High flying startup Entellium crashed to the ground last Friday when the former CEO and CFO were arrested on fraud charges. Entellium had raised over $50 million in venture funding from top firms Ignition Partners and Sigma Partners on the potentially fraudulent bases.

According to a criminal complaint filed Wednesday morning in U.S. District Court in Seattle, Entellium reported to that board that it had received $15.4 million in revenue over the past three years. The U.S. Attorney’s office alleges that the actual revenue for that period was $3.7 million.Ex-Entellium execs appear in court; prosecutor tracking money - Puget Sound Business Journal (Seattle):

Assuming this really is fraud and not some colossal misunderstanding, this is more egregious than Enron — although smaller in that it only affects 190 employees.

A ridiculous number of people had to either be in on it or duped. If a $100,000 sale is reported as a $1,000,000 sale you have to cover your tracks with: the person who made the sale, sales management reporting sales numbers, whoever pays commissions to the sales person, the bookkeeper handling the accounts receivable, finance reporting the financials, anyone keeping the alleged second set of books, all board members and investors who were receiving revenue reports so inconsistent with what was really going on with customers–and who I bet let themselves get talked into either not doing an annual audit or having the audit done by the equivalent of the CFOs brother ….

What were they all thinking?! My hypothesis is that they worked hard to not think about it. They had a good thing going, why be the one to spoil it. Other rationalizations that may have floated around their heads include “it’s not my job,” or “there is probably a really good explanation for this behavior and I just don’t know what it is.” Rationalizations are not good. They are attempts to make something wrong appear not so bad. They cloud clear thinking

According to PEHUB, this all came to a head last week when an HR employee discovered suspicious financial information in the desk of a former sales VP. Their attorneys, Wilson Sonsini Goodrich & Rosati, got this information and brought it to the attention of law enforcement. Thankfully, someone had the guts and good sense not to get wrapped up in this and bring this to light.

I have not blogged recently because I have been busy giving radio and press interviews while vacationing in Hawaii for a few weeks. However, I could not help but comment on the 2007 State Piracy Study by the Business Software Alliance (BSA) that was released recently. In it, BSA claims that

The national average for software piracy in 2007 was 20%, meaning that one in five pieces of PC software in use in the United States was unlicensed. States with piracy rates well above the national average include California, 25%; Illinois, 22%; Nevada, 25%; and Ohio, 27%. Business Software Alliance - Lost Revenues from Software Piracy in Eight States Would Have Been Enough to Fund 54,000 High Tech Workers, Build 100 Schools or Hire 25,000 Police Officers

The report goes on to say that the $’s lost from the eight states studied represent financial losses greater than the financial losses from any single country in the world except China.

The good news, if you can call it that, is the US had the lowest software piracy rate of any of the 108 countries studied.

Software piracy is to theft what white lies are to lies. In both cases it is all too easy for people to tell themselves a story about how it doesn’t fully count somehow. Everyone else is doing it. No one will know. Or a myriad of other rationalizations.

If you have pirated software on your computer and you feel a bit guilty about it, this is a hopeful sign. It means you haven’t become completely numb to the ethics of the situation and you have not completely bought your attempted rationalizations to yourself.

Ethical habits start with the small things — such as software piracy. Fortunately, in the case of software piracy, it is a relatively cheap proposition to practice doing the right thing and develop good ethical decision making habits. These could come in handy when you find yourself in situations with bigger stakes.

Tags: computerethics, business ethics, clint korver, ethics for the real world

The frequency of my blogging has dropped dramatically in the last week due to the launch of my book. It turns out you have a few weeks of fame when everyone pays attention to you and then you become old news. So, I have been making hay while the sunshines and have done six radio interviews, one phone talk, one TV interview, and a few email interviews.

Emeraldinsight.com, in their email interview, asked me a most interesting question:

The 2000 Enron annual report seemed to indicate that everything was going well. To quote some examples: “we work with customers and prospects openly, honestly and sincerely…” and “we are satisfied with nothing less than the very best in everything we do…” From an ethical perspective, do such improprieties suggest that more regulation should be in place with regard to annual reports and investor relations information?

This gets into the area of what part of your ethical code are you willing to impose on others by force. Here was my response:

Although Enron was a particularly egregious example of poor ethics, we are not fans of more regulation. Too often regulation creates unintended consequences, making the cure worse than the disease. Regulation takes the focus off doing what’s right and puts the focus on doing what is legal. Clever, aggressive executives can hide behind regulation, substituting compliance for ethics.

I believe a better solution would be an increased sensitivity in boards, investors, executives, employees, spouses, etc. to the importance of ethics. We have hope that with increasing transparency and access to information, ethical lapses will become more known and more shunned. Business leaders with integrity, who create open honest relationships with investors and customers, will more and more win in the game of business. As these feedback loops become stronger, ethics will become a more effective and authentic shaper of behavior than regulation ever could. 

