June 09, 2004

Adelphia Vendors Motorola, Scientific-Atlanta Implicated in Executives' Securites-Fraud Trial

Today's WSJ ($) reports that, in the trial of two former Adelphia executives, an email and witness testimony have implicated Adelphia vendors Motorola and Scientific-Atlanta as "allegedly help[ing] Adelphia cook its books."

According to [prosecution witness Jarmes R.] Brown's testimony in U.S. District Court in Manhattan, Adelphia in mid-2000 realized it was going to miss its earnings targets, in part because of higher-than-expected expenses related to the rollout of new set-top converter boxes -- the equipment that generally sits on top of cable subscribers' televisions -- that it had purchased from Motorola and Scientific-Atlanta.

Mr. Brown testified that Timothy Rigas, one of the former Adelphia executives on trial, suggested capitalizing the marketing and advertising expenses associated with the rollout of the equipment. That would stretch out the expenses and boost Adelphia's earnings.

The article notes that "the Securities and Exchange Commission has taken a harder line on suppliers, customers, bankers and others who knowingly helped companies commit accounting fraud."

See also SEC Hammers Company's Customers for Securities-Fraud Participation.

June 9, 2004 in Criminal Penalties, Finances, Litigation, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack

June 04, 2004

After-the-Fact Contract Changes, Side Letter,
Lead to Federal Fraud Indictments

The Department of Justice recently announced that several former Enterasys executives had been indicted for securities fraud and wire fraud. According to the Justice Department, the accused executives altered an already-signed contract to change its terms -- after the close of the quarter -- so that revenue could be recognized in the quarter. One of the executives also allegedly drafted and signed a secret side letter giving a customer an exchange right, and insisted that the exchange right not be referenced in the customer's purchase order, so that revenue could improperly be recognized.

According to the Justice Department press release:

The Indictment further alleges that, several weeks after the close of the quarter and after learning that Enterasys’ outside auditors had selected the Ariel transaction for review, the conspirators allegedly caused the Letter of Agreement to be altered to delete or change the problematic terms. The altered Letter of Agreement was then backdated to create the false impression that it had been executed before the close of the quarter, and a new secret side letter reinstating the deleted terms was issued to Ariel. According to the Indictment, some of the conspirators caused the altered and backdated Letter of Agreement to be sent to the company’s outside auditors in connection with their review of Enterasys’ quarterly financial statements. Neither the original Letter of Agreement nor the side letter were provided to Enterasys’ outside auditors. Some of the conspirators also allegedly caused Enterasys to issue a press release and to make an SEC filing which included the fraudulent revenue and contained related false statements. After the fraud was uncovered, the company restated its earnings and reversed all of the revenue associated with the Ariel transaction.

The Indictment also charges Spence in connection with an additional transaction between Enterasys and SAP AG, a German commercial computer solutions company. According to the Indictment, SAP sought an eighteen month right to exchange $1 million in computer products it was purchasing from Enterasys in the final days of the quarter ending December 29, 2001. Enterasys allegedly agreed to the right of exchange even though it was not consistent with revenue recognition under relevant accounting principles. The Indictment alleges that Spence and a “very senior” Enterasys official insisted that SAP not refer to the right of exchange in its purchase order, promising instead to put that term in a secret side letter. The Indictment further alleges that Spence then drafted and signed such a side letter and sent it to SAP.

The maximum sentences associated with conspiracy, mail fraud and wire fraud at the time of the offenses was five years per count. The maximum sentence for securities fraud is ten years per count. The offenses also carry with them the possibility of substantial criminal monetary penalties.

June 4, 2004 in Criminal Penalties, Finances, Sales, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack

June 03, 2004

Good News -- I Guess

The Associated Press reports that today the U.S. Attorney's office announced criminal indictments against seven former employees of Symbol Technologies for securities fraud. Symbol's home page announced, "No Criminal Complaint Filed Against Symbol." Imagine being a customer and seeing that on a vendor's home page. (The Symbol home-page item is linked to this press release.)

