Some Things Never Change: BP's Unethical Business Practices

British Petroleum (BP) is no stranger to being in the news for unethical practices. With the most recent being the explosion of the Gulf Coast Rig, the Deepwater Horizon, that killed 11 people, injured many more and produced one of the largest oil spills in history that occurred in U.S. Waters (Adelson, 2010). If this incident was BP’s first than I would say this could have been an accident. However, this incident doesn’t come close to being the first and only shows us a devastating trend that places profits over the value of human life. In fact, BP’s unethical practices have claimed the lives of 38 employees ending just after March, 23, 2005 (CSB, 2007). One of the accidents happened five years ago, when the BP Texas Refinery exploded killing 15 and injuring 180 more. To better understand what is going on at BP we will take a look at the Texas Refinery Explosion and the ethical considerations that contributed to the problems that lead to the death of those 15 workers.

The BP Texas City Refinery Explosion

March 23, 2005, the BP Texas City Refinery (BPTCR) exploded causing 43,000 people in the surrounding area to remain indoors after being issued a shelter-in-place order. The explosion also killed 15 contractors and injured another 180 workers, which caused an additional estimated $1.5 billion in financial losses (CSB, 2007). The Final Investigation Report, issued by the U.S. Chemical Safety and Hazard Investigation Board (CSB), cites: “The Texas City disaster was caused by organizational and safety deficiencies at all levels of the BP Corporations (CSB, 2007).” The CSB, using investigation techniques that were similar to the techniques used by the Columbia Accident Investigation Board during their probe in the explosion of the space shuttle, found that warning signs of possible disaster were present for several years before the 2005 BPTCR explosion. The unethical decisions that were made to ignore the safety of BP’s employees and contractors, in order to shave costs and increase profits, lead OSHA to handout the largest penalty in the regulator’s history.

BP agreed to settle with OSHA, in what was then the highest penalty given, at $21 million (OSHA, 2009). The 2005 Settlement Agreement included:

Agree to pay $21 million in penalties.

A comprehensive evaluation of BPTCR’s Process Safety Management program by an independent auditor.

Implementation of all feasible recommendations of the auditor.

Required other abatement actions such as conducting audits and determining the adequacy of pressure relief for individual pieces of equipment.

April 24, 2006, BP’s Senior Group Vice President of Safety & Operations, John Mogford, gave a speech, about the Texas City incident, to express the lessons learned from the accident and to help others from enduring the same fate (Mogford, 2006). During the speech John stated that, “This was a preventable incident” and “It should be seen as a process failure, a cultural failure and a management failure.” John also addressed BP’s commitment to make sure that what happened at the Texas Refinery never happens again.

John Mogford’s speech says a lot about how BP is now newly energized and focused to ensure their past unethical convictions end and a new ethical chapter begins. However, will this new ethical commitment become a lasting one? Or, has the unethical behavior within BP been so deeply engrained into the company’s fabric that no amount of recommitment will ever change the foundation of BP?

Part of BP’s 2005 settlement was to resolve more than 300 separate alleged violations of OSHA regulations (Mogford, 2006). In 2006, John Magford’s speech reassures BP’s stakeholders that they are committed to resolving all safety issues. So, why in 2009, when all of the 300 separate alleged violations were to be complete, did OHSA find that BP failed to correct 270 previous citations and found 439 new violations (OSHA, 2009)? It seems John’s speech was nothing more than puffery and BP was still up to their old unethical habits. OHSA cited BP with another record breaking penalty totaling $87 million for their failure to abate.

Summary

With BP’s long history of unethical behavior, what will it take to ensure that this profit driven Oil Company follows not just the laws but the spirit of the law in order to prevent even more deaths from occurring? BP’s flagrant disregard to safety is unacceptable and those responsible should be held accountable for their actions. Criminal charges should be pressed for those who knew of any life threatening safety violations that resulted in the otherwise preventable death of an employee. In my opinion BP should be held accountable for murder and nothing short thereof. Those employed by BP, or any organization, has the right to go to work without fear that their working environment is unsafe and their lives are not put at risk because of greedy executives who thrive on profit mongering.

