 2008 and the continuing bear market in housing in much of the U.S.

The full essay is at "How Wall Street Snuffed Out Clinton's Goal."

Nissan's CEO Caught in the Crosshairs of Business and Society in Japan

Ordinarily, courses that include business & society (with business & government, and business ethics material also included as if the three fields were somehow one) have been relegated to the periphery in American business schools. Perhaps the business sector and its sycophantic deans have simply assumed that little actual cost comes from business managements deviating from societal norms and values. Admittedly, such a schism decreases reputational capital, a long-term intangible asset. Even so, the long-term-oriented and intangible can manifest as immediate jolts to such capital, with actual, measurable financial costs kicking in. They are triggered by news-worthy incidents in which a company or even one high-level manager, such as a CEO, are perceived societally as being in the wrong. The general perception of wrongness in turn depends on how far a company or manager have deviated from societal norms and values. Crucially but typically ignored, even though societal norms and values can absorb certain ethical principles or theories, business ethics is a distinct field because reasoning from or to ethical principles or theories lies at the core there. That is, no philosophical reasoning is involved in business & society; rather, the norms/values of a business sector, industry, or company are compared or contrasted with relevant societal norms and values. In this essay, I analyze the case of Carlos Ghosn, who was CEO of Nissan, Renault, and Mitsubishi on November 19, 2018 when he was arrested “on allegations that for years he had withheld millions of dollars in income from Nissan’s financial filings.”[1]

The full essay is at "Nissan's CEO in Japan."

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1. Amy Chozick and Motoko Rich, “The Rise and Fall of Carlos Ghosn,” The New York Times, December 30, 2018.

Superficial Hospitality in Hospitality Management: A Weak Industry?

Staying at a motel or in a hotel can involve being at close quarters with people coming with various backgrounds and cultures, and with different lifestyles. A group of teenagers may be in one room, while an elderly couple is trying to sleep next door. It seems to me that hospitality management should take a look at Crowne Plaza's instituting “snore monitors” to patrol corridors in the designated quiet zones in the hotels in London, Leeds and Manchester in the E.U. While the monitors were apparently particularly oriented to detecting particularly loud snorers, such an understanding of the problem may be superficial, for most noise issues, I submit, involve others things, such as people shouting, or loud television or music. In short, the sheer extent of inconsiderateness toward strangers in society generally is doubtlessly reflected in hotels and motels. What may be surprising is the extent to which employees and even managers working in the hotels or motels are inconsiderate themselves in refusing or otherwise failing to enforce their own noise rules. This weakness may have a wider extent within the business sector, at least in the U.S., wherein employees and their supervisors act as individuals (with momentary power over customers) rather than as agents, for significantly less power is involved in the latter than the former role/mentality.

The full essay is at "Superficial Hospitality in the Hotel Industry."

Unnecessary Systemic Risk: Banks' Price-Fixing and Racketeering in Side Businesses

A lawsuit filed in a Florida district-court in 2013 alleged that JPMorgan, Goldman Sachs, and the London Metal Exchange (LME) artificially inflated aluminum prices.  The plaintiffs accused the companies of anti-trust practices and racketeering, including the “manipulation of the aluminum market through supply price fixing.”[1] This sounds like what had led to the forced break-up of Rockefeller’s Standard Oil Company, though in that case exactly a century before, the restraint of trade had to do with the company’s main line of business (i.e., oil). In the case of the banks, however, owning commodity assets such as storage facilities and trading in raw materials do not constitute banking. This point triggers a larger question involving the repeal of the Glass-Steagal Act.

Should we allow banks to expand even beyond these functions to owning commodities and related real-estate? What does this do to the banks' systemic risk?    Image Source: salisburyareafoundation.org. 

The full essay is at "Unnecessary Systemic Risk in Banking."

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[1] Melanie Burton, “Glencore, JPMorgan Sued Over Warehouse Aluminium Prices,” Reuters, August 7, 2013.

The Underbelly of Corporate Charity as Corporate Social Responsibility

Why do corporate managements spend corporate money on charities? The obvious reason is to reduce the amount of corporate income tax due. Yet another motive, not as transparent, has to do with reputational capital, and that motive may also explain corporate social responsibility.

  Bernie Madoff, surrounded by police, after having been arrested. Wikimedia Commons

The full essay is at "Corporate Charity as Social Responsibility?"