It all reminds me of an old Navy joke: A ship was visiting a foreign port after a long stretch at sea. On liberty, the captain imbibed a bit too freely. Returning to the ship, he stumbled across the gangway, gave a slurred acknowledgement to the young seaman who had the gangway watch, and staggered off to his cabin. The seaman dutifully recorded in the ship's log, "The Captain returned to the ship drunk." The seaman's supervisor, a grizzled chief petty officer, chastised him for his lack of discretion. Two nights later, the captain went on liberty again but, having learned his lesson, he drank only tea and made an early night of it. As luck would have it, the same seaman had the gangway watch again. He, too, had learned his own lesson -- this time he recorded in the log, "The Captain returned to the ship sober."

June 3, 2004 in Criminal Penalties, Finances, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack

March 10, 2004

When the Feds Call: Lessons Learned
from the Martha Stewart Case

Well, Martha Stewart has been convicted, as someone said, of covering up a crime that the feds couldn't prove had been committed. More specifically, she was convicted (generally speaking) of making false statements to federal investigators. What kind of practical lessons does this offer for day-to-day life in the business world?

Think Carefully Before Agreeing
to be Interviewed by Government Agents

Several commentators have said that any more, you'd have to be nuts to voluntarily talk to any government agent about anything -- and that this will discourage people from cooperating with government investigations. See, for example, this nice round-up in Professor Bainbridge's blog.

Tape-Record Your Own FBI Interview?

Boston attorney Harvey Silverglate (see this bio) writes, in a letter to the WSJ ($), that:

[S]ome federal agencies, including the FBI, have a policy or practice of intentionally not tape recording even crucial interviews. Instead, agents often conduct interviews in pairs, with one agent doing the questioning and the other taking notes.

This later often pits the uncorroborated word of the interviewee against the report submitted by the agent, when any question arises as to what the person said or, equally crucially, what the agent's question was that the person was seeking to answer. Without a verbatim record of the interview, the agent's report as to what the interviewee said is usually considered authoritative, despite any errors or spin.

The lesson is that it's easy to be convicted not for what you say, but for what an agent claims you said.

(Emphasis and paragraphing added.) Lesson: If you do voluntarily agree to be interviewed by any kind of federal- or state government agent, consider doing the following --

1. preferably, tape-recording the interview. To reduce the chances of inadvertent privacy violations, ideally the recording should include your oral disclosure to the interviewer that you are recording the interview, as well as the interviewer's oral acknowledgement of that fact; or

2. as a distant second choice, having a friend sit in on the interview and take notes. But remember, your friend's notes may be incomplete or mistaken in places. And, the friend may well have to testify both (i) as to his-or-her recollection of the interview, and (ii) as to the authenticity of his-or-her notes. So your friend may end up having to hire his-or-her own lawyer, which I'm sure s/he'll be delighted to do.

Don't Lie, Either Explicitly or by Omission

Obviously the best way to stay out of trouble in this area is simply, don't lie. You'll still have some practical problems even if you try as hard as you can to tell the truth. First, you may not remember everything right then and there, and your omission of a material fact might later be regarded as a lie. Second, you might remember things incorrectly; it happens. Third, as noted above, unless you're recording the interview yourself, your interviewer may claim -- through misunderstanding or otherwise -- that you said something other than what you actually said.

March 10, 2004 in Criminal Penalties | Permalink | Comments (0) | TrackBack

March 08, 2004

Martha Stewart Juror Says Her Changing
a Phone Message Brought Her Down

This AP story reports some post-trial comments by jurors in the Martha Stewart case. It seems that one of the key pieces of evidence was testimony that Stewart had tried to change a phone message from her stockbroker:

Other jurors said Stewart's assistant Ann Armstrong, who reluctantly testified that Stewart tried to alter a phone record of a message from her stockbroker, was the key witness leading them to the domestic diva's conviction.

Armstrong testified that Stewart sat down at Armstrong's desk to change a message from her broker, Peter Bacanovic, that informed her that he thought the ImClone stock price would start falling.