References

Adelson, B. (2010, April 29). Troubling Details Emerge About BP's Oil Rig Explosion and Spill. Retrieved June 1, 2010, from Whistleblower.org: http://www.whistleblower.org/blog/31-2010/534-troubling-details-emerge-about-bps-oil-platform-explosion

CSB. (2007, March). Investigation Report - Refinery Explosion and Fire. Retrieved June 1, 2010, from CSB.gov: http://www.csb.gov/assets/document/csbfinalreportbp.pdf

Mogford, J. (2006, April 24). The Texas City Refinery Explosion: The Lessons Learned. Retrieved June 1, 2010, from bp.com: http://www.bp.com/genericarticle.do?categoryId=98&contentId=7017238

OSHA. (2009). Fact Sheet on BP 2009 Monitoring Inspection. Retrieved June 1, 2010, from OSHA.gov: http://www.osha.gov/dep/bp/Fact_Sheet-BP_2009_Monitoring_Inspection.html


By: Joseph Dustin

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Ethics Within the SEC During the Madoff Years

On 10 December 2008, the largest “Ponzi-scheme” started to unfold when Bernard L. Madoff reportedly admitted to “one or more employees of BMIS” that he was conducting a Ponzi-scheme and his liabilities estimated around $50 billion (SEC vs. Bernard L. Madoff, 2008). The next day the Securities and Exchange Commission (SEC) filed a complaint against Madoff and Bernard L. Madoff Investment Securities LLC (BMIS) to (a) halt ongoing fraudulent offerings of securities and investment advisory fraud by Madoff and BMIS, (b)expedite relief needed to halt the fraud and prevent the Defendants from unfairly distributing the remaining assets in an unfair and inequitable manner to employees, friend and relatives, at the expense of other customers, and (c) seek emergency relief, including temporary restraining orders and preliminary injunctions, and an order to impose asset freezes; appointing a receiver over BMIS; allowing expedited discovery and preventing the destruction of documents, and requiring the defendants to provide verified accountings (SEC vs. Bernard L. Madoff, 2008).

Prior to his Ponzi-scheme, Madoff’s managed funds were ranked highly in NASDAQ stocks, order flow in the New York Stock Exchange, and in other specialized securities (Ocrant, 2001). Erin Arvedlund, a Barron’s reporter, published an article on May 7, 2001, this article attempts to explain how Madoff delivers above average returns, 10% to 15%, using a secretive split-strike strategy (Arvedlund, 2001). Within the Barron’s article, Erin Arvedlund states, “What’s more, these private accounts have produced compound average annual returns of 15% for more than a decade. Remarkably, some of the larger, billion-dollar Madoff-run funds have never had a down year.”

Madoff Investment Securities reportedly had $6-7 billion in assets that were funneled through him by three feeder funds (Ocrant, 2001). These feeder funds brought in new customers and established a steady stream of cash flow to allow the Ponzi-scheme to carry on for years. Madoff’s knowledge of the markets, regulatory gray area in the securities industry, and the lack of internal ethics within the SEC helped Madoff continue his operation for sixteen years.

The Regulatory Gray Zone

As Madoff conducted his Ponzi-scheme, where were the watchdogs that are supposed to protect investors from these types of fraudulent activities, and why didn’t they catch him? The SEC has the authority to investigate entities such as BMIS as well as Bernard Madoff himself. According to the SEC’s website,

“The SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. Here the SEC is concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud (SEC, 2010).”

However, Madoff was not a registered broker-dealer or a registered investment advisor. The Investment Advisers Act of 1940 and its amendment in 1996, under section 203 titled Registration of Investment Advisers, describes exceptions to those who do not have to register with the SEC. For example, subsection (3) states any investment adviser who during the course of the preceding twelve months has had fewer than fifteen clients and who neither holds himself out generally to the public as an investment adviser nor acts as an investment adviser to any investment company registered under title I of this Act (SEC, 2009).

The exceptions within the Investment Advisers Act and other similar exceptions help formulate a “gray area” that allows people like Madoff to fly under the radar. Staying under this “radar” would mean finding the loopholes in each regulatory agency’s rules and it seems Bernard Madoff was just the man for the job.