Just the Facts: Empirical Social Science Overplayed

Tilburg University in the E.U. is known to have an emphasis on empirical studies in the social sciences (including business). With this bent, the university is typically considered to be closer to the American academic tradition than that of Europa. So when Dr. Diederik Stapel, a psychology professor at Tilburg, acknowledged to having committed academic fraud in several dozen published articles in academic journals, the academic status of empirical research itself was thrown into question. Experts point out that Stapel “took advantage of a system that allows researchers to operate in near secrecy and massage data to find what they want to find, without much fear of being challenged.” Indeed, it is rare even for peer-reviewers of potential articles to demand to see the raw empirical data supporting a given study’s conclusions. According to Dr. Jelte Wicherts, a psychology professor at the University of Amsterdam, the problem of data being misused by the scholars who collect and analyze it is widespread in the discipline of psychology.

The full essay is at "Empirical Social Science."

The Financial Crisis of 2008: On the Role of Negligence Breaching Fiduciary Obligation

Roger Lowenstein laments that “New York Times columnist Joe Nocera lamented that ‘Wall Street bigwigs whose firms took unconscionable risks … aren't even on Justice's radar screen.’ A news story in the Times about a mortgage executive who was convicted of criminal fraud observed, ‘The Justice Dept. has yet to bring charges against an executive who ran a major Wall Street firm leading up to the disaster.’ In the same dispassionate tone, National Public Radio's All Things Considered chimed in, ‘Some of the most publicly reviled figures in the mortgage mess won't face any public accounting.’ New York magazine saw fit to print the estimable opinion of Bernie Madoff, who observed that the dearth of criminal convictions is ‘unbelievable.’ Rolling Stone, which has been beating this drum the longest and with the heaviest hand, reductively asked, ‘Why isn't Wall Street in jail?’”

Lowenstein interprets these sentiments as implying “that the financial crisis was caused by fraud; that people who take big risks should be subject to a criminal investigation; that executives of large financial firms should be criminal suspects after a crash; that public revulsion indicates likely culpability; that it is inconceivable (to Madoff, anyway) that people could lose so much money absent a conspiracy; and that Wall Street bears collective guilt for which a large part of it should be incarcerated.”

Lowenstein argues that “(t)hese assumptions do violence to our system of justice and hinder our understanding of the crisis. The claim that it was ‘caused by financial fraud’ is debatable, but the weight of the evidence is strongly against it. The financial crisis was accompanied by fraud, on the part of mortgage applicants as well as banks. It was caused, more nearly, by a speculative bubble in mortgages, in which bankers, applicants, investors, and regulators were all blind to risk. More broadly, the crash was the result of a tendency in our financial culture, especially after a period of buoyancy, to push leverage and risk-taking to the extreme.”

Lowenstein also ticks off a loose monetary policy (i.e., extremely low interest rates), unaccountability at Fannie Mae and Freddie Mac, weak financial regulation, and an overconfidence in “risk management” methods in arguing that we should not be reductionist in ascribing the crisis to fraud alone or even primarily.  

Analysis at "Negligence in the Financial Crisis of 2008."

The Founder of Theranos: A Flawed Charismatic Vision and Leader

“Theranos rose quickly from being a college dropout’s idea to revolutionize the blood analysis industry to a hot tech bet that accrued $700 million in funding and many famous names for its board.”[1] Elizabeth Holmes, the company’s founder, was stripped of her position at the company in 2018 after the SEC discovered her deep involvement with the fraud at the company. Her “smarts, fierce determination and Steve Jobs-inspired look . . . were critical” to her being able to perpetuate the lie that the company had a device that could do blood tests with just a scant amount of blood, obviating the unpleasant experience of having blood drawn by needle.[2] Although Jack Welsh, Bill Gates, and Steve Jobs accomplished enough to warrant their fame, I submit that companies are too prone to create “champions”—even strangely calling them “rock stars.” In other words, even though charismatic vision is of value to a business, neither such a leader nor his or her vision itself should be overplayed. Business, I submit, has a marked tendency to do just that, and often with impunity.

The full essay is at "Fraudulent Charismatic Vision at Theranos."

On leadership vision, see Skip Worden, The Essence of Leadership: A Cross-Cultural Foundation

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[1] Marco della Cava, “Behind the Scenes of Theranos’ Dramatic Rise, Fall,” USA Today, March 16, 2018.

[2] Ibid.

The Downfall of MF Global: Implications for Banks Too Big To Fail

Here is an alphabet-soup of regulatory agencies that let MF Global, a financial services company that specialized in futures-trading, engage in much, too much, risk: SEC, CME, CFTC and FINRA. On one level, regulators will never be able to stop practitioners from making risky or simply bad decisions; a business system populated only by firms above average is by definition impossible. As long as their managers have any freedom of movement at all, some firms, including some in the financial sector, will inevitably fail. The question I want to pose is whether this means that firms too big to fail (TBTF) should be allowed to exist at all. In short, although MF Global itself was not TBTF, the risk Corzine (who had been chairman of Goldman Sachs) permitted suggests that human nature might be insufficiently disposed to support mammoth concentrations of private capital whose fall could mean the collapse of the financial system itself. Ultimately, I suppose, human nature can only go so far, organizationally speaking.

The full essay is at "The Downfall of MF Global."

The SEC and the Courts on Wall Street Settlements in 2011

The SEC enforcement staff, including its chief, Robert Khuzami, decided to kick a gift horse in the mouth rather than to “take a lesson” and perhaps come out stronger for it. At issue was the rejection by U.S. District Judge Jed Rakoff of the SEC’s proposed $285 million settlement with Citigroup. In his ruling, Rakoff denounced the penalty as “pocket change” to the bank, which would not even have to admit to any wrongdoing. Investors duped into buying into a $1 billion deal called Class V Funding III had lost $700 million. Betting at the time of issue against half of the assets in the deal, Citigroup did not share knowledge of its hedge with the investors.

The reaction of the SEC staff in Khuzami’s department was simply to “put down their pencils” and wonder how they should go about arranging settlements with financial firms accused of misconduct before and during the financial crisis of 2008. The SEC “doesn’t know what to ask for anymore in the settlements,” one of the people familiar with the Citigroup settlement said. Rather than take the judge’s judgment to heart, Khuzami urged the five-person commission running the SEC to vote to approve an appeal, and they did so. Rather than take the less convenient course of insisting that the banks too big to fail that manipulated their own clients at least admit wrong-doing and reimburse the losses, Khuzami viewed the judge’s ruling as if it were a political obstacle to be obviated by asking an appellate court to ignore it. Given the political muscle that must surely go with Citigroup’s wealth, Khuzami could have been assuming that the bankers would see to it that sufficient pressure would plied on enough appellate judges to make the obstacle easily avoidable. In other words, Khuzami was likely assuming that Rakoff was a fluke, given Citi’s influence—perhaps even in the SEC itself.

The full essay is at "The SEC and the Courts."

Knee-Jerk Reactions: On the U.S. Government Enabling Dictators

While in the U.S. Senate, Paul Kirk, the interim U.S. Senator who took Ted Kennedy’s seat, said, “Without a legitimate and credible Afghan partner, that counterinsurgency strategy is fundamentally flawed. The current Afghan government is neither legitimate nor credible. . . . We should not send a single additional dollar in aid or add a single American serviceman or woman to the 68,000 already courageously deployed in Afghanistan until we see a meaningful move by the Karzai regime to root out its corruption.” 

The full essay is at "Enabling Dictators."

Investment Bank Dinners with Corporate Executives and Hedge Fund Managers: The General Public Not Admitted

“One day in early March [2011], the phone lines of hedge-fund traders around London and New York suddenly lit up. A stock that many of them had placed hefty bets on—Pride International Inc., an energy company in the process of being sold to a rival—was falling. The traders had no idea why. They soon figured it out: J.P. Morgan Chase & Co. had hosted a meeting that day between a handful of hedge-fund traders and executives from a company that was considered a prime candidate to start a bidding war for Pride. One of those executives had indicated they weren't likely to make a bid.”

“The prospect of a bidding war had lifted Pride's shares above where they likely would have traded in the absence of a potential interloper. . . . At the March 8 lunch, though, as the traders munched on scallops and fish, Seadrill vice president and board member Tor Olav Trøim splashed cold water on the idea of a bid. He recalls telling traders that the company's Feb. 24 statement was ‘not normally what you would say if you were interested in bidding yourself. His intended message, according to one person familiar with the matter, is that Seadrill was "very unlikely’ to launch a competing offer for Pride. The information was market-moving, traders say. In the hours after the lunch, some traders wagered that the odds of a bidding war had declined. Seadrill's shares rose more than 1% as it was viewed as less likely to pursue a costly acquisition. Pride's shares fell by about 0.5% in the minutes before markets closed.”

“The moves may seem small, but they were significant for ‘merger arbitrage’ traders, who make short-term bets on deal stocks. In the case of the Ensco-Pride deal, the movements translated into a sudden 64% spike in the deal's ‘spread.’ That arcane measure reflects the difference between a target company's stock price and the per-share value of the acquirer's offer. The spread is closely watched by hedge funds that focus on merger arbitrage, which stand to gain or lose large sums based on the spread's movement. As the shares moved, anxious investors bombarded Seadrill's investor-relations office with phone calls, trying to figure out whether the company had issued new guidance about its appetite for bidding on Pride, according to a person familiar with the matter. Company officials responded that they hadn't released any new information. . . . Trøim says Seadrill executives regularly meet with large and small investors and that it is appropriate to help them understand the company's strategy. ‘We cannot see that we in any way have crossed any lines for giving privileged information,’ he says.”

The full essay is at "Investment Bank Dinners."

Source:

David Enrich and Dana Cimilluca, “Banks Woo Funds with Private Peeks,” The Wall Street Journal, May 16, 2011.

Anti-Corruption and Federalism in India

At the end of 2011, India’s coalition government adjourned the upper chamber of the federal legislature without passing legislation that would have created an independent anti-corruption agency. India was a the time rife with governmental corruption. A college wants its foreign students protected from crime? A payment is made to local police employees, who pocket the money for themselves. Someone wants a government contract? Well, that goes without saying.

The full essay is at "Anti-Corruption and Federalism in India."

Source:

Jim Yardley, “Bill to Create Anticorruption Agency Stalls in India,” The New York Times, December 30, 2011. 

Christianity and “Social Capitalism”

The SEC charged Ephren Taylor with a fraudulent $11 million Ponzi scheme in April 2012. According to Reuters, “Taylor fraudulently sold $7 million of notes said to bear 12 percent to 20 percent annual interest rates, to fund small businesses such as laundries, juice bars and gas stations.” He “had conducted a multi-city ‘Building Wealth Tour’ in which he spoke to congregations” on the importance of “giving back.” He called himself a “social capitalist.” In actuality, he used the money on himself and his wife’s attempt to become a singer.

The full essay is at "Christianity and 'Social Capitalism'."

Source:

Jonathan Stempel, “SEC Charges Ephren Taylor II ForAllegedly Bilking Churchgoers In $11 Million Ponzi Scheme,” The Huffington Post, April 12, 2012.

The U.S. Goes after Executives at Volkswagen: A Deterrent?

Oliver Schmidt, a Volkswagen executive who had been head of the company’s environmental and engineering center in Michigan, pleaded guilty on August 4, 2017 to two federal charges in the United States: conspiracy to defraud the federal government and violating the Clean Air Act. He “admitted conspiring with other Volkswagen employees to mislead and defraud the United States in 2015 by failing to disclose that thousands of diesel cars were rigged to evade detection of excess emissions levels. He also admitted filing fraudulent emissions reports to regulators.”[1] He faced possible fines and time in prison. James Liang, another of the company’s executives who had been charged, had already pleaded guilty to charges of conspiracy and violating the Clean Air Act. The other executives charged were in the E.U. state of Germany, which does not extradite its residents. Given the power of the auto industry in that state, such accountability applied to executives for the same fraud in the E.U. may have been too difficult to achieve. Nevertheless, for the sake of business ethics alone, prosecuting executives personally rather than just companies is in general important as a deterrent.

The full essay is at "Executives at Volkswagen."

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[1] Bill Vlasic, “Volkswagen Executive Pleads Guilty in Diesel Emissions Case,” The New York Times, August 4, 2017.

Unethical Business at Volkswagen: Loans Cut off

As R&D was at a premium in car companies reorienting to electric and even driverless cars, Volkswagen could ill-afford the suspension of the European Investment Bank’s low-cost financing in 2017. The company “was barred from receiving European Union research funding over allegations it misused a previous loan to cheat on emissions” by programming “11 million cars to fool regulators.”[1] At issue were the company’s “use of so-called defect devices, software that caused pollution controls in diesel motors to work properly only when the engine computer detected that an official emissions test was underway.”[2] Accordingly, the European Anti-Fraud Office concluded that the company had misled authorities about how €400 million ($472 million) was used ostensibly to develop engines to be more fuel efficient and thus pollute less. I contend that the company’s reply was worse than none.

The full essay is at "Unethical Business at Volkswagen."

A related book: Cases of Unethical Business, can be obtained in print or as an ebook at Amazon.com.

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1. Jack Ewing, “European Bank Cuts Funds to VW Because of Emissions Fraud,” The New York Times, August 1, 2017.

2. Ibid.

Institutional Conflicts of Interest: Business and Public Policy

Typically people react emotionally much more severely to an exploited conflict of interest when a person gains a personal benefit such as through a bribe. If company, or even an office or department thereof, stands to benefit inordinately, American society typically looks the other way on the institutional conflict of interest rather than taking it apart. This may just be human nature. However, the troubling institutional arrangements within an organization or between them may be tolerated because of the erroneous assumption that conflicts of interest are unethical only when they are exploited. Accordingly, the book provides a solid grasp of the structure and essence of the conflict of interest in order to make the case that it is inherently unethical. Examples of institutional conflicts of interest readily come from business, with particular attention to corporate governance and the financial sector, as well as from how business and government relate, such as through regulation The reader should come away with a sense of just how pervasive and ethically problematic institutional conflict of interests are. 

The book, Institutional Conflicts of Interest: Business and Public Policy, is available in print and as an ebook at Amazon.com