"She ultimately gave the testimony that was going to bring Martha down. That was a very important piece," said juror Chappell Hartridge, one of six jurors who spoke to "Dateline NBC" in interviews that aired Sunday night.

"We all believed her 100 percent," juror Adam Sachs said of Armstrong.

This is another example of a brutal fact of legal life: In a trial, evidence can often be confusing, difficult to understand, or even contradictory. If you are accused of wrong-doing, it may not be entirely clear whether what you did was wrong. (This can be especially true in intellectual-property cases, by the way.) On the other hand, evidence-tampering is very easy to understand. If jurors conclude that you tampered with evidence, they may well seize on that as "proxy evidence" that your actions must indeed have been wrong, otherwise why would you have tried to cover your tracks?

It bears repeating: If you've been sued, or if you think you're going to be sued, or if you hear that government authorities are investigating your actions, DON'T destroy or tamper with potential evidence. The chances are you'll only be hurting yourself.

March 8, 2004 in Criminal Penalties, Litigation, Record-keeping | Permalink | Comments (0) | TrackBack

March 07, 2004

Martha Stewart - Targeted to Send a Message?

Today's New York Times has this article (registration required) about possible reasons that Martha Stewart might have been prosecuted more vigorously than had she not been a celebrity. The article quotes a former prosecutor about something I'd heard before, namely that prosecutors especially like to go after high-profile people pour encourager les autres (see here for an explanation of this French phrase and its provenance):

Prosecuting someone famous can help to change behavior, though, and appeals to prosecutors seeking favorable media attention, said Roland Riopelle, a former federal prosecutor who practices at Secarz & Riopelle in New York.

"The government is in many cases quicker to pull the trigger on a public figure than a private citizen, and I think Martha Stewart was a victim of that," Mr. Riopelle said. "The truth is, quite honestly, it's all the more exciting and it creates all the more press."

As a result, he concluded, "They're more likely to charge a prominent person for a piddly crime than they are an ordinary Joe."

March 7, 2004 in Criminal Penalties | Permalink | Comments (3) | TrackBack

December 19, 2003

Don't Even Think About Accessing
Computer Data Without Permission

This AP story reports that an employee of a market-intelligence company pleaded guilty to federal charges of obtaining unauthorized access to a customer's computer files. The files included passwords and personal data of the customer's own customers. The market-intelligence employee reportedly downloaded the data to CDs and stored it at his house, just because he liked to have it -- he didn't use it for criminal or commercial purposes.

The employee is being held without bond, pending sentencing in about two months. He faces up to five years in federal prison.

December 19, 2003 in Criminal Penalties, IT Management | Permalink | Comments (0) | TrackBack

October 08, 2003

What Did Quattrone Know, and When Did He Know It?

The Frank Quattrone trial proceeds -- see this Dow Jones story, or this search in the Yahoo news files. As has been widely reported, Quattrone received a "let's clean up those files" email and forwarded it to his group at Credit Suisse First Boston. He had recently been told by a CSFB in-house lawyer that the SEC was doing an investigation into some CSFB-related matters. It's in dispute whether he was told enough to make him realize that his own group should suspend any cleaning out of their files.

The jury will have to decide -- more than 3-1/2 years after the fact -- whether Quattrone had the intent to obstruct justice when he forwarded the clean-up email to his group. Even if Quattrone is acquitted, his life and career have suffered major disruption, all because of an email.

(Continued below)

Basic Documentation-Retention Rules

The basic legal principle is simple, at least in theory: Don't destroy documents that might be relevant to impending legal action, at least not without consulting counsel.

But, you ask, when is legal action impending enough to trigger this principle? It depends. As the Quattrone case illustrates, if any legal action is impending, and you destroy documents, then the government might suddenly get very interested in you. If the jury gets the wrong impression, you could find yourself taking an extended sabbatical from your life as you know it.

Possible Lessons

If in any doubt whether you should destroy particular documents, you likely will sleep better if you consult counsel first. The mere fact that you consulted counsel, standing alone, could later help you refute any allegation of criminal intent.