Madoff was a prominent member in the securities industry throughout his career. The National Association of Securities Dealers (NASD) knew Madoff as their vice chairman for a period of time, a member of NASD board of governors, and as chairman of its New York region. The NASDAQ Stock Market knew Madoff as a member of the board of governors and executive committee while serving as chairman of its trading committee (SEC, 2008).

Because of his affiliation with each agency that works with the securities industry Madoff was in the position to fully comprehend the ins-and-out of the system and if anyone could find a loophole, it was Madoff. Madoff would use his “Industry Stature” to intimidate examiners and investigators during the 16 years that the SEC complaints started coming in. For example, one examiner from the SEC’s Northeast Regional Office (NERO) characterized Madoff as “a wonderful storyteller” and “very captivating speaker” and noted that he had “an incredible background of knowledge in the industry (Kotz, 2009).” Another NERO examiner, from the same report, recalls that Madoff would become angry during examinations and then Madoff’s “veins were popping out of his neck” and he was repeatedly saying, “What are you looking for? . . . . Front running. Aren’t you looking for front running, “and “his voice level got increasingly loud.”

Madoff may have known the security industry better than the SEC’s teams that investigated him, but did this give the SEC a reason not to catch Madoff’s Ponzi-scheme? Even though Madoff hid his activities behind the gray areas of the security industry, evidence points to other reasons for the SEC’s failure to catch Madoff.

SEC’s failure to catch Madoff

After Bernard Madoff confessed to his multi-billion dollar Ponzi-scheme an investigation conducted by the Office of Inspector General (OIG); the OIG findings are detailed in a report titled, “Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme.” Lead by Inspector General H. David Kotz, the investigation details that the SEC received eight separate complaints between June 1992 and December 2008. Three of the complaints were from the same source and the first two versions were dismissed entirely (Kotz, 2009). The report also makes known that the SEC was fully aware of the two articles regarding Madoff’s questionable returns. If the SEC had received complaints and knew about the two articles then why didn’t the SEC catch Madoff?

During the sixteen year time span that the SEC received complaints concerning Madoff and BMIS, the SEC conducted three examinations and two investigations into his advisory business based on the complaints that Madoff was possibly misrepresenting his trading and could be operating a Ponzi-scheme. The OIG report states that the most critical step in examining or investigating a potential Ponzi-scheme is to verify the subject’s trading through an independent third party,” and “Yet, at no time did the SEC ever verify Madoff’s trading through an independent third-party, and in fact, never actually conducted a Ponzi scheme examination or investigation of Madoff (Kotz, 2009).”

The first opportunity that the SEC had to catch Madoff’s Ponzi-scheme was in 1992, sixteen years before Madoff confessed. A complaint lead the investigation team to door steps of Avellino & Bienes, an unregistered investment firm providing its customers with 100% safe investments. Although, the focus of this examination was to discover if Avellino & Bienes was operating as an unregistered investment firm, the SEC’s lead examiner states that, “Madoff’s reputation as a broker-dealer may have influenced the inexperienced team not to inquire into Madoff’s operations (Kotz, 2009).” Madoff would rinse and repeat this strategy within all investigations and examinations that were conducted.

The SEC’s blunders into all investigations concerning Madoff and his associates could be considered gross neglect. The interworking of the SEC seems to be missing something that would help them perform their duties better. Maybe that specific piece of the puzzle is ethical values.

Ethics within the SEC

The SEC made many mistakes during the Madoff investigations. Were these mistakes related to internal ethical decisions on the part of the SEC? One way to find out if the SEC’s mistakes were due to internal ethical decisions is to look into the decision history during the Madoff investigations.

Over the years the SEC has established a number of ethics changes in its rulemaking. One ethical change was the SEC’s Final Rule for implementing section 406 and 407 of the Sarbanes-Oxley Act of 2002 (Haynes and Boone, LLP, 2003). Also, a Final Rule, titled Investment Adviser Codes of Ethics, adds new amendments to the Investment Advisers Act of 1940, and requires registered advisers to adopt codes of ethics (SEC, 2004). As we can see the SEC is aware of the need for companies to implement a code of ethics.

