Business Ethics and Corporate Culture

FINRA Sanctions Firms for Selling Leveraged and Inverse Exchange-Traded Funds

The United States (US) Financial Industry Regulatory Authority (FINRA) has announced that it has “sanctioned Citigroup Global Markets, Inc; Morgan Stanley & Co., LLC; UBS Financial Services; and Wells Fargo Advisors, LLC a total of more than $9.1 million for selling leveraged and inverse exchange-traded funds (ETFs) without reasonable supervision and for not having a reasonable basis for recommending the securities”. FINRA executive vice president and chief of enforcement Brad Bennett averred that brokerage firms must ensure that they and their sales force adequately understand leveraged and inverse exchanged-traded products prior to making them available to retail customers. “Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products”, said Mr Bennet. According to FINRA, between January 2008 and June 2009, the firms failed to put in place “adequate supervisory systems in place to monitor the sale of leveraged and inverse ETFs, and failed to conduct adequate due diligence regarding the risks and features of the ETFs”, resulting in unsound advice to retail customers.

FINRA’s media release (1 May 2012)
(Source: FINRA)

Facebook Champions Social Change Regarding Organ Donation

Facebook has revealed a plan “to encourage everyone on Facebook to start advertising their donor status on their pages, along with their birth dates and schools”. According to organ donation experts, the move could create an informal alternative to motor vehicle departments or online registries and “could, even though it carries less legal weight, lead to more organ donations”, reports The New York Times. Reportedly, Facebook intends to introduce the change in the United States as well as the United Kingdom and “plans to add it in several other countries in the coming months”. Donate Life California chief executive Charlene Zettel reportedly opined that “[i]f people were to declare themselves organ donors on Facebook … it might simplify and hasten the decision for families to approve a donation”, but added that “[w]e do not want people to feel that all they have to do is put their decision to donate on Facebook. We really need to encourage people to go to their state registry”.

The New York Times: Facebook Is Urging Members to Add Organ Donor Status (1 May 2012)
(Source: The New York Times)

The Wal-Mart Bribery Scandal

According to a report in the New York Times, high ranking Wal-Mart executives suppressed a credible investigation into widespread bribery at Wal-Mart’s Mexican subsidiary. In 2005, a Wal-Mart attorney received an email from a former executive at the Mexican subsidiary, Sergio Cicero Zapata, detailing a pervasive campaign of bribery by Wal-Mart de Mexico to obtain permits and approvals to build new stores and quickly obtain dominance in the Mexican market. Wal-Mart then sent investigators to Mexico to look into Cicero’s claims. The investigators found evidence of over $24 million of suspect payments. They also found evidence that top executives at the Wal-Mart subsidiary were aware of the payments and took steps to hide the payments from the parent company. The lead investigator, a former F.B.I. special agent, concluded there was “reasonable suspicion to believe that Mexican and USA laws had been violated” and recommended that Wal-Mart expand its investigation.

Instead, “focused more on damage control than on rooting out wrongdoing,” top executives at Wal-Mart quickly shut down the investigation. In a management meeting where the bribery allegations were reviewed, the then chief executive, H. Lee Scott Jr., scolded the investigators for conducting their investigation too aggressively. Shortly after this meeting, the investigation was turned over to Wal-Mart de Mexico’s general counsel, Jose Luis Rodriguezmacedo Rivera. This move, if true, was “remarkable” given the fact that Rodriguezmacedo allegedly authorized bribes and was a main target of the initial investigation. Shortly after being put in charge of the investigation, Rodriguezmacedo cleared his fellow executives, closed the investigation, and submitted his final report, the bulk of which attacked the integrity of Mr. Cicero with no direct proof to support the claims. The final report was quickly accepted by Wal-Mart’s executives. Later, a Wal-Mart de Mexico executive implicated in the questionable payments was promoted.

In December, after learning of the New York Times investigation, Wal-Mart reported to the Department of Justice and the Securities and Exchange Commission that it had begun an internal investigation into possible violations of the Foreign Corrupt Practices Act (FCPA). According to a Wal-Mart spokesman, the company’s Mexico operations and the manner in which the 2005 investigation was handled are major focuses of the inquiry.

Related Items:

New York Times: Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle (21 April 2012)
New York Times: Weighing the Legal Ramifications of the Wal-Mart Bribery Case (23 April 2012)
New York Times: Wal-Mart Stock Falls Nearly 5% (23 April 2012)
MSNBC: Wal-Mart creates global anti-bribery watchdog post (24 April 2012)

(Source: New York Times; MSNBC)

Construction Firm Agrees to Pay US$500,000 to Settle False Claims Act Allegations

The United States (US) Department of Justice (DoJ) has announced that Cleveland construction firm Anthony Allega Cement Contractor Inc (Allega) has agreed to pay US $500,000 to settle claims “that it knowingly submitted false claims related to a federally-funded construction project”. The company allegedly submitted false claims in order to seem that it was in compliance with the US Department of Transport’s Disadvantages Business Enterprise (DBE) program, which was necessary for it to obtain and maintain its contract with the US Government. According to the DoJ, Allega made false claims stating that another company, Chem-Ty Environmental provided materials and services in a Cleveland Hopkins International Airport project between 2001 and 2006, “when in fact Chem-Ty was merely a “pass-through” entity used to make it appear as if a DBE had performed the work”. In this way, Allega, who was the prime contractor in the project, obtained and maintained its contract with the US Government.
DoJ’s media release (23 April 2012)
(Source: DoJ)

Aerospace & Defence Co Arrives at US$37 Million Settlement for False Claims Product Substitution Case

The United States (US) Department of Justice (DoJ) has announced that ATK Launch Systems Inc (ATK) “has agreed to a [US]$36,967,160 settlement with the [US] to resolve allegations that ATK sold dangerous and defective illumination flares to the Army and the Air Force”, following a lawsuit initially filed by an ATK whistleblower. According to the US Government, ATK knew, at the time of submitting claims for payment, that its flares could not withstand a 10-foot drop test “without exploding or igniting, as required by specifications”. According to the DoJ, “ATK has agreed to pay the [US]$21 million in cash and provide necessary in-kind services worth [US]$15,967,160 to fix the [US]$76,000 unsafe para-flares remaining in the government’s inventory”.
DoJ’s media release (23 April 2012)
(Source: DoJ)