You might want to get written confirmation of what counsel says, even something as simple as an email exchange. That's a little bit of extra work, but it's worth it. Months or years later, you, or your counsel, may not remember what transpired. Moreover, it's widely believed that juries tend to give credence to contemporaneous written documents, possibly more so than to after-the-fact witness testimony.

October 8, 2003 in Communications, Criminal Penalties, Record-keeping, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack

September 26, 2003

Altered (Document) States

The SEC continues its enforcement efforts, yesterday announcing that criminal charges had been filed against a former E&Y; accountant for allegedly altering and destroying documents to obstruct an investigation. The SEC's press release pretty much speaks for itself (bold-faced emphasis is mine):

Thomas C. Trauger, a former Ernst & Young partner who allegedly altered and destroyed audit working papers, was arrested this morning by FBI agents on criminal charges for obstructing investigations by both the Office of the Comptroller of the Currency and the Securities and Exchange Commission. * * *

. . . The complaint contains two counts: one count charging Mr. Trauger with obstructing the examination of a financial institution and one count charging falsification of records in a federal investigation in violation of the Sarbanes-Oxley Act of 2002. * * *

According to the allegations in the criminal action, . . . Mr. Trauger . . . began to alter and destroy copies of working papers related to E&Y;'s audit work for its client NextCard, Inc. . . . The document destruction allegedly occurred after the working papers had been completed and during an OCC examination of NextCard's banking subsidiary, NextBank. * * *

. . . Finally, the complaint alleges that in April 2003, Mr. Trauger gave sworn testimony to the SEC related to NextCard where he allegedly concealed his alteration and destruction of documents when questioned about his role in the production of E&Y;'s audit working papers to the OCC. * * *

In announcing the charges, U.S. Attorney Kevin V. Ryan said, "This is one of the first cases in the country in which an auditor has been accused of destroying key documents in an effort to obstruct an investigation. . . . The U.S. Attorney's Office will bring those professionals to justice who join in the criminal acts they are supposed to uncover and expose."

September 26, 2003 in Accounting, Criminal Penalties, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack

September 25, 2003

Insider Trading is Bad Enough;
Lying to the SEC About It Is Worse

In the latest insider-trading bust, the SEC settled a case with a North Carolina lawyer who was accused of trading on inside information concerning a client of his law firm. The lawyer allegedly netted a whopping $4,272 in profits, which he disgorged as part of the settlement (and in addition he paid an identical amount as a civil penalty). It appears he also got fired.

Mike O'Sullivan notes, in his Corporate Law Blog, that the North Carolina lawyer "has already lost his job at the law firm. It's unlikely he will ever earn a dime with his J.D. ever again -- even if he isn't disbarred, who'd hire him? . . . [H]ow long will it take him to earn back the trust and respect he frittered away?" Bruce Carton points out, in his Securities Litigation Watch blog, that the case is "a reminder that there really is no de minimis exception for persons who would engage in insider trading--if the SEC thinks they have the goods on you, they'll bring the case for deterrent value alone."

* * * * *

It could have been worse -- as a Philadelphia lawyer found out a few years ago in a different insider-trading case.

In that case, the Philadelphia lawyer, via a client, learned some confidential information about an upcoming acquisition. He bought 500 shares of the target company, then sold it after the acquisition was announced.

Here's where it got worse: SEC lawyers called up the lawyer and interviewed him about his stock trade. During the converesation, the lawyer "knowingly and willfully made a false statement when, asked about the reasons for his purchase, he failed to disclose that he had been informed of [the acquisition]."

So, not only did the SEC bring a civil case, it also referred the matter to the U.S. Attorney's office. The lawyer pleaded guilty to a one-count criminal information alleging that he had made false statements to federal officials in violation of 18 U.S.C. § 1001 -- which is a felony punishable by up to five years' imprisonment.

This lawyer had been the head of the corporate department of a Philadelphia-based law firm. He also was on the board of directors of the client that had disclosed the confidential information to him. What was he thinking?

