Chapter 3 Business Ethics Jennings Withheld Evidence From Defense

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subject Authors Marianne M. Jennings

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Business Ethics, 8e Jennings
81. The Duke LaCrosse players:
82. The North Carolina State Bar:
Short Answer/Essay Questions
1. Describe a situation in which Dr. Friedman would support a corporation taking voluntary or
socially responsible action.
2. How would you describe Adelphia’s treatment of its stakeholders?
3. Describe Dayton-Hudson’s experience with charitable contributions.
4. Using the MLB steroids case as an example, explain how unethical choices by some players
harms players who comply with the rules.
5. Leslie Fay Companies was a clothing conglomerate that produced lines of women’s clothing and
lingerie under the brand names Leslie Fay, Joan Leslie, Albert Nipon, Theo Miles, Kasper, Le
Suit, Nolan Miller, Castleberry, and Castlebrook. In early 1993, it was discovered that senior
Leslie Fay executives, in an effort to inflate profits and to mask an actual loss of $13.7 million,
had perpetrated an accounting fraud. Paul Polishan, Leslie Fay’s chief operating officer, was
placed on leave without pay in January 1993, along with Donald F. Kenia, the corporate
controller. Mr. Kenia had first alerted the company to the accounting manipulations and worked
with auditors to untangle the books.
By April 1993, Leslie Fay, under intense pressure from creditors, filed for Chapter 11 bankruptcy
(reorganization) in Manhattan. Both Mr. Polishan and Mr. Kenia were fired. Mr. Kenia, charged
with two counts of filing false statements with the SEC, has entered into a plea bargain with the
U.S. Attorney in exchange for his cooperation in the continuing investigation of the Leslie Fay
accounting improprieties.
Also in April 1993, two new outside directors were named to the Leslie Fay board. The audit
committee of the board discovered, through continuing investigation, that accounting irregularities
had inflated the company’s profits for at least five quarters beginning in the fall of 1990.
As Leslie Fay continued its climb from bankruptcy, it was discovered that its law firm, Weil
Gotshall & Manges, had failed to disclose its close ties to two board audit committee members. A
federal bankruptcy judge ordered the law firm to pay fines totaling $800,000, which was the cost
of having an independent review of the law firm’s representation and conduct in the case.
In March 1995, Leslie Fay placed its flagship dress and retail business up for sale and offered its
CEO a success fee of $1.5 million if those businesses were sold.
Also in March 1995, a report detailing accounting improprieties was released by the audit
committee of the Leslie Fay board. The board found that when executives realized they would not
meet pre-established goals, they would ship goods out to a Wilkes-Barre, Pennsylvania, facility to
inflate sales. The executives also forged inventory tags, multiplied the value of inventory,
developed phantom inventory and altered records to meet sales target. Some goods were
invoiced to be shipped in the final day of a quarter even though they were not actually shipped
until the next quarter. Numerous shareholders have filed suit against the Leslie Fay board and
BDO Seidman, the company’s auditor during this period.
John Pomerantz continued as CEO from 1993 onward. The company has tried to find a buyer
but has remained unsuccessful in doing so.
a. What signals about the importance of earnings at Leslie Fay were sent to the officers who
committed the accounting improprieties?
b. Wouldn’t employees have been aware of the financial fraud? Why didn’t they speak up?
Why didn’t they tell someone?
c. How might Leslie Fay have prevented what happened?
d. If you were the new chief financial officer, what message would you most want to impress
upon all Leslie Fay employees?
Business Ethics, 8e Jennings
e. Of what significance are the law firm’s ties to the board’s audit committee members? Did
these ties set a poor tone at the top?
6. Albertson’s, the grocery retailer, has the highest profit margins in the industry at 6%. A union has
filed suit against Albertson’s for its “off-the-clock” without pay practices with respect to manager
trainees. These trainees worked 4-5 hours extra each week without pay and did not complain
because of promises of progression in the organization. When progression did not materialize,
the trainees returned to checking positions and their union filed a class action suit on their behalf.
The potential for back pay and penalties in the case is $200 million.
Albertson’s notes that some managers may prod trainees to work longer without pay but that
such is not company policy.
a. Who is responsible for the “off-the-clock” policy?
b. Is it each store manager or Albertson’s?
c. Is “off-the-clock” an ethical policy?