Tags: Enron, ethics, Clint Korver, ethics for the real world

Comics and Editorial Cartoons: Non Sequitur on Yahoo! News

Tags: EthicsHumor, Clint Korver, Ethics for the Real World

Today is the official launch day of Ethics for the Real World. As part of the launch I am participating in a number of radio interviews. Here is a recording from one that occurred at 4am my time this morning–I may have to talk to my publicist about the ethics of scheduling.

In a Wall Street Journal editorial this morning, Sen. Kent Conrad (D. N.D.) defended himself against accusations that he got a “sweetheart” deal from Countrywide Financial.

Here are the facts: In 2002 I was looking for a mortgage and went to several lending institutions. I also called a close friend of mine who knew a lot about mortgages for advice. My friend happened to be with the head of Countrywide Financial when I called and put him on the line. I spoke with a gentleman by the name of Angelo Mozilo for about 30 seconds, and he referred me to a junior loan officer. No, I Didn’t Ask for Any Special Mortgage Deal - WSJ.com

I looked at Sen. Conrad’s website and he seems like a decent guy. When I read his editorial, however, my BS detector goes off left and right.

• I find it hard to believe his conversation with Angel Mozilo (the CEO of Countrywide Financial) only lasted 30 seconds. Five minutes–maybe. 30 seconds–no way. Exaggerations like this undermine credibility, especially when they are used to rationalize questionable behavior.

• There is no way the CEO of Countrywide passes a US Senator on to a  JUNIOR loan officer. I would bet big money that Mozilo refers his friends (or friends of friends) to the most experienced, best sales people in his company. Mozilo probably doesn’t even know the names of any junior loan officers.

• Suppose for the sake of argument, that Mozilo did refer Sen. Conrad’s to a junior loan officer. This presents the most troubling ethical issue yet. A very senior loan officer might have the organizational clout and experience to push back if something ethically fishy were going on, but a junior loan officer… These kinds of situations put junior people in terrible positions.

Unfortunately, Sen. Conrad missed the leadership point in all of this. As a leader, your actions speak louder than any words. You do not get the opportunity to explain the nuances of an ethically sensitive decision. When the troops see you trade off ethical standards in return for personal gain, they will conclude that ethical decisions favoring self-dealing are fair game and give it a try themselves.

Even if everything Sen. Conrad says is true, he shows a lack of appreciation for how his position as a U.S. Senator influences others. He has also shown a lack of appreciation for how the CEO of a company influences junior employees.

At worst Sen. Conrad blatantly used his position for personal gain. At best he was asleep at the ethical wheel. Either way, it’s a lesson in what not to do in ethical leadership.

Tags: Sen.Kent Conrad, ethical leadership, clint korver, ethics for the real world

YouTube - Broadcast Yourself.

There has been a lot more smoke found around these hedge fund managers (Matthew Tannin and Roger Cioffi) in the last few days. Here is a sampling from the WSJ Law Blog:

Before Cioffi and Tannin reassured investors that everything was just fine, Tannin

• told Cioffi they should close the fund. ““If we believe the [CDOs reports is] ANYWHERE CLOSE to accurate I think we should close the funds now.” He added, “caution would lead us to conclude the [CDO Report] is right — and we’re in a bad shape.”
• suggested to Cioffi that they retain outside counsel to help them with whatever might come
• used his personal email rather than his work email to express his doubts about the market (Tannin was a 1994 graduate of USF law school)

A WSJ article on Friday, suggested “Defense lawyers are likely to argue that debates about the economy and the stability of the credit markets were standard fare last year as U.S. housing prices began a long slide.

This is called the “everyone else was doing it” defense. While it may work legally, it doesn’t hold much water ethically. Just because other hedge funds may have been privately worrying and publicly confident, this doesn’t make it ethically any better.

Apparently Cioffi and Tannin did not remember their mother’s admonition not to be a lemming. With my mom it went something like “if everyone else were jumping off a cliff would you do it too?” It seemed like a dumb idea when I was little and it seems like even a dumber idea now that I’m older.

Tags: Cioffi, Tannin, Bear Sterns, Clint Korver, Ethics for the Real World, Lemmings

William Baker, a freelance writer and regular contributer to the Boston Globe, spent the last eighteen months blogging about ethics on BNET. In his last post today, he summed up what he has learned from this experience.

* Profit never outweighs wrong.

* The solution to a tricky ethical dilemma is often to just say “no.”

* The best way to deal with a bad idea is to come up with a better one.

* If your gut tells you something is wrong, it probably is. Listen to your instincts.

* There are some work environments that you can’t fix, so dust off your resume.

* You can’t blame anyone else if you get caught up in ethically questionable behavior. There are no victims when “no” is available.

* Tolerating poor ethical behavior is just as bad as doing it yourself.

* The ethical character of an organization is dictated from the top down. Establish an environment where employees know that cutting corners will not be tolerated, and they won’t.