I wasn't able to find out whether the lawyer went to prison. He did get suspended from practicing law for one year (he was later reinstated). I couldn't find him in the Martindale-Hubbell on-line database of attorneys, which makes me wonder whether he's still in practice.


1. If you trade on inside information, the SEC won't care how small your trade was or how little money you made.

2. If SEC investigators think you've lied to them, or withheld information from them, the range of possible bad things that could happen to you will expand dramatically.

3. Trading on inside information is a Bad Career Move. It likely won't matter what a stellar performer you were before -- as one of my Navy shipmates once said, "ten thousand attaboys can get wiped out in an instant by one aw-sh_t."

September 25, 2003 in Criminal Penalties, Embarrassments / Bad Career Moves, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack

September 23, 2003

California Anti-Spam Law - Welcome, Plaintiffs' Bar

California has just enacted a tough new anti-spam law. See these NY Times and CNET stories. The text of the new law is here. Effective January 1, 2004, the new law:

  • bans essentially all unsolicited commercial email advertisements sent to or from California, except to people who (i) have provided "direct consent" to receiving ads from the advertiser, or (ii) have a pre-existing or current business relationship with the advertiser;
  • requires commercial email ads sent to pre-existing or current relationships to include an "opt-out" capability, either by email or by toll-free number;
  • imposes liquidated damages of $1,000 per email, up to $1 million per email campaign; and
  • perhaps most significantly, allows recipients, ISPs, and the state attorney general to file lawsuits against spammers.

Boy, the plaintiffs' lawyers must be salivating over this one.

If your company sends out email blasts from a California location, the new law will cramp your style severely. If your company isn't in California, you may end up with a tough choice: Either figure out which addresses on your email lists are in California, or comply with the California rules for all your emailings.

Here's an excerpt from the introduction to the bill:

The bill would . . . prohibit a person or entity located in California from initiating or advertising in unsolicited commercial e-mail advertisements. The bill would prohibit a person or entity not located in California from initiating or advertising in unsolicited commercial e-mail advertisements sent to a California e-mail address. The bill would also prohibit a person or entity from collecting e-mail addresses or registering multiple e-mail addresses for the purpose of initiating or advertising in an unsolicited vommercial e-mail advertisement from California or to a California e-mail address. The bill would prohibit a person or entity from using a commercial e-mail advertisement containing certain falsified, misrepresented, obscured, or misleading information.

This bill would authorize the recipient of a commercial e-mail advertisement transmitted in violation of these prohibitions, the electronic mail service provider, or the Attorney General to bring an action to recover actual damages and would authorize these parties to recover liquidated damages of $1,000 per transmitted message up to $1,000,000 per incident, as defined, subject to reduction by a court for specified reasons. The bill would provide for an award of reasonable attorney's fees and costs to a prevailing plaintiff.

The introduction to the bill states that prohibited spamming is a crime, but that wasn't clear to me from the bill's text.

The Times article notes that some fear a wave of largely-frivolous litigation; that the law may be subject to constitutional challenge under the Commerce Clause; and that pending federal legislation, which isn't as tough, may end up preempting harsher state laws like the new California statute.

September 23, 2003 in Criminal Penalties, Marketing | Permalink | Comments (1) | TrackBack

August 23, 2003

Backdating Contracts Leads to Prison Term --
But It Can Be Entirely Proper

From the notes I took while getting ready to start this blog:

A former public-company CFO was recently sentenced to three and a half years in federal prison. His company, Media Vision Technology, had inflated its reported revenues, in part by backdating sales contracts. Because of the inflated revenue reports, the company’s stock price went up – until the truth came out, which eventually drove the company into bankruptcy. (We've all seen that particular movie in the past couple of years, eh?)

The judge noted that the CFO had an otherwise-exemplary record. If the new, stiffer penalties of the post-Enron sentencing guidelines had applied, however, the CFO likely would have faced more than 10 years in prison. (The Recorder, Apr. 8, 2003; see archived story.)

But backdating a contract is not necessarily illegal, depending on the circumstances.

Let's look at a hypothetical example. Suppose that:

  • Jones is an end-customer from Customer Corporation. Smith is a sales rep from Vendor Corporation.

