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The Ethical and Regulatory Morass of the Stanford Scandal

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I didn’t start out looking for trouble.

But like the camera shots in a Sergio Leone western, every time the camera pulls back for perspective in the Stanford Investment Bank story, the plot changes.

But let’s begin at the beginning. You of course know Madoff–the man with the minus touch.

Now we have "Sir" Allen Stanford–let’s call him mini-Madoff. He’s head of the Stanford International Bank (SIB), now accused by the SEC of bilking about $1.8 billion through, what else, a Ponzi scheme. Based in Antigua, operated out of Mississippi and Texas, a very private management team.

SIB had an outside lawyer from the prestigious firm Proskauer, Rose. His name is Thomas Sjoblum. On February 10, in the SEC offices in Fort Worth, Texas, Mr. Sjoblum accompanied his client, SIB’s Chief Investment Officer Laura Pendergest-Holt, to a 4-hour deposition by her.

The next day, Mr. Sjoblum told the SIB folks he was resigning from the case.

Musta been one helluva testimony Ms. Pendergest-Holt gave, eh? So it would sound.

In a blackberry email to an SEC lawyer two days later, Sjoblum clarified:

"I disaffirm all prior oral and written representations made by me and my associates … to the SEC staff regarding Stanford Financial Group and its affiliates.”

For me, it all started with that funny word–“disaffirm.” In a blogpost on February 20 I said “disaffirm” was a tortured linguistic construct aimed at putting distance between telling the truth and technically not lying.

But then the real fun started. Pull the camera back a few feet.

I then separately heard from two lawyers for whom I have very high regard, suggesting I had been too hard on Sjoblom. They suggested Sjoblom was a whistle blower whose actions were principled, difficult and courageous.

They were not alone. The blog AmLaw Daily had written the day before:

…Sjoblom…sniffed out the fraud, withdrew his representation, and told federal investigators he essentially took back everything he had told to them in recent weeks…

Am Law Daily contacted a number of legal ethics experts to discuss Sjoblom’s decision to come clean about a client’s alleged frauds–especially given the possibility that in doing so, he disclosed confidential client information to the government…

Experts said Sjoblom did precisely the right thing–and, more importantly, that the federal Sarbanes-Oxley Act likely made his decision much easier than it otherwise might have been.

"He [Sjoblom] did the right thing here," says Stephen Gillers, a legal ethics expert at New York University School of Law.

I started looking for crow to eat. Until, that is, I read the Memphis Daily News account of what actually happened at that February 10 SEC deposition.

By the SEC’s own notes, Sjoblom came out swinging—asking if the SEC had yet referred the case to Justice, arguing that the SEC didn’t have geographic jurisdiction, arguing that the (allegedly) bogus CDs Stanford sold were not “securities” under the relevant legal definition.

Huh?

Suddenly the aspiring Hollywood screenwriter in my head switched stereotypes: this was not the plot for the courageous whistle blower movie. This was the script for the B "mob lawyer" movie. Could he really have had a Saul on the road to Damascus conversion in one afternoon?

So–what happened in that room? Did Ms. Pendergest-Holt really drop a bombshell that blindsided Sjoblom? Or did Sjoblom do a Claude Raines (“I am shocked, shocked! to discover my client has lied to me for years about billions of dollars!”)? Incidentally, Ms. Pendergest-Holt was arrested by the FBI a few days later.

Let’s pull the camera way back.

Attorney Sjoblom is an ex-assistant chief litigation counsel in the SEC’s Division of Enforcement. On February 10 he aggressively explores defenses for SIB just before Pendergest-Holt comes on and says things that get her arrested. The next day he resigns.

The obvious question becomes, ‘What did Sjoblom know, and when did he know it?’ Of course I don’t know, but let’s consider what Sjoblom might have known:

  1. In 2003, a whistle blower case against Stanford was brought in front of the NASD (FINRA’s predecessor).
  2. In fact, according to Henry Blodget, "at least five former Stanford employees told the SEC they thought Stanford was running a Ponzi scheme, from 2003 on."
  3. A January 2008 lawsuit was filed against Stanford alleging endemic lack of compliance.
  4. A Venezuelan analyst wrote a report called Duck Tales in January 2009 which did for Stanford what Markopolis did for Madoff–blew the conceptual lid off.
  5. But the nail in the "shocked, shocked!" coffin is in the FBI arrest claim for Stanford’s Pendergest-Holt:

..the complaint alleges there were stormy preparation sessions for Pendergest-Holt in January and February “during which the bank’s shaky asset base became apparent to a wider circle of officials and to the lawyer — ‘Attorney A’ — who later quit.”

Um, who might ‘Attorney A’ be? Whoever it was, he knew something was up back in January.

So–just when did Sjoblom "sniff out the fraud?" The day after he heard testimony in Dallas? Or way before?

If he knew anything in advance–then why the aggressive denial-of-jurisdiction rant at the outset of the hearing? How much charade does a lawyer have to go through before he can speak some truth? I know legal ethics is much concerned with maintaining client confidences. But how much pretzel-twisting is required to serve that particular god?

The legal experts said Sjoblom did “exactly the right thing.” They also say that Sarbanes-Oxley made it far easier for lawyers to reveal confidences in certain situations. Let’s assume both statements are true. How horrible it must have been pre-Sarbanes–how many would-be whistle-blowing lawyers went to the grave mute?

How much in-your-face evidence of massive fraud does it take before a lawyer can say "my client is a crook and a liar" in a legally acceptable manner?

May I suggest the right answer should be–"less than this."

If this was a praiseworthy, ethical act consistent with the highest standards of the law, then something is very wrong–either with a lawyer, with legal ethics, or with the law itself. The law owes society more than citing last-minute tortured "disaffirmations" in the face of egregious criminal wrongdoing as examples of ethical behavior.

Note: It’s possible that Professor Gillers was not aware of all this background when he called Sjoblom’s actions "exactly the right thing." For all I know, given the background, he might even agree with me. I’d welcome his perspective here, and I’d welcome any correction from anyone about matters of law or fact.

Fixing Executive Compensation: Social Engineering, or Ethics?

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A little over two years ago I wrote a post called The Next Big Trust Scandal—suggesting it would be Executive Compensation.

I may have gotten that one right. Think of the fuss lately about corporate junkets (most recently, Northern Trust) , CEOs on private jets, etc. And of course, Obama’s proposal to cap executive compensation.

Which brings us to yesterday’s Wall Street Journal Op-Ed page, where two respected academics (Judith Samuelson, Lynn Stout) write “Are Executives Paid Too Much?”

They get a few things quite right—and one big thing quite wrong.

They suggest an epidemic of short-termism is responsible not only for compensation excesses, but for value destruction in the economy as a whole. In this they are surely right—or, to be accurate, I completely agree with them.

They also offer a simple, practical and powerful suggestion:

“Top executives who receive equity-based compensation should be prohibited from using derivatives and other hedging techniques to offload the risk that goes along with equity compensation, and instead be required to continue holding a significant portion of their equity for a period beyond their tenure.”

Well done.  But now for that Other Thing. The heart of their problem statement is:

“Our economy didn’t get into this mess because executives were paid too much. Rather, they were paid too much for doing the wrong things…. The system was perfectly designed to produce the results we have now. To get different results, we need a different system.”

No. The problem extends well beyond “the system,” and it won’t get fixed at the same level it was caused.

We cannot let business off the hook by claiming the rat maze was incorrectly designed, the cheese was of the wrong variety, or was hidden in the wrong corners. The solution does not lie (solely, or even mainly) in tweaking financial incentives, even in shifting timeframes.

The solution to egregious excesses—and to a lot more—simply must include a healthy dose of personal accountability for doing the right thing. A conscience. An inkling that society has expectations, and the power to demand that they be met. For lack of a better term, ethics.

Samuelson/Stout’s three solutions—metrics, communications and compensation structures—don’t include a simple social demand to behave decently.

What has to happen, I think, is not behavioral engineering, but shock therapy.

I am not being naïve here. In fact, I think they may be. The verbs in their recommendations are “we need new ways to measure,” “must change the ways they reward,” “need to ensure.”

The academics and the exec comp consultants are not going to force change. In fact, by treating the issue as a strictly technical one, solvable by just tweaking metrics and rules, they are actively complicit in the continued non-ethical framing of the problem.

Force is what’s needed. CEOs and Boards don’t do things because an academic says they should. Radical politicians have it right when they say, “power comes only to those who take it.”

My suggestion is for a lot of people to get really ticked off. The authors may deride Obama’s solution, but a president proposing policy exerts a lot of pressure. Columnists, bloggers, authors, short-sellers, reformers—get angry. Shareholder activists, get active. Demand accountability and decency.

As Alfie Kohn says, “monetary incentives work. They incent people to get more monetary incentives.” If we believe the only reason corporate people behave the way they do is to maximize their own personal bank accounts, then we will get nothing but more rats, moving in slightly different directions, more and more firmly grounded in nothing beyond their rat-ness.

Ironically, author Lynn Stout may understand this well, having recently written a paper called Taking Conscience Seriously. It looks good. One hopes she will allow her thoughts on conscience to more deeply infect her writings on altering corporate compensation.

 

 

Mini-Madoff Scandal Scales New Linguistic Heights

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R. Allen Stanford, head of Stanford International Bank, has been charged with fraud by the SEC.

Another day, another Ponzi scheme. Stanford’s take: $8 Billion. Not chump change, of course, but neither does it put him in Madoff’s league (up to $40 billion).

I think I shall call him mini-Madoff.

But the Stanford scandal has set a linguistic record—a record for creative disingenuousness. According to Securities Docket:

…one of Stanford’s own lawyers has emerged as a key figure in the matter. Bloomberg reports that last week, Thomas Sjoblom, a partner at law firm Proskauer Rose doing work for Stanford’s company’s Antigua affiliate, told authorities that he “disaffirmed” everything he had told them to date. According to his bio on his law firm’s website, Sjoblom spent nearly 20 years at the SEC, and served as an Assistant Chief Litigation Counsel in the SEC’s Division of Enforcement from 1987 to 1999.

“Disaffirmed” (italics mine). Doncha love it?

I hereby nominate “disaffirmed” as the new leader in the “Mistakes Were Made” category at the forthcoming Creative Language awards ceremony.

This is no trivial honor. It outpaces such classics as “the dog ate my homework,” “I have no recollection,” and “it depends on what the meaning of the word ‘is’ is.”

In my humble opinion, the only one that comes close was “modified, limited hangout” from the Watergate days.

It is a distant descendant of the old IBM (or was it GE?) culture that used “concur” and “dis-concur” as part of its decision-making process. But that was for standard business processes; this is for excusing $8 billion of malfeasance—clearly vaulting the term into another category altogether.

Sjoblom, a 20-year SEC employee, originally affirmed certain facts to his old employer. Enquiring minds want to know–where did he learn “disaffirm?” Was it at the feet of Stanford? Did he bring it with him from the SEC?  Was he–oh, this is juicy–speaking Ponzi-talk?  Or was he talking bureaucrat-speak?

And what’s to make of the syntax? Does it truly confound logic, as in "have you stopped beating your wife?" Or is it just a fancy "I lied?"

Never mind–let’s be practical. Where else can we put this word to use? After all, if you can undo a legal affirmation by using it—why, the sky’s the limit!

  • That affair I had back when I was married? I’d like to disaffair it, please.
  • Remember when I said I’d pick up the tab? Distab that, if you don’t mind.
  • The vows we made at our marriage? Disavow them, please (oops, that one’s a real word). Yes, I know I said "I do," I’m just saying "I dis-do."

You get the idea.

Language evolves marvelously to fit the circumstances requiring description. So it is here.  Double-talk is as double-talk does.

Mini-Madoff financially, perhaps. But in a league of its own in AOL—Abuse Of Language.

I Have Done Nothing Illegal

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You know the old joke: “Legal ethics is an oxymoron.”

Now, it may or may not be that lawyers are disproportionately ethically challenged. But the real oxymoron is not about lawyers—it’s about the legal-ization of ethics.

An act can be immoral or unethical without being illegal. And the absence of illegality does not make an act moral. This should not be a hard concept to grasp.

Yet, there is no shortage of businessmen and politicians who aggressively assert legal non-guilt as if it could mask the stench of grossly unethical behavior.

Googling “I have done nothing illegal,” and variations on the theme, provides such gems as these:

Illinois Governor Rod Blagojevich—“I’m here to tell you right off the bat that I am not guilty of any criminal wrongdoing.”

New York’s former State Senate Majority Leader Joseph Bruno, responding to a damning indictment, sounds like the ex-boxer he is, saying
“After being hounded for three years, I am being indicted on a prosecutor’s sleight of hand.” Bruno insults an entire profession by calling millions of dollars in sales-commissions-or-is-it-kickbacks “consulting fees.”

Remember Senator Alan Cranston of the Keating Five? Talking to congress, he said, “You know that I broke no law.”

Enron’s Jeff Skilling testifies that he and Lay never broke the law.

Confirming their virtue, his buddy Ken Lay said: “We don’t break the law.”

Former New Jersey Senator Robert Torricelli, explaining the scandal that led to his resignation: “…had not denied taking gifts from Mr. Chang, but said that he took no ‘illegal gifts’…”

Back in 2006, San Jose’s mayor Ron Gonzales kept it simple. Indicted for fraud, bribery and conspiracy, he said “I broke no law.”

Lousiana’s former Governor Edwin Edwards, being charged with $1M in racketeering and extortion said, ”I know I didn’t break any Federal laws.”

Really blurring the ethics/law boundaries, Pennsylvania State Senator Fumo’s 2007 response to a 139-count Federal indictment was, “I know in my heart that I have not done anything illegal.”

Over on Long Island, the late Republican Joseph Margiotta was convicted of federal mail fraud and conspiracy charges in a municipal insurance kickback scheme, and served 14 months. Even then, he explained, “I didn’t break any law.”

When Don Imus was brought back to the air from the racist dead, part of the rationale for it, as provided by the CEO of Citadel Broadcasting was, you guessed it, “he didn’t break the law.” So I guess all that other stuff—no biggie.

I can’t wait to hear from Madoff. His scam deftly sought out legal vacuums. So if and when he says, “I’ve broken no laws,” it’s important we remember he’s still a sociopathic ripoff artist.

When someone says, “I didn’t do anything illegal,” you can bet your bottom dollar they did two things wrong. One was the scam itself.

The other is worse. They have demeaned both the law and ethics.

The law cannot and should not substitute for ethics. For one thing, it puts an unsupportable load on the law—and lets unethical and immoral people off the hook.

Worst of all, it equates moral arguments to whining complaints made to third parties. That’s a recipe for abdicating personal responsibility. You can’t trust people who have no inner moral compass. A thief with a legal loophole is still a thief. A con artist with a good lawyer is no less a con artist.

That is the true meaning of “legal ethics is an oxymoron.”

When someone to whom we entrust our life savings or our political leadership acts badly, and then defends himself by saying,“I broke no law,” they should be shunned and shamed—outed and shouted—exposed to derision and disgust in all forms of public dialogue. Not to mention voted out or fired.

Bruno, Blago and Bernie ought to be ashamed of themselves. If they can’t even manage that, their status in court has no claim on our judgment.

Great Selling by Truth Telling: A Best Buy Tale

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I was in Best Buy the other day.

The sales guy was excellent. He was open about what he knew and what he didn’t. He advised us to spend more, or to spend less, depending on what we wanted and needed in the several product lines we were exploring. He was candid. He spoke quickly and directly, in short, to-the-point sentences.

When we finished, I asked him, “You’re not on commission here, right?”

“No, not here. I’ve sold on commission before, though.”

“Which do you like better?” I asked.

“Oh, I prefer this. You can tell the truth.”

“You can tell the truth?”

“Yup. The other way, sometimes you’ve got to make the month, or bend it around for some other reason. It’s hard. Here you just tell the truth. It’s a lot easier.”

Just tell the truth–it’s a lot easier.

Let’s parse that: then evaluate it.

Why is it a lot easier?

1. There’s only one version of the truth—an infinity less to remember.
2. It’s easier to answer questions—it requires only short-term memory, not creative license.
3. It’s easier for people to tell you’re not lying.
4. People buy more from you if they feel you’re telling the truth.
5. People tell their friends; truth-telling is good marketing.

Of course, some people feel this is a sucker’s game. It’s sales right? The point isn’t to tell the truth, it’s to not get caught not telling the truth? To look like you’re telling the truth, not to actually tell it.

After all, we’re in business—right?

So let’s have a look at the numbers.

BBY Stock Chart

Here is a 5-year stock chart for Best Buy, tracked against the S&P500, and against Best Buy’s most obvious US competitor, Circuit City. (BBY is the one that ends at the top, by the way).

And sure, you can make charts look any way you want. I’m not trying to be an analyst here. I’m just saying the case is not only intuitive, but very plausibly empirical as well.

(By the way, Bear Stearns rated it underperform back in January. Goldman Sachs rates it a Buy.  Cheap shot? Maybe, but I’m just sayin’…)

Telling the truth is not stupid, wussy, or bad business. Far from it. It’s very good business. And for pretty obvious reasons.

And that’s the truth.

Decaying Social Trust and Moral Indignation

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Pop quiz!

Who wrote: “This is how the world will end—not with a bang, but a whimper.”

a. T.S. Eliot
b. W. H. Auden
c. Robert Frost
d. e.e. cummings
e. Alfred E. Neumann

Answer at the end; no fair peeking.

I don’t know about the world, but the subprime/mortgage/credit crisis shows how social trust ends. Not with a whimper, but with righteous moral indignation—on all sides.

We are in the midst of the deflation of a debt or credit bubble, itself based on an asset bubble—overpriced houses. As of today, according to the Mortgage Bankers Association, 24% of subprime mortgages are delinquent or in foreclosure; ditto for 4% for prime mortgages; and for all mortgages it’s a record 7.9%, the highest since records began in 1979.

Everyone played musical chairs. And the more frantic the music, the more rightous the talk.

Here’s the Heritage Foundation—mind you, just last November, 2007—demonstrating its utter subordination of logic to ideology, arguing against H.R. 3915, a House bill to reign in predatory lending:

[the bill] would establish an explicit series of credit standards for lenders, which could have the effect of excluding many moderate income borrowers from the ownership market. In sum, the enactment of H.R.3915 would delay the housing market recovery that is now struggling to get underway.

Yup, Congress killed the real estate bubble appreciating market.

A year earlier, in September 2006, the Mortgage Bankers Association stated that

“the subprime market has evolved dramatically in recent years, providing significant benefits to consumers…increasing regulation could decrease competition and increase rates that the subprime market offers consumers.”

But this is not a populist rant.  Consumers were far from just hapless victims.

An FBI Mortgage Fraud report 3 months ago stated that up to 70% of early payment defaults may have been linked to buyer misrepresentation on loan applications.

What about FICO credit scores?  Courtesy of BusinessWeek, meet “credit doctors,” companies who will manipulate credit ratings by blitzing credit agencies with disputes about old reports (which have likely been lost), setting you up as an “authorized user” of an account owned by someone with good credit, or just creating paper accounts.

“All legal,” they protest. Of course. No miscreants here.

So—end game—bang or whimper?

Dateline, CBS Evening News February 12, 2008.  Meet Karen T., a married San Francisco suburbanite who bought a condo as a second home for $505K, financing it 100% with mortgage debt. Now it’s worth $340K, and her adjustable mortgage goes up $900 this June.

They own another home. They can afford the rate increase. So—what to do?

Karen’s answer?  Walk away. Default.  Give it back to the bank.

Is Karen distraught? Not really. “I’m not doing anything illegal.  Everything’s negotiable in business—this is just another business decision. I don’t see why this is any different. I’m within my right to walk away from a bad deal.”

And 60% in an LA Times Real Estate blog poll agreed with her.

Karen is morally indistinguishable from a landlord turning off the heat under rent control; insurance companies withdrawing sole-provider coverage from unprofitable markets; banks charging usurious credit rates; emergency rooms turning out the uninsured; de facto mortgage redlining; and a thousand forms of “fine print."  Or—come to think of it—from a banker foreclosing on a never-should’ve-approved-that-loan loan. 

The rallying cry is always, “I’m not doing anything illegal.”

But here’s the kicker.

Karen’s not morally indignant about walking away. To her, that’s “a business decision.”

No, her moral indignation is reserved for the consequences she might face.  She leans her face on her hand, her voice intensifying, as she says, “It is devastating to think that my credit scores are going to drop 200 points," she said.

OMG, it’s just so, like, unfair!

Huh? Devastated because you were educated, had the money, and placed a 100% bet on an overheated market—and lost? And you can afford to pay the piper—but don’t want to?