7. Fifty-nine auto dealers around the country were fined $200,000 by the Department of Labor for
child labor violations. The car dealers hire 16- and 17-year olds to move cars from service bays
to customer pick-up areas and from lots to show rooms. They are also employed to wash cars.
The teenagers move the cars literally only hundreds of feet in the process, but they are driving
the cars.
Under the Fair Labor Standards Act and the federal regulations, only those employees who are
age 18 or above are permitted to drive as part of job requirements. The fine for a violation is
The Department of Labor contacted dealerships and asked for the names of their employees
under the age of 18. Once the Department had the names, it contacted the young employees to
question them about their job duties. Upon discovery of the driving, the dealerships were fined.
About one-half of the dealerships have paid the fines and the remainder are protesting. The
result has been that dealerships will now employ only those who are 18 and older because it is
impossible to have an employee responsible for washing cars and not be able to move the car.
The result has been that many special job programs for minority students and students in
vocational schools have been eliminated.
a. Do you think this type of driving was intended to be covered in the child labor statutes?
b. Are auto dealers taking advantage of children or helping them?
8. Discuss the benefits for a company of not downsizing, as in the case of Aaron Feuerstein and
Malden Mills.
9. Explain who stakeholders are.
10. List and explain three schools of ethical thought.
Business Ethics, 8e Jennings
11. Why does Michael Novak distinguish corporations’ responsibilities?
12. Raymond Randall is an attorney with the Federal Trade Commission. A 19-year veteran with the
agency, Mr. Randall was known as a good trial attorney. The FTC charged William Farley, the
chairman of Fruit of the Loom, Inc., with violations of the reporting provisions of the Hart-Scott-
Rodino Act, when he purchased shares of West Point-Pepperell Corporations prior to a Fruit of
the Loom takeover bid. The Hart-Scott-Rodino Act requires investors to notify the government
when their holdings in a firm pass $15 million.
The FTC sought a fine of $10,000 per day against Mr. Farley, for a total of $910,000. Mr. Farley
did notify the FTC once Fruit of the Loom made its decision to acquire West Point-Pepperell.
Randall was assigned the Farley case. The FTC took a position of refusing to disclose to Farley
and his attorneys documents relating to the case. Mr. Randall felt that the documents pointed to
weaknesses in the FTC case and supported Mr. Farley's point that he notified the FTC once the
takeover position was announced. Mr. Randall leaked the documents to Mr. Farley's lawyer.
Mr. Farley's lawyers were concerned that they should not be in possession of government
documents returned the documents and resigned from the case because they had seen the
documents. Mr. Farley's new attorneys went to court demanding production of the documents.
The documents were ordered produced by the court. When the FTC refused to produce them, the
case against Mr. Farley was dismissed by a federal district judge.
a. Did Mr. Randall do the right thing in disclosing the documents to Farley's attorneys?
b. Did Mr. Farley's lawyers do the right thing in returning the documents to the FTC?
13. Lee Iacocca, chairman and CEO of Chrysler Corporation, announced on January 27, 1988, that
the automaker would be closing its Kenosha, Wisconsin, plant. Iacocca and his board of directors
were under significant pressure from shareholders due to Chrysler’s continuing poor financial
performance. Chrysler had acquired the Kenosha plant when it purchased American Motors
Corporation in 1987. In his announcement, Iacocca blamed national trade policy for Chrysler’s
declining sales and resultant earnings problems.
At the Kenosha plant, which manufactured the Dodge Omni and the Plymouth Horizon, 5,500 of
the 6,500 workers were to be laid off and production moved to a Detroit plant. Kenosha, a city of
77,000 on the shores of Lake Michigan, depended heavily on Chrysler’s presence.
The announcement of the closing came at a critical time. Chrysler was negotiating to renew its
contract with the United Auto Workers (UAW). Also, the Kenosha plant carried a history of union
financial assistance. The UAW had loaned American Motors over $60 million to keep the
Kenosha plant running, and Chrysler had assumed the loan obligations as part of the acquisition.
Also, Wisconsin had paid $5 million for job training at the Kenosha plant in 1987 after Chrysler
promised that the plant would build Omnis and Horizons for at least five more years.