  • While playing golf together one Saturday, Jones and Smith start talking about a potential sales deal. (That’s why I keep telling myself I should learn to play golf.)

  • During their conversation, sales-rep Smith tells Jones about some features that will be in Vendor Corporation's next product release; he asks Jones to keep the information to himself, because it's still confidential. Jones says "no problem."

  • Monday morning, sales-rep Smith starts getting nervous about having disclosed his company's confidential information to Jones. He calls his company's lawyer. The lawyer drafts a nondisclosure agreement (NDA), which states that it is “executed to be effective as of” the previous Saturday.

  • Smith takes Jones out to lunch. While they're waiting for their food, he and Jones sign the NDA.

    (Whether Smith and Jones had authority to sign contracts under their companies' respective policies is another question -- many companies have internal policies that restrict who is allowed to sign what kind of contracts. But chances are that Smith and Jones each had apparent authority, vis à vis the outside world, and that may well have been enough to create a binding contract.)

So far, so good – the backdated NDA very likely will be deemed to be effective during Jones’s and Smith’s conversation on the golf course. There's no deception involved; the written NDA simply memorializes and fleshes out the oral confidentiality agreement that Smith and Jones entered into. (There's another lesson here, which is that oral agreements can sometimes be entered into very casually.)

Now change the facts a little, and the possibility of jail time looms into view:

  • Customer Jones and sales-rep Smith continue with their discussions. It ends up being a big-dollar deal. Smith, the sales rep, starts shopping for the new car that he intends to buy with his commission check. Jones and Smith work hard to get the sales contract executed by March 31, the last day of the first (calendar) quarter.

  • Unfortunately, however, Customer Corporation’s legal department is too busy to review the contract before March 31. Customer’s purchasing department refuses to sign the contract without the legal department’s blessing. (Damned lawyers, always screwing up deals . . . .)

  • On April 10, Customer’s legal department blesses the sales contract (finally!), without asking for any changes, so the purchasing department signs the contract – without dating it – and FAXes it back to Smith the sales rep.

  • A happy Smith and his sales director fill in “March 31” on the date line. The sales director signs the contract and sends a copy to Accounting. The company's controller calls up the sales director and says, "it's about time!"

If Vendor’s accounting department books the revenue in the first quarter, that might well constitute securities fraud. The Media Vision Technology CFO undoubtedly knew this. Unfortunately for him, he had the lesson reinforced the hard way, with a prison sentence.

August 23, 2003 in Accounting, Contracts, Criminal Penalties, Embarrassments / Bad Career Moves, Sales, Securities law, SEC regs / actions | Permalink | Comments (0)

August 22, 2003

Article: When Your Company Gets Hit
With a Search Warrant

An article by some lawyers at Latham & Watkins (a big L.A. firm), posted on law.com (paid subscription required), lists the immediate actions the authors say you should take if The Law shows up with a search warrant.

I found what appears to be another version of the same article in HTML and PDF formats at the Latham & Watkins Web site.

(Usual disclaimers: I can't vouch for the accuracy or completeness of the information at external sites; if your company gets served with a search warrant, you really ought to call your lawyer right away.)

August 22, 2003 in Criminal Penalties | Permalink | Comments (0)

Insider Trader Convicted --
And He Wasn't Even an Insider

Today's National Law Journal has a story that illustrates yet again how vigorously the SEC goes after people it thinks are trading on on "inside" information. This one involves a stock broker who was convicted by a jury of insider trading.

The broker had learned that certain companies were about to be mentioned in the "Inside Wall Street" column of a business magazine. He got this information second-hand, from a colleague who in turn had a contact at the business magazine. The SEC got suspicious when the stock prices of companies mentioned in the column started going up before the publication dates.