Take a trip to Vegas, Karen, and see if the blackjack dealers buy it.  Better yet, go tell it to someone with half your education and income who’s been foreclosed on after having spent their last money trying to pay the bank. 

It doesn’t matter who started the food fight.  It seems that the decay of social trust is accompanied by higher levels of self-righteousness and narcissism on both sides.

When business and consumer alike choose moral bankruptcy over financial bankruptcy—without even thinking about it—and then justify it indignantly through Darwinian arguments—well, Houston, we’ve got a problem in trust-land.  Not to mention ethics-land. 

Oh yeah—T.S. Eliot. 
 

Business Ethics and Self-Orientation

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The Harvard Business School Working Knowledge series has a track record of picking fascinating topics, even if I’ve occasionally accused them of over-analyzing the obvious.  Not so in a current article.

Why We Aren’t as Ethical as We Think We Are, by Tenbrunsel et al, is not only a terrific topic, but—in my humble opinion—it’s treated very provocatively. It raises big issues well.

Here’s HBSWK’s abstract:

People commonly predict that they will behave more ethically in the future than they actually do. When evaluating past (un)ethical behavior, they also believe they behaved more ethically than they actually did. These misperceptions, both of prediction and of recollection, have important ramifications for the distinction between how ethical we think we are and how ethical we really are, as well as understanding how such misperceptions are perpetuated over time…Key concepts include:
• All individuals have an innate tendency to engage in self-deception around their own ethical behavior.
• Organizations worried about ethics violations should pay attention to understanding these psychological processes at the individual level rather than focus solely on the creation of formal training programs and education around ethics codes.

That second conclusion contrasts with the usual business approach to "ethics."  Many corporate “ethics” initiatives amount either to probabilistic analyses or to brainwashing about political correctness.

Harvard Business School’s own ethics program is, if I recall, built around analyzing three constituencies: business, the law, and society (the latter including prevailing norms and mores).  The manager’s job is to intelligently balance the response.

This approach doesn’t distinguish between “ethics” and corporate strategy.  If the overriding goal is the long-term survival and success of the company—which it nearly always is (think "sustainable competitive advantage")—then "balancing" is just another exercise in corporate optimization.  The concept of a “conscience” in such models is a curiosity that seems to exist solely in others—just another data point or constraint to be optimized.

Yet how can “ethics” be discussed absent a treatment of the formation of conscience?

It can’t.  To their credit, the authors suggest conscience is individually meaningful, and affected by emotional processes. They say the psychological angle may be heretical to some ethicists—but I think the personal angle is even more heretical to most business thinkers, stuck in modes of alignment and processes, where "conscience" is an alien concept.

The article has meaning beyond ethics.  Look at this pattern.  People think they are more ethical than others; and they rewrite their past (and future) ethicality relative to current actions.

This is also a pattern not just of ethics, but of self-orientation.

A study asked faculty and students to rate how often they thought about the other group, and how often they thought the other group thought about them.  Yup—students and faculty alike thought mostly about themselves—but students assumed that faculty were also absorbed by their thoughts of students.  And faculty assumed that students were consumed by thoughts of faculty.  Everyone projects their own levels of self-absorption on to others, no one noticing the true similarity—self-absorption itself.

In its low-grade form, this is human nature.  In extremis, it is narcissism.  Another extreme form is encountered in alcoholics.  In both cases, the individual projects an over-inflated sense of one’s own importance on to others. (For narcissists, the projection is always positive—for alcoholics, it’s an oscillating  sine wave of positivity and self-revulsion).

Narcissists and alcoholics—I suspect—aren’t high on ethical behavior charts either.

Which suggests the ability to get out of oneself and to see things as they are are prerequisites both for accurate observation of the outside world, and for ethical behavior.  

Which suggests that strategy and ethics actually share something—an innate focus on the Other.  Self-centered strategies, those built around optimizing selfishness, are ultimately self-destroying; good strategies are intimately bound up with markets, customers, employees, suppliers.   Ditto for ethics; an ethics built solely on corporate success is an oxymoron.  Ethics require us to be intimately bound up with others.  

Hmmm…strategic and ethical analyses share an external view…both have a psychological component…business is about people as people, not just as objects of behavioral vectors …

This is not your normal business writing.  Kudos to HBSWK, and to the authors.