Peter Pfaff, a member of the UAW Local 72 of Kenosha and an employee at the plant since 1972,
said: I was there. We’ve got it on tape and in writing. They said they’d stay. Greenwald (then
Chrysler Motors chairman) keeps saying Chrysler never said that, but I was there when he said
The Kenosha local threatened to delay negotiations on renewing the national contract with 64,000
workers. After the threat, Iacocca announced that Chrysler would establish a $20 million trust
fund to aid the 5,500 Kenosha workers through housing payments and educational funding. This
fund would be in addition to severance pay, extended unemployment benefits, and repayment of
the UAW loans. While denying that Chrysler was setting a precedent, Iacocca declared it had a
“moral obligation” to Kenosha.
Wisconsin threatened to sue Chrysler over the job training program but agreed to hold off in
exchange for Iacocca’s promise to extend production at the plant for several months into the fall
of 1988.
Iacocca stated that Chrysler was “guilty as hell of being cockeyed optimists. Blame us for being
dumb managers, for spending $200 million to put two old cars (the Chrysler Fifth Avenue and the
Dodge Diplomat) in an eighty-six-year-old plant, but please don’t call me a liar when I’ve got to
close it sooner than I thought.” Iacocca sought congressional support for converting the Kenosha
plant to defense work by Chrysler.
Chrysler and the UAW negotiated a contract that provided additional unemployment benefits for
the 5,500 laid-off workers and more job security for the 1,000 workers who would transfer to other
Chrysler operations. Ultimately, the plant closing resulted in 3,700 layoffs.
By mid-1990, Kenosha was enjoying unprecedented economic growth. At a July 1990 ceremony
in which engineers detonated explosives to destroy the 250-foot-high smokestack of the Chrysler
plant, dignitaries and former workers cheered. Kenosha resident T. R. Garcia said at the blasting,
“I think it’s about time they got rid of it. What we need to do is develop the lake front, and this
Business Ethics, 8e Jennings
thing is the last to leave.” City planner Ray Forgianni, Jr., added, “The community’s image is
probably the best it’s been in 100 years. The closing was almost like a catalyst. The handwriting
was on the wall-the economy needed to diversify.”
a. Did Chrysler have a moral obligation to the Kenosha workers and Wisconsin, or was it
just responding to pressure?
b. Do arrangements like Chrysler had with the UAW loans and Wisconsin interfere with the
ability to make business decisions? Review Iacocca’s quote on business mistakes as you
evaluate the issue.
c. Were the shareholders required to pay twice for the closing - once in severance pay and
again in extended benefits?
d. Was Chrysler simply putting its duty to shareholders above its duty to Wisconsin,
Kenosha, and its workers? Is this proper? Is it ethical?
e. Was Chrysler’s action just a catalyst for needed economic development?
f. Iacocca, after having stepped down as chairman of Chrysler, made a takeover offer for
Chrysler in 1995. What would Chrysler’s ethical culture be like if Mr. Iacocca had
succeeded in his takeover bid?
14. In November 2009, a large cache of e-mails and technical documents from the Climate Research
Unit (CRI), part of the University of East Anglia in Great Britain, appeared on several Internet file-
servers and could be downloaded by the public. The University has yet to determine whether the
posting of the proprietary files were the result of a hacker’s effort or whether they were posted by
a whistleblower with CRI.
CRI’s research and data have been used by the UN’s Intergovernmental Panel on Climate
Change (IPCC) as the basis for its support for both the Kyoto and Copenhagen Protocols, a form
of international treaty that would have countries agree to curb their carbon emissions. The Kyoto
Protocol fizzled when the United States declined to adopt it. The meeting at Copenhagen for the
adoption of emissions standards began on December 7, 2009. Fossil-fuel industries would be
affected by the Protocol. Those industries include oil and gas, auto industry, and fossil-fuel
based utilities (coal, oil, and gas). Those industries did undertake voluntary reductions following
the demise of the Kyoto Protocol. To date, businesses and industries in the United States have
achieved one-half of the reductions that Kyoto would have mandated.
The 1,000+ e-mails from the scientists at CRI reveal what MIT scientist Michael Schrage has
called “malice, mischief, and Machiavellian maneuverings” among the scientists with regard to
their data and research on climate change. The e-mails include the following revelations:
Ongoing efforts to manipulate the peer-review process for manuscripts that were submitted
for publication in academic journals if those manuscripts challenged the research and
conclusions of CRI scientists.
From: Phil Jones. To: Many. March 11, 2003
“I will be emailing the journal to tell them I’m having nothing more to do with it until they
rid themselves of this troublesome editor.”
Professor Jones appears to be lobbying for the dismissal of the editor of Climate Research, a
scientific journal that published papers downplaying climate change.
From Phil Jones To: Michael Mann (Pennsylvania State University). July 8, 2004
"I can't see either of these papers being in the next IPCC report. Kevin and I will keep
them out somehow even if we have to redefine what the peer-review literature is!"
There was considerable disagreement acrimony among the CRI scientists about the results,
meaning, and interpretation of their data and work something not revealed in either their
publications or speeches.
Significant portions of data from CRI were withheld from public disclosure or examination by
scientists outside CRI.
University of Arizona professor Jonathan Overpeck expressed concern to his colleagues in
the e-mails, “Please write all e-mails as though they will be made public.”
CRI scientists ignored requests for the release of raw data.
One CRI scientist deleted his e-mails after demands for the data were made public.
However, he neglected to delete an e-mail that revealed his actions in response to a British
Freedom of Information Act (BFOIA), “I am supposed to go through my emails and he can get
anything I’ve written about him. About 2 months ago I deleted loads of emails, so have very
little if anything at all.” There is an investigation of possible violations of the BFOIA.
That the CRI scientists were aware that the reconstruction of the earth’s climate
(paleoclimatology) during periods prior to actual human measurement and recording is a
massive and complicated undertaking that is dependent upon statistical interpretation of raw
data, interpretation that would ordinarily result in intense academic controversy. However,
the e-mails reflect efforts to prevent or obscure the controversy. Again, CRI Scientist Phil
Jones’ e-mail:
Business Ethics, 8e Jennings
From: Phil Jones. To: Many. Nov 16, 1999
"I've just completed Mike's Nature [the science journal] trick of adding in the real temps to
each series for the last 20 years (i.e., from 1981 onwards) and from 1961 for Keith's to
hide the decline."
An e-mail from a U.S. climatologist included in the releases reflected, “I support the continued
collection of such data, but I am disturbed by how some people in the paleo community try to
oversell their product.”
Another scientist wrote, “I’m not political. If anything, I would like to see the climate change
happen, so the science could be proved right, regardless of the consequences.”
An outside scientist brought into the loop wrote, “That fact is that we can’t account for the lack
of warming at the moment [since 1998] and it is a travesty that we can’t.”
The University of East Anglia is conducting an investigation of the e-mails and CRI, but has
warned, "The selective publication of some stolen emails and other papers taken out of context is
mischievous and cannot be considered a genuine attempt to engage with this issue in a
responsible way."
Prominent government and NGO officials have responded by indicating that regardless of the
conduct of the scientists there is a climate problem that must be addressed.
List all of the ethical issues you see. Be sure to include a discussion of any social responsibility
issues that you see.
15. The American Board of Internal Medicine (ABIM) has taken some sort of disciplinary action
against 140 docs who cheated on their ABIM certification exams. In a lawsuit that the ABIM had
filed previously against Arora Board Review, a company that does exam review courses for
certification, the discovery process yielded information that proved to be more damaging for the
docs than for Arora. The documents in the now-settled case included e-mails and other
correspondence from the docs to Arora. The e-mails and correspondence revealed that the docs
knew many of the questions and, indeed, followed up by sending along memorized test questions
from their own certification exams to Arora in order to help the cert-docs-in-waiting along.
List the stakeholders in this situation.
16. In 2008, Starbucks placed a red light on 600 planned openings. Starbucks says it was excused
from the leases because of economic conditions. Landlords note that Starbucks is driving down
property values by allowing the leased spots to lie fallow. The landlords also note that they are
victims because Starbucks’ expansion plans were too ambitious, even for a good economy.
Discuss the social responsibility of Starbucks in this situation.
17. Why do companies have moral clauses in their contracts with stars who are appearing in their
18. A group of food retailers and manufacturers banded together to self-regulate their ads,
particularly on the Internet, for their products. Discuss why the manufacturers and retailers would
make such a joint agreement?
19. Explain the evolution of an individual baseball player using performance enhancing drugs (PEDs)
to it becoming a societal issue.
20. Discuss the actions of the Duke faculty members with their ad and their follow-up conduct.
21. Discuss the ethics of posing as another for purposes of investigating an issue or organization.
Business Ethics, 8e Jennings

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