The Ethical Barometer

This is one for the books, as it were. Mattel understated its losses in the third and fourth quarters of 2017 by $109 million. The mistake in losses resulted from an error in calculating an allowance for its tax valuation. The company’s audits committee, along with outside counsel, found that Mattel had to restate its financials (but nothing material here, so move along) and its 10-K. Oh, and the report identified a “material weakness” in internal controls. Say what? So long as it is not quantitatively material, what, me worry? To be fair, the error did not materially affect annual EBITDA, adjusted EBITDA, cash flows, or EPS, i.e., neither the fake numbers nor the real numbers were materially affected — quantitatively)

Anyone can make a mistake on allowances, particularly on taxes. The odd thing about this particular error (and the resulting finding of a material weakness in internal controls) is that no one told either the CEO nor the audit committee about the error. One more odd thing, the error did not come to light until the company’s auditor received a whistleblower letter in August 2019. Oops– one more odd thing. PricewaterhouseCoopers LLP (the supercalifragilisticexpialidocious of the Big 4 accounting firms) replaced its lead partner on the Mattel account because the former lead partner had been recommending people for senior finance positions in Mattel. The whistleblower let those beans spill as well. PwC (to save the space) and Mattel issued statements indicating that they both “take independence seriously” and that they have “robust policies and procedures in place to identify and address potential threats to independence.”

PwC can stay, nothing to see here, and we will fix those internal controls. Just “lapses in judgment by management.” Off you go! The Barometer has found that “lapses in judgment by management” loosely translated means, “Managers were too “‘a scared” to report the error.” Such a “lapse in judgment” travels in pairs. The accounting “lapse in judgment” is followed by another “lapse in judgment” the failure to appreciate that this stuff wants out there. Somehow this stuff always comes out. Sort of comical that the whistleblower sent the letter to PwC — must not have known of the HR work of the audit firm.

See Paul Ziobro, “Mattel’s Finance Chief to Leave,” Wall Street Journal, October 30, 2019, p. B5 for more insights into the issues.

The SEC is investigating AIG sales practices (in its Valic division) with schools districts. Part of the investigation includes looking into whether money Valic gives to schools for certain expenses even as it offers plans, advice, and products to those schools. Oh, and there is the matter of the compensation system for sales reps, i.e., sales reps get bigger bonuses for selling more expensive products and it is not clear that their disclosures of such an upside for them were clear. Oh, and one last thing. The SEC is looking at those who do legal and compliance work for the school districts on their retirement plans. The lawyers are looking at the lawyers who are responsible for making sure retirement plans meet disclosure standards.

AIG has placed several Valid executives on leave, but declined to comment on the investigation. Conflicts of interest are at the heart of this investigation. Only two ways to deal with a conflict of interest: don’t or disclose. In this investigation, the focus seems to be one the adequacy of the disclosures.

Boeing employee e-mail to the head of the Boeing 737 MAX program during the plane’s production. The employee added that, “Our work force is exhausted. Fatigued employees make mistakes.”

At the time of the design of the 737 MAX airplane, Boeing was facing intense competition from Airbus and needed a plane that could carry more passengers for longer distances. Rather than design from scratch, the company started with its existing 737 plane and added bigger engines and made it wider. The result was an impact on the plane’s angle of attack, and a decision to not install an alert for the system tracking the plane’s angle. Cost was an issue as well. The result was pilots had only 10 seconds to react to flawed sensing of the plane’s altitude and automatic adjustments in the wrong direction. Two of the planes crashed, killing 346 people.

Boeing’s CEO testified before Congress this past week, and Boeing ran full-page ads twice in the Wall Street Journal, New York Times, and USA Today explaining what it has done thus far to address the issues with the still-grounded plane and the needs of the families of those who were killed in the two crashes.

Former California Representative Katie Hill gave her last speech on the House floor on Thursday. Ms. Hill said, “I am leaving now because of a double standard. I’m leaving, but we have men who have been credibly accused of intentional acts of sexual violence and remain in board rooms, in the Supreme Court, in this very body and worst of all in the Oval Office.” Speaker of the House Nancy Pelosi added, “Regardless of any errors in judgment that anyone may have made, it’s shameful that she’s been exposed to public humiliation by way of cyber exploitation.”

The cyber exploitation is not the cause of Ms. Hill’s departure. The cyber posts are evidence of truly awful judgment: Nudity, bongs, a Nazi-era tattoo, and a photo of a kiss of a staffer are indeed her personal life. But when there is photographic evidence of bad judgment elected representatives are exposed (as it were) to pressures, threats, and even blackmail, well, there are few choices. The public is not asking for perfect lives in elected representatives — the public is asking for good judgment and discretion. – grown-ups. That was once not too much to ask.

Despite this setback, Ms. Hill has an opportunity to help others. Some of us learn our lessons in life with pain, but in private. Some of us have the documentation of text messages and photos that are out there even when we have changed. The pain and embarrassment are humiliating. She is a public figure who is being judged publicly, but therein lies her opportunity. Helping others understand the risks of posts, messages, and a little too much sharing is a tall order in this era of too much posted information. Ms. Hill should seize this moment, not seek to blame. Grace when we are fallen is an admirable quality. Bitterness cuts off redemption’s freedom.

The Barometer is no fan of Mark Zuckerberg, his hoodies, or his company, Facebook. However, it is a commentary on the intellectual level of members of congress when the man who became a billionaire through a marketing scheme planted within an addictive social media site looks like a sage. Mr. Zuckerberg was up on the Hill looking to win support for Facebook’s cryptocurrency, Libra. Sure, Zuckerberg and fake currency – what could possibly go wrong there? However, the members of congress did not want to zero on on that scary proposition. Nay, nay. They wanted Zuckerberg to pledge to take down political ads that contained “lies.” The ubiquitous Alexandria Ocasio-Cortez was loaded for bear.

AOC: “Could I run ads targeting republicans in primaries saying they voted for the Green New Deal?”
“Do you see a problem here with a complete lack of fact-checking on political advertisements?”
“So you will take down lies or you won’t take down lies? I think this is a pretty simple yes or no.”

Mr. Zuckerberg did not provide an answer, but should have explained the policy his company came up with (not sure Mr. Zuckerberg came up with it, which explains why he was stumped). He did well when he offered an explanation when he spoke recently at a law school. Someone at Facebook figured out that fact-checking political ads would consume their resources. Shades of truth, opinion, phrasing, and other content in all ads are misleading. Check out the infomercials for cooking pans alone.

Are there misleading statements in political ads? Absolutely. Are there misleading statements in speeches by members of congress? ‘Tis why they exist. Are there misleading statements at the UN, the state of the union address, and Parliament? The Honorable AOC needs to learn the old joke, “How can you tell when a politician is lying?” “When his lips are moving.” Or hers. Like the AOC whopper about the world ending in 12 years. That she honestly believes that factoid does not make it true. Or the time she posted footage of her crying at the border as she hung onto a chain-link fence because of the detained children. The problem was that there was just a tree and a Ford Explorer on the other side of the fence, but no detained children.

An AOC staffer offered justification, “But she could see the entrance!” True or false photo op? You decide. The point being that Facebook is right in its policy even if its CEO cannot always articulate it. Zuckerberg lucked out by not answering because whether true or false, political ads need voter discretion, analysis, and reflection. Voters do it well. Facebook has proven unreliable on the issue of disclosure in the past. