Scandals in the Corporate World

The HP Spying Scandal

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What began as an effort to find reporters’ unidentified sources had turned into an elaborate spying operation. The entire mess started in early 2005, when the Hewlett-Packard Company (HP) board became troubled over leaks of confidential board meeting details to the media. Determined to dig out the source of the leak, HP chairwoman Patricia Dunn ordered HP senior counsel Kevin Hunsaker to lead an internal probe that involved hiring of an independent group of electronic security experts-investigators to spy on HP board members and several journalists. However, the group practiced the illegal technique of “pretexting,” which is the act of creating a scenario (pretext) or pretending to be someone else to trick people into releasing confidential information. They planted false documents, tracked HP board members and journalists, and watched their homes and family to obtain their phone call records. A sophisticated albeit unsuccessful email sting operation was also devised in an attempt to trick Dawn Kawamoto, who wrote a rather detailed CNET article summarizing the HP’s long-term strategy on January 23, 2005, into revealing her sources.

In September 2006, the US House Committee on Energy and Commerce learned of HP’s use of pretexting while conducting an investigation on Internet-based brokers who purportedly employed “lies, fraud and deception” to obtain personal information, and permitted anybody to acquire “itemized incoming and outgoing call logs” in exchange for a modest fee. During the congressional hearing, Dunn initially professed to have no knowledge of the operational aspects of the probe, but subsequenly acknowledged to the truth when several of her emails with Hunsaker came to light, revealing the intense degree of interest she had given it. Criminal charges and arrest warrants were eventually filed against Dunn, Hunsaker and three outside investigators for four counts each of identity theft, fraud and conspiracy. All pleaded not guilty except for Colorado investigator Bryan Wagner who was indicted, for having illegally obtained and transmitted personal information of HP directors/employees and journalists. Dunn and Hunsaker left the company as a result of the scandal.

Harken Energy Scandal

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The Harken Energy scandal refers to a series of transactions Harken Energy Corporation took part in during 1990 that allegedly constituted illegal issues as insider trading or influence peddling. In the 1980s, Spectrum 7, an energy company ran by George W. Bush, was experiencing serious financial difficulty due to a deep slump in the oil market until 1986 when Harken purchased the firm. The main attraction for Harken’s investment decision was having Bush on board as he had extensive political connections, his father being the then Vice President. Bush was given a seat on the board of directors, stock valued at $500,000 at the time, and a lucrative consulting contract worth between $80,000 and $120,000 annually. It was not a full-time job though, as Bush dedicated most of his time to his father’s presidential campaign in 1987 and 1988. The following year, he borrowed a sum of $600,000 to purchase a share of the Texas Rangers baseball franchise, an investment that would pay off generously for him. And to pay off the loan, he sold his 212,140 Harken arkenHashares at $4, his single largest asset, for a total of $848,560 on June 22, 1990.

Allegations of inappropriate conduct started brewing in 1991 when the sale became public, considering that Harken announced a larger than expected second quarter loss on August 22, 1990, a mere two months after the sale, causing its stock to hit $1.25 by year end. The US Security and Exchange Commission (SEC) initiated an investigation to determine whether Bush had any insider information. It was discovered that Bush did not initiate the sale but was contacted by a stockbroker offering to buy the stock; and that he consulted his fellow executives/directors and internal/external counsels before selling his stock. There were also accusations that Bush attempted to hide the information, as the law required immediate filing of two disclosure forms for insider sales. He filed Form 144 “Notice of Proposed Sale of Securities” on the day of the sale, thus clearing Bush of any intent to conceal. However, he was late by 8 months in filing the second form, the Form 4 informing SEC of the completed sale, but his failure was not considered to be a punishable crime. Moreover, the stock rebounded in 1991 and hit $8 per share. The final findings read “In light of the facts uncovered, it would be difficult to establish that, even assuming Bush possessed material non-public information, he acted with scienter or intent to defraud.”

Salad Oil Scandal

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Regarded as one of the greatest business frauds of all time, the Salad Oil Scandal (also called the Soybean Scandal) happened when Tino De Angelis, the founder of the Allied Crude Vegetable Oil Refining Corporation with unsavory business history, learned that he could secure huge amounts of loans from banks using salad oil inventory as collateral. Ships arriving in the docks would be checked by inspectors from the American Express Warehousing Ltd, who would then issue warehouse receipts certifying that the tanks were indeed full of oil. The tanks were actually filled only with water, with only a few feet of oil floating on top. Allied managed to fool many people into believing he had stored almost a billion pounds of oil in an American Express subsidiary’s tank farm in New Jersey that had only 500 million pounds capacity, thereby securing enormous sums of money for non-existent oil.