 

How the Pharmaceutical Industry Can Increase Trust

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“You can’t talk your way out of what you behaved your way into,” says Stephen Covey.

But not everyone believes Covey.

NY Times, May 22, 2007.

“Columbia University dismissed its financial aid director yesterday after the release of documents showing he promoted a student loan company in which he had a stake, sending letters to parents and alumni on three occasions praising the lender.”

NY Times, March 21, 2007.

…the year [Dr. Allan Collins]was chosen as president-elect of the National Kidney Foundation, the pharmaceutical company Amgen, which makes the most expensive drugs used in the treatment of kidney disease, underwrote more than $1.9 million worth of research and education programs led by Dr. Collins…In 2005, Amgen paid Dr. Collins at least $25,800, mostly in consulting and speaking fees…

…Dr. Donald Hunninghake served on a government-sponsored advisory panel that wrote guidelines for when people should get cholesterol-lowering pills… eight of [the panel’s] nine members had financial ties to drug makers.

A 2002 survey found that more than 80 percent of the doctors on panels that write clinical practice guidelines had financial ties to drug makers.

Doctors said that lectures were highly educational, and that drug makers hired them for their medical expertise and speaking skills. But former drug company sales representatives said they hired doctors as speakers mostly in hope of influencing that doctor’s prescribing habits.

I don’t wish to engage in pharma-bashing. But Covey’s point needs heeding.

Columbia’s response to conflict was to say that the director, a 1985 graduate of the university, had “abused a position of trust and violated the university policy on conflicts of interest.”

So they fired him.

Covey, presumably, would approve.

Not so in pharma. In recent decades, the business of making and selling drugs has become much less about making and much more about selling. Perhaps that’s why the industry tends to see its trust problem as a marketing or PR issue—’if only the public knew the full truth, they’d trust us.’

Typical is this headline, from an April post by Ipsos research, :

Pharmaceutical Companies Need To Raise Awareness Of Their Social Investments To Improve Industry’s Image

Or this, promoting an interactive web seminar:

How can you safely navigate this politically-charged environment—and keep your business and brands strong? What can you do to restore public trust—even while facing negative campaign rhetoric? Find out at a New WebSeminar—Surviving the Election Wars: Strategies to Build Trust and Defend Brands.

Just to be clear who they view as being in charge of trust and brands:

If you are involved in advertising, marketing, market research, corporate communications, product and brand management, senior management, public affairs, or public relations…This is a program you can’t afford to miss!

PhRMA, the industry association, is a big proponent of the trust-is-a-communications-issue viewpoint. In an article appropriately titled "New PhRMA Leaders Discuss Future of the Industry, Need for More Public Education, " PhRMA’s CEO, ex-congressman Billy Tauzin, says, "“For PhRMA to continue to advocate well for our members, we must begin to correct the misconceptions and the outright fraudulent views that have been created about our work and our products.”

So, how’s it working? Here’s one survey:

43% of US adults believe that pharmaceutical companies fund groups like the American Heart Association and the National Kidney Foundation in order to get more people to buy their products or medicines, whereas only 21% believe it is to demonstrate that the companies care about a health issue supported by the group.

Truth: the pharmaceutical industry is loaded with good, smart, dedicated, well-meaning people. It has saved millions of lives, and improved millions more. It has the potential to do unimagineable good. We need a trusted pharmaceutical industry. But it’s the industry that must do the heavy lifting, not the consumer. The only real way to be trusted is—to be trustworthy.

A friend who does PR for pharma tells me it is difficult to give away drug coverage to lower income people—for free—because people are suspicious.

Covey’s right. You can’t talk your way out of a problem you behaved your way into—ask Imus. You can’t market your way out of structural conflicts of interest—ask Arthur Andersen. You don’t become trustworthy—worthy of trust—via marketing or advertising or PR agencies. That’s throwing water on a grease fire.

Pharma needs a fundamental recontracting with two critical constituencies—patients and physicians. It’s a business thirsting for trust—but trust based on values and behaviors. Not on spin, ads, press releases, awareness improvement and “education.”

We should all be rooting for pharma to make that shift.

