Business Ethics and Social Responsibility

Read the two cases and answer the question below that follows. Also, answer the questions that relate to: Deceptive Advertising, Corporate Social Responsibility Program, Multinational Companies and International Travel.
Insider Trading: Martha Stewart: Insider Trader? Case (Ethics in Finance)

On December 27, 2001, Martha Stewart was en route with a friend from her home in Connecticut to a post-Christmas holiday in Mexico when her private plane landed for refueling in San Antonio, Texas. While standing on the tarmac, she listened to a telephone message from her assistant, Ann Armstrong, reporting a call from Peter Bacanovic, her stockbroker at Merrill Lynch. The message relayed by her assistant was brief: Peter thinks ImClone is going to start trading down. Stewart immediately returned the call, and at some point during the 11-minute conversation, was put through to her broker’s office at Merrill Lynch. Peter was on vacation in Florida, and so she talked instead with his assistant, Douglas Faneuil. Faneuil later testified that, on orders from Peter, he told Stewart that he had no information on the company but that the Waksal family was selling their shares in ImClone. Although Stewart denied being told this, she instructed Faneuil to sell all of her ImClone stocks. Her 3,928 shares sold within the hour at an average price of $58.43 a share, netting her approximately $228,000. Stewart than made one more phone call, to Sam Waksal’s office, leaving a message that Waksal’s secretary scribbled as Martha Stewart something is going on with ImClone and she wants to know what. During her vacation in Mexico, she reportedly told her friend, Isn’t it nice to have brokers who tell you those things?
Martha became a national celebrity and self-made billionaire through her print and television presence and the many household products bearing her brand name. After a brief career on Wall Street as a stockbroker, she started a successful catering business that led to a succession of books on cooking and household decorating. The magazine, Martha Stewart Living followed, along with a television series and a partnership with Kmart. In 1999, her company Martha Stewart Living Omnimedia (MSLO) went public, with Stewart as the CEO and chairman. MSLO was unique in that Martha herself was the company’s chief marketable asset.
Sam Waksal was the founder, president, and CEO of ImClone Systems, Inc., a biopharmaceutical company that sought to develop biologic compounds for the treatment of cancers. Martha and Sam were close friends, having been introduced in the early 1990s by Martha’ daughter Alexis, who had dated Waksal for a number of years. It was also through Alexis that her mother and Waksal came to know Peter Bacanovic, who attended Columbia University in the mid-1980s while Alexis was enrolled at nearby Barnard College. Peter worked briefly at ImClone before joining Merrill Lynch in 1993 as a broker, and Martha and Waksal became two of his most important clients. Waksal helped Marther achieve an advantageous split from her then publisher Time Warner in 1997, and in gratitude, she invested an initial $80,000 in ImClone stock. With a net worth of over $1 billion, her investment in 2001 represented three hundredths of one percent of her holding.
In 2001, the future of ImClone rested on the uncertain prospects of a single drug, Erbitux, for the treatment of advanced colon cancer. Erbitux was a genetically engineered version of a mouse antibody that showed great promise in early tests. In October, ImClone submitted a preliminary application to the Food and Drug Administration (FDA) for approval of Erbitux. This application was merely the first step that allowed the FDA to determine whether the research submitted by the company was sufficiently complete to begin a full FDA review. A decision on the application was expected by the end of December. On December 28, 2001, ImClone announced that the FDA had found the application to be incomplete and would not proceed to the next stage. After the news was announced, ImClone stock dropped 16 percent to $46 a share. The previous day, on the morning of December 27, Sam Waksal and his daughter asked Peter Bacanovic to sell all of their ImClone shared held at Merrill Lynch, which was worth over $7.3 million. Merrill Lynch sold the ImClone stock of daughter for approximately $2.5 million but declined to sell Sam Waksal’s shares, citing concern about insider trading. An attempt by Waksal to have his shares transferred to his daughter so that they could be sold by her failed. Separately, Sam Waksal’s father sold shares worth more than $8 million, and smaller amounts were sold by another daughter and a sister of Sam Waksal.
The Securities and Exchange Commission (SEC) quickly ed an investigation into suspected insider trading in ImClone stock. Faneuil later testified that Peter Bacanovic initially told him that duping Stewart’s stock was part of a tax-loss selling plan. After being informed by Faneuil that Stewart had made a profit, Peter changed the story, explaining that Martha had placed a stop-loss order to sell the stock if it dropped below $60 a share. Martha affirmed to federal investigators that she had given this instruction to Peter and gave as a reason that she did not want to be bothered about the stock during her vacation. This conversation, she claimed, was with Peter, though she had in fact talked only with Faneuil. She also said that she was unable to recall whether Sam Waksal had been discussed in the December 27 telephone conversation or whether she had been informed about stock sales by the Waksal family. Before meeting with investigators, Martha accessed the phone message log on her assistant’s computer and changed the entry Peter Bacanovic re ImClone, but afterwards told her assistant to restore the original wording. Meanwhile, Peter Bacanovic altered a worksheet that contained a list of Martha’s holdings at Merrill Lynch, with notations in blue ballpoint ink to include @$60 by the entry for ImClone. An expert later testified in court that the ink for this entry was different from that used in the other notations.
In March 2003, Same Waksal pleaded guilty to changes of securities fraud for insider trading, obstruction of justice, and perjury. He was later sentenced to seven years and three months in prison and ordered to pay $4 million. The Department of Justice accepted a proposal from Martha’s attorneys that she plead guilty to a single felony court on making false statement to federal investigators that would probably avoid any prison time. However, Martha decided that she could not do this and would take her chances in court. A justice department official said, We had no desire to prosecute this woman but indicated that the lying was too egregious to ignore. Martha Stewart and Peter Bacanovic were charged with conspiracy, obstruction of justice, and perjury- but not insider trading. On March 5, 2004, a jury found both parties guilty. Martha and Peter were each sentenced to five months in prison, five months of home confinement, and two years of probation. Martha was fined $30,000 and Peter $4,000. By selling her ImClone stock when she did, Martha avoided a loss of approximately $46,000. She estimated the total loss from her legal troubles to be $400 million, including a drop in the value of MSLO stock and missed business opportunities.
In June 2003, the SEC brought a civil action for insider trading, which was separate from the criminal charges of with Martha was found guilty. To convict Martha of insider trading, the SEC would have to show that she had received material nonpublic information in violation of a fiduciary duty. The information that she received from Faneuil in the December 27 phone call was that the members of the Waksal family were selling their ImClone stock. Neither Faneuil nor Bacanovic had information about the FDA rejection of the Erbitux application that prompted the sell-off. Neither one had a fiduciary duty to ImClone. However, Peter owed a fiduciary duty to Merrill Lynch that he breached in ordering that information about the Waksal’s sales conveyed to Martha. Merrill Lynch had an insider trading policy that prohibited the disclosure of material nonpublic information to anyone who would use it to engage in stock trading. A confidentiality policy also prohibited employees from discussing information about a client with other employees except on a strict need-to-know basis, and further stated, We do not release client information, except upon a client’s authorization or when permitted or required by law.
Since the information that the Waksals were selling was obtained by Peter Bacanovic in his role as their broker, he breached his duty to Merrill Lynch. However, Martha Stewart denied that she was aware that Peter was their broker. Moreover, as a former stockbroker, who understood the law on insider trading, she knew that she could not act on information received from an insider like Waksal. But could she trade on information provided by Peter, even if he was violating a fiduciary duty to Merrill Lynch? Martha Stewart was apparently unconcerned about her first interview with federal investigators because, according to a close associate, All she thought they wanted to talk about was whether Waksal himself had tipped her about the FDA decision.
Postscript: On August 7, 2007, the SEC announced a settlement with Martha Stewart and Peter Bacanovic. Martha agreed to pay a $195,000 penalty and accept a five year ban on serving as an officer or director of a public company. Bacanovic was ordered to pay $75,000; he had previously received a permanent bar from work in the securities industry. The SEC’s Director of Enforcement declared, It is fundamentally unfair for someone to have an edge on the market just because she has a stockbroker who is willing to break the rules and give her an illegal tip. It’s worse still when the individual engaged in the insider trading is the Chairman and CEO of a public company.

Sears Auto Centers Case (Corporate Ethics and Accountability)

On June 11, 1992, the CEO of Sears, Roebuck and Company, Edward A. Brennan learned that the California Department of Consumer Affairs (DCA) was seeking to shut down the 72 Sears Auto Centers in that state. A year-long undercover investigation by the DCA had found numerous instances in which Sears’s employees had performed unnecessary repairs and services. Officials in New Jersey quickly announced similar charges against six local Sears Auto Centers, and several other states, including Florida, Illinois, and New York ed their own probes into possible consumer fraud. In the wake of this adverse publicity, revenues from the auto centers fell 15 percent, and the public’s trust in Sears was badly shaken.

Sears Auto Centers, which were generally connected with a Sears’s department store, concentrated on basic undercar services involving tires, brakes, mufflers, shock absorbers, and steering mechanisms. Investigators from the DCA’s Bureau of Automotive Repair purchased old vehicles in need of minor repairs and disassembled the brakes and suspension systems. After examining and photographing each part, the investigators towed the automobiles to a shop where they requested a brake inspection. In 34 of 38 instances, Sears’s employees recommended unnecessary repairs and services, and some auto centers charged for parts that were not installed or work that was not performed. The average overcharge was $235, but in to cases the amount overcharged exceeded $500.
Brennan had been notified in December 1991 of early results from the investigation, and Sears executives negotiated for six months with California officials. The company objected to the state’s position that no part should be replaced unless it had failed and claimed that many repairs were legitimate preventive maintenance. For example, there is disagreement in the industry on whether brake calipers should be reconditioned whenever the pads are replaced. In aIDition, some of the automobiles used in the investigation showed signs of damage from worn parts that had already been replaced, thus leading mechanics to believe that repairs were needed. The DCA moved to revoke the licenses of all Sears Auto Centers in the state after the negotiations broke down over details of the financial settlement.
California officials charged that the problems at the Sears Auto Centers were not confined to a few isolated events but constituted systemic consumer fraud. According to a deputy attorney general, There was a deliberate decision by Sears management to set up a structure that made it totally inevitable that the consumer would be oversold. Until 1991, service advisers who make recommendations to customers were paid a flat salary, but subsequently their compensation included a commission incentive. The service advisers were also required to meet quotas for a certain number of parts and services in a fixed period of time. The new incentive system also affected the mechanics, which perform the work on the customers’ automobiles. Instead of an hourly wage that was paid regardless of how much work was done, mechanics now received a lower hourly wage that was supplemented by an amount based on the time required to install a part or perform a service. The company determined how long it should take to complete each job, and a mechanic could earn the former hourly wage only by finishing the work in the time specified. Under this system, slow workers would earn less than before, but a mechanic could also earn more by working faster than expected.
Commissions and quotas are commonly used in competitive sales environments to motivate and monitor employees. However, critics of Sears charge that there were not enough safeguards to protect the public. One former auto center manager in Sacramento complained that that quota were not based on realistic activity and were constantly escalating. He said that sales goals had turned into conditions of employment and that managers were so busy with charts and graphs that they could not properly supervise employees. A mechanic in San Bruno, California, alleged that he was fired for not doing 16 oil changes a day and that his manager urged him to save his job by filling the oil in each car only halfway. This illustrated, he said, the pressure, pressure, pressure to get the dollar. The changes in the compensation system at Sears Auto Centers were part of a company-wide effort to boost lagging performance. In 1990, net income for all divisions, including Allstate (insurance), Coldwell Banker (real estate), and Dean Witter (brokerage), dropped 40 percent. Net income for the merchandising group, which included the department stores and the auto centers, fell 60 percent. Brennan, CEO since 1985, was under strong pressure to cut costs and increase revenues. Some dissident shareholders were urging the board of directors to spin off the more profitable group. Brennan’s response was to cut jobs, renovate stores, and motivate people. The overall thrust, according to a story in BusinessWeek, was to make every employee, from the sale floor to the chairman’s suite focus on profits. Some critics of Sears attribute the problems at the auto centers to an unrealistic strategic plan that sought to wring more revenue out of the auto repair business than was possible. Robert Monk, who unsuccessfully sought a seat on the company’s board, said Absent a coherent growth strategy, these sorts of things can happen.
At a press conference on June 22, 1992, Edward Brennan announced that, effective immediately, Sears would eliminate its incentive compensation system for automotive service advisers and all product-specific sales goals. Although he admitted that the company’s compensation program created an environment where mistakes did occur, Brennan continued, We deny allegations of fraud and systemic problems in our auto centers. Isolated errors? Yes. But a pattern of misconduct? Absolutely not. He reaffirmed his belief that the California investigation was flawed and that Sears was practicing responsible preventive maintenance. He further announced that the company would retain an independent organization to conduct random shopping audits to ensure that no overcharging would occur. Sears also paid $8 million to settle claims in California and gave auto center customers $50 coupons that were expected to cost the company another $3 million. The total cost, including legal bills and lost sales, is estimated to have been $60 million.
On September 30, 1992, Sears revealed plans to spin off its three nonretail divisions, Allstate, Coldwell Banker, and Dean Witter, and to reorganize the merchandising group. A new CEO, Arthur C. Martinez, succeeded Brennan and began a turnaround of the company. In describing his vision, Martinez said, I want to revisit and intensify the theme of our customer being the center of our universe. A cornerstone of Martinez’s strategy, according to the New York Times, was clean business ethics.

Insider Trading: Martha Stewart: Insider Trader? Case (Ethics in Finance)

a. In 2007 Martha Stewart was fined $195,000 and Peter Bacanovic was fined $75,000 by the SEC. Take a position and defend that position on whether or not the fines levied by the SEC are a deterrent to insider trading?
b. What steps should the SEC take to protect the public against insider trading? Why?

Sears Auto Centers Case (Corporate Ethics and Accountability)
Develop a corporate ethics program (including a Code of Ethics). Explain how the ethics program would have helped prevent the actions of the employees of Sears Auto Centers.

Deceptive Advertising
a. Share and discuss examples of deceptive advertising that you have personally experienced.
b. Create an example of a deceptive advertisement for a product that is well known to everyone.
c. Discuss how this advertisement could cause harm to the public.
d. Determine whether the deceptive advertisement actually contained any false information or whether it simply misled the consumer and explain your answer.

Corporate Social Responsibility Program
a. Share and discuss examples of corporate social responsibility that you have personally seen or of which you have been a part.
b. Choose a company with which you are familiar (perhaps the one for which you currently work) and devise a corporate social responsibility program for that company. The program should support the company’s mission and strategy.

Multinational Companies.
AIDress the ethical dilemmas that face multinational companies. Pay particular attention to the problem of different standards for business practice.

International Travel
You are traveling on business in West Africa. As you are leaving country X, the passport control officer tells you there will be a delay of 12 hours in the processing of your passport. You explain that your plane leaves in 30 minutes, and the official suggest that a contribution of $50.00 would probably speed things up. What would you do? Why? Discuss how the cultural differences in ethics might affect the multinational corporation in this scenario.