In November 1963, the scam was exposed when Allied was unable to meet its obligations, having speculated most of the money in the commodity futures market that had gone terribly wrong. In total, investors in more than 50 banks discovered that they had been ripped off of about $175 million (nearly $1.4 billion in today’s dollars). One of the scandal’s largest casualties was the American Express, whose stock plummeted more than 50 percent, costing the company nearly $58 million. Celebrated investor Warren Buffett injected 40 percent of his partnership’s assets into the beleaguered company, collecting a massive premium as the company regained its footing. Ira Haupt & Co. and the Williston and Beane, two major New York Stock Exchange member firms, were also caught in the Allied deceit, being left with $37 million it could not pay, as their funds intended for stock market transactions were used to settle commodities contracts. De Angelis pleaded guilty for several counts of fraud and conspiracy in 1965 and served 7 years in prison. This particular scandal’s capacity to lure otherwise conservative financial institutions into making increasingly riskier investments has prompted comparisons to the current financial crises including the 2007 – 2008 subprime mortgage financial crisis.

Ford Pinto Scandal

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The Ford Pinto was a subcompact car that was first introduced in 1971 and manufactured through the 1980 model year by the Ford Motor Company. Its twin of similar design, the Mercury Bobcat, was introduced in Canada in 1974. Designed and built in 1968 under the direction of Ford executive Lee Iacocca, it was launched to compete against new import and domestic subcompacts like the Volkswagen Beetle and the Toyota Corolla, and soon became a US market leader. It became the center of a literally explosive scandal, when Ford became aware of a major fault in the car’s design during the course of its production. Ford Pinto’s lack of a true rear bumper as well as strong reinforcing structure between the fuel tank and the rear panel meant that the tank is liable to be damaged in case of rear-end impacts, thus resulting in deadly explosions and fires. In addition, the doors could easily jam up in an accident due to weak reinforcing, potentially turning the vehicle into an eventual deathtrap.

However, Ford refused to pay for the costs of redesign, and determined instead that it would be much cheaper to settle possible lawsuits for resulting deaths. In 1977, Mother Jones Magazine published an article after having obtained the cost-benefit analysis that Ford had used to compare cost of repair versus the cost of major lawsuits, (later referred to as the “Ford Pinto Memo”); and other internal documents revealing a series of Pinto crash tests wherein 8 out of 11 tests resulted in damaged fuel tanks at speeds averaging of 31 mph (50 kph). The article’s depiction of Ford’s utter disregard for human lives for profits brought about a whirlwind of controversies including large lawsuits, criminal (murder) charges and an expensive recall of all defective Pintos. Although Ford was subsequently acquitted of all charges on a technicality, it paid several millions of dollars in damages and earned the reputation for being the manufacturer of “the barbecue that seats four.” It was estimated that between 500 and 800 people had perished in Pinto rear-end collisions.

The United Nations Corruption Scandal

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Surrey-based Compass Group, the world’s biggest food service business, provides catering services to a wide range of institutions from schools, hospitals, prisons, airports and corporations to military, remote and offshore sites. Compass Group was embroiled in a corruption scandal when it subsidiary, Eurest Support Services (ESS) alleged won contracts to supply food to United Nations peacekeepers in Liberia and other world trouble spots through rigged bids and fraud. In March 2006, rivals Swiss-based Supreme Foodservice AG and Monaco-based ES-KO filed lawsuits in New York against the company in relation to the allegation and possible questionable conduct by Compass CEO Michael Bailey totaling £600 million.

The United Nations conducted an internal investigation and discovered that protocols had been violated by its procurement officer, Alexander Yakovlev, and head of Administrative and Budgetary Issues committee, Vladimir Kuznetzov, both of whom were later charged for wire fraud and money laundering, having accepted nearly $1 million in bribes from Compass and other UN contractors. Compass’ own probe also revealed “serious irregularities” in its UN business deal and resulted in the dismissal of its senior executive Peter Harris and senior ESS staff Andy Siewert. Bailey stepped down in June 2006 due to shareholder discontent over the company’s declining profitability and his handling of the scandal. However, the true extent of the corruption is unclear as Compass refused to make public its investigation and did not mention any other individuals other than those already fired. The fraud lawsuits were ultimately settled out of court to the tune of £40 million.

More Scandals

• Notable Military Scandals in History
• Corporate Accounting Scandals
• Political Sex Scandals in History
• Scandals: Five Misbehaving Scientists
• Notable Medical Scandals