* Your own ethical character is tied in with the companies you do business with. Not all clients are good clients.

* You are a citizen of humanity. Selfish goals cannot outweigh the greater good.

* Writing down a code of conduct is a good thing. Establishing it by example is even better.

Lessons of an Ethics Writer | Where’s the Line ? | BNET

Most of these are excellent. The only one I have a problem with is “You are a citizen of humanity. Selfish goals cannot outweigh the greater good.” I don’t know what it means. It sounds like a positive ethic (e.g. feed the hungry, shelter the homeless), which sound good, but create fuzzy ethical lines.

Overall Kudos to William Baker for his practical ethical insights.

Tags: WilliamBaker, BNet, Lessons of an Ethics Writer, Ethics for the Real World, Clint Korver,

The WSJ this morning ran a front page article on how the managers of the two Bear Sterns Hedge funds that lead to the collapse of Bear Sterns and were the front of the credit crunch wave may face indictments. At issue is whether the managers, Ralph Cioffi and Matthew Tannin, mislead investors. I don’t know if there is fire here, but there is definitely smoke. Here is a timeline of the 2007 events leading up to the issue.

March: three months before Cioffi’s riskier fund goes belly up, Cioffi takes out $2 million of his $6 million personal investment in the fund.

April: Cioffi exchanges emails with colleagues expressing concerns about the credit markets and the potential negative impact on his funds. Then, he turns around and tells investors in an April 25 call he is “cautiously optimistic” about his and Mr. Tannin’s ability to hedge their portfolio.

May: Cioffi and Tannin sell billions of dollars in bonds to keep the riskier fund viable. Some investors hear about this and desperately try to get their money out, but Coffi and Tannin refuse redemption requests.

June: Cioffi and Tannin leave the riskier fund to die, saddled with unrecoverable margin calls and notices of default.

To be blunt, hedge funds bug me. They are not an asset class. They are a compensation scheme. And the compensation scheme creates incentives for fund managers to engage in risky behaviors not aligned with investors expectations or interests.

In another post I will describe the mechanics, but suffice it to say the typical hedge fund compensation scheme creates unbalanced incentives. There is a huge upside financial incentive to take big risks and swing for the fences (this is how you become a billionaire hedge fund manager). However the incentives to avoid the downside are not nearly so great. If your hedge fund goes under (a more and more common occurance), you can take some of your money out (e.g. Cioffi) and then wait a year or two and just start another one.

If Cioffi and Tannin are found not guilty, I would bet big money they are leading another giant hedge fund in a year or two.

The feedback loops are broken in the hedge fund world, creating an ethical pressure cooker of temptation.

Tags: BearSterns, ethics, ethics for the real world, clint korver, hedge funds

Countrywide has recently been taking fire for CEO Angelo Mozilo’s Friend’s of Angelo program where the CEO would give special deals to his friends. Given that Countrywide is the poster child for the subprime meltdown, this program has been getting extra attention.

The Washington Post today showed this morning how it worked. Sen. Kent Conrad, D-N.D. upon advice from an old friend, called up Countrywide CEO Angelo Mozilo to obtain a $1.07 million loan for his Bethany Beach, Del. vacation home. Apparently they hit it off and Mozilo took up the cause of getting Sen. Conrad a good deal.

“[T]ake off 1 point,” Mozilo instructed a subordinate in a March 17, 2004, e-mail obtained by Condé Nast Portfolio magazine. In another e-mail that April about a Conrad loan, Mozilo wrote: “Make an exception due to the fact that the borrower is a senator.” Countrywide Gave Special Attention To Lawmakers - washingtonpost.com

I don’t see any ethical issues for Mozilo with the above activities — so long as  Mozilo was not being deceptive about this practice. In fact, it sounds like he was quite open with his special favors. “It was something he handed out like party favors. He was fairly forthcoming with it,” said Guy Cecala, publisher of Inside Mortgage Finance Publications. “As long as I can remember, he was offering that.”Countrywide Gave Special Attention To Lawmakers - washingtonpost.com. Mozilo wasn’t being deceptive, he wasn’t stealing (company’s give discounts to customers for all kinds of reasons), and he wasn’t hurting anyone.

Except for now being in the negative spotlight, this practice could easily have been a prudential (smart business) practice as well. Who wouldn’t want a US Senator as a happy customer telling their friends what a great experience they had buying your product.

The ethics of the Sen. Conrad is potentially a different story. The Senate ethics committee has a gift rule that frowns on Senators getting benefits of this magnitude. Sen. Conrad claims “I was never told I was given preferential treatment. I didn’t ask for it, didn’t seek it, and as far as I know, I didn’t get it,”

Give me a break. Sen. Conrad apparently thinks it is common practice for the CEO of the world’s largest mortgage lender to personally handle a mortgage transaction. Either Sen. Conrad is lying or he is completely out of touch with how the world works.

Tags: countrywide, ethics, ethics for the real world, clint korver, Sen. Kent Conrad