Vanessa O'Connell, "Bans on Smoking In Prisons Shrink a Coveted Market," Wall Street Journal, August 27, 2003, A1, A6.

Update: October 20, 2003
Reporter and anchorwoman, Maria Bartiromo, conducted an interview of then-CEO Sanford Weil of Citigroup. The one-hour interview on CNBC began with Ms. Baritromo disclosing that she owned 1,000 shares of Citigroup stock, worth, at that time, about $45,000.

Refer to Chapter 3.

Do you think she should have done the interview? What is the ethical issue?

CNN does not allow its reporters to cover companies or conduct interviews in companies in which they hold a substantial block of stock. Fox News takes the position that the disclosure solves the conflict of interest. However, several ethics organizations maintain that disclosure does not resolve the conflict. Fox vice president for business news, Neil Cavuto says that ownership in a company sharpens his ability to cover it. Discuss these positions as well.

FOR MORE INFORMATION

Patrick McGeehan, "CNBC Disclosure Stirs Ethics Debate in Business Media," New York Times, July 28, 2003, C1, C6.

You also may review a summary of the various statements and principles on international business ethics, written by Marianne M. Jennings.

Update: September 29, 2003
A recent survey sponsored by the Ethics Officer Association provides insight into employee Internet use and employer monitoring of that use. Employers have been concerned about such use because one estimate is that if 50 employees spend 3 hours per week on recreational surfing during work hours the cost per week to a company is $3,322.50. And the latest survey indicates that employees spend about 2 hours per day surfing the net.

E-mail use by employees is also controversial with the following data from a United Kingdom survey:

• 38% have used employer e-mail for political purposes
• 30% have sent racist, pornographic, sexist or otherwise discriminatory e-mails while at work

The survey results (of 106 companies) indicate the following:

• 92% of companies engage in monitoring
• 75% regularly record employees' e-mail transmissions
• Most allow "reasonable personal usage of e-mail and the Internet," but only 42% define what constitutes "reasonable personal usage"
• Those activities considered "reasonable personal usage" are
  · News - 84%
  · E-mail to family - 86%
  · 401(k) dealings - 77%
  · Online banking - 54%
  · Online shopping - 51%
  · Online trading - 28%
  · Job search - 25%
• 86% of companies block certain Websites
• 19% monitor Website traffic by employees
• 69% use IT to monitor; 13% use the legal department; only 9% use the ethics office
• 80% notify employees of monitoring using the code of ethics, training and policy manual
  

Refer to Chapter 3.

FOR MORE INFORMATION

W. Michael Hoffman, Laura P. Hartman and Mark Rowe, "You've Got Mail . . . And the Boss Knows: A Survey by the Center for Business Ethics of Companies' Email and Internet Monitoring," 108 Business and Society 285 (2003).
Elron Software, "Guide to Internet Usage and Policy," p. 12 (2003). http://www.elronsoftware.com
Institute for Global Ethics, "U.K. survey finds many workers are misusing email," Newsline, 5(10), March 11, 2002.

Update: September 22, 2003
In a memorandum opinion, the Delaware Chancery Court has provided further guidance on corporate boards, governance and conflicts of interest. The case, In re Oracle Derivative Litigation, involves the court's review of a special board committee's decision that declined to look into stock sales made by Oracle's CEO, Larry Ellison.

The special litigation committee (SLC) was created in response to a suit filed by shareholder plaintiffs that alleged that several directors had engaged in insider trading in Oracle stock. The directors accused of insider trading, in addition to Mr. Ellison, were Michael Boskin, a Stanford professor and head of the Council of Economic Advisors during the first Bush administration, Donald Lucas, a Stanford alumnus who had donated millions to Stanford, and Jeffrey Henley, the CFO of Oracle.

The SLC had Prof. Joseph Grundfest and Prof. Hector Garcia-Molina as members. Both are Stanford professors and Mr. Boskin taught Prof. Grundfest when he was a student at Stanford in the 1970s. Mr. Grundfest is a steering committee member of the Stanford Institute for Economic Policy Research and Mr. Lucas had donated $50,000 to Stanford Law School shortly after Prof. Grundfest gave a lecture there at Mr. Lucas's request. Mr. Lucas is chairman of the Institute's advisory board and had donated $11.7 million to Stanford for the Richard M. Lucas Conference Center, named for his brother who had died of cancer. Mr. Lucas has given an additional $4.1 million to Stanford between 1998 and 2003.

At the time the SLC was doing its investigation and report, Mr. Ellison announced publicly that he was considering donating $170 million to Stanford as a scholarship program and that he was also considering donating his $100 million home to Stanford. The statement was reported in the Washington Post. However, Ellison explained in his deposition for the case that he has since changed his testamentary intent. Oracle has donated $300,000 to Stanford.

Calling the obvious conflicts "too substantial to ignore," the court ruled that the SLC was not independent and could not make an impartial decision on the litigation. The court noted, "By any measure this was a social atmosphere painted in too much vivid Stanford Cardinal red for the SLC members to have reasonably ignored it."

As a result, the litigation by the plaintiff shareholders over the insider trading allegations can proceed, although the SLC has appealed the decision.

Refer to Chapters 3 and 49.

What is a conflict of interest? How are directors independent?

FOR MORE INFORMATION

Read the opinion in the case: http://courts.state.de.us/chancery/opinions/18751-231.pdf

Update: September 15, 2003
Bermuda has featured pictures of Hawaii in its latest advertising campaign. One ad executive has said, "It's misrepresentation." Another has said, "If this were a pharmaceutical ad, that would be one thing. But this isn't harmful." One magazine carrying the ads noted, "We don't have a policy that's strict and hard for advertising, though our editorial-side policies are strict."

Refer to Chapters 3 and 26.

Are the ads legal? Are they ethical?

FOR MORE INFORMATION

Vanessa O'Connell, "Fantasy Island? Bermuda Ad Shows Hawaii," Wall Street Journal, March 6, 2003, B1 and B3.

Update: September 15, 2003
In a review of the impact of bribes on economic activity, the New York Times quoted Mexico's anti-corruption official as saying that graft causes an increases in costs for government services that amounts to 9.5 percent of Mexico's GDP, which is twice the amount of the country's education budget. The review of corruption and the impact of bribes concludes as follows:

• The most corrupt nations are the poor nations
• Larger government structures tend to be less corrupt, however, more steps in processing can also lead to more corruption. For example, when there are 16 steps to getting goods unloaded, there are often 16 opportunities for government officials at customs to demand payments
• Democracy helps cut down on corruption
• How an economy is driven makes a difference with oil corrupting more than other products
• Keeping a registry of goods helps reduce corruption because then officials are aware of what is coming into the country. The most corrupt countries do not keep records as goods arrive, are inspected and then approved for entry.

Corruption discourages foreign investment and throws the countries into a never-ending circle of no economic development.

Refer to Chapters 3 and 7.

Why do economies suffer when there is corruption? What are the rules on payments to government officials in the U.S.? for U.S. companies abroad?

FOR MORE INFORMATION

Tina Rosenberg, "The Taint of the Greased Palm," New York Times, Aug. 10, 2003, 28.

Update: September 15, 2003
Several surveys recently conducted have revealed interesting revelations about business and employees.

In the first survey, completed at the end of July 2003, 40% of consumers indicated that they trust companies less than they did one year ago. Fifty percent indicated that they trust companies about the same and 10% said that they trust companies more.

A November 2002 survey indicated that 63% of workers would leave a date off their resumes in order to hide their age (37% would not). Most indicated that take their work histories back only 10 years and routinely eliminate their graduation dates. One employer noted that he deletes such resumes from the pile because "If they hide that, what else are they hiding?"

Eighty-seven percent believe that interviewers have held their age against them in an interview, and 18% said they would get plastic surgery in order to improve their job prospects.

Product and services sales indicates that job seekers are desperately seeking to hide their ages largely because of their beliefs about age discrimination being prevalent. The EEOC had 19,921 age discrimination complaints filed in 2002, a 40% jump from the 14,141 filed in 1999.

Plastic surgeons indicate that most of their patients are between the ages of 51 and 64, and that the number of men seeking solutions for looking younger has jumped to 130,000, up 25% from 2001.

Hair coloring for men sales are up 15% in 2003 over 2002. 75% of men who purchase hair coloring indicate it gives them an edge in the job market.

The following survey from Right Management Consultants indicates differences in what employees classify as important for their next job:

Issue	% in 1999	% in 2003
Ongoing training	41%	76%
Flextime	57%	73%
Cell phones & laptops	52%	71%
Outplacement	53%	69%
Tuition reimbursement	40%	53%
Health-club membership	58%	45%
Company car	58%	28%
Child care	32%	19%
Concierge services	31%	16%

Refer to Chapters 3 and 41.

FOR MORE INFORMATION

Darryl Haralson and Quinn Tian, "Companies Lose Trust," USA Today, July 22, 2003, 1B.
Stephanie Armour, "More job seekers try to hide their ages." USA Today, July 21, 2003, 1B.
"Dream jobs get real," Time, April 7, 2003.

Update: September 8, 2003
George Couto was a marketing manager with Bayer Corporation, the U.S. subsidiary of Bayer A.G., a German-based company. In 1995, Kaiser, the largest HMO in the United States, was demanding a discount for its bulk purchases of Cipro, an antibiotic manufactured by Bayer. Bayer could grant the discount to Kaiser, however, that discount meant that it had to sell the drug at that price to the federal government (under Medicaid regulations).

In order to avoid having to give the federal government the discount, Couto oversaw the development and sale of a private label Cipro for Kaiser. The drug was manufactured in Connecticut and sold to Kaiser under a private label at a 40% discount. Kaiser had indicated it would turn to Johnson & Johnson if it were not given a deep enough discount by Bayer.

The plan was uncovered almost five years later and Bayer agreed to pay $257 million to the federal government, the largest Medicaid fraud settlement to date. Couto was the person who led the federal government to Bayer and the plan and such whistleblowers are entitled to as much as 30% of the amount of the penalty. According to his testimony, Couto wrote a letter outlining the private label plan that had been in effect for almost five years after attending an ethics class in which Bayer's CEO indicated that employees should not just follow the letter of the law, but also the spirit of the law.

Couto was deposed in the case and admitted his role, but three months after his deposition and five months before Bayer settled the case, Couto (39) died of pancreatic cancer. Despite his misgivings about the private label plan, he did seek to obtain a President's Achievement Award from the CEO of Bayer for his retention of the Kaiser account.

Couto, divorced, was awarded 24% of the federal government's share of the fine Bayer paid. His three children are the primary beneficiaries of the $34 million award.

Refer to Chapter 3.

Should a participant in the scam to defraud the government be permitted to collect the whistleblower fees?

FOR MORE INFORMATION

Peter Aronson, "A Rogue to Catch a Rogue," National Law Journal, Aug. 18-25, 2003, A1.

Update: August 25, 2003
Two recent surveys offer some insight into the workplace. Crescendo Partners has conducted its annual Copier Usage Survey (2003) and revealed that many of our co-workers go through the trash located next to the office copy machine with the following goals:

• 39% are looking for gossip
• 32% are looking for confidential company data
• 29% are looking for confidential personnel data

Refer to Chapter 3.

What are the ethical issues in looking through the copier room waste can? Can you think of any legal issues?

FOR MORE INFORMATION

Darryl Haralson and Suzy Parker, "Twenty-nine percent spy on co-workers," USA Today, August 19, 2003, 1B.

LEVEL OF EDUCATION	UNEMPLOYMENT RATE
Less than high school graduate	7.3%
High school graduate	4.2%
Some college, no degree	3.5%
Associate degree	2.9%
Bachelor's degree or higher	2.3%

Refer to Chapter 40.

What protections are there for those who lose their jobs? Are they state or federal protections?

FOR MORE INFORMATION

Visit the websites for the Departments of Labor and Education: http://www.labor.gov and http://www.edu.gov.

Update: August 18, 2003
Both UPS and FedEx are exploring the possibilities for different types of trucks powered by alternative fuels. UPS is testing hydrogen-powered trucks and already has 1,000 natural gas vans. FedEx will replace 30,000 of its vehicles next year with gas-electric models.

Both companies say the new fuels and vehicles are good for the environment but also save them fuel costs in their delivery services.

Refers to Chapter 3.

Why would a company take voluntary action with regard to fuel efficiency and emissions?

FOR MORE INFORMATION

Charles Haddad and Christine Tierney, "FedEx and Brown Are Going Green," Business Week, Aug. 11., 2003, 60 - 62.

Update: August 11, 2003
The Burger King/Frozen Coke dispute has been settled. Burger King had threatened to withdraw Coca-Cola products from its restaurants because it learned, via a former Coke employee's lawsuit, that Coke had hired a consulting firm to pump up the demand for the new Frozen Coke products so that Burger King would invest in selling the product.

Burger King invested $37 million to carry the Frozen Coke product but sales were not as they expected. When the revelation about the artificial test marketing demand came through the litigation, Coke had to scramble to retain Burger King's business. The settlement requires Coke to pay $10 million to Burger King, and franchisees will still have the right to determine whether they will continue to carry the Frozen Coke products.

Refers to Chapter 3, 12, and 13.

Why did Coke settle the dispute?

FOR MORE INFORMATION

Theresa Howard, "Frozen Coke debacle settled," USA Today, Aug. 4, 2002, 4B.

Update: July 28, 2003
The war in Iraq had a profound impact on US corporations because of the intense level of emotion associated with the war. As a result, many business witnessed boycotts of their products. The following is a list of companies boycotted during the war:

• Michelin Tires, Inc. was boycotted in the U.S. (headquartered in France and France was critical of the U.S. decision to go to war)
• India boycotted Nike because it is a U.S. company
• In Italy there were boycotts and protests against IBM
• Arab nations boycotted Coca-Cola
• Wal-Mart had protests in its stores in Germany, Argentina and Mexico
• Muslim students boycotted KFC in the United States

The international make-up of the companies meant that many of the boycotts did not impact the corporations precisely as the protesters had hoped. For example, most Michelin tires are made in South Carolina and the boycott affected American workers and their jobs. Michelin indicated that it spent advertising dollars to get out its message about how a boycott of Michelin only hurt the U.S.

Refer to Chapter 3.

What is the social responsibility of a business with regard to a war and its position on a war?

FOR MORE INFORMATION

Glenn R. Simpson, "Multinational Firms Take Steps To Avert Boycotts Over War, " Wall Street Journal, April 4, 2003, A1, A4.

Update: July 21, 2003
Professor Bryan Hargrove and his secretary developed a complex scheme for obtaining textbooks from publishers and then reselling them for a profit. They ordered about $150,000 in textbooks and their resale brought them between $20,000 and $30,000. Based on e-mails they sent to each other as well as a middleman, Ken Neger, who sold the books for them, all three were charged with fraud. The scheme involved about 2,000 books and they were resold at a profit between $10 and $15 per book.

The charges are a first-time offense for the three. Both Hargrove and his secretary were dismissed from their employment at Seton Hall University when the charges were filed. Professor Hargrove indicated he was feeling financial pressure from a "messy divorce," had contracted Hepatitis C and was concerned about the pressures of obtaining tenure.

Are there any copyright or other intellectual property violations? What criminal charges apply? What are the ethical issues? Does it matter that Prof. Hargrove was under pressure?

Refer to Chapters 3, 8, 9 and 10.

Are there any copyright or other intellectual property violations? What criminal charges apply? What are the ethical issues? Does it matter that Prof. Hargrove was under pressure?

FOR MORE INFORMATION

Guy Sterling, "Ex-Seton Hall prof loses bid for PTI in book scheme," The Star Ledger, March 28, 2003.

Update: July 21, 2003
A new type of corporate game has emerged in response to the technology now available to workers such as the computer, the cell phone and voice mail. Psychologists refer to the corporate game as "impression management." Employees are using technology to give the impression that they are dedicated workers. In some cases, employees are using technology to give the impression that they are at work when they are not really at work. Here are some of the components used for the dedicated worker syndrome:

• using e-mail timers so that your e-mails go out late at night - the late hour suggest that you are burning the midnight oil and are a dedicated worker
• using a remote control to operate your office computer from outside the office - you can open documents and print them on the office printer giving the impression that you are there even when you are not
• instant messaging is a tool that lets you respond immediately so it appears that you are always on alert and ready to work
• call forwarding allows you to get your office phone calls wherever you are
• Reconfiguring the Blackberry so that it doesn't look as if you sent messages from your handheld device, but from your office computer
• Get ride of the "idle" message of your computer - a sign to co-workers and boss that you are not there

Refer to Chapter 3.

What are the ethical issues in using these devices to take 3-hour lunches? To be late for work? To leave early?

FOR MORE INFORMATION

Jane Spencer, "Shirk Ethic: How to Fake A Hard Day at the Office," Wall Street Journal, May 15, 2003, D1, D3.

Update: June 30, 2003
In another interesting financial reporting case, Levi Strauss has been sued by two former employees who claim they were fired for disclosing some questionable financial and tax practices of Levi.

Rob Schmidt, formerly a lawyer with Levi Strauss, furnished to an IRS agent a document that showed that Levi was using a "thinly capitalized Brazilian partnership to claim $138 million in tax deductions." The document then became the chief piece of evidence in an IRS dispute with Levi over the tax implications of the Brazilian venture. Mr. Schmidt was fired shortly after the IRS settled the issue with Levi.

Levi's position is that Mr. Schmidt was fired not for "whistle-blowing," but for his failure to own up to the fact that he had given the document to the agent, i.e., he was fired for lying about whether he was the source.

Tom Walsh, an accountant with Levi, was fired after he raised concerns with his fellow Levi employees about the disclosures being made to Levi's outside auditors about its tax reserves. Levi maintains that it fired Mr. Walsh for "several significant technical errors." However, no technical errors were mentioned in previous memos and evaluations in his file. He was, however, taken to task by his superiors for disclosures to outside auditors.

Walsh and Schmidt have sued for wrongful termination following Levi's suit in May against them for allegedly removing confidential documents from Levi headquarters.

Levi has asked a consultant to review its tax returns and deductions. That review is ongoing.

Refer to Chapters 3 and 38.

What are the rights of employees who raise issues about compliance with the law? Does Sarbanes-Oxley give them more protection?

FOR MORE INFORMATION

Glenn R. Simpson and Sally Beatty, "Levi Firing Letters Raise Questions," Wall Street Journal, June 18, 2003, A7.

Update: June 23, 2003
Coca-Cola has admitted that it paid a consultant $10,000 to drive up the demand for its Frozen Coke beverage being test marketed in Burger Kings in the Richmond, Virginia area. The impressive demand that resulted had Burger King investing $65 million to put the machines in restaurants around the country. However, the demand was not what it had been falsely alleged to be and the result is that, following a 6-week investigation by a law firm hired by the Coca-Cola board, Coca-Cola issued an apology to Burger King as well as full disclosure of the memo and the events surrounding the consulting firm's activities.

The investigation followed an allegation in a lawsuit filed by a former employee who disclosed an internal memo on the consultant's work and also raised issues of accounting improprieties. Coca-Cola also issued an earnings restatement of $9 million based on an investigation of those allegations. The suit followed the termination of Matthew Whitley, a finance director, who raised the allegations internally. He was fired shortly after raising the same concerns he later raised in his suit.

Burger King's CEO was informed of the consultant's activity following the investigation.

Refer to Chapter 3 and 38.

Was this conduct ethical? Was it fraud? What of Mr. Whitley's termination? Does he have protection?

FOR MORE INFORMATION

Chad Terhune, "Coke Employees Acted Improperly in Marketing Test," Wall Street Journal, June 18, 2003, A3, A6.

Sherri Day, "Coke Confirms Product Test Was Rigged," New York Times, June 18, 2003, C1, C10.

Update: June 5, 2003
Eli Lilly has announced that it will transfer its patents to certain drugs that can be used to fight tuberculosis. Lilly has assigned them on the condition that the drugs be sold cheaply so as to boost the supplies of antibiotics around the world. The company has chosen partners in India, China and South Africa to which to assign the patents for manufacture and is looking for a partner in Russia.

Refer to Chapter 3 and 10.

Why would a company relinquish its patent rights in these countries? What is the effect of turning over its patents to these partners?

FOR MORE INFORMATION

http://www.lilly.com
Marilyn Chase, "Lilly to Transfer TB-Drug Rights to Poor Nations," Wall Street Journal, June 5, 2003, B1, B12.

Update: June 2, 2003
The number of companies with hotlines, a means for employees to anonymously report legal and ethical issues occurring in their companies, has increased 570% in the first quarter of 2003 over the last quarter of 2002. The four quarters for 2002 saw the following percentage increases over the previous quarter in terms of the number of hotlines: 70%; 20% 60%; 140%.

Section 301 of the Sarbanes-Oxley legislation passed last August requires companies to have some form of anonymous reporting system. In many cases, companies are subcontracting out the hotline to companies such as Pinkerton Security. It is estimated that there are about 1,000 remaining companies that are covered under Sarbanes-Oxley and have yet to establish a hotline.

A variety of reports have been coming into the new hotlines including one that revealed bribes being paid in a company's foreign operations and another in which managers had claimed to ship $1 million in goods that had not actually been shipped in order to meet sales quota requirements. Another problem heard through the hotlines include complaints about managers refusing to pay justified overtime.

The percentage of calls yielding information that should go to the audit committee, as required under Sarbanes-Oxley, is very small. Pinkerton Security receives 12,500 calls per month from its nearly 1,000 clients, but only 200 of those calls involved reportable issues. Pinkerton automatically reports harassment, theft or any kind of issue in which employees or customers are in danger.

A recent survey (2003) by the Ethic Resource Center indicates that 25% of employees have observed illegal conduct at work. That figure was 31% in a survey the ERC did in 1994 and 2000. However, a 2000 KPMG survey put the figure at 49%.

Refer to Chapter 3 and 8.

Why don't employees report these issues directly to supervisors?

FOR MORE INFORMATION

http://www.ethicsresourcecenter.org
Del Jones, "Law rings up growth in worker hotline industry," USA Today, May 27, 2003, 3B.

Update: May 12, 2003
Wal-Mart Stories, Inc. has banned three men's magazines from sales in its stores. The banned magazines are Maxim, Stuff and FHM. The magazines feature scantily-clothed women and "bawdy humor."

The banned products are parts of an ongoing series of decisions Wal-Mart has made about carrying products. Wal-Mart has long banned the sales of certain CDs in its stores. Last year it banned the sales of certain video games as well. Because it is the largest seller of CDs and DVDs, producers offer sanitized versions of these materials for sale at Wal-Mart.

Refer to Chapter 3.

Why do you think Wal-Mart makes the voluntary decision to not sell certain products?

FOR MORE INFORMATION

David Carr and Constance L. Hays, "3 Racy Men's Magazine Are Banned by Wal-Mart," New York Times, May 6, 2003, C1, C3.

Update: May 12, 2003
Business Ethics magazine has named its 100 best corporate citizens of 2003. The rankings are based on commitment to community, environment, employees, minorities and women. At the top of the list are the following:

1. General Mills
2. Cummins Engine
3. Intel
4. Procter & Gamble
5. IBM
6. Hewlett-Packard
7. Avon
8. Green Mountain Coffee
9. John Nuveen
10. St. Paul
11. AT&T
12. Fannie Mae
13. Bank of America
14. Motorola
15. Herman Miller
16. Expedia
17. Autodesk
18. Cisco Systems
19. Wild Oats Markets
20. Deluxe
21. Starbucks
22. Eastman Kodak
23. J.M. Smucker
24. Ecoclab
25. Spartan Motors

Refer to Chapter 3.

For more information see www.bizethics.com.

Update: May 5, 2003
Jonathan G. Lebed, a middle-school student when the SEC charged him with a pump-and-dump fraud scheme for making money on stocks, is back in the public eye. While he signed a consent decree that had him return all but $272,000 of the $800,000 he had made with his scheme, he did not admit to any wrongdoing.

So, Master Lebed has returned. Following high school graduation, he began a Website in which he touts stocks again, but this time he does not take positions in the stocks he is advancing. And he adds, "I never thought there was anything wrong with what I did." (lebed.biz)

He also has an investor-relations firm, Lebed & Lara, that now has about 100 clients who pay $200 per year for access to stock information.

He is running for city council in Cedar Grove, NJ, and he is in negotiations for a movie deal for his story.

Refer to Chapter 3 and 47.

Update: April 20, 2003
Walgreen's pulled from the shelves its Easter baskets that contained toy soldiers, indicating that such sales were inappropriate given the war in Iraq. Wal-Mart and Kmart decided not to pull their baskets with toy soldiers explaining that they have sold the baskets for years and that they do not draw attention. Both stores noted that they switched content of their baskets to more toys than candy in response to consumer concerns about childhood obesity.

Refer to Chapter 3.

What social responsibility issues are the companies addressing?

FOR MORE INFORMATION

Theresa Howard, "Walgreens won't sell Easter Baskets with toy soldiers," USA Today, March 7, 2003, 1B.

Update: April 7, 2003
Because of concerns about liability as well as image, college-student spring break marketing has been downplayed during the past five years by U.S. businesses. Many businesses have incurred costs for damages to property and for liability for alcohol-induced accidents. The businesses, therefore, have declined to market their products or facilities to the spring break crowd.

To fill the void, U.S. companies have begun to use Mexico, Amsterdam, and the Caribbean as liability-free spring break areas. The companies are marketing these sites intensely to college students. StudentSpringBreak.com encourages students to take a trip to Amsterdam, a "pot-smoker's paradise." It also notes, "Your yearly intake of alcohol could happen in one small week in Cancun, Mexico, on spring break." Hotels and travel agencies sell $179 passes for 7 bars with one all-you-can-drink-night in each one.

Cancun, Jamaica, Mazatlan, Acapulco, the Bahamas, Cabo San Lucas, and Amsterdam now top Miami, Fort Lauderdale, Daytona Beach, and South Padre Island. The drinking age in the U.S. locations is 21, but only 18 out of the country.

Refer to Chapter 3.

Discuss the ethics of the companies going off-shore as well as their marketing techniques.

FOR MORE INFORMATION

Donna Leinwand, "Alcohol-soaked spring break lures students abroad," USA Today, Jan. 6, 2003, 1A, 2A.

Update: March 31, 2003
Richard N. Perle is the chairman of the Defense Policy Board, a position to which he was appointed by the Secretary of Defense, Donald H. Rumsfield. Mr. Perle was recently hired by Global Crossing, a telecommunications company in Chapter 11 bankruptcy. The company hired him to work with the Defense Department. The Department opposes the sale of Global Crossing to Hutchison Whampoa and Singapore Technology, two foreign companies. Mr. Perle is to be paid $725,000 for his work, $600,000 of which is due if the Defense Department approves the sale. The Defense Department opposes the sale because its uses the Global Crossing fiber optics network for its telecommunications needs. In addition, the sale would put that network under Chinese control.

Mr. Perle filed an affidavit in the review process by the FBI and Defense Department (whose approvals are required) with the following language:

As the chairman of the Defense Policy Board, I have a unique perspective on and intimate knowledge of the national defense and security issues that will by raised by the CFIUS review process that is not and could not be available to the other CFIUS professionals. [CFIUS is the Committee on Foreign Investment in the United States and consists of representatives from the Defense Department and other agencies. CFIUS has the authority to block foreign acquisitions.]¹

When asked about his dual role, Mr. Perle said,

I've abided by the rules. The question, I think, is have I recommended anything to the secretary or discussed this with the secretary, and I haven't. The alternative is if you are on the board, you can't have any action before the Defense Department. That isn't the rule. If that were the rule, I'd have to make a choice between being on an unpaid advisory board and my business.²

Refer to Chapter 3.

What ethical issue exists in Mr. Perle's conduct?

Update: March 17, 2003
The University of California at Berkeley has implemented a new admission process. The Haas School of Business has begun running background checks on applicants to determine whether the information in their applications is correct. The Wharton School implemented a similar procedure and charges applicants a $35 fee for these background checks.

Of the 100 students admitted for next fall, 5 were found to have offered false information on their admissions applications. The most common lie was the job title that they held with the second most common being the number of years of work experience. Haas admissions officers indicated that, had the students not lied, they would have been admitted.

Refer to Chapter 3.

What risk do the students take in lying on their applications? What are the long-term consequences?

FOR MORE INFORMATION

"Cheaters don't make the grade at Berkeley business school," www.azcentral.com March 14, 2003, AP wire reports

Update: March 17, 2003
Columbia HCA paid the largest fine in government history for Medicare fraud. In order to prevent such activity in the future and also to comply with Sarbanes-Oxley requirements, HCA has now implemented the following for its 430 firms and 2.5 million employees:

• Offers an anonymous hotline that now receives 100,000 calls every year
• Responds to every call within 24 hours
• Documents what it finds within the 24 hours
• Allows callers to check on the status of their report and issue - even those who do not give their name can follow up with an ID# they are given for their complaint (about 30% report anonymously)
• Of the 100,000 calls, 1,200 become cases that are pursued for investigation and discipline
• About 60% of the 1,200 cases involve personnel issues
• The remaining complaints center around harassment, fraud, improper billing, patient care and environmental issues
• The best tips come from "jilted girlfriends"
• One tip resulted in uncovering a scam with a temp agency. The scheme involved $162,000 in padded bills to HCA that the temps and employees then split. HCA fired both the temp agency and the employees who participated
• A female employee reported a male employee who sent her lewd e-mails. The hotline staff checked the computers, found the e-mails, reprimanded the male employee, and denied him his stock options for the year
• One employee reported that hospital vendors were giving gifts and offering bigger gifts than other vendors in order to obtain or retain business. HCA had the vendor replace all salespeople who called on HCA
• A supervisor borrowed almost $6,000 from her employees and paid back just a little over $1,000. HCA fired the supervisor
• HCA made a supervisor remove a one-way glass that he had installed to watch employees without their knowledge. HCA then removed the supervisor with a termination notice

HCA's stock went from $40 per share down to about $18 per share when it went through its experience with the federal government's prosecution for fraud. Its new program is designed to ensure that it does not experience the same setbacks again.

Refer to Chapter 3.

FOR MORE INFORMATION

"Cops, Inc," Forbes, March 17, 2003, p. 68.

Update: March 17, 2003
The Justice Department shut down 11 Web sites because they were sites for buying and selling drug paraphernalia such as bongs, roach clips, and cocaine spoons. For example, going to http://www.PipesForYou.com now means that you will be directed to a Drug Enforcement Administration site with a U.S. flag in the background and a message that reads, "The Web site you are attempting to visit has been restrained."

The question being raised by civil liberties lawyers is whether the government should be simply shutting down the sites rather than commandeering them. The concerns arise because, with the transfer of the visitor to the DEA site, the DEA gathers information about the visitor.

The Justice Department says that the sites were seized pursuant to drug forfeiture statutes, but adds that they are not tracking visitors. Defense lawyers liken the use of information about visitors to the sites to people having their pictures taken as they stop to look in the window of a store that sells drug paraphernalia.

Refer to Chapters 3 and 8.

Do you think the DEA and Justice Department have acted legally in their forfeitures and uses of the sites? Do you think their conduct is ethical?

FOR MORE INFORMATION

Tina Kelley, 'Eminent Domain: Seizing Web Sites," New York Times, March 9, 2003, WK 5.

Update: March 3, 2003
The SEC has sent a so-called "Wells notice" to Morgan Stanley. The Wells notice is the traditional means for the SEC to notify a firm that the SEC plans to bring charges against the firm. In the case of Morgan Stanley, the SEC's charges are the result of an investigation into a market practice that is already the subject of a class-action civil suit. The SEC investigation runs parallel to a New York Attorney General's investigation into investment banking practices.

The specific charges against Morgan Stanley will center around "laddering," a practice used during the dot-com market bubble. The usual methodology for laddering was as follows: A broker would call a client and indicate that the brokerage house was underwriting an IPO for a new company. (Typically they were new dot-coms). The broker would offer shares in the IPO in advance if the client would agree to buy more shares on the market at a certain price once the shares were offered publicly. Often the brokers would ask, "How much would you be willing to pay on the open market for these shares if I get you 100 shares in advance?"

These commitments from favored customers to go to the market at a certain price ensured that the IPO was successful and sold at the price the underwriter wanted, and then some. The result of this floor for pricing and the automatic demand from customers was that the value of the shares was artificially inflated. The SEC charges focus, therefore, on market manipulation.

Refer to Chapters 3 and 47.

How does such a scheme affect the market? Share price? The role of other investors?

FOR MORE INFORMATION

Randall Smith, IPO 'Laddering' Case Expands, WALL STREET J., Feb. 26, 2003, C1.

Update: February 17, 2002
In an October 2002 survey of high school students, the Josephson Institute of Ethics found the following data:

College admissions officers find that less and less of an application can be used as a good measure of a student's ability. So much is exaggerated and materials furnished are very often not the student's work product. The tendency is to rely on numbers more and more because there is some outside control on the test scores and GPAs.

Refer to Chapter 3.

Discuss the ethics of falsifying information on a college application and obtaining outside help on a personal statement.

FOR MORE INFORMATION

Mary Beth Marklein, "Is there any truth to today's resumes?" USA Today, Feb 4, 2003, 1D.

Update: February 17, 2002
The United States Olympic Committee is grappling with its own ethical issues. Marty Mankamyer, the president of the USOC, resigned in early February 2003. Reports in The Denver Post indicated she had demanded a commission from a fellow real estate broker in the Colorado Springs area, the home of the USOC. The other broker had sold property to Lloyd Ward, the CEO of the USOC. Mr. Ward had purchased a 1.3 acre lot in Colorado Springs for $475,000 and had paid the listing broker, Brigette Ruskin, a commission. Ms. Mankamyer allegedly demanded a portion of the commission from Ms. Ruskin, and Ms. Ruskin did send a check. Ms. Mankamyer had shown Mr. Ward and his wife properties in the area when they were being considered for the job and when he was considering taking the job. However, Mrs. Ward indicated that Ms. Mankamyer did not identify herself as a real estate agent. Mrs. Ward assumed that Ms. Mankamyer was showing the properties as a "good will gesture."

Refer to Chapter 3.

What conflicts of interest do you see here?

FOR MORE INFORMATION

Richard Sandomir, "U.S. Olympic Chief Resigns in a Furor Over Ethics Issues," New York Times, Feb. 5, 2003, A1, C17.

Bill Briggs, "Realtor waving red flag," Feb 4, 2003 www.denverpost.com

Update: December 2, 2002
New issues have developed in the downloading of music from the Internet. The first issue deals with the physical aspects of acquiring music via the Internet. A group of individuals, referred to as "bandwidth hogs," are using an inordinate amount of their servers in order to download music. Some of the ISPs are considering placing limits on the amount of bandwidth that their subscribers can use each month. The result is that the physical limitations of technology may serve to curb the downloading of music. Lawsuits, injunctions, and other forms of judicial and legislative mandates have not been able to control the file swapping by Internet users. However, these limits on technological use may serve to provide copyright holders with the results that they want.

Issue two involves the litigation over the downloading of music. Artists and music companies have not given up the fight. They have been able to shut down Napster, Aimster, Audio Galaxy, Grokster, and Morpheus. However, there remains that one operating site, Kazaa. Lawsuits are pending against Kazaa, but Kazaa has taken an interesting approach to doing business. Kazaa is owned by Sharman Networks. Sharman Networks is headquartered in Los Angeles, but is incorporated in Vanuatu, an island in the Pacific. The result is that Kazaa is a long arm and jurisdictional nightmare for litigants because the issue of where the company is located and who has jurisdiction is puzzling to lawyers, judges, and litigants.

Issue three involves pressure. The music companies sent a letter to college and university presidents around the country reminding them of their obligations under copyright law and, most particularly, the Digital Millennium Copyright Act. Their duty is to stop any known infringement activity by students and to check periodically for student activity in this regard. As a result of the letter, the U.S. Naval Academy seized 100 computers from its midshipmen undergraduates. The computers are part of the academic program at the Academy. The computers will be checked for violations of Academy policy, including copyright infringement. The consequences could include expulsion for violation of the honor code.

Refer to Chapters 2, 3, and 10.

Discuss the ethical issues involved in Kazaa's approach to doing business. Discuss the ethics of the students doing the downloading and the bandwidth hogs. Discuss the jurisdictional issues of Kazaa.

FOR MORE INFORMATION

Steve Musil, "Scuttling the Pirates," New York Times, December 2, 2002, WK 1.

Update: November 25, 2002
E-mails once again reveal interesting relationships in the Wall Street scandals surrounding analysts' behaviors. Jack Grubman, an analyst with Salomon Smith Barney, was the father of twins whom he wanted to see admitted to one of Manhattan's most prestigious preschools - 92nd Street Y.

Mr. Grubman wrote a memo to Sanford Weill, the chairman of Citigroup, with the following language:

On another matter, as I alluded to you the other day, we are going through the ridiculous but necessary process of pre-school applications in Manhattan. For someone who grew up in a household with a father making $8,000 a year and for someone who attended public schools, I do find this process a bit strange, but there are no bounds for what you do for your children.

Anything, anything you could do, Sandy, would be greatly appreciated. As I mentioned, I will keep you posted on the progress with AT&T which I think is going well.

Thank you.

In another e-mail, Mr. Grubman wrote, "I have always viewed [AT&T] as a business deal between me and Sandy."

Refer to Chapter 3.

Are there conflicts of interest? Do you think any laws were violated?

FOR MORE INFORMATION

Charles Gasparino, "Ghosts of E-Mails Continue to Haunt Wall Street," Wall Street Journal, November 18, 2002, C1, C13.

Update: November 25, 2002
Another conflict has developed in the health insurance industry. Many new independent insurance organizations have developed. These insurance companies provide medical and other insurance benefits for employees of companies and not-for-profit organizations. These companies and organizations do not provide health insurance for their employees, but recommend these insurers for their employees. However, investigations have revealed that employers very often have an ownership stake in the independent insurer or in the company managing the policies and customers for the insurance agency. In one situation, the CEO of the company owned the independent insurance company he recommended to his employees and his son owned the company that handled administrative matters for the insurance company.

Following an investigation into the ties between independent insurers and the not-for-profit organizations recommending them, the Wall Street Journal developed a list of suggested precautions when purchasing insurance through a recommended provider:

Refer to Chapter 3.

What impact would the conflict of interest outlined here have on the fees and coverage? How could the conflict be eliminated?

FOR MORE INFORMATION

Chad Terhune, "Nonprofit Groups That Tout Insurance Have Hidden Links," Wall Street Journal, November 21, 2002, A1, A10.

Update: November 18, 2002
The Norwegian Cruise Lines has been fined $1,000,000 for dumping waste into the ocean and then filing false reports in order to mislead the U.S. Coast Guard. The documents in the case indicate the company dropped raw sewage as well as cancer-causing agents from its dry-cleaning operations on board its ships. The Coast Guard has photos of ships discharging waste in the ocean as they leave the U.S. territorial waters.

The ships are inspected for compliance with EPA standards for disposing of waste. However, many of the ships were equipped with bypass lines that permitted the crews to simply make a turn of the switch and dump the waste into the ocean. The reason for such extensive violations is the cost of the waste storage on board the ships as well as the replacement and maintenance of filters for the equipment.

The U.S. Justice Department has prosecuted nine cruise lines in nine years in an attempt to halt the decades-old practices of dumping on the part of the cruise lines.

Refer to Chapters 3 and 51.

Is the conduct of the cruise lines ethical? Can a company be tried for environmental violations committed on the high seas?

FOR MORE INFORMATION

Narilyn Adams, "Cruise-ship dumping poisons seas, frustrates U.S. enforcers," USA Today. November 8-10, 2002, 1A, 2A.

Update: November 11, 2002
In light of ethics training and new codes of ethics being implemented due to Sarbanes-Oxley requirements, there have been some studies of past practices of companies with regard to such policies and training. The following is a summary of the companies and their policies:

*Andersen provided ethics training for companies on a consulting basis.

Among companies adopting new ethics policies and new training programs are Philip Morris, Ford Motor, and Johnson & Johnson. The Ethics Officer Association reports that it has 100 new members, including a representative from WorldCom.

Refer to Chapter 3.

What is the role of a code of ethics in a business?

FOR MORE INFORMATION

Richard B. Schmitt, "Companies Add Ethics Training: Will It Work?" Wall Street Journal, November 4, 2002, B1, B4.

Update: November 4, 2002
The NCAA athletic conferences around the nation are asking for changes in the way officials for football games are selected. Coaches and athletic directors would like to see the officials be from a different conference, one in which they do not have a team and a stake.

Currently, college teams use neutral conference officials for preseason games and bowl games. Now the cry for reform is to use them for all games. One conference commissioner has said, "It's not that they question their ability. They question their integrity."

Refer to Chapter 3.

What ethical breach are the coaches and others concerned about with regard to the officials?

FOR MORE INFORMATION

Jack Carey, "Schools Tackle Ref Concerns," USA Today, October 30, 2002, 1C.

Update: October 28, 2002
Ronald L. Zarrella, the CEO of Bausch & Lomb, admitted that he had false information in his resume. His resume stated that he had an MBA from NYU. He had attended NYU and taken graduate courses in business at night while he was working for Bristol-Myers, but he never completed the degree program.

The information has been included in Bausch & Lomb press releases since 1982. In addition, CSFB released a statement indicating that information on Mr. Zarrella regarding his serving on its subsidiary's board, First USA, was inaccurate. Mr. Zarrella instead serves on the board of "US First," a nonprofit organization that supports students entering the sciences and engineering fields.

The news resulted in a drop of $1.01 in the price of Bausch & Lomb's shares from $31.48. Mr. Zarrella said he would not resign and the Board issued a statement expressing confidence in him. Mr. Zarrella was hired as CEO just 11 months ago. However, he had worked in an executive capacity for Bausch & Lomb from 1985-1994. He left during an SEC inquiry about Bausch & Lomb's reporting of sales. The company had placed pressure on employees to meet sales targets and the result was a series of postings of questionable sales figures that were later reversed. Mr. Zarrella was not charged with any wrongdoing, but he left the company and the company paid a $42 million fine.

When Bausch & Lomb hired Heidrick & Struggles to conduct its CEO search last year, it did not check Mr. Zarrella's background because he came in as a candidate through a board member's recommendation and not through the search firm.

Refer to Chapter 3.

What ethical breaches occur in the falsification of resumes? Would the company have been justified in firing Mr. Zarrella?

FOR MORE INFORMATION

Leslie Wayne, "Bausch & Lomb Executive Admits to Falsified Resume," New York Times, October 20, 2002, C1.
William M. Bulkeeley, "Bausch & Lomb Now Says CEO Has No M.B.A.," The Wall Street Journal, October 21, 2002, A10.

Update: October 21, 2002
The Department of Health and Human Services has proposed new guidelines for the interpretation of federal statutes on gifts, incentives, and other benefits bestowed on physicians by pharmaceutical companies. The areas the interpretation focuses on are:

• Paying doctors to act as consultants or market researchers for prescription drugs
• Paying pharmacies fees to switch patients to new drugs
• Providing grants, scholarships, and anything more than nominal gifts to physicians for time, information sessions, etc. on new drugs

The Office of Inspector General is handling the new rules interpretation and has established a public comment period of 60 days.

Refer to Chapters 3 and 6.

Explain the purpose of the public comment period. What ethical issue do the rules address?

FOR MORE INFORMATION

See 67 Federal Register 62057, October 3, 2002.

Go to http://www.oig.hhs.gov/fraud.html.

Robert Pear, "U.S. Warning to Drug Makers Over Payments," New York Times, October 1, 2002, A1, A23.

Julei Appleby, "Feds Warn Drugmakers :Gifts to Doctors May Be Illegal," USA Today, October 2, 2002, 1A.

Update: October 14, 2002
Christian van Someren was one of six presidents of Korn/Ferry International, but he was fired last week when Korn Ferry learned of conduct at his prior job that had not been thoroughly investigated when he was originally hired. Mr. van Someren's success at Korn Ferry was phenomenal, generating more revenue than anyone else in the company. In a short time, he was one of six Korn Ferry presidents.

However, upon his ascent to the high position at Korn Ferry, some issues from his past arose that were not thoroughly investigated when he was hired initially as a recruiter. The issues emerged because a supervisor at A.T. Kearney, Mr. van Someren's first place of employment, told Korn Ferry officials that van Someren had charged $28,000 on the corporate credit card for Christmas gifts. When his supervisor confronted him, he indicated that he did not have the money to pay back what he had charged. The supervisor had also signed as a guarantor on a bank loan of $17,000 to van Someren, funds that were used to repay already existing personal debt. Nonetheless, his supervisor fired him in March 1993.

During his 1996 Korn Ferry interview, van Someren did disclose some information about his termination at Korn Ferry, but he did not disclose the amounts involved. The hiring manager spoke with co-workers at A.T. Kearney who said, "Chris deserved a second chance." The hiring manager did not contact his former supervisor at Kearney.

If the hiring manager had contacted his supervisor, he would have discovered that, when Mr. van Someren declared bankruptcy just after leaving Kearney, he was discharged from over $100,000 in credit-card debt as well as the $17,000 loan which left his supervisor there, as guarantor, liable for the $17,000, plus accumulated interest of $2,725. The bankruptcy filing indicates he had income of $40,000 per year and living expenses of $58,000 per year.

At the time of his termination, he was earning $700,000 per year.

Refer to Chapters 3, 38, and 39.

Is the use of a corporate credit card for personal items grounds for termination? Is the failure to disclose background information grounds for termination? Do you think it was ethical for Mr. van Someren to leave his supervisor liable for the loan?

FOR MORE INFORMATION

Joann S. Lublin, "Recruiters Fail to Check Past of Some Hires," The Wall Street Journal, October 8, 2002, pp. B1, B6.

Update: September 23, 2002
The latest issue in corporate governance to emerge in the wave of business scandals is that of CEO perks. During the past few months, information about Jack Welch, the retired CEO of GE, and Dennis Kozlowski, the former CEO of Tyco emerged. The list of the perks for Jack Welch includes wine, food, laundry, dry cleaning, flowers, toiletries, Knicks tickets, cook, housekeep staff, postage, newspaper subscriptions, Red Sox tickets, Yankee tickets, four homes (complete with satellite TV), restaurant tabs, jets, helicopters, and limousines. The perks were in addition to his $16.9 million in salary.

Dennis Kozlowski, former CEO of Tyco and under indictment for sales tax evasion on his multimillion-dollar art sales, had Tyco pick up the tab for a $15,000 umbrella stand; a $6,300 sewing basket; a $2,200 waste basket; $2,900 in coat hangers; $1,650 for a notebook; and $445 for a pin cushion. Tyco also paid for a birthday party for Mr. Kozlowski's wife that was held near Greece. The tab was $1,000,000.

One corporate governance expert has pointed to conflicts of interest on the board's compensation committee. That is, those who approved salaries and perks owned or were associated with companies that did business with GE or Tyco.

Shareholders have submitted proposals to curb such perks.

Refer to Chapters 3, 47, and 49.

How do shareholders make proposals? What are the requirements? Do you think what these CEOs did was ethical?

FOR MORE INFORMATION

Review the GE and Tyco SEC filings: http://www.ge.com and http://www.tyco.com. Click on investor relations and go to SEC filings. Review proxy materials.

JoAnn S. Lublin, "How CEOs Retire in Style," The Wall Street Journal, September 13, 2002, pp. B1, B2.

Update: September 16, 2002
Congress has passed the Sarbanes-Oxley bill , 15 U.S.C. Section 7201 et seq. which is the legislation passed in response to the issues surrounding the collapse of Enron, WorldCom and Adelphia, including financial reporting and the conduct of corporate officers. The key elements of that legislation are: (1) an accounting oversight board; (2) regulations on the independence of auditors; (3) corporate responsibility and governance issues including the structure of audit committees, certification of financial statements, forfeiture of bonuses and options, codes of ethics for senior financial officers, and professional responsibility rules for attorneys working with companies on certification of financial statements; (4) analysts' conflicts of interest; and (5) increased criminal penalties for fraud in financial reporting. Following is a summary of the new law from a forthcoming piece in the Corporate Finance Review:

NEW RULE/LAW

1. SEC certification of financial statements - "untrue statement of a material fact"
2. SEC certification of financial statements - "no covered report omitted to state a material fact necessary to make the statements in the covered report, in light of the circumstances under which they were made, not misleading as of the end of the period covered by such report"
3. SEC certification of financial statements - officer signatures
4. Sarbanes-Oxley Sec. 203. Audit partner rotation. Provides for audit partner rotation once every 5 years.
5. Sarbanes-Oxley Sec. 204. Auditor reports to audit committees.
6. Sarbanes-Oxley Sec. 206. Conflicts of interest. Strict prohibitions on consulting activities beyond financial statement certification. Exceptions require board approval.
7. Sarbanes-Oxley Sec. 301. Public company audit committees. Requires members to not be employed by the company or have family members employed at the company; cannot be hired as consultants; restrictions on business with the company.
8. Sarbanes-Oxley Section 407 - Audit committee must have at least one "financial expert" as defined by the SEC.
9. Sarbanes-Oxley Sec. 304. Forfeiture of certain bonuses and profits. If the company must restate a financial statement, the officers responsible lose their bonuses for any 12-month period surrounding the original financial statement and they must return any profits realized on sales of stock.
10. Sarbanes-Oxley Sec. 306. Insider trades during pension fund blackout periods. Officers and directors cannot trade in stock during this black-out period any stock or interests acquired through company affiliation.
11. Sarbanes-Oxley Sec. 307. Rules of professional responsibility for attorneys. Attorneys must report financial fraud or misdeeds to CEO of chief counsel and if they fail to act, must report such to the audit committee. If the audit committee is not independent with regard to the issue, then the attorney must report the issue to another committee or the board itself.
12. Sarbanes-Oxley Sec. 402. Enhanced conflict of interest provisions. Sec. 403. Disclosures of transactions involving management and principal stockholders.
13. Sarbanes-Oxley Sec. 406. Code of ethics for senior financial officers. Officers must certify along with financials that the company has a code of ethics.
14. Sarbanes-Oxley Sec. 806. Protection for employees of publicly traded companies who provide evidence of fraud. Amends Federal Whistleblower Protection Act to provide coverage for employees who report financial fraud internally or to federal agencies
15. Penalties. Penalty for securities fraud has increased to 25 years. The White-Collar Crime Penalty Enhancement Act of 2002, enacted as part of the Sarbanes-Oxley bill, increases penalties for mail and wire fraud from 5 to 20 years. Violations of ERISA now carry greater penalties with "$5,000" fines for individuals increased to "$100,000"; 1 year imprisonment increased to 10 years; and company fines of "$100,000" increased to "$500,000. New provisions for certification of financial reporting impose penalties of $1,000,000 and/or 10 years and for willful violations, $5,000,000 and 20 years. Corporate Fraud Accountability Act of 2002, also part of Sarbanes-Oxley, imposes penalties for the concealment or destruction of documents related to the financial reports of a company (20 years). Penalties under the Securities Exchange Act of 1934 are increased: $1,000,000, and/or 10 years is increased to $5,000,000 and/or 20 years and company penalties are increased from $2,500,000 to $25,000,000
16. Debts from financial fraud are nondischargeable in bankruptcy.

Refer to Chapters 3, 6, 8, 36, 38, 39, 40, 47, and 49.

FOR MORE INFORMATION

Go to http://www.senate.gov and go to bill status for complete copy of the legislation.

Update: August 26, 2002
A new issue in advertising has emerged at all the major networks. Over the past year about 24 celebrities have appeared on talk shows and morning news shows such as "The Today Show," "Good Morning America," and "The Early Show." However, the interviews and discussions were touted as news stories about celebrities with health problems and how they are coping with them. There was no disclosure that in most of the situations, the celebrities were being paid by the pharmaceutical companies whose medications they were using. For example, Kathleen Turner has appeared on CNN to discuss her story of battling arthritis but did not disclose that she was being paid by Amgen and Wyeth (the manufacturers of Embrel, the drug she was taking for her arthritis). Ann Wilson, singer in the group "Heart," was paid for her appearances to discuss the Lap-band, a surgical device that is used to combat obesity. Peggy Fleming is paid by Pfizer, who manufactures her treatment for high cholesterol, Lipitor. But she did not disclose in an interview on ABC that she was working for Pfizer, only that she was working with a pharmaceutical company. Even some of the agents for the celebrities were being paid by the drug companies for encouraging the celebrities to make these public appearances.

CNN announced that it will ask celebrities whether they are working with a drug company. If so, that financial tie will be disclosed during the interview so that the audience is aware of it.

Refer to Jennings Chapters 3 and 6.

Why are the networks concerned about the disclosure of the financial ties of celebrities? What federal regulation covers celebrity advertisements?

FOR MORE INFORMATION

Melody Petersen, "CNN to Reveal When Guests Promote Drugs for Companies," New York Times, August 23, 2002, pp. C1, C2.

Update: August 19, 2002
Citibank and Providian Bank have announced that they will not permit the use of their credit cards for Internet gambling. Citibank is the largest credit card company in the United States, with an estimated 33 million VISA and MasterCard credit card holders.

Citibank, in making the announcement, also donated $400,000 to nonprofit organizations that are involved in gambling counseling.

Online gambling companies say that 90% of their customers use credit cards as a means of payment.

Refer to Chapter 3.

Why do you think Citibank made such a decision?

Update: August 12, 2002
One fallout from the investigation into conflicts of interest among brokerage houses was the revelation that their analysts were making public recommendations for stock buys from companies that the analysts were privately saying were "dogs." Their true feelings about the stocks were found in their e-mail in an investigation conducted by New York Attorney General, Eliot Spitzer.

However, another issue the investigation uncovered was the violation of the New York Stock Exchange, SEC, and NASD rules that the brokerage firms are required to retain their e-mails for three years, the last two of which must be easily accessible. The regulators were negotiating fines with the firms involved including Smith Barney, Citigroup, Morgan Stanley, Goldman Sachs, Merrill Lynch, Deutsche Bank, and U.S. Bancopr Piper Jaffray.

Refer to Chapters 2, 3, and 8.

Is e-mail discoverable? Recoverable? Private? What relation does obstruction of justice have to this issue?

FOR MORE INFORMATION

Randall Smith, "Wall Street Has E-Mail Problems, " The Wall Street Journal, August 2, 2002, C1, C10.
Patrick McGeehan, "Wall St. Banks May Be Fined For Discarding E-Mail Traffic," New York Times, August 2, 2002, C1, C4.

Update: August 12, 2002
The following chart is adapted from a forthcoming piece in Corporate Finance Review and the Cal Western Law Rev. by Professor Jennings. It provides a summary of the issues surrounding the corporate collapses of 2001-2002.

Refer to Chapters 3, 8, and 47.

What are the types of penalties the companies and individuals could face for the various charges? What securities laws do you think were violated? Discuss the ethical issues involved in the conduct of the companies and officers.

Update: August 5, 2002
The United States Attorney's office for the Southern District of New York has charged Alimzan Tokhtakhounov, a Russian, with wire fraud and robbery, in connection with the controversial pairs skating competition at the Salt Lake City Winter Olympics in February 2002. The federal government is seeking Mr. Tokhtakhounov's extradition from Italy where he is now, apparently awaiting a visa to return to France.

As a result of the pairs competition, Marie Reine LeGougne, a French judge, was suspended by the International Skating Union as a judge. The suspension came following a controversial decision for the Russian team in the pairs skating that caused so much uproar that the Canadian team was awarded a second gold medal six days later. The suspension was given for the failure to report pressure alleged from another judge. However, that story has been muddled with retractions and a cloud of mystery engulfs the February ice skating Olympics.

While no direct connection is made between the two, the indictment alleges that Mr. "T" assured one skater's mother that even if her daughter "falls, we will make sure she is No. 1."

Refer to Chapters 3, 7, and 8.

Can the United States charge a non-citizen/visitor here with a crime after that visitor has left the country?

What would be required to show bribery was committed?

FOR MORE INFORMATION

Richard Sandomir, "Russian Man Is Arrested in Italy In a Plot to Fix Olympic Skating," New York Times, August 1, 2002, A1, A22.

Update: August 5, 2002
In April 2002, during that time period when students are anxiously awaiting information as to whether they have been accepted by a particular college, there was a cyberspace invasion by one Ivy League institution against another. The associate dean and director of the Princeton admissions office used the names and social security numbers of students who had applied to Princeton to gain access to the Yale admissions Web site. While the motive was unclear, and the director of admissions was on administrative leave pending an investigation and unwilling to talk with reporters, the site was accessed on behalf of 18 students.

The Yale Daily News uncovered the story and speculated that perhaps the Princeton director (and others from his staff because he was not acting alone) was trying to gain personal information about the students via the Yale Web site, the type of information that could provide an edge in recruiting.

Harvard does not use a Web site because its computer staff felt that e-mails sent directly to the students were less likely to experience the type of security breach involved in this situation.

Refer to Chapters 3 and 8.

Do you think the Princeton officials violated any laws? Was their conduct ethical?

FOR MORE INFORMATION

Karen W. Arenson, "Princeton Pries Into Web Site for Yale Applicants," New York Times, July 26, 2002, A1, A19.
Charles Forelle, "Ivy Imbroglio: Princeton Says It Spied on Yale," The Wall Street Journal, July 26, 2002, B1, B4.
Neal Katyal, "How to Fight Computer Crime," New York Times, July 30, 2002, A23.

Update: August 5, 2002
On July 30, 2002, President Bush signed PL 107-204 (HR 3763), the SARBANES-OXLEY ACT OF 2002, called the Investor Confidence Act, the Public Accounting and Corporate Accountability Act, Public Company Accounting Reform and Investor Protection Act of 2002, and numerous other names that reflect its purpose of restoring investor confidence in financial reporting. The description of the Act is as follows: An Act To protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.

New portions of the law appear at 15 U.S.C. Section 7201, including a beginning definition section. However, many of the provisions amend the Securities Exchange Act of 1934, found at 78 U.S.C. Section 1 et seq.

The following is a summary of the new law that was posted on the House and Senate Web sites.

- Title I: Public Company Accounting Oversight Board - Establishes the Public Company Accounting Oversight Board to: (1) oversee the audit of public companies that are subject to the securities laws; (2) establish audit report standards and rules; and (3) investigate, inspect, and enforce compliance relating to registered public accounting firms, associated persons, and the obligations and liabilities of accountants.

(Sec. 101) Prohibits Board membership from including more than two certified public accountants.

(Sec. 102) Mandates registration with the Board by any public accounting firm that performs or participates in any audit report with respect to any issuer.

(Sec. 105) Empowers the Board to impose disciplinary or remedial sanctions upon registered public accounting firms and their associated persons who are in violation of this Act, including the securities laws relating to the preparation and issuance of audit reports and the obligations and liabilities of accountants with respect to them.

Restricts liability to intentional conduct, or repeated instances of negligent conduct. Authorizes Board sanctions upon a registered accounting firm or its supervisory personnel for failure to supervise.

(Sec. 106) Places within the purview of this Act: (1) foreign public accounting firms that prepare or furnish an audit report with respect to any issuer; and (2) audit workpapers. (Sec. 107) Grants the Securities and Exchange Commission (SEC) general oversight of the Board and the power to review Board actions, including general modification and rescission of Board authority.

(Sec. 108) Amends the Securities Act of 1933 to: (1) authorize the SEC to recognize, as "generally accepted" for purposes of the securities laws, any accounting principles established by a standard setting body; and (2) direct the SEC to study and report to Congress on the adoption by the U.S. financial reporting system of a principles-based accounting system.

Title II: Auditor Independence - Amends the Securities Exchange Act of 1934 to prohibit a registered public accounting firm from performing specified non-audit services contemporaneously with a mandatory audit. Requires preapproval for non-audit services not expressly forbidden by statute.

(Sec. 203) Mandates: (1) audit partner rotation on a five-year basis; and (2) auditor reports to audit committees of the issuer.

(Sec. 206) Prohibits a registered public accounting firm from performing statutorily mandated audit services for an issuer if the issuer's senior management officials had been employed by such firm and participated in the audit of that issuer during the one-year period preceding the audit initiation date.

(Sec. 209) States that it is the intention of this Act that, in supervising nonregistered public accounting firms and their associated persons, appropriate State regulatory authorities should make an independent determination of the proper standards applicable, particularly taking into consideration the size and nature of the business of the accounting firms they supervise.

Title III: Corporate Responsibility - Vests the audit committee of an issuer with responsibility for the appointment, compensation, and oversight of any registered public accounting firm employed to perform audit services. Requires committee members to be a member of the board of directors of the issuer, and to be otherwise independent.

(Sec. 302) Requires the chief executive officer and chief financial officer of an issuer to: (1) certify that periodic financial statements filed with the SEC fairly present, in all material respects, the operations and financial condition of the issuer; and (2) forfeit certain bonuses and compensation received following an issuer's accounting restatement owing to noncompliance with securities laws.

(Sec. 305) Authorizes a court to prohibit a violator of certain SEC rules from serving as an officer or director of an issuer if the person's conduct demonstrates unfitness to serve (the current standard is "substantial unfitness").

(Sec. 306) Prohibits insider trades during pension fund blackout periods. States that profits realized from such trades shall inure to and be recoverable by the issuer irrespective of the intent of the parties to the transaction.

Title IV: Enhanced Financial Disclosures - Instructs the SEC to require by rule: (1) disclosure of all material off-balance sheet transactions and relationships that may have a material effect upon the financial status of an issuer; (2) the presentation of pro forma financial information in a manner that is not misleading, and which is reconcilable with the financial condition of the issuer under generally accepted accounting principles.

(Sec. 401) Directs the SEC to study and report to Congress on: (1) the extent of off-balance sheet transactions and the use of special purpose entities; and (2) whether generally accepted accounting rules result in financial statements that reflect the economics of such off-balance sheet transactions in a transparent fashion to investors; and (3) the extent to which special purpose entities are used to facilitate off-balance sheet transactions.

(Sec. 402) Prohibits a corporation from making personal loans to its corporate executives. Cites exceptions for home improvement and manufactured home loans made in the ordinary course of the consumer credit business of such issuer and made on terms that are no more favorable than those offered to the general public.

(Sec. 403) Reduces the mandatory period for principal stockholders or senior executives to disclose changes in ownership of securities or security-based swap agreements to two business days after changes were executed (presently ten days after the close of a calendar month). Includes electronic filing within such mandate to disclose.

(Sec. 404) Directs the SEC to prescribe rules mandating inclusion of an internal control report and assessment within requisite annual reports. Requires a public accounting firm that issues the audit report to attest to, and report on, the assessment made by corporate management.

(Sec. 406) Directs the SEC to issue rules requiring a code of ethics for senior financial officers of an issuer applicable to the principal financial officer, comptroller or principal accounting officer.

(Sec. 407) Sets a deadline for the SEC to promulgate rules mandating issuer disclosure whether its audit committee comprises at least one member who is a financial expert.

Title V: Analyst Conflicts of Interest - Requires the SEC to adopt rules governing securities analysts' potential conflicts of interest, including: (1) restricting the prepublication clearance or approval of research reports by persons either engaged in investment banking activities, or not directly responsible for investment research; (2) limiting the supervision and compensatory evaluation of securities analysts to officials who are not engaged in investment banking activities; (3) prohibiting a broker or dealer involved with investment banking activities from retaliating against a securities analyst as a result of an unfavorable research report that may adversely affect the investment banking relationship of the broker or dealer with the subject of the research report; and (4) establishing safeguards to assure that securities analysts are separated within the investment firm from the review, pressure, or oversight of those whose involvement in investment banking activities might potentially bias their judgment or supervision.

Directs the SEC to adopt rules requiring securities analysts and broker/dealers to disclose specified conflicts of interest.

Title VI: Commission Resources and Authority - Authorizes appropriations for FY 2003 to the SEC for: (1) additional compensation, salaries and benefits; (2) enhanced oversight of auditors and audit services; and (3) additional professional staff for fraud prevention, risk management, market regulation, and investment management.

(Sec. 602) Grants the SEC censure authority in connection with appearance and practice before the Commission. Sets forth rules of professional responsibility for attorneys representing public companies before the SEC, including: (1) requiring an attorney to report evidence of a material violation of securities law or breach of fiduciary duty to the chief legal counsel or the chief executive officer of the company; and (2) if corporate executives do not respond appropriately, requiring the attorney to report to the audit committee of the board of directors.

(Sec. 603) Amends the Securities Exchange Act of 1934 and the Securities Act of 1933 to grant Federal court authority to prohibit specified brokers, dealers, or issuers from participating in offerings of penny stock.

(Sec. 604) Amends the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 to authorize SEC censure or restriction of associated persons of brokers and dealers who are subject to any final order of certain State regulatory entities barring them from engaging in the business under their regulatory purviews. Title

VII: Studies and Reports - Mandates studies and reports to Congress by: (1) the Comptroller General regarding the consolidation of public accounting firms, and the impact upon the capital formation and securities markets; and (2) the SEC regarding the role and function of credit rating agencies in the operation of the securities market.

Title VIII: Corporate and Criminal Fraud Accountability - Corporate and Criminal Fraud Accountability Act of 2002 - Amends Federal criminal law to prohibit: (1) knowingly destroying, altering, concealing, or falsifying records with the intent to obstruct or influence an investigation in a matter in Federal jurisdiction or in bankruptcy; and (2) auditor failure to maintain for a five-year period all audit or review work papers pertaining to an issuer of securities. Directs the SEC to promulgate regulations regarding the retention of audit records containing conclusions, opinions, analyses, or financial data.

(Sec. 803) Amends Federal bankruptcy law to make non-dischargeable in bankruptcy certain debts that result from a violation relating to Federal or State securities law, or of common law fraud pertaining to securities sales or purchases.

(Sec. 804) Amends the Federal judicial code to permit a private right of action for a securities-fraud claim to be brought not later than the earlier of: (1) five years after the date of the alleged violation; or (2) two years after its discovery.

(Sec. 805) Directs the United States Sentencing Commission to review and amend Federal sentencing guidelines to ensure that the offense levels, existing enhancements, and/or offense characteristics are sufficient to deter and punish violations involving: (1) obstruction of justice; (2) record destruction; (3) fraud when the number of victims adversely involved is significantly greater than 50 or when it endangers the solvency or financial security of a substantial number of victims; and (4) organizational criminal misconduct.

(Sec. 806) Prohibits a publicly traded company from discharging or otherwise discriminating against an employee because of any lawful act by the employee to: (1) assist in an investigation of prohibited conduct by Federal regulators, Congress, or supervisors; or (2) file or participate in a proceeding relating to fraud against shareholders.

Delineates remedies for such aggrieved employee, including reinstatement, back pay, and compensatory damages.

(Sec. 807) Subjects to a fine and imprisonment any person who defrauds shareholders of publicly traded companies.

Title IX: White-Collar Crime Penalty Enhancements - White-Collar Crime Penalty Enhancement Act of 2002 - Amends Federal criminal law to increase criminal penalties for: (1) conspiracy to commit offense or to defraud the United States, including its agencies; and (2) mail and wire fraud.

(Sec. 904) Amends the Employee Retirement Income Security Act of 1974 to increase the criminal penalties for violations of such Act.

(Sec. 905) Directs the United States Sentencing Commission to review Federal Sentencing Guidelines to: (1) ensure that they reflect the serious nature of the offenses and the penalties set forth in this Act, the growing incidence of serious fraud offenses, and the need to deter and punish such offenses; and (2) consider whether a specific offense characteristic should be added in order to provide stronger penalties for fraud committed by a corporate officer or director.

(Sec.906) Amends Federal criminal law to require senior corporate officers to certify in writing that financial statements and the disclosures therein fairly present in all material aspects the operations and financial condition of the issuer.

Subjects to criminal liability any person who recklessly and knowingly violates such requirement, including maximum imprisonment of: (1) ten years for willful violation; and (2) five years for reckless and knowing violation.

(Sec. 908) Subjects to a maximum ten-year prison term anyone who corruptly tampers with a record with intent to impair the object's integrity or availability for use in an official proceeding, or otherwise impedes an official proceeding.

(Sec.909) Amends the Securities Exchange Act of 1934 to authorize the SEC to seek a temporary injunction to freeze extraordinary payments earmarked for designated persons or corporate staff under investigation for possible violations of Federal securities laws.

(Sec. 910) Requests the United States Sentencing Commission to: (1) promptly review sentencing guidelines applicable to securities and accounting fraud; and (2) expeditiously consider promulgation of new sentencing guidelines to provide an enhancement for senior corporate officers who commit fraud and related offenses. Prescribes guidelines for Commission consideration, including a request that it ensure that the sentencing guidelines and policy statements reflect the serious nature of securities, pension, and accounting fraud and the need for aggressive and appropriate law enforcement action to prevent such offenses. Sets a deadline for promulgation of such guidelines.

(Sec. 911) Amends the Securities Exchange Act of 1934 and the Securities Act of 1933 to authorize the SEC to prohibit a violator of rules governing manipulative and deceptive devices, and fraudulent interstate transactions, respectively, from serving as officer or director of a publicly traded corporation if such person's conduct demonstrates unfitness to serve.

Title X: Corporate Tax Returns - Expresses the sense of the Senate that the Federal income tax return of a corporation should be signed by the chief executive officer of such corporation.

Refer to Chapters 3, 8, and 47.

Make a list of all the the statutes noted in the summary that will change as a result of this new Act.

FOR MORE INFORMATION

Go to http://www.senate.gov and plug in "accounting" to find the new legislation as well as its history in both the House and Senate.

Update: July 15, 2002
The tax evasion charges brought against L. Dennis Kozlowski, the former CEO of Tyco, have resulted in several revelations. First, there is a huge network in the art world established for the purpose of avoiding sales taxes, a network that Kozlowski used. Second, many participants in that network are coming forward to pay sales taxes on transactions in the past, with which they tried to avoid the taxes.

Tax collectors assure that they cannot possibly catch up with everyone who avoids sales taxes, but they do focus on large ticket items such as artwork.

Refer to Chapter 3.

Analyze these statements that apply here: "Everyone avoids sales taxes on art work." "Who's to know?" "How will they ever find out?"

FOR MORE INFORMATION

Tom Herman, "Would-Be Tax Dodgers Pay Up, Prompted by Kozlowski," The Wall Street Journal, June 13, 2002, D2.

Glenn R. Simpson, Jeff D. Opdyke and Ann Zimmerman, "Sales-Tax Indictment Targets Common Practice," The Wall Street Journal, June 5, 2002, D1, D2.

Update: July 15, 2002
The issue of drug makers' relationships with physicians continues to attract attention of lawmakers, the public, the media, and medical professionals. Vermont passed a statute in June that requires pharmaceutical companies to disclose any gifts and cash payments made to doctors, hospitals, and all others involved in health care. States that have had or have pending bills on the same type of regulation include California, Connecticut, Hawaii, Illinois, Kentucky, Maine, and New York. Vermont's governor, Howard Dean, is himself a physician. He favored the legislation and pledged his signature before it was passed in the Vermont senate and house.

A bill has been proposed in the U.S. House that would prohibit pharmaceutical companies from deducting their marketing expenses that exceed the amount that they spend on research and development. In 2001, the industry spent $19 billion on advertising, an amount that has doubled in the past 5 years.

Pharmaceutical firms say that doctors need to have the information on the latest drugs and studies in order to keep current and that they pay for trips and meals so that they can get the doctors' attention for a time in order to present their evidence on the drugs. The direct marketing to consumers, they say, helps consumers know when to seek treatment.

Others argue that doctors should be making independent decisions as to which drugs to prescribe and not base those decisions on which company spends the most money.

The AMA has issued guidelines in the past for doctors to follow in accepting benefits and gifts from pharmaceutical companies. Those standards can be found at http://www.ama-assn.org/go/ethicalgifts and were developed by the AMA's Council on Ethical and Judicial Affairs.

A new attitude has emerged among medical students, interns, and residents with many deciding to adopt a "zero tolerance" policy of accepting nothing from drug company representatives. Some have even stopped accepting the pens and notepads. A new organization, Division of Pharmacoepidemiology, was created in Boston's Brigham and Women's Hospital to provide physicians with "data on prescribing effectively." DOPE (an accidental acronym) has 18 researchers plus staff who assemble data for doctors and then conduct seminars for presenting the information, including free dinner for the doctors.

Refer to Chapter 3.

What ethical dilemma is involved in this issue with the drug companies and the physicians?

FOR MORE INFORMATION

Chris Adams, "Student Doctors Protest Largess of Drug Makers," The Wall Street Journal, June 24, 2002, B1, B4.

"Free Gifts Carry a High Price," American Medical News, June 10, 2002, p. 29.

Melody Petersen, "Vermont to Require Drug Makers To Disclose Payments to Doctors," New York Times, June 13, 2002, C1, C12.

Andis Robeznieks, "Vermont Watches Drug Marketing Costs," American Medical News, July 1, 2002, p. 9 and 12.

Update: July 1, 2002
In a decision at the trial court level in California, a judge has ruled that Unocal must stand trial for the human rights violations committed in Burma (now Myanmar) under a theory of vicarious liability. The court ruled that because Unocal was in a joint venture with the government of Burma, it must bear the responsibility and liability for the actions of its joint venturer.

Unocal had made a motion to dismiss the case brought against it for human rights violations it says it never participated in, never knew occurred, and certainly did not authorize. The suit alleges that Unocal either closed its eyes to the conduct or was completely naïve about operations of the government at that time.

The suit was based on the federal law, the Alien Tort Claims Act, which permits foreign citizens to use U.S. courts for litigation against each other. The idea was to prevent "seafaring pirates" from using the United States as a safe zone, thereby escaping responsibility and liability.

There are about 12 other human rights cases pending around the country, but the Unocal ruling represents the first time a judge has ruled on the issue of whether the cases should be allowed to go forward. The decision in Unocal was hailed by the plaintiffs' lawyers in the other cases as a way to hold corporations accountable for their conduct even when they move operations offshore. .

Refer to Chapters 2 and 3.

Do U.S. courts have jurisdiction over these corporations? These plaintiffs who were laborers in these countries?

FOR MORE INFORMATION

Peter Waldman, "Unocal to Face Trail Over Link to Forced Labor," The Wall Street Journal, June 12, 2002, B1, B3.

See also http://www.unocal.com.

Update: June 10, 2002
Tyco International has seen about two thirds of its share value decline this year. The decline is caused by market conditions as well as restatements of earnings following questions about its accounting practices. Tyco had made over 700 acquisitions in 3 years. The complex accounting issues in those acquisitions served to create an inaccurate picture of Tyco's financial picture.

When Tyco's CEO, Dennis Kozlowski, resigned suddenly on June 3, 2002, the market experienced a quake from the fallout. Investors, already nervous because of Enron and other ongoing disclosures about firms and their restatements of earnings, took the news hard and began selling with the market dipping 215 points in one day.

Two days later, Mr. Kozlowski was indicted in New York for the failure to pay sales tax on million-dollar paintings he collected and sold. Apparently company warehouses and invoices were used as a means for passing through the art and cash so as to avoid the sales tax. There are indications that indictments of others in the art world are pending. The sales taxes on all the paintings amount to $1 million, according to documents filed in Manhattan yesterday by the District Attorney.

Refer to Chapters 3 and 8.

Why do you think investors become skittish because of an earnings reversal announcement by one firm? Why does a CEO's resignation following a restatement of earnings make them nervous?

What type of crime do you think Mr. Kozlowski is accused of with regard to the paintings and the sales taxes?

FOR MORE INFORMATION

Thor Valdmanis, "Art Purchases Put Ex-Tyco Chief in Hot Water," USA Today, June 5, 2002, 1B.

Update: May 20, 2002
The Stanley Works proposal to reincorporate in Bermuda is part of an ongoing trend by corporations and individuals in the United States to minimize their federal tax bills. For example, Enron used offshore partnerships as a means of avoiding nearly all federal income tax. Cruise lines are incorporated in Liberia and other countries so as to avoid U.S. taxes even though their cruises originate in the United States and the majority of their passengers are U.S. citizens.

The Internal Revenue Service has increased its audits of off-shore investments and the U.S. Treasury estimates that its loses billions in tax receipts because of offshore tax shelters and business restructuring using offshore structures. Both the Cayman Islands and the Bahamas have very strict statutes on privacy. Information from banks on companies is held in the strictest confidence. Even corporate filings are private in both locations.

One recent example involves the Pritzker family's 5% holding in hotels developed by Hyatt in Baku, Azerbaijan. The complex relationship, which allows the Pritzker family to reduce its substantial U.S. tax bill, was disclosed when the World Bank was required to make a routine filing with the Grand Court in the Cayman Islands. One commentator offered the following explanation, "Clearly there is nothing unusual or improper about American businesses or citizens using offshore structures to minimize tax and for other legitimate business and administrative reasons."

Refer to Chapter 3.

Do you think the conduct is ethical? Do you think it is legal?

FOR MORE INFORMATION

Glenn R. Simpson, "Island Tax Haven May Aid Pritzker," The Wall Street Journal, May 13, 2002, A3.

Update: April 29, 2002
A new trend is emerging in health insurance, that of the premium increase based on claims. It is common practice in the auto insurance industry, for example, for insurers to revisit your premium each year and adjust it based on factors such as your driving record or number of accidents. However, health insurers have generally evaluated their insured's health only once, at the outset, when issuing the policy. The reevaluation of health and premiums was a practice that ended in the 1950s because the insurers feared regulators would impose limitations on premiums.

At least one health insurer, however, has begun the practice of annual evaluation of the health of its insureds and has adjusted policy premiums accordingly. Even without an examination of the insured, some insurers have increased the insureds' premiums based simply on the nature of their claims for the year and the possibility that more claims will arise.

Those who are healthy are in favor of the annual look. Perceiving themselves as the equivalent of good drivers, they want to pay less when the stay healthy. The health discount is, in their minds, the equivalent of the safe driver discount.

However, those who are less healthy argue that you buy insurance for when you need it and the coverage should apply without regard to claims.

Refer to Chapters 3, 12-15.

Consider the ethical and contractual issues in these new adjustments by health insurers.

FOR MORE INFORMATION

Chad Terhune, "Insurer's Tactic: If You Get Sick, The Premium Rises," The Wall Street Journal, April 9, 2002, A1, A20.

Update: April 22, 2002
NBC has decided not to carry liquor ads following its signature on a multi-million dollar contract with Guinness UDV, the makers of Smirnoff. The contract did not break any laws but rather broke a longstanding taboo among television networks not to accept ads for hard liquor. The networks carried ads for beer, wine and champagne, but not for vodka, whiskey, etc. NBC had only run one liquor ad since signing the contract in December and it was a public service type of ad that featured the name "Smirnoff."

Congress, beer advertisers, health groups and consumer advocates had placed a significant amount of pressure on NBC. Several committees in the House and Senate had asked the network to revisit its decision. Beer companies had also pressured Congress, indicating that they were required to comply with very strict requirements and that hard liquor was more intoxicating and should be subjected to equal or greater standards than beer ads.

NBC had planned to run the ads only after 9 PM, a time period in which 80% of viewers are shown to be 21 or older.

However, the Justice Department has continued its probe of the New York agency to determine whether employees of Ogilvy altered time sheets in order to increase the amount due from the government.

Refer to Chapter 3.

If the ads are legal, why did NBC decide not to run them? What issues would health and consumer groups raise?

FOR MORE INFORMATION

Theresa Howard, "After criticism, NBC calls off liquor ads," USA Today, March 21, 2002, 1B.

Stuart Elliott, "Facing Outcry, NBC Ends Plan To Run Liquor Commercials," New York Times, March 21, 2002, C1, C8.

Update: April 8, 2002
Ogilvy & Mather is a Madison Avenue advertising agency that had been awarded the ad contract for the federal government's antidrug campaign by the Office of National Drug Control Policy. Its ads drew attention when they were run during the 2002 Super Bowl. An audit revealed that the agency had overbilled the federal government and the agency settled the charges with the ONDCP for $1.8 million.

However, the Justice Department has continued its probe of the New York agency to determine whether employees of Ogilvy altered time sheets in order to increase the amount due from the government.

The agency carries clients such as IBM and American Express. Other agencies are now bidding for the government project, estimated to be worth $150 million per year.

Refer to Chapters 3 and 8.

Was Ogilvy's conduct ethical? Do you think it was a crime? What would the federal government have to prove?

FOR MORE INFORMATION

Vanessa O'Connell, "Ogilvy's Overbilling Scandal Reverberates," The New York Times, February 27, 2002, B5. 2.

Update: April 8, 2002
David A. Vise is a Putlitzer Prize winner who is a reporter for the Washington Post and wrote a book entitled, The Bureau and the Mole. When the book hit the market, Mr. Vise purchased 20,000 copies via Barnes & Noble.com, taking advantage of both free shipping offered by the publisher and a discounted initial price. Mr. Vise's book had already hit the New York Times' bestseller list in the week before the purchases.

He used the books he purchased to conduct online sales of autographed copies of the books, but he did return 17,500 books and asked for his money back. However, the return of the 17,500 books represents more books than a publisher generally runs for a book.

Mr. Vise said that he did not intend to manipulate the market or profit from the transactions. He said his only intent was to increase awareness of The Bureau and the Mole.

Mr. Vise's editor offered to pay Barnes & Noble for any expenses it incurred.

Refer to Chapters 3, 26, and 27.

Was it ethical to do what Mr. Vise did? Was he within his rights to return the books? What are his remedies? Does Barnes & Noble have any rights?

FOR MORE INFORMATION

David D. Kirkpatrick, "Author's Attempt to Promote Book Backfires," The New York Times, March 6, 2002, C2.

Update: April 1, 2002
An interesting development has occurred in the field of purchasing, particularly in the area of medical supplies. About 50% of U.S. nonprofit hospitals use buying agents to purchase their supplies. The hospitals work together so that their buying power in numbers serves as a way to reduce the costs of the supplies to them. Buying agents then serve as the liaison between the hospitals and the suppliers, negotiating bulk price deals for the groups of hospitals.

However, what was recently discovered is that the buying agents also had interests in the companies from which they were purchasing the supplies and receiving the discounts. Because of those interests, they were often not negotiating price and were certainly not examining the products of the suppliers' competition. Because they held interests in the supplying companies, the agents benefited from the orders from the hospitals.

In addition there is perhaps an issue going the other way. The buying agents share with the hospitals any payments made to the agents by the suppliers as a discount or as incentives for the use of a particular manufacturer's product. The result is that the hospitals and agents are working together to get the best price as well as the best returns through the use of the agents.

Refer to Chapter 3.

Do the purchasing agents have a conflict of interest? What kinds of problems could result for the hospitals if they must rely only on one supplier in which the agent has an interest?

FOR MORE INFORMATION

Walt Bogdanich, Barry Meier and Mary Williams Walsh, "2 Hospital Purchasing Groups Face Questions Over Conflicts," The New York Times, March 4, 2002, A1, A18.

Update: March 11, 2002
Ms. Suzy Wetlaufer, editor of the Harvard Business Review, interviewed former GE CEO Jack Welch for a piece in the business magazine. She asked in December 2001 that the piece be withdrawn because her objectivity might have been compromised. Those at the magazine did another interview and published that interview in the February issue of the magazine.

Editorial director of the magazine, Walter Kiechel, who supervises Ms. Wetlaufer, acknowledged that a report in the Wall Street Journal about an alleged affair between Ms. Wetlaufer and Mr. Welch and about Mr. Welch's wife calling to protest the article's objectivity is correct in substance. Mr. Welch refused to confirm or deny that there had been an affair. Ms. Wetlaufer is divorced.

Some staff members have asked that she resign from her $277,000 per year job, but thus far she has survived termination. Their objections are that she compromised her journalistic integrity. Mr. Kiechel, on the other hand, notes that she did "the right thing in raising her concerns."

Refer to Chapter 3.

Do you think there was a conflict of interest if there was an affair between the two?

FOR MORE INFORMATION

James Bandler, "Harvard Editor Faces Revolt Over Welch Story," The Wall Street Journal, March 4, 2002, B1, B4.

Update: March 4, 2002
The issue of conflicts of interest between physicians and pharmaceutical companies continues. Experts estimate that drug companies spend about $1,500 per physician per year in trying to attract the physicians' attention to particular drugs in order to have the doctors prescribe them. Those figures come from the $15.7 billion drug companies spent on marketing in 2000. That figure for marketing was $9 billion in 1996.

The AMA has created a $1 million educational campaign to discourage doctors from accepting even the smallest of gifts from pharmaceuticals because of the reality and perception that these gifts influence doctors' decisions on which drugs to prescribe. Interestingly, $675,000 of the $1 million were donated by the pharmaceutical companies themselves.

At the same time of the announcement of the AMA campaign, Dr. Joseph Bailey proposed that the physicians in his specialty practice group simply charge pharmaceutical company representatives $65 in order to make a 10-minute pitch to a doctor about their drug (s). One doctor describes the proposal as follows, "There are some doctors who would like to have access to that information who don't want to give up two hours of their time to go to dinner. Rather than getting a free ham or a free turkey from a pharmaceutical rep, I would rather see that money put to use to directly benefit the patient." The reps sign up through a separate for-profit corporation and the corporation then distributes its funds to the physicians so that there is no taint or influence from a particular company.

Refer to Chapter 3.

Do you think the conflict of interest is resolved?

FOR MORE INFORMATION

http://www.ama.org

http://www.kaisernetwork.org

Update: February 25, 2002
Piper High School in Piper, Kansas, a town located about 20 miles sw legal of Kansas City, has been experiencing national attention because of questions about students and their term papers in a class in botany.

Ms. Christine Pelton, a high school science teacher, had warned the students in her sophomore class not to use papers posted on the Internet for their projects. When the projects were turned in, Ms. Pelton noticed that some of the students' writing in portions of the paper was well above their usual quality and ability. She found that 28 of her 118 students had taken substantial portions of their papers from the Internet. She gave the students a 0 grade on their term paper projects. The result was that many of the students were now going to fail the semester in the course.

The students' parents protested and the school board ordered Ms. Pelton to raise the grades. She resigned in protest. She has received a substantial number of job offers from around the country following her resignation. Nearly half of the high school faculty as well as its principal have announced their plans to resign at the end of the year.

Several of the parents pointed to the fact that there was no explanation in the Piper High School handbook on plagiarism. They also said that the students were unclear on what could be used, when they had to reword, and when quotations marks are necessary.

The annual Rutgers University survey on academic cheating reveals that 15 percent of college papers turned in for grades are completely copied from the Internet.

Refer to Chapter 3.

Do you think the copying was unethical? Why do we worry about such conduct? Isn't this conduct just a function of the Internet? Isn't it accepted behavior?

FOR MORE INFORMATION

Jodi Wilgoren, "School Cheating Scandal Tests a Town's Values," New York Times, February 14, 2002, A1, A28.

Update: February 18, 2002
In an example of private law at work, the International Olympic Committee (IOC) dealt with issues of vote exchanges among judges for the pairs' figure skating competition. Canadian skaters, David Pelletier and Jamie Sale, were awarded a silver medal after what was called "the performance of a lifetime" in the competition. Their performance was flawless, although not as difficult as that of Elena Berezhnaya and Anton Sikharulidze, who were awarded the gold medal despite several errors in their performance.

The French judge on the panel, Marie Reine Le Gougne, said she was pressured by the Russians to rank the Russian team first. There may have been a quid pro quo arrangement: French would be assured the Russian vote in ice dancing if the Russians could have the French vote in pairs.

Following public outcry and an investigation, the IOC awarded a second gold medal to the Canadian skaters. The decision was one based on IOC rules, internal policies, and an internal fact-finding group. There were no criminal laws broken and it was up to the private body to take appropriate action for rules violations.

Refer to Chapters 1 and 3.

What ethical issues do you see in the events? Was the remedy appropriate? Would you have accepted the gold medal if you were the Canadian team?

FOR MORE INFORMATION

Selena Roberts, "Canadian Skaters Awarded Share of Olympic Gold; French Judge Suspended, Her Scoring Thrown Out," New York Times, February 16, 2002, A1, B21.

Update: February 11, 2002
When the Taliban were in power in Afghanistan, it banned watching television. The ban created a substantial market for smuggling in televisions. For example, a Sony television set smuggled into Pakistan would run $400. If the set is imported legally, the cost is $440. The smuggled set can be sold across the border in Afghanistan for much more. The amount due to Sony is $220, regardless of tariffs, so the incentive for those in Pakistan is to smuggle the sets into Pakistan and then sell them in Afghanistan, thus producing a higher profit margin The demand for the sets in Afghanistan was high and the Taliban soon determined the extent of the activity. Even as it prohibited the watching of television, the Taliban began extracting taxes and tariffs on the smuggled television sets. It was able to earn substantial sums through its combination of prohibition and smuggling.

Refer to Chapters 3 and 7.

Do you think Sony has an ethical obligation to police such smuggling? What happens when the government benefits from its own prohibitions by operating in the black market?

FOR MORE INFORMATION

Daniel Pearl and Steve Stecklow, "Taliban Banned TV But Collected Profits on Smuggled Sonys," Wall Street Journal, January 9, 2002, A1, A8.

ASIDE FOR STUDENTS: Note that this article was written by Daniel Pearl, the reporter from the Wall Street Journal who was kidnapped.

Update: January 28, 2002
The Enron bankruptcy has resulted in Congressional hearings, calls for regulatory reform for auditors, and changes in regulation of employee retirement plans. The Enron case presents a flurry of business law and legal environment issues.

For example, the original creation of the partnerships that Enron did business with had officers of Enron as the partners in those partnerships. In fact, they were enjoying substantial returns in their roles as partners. Issues that arise here are conflicts of interest and the liability of the partners and officers for the transactions. Issues of disclosure to the board and perhaps the shareholders also arise.

Enron paid little federal income tax because it had created over 800 corporations located in the Cayman Islands and managed to avoid federal tax liability by channeling earnings through a wide range of businesses and corporations located there. Questions that arise here relate to international law and the jurisdiction of the United States over wholly owned subsidiaries of Enron incorporated and located in other countries. Also, there is the constitutional issue of taxing the income of companies whose earnings come from operations outside the United States.

Enron employees had retirement plans through the company and were permitted to hold up to 62 percent of their retirement savings in Enron stock. In fact, the company's program for matching the stock chosen for investment made it rather tempting for employees. As the value of the company's stock was declining, the officers placed a lock on trading by the employees for 30 days, with the result being, for many employees, the loss of most of their retirement funds. Because of the high exposure employees have when they are so heavily invested in their employer's stock, Congress is considering more regulation under ERISA with regard to these types of retirement plans.

There is the story of Sherron S. Watkins, the former accountant who became an Enron officer and wrote a letter, now referred to as the smoking gun, to chairman and CEO Ken Lay expressing concern about Enron's accounting practices and financial reports. In her memo she reports a conversation she overheard in which one middle manager said to another manager, "I know it would be devastating to all of us, but I wish we would get caught. We're such a crooked company."

There have been allegations that Andersen and Enron employees were destroying records, in advance of their usual time for destruction under company policies. Andersen has stated that it halted the shredding once it had notice of an SEC investigation. It is a criminal violation to shred documents that are necessary for an ongoing investigation.

David Duncan, the Andersen partner in the Houston office assigned to the Enron account, took the Fifth Amendment when he was called to testify before Congress. Newspapers are exploring the campaign donations of Enron and its officers and that information can be found at http://www.fec.gov.

Finally, employees from Arthur Andersen, Enron, and accounting groups have been called to testify before Congress regarding everything from the shredding of documents to whether new rules are necessary for auditors and their roles in certifying financial statements.

Refer to Chapters 3, 7, 8, 42-49.

Discuss the issues outlined above. Include a discussion on whistleblowers and whether they are protected under the law.

FOR MORE INFORMATION

Richard A. Oppel Jr., and Kurt Eichenwald, "Arthur Andersen Fires An Executive for Enron Orders," New York Times, January 16, 2002, A1, C7.

Jim Yardley, "Author of Letter to Enron Chief Is Called Tough," New York Times, January 16, 2002, A1, C6.

John Waggoner, "How to protect yourself from spooky stuff like Enron, New York Times, January 25, 2002, 3B.

Thomas A. Fogarty and Jayne O'Donnell, "Andersen execs point finger at fired partner," USA Today, January 25, 2002, 1B.

Update: January 7, 2002
Some recent ethics surveys provide insight into views of various professions. The following is a survey of professions for the highest ethical standards:

A second survey ranked those professions with the lowest ethics:

• Car salespeople
• Lawyers
• Labor union leaders
• TV reporters and commentators

Refer to Chapter 3.

What factors do you think influence the rankings and ratings in the polls?

FOR MORE INFORMATION

"Firefighters Receive Top Marks for Ethics, Honesty," USA Today, December 5, 2001, 1A.
"Who Has the Lowest Ethics?" USA Today, June 5, 2001, 1A.

Update: December 31, 2001
A dramatic business story is unfolding in Ohio as a businessman sues his banker for turning down his loan application for funds to be used to buy a company. The suit is not for violation of the Equal Credit Opportunity Act or for wrongful refusal to lend. The suit resulted when the loan officer for the bank turned around and bought the company instead.

In 1997 Jeffrey Groob decided to buy the Oldfield Equipment Company, a commercial pump business located in Reading, Ohio. After negotiating a price of $1.8 million for the company, Mr. Groob applied for a loan at two banks that rejected his application. He then applied at KeyBank. Carol Sapinsley, the vice president of commercial lending for KeyBank, called Mr. Groob on October 31, 1997, to let him know that the loan was denied. Mr. Groob abandoned his efforts to buy the company and went on to other opportunities.

In 1999, Mr. Groob happened to be reading the obituaries and noticed that Oldfield's former owner had died. Within the obituary were the names of the current owners of the company and one of those owners was Carol Sapinsley.

Mr. Groob then filed suit against Ms. Sapinsley and KeyBank for tortuous interference, breach of fiduciary duty, negligent supervision, and misappropriation of a business opportunity.

KeyBank has responded by explaining that Mr. Groob did not meet their lending standards, that he was putting in no money himself, and that he also wanted the bank to provide him with working capital. Ms. Sapinsley and her husband purchased Oldfield on November 4, 1997, with a loan from Fifth Third Bank for $1.35 million and $400,000 of their own money.

Mr. Groob also cites two provisions in KeyBank's code of ethics that he says Ms. Sapinsley violated:

[Employees of the bank will] maintain no position or interest, financial or otherwise, which affects or could affect the employee's independence or judgment concerning transactions between KeyCorp and its customers, suppliers, or others with whom KeyCorp competes or has existing or pending or potential business relationships.

[Employees of the bank] cannot divulge confidential information nor use it for trading in securities or for other personal gain during or after employment.

Refer to Chapters 3, 9, and 39.

Do you think the lending officer breached any fiduciary duty? Was there tortuous interference with Mr. Groob's contract to buy Oldfield? What do you think Mr. Groob is alleging under the negligent failure to supervise?

FOR MORE INFORMATION

James McNair, "Case Tests Banking Ethics," The Cincinnati Enquirer, December 15, 2001.

Update: December 31, 2001
There are some companies that shun layoffs even during economic downswings. Southwest Airlines is the example of a no-layoff company that has enjoyed media coverage over the past few months. However, Southwest has not had any layoffs in the 30 years it has been in business. There are other with similar longstanding policies of avoiding layoffs.

• Nucor, Inc. is a steel manufacturer located in Charlotte, North Carolina. It has not had a layoff since 1960, when it began as a company. Nucor has 7,000 employees and its copes with economic downturns by restricting travel or reducing work schedules.
• Davis Polk & Wardell, an international law firm based in New York, told its employees that, despite the impact of the September 11 attacks, it would not downsize. The law firm has never had a layoff and assured employees that it would stand by its policy. The spokesperson for the law firm said that the firm believes the no-layoff policy preserves its "collegial culture."
• Rogers & Associates, a Los Angeles public relations firm, has had only one layoff in its 21 years in the business and had pledged no downsizing now.

The companies indicate that they could post higher earnings with layoffs. But the companies feel that they can cut expenses in other ways and that, over the long term, retention of employees with their dedication and skills provides higher returns. At least one study indicates that companies with high retention rates provide 8% higher returns for their shareholders.

Refer to Chapters 3 and 38.

Do the employees have any legal protections against downsizings and layoffs? Is there an ethical obligation to retain employees?

FOR MORE INFORMATION

Stephanie Armour, "Some Companies Choose No-Layoff Policy," USA Today, December 17, 2001, p. 1B.

Update: December 24, 2001
Dmitri Sklyarov, a programmer from Moscow, was arrested in the United States five months ago for violations of the Digital Millennium Copyright Act. Mr. Sklyarov was charged with developing a program that permitted computer users to circumvent the encryption technology on electronic books, thereby enabling them to download the books without paying for them over the Internet.

However, Mr. Sklyarov was permitted to return home after he reached an agreement with U.S. prosecutors to cooperate with them in the prosecution of his employer, Elcomsoft, a software manufacturer based in Moscow. The charges against Mr. Sklyarov will be dropped if he testifies against his employer and if he has no further violations of the law in the next year.

Mr. Sklyarov is a graduate student in Moscow and attained international fame for being the first person arrested under the U.S. 1998 DMCA. He was arrested when he came to the United States to attend a computer software show. Russia has warned its computer industry employees about traveling to the United States because they will be subject to arrest for their legal activities in Russia related to circumvention of software encryption.

There were protests regarding Mr. Sklyarov's arrest and Web sites dedicated to seeing his release. See http://www.eff.org.

Refer to Chapters 3, 7, 8, and 10.

1. Is software protected by a copyright? What does the DMCA do?
2. Are citizens of other countries subject to arrest here in the United States? What happens if their conduct in their countries is legal and they commit their acts in their home country, but those acts travel internationally via computer? That is, the program to get around the encryption of books was developed in Russia and sold from there - can citizens of Russia be prosecuted here for violations of our laws?

FOR MORE INFORMATION

Jennifer S. Lee, "In Digital Copyright Case, Programmer Can Go Home," New York Times, December 14, 2001, C4.

Update: December 24, 2001
Television networks have voluntarily refused to accept ads for the so-called "hard liquors." Beer and wine commercials have been part of television advertising since television began. With the cooperation of the liquor industry, there have been no hard liquor ads since 1948. That voluntary ban was lifted by the industry in 1996, but the members of the industry and TV networks have continued the ban. However, since September 11 and owing largely to the commercial-free coverage the networks ran during that time, TV advertising revenues have been down substantially.

NBC Television signed an agreement with Guinness UDV, the makers of Smirnoff vodka, to begin advertising its products. The ads began on Saturday, December 15, 2001, with an ad for Smirnoff. However, the ad was a reminder about the need for a designated driver when attending holiday parties. The end of the ad read, "From your friends at Smirnoff."

NBC spokespersons indicated that the network had been approached in the past by liquor manufacturers about advertising, but had not considered it. Guinness, however, approached the network with guidelines and protocols. For example, NBC has dictated that the ads run in programming in which 85 percent or more of the audience is over 21. Also, there will be a four-month period in which the liquor ads will only be for "social-responsibility spots." These ads will be similar to the designated driver ad and provide warnings and reminders about the use of alcohol. Following the four-month introductory period, one in every five ads must be "social-responsibility spots."

Consumer groups responded positively to the code except for their objection to the use of a liquor name at the end of the ad. Their position was that the ad sponsor should be the corporate name and not the name of a particular liquor.

Refer to Chapter 3. Should the liquor companies advertise on television? Should the networks accept the ads? What are the issues in having such ads on television? Do you think their self-imposed code is socially responsible?

FOR MORE INFORMATION

"NBC, With Conditions, Accepts Liquor Ads," New York Times, December 14, 2001, C1, C2.

Update: December 3, 2001
The Pentagon's inspector general conducted an investigation into the Osprey tilt-rotor aircraft, a flying machine that takes off like a helicopter but is able to fly at airplane speeds. The program for the development of the osprey has been subject to much questioning as to the craft's viability. Two fatal crashes, one of which killed 23 Marines, resulted in even closer scrutiny.

After the inspector general's report was released, eight Marines were charged with falsification of maintenance records for the Osprey. The report concluded that the falsification occurred in an effort to make the performance of the craft look better than it actually was. The fear of those who were working on the Osprey project was that it might be scrapped without better results.

The falsifications occurred during a 21-day period from December 20, 2000, through January 11, 2001, when the Pentagon was taking a close look at the experimental aircraft.

Refer to Chapter 3.

Why do workers make decisions to falsify records? Is compromising on quality a peculiar or typical ethical breach? What category of ethical breach is the falsification of records?

FOR MORE INFORMATION

Robert L. Jackson, "8 Marines charged in Osprey case," Tribune, August 11, 2001, A11. www.usmc.mil.

Update: November 26, 2001
Melissa Biba, 22, was in Las Vegas at the New York-New York Hotel and Casino in January 2001. She was drinking so that her blood-alcohol level was above the legal limit. She was able to rent, along with someone she had met the night before at the hotel, a Chevrolet Corvette that the two of them drove to Jean, Nevada, that morning. Ms. Biba was observed speeding and passing on the right, in many cases on the shoulder of the road.

Dick and Carlene Scott, ages 59 and 66 respectively, were out that morning in their small pick-up truck headed from their rural community into Las Vegas to buy groceries. Ms. Biba ran into their truck, killing both of them. Ms. Biba and her passenger were unharmed.

Ms. Biba was charged with 2 counts of felony drunken driving. She entered a guilty plea and was sentenced to between 6 and 20 years.

While Ms. Biba took full responsibility for her actions, her lawyer pointed out in a sentencing memorandum that others should be held accountable. Mr. Dominic Gentile pointed to the longstanding practices of Las Vegas casinos of giving free alcohol to those who are gambling. He also noted that, when Ms. Biba and her new acquaintance went to the car rental agency on the strip that specializes in high performance vehicles, they both had beers in their hands.

Ms. Biba, who had been free on bond since her arrest following the accident, has been lecturing to high school students in her native Chicago about the dangers of drinking and driving.

Mr. and Mrs. Scott's son testified at the sentencing hearing that his parents' death caused the break-up of his two-year marriage because he has been grieving.

Ms. Biba's father had no comment following her sentencing but her mother noted to reporters, " I want to say that Las Vegas is great to its tourists."

Refer to Chapters 3 and 9.

Could the casino and car rental agency be held liable for the deaths of the Scotts? Was it ethical for the car rental agency to rent a car to two people who were clearly drinking?

FOR MORE INFORMATION

Thevenot, Carri Geer, "Drunken Driving Case: Illinois Woman Sentenced," Las Vegas Review-Journal, November 10, 2001, B1.

Update: November 19, 2001
Transparency International has published its annual Corruptions Perception Index (CPI). Transparency International is a nongovernmental organization (NGO) with the strategic goal of eliminating corruption in international business.

The CPI is determined by surveys of businesspeople, academics, and risk analysts in each of the countries. The survey ranks countries from 0 (highly corrupt) to 10 (highly clean). There are 91 countries on the list and the full survey can be found at http://www.transparency.org.