I thought four things were particularly interesting about the story: First was the reminder that the SEC monitors stock prices to sniff out possible insider trading. Second, the broker wasn't an insider at any of the companies whose stock he traded. Third, the guy ended up spending about $75K in legal expenses and is now working as the manager of a donut shop -- honorable work, and nothing to be embarrassed about, but probably not what he expected to be doing for a living. Finally, the judge apparently wasn't totally sure that what the broker did was a crime, but he felt that he had to sustain the conviction; then, when the SEC asked that the broker be ordered to disgorge his profits (about $5K), the judge said "enough is enough," and awarded the SEC $1. (The story doesn't say whether the broker will face any prison time.)

August 22, 2003 in Criminal Penalties, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack

August 15, 2003

Cheating on Educational Discount
Results in Damage Award,
Mail-Fraud Conviction

Hewlett-Packard announced yesterday that it had recovered some $1.8 million from a company that bought computers using an educational discount but then resold them to commercial customers. See story.

(Perhaps of greater interest to corporate managers, the company's owner reportedly pleaded guilty to related federal mail-fraud charges.)

Lesson: Don't lie about being eligible for discounts or other special deals -- that is, unless you think you might look good in handcuffs.

August 15, 2003 in Criminal Penalties, Purchasing | Permalink | Comments (0)

August 13, 2003

Rigging a Promotion Costs Coca-Cola Big Bucks
and Triggers Grand-Jury Investigation

From the Career-Limiting Moves Department: Coke agrees to pay up to $21MM to Burger King for rigging results of market testing of Frozen Coke at BK restaurants. Wouldn't you hate to be in the shoes of the marketing managers who did that . . . .

In 2000, Coca-Cola and Burger King ran a promotional campaign to test the appeal of Frozen Coke, a slushy drink, at Burger King restaurants in Virginia. (Burger King is a huge customer for Coke fountain drinks.) If the test was successful, then Burger King would make Frozen Coke a regular offering.

Apparently the initial results of the campaign weren't pleasing to some people at Coke. They took steps to increase the Frozen Coke traffic at the test restaurants. Supposedly, this included paying a man -- without Burger King's knowledge -- to get hundreds of kids to go to Burger King restaurants and ask for the Frozen Coke meal deal. That made sales look pretty good. Burger King started to ramp up its Frozen Coke program.

Then, however, a finance executive in Coke's fountain-drink division was let go. He filed a lawsuit, claiming that he had been fired for whistleblowing. In his lawsuit, he accused Coke of rigging the Frozen Coke promotional campaign.

His accusations touched off investigations by the SEC and by the Justice Department. Coke was subpoenaed by a federal grand jury. Coke's corporate headquarters admitted that some of their employees had rigged the promotional campaign and said that it was cooperating with the investigations.

Needless to say, Coke's customer Burger King was not thrilled. Earlier this week, Coke announced that it had reached a settlement with BK. According to the New York Times, Coke agreed to pay up to $21 million to Burger King and its franchisees. Of course, Coke still has the SEC and the federal grand jury to worry about.

It's not clear what happened to the individual Coke employees who supposedly rigged the promotional campaign. Coke reportedly said it had "disciplined" them. It's safe to say they probably don't have stellar careers at Coke ahead of them. And who knows what punishment the federal prosecutors will demand.

Some possible lessons for corporate managers:

1) Remember the old saying that you shouldn't do anything you wouldn't want to see published on the front page of the New York Times.

2) Your corporate sins can come back to haunt you years later, especially if one of your colleagues leaves the company under less-than-happy circumstances.

3) What you think of as a simple error in business judgment, the Justice Department -- those friendly folks who can send you to federal prison -- might regard as criminal behavior. (And let's not forget the SEC and the private shareholder plaintiffs' bar. )

4) Angering one of your company's biggest customers is seldom a career-enhancing move.

5) Coke's marketing budget for Frozen Coke probably didn't include a $21 million payment to settle the dispute with Burger King. Busting that budget was unlikely to have been a career-enhancing move either.

Sources: New York Times story (free subscription required) and National Post (Canada) story (with more details on the former executive's accusations about the rigged promotional campaign); Google News search.

August 13, 2003 in Criminal Penalties, Embarrassments / Bad Career Moves, Marketing, Securities law, SEC regs / actions | Permalink | Comments (0)