This 3rd Edition of Resisting Corporate Corruption takes us beyond the Financial Crisis. The new case studies explore whether the causes of that Crisis have been addressed. They also examine whether conditions surrounding those who resist corruption have evolved such that resisters have the necessary support to do the right thing and not be punished for it.

The 1st Edition, published in 2007, dealt only with Enron. It asked two questions: 1) How does a firm as famous as Enron become thoroughly corrupted; and 2) How can honest executives within such a firm resist this descent? Since 2007, these cases have been repeatedly taught in courses at the University of Houston and the Kenan-Flagler Business School, University of North Carolina at Chapel Hill. Enron resisters Sherron Watkins, Jordan Mintz and Vince Kaminski came to classes where their cases were discussed.

This process brought increasing clarity to answering these questions. Enron was led by a CEO, Ken Lay, who did not value sound financial control. Early in Enron’s existence, he signaled to the Board and to employees that he would sacrifice controls to address immediate business pressures. Lay also repeatedly promoted individuals like Jeff Skilling who shared a similar indifference to controls and sound accounting. Skilling particularly played a major role in undermining the integrity of Enron’s financial reports and the position of the accounting firm Arthur Andersen.

These developments signaled Enron’s employees that any rule could be bent if the party intent on doing so was clever. Agents like Andy Fastow rose to the occasion. When Enron’s performance faltered, they brought forward cover-up schemes of unimaginable complexity and audacity. Lay and Skilling welcomed the schemes. The story from there is well known. The seeds planted early on by Lay and Skilling, when they dismantled internal audit and sound accounting, are still not appreciated. The lesson worth taking away is this—firms get corrupted when the CEO is weak on financial control and allows agency behavior to corrupt the accounting, compensation and promotion systems.

Enron’s corporate resisters enjoyed no legal protection. However, effective resistance was still possible within the firm. Mintz, Kaminsky and Watkins enjoyed a measure of success by picking their resistance issues carefully and taking them to targeted executives. Mintz showed how an attorney can go to outside counsel to buttress a position opposing corrupt actions. Watkins picked the right issue, the fraudulent accounting for Fastow’s partnership deals. Unfortunately, she picked the wrong recipient, sending her letter to Ken Lay. By leaving a paper trail, however, she left investigators a clear path to follow.

The 2nd Edition, published in 2013, asked how an entire industry could become corrupted. Its case studies revealed the Financial Crisis to be analogous to a major traffic accident. Many elements were involved, each one contributing to a chain of causation that produced a massive pile-up with carnage. Each case revealed one or more elements in the chain—from Goldman Sachs’ deliberate choice to favor Big Trading over banking, to Countrywide’s decision to follow AmeriQuest into toxic mortgage products, to Moody’s sacrifice of sound ratings methodologies for market share, to AIG’s failure to reserve for the risks embedded in the subprime credit default swaps it wrote. One constant from the Enron story became apparent. In the Financial Crisis cases there also were CEOs, Corzine, Mozilo, McDaniel, Greenberg and Sullivan, who subordinated sound financial control for other priorities.

The 2nd Edition also asked whether the landscape for resisters had improved. The answer is a qualified yes. Sarbanes-Oxley (SOX) provides a foundation of legal protection. The favorable publicity surrounding Sherron Watkins, WorldCom resister Cynthia Cooper, and others improved the public’s image of whistleblowing. However, these improvements were not enough to bring forth effective whistleblowing in the Financial Crisis. Three whistleblowers of note appeared: Richard Bowen at Citigroup, Eric Kolchinsky at Moody’s and Matthew Lee at Lehman Brothers. All dealt with managements unresponsive to their disclosures and willing to punish whistleblowing. All ended up leaving their companies without accomplishing much in the way of influencing business conduct. Each provided lessons of what not to do as a resister. Kolchinsky adamantly asserted that SOX did not provide protection for whistleblowers on Wall Street.

This industry-wide failure of whistleblowing was recognized in the wake of the Financial Crisis. Gaps in the SOX whistleblower protections were plugged by the Dodd-Frank law. Whistleblowers were also given the incentive of a Federal bounty program run by the Securities and Exchange Commission (SEC). Subsequently, a substantial whistleblowing legal industry developed. Whistleblowers can now choose from multiple legal firms who provide assistance in return for a share of potential bounties. A National Whistleblowers Center helps guide resisters trying to figure out what to do. The Whistleblower’s Handbook is available to educate business people before they have to confront a crisis.

These developments profoundly change the landscape for resisting corporate corruption. Are they enough to help turn back the tide of corruption visible during the Financial Crisis?

This brings us to the purpose of this 3rd Edition. Scandals have continued since the Crisis and the passage of Dodd-Frank. Are these evidence that underlying problems haven’t been fixed? Or, are they the spasms of an industry on a glide path to a safer and more ethical course of conduct? The new cases provide the opportunity to explore these questions—the major post-Crisis scandals are here: MF Global, LIBOR and Banamex. Two cases, Morgan Stanley’s revisions to compensation and Goldman’s handling of the El Paso-Kinder Morgan merger, provide opportunities to consider whether bank CEOs are sorting out the conflicts inherent in their Big Trading business models. The MF Global and CitiMortgage cases present new junior employees, Edith O’Brien and Sherry Hunt, struggling with classic resistance issues within the new landscape. Do these endangered employees enjoy fundamentally better conditions for resisting corruption than in the past?

This 3rd Edition retains the classic Enron cases which chart that firm’s trajectory to fraudulent demise. Almost all of the Financial Crisis cases return, the omissions being the follow-up Fannie Mae and Moody’s cases. A new essay summarizes the causes of the Financial Crisis as illuminated by these case studies. A primer on Dodd-Frank is provided to provide context for the post-Crisis cases. Finally, two closing essays have been added, one summarizing the best tactics available to motivated resisters and the second providing an assessment of whether the conditions promoting corporate corruption have been adequately addressed.

We conclude this Preface with this point: the legal conditions for external whistleblowing have never been stronger and the support available has never been so accessible. Potential whistleblowers with evidence of profound wrongdoing now have a chance to disclose it to authorities without facing financial ruin. For those resisters still seeking to work within the firm, there is still the need to master resistance tactics and organizational smarts.

Most resisters will want to tread this internal path if at all possible. These cases provide a laboratory for developing this skill set in advance of a personal, firm, or industry crisis.

Chapel Hill, North Carolina,
January 23, 2017