Firms adopting zero-tolerance
policies after scandals
Monday, April 4, 2005
By LANDON THOMAS JR.
THE NEW YORK TIMES
NEW YORK -- Two senior investment bankers at Bank
of America were summoned to a meeting where their
boss, visibly uncomfortable and flanked by bank
lawyers, read them a statement. They were both dismissed
and asked to leave the building immediately. The
decision was final.
Stunned, the bankers asked if they had broken
any regulations. No, they were told. Nor had they
traded on any inside information. Within the hour,
they had turned in their BlackBerrys and laptops
and were on their way home to the suburbs.
In the ruthlessly competitive world of investment
banking, these two men had been doing what presumably
was their job. Acting on a tip from a rival banker,
they had called a company preparing to merge with
another and asked to get in on the deal. In a
different era, such a ploy might well have been
seen as an example of what hungry bankers do to
secure an inside edge with a client and maybe
even a better bonus -- not an inappropriate use
of confidential information and cause for termination.
But with regulatory scrutiny heightened after
the collapse of Enron and other companies, corporations
and their boards are adopting zero-tolerance policies.
Increasingly, they are holding their employees
to lofty standards of business and personal behavior.
The result is a wave of abrupt firings as corporations
move to stop perceived breaches of ethics by their
employees that could result in law enforcement
action or public relations disasters.
"We are in a regulatory frenzy," said
Ira Lee Sorkin, a senior white-collar crime lawyer
at Carter Ledyard & Milburn in Manhattan.
"Corporations are acting out of fear and
they don't want to take a chance that employees
did something wrong under their watch, so they
are basically cleaning house. Someone has to say,
'Enough!' "
Dismissals rise
The seemingly frantic reach for the moral high
ground is driven as much by self-interest as any
attempt at righteousness, now that boards and
chief executives have seen how public scandals
can torpedo stock prices, alienate customers and
end careers.
The reasons for the dismissals vary widely, ranging
from actions that are potentially illegal to conduct
that is unseemly. Recently, for example, Thomas
Coughlin, a former vice chairman and director,
was forced to resign from Wal-Mart Stores over
questions relating to his knowledge of corporate
gift card and expense account abuses. Wal-Mart
also referred the case to the Justice Department.
Last month, insurance giant American International
Group fired two senior executives for refusing
to cooperate with a regulatory investigation.
At The Boeing Co., Harry Stonecipher, the chief
executive, was abruptly pushed out last month
by his board for having a consensual affair with
an executive, behavior that in a more permissive
time might even have been winked at.
"There is a new kind of Puritanism,"
said Marjorie Kelly, editor of Business Ethics
magazine, replacing what Kelly said was an era
of "arrogance and ignorance, an attitude
that boys will be boys."
There are exceptions, of course. After paying
a $300 million fine to settle charges by the Securities
and Exchange Commission that it overstated advertising
revenue, Time Warner last week elected not to
dismiss the executives, including the chief financial
officer who approved the fraudulent accounting.
The three officials settled separate charges of
securities law violations without admitting or
denying guilt.
But the reaction has been most severe on Wall
Street, where investment banks, mutual funds and
insurers have felt the sting of legal prosecution
for ethical lapses most acutely.
Bank of America, which has paid nearly $1 billion
in fines during the past year, in many ways exemplifies
this trend. Earlier this year, the bank acted
in a similarly severe fashion when it fired a
highly regarded bond analyst, Andrew Susser, for
his gender-bending stab at humor in compiling
a research report on the casino and lodging industry.
On its cover, which carried the title "Checking
In," Susser's face was superimposed over
the body of a woman in a cocktail party dress
and heels, as he was carried over the threshold
by another man. There is no evidence that any
client complained. Instead, the bank concluded
on its own that the image was inappropriate.
Crackdown is widespread
It is not only Bank of America that is cracking
down.
Citigroup, which has been plagued by a series
of ethical lapses by its employees and has seen
its stock price suffer as a result, fired three
senior executives after the breakdown within the
firm's private banking unit in Japan. Japanese
regulators forced Citigroup to close its private
bank, based in Tokyo, because of numerous violations
stemming from a lack of internal controls, including
potential money laundering in one account. One
of the fired executives, Thomas Jones, has filed
a lawsuit against a consultant who wrote an internal
report on the matter. Jones said he was not at
fault.