Insurance Fraud, Short-Selling and Why You Can’t Trust Stock Analysts

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8AM, July 17, 1989: I’m driving on Route 2 outside Concord Massachusetts, lights flashing and horn honking, fighting rush hour traffic. My son is nearly being born in the back of the car. We reach Emerson Hospital; nurses rush my wife to the ER; I park the car and run back.

Birth time: about one minute after reaching the hospital. Delivery: by the good nurses, a minute before the obstetrician on duty arrives to bless what’s now history.

Two weeks later, the bill arrives. It includes several thousand dollars for the obstretrician. I call to complain. “What do you care,” the office says, “it’s all covered by your insurance.”

9:20AM May 12, 2007: I’m flying from Amsterdam Schiphol back home, reading Joseph Nocera in the Herald Tribune, Why Short-sellers Should Have Their Say. Think of short-selling as the “opposite” of buying stocks—betting that a stock will go down, rather than up.

Since precisely 50% of stock trades involve selling, you’d think Wall Street would put roughly the same emphasis on when to sell as on when to buy. Of course, you’d be wrong. There are few short-sellers, and they are often reviled, harrassed, even sued.

Reasons often given for the dearth of short-sellers are that losses from short-selling are potentially unlimited (true), that short-selling goes against the long-term natural rise of the market (true so far), and that human psychology is basically optimistic (debatable). But those are weak explanations.

The real reason is—wait for it—money. Wall Street gains more when you buy and trade than when you sell. This is one reason securities analysts overwhelmingly issue positive, not negative, ratings. But there’s more.

Companies don’t like negative ratings. To be more precise, CEOs and senior managers of companies with compensation tied to stock performance don’t like negative ratings. Many leaders call the analysts’ parent company to complain, even issue veiled threats to switch to other providers of financial services. Even sue.

And voila, the analysts either withdraw the negative rating or just stop covering the company.

The analyst will blame management for telling him to emphasize positive reviews. Thus he justifies his lapse in professionalism: the devil made me do it.

The poorly rated company blames the analyst for “unfair” analysis (meaning it hurts the CEO in the wallet). Easier to blame the analyst than to take responsibilty for the shortcomings identified.

Management of the analyst firm also caves in, blaming the blackmail tactics of the rated company.

Fingers point everywhere but back. Blame instead of responsibility And blame feeds the rot.

Our social “solutions” propagate the problem. We opt for an expensive regulatory program like Sarbanes-Oxley, to protect everyone from their presumed innate selfish tendencies. Our approach resembles airport security—“somebody will always cheat: let’s constrict everyone’s freedom, in order to stop the few.” But securities markets are not airports.

Far from stopping a culture of blame-throwing, this approach enables it by assuming bad motives.

Instead, we should selectively prosecute the hell out of individuals who behave badly. Prosecute analysts who won’t honor their role, CEOs who blackmail bankers, and bankers who cave in, and who lack the guts to call the cops.

A vibrant community of short-sellers would have seen Enron coming. A few people could have spotted the lies, and made a lot of money by publicizing the rot—saving a lot of lifes’ savings and careers. An MBA class at Cornell did just that—analyzed the numbers and recommended shorting Enron well before it imploded. No one was listening.

Business has no right complaining about government intervention if it can’t bring to bear the pressure of capitalism upon itself. Greed and lies aren’t the stuff of business—they’re the death of business, as long as they stay in dark rooms.

July, 1998, Madison, New Jersey: I go to a collision damage repair shop.

“I’ve got a dent in the back door of my car, can you punch it out? It doesn’t have to be perfect."

“Nah, we’d have to replace the whole door.”

“No you wouldn’t—the gas station will do it for me for a hundred bucks, I figure you guys could just do a better job. It’s a simple job to punch it out, I’d do it myself if I had the tools.”

“Buddy—god alone couldn’t fix that door, we’ll replace it or do nothing at all.”

Translation: “what do you care, your insurance company is paying. And we’re not about to ruin a good scam by being customer-focused.”

We don’t have to put up with this crap. Call your better business bureau. Call your state regulatory agency. Call your insurance company. Write a letter to the editor. Rat these people out.

With the market in nosebleed territory, you might want to short a few stocks yourself. If your broker doesn’t know how, then help create trust and integrity in the market while you make money—by getting a new broker.