The report names Bangladesh (0.4), Nigeria (1.0), Uganda (1.9), Indonesia (1.9), Bolivia (2.0), Kenya (2.0), Cameroon (2.0) and Russia (2.3) as the countries most prone to corruption.

The list from the cleanest down is as follows:

Refer to Chapters 3, 7, and 8.

Why is there a concern about corruption in business transactions?

FOR MORE INFORMATION

Visit the web site for the full corruption report: http://www.transparency.org.

Update: October 22, 2001
An executive search firm conducted a survey of 7,000 resumes and found the following types of misrepresentations on the resumes and the percentage of time they found those misrepresentations on resumes:

The survey was conducted by Christian & Timbers in 2001.

Refer to Chapters 3 and 38-40.

Is it ethical to exaggerate accomplishments on a resume? Is it misrepresentation? Is it grounds for termination if the person is hired and the exaggerations are then discovered?

FOR MORE INFORMATION

"Executives Pad Resumes," USA Today, October 16, 2001, 1B.

Update: August 27, 2001
A Florida judge is considering sanctions against a Florida husband/wife team of lawyers for a lawsuit the couple brought against Denny's on behalf of an employee who alleged that she was sexually harassed and raped over a one-year period by two managers who worked at the same restaurant. The suit, Norelus v. Denny's, Inc. was brought by Amlong & Amlong, the husband/wife team that was successful in the landmark case that went to the U.S. Supreme Court and redefined sexual harassment, Faragher v. City of Boca Raton.

The case was originally brought in 1994 and, when Norelus was deposed in 1995 and again in 1996, major discrepancies began to emerge. For example, she claimed that she was raped in a walk-in freezer, but then later said that "no sex occurred in the walk-in cooler or freezer." In the errata sheet that attorneys, clients, and witnesses are permitted to file when they review their depositions, Norelus and the Amlongs filed a 63-page errata with 868 changes in her testimony. Many of the corrections went to the heart of the lawsuit and one deposition contained the statement "I don't understand the question" over 500 times.

One of the pieces of evidence in the hearing on whether sanctions should be imposed was a statement made by Karen Amlong to a magistrate in 1997, after she had just settled another case with Denny's and as she took over as lead counsel in the Norelus matter:

Quite frankly, I wanted to chew on Denny's a little bit more. I felt that they had some employment practices that really bothered me. From . . . where I was coming from as an employee advocate and, particularly, a woman advocate.

In reviewing the case, a magistrate has recommended sanctions against the Amlongs that will include the payment of Denny's attorneys' fees, that now total over $500,000 plus interest.

The magistrate, in issuing the order, noted:

The court finds that the Errata sheet was used to bolster Plaintiff's case and recitation of facts as alleged in the complaints, not simply to correct inaccuracies or mistakes. From the outset, Plaintiff's testimony and conduct called into question the validity of her claims. Plaintiff not only forgot key details set forth in the Complaint, but provided several inconsistent versions of the events or outright falsehoods. None of these witnesses knew anything about the allegations or could lend support to the claims.

The record demonstrates that reasonable investigation, once counsel was aware of the 'inconsistencies' of the deposition, would have made any reasonable attorney aware of the frivolity of the case.

In a speech commenting on the potential sanctions, a lawyer for the ACLU noted, "Be wary of clients or claims that sound too good to be true."

Refer to Chapters 2, 3, and 41.

Why do you think there is incentive for sexual harassment claims now? Evaluate Ms. Norelus's ethics. Evaluate the ethics of her attorney. What are the effects of frivolous lawsuits? Does it take discovery to determine if a lawsuit is frivolous? Do you think the lawyers acted ethically?

FOR MORE INFORMATION

Julie Kay, Fla. Couple face possible big sanction, NATIONAL LAW JOURNAL, August 13, 2001, A1, A18.

Update: August 20, 2001
Because employers have become dependent on temporary workers and the agencies that provide them, an interesting issue has developed with regard to liability. The question is: who is responsible for checking the temporary worker's background, especially when the temporary worker is offered a permanent position following a temporary stint?

For example, Robert Half International, Inc. had recruited T'Challa Ross as a bookkeeper and she was placed with Fox Associates, Inc. in Chicago. She did so well at the temporary position that Fox hired her permanently.

However, Robert Half had failed to uncover the fact that Ms. Ross had entered a guilty plea to charges that she embezzled $192,873 from a former employer and had been sentenced to 4 years' probation and community service. Once hired by Fox, Ms. Ross took blank checks and forged signatures which resulted in her taking over $70,000 from the company. Her annual salary was $35,000 when she was hired by Fox.

Fox brought suit against Robert Half to recover the $70,000 plus its $6,600 fee, alleging that Robert Half was negligent in that it failed to verify that Ms. Ross, who had checked "No felony convictions" on her application, indeed had no felony convictions. However, two previous employers had given good recommendations and never mentioned any issues of dishonesty or embezzlement.

However, a judge dismissed the case ruling that Robert Half was in the talent business and not the background check or investigation business.

The issue is not limited to staff level. Sunbeam discovered that the executive search firm it used to recruit Al Dunlap did not discover that Dunlap had been dismissed from two previous executive positions. Sunbeam is reeling from losses resulting from Dunlap's tenure as CEO there.

Refer to Chapters 3 and 9.

Do you think there is a duty on the part of the temporary agency to check backgrounds? Do you think Fox should have done its own background check?

Why do you think the former employers said nothing about her history and gave her good recommendations?

Update: July 30, 2001
Tobacco company Philip Morris commissioned a study by Arthur D. Little International to weigh the costs of tobacco use such as medical care for sick smokers against the benefits of cigarettes such as the excise taxes collected. Little studied smokers and taxes in Czechoslovakia and found that in 1999, the Czech government had a net gain of $147.1 million from smoking. The study indicates that the government saves money on smokers' pensions, health care, and housing because they die prematurely from the effects of using tobacco.

Philip Morris released the study, which has resulted in public outcry, jokes on the television show Politically Incorrect, and demands for apologies from members of Congress. Philip Morris CEO wrote a letter of apology to Senator Dianne Feinstein saying that the report "exhibited terrible judgment as well as a complete and unacceptable disregard of basic human values."

The study was intended to be part of a lobbying effort by Philip Morris to curb regulation by the FDA with the argument that tobacco was providing revenues and did not need such extensive supervision. Along with its lobbying efforts, Philip Morris has spent $100 million on an advertising campaign designed to inform the public of its good deeds, including its donations to food banks and construction of shelters for abused women. Most commentators feel the report makes those ad efforts a waste of resources because of the negative image from the report.

Refer to Chapter 3.

Was it ethical to commission such a study? Does it matter that governments do have a net gain from smokers?

FOR MORE INFORMATION

Gordon Fairclough, "Philip Morris Says It's Sorry for Death Report," Wall Street Journal, July 26, 2001, B1, B6.

Update: July 16, 2001
Jonah White is the founder of Billy-Bob-Teeth, Inc., a company that created and manufactures Billy-Bob teeth. Billy-Bob teeth are a fake set of teeth with stains and teeth missing. These novelty items have sold very well and Novelty, Inc. of Indianapolis created its version of the fake bad teeth called "Bubba Teeth."

Novelty, Inc. had contacted Jonah White in 1999 about the possibility of becoming a distributor and asked that samples be sent. White sent samples and never heard back from Novelty. However, six months later Mr. White saw what looked like his teeth in a drug store and realized Novelty, Inc. had begun producing its own rotting teeth product.

Mr. White filed suit for copyright infringement. During the course of discovery in the case, Mr. White's lawyers uncovered the following e-mail from one of the executives at Novelty, Inc. sent to a factory in Taiwan where its teeth were ultimately produced:

Today I sent some Billy Bob-Teeth. You need to change so they are not copied. This could be a good item.

At trial, Mr. White's lawyer also had a dental technician as an expert witness who detailed the identical dental diseases that appeared in the original Billy Bob-teeth and in the Bubba knock-offs.

The jury found there was infringement and awarded Mr. White $142,046. Mr. White says it is the fourth time he has brought suit to protect his copyrighted novelty product.
Novelty, Inc. has appealed the case.

Refer to Chapters 3 and 10.

Was it ethical to request the samples under the guise of a distribution proposal and then send them to Taiwan to be copied?

Can teeth be copyrighted?

FOR MORE INFORMATION

Peter Page, "Billy-Bob Takes a Big Ol' Bite Out of Bubba," National Law Journal, July 2, 2001, p. A6.

Update: June 25, 2001
In 2001, Arthur Andersen, one of the largest accounting firms in the world, agreed to pay a $7 million fine to the Securities Exchange Commission (SEC), the largest fine ever assessed against an accounting firm. The SEC had charged Andersen with fraud for its role in the overstatement of earnings throughout the 1990s by Waste Management, Inc. Waste Management eventually had to restate its earnings in 1998, which amounted to a $3.5 billion charge. The company had overstated its earnings by $1.43 billion from 1992-96.

The complaint filed by the SEC against Andersen and three of its audit partners included charges of fraud. In settling the case, neither Andersen nor the partners (who paid between $30,000 and $50,000 in fines) admitted or denied the allegations. The partners are also barred from doing audit work for publicly traded companies for periods ranging from one to five years. Andersen has already paid $220 million to settle the shareholder litigation that resulted from the overstatement.

The SEC's complaint in the case alleged that the auditors from Andersen had pleaded with Waste Management executives to make changes. While the executives promised future reforms, they refused each year to reduce the profits. Each year Andersen succumbed to pressure from the Waste Management executives and certified the financial statements. Andersen's internal records reveal that it considered Waste Management a "high risk client" and that it "actively managed reported results." When it was auditing Waste Management's 1993 earnings in early 1994, Andersen auditors discovered $128 million in earnings misstatements that it asked management to change, a change that would have resulted in a reduction in earnings of 12 percent. When Waste Management executives refused to restate earnings, Andersen certified the financial statements anyway, concluding that the misstatements were "not material."

The SEC issued the following statement on the announcement of the settlement:

Unless the auditor stands up to management the first time it discovers incorrect accounting, the auditor ultimately will find itself in an untenable position: it either must continue issuing unqualified audit reports on materially misstated financial statements and hope that its conduct will not be discovered or it must force a restatement or qualify its report and thereby subject itself to the liability that will likely result from the exposure of its role in the prior issuance of the materially misstated financial statements.

Arthur Andersen's managing partner for North America released the following statement:

This settlement allows the firm and its partners to end a very difficult chapter and move on. There are important lessons to be learned from this settlement by all involved in the financial reporting process. The pressures on management to meet expectations are greater than ever in a market where information and capital move instantly.

Refer to Chapters 3, 8 and 49.

Do you think the auditors at Arthur Andersen had intent to mislead? What were they trying to accomplish? Do you think the overstatement of earnings by 12 percent was ethical? What would have helped Waste Management executives see the issue differently? What would have helped the auditors?

FOR MORE INFORMATION

Michael Schroeder, "SEC Fines Arthur Andersen in Fraud Case," Wall Street Journal, June 20, 2001 A3, A6.

Floyd Norris, "Big Five Accounting Firm to Pay Fine in Fraud Case," New York Times, June 20, 2001, A1, C7.

Update: June 11, 2001
Pharmaceutical companies, faced with the uphill battle of getting doctors to take a look at their new products, have created complex systems and programs for enticing doctors to come, sit and absorb information about the new products. Below is a list of the various type of benefits and gifts drug companies have given doctors over the past few years to try and get them to consider prescribing their new offerings:

• An event called "Why Cook?" in which doctors are given the chance to review drug studies and product information at a restaurant as their meals are being prepared - they can leave as soon as their meals are ready and they are treated to appetizers and drinks as they wait
• An event at Christmas tree lots where doctors can come and review materials and pick up a free Christmas tree
• Flowers sent to the doctors' offices on Valentine's Day with materials attached
• Manicures as they study materials on new drugs
• Pedicures as they study materials on new drugs
• Free car washes and they can study materials as their cars are being washed
  
• Free books with materials enclosed
• Free CDs with materials attached
• Bottles of wine sent with materials attached
• Events at Barnes & Noble where doctors can browse and pick out a book for themselves for free so long as they take along some materials on a new drug

Some doctors say that they can often enjoy dinner on a drug company as often as five times per week.

The American Medical Association frowns on the "dine and dash" format because its rules provide that dinners are acceptable so long as the doctors sit and learn something from a featured speaker. The AMA also limits gifts to those of a "minimal value" that should be related to their patients, such as note pads and pens with the new drug's name imprinted on them. The chairman of the AMA Committee says the following about the gifts, "There are doctors who say, 'I always do what's best for my patients, and these gifts and dinners and trips do not influence me. They are wrong.'"

Refer to Chapter 2.

What category of ethical issue are these gifts? Do you think the doctors act ethically in accepting the gifts, meals and favors?

FOR MORE INFORMATION

Chris Adams, "Doctors on the Run Can 'Dine'n'Dash' in Style in New Orleans," Wall Street Journal, May 14, 2001, A1, A6.

Update: June 11, 2001
The transfer of talent among executives continues to be an issue, particularly among the auto executives of the top three companies in the United States. Following is a list of executives who have switched companies over the past two years:

The companies say that they instruct new employees from other auto companies not to share new product information with them. Do you think that's all the valuable information they might bring with them? Is it ethical to share systems, plans and management tools with a new company from your former employer, a competitor?

FOR MORE INFORMATION

David Kiley, "Big Three Auto Execs Jump from Ship to Ship," USA Today, May 15, 2001, 3B.

Refer to Chapters 3, 6, and 12-16.

Update: June 4, 2001
When pharmaceutical firms sponsor or conduct studies on the drugs they manufacture, there are often disappointing results. For example, a company may have four studies, three of which are disappointing or negative, and one which is positive. For the most part, the companies send the positive study to both academic journals for publication (such as JAMA, Journal of the American Medical Association and The New England Journal of Medicine) and the FDA. The positive study results are the ones then carried by the government and on the drug's warning pamphlets given to consumers.

The companies say that many of the studies are not reflective of the drug's true effects and qualities. They are studies settling on the proper dosage such as when a new inhaler product was a failure in two studies. With the third study the dose was increased to two puffs and the inhaler was a resounding success.

One scientist commented, "Great science needs negative research, too." The FDA is considering a type of "file drawer" approach where the public would have access to all studies on the drugs. Such disclosure is not now required although many scientists feel the information does make its way into the public domain. There is a current data base, "Clinical Trials Data Bank," with 5,500 federally funded studies listed, but the estimates are that there are about 40,000 private ones on currently used drugs.

Refer to Chapters 3 and 5.

Do you think the companies should disclose all studies? Could the FDA require the disclosure?

FOR MORE INFORMATION

Dan Vergano, "Filed Under F," USA Today, May 17, 2001, 8D.

Update: June 4, 2001
Federal law restricts the amount of water that can flow from showerheads to 2.5 gallons per minute. Many hotel chains have had complaints from their guests that the water flow is insufficient for adequate bathing. Westin Hotels and Resorts announced that it will be installing 2 showerheads in the baths of its rooms. Each showerhead will meet federal standards but together the total water output in one shower will be 5 gallons per minute. Westin maintains that it is in compliance with the law. A federal employee responded, "But we didn't anticipate the loophole of 2 shower heads per shower."

Review chapters 3 and 5.

Is Westin's interpretation of the law correct? Is Westin's decision ethical?

FOR MORE INFORMATION

Chris Woodyard, "Dual Shower Heads Land Hotel in Hot Water," USA Today, May 22, 2001, 1B.

Update: May 21 , 2001
BUSINESS ETHICS magazine has named its top 100 corporate citizens. The magazine develops the list by looking at the investment portfolios of socially responsible investment funds. Those funds focus on issues such as human rights, animal testing, diversity, non-weapon production, and impact on the environment. The top 20 corporate citizens are listed below:

1. Procter & Gamble
2. Hewlett-Packard
3. Fannie Mae
4. Motorola
5. IBM
6. Sun Microsystems
7. Herman Miller
8. Polaroid
9. St. Paul Cos.
10. Freddie Mac
11. Home Depot
12. State Street
13. QRS
14. Dime Bancorp
15. HB Fuller
16. Cummins Engine
17. Amgen
18. Intel
19. Cisco Systems
20. Avon Products

Go to the Web sites for the companies and compare their financial performances with their rankings. Discuss the issue of whether good ethics is good business. Is social responsibility the same as ethics?

Chapter 3.

FOR MORE INFORMATION

Visit the Web site of BUSINESS ETHICS for the full rankings: http://www.business-ethics.com.

Update: February 12, 2001
Companies are increasingly creating positions known as "Ethics Officers." These employees are given the task not just of promoting ethical conduct within the organization, but also of investigating issues and allegations raised within the company. The profile of these employees who handle the sticky issues within their companies is provided by a recent survey of the Ethics Officer Association:

33% of these officers are lawyers by training Nearly
100% of them have 15 years or more with their companies
Fellow employees describe these ethics officers as "respected and trusted"
All report either to the board of directors, the CEO or a senior vice president
They all work closely with the company's legal counsel as well as the internal auditor
When they conduct investigations of allegations or complaints, the resolution is as follows:

• 44% of the investigations produce results and positive changes
• 38% result in no change in conduct
• 18% were primarily informational inquiries that employees raised and with the information provided to them, the file is closed

Having an ethics officer is a plus for purposes of the federal sentencing guidelines. Nearly all defense contractors have ethics officers and this industry has had the position for the longest time of all U.S. industries. Companies such as United Technologies and Healthcare Co. credit their ethics officers with the rapid investigation and resolution of wrongdoing in their companies. They also note the reduced fines that resulted from the ethics officers' internal investigations and forthcoming efforts in disclosing information.