Next month, Citigroup will start an online ethics-training
program that will be mandatory for all of its
300,000 employees.
And at Goldman Sachs, Henry Paulson Jr., the chief
executive, will moderate 20 forums this year on
various business judgment and ethical issues with
all the bank's managing directors. Among the guest
speakers invited by Paulson was Eliot Spitzer,
the New York state attorney general, who talked
to Goldman bankers last month about various ethical
pitfalls.
Given the scandals of recent years -- Wall Street
banks writing research reports biased in favor
of corporate clients or doling out hot initial
public offerings to win business, for example
-- it's not at all surprising that banks have
been more rigorous in monitoring the behavior
of their employees. But the two Bank of America
employees, Eric Corrigan and Thomas Chen, say
that Wall Street's new broad brush has unfairly
tarred them.
"We are scapegoats," said Chen, 37.
"We agree that there should be zero tolerance
when rules are broken, but we didn't break any
rules. This was a summary execution. We just need
to re-establish our reputation because without
that you can't be an investment banker."
In a statement, a Bank of America spokesman said:
"The environment in the financial sector
continues to evolve, and in any environment we
expect our associates to maintain the highest
possible ethical standards in everything that
they do."
For Corrigan, Chen and Thomas Heath, the J.P.
Morgan banker who provided the information to
Corrigan, their fall from grace has been precipitous.
Corrigan and Chen were successful and respected
bankers who had received generous bonuses for
their work last year.
Heath had just finished working on one of the
biggest bank deals of his career, and had accepted
an offer to take his flourishing practice to Bank
of America. J.P. Morgan has since fired him, and
Bank of America has rescinded its job offer. Now
all three are accused of inappropriately using
confidential information -- a charge that, in
many ways, brands them with Wall Street's version
of the scarlet letter.
'Pendulum has swung too far'
Indeed, the story paints a vivid picture of how
these changing times have made the exchange of
information and market rumor -- long the lifeblood
of deal making on Wall Street -- an exercise fraught
with risk.
Corrigan and Heath first met last month to discuss
how they might work together once Heath joined
Bank of America, potentially as Corrigan's boss.
No specific deals were discussed until a few days
later when Heath called Corrigan at the request
of Bank of America executives. At the time, Heath
and J.P. Morgan were advising Hibernia, a Louisiana-based
bank, in its merger talks with Capital One, the
credit card issuer.
During that conversation, Corrigan said, Heath
voluntarily disclosed J.P. Morgan's role in the
deal.
Corrigan said he was surprised that Heath would
be so forthcoming. But he added that he and Chen
had already heard rumors of the deal, which was
formally announced on March 7, so he asked Chen
to call an executive at Capital One. Corrigan
also said that he told his boss about the exchange.
Such an approach is standard investment banking
behavior, said Chen and Corrigan, and neither
felt he had crossed any line. Indeed, since Capital
One was already a deal participant, both men argued,
Chen did not break the circle of trust.
"I didn't even call my wife," Chen said.
"I had a relationship with the guy at Capital
One, so I put a call into him."
While Heath acknowledges that he erred in disclosing
the information, he said he did so in response
to a query from Corrigan and under the condition
that the information not be used.
"I had been asked by Bank of America to call
Eric to discuss mutual accounts and smooth feelings
as I would be assuming his group head position,"
Heath said. "During the course of our conversation
Eric said he was curious as to what I was working
on. I told him that the information was bound
in the strictest confidentiality, to which he
agreed."
Corrigan denies that he made such a query or that
Heath asked that the information remain confidential.
No matter the details, "The pendulum has
swung too far," said Herbert Lurie, a former
top investment banker at Merrill Lynch, where
Chen once worked. "Tom Heath clearly did
something wrong. He was working on a deal and
he told competitive parties about it. But Tom
Chen just called a party to the deal. In a normal
world, Tom would have been given a hard time for
not making the call."
For Bank of America, operating in today's brave
new regulatory world, such subtleties are immaterial.
In the bank's view, Corrigan and Chen exercised
bad judgment in contacting the client after Heath's
phone call -- especially since Heath claimed the
information was given in confidence -- and that
was reason enough to fire them.
Both Chen and Corrigan have hired lawyers and
said they are considering their legal options.
Heath declined to comment on his plans.
© 1998-2005 Seattle Post-Intelligencer
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