The SEC faced many ethical situations during the Madoff investigations; the ethical situations that were prevalent within the SEC, during the time of the investigations, seemed to affect the core decisions that were being made within the SEC. As stated earlier the SEC’s main goal is maintaining fair dealing, and protecting against fraud, with this in mind unethical decisions would entail any decision that fails to align with that mission statement. The OIG report contains a number of decisions, made by the SEC, that failed to align with their mission statement, to name a few: (a) failure on behalf of the SEC to perform due diligence when conducting investigations; (b) the SEC failed to prevent conflict of interests; (c) the lack of internal controls and standardization for conducting investigations; (d) absence of “Tone-at-the-Top;” and (e) the SEC’s lack of formal training for investigators (Kotz, 2009).

The future of the SEC will rest in the ability to perform better investigation and examinations. David Kotz outlines several recommendations, for the SEC, that will improve investigations in the future. Among the recommendations are better training to investigators, better internal controls, and mandating better control over how to handle tips, and arranging more qualified investigation teams (Kotz, Testimony Before the U.S. Senate Committee on Banking,Housing and Urban Affairs, 2009).

Summary

Bernard Madoff may have been a great manipulator and master of the security industry, the fact still remains, the SEC should have caught on to the Ponzi-scheme years before he confessed. The SEC had more than enough complaints, from reputable sources that pointed out many red flags. A total of three examinations and two investigations failed to catch Madoff’s Ponzi-scheme. The SEC displayed unethical decisions throughout all inquiries conducted within Madoff’s businesses. Now that the SEC has the hindsight into what when wrong, it’s up to the SEC to fix their internal issue.

In the end, the lives of the people that invested with Madoff and his feeder funds were forever changed. Pointing the finger at this point in time may give some relief to those who seek justice but does nothing to change the outcome to what has already taken place. We, as society, must push to become a more proactive nation that seeks due diligence and higher ethical values for everyone. Forcing companies to setup ethics policies and perform due diligence will not stop people from unethical behavior or making poor decisions. I believe we must find away to instill not just the letter of the law into society but the spirit in which the law was created. My moving beyond compliance, I believe, society will suffer far less instances of fraud by eliminating gray areas that laws fail to address.

References

Arvedlund, E. (2001, May 7). Don't Ask, Don't Tell: Bernie Madoff is so secretive, he even asks his investors to keep mum'. Barron .

Haynes and Boone, LLP. (2003, January 24). SEC Adopts Code of Ethics Disclosure Rules. Retrieved April 18, 2010, from HG.org: http://www.hg.org/articles/article_182.html

Kotz, H. D. (2009). Investigation of Failure of the SEC to Uncover Bernard Madoff's Ponzi Scheme. Office of Inspector General (SEC).

Kotz, H. D. (2009, September 10). Testimony Before the U.S. Senate Committee on Banking,Housing and Urban Affairs. Retrieved April 20, 2010, from SEC.gov: http://www.sec.gov/news/testimony/2009/ts091009hdk.htm

Ocrant, M. (2001, May). Madoff tops charts; skeptics ask how. MAR/Hedge No. 89 , pp. 1-5.

SEC. (2004, July 4). Investment Adviser Codes of Ethics. Retrieved April 18, 2010, from SEC.gov: http://www.sec.gov/rules/final/ia-2256.htm

SEC. (2009, October 13). INVESTMENT ADVISERS ACT OF 1940 [AS AMENDED THROUGH P.L. 111-72].

SEC. (2008, December 11). SEC Charges Bernard L. Madoff for Multi-Billion Dollar Ponzi Scheme. Retrieved April 19, 2010, from SEC.gov: http://www.sec.gov/news/press/2008/2008-293.htm

SEC vs. Bernard L. Madoff, 08 CIV 10791 (U. S District Court Southern District of New York December 11, 2008).

SEC. (2010, January 20). What We Do. Retrieved April 19, 2010, from SEC.gov: http://www.sec.gov/about/whatwedo.shtml

By: Joseph Dustin

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The Sound of Corruption

John Yeh is a businessman. Like most businessmen, John has the drive and determination that inspire people to succeed. John went to college at the University of Maryland where he earned his bachelor’s degree in mathematics and then pursued his master’s in computer science.

After graduation John started his own company. The company was known as Integrated Microcomputer Systems and after a few successful government contracts, John’s company quickly grew with a revenue of $21 million in 1987.

What makes John Yeh any different from others that have succeeded?

John has a disability that made him have to work a little bit harder than most. Born without the ability to hear, John needed to find an alternate way to communicate. Growing up in China, Taiwan, and Brazil he learned to read lips and knew Chinese sign language.

At the age of 15, John arrived in the United States were he had to translate Chinese to English and then English to sign language. In school he was put in a class with eight and nine year olds, leaving John feeling embarrassed; yet determined.

After graduation he struggled to land a job. When John was ready to start his own company he found it difficult to obtain a loan. Every bank that he went to, turned John away. Then, as luck would have it, John discovered a loan that was available to the handicapped through the U.S. Small Business Administration in the amount of $100,000 dollars. (Knocke, 1989) As you can see, John’s life was not that of anything I would call normal.

John went on to become the 2008 Deaf Person of the Year by Deaf Life magazine and Gallaudet University once honored him as Entrepreneur of the Year. (Washington Post) All of which makes John Yeh’s arrest seem to come as a shock.

What would drive John, who seems to have everything finally going right for him, to commit an occupational fraud? Although that question may never be answered, the Department of Justice unsealed twenty-six indictments on November 19, 2009. (Department of Justice Press Release, 2009) The twenty-six, including John Yeh, was charged with engaging in a scheme to steal millions of dollars from the Federal Communications Commission’s (FCC) Video Relay Service program.

John’s company, Viable Communications, makes Communication devices that allow deaf people to communicate over the telephone through a video type interface. The video shows a translator that translates the voice or data type message and then uses sign language to communicate back. John Yeh was then able to bill the FCC for a portion of the time being used. The program started off in 1993 with about $30 million and quickly grew to over $400 million in 2007. (Potter, 2010)

John is accused of coaching employees and other on how to make false calls that would not be suspicious. Some of the other twenty-five indictments include those involved with the scheme from various other call centers. Six other call centers are independently owned and did contract work for Viable Communications. Altogether, officials still have not said precisely how much they think was stolen, but the estimate was approximately in the “tens of millions.” (Glod & Johnson, 2010)

The question still remains; did John Yeh use his fiduciary powers to make people commit occupational fraud when they normally would not have?

Occupational fraud is a term that is used to describe a wide variety of corporate fraud cases and can be broken down into more distinct segments to help identify the different types of frauds being committed. Each type of fraud can be easily identified in some schemes, while other schemes are more difficult to identify. One reason for the difficulty in identifying a fraud type is during some cases where fraudsters are committing several fraudulent acts to commit their crimes, thus making it harder to categorize each scheme. For example, one investigation may start with a billing fraud scheme and turn into a conflict of interest/corruption scheme with multiple parties involved.

Corruption, according to Joseph T. Wells, can be defined as an act in which a person uses his or her position to gain some personal advantage at the expense of the organization he or she represents. (Wells, 2008) In this light, John Yeh had the equipment that was needed to deploy the services. John also worked with other independent contractor that needed what John had to offer to turn a profit. This would leave me to believe that he defiantly had the ability to misuse his fiduciary powers to conspire with other and corrupt their business relationships.

In the case of John Yeh, the details may not be clear as to the extent of the corruption. Details such as who was the initiator are still not clear. Knowing who the initiator would better determine the type of corruption, such as economic extortion or bribery.

In either case, to help deter corruption, you should keep an eye out for gifts and create an ethical policy that states employee are not allowed to receive gifts over a certain amount. Maintain a set of reports that actively looks for financial changes and policy deviations as red flags may indicate corruption.

When corruption is at its worst the amount of damage caused is hard to place a price tag on. Although millions of dollars are alleged to be stolen using this scheme, the money itself may not be the only thing lost. If John Yeh is convicted of his crimes, how will it affect all the deaf people that used the service legitimately? Will the service be discontinued or will the price go up if the government chooses to stop giving money for the program?

By: Joseph Dustin

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