Refer to chapters 3 and 8.

How do you think the presence of ethics officers could help reduce not just the fines but also the misconduct within a company?

FOR MORE INFORMATION

Darryl Van Duch, "Keeping a Boss Out of Trouble," National Law Journal, Feb. 5, 2001, B1, B4.

Update: October 30, 2000
The Ethics Officer Association issued new data on the role of ethics in corporations. The Ethics Officer Association is a nonprofit group of company executives responsible for the administration of ethics policies and training in their companies. The group began in 1992 and now has almost 800 companies represented in its memberships.

The new data show that in 1987, 21% of the boards of the directors of companies participated in the development of a code of ethics for their companies whereas that number is now at 78%.

The role of the ethics officer has changed from one of policies and training to actually helping companies make ethical choices. Many describe their role as an ethics coach - trying to get people to do the right thing.

Refer to Chapter 3.

What would be important for a company in finding ways to prevent unethical conduct?

FOR MORE INFORMATION

Amy Zipkin, "Getting Religion on Corporate Ethics," New York Times, October 18, 2000, C1 and C10.

Update: October 30, 2000
International banks have agreed to a voluntary code on the acceptance of certain types of funds that might be part of a money-laundering scheme. The code was drafted in response to several high-profile cases over the past two decades including the $500 million Ferdinand Marcos of the Philippines deposited in Swiss accounts, the $57 million deposited in Swiss accounts by Slobodan Milosevich, and $670 million deposited by the late Nigerian leader Sani Abacha.

Currently, there are few regulatory sanctions for such funds. While Swiss banking regulators publicly condemned Credit Suisse for its acceptance of the Nigerian dictator's funds, they note that their acceptance of the funds from leaders of questionable character is not money laundering.

The code is designed to stop banks from crediting offshore accounts and keeping controls in place so that they do not become a clearinghouse for bribes. The code will require the banks to pay particular attention to transactions through their offshore subsidiaries.

The banks that have agreed to the voluntary code are UBS, Credit Suisse, Barclays Bank, Deutsche Bank, Chase Manhattan, J.P. Morgan, Citibank, and Bankers Trust.

The Financial Action Task Force, based in Paris, also has a set of guidelines on money laundering and that organization does investigate allegations and then releases public condemnations of those countries in which there is ineffective banking regulation to prevent laundering schemes.

Refer to Chapters 3, 7, and 8.

Do you think it is ethical for banks to accept the large deposits of leaders such as Milosevic?

FOR MORE INFORMATION

Elizabeth Olson, "A New Push to Combat Dirty Money," New York Times, October 25, 2000, C1.

Update: October 9, 2000
Metrocall, a cellular phone company, recommends to parents who wish to buy phones for their children that they consider pagers instead. The company is concerned about inconclusive data on cell phones and possible health effects on users. The correlation between brain cancer and cell phone use is unclear and Metrocall believes customers should at least be warned.

Refer to Chapters 3 and 26.

Why do you think a company would choose to provide this warning to customers? What would happen to the company's liability if they did not disclose this information?

Analyze the conduct of the company from an ethical perspective.

FOR MORE INFORMATION John Greenwald, "Do Cell Phone Need Warnings?" Time, October 9, 2000, pp. 66-67

Update: September 25, 2000
Jonathan G. Lebed, a 15-year-old sophomore from New Jersey, became the first minor ever charged with securities fraud by the SEC. Lebed had to return the $273,000 he made in the penny stock market through market manipulations using the Internet. Lebed began trading stocks when he was 12 years old using $8,000 he had in gifts.

Lebed's parents did not know their son had a brokerage account although his father admitted to teaching Jonathan the basic principle of making money on the stock market, buy low and sell high. However, Jonathan discovered that he could sell much higher if he used Internet message boards on Yahoo Finance to pump up the value of his stock. When the value was sufficiently high, Jonathan sold his stock. This was an example of a teen-age "pump and dump" scam.

Jonathan will return the money and the interest earned. He had not spent any of the money.

Refer to Chapters 3, 8 and 47.

FOR MORE INFORMATION

Noelle Knox, "Teen Settles Stock-Manipulation Case for $285,000," USA Today, Sept. 21, 2000, 1B.

Gretchen Morgenson, "S.E.C. Says Tennager Had After-School Hobby: Online Stock Fraud," New York Times, Sept. 21, 2000, A1, C10.

Update: September 18, 2000
The Federal Trade Commission issued a report that indicates those in the entertainment industry are peddling adult material to the very young and targeting children in their ads. The report triggered Congressional hearings at which both Senator Joseph Lieberman (candidate for vice president) and Lynne Cheney (wife of vice presidential candidate Dick Cheney) testified. Dr. Cheney read the lyrics from a song by rapper Eminem. The song is "Kill You," and describes raping and killing his mother. Among the lyrics she read, "Blood, guts, guns, cuts, knives, lives, wives, nuns, sluts."

Dr. Cheney suggested that parents write to members of the board of Seagram's, the parent company of the Universal Music Group, Eminem's recording company.

Refer to Chapters 4 and 6 and discuss the constitutional and regulatory issues that would apply in the discussion of the rights of the artists and possible regulation. Refer also to Chapter 3 and discuss the social responsibility of Seagram and other companies involved in the production of such entertainment and its advertising.

FOR MORE INFORMATION

See the FTC report at: http://www.ftc.gov/opa/2000/09/youthviol.htm.

David E. Rosenbaum, "Two Parties Share Soapbox in Hearing to Scold Hollywood," New York Times, Sept. 14, 2000, A1, A18.

Andy Seiler, "Entertainment Marketing to Children Blasted," New York Times, Sept. 14, 2000, 4A.

Bruce Orwall and John Lippman, "Movie Industry to Defend Its Teenage Practices," Wall Street Journal, Sept. 13, 2000, B12.

Update: September 11, 2000
KMPG has a new survey on ethics at work with the following results:

• 76% of employees surveyed said that they had observed violations of the law or company standards during the past year
• 50% said that their firms "would significantly lose public trust" if the information they knew found its way into the media

The survey can be found at http://www.us.kpmg.com. Another survey can be found at http://www.ethics.org.

Refer to Chapter 3.

Update: September 11, 2000
Mark Pastin, of the Council of Ethical Organizations, offers the following questions as ethical tests:

1. If my boss asked me to lie to cover up his or her mistake, I would:

a. Quit
b. Lie
c. Say it made me uncomfortable
d. Do it this time, but refuse if it became a pattern

2. If a vendor who was also a personal friend offered me a free laptop, I would:

a. Turn it down and report the vendor to our purchasing officer
b. Accept the gift if it was personal rather than business-related
c. Ask my supervisor if I should accept it
d. Accept the gift but tell the vendor they will get no special consideration

Pick your answer and then consider the following:

Answer A - is the conformist who is difficult to get along with
Answer B - is the negotiator who makes up the rules as he goes along
Answer C - is the navigator who has the sound moral compass
Answer D - is the wiggler who dodges ethical issues to protect his own interests

Refer to Chapter 3.

FOR MORE INFORMATION

Mark Pastin
The Council of Ethical Organizations
214 S. Payne Street
Alexandria, VA 22314
(703) 683-7916

Update: September 4, 2000
A Florida jury found in favor of All Pro Sports Camp, Inc. and ordered The Walt Disney Company to pay the small corporation $240 million for misappropriation of trade secrets.

The founders of All Pro Sports, Nicholas Stracick and Edward Russell, brought suit against Disney because they had taken an idea for a sports complex to Disney in 1986 and met with Disney officials more than 40 times before Disney rejected the idea in 1987.

In 1993, Disney began building a sports complex and opened Wide World of Sports in 1997. Disney denied the misappropriation saying that it always had ideas for sports complexes in the table. Disney will appeal the case.

Refer to Chapters 3 and 10.

Was the conduct legal? Was the conduct ethical? How could those who present proposals protect themselves from misappropriation? How could those who view the idea protect themselves from future allegations of misappropriation?

FOR MORE INFORMATION

Margaret Cronin Fisk, "Jury to Disney: Pay Pair $240 Million," National Law Journal, August 28, 2000, A15.

Update: September 4, 2000
The issue of cyber squatters and squatting for profit continues to be an emotional one. The World Intellectual Property Organization (WIPO) is hearing 200 cases per month in which those with protected names challenge the use of their names by cyber squatters for web sites. WIPO began hearing the cases in December 1999 and it sides with the plaintiffs in 80% of the cases. Profiteer squatters have lost cases brought by Julia Roberts, Dan Marino, Ally McBeal (producers of show), Jimi Hendrix (estate), Yahoo!, ESPN and WWF.

Some of the cases pending include complaints filed by Mick Jagger against the holder of mickjagger.com, Brad Pitt against BradPitt.com and Tina Turner against TinaTurner.net.

Many of the complaints have been filed against Dan Parisi, 40, a former asbestos remover who operates porn sites. He has registered over 500 names for web sites and has spent about $100,000 to do so. Most of his 500 web site names come from his taking large corporations and adding "sucks.com" to them for a registered domain name. Madonna has filed a complaint against a porn site he has called Madonna.com. LockheedMartin has filed a complaint against him for his Lockheedsucks.com. Intel will not be filing a complaint against Parisi for his Intelsucks.com because they perceive it to be parody. If he began selling computer products, however, Intel would file a complaint.

Refer to Chapters 3 and 10.

Is Parisi guilty of infringement with his site names? Is Parisi's conduct ethical?

FOR MORE INFORMATION

Jon Swartz, "Profiteers Get Squat for Web Names," USA Today, August 25, 2000, 1B.

Some interesting new web sites for exploring the law:

For legal advice on ordinary issues: http://www.lawstreet.com.

For a look at briefs, pleadings and other documents filed by lawyers in cases: http://www.juritas.com and http://www.briefreporter.com.

Update: September 4, 2000
On the SW Legal Side Highway in Manhattan, several billboards carry the following announcement:

THE NEWS WITH BRIAN WILLIAMS
FIND OUT WHY 42 MILLION PEOPLE ARE WATCHING
WEEKNIGHTS 9 PM
MSNBC

Several competitors complained about the number "42 million" because Nielsen figures show the following audiences for the various news shows:

MSNBC defends the figure by noting that the Brian Williams news runs four times each night, twice on MSNBC and twice on CNBC. They took all the people who watched at least one minute of the news program since last April and added them together.

Refer to Chapters 3, 13, and 29.

Do you think the ad is deceptive? Do you think it is ethical?

FOR MORE INFORMATION

Jim Rutenberg, "Some New Math on MSNBC's Billboards," New York Times, August 28, 2000, C10.

Update: July 31, 2000
The Federal Trade Commission passed, by a vote of 4-1, new rules on the use of information on Web users. The rules were drafted with the cooperation of Internet advertisers who use profiling to target their sales over the Internet. The rules require the following:

Privacy groups protested the rules because consumers are required to "opt out." The privacy groups felt that the opting out should be automatic and that consumers should elect whether they wish to be profiled. Some groups are considering legal action challenging the rules.

Refer to Chapter 3. How could the groups challenge the rules?

Refer to Chapter 6. What are the ethical constraints of the advertisers with respect to the information they gather?

FOR MORE INFORMATION

D. Ian Hopper, "FTC OKs Rules for Profiling Users on the Web," Mesa Tribune, July 28, 2000, A12.

Update: July 31, 2000
Based on the damaging e-mails in the Microsoft case, many companies are stepping in with technology designed to destroy e-mails so that a paperless but electronic trail no longer exists. Visit the web sites for the companies offering the technology:

• http://www.authentica.com
• http://www.disappearinginc.com
• http://www.qvtech.com

Refer to Chapters 2 and 3. What constraints are there on the destruction of documents and when?

FOR MORE INFORMATION

Jeffrey Beard, "E-mail that evaporates," National Law Journal, July 17, 2000, B11.

Update: July 31, 2000
Ford Motor Company announced that it would increase the average fuel economy of its sports utility vehicles by 25 percent over the next five years. The increase in fuel economy (about 5 miles per gallon) goes beyond federal requirements and was undertaken, the company noted, in response to concerns from environmentalists about the role of large vehicles in global warming.

Ford's SUV sales are 800,000 per year, or about one-fifth of its total sales. Ford will finish with its vehicles well ahead of the federal mandates for 2005 and says that its customers desire more fuel efficient vehicles.

Refer to Chapters 3 and 51.

What school of social responsibility does Ford occupy? Why does a company undertake voluntary action ahead of regulatory requirements? Is the decision good for Ford shareholders?

FOR MORE INFORMATION

Keith Bradsher, "Ford Appears Set to Raise Mileage of Sport Utilities," New York Times, July 27, 2000, C1, C22.

Update: July 31, 2000
Seven retailers that sell online, including Macys.com, Toysrus.com, and CDNOW, have signed a consent decree with the Federal Trade Commission. The consent decree requires the retailers to pay fines totaling $1.5 million to settle an FTC complaint brought against the companies for late deliveries during the 1999 holiday season.

The FTC charges allege that the retailers promised delivery dates to customers knowing the dates could not be met and that they failed to notify their customers of the delay. The charges are based on the FTC rules on mail and telephone orders that requires retailers to ship an item within 30 days of the order. If the retailer cannot make the shipment, it must notify the customer and the customer must be given the opportunity to cancel the order.

The mail and telephone order rule does not apply to the so-called "brick and mortar" retailers, but, until this enforcement action, retailers were apparently not clear that the rule applied to e- commerce orders. The FTC issued a statement with the announcement of the consent decree that indicates it will continue to monitor e-commerce transaction and enforce the rules strictly against the e-retailers.

Refer to Chapters 3, 6 and 29. What type of administrative agency action was taken here? What rights did the retailers have? Is the interpretation of a rule within the jurisdiction of the agency? What consumer protection statutes apply here? What are the ethics of the failure to notify a customer of a delay in shipment, particularly during the holiday season?

FOR MORE INFORMATION

Go to http://www.ecommercetimes.com.

Update: July 31, 2000
The music downloading site, Napster, has had a flurry of legal activity over the past few weeks. A federal district judge ruled that the operation of Napster should be halted because she found "overwhelming" evidence that Napster was created to facilitate the duplication of copyrighted works.

However, Napster appealed the decision and a federal court of appeals ruled that the injunction must be stayed. Napster was thus given a reprieve and remains in operation as of this date.

Napster was founded by 19-year-old Shawn Fanning and is a single data base of music. Users can search for songs and then swap them. Napster has approximately 20 million users.

The appellate court focused on the Audio Home Recording Act of 1992 which protects certain noncommercial copyings of sound recordings. The issue is the Internet and its capability and whether it was intended to have that protection of that statutory exemption to federal copyright laws.

Refer to Chapters 3 and 10 and consider the following questions.

Does Napster violate copyright laws? Is the downloading an infringement? Is it ethical?

One of the claims is that Napster actually causes users to buy more CDs so that the recording industry and artists actually benefit from the site. Is this a justification for its use?

Napster's CEO sent a cease-and-desist order to Offspring, a punk-rock band, asking them to stop selling T-shirts featuring the Napster logo. Napster claimed copyright infringement. Are the T- shirts different from the downloading?

FOR MORE INFORMATION

Visit Napster: http://www.napster.com

Paul Krugman, "Facing the Music," New York Times, July 30, 2000, WK 15.

Christopher Stern and David Segal, "And the Downloads Played On for Napster," Mesa Tribune, July 29, 2000, A1, A6

Alex Berenson, "Napster Wins a Reprieve, For the Moment," New York Times, July 29, 2000, C1, C4.

Shawn Tully, "Big Man Against Big Music," Fortune, August 14, 2000, p. 187.

Clay Shirky, "Music Industry Will Miss Napster," Wall Street Journal, July 28, 2000, A14.

Lee Gomes, "Napster Ruling May Be Just the Overture," Wall Street Journal, July 28, 2000, B1, B4.

Lee Gomes, "When Its Own Assets Are Involved, Napster Is No Fan of Sharing," Wall Street Journal, July 26, 2000, A1, A10.

Update: July 31, 2000
In the July 30, 2000 Money & Business Section of the New York Times, there was a profile of the financial status of Sarah Jessica Parker, an actress who stars in the H2O comedy series, Sex and the City. One paragraph in the story reads as follows:

She is not impervious to stock tips. In 1992, when she was working in Pittsburgh, the hub of US Air Group, now US Airways, she took a shot. "The guy who did my hair had a boyfriend who worked at US Air. He's like: ???It's going to merge with British Air. Get in there.' I called Frank (her financial adviser) at 6 in the morning and said, ???Buy US Air.'" She invested about $2,500.

This year, when US Airways agreed to be acquired, albeit by the UAW Corporation, parent of United Airlines, Ms. Parker sold and made $4,000.

Refer to Chapters 3 and 47 and answer the following questions.

Did Ms. Parker violate any securities laws? Did her hairdresser? Did her hairdresser's boyfriend?

Was what Ms. Parker did ethical? Was it worth the risk? Calculate the return on her 1992 investment.

FOR MORE INFORMATION

Geraldine Fabrikant, "From a Start on Welfare to Riches in the City," New York Times, July 30, 2000, 3-1 and 3-8 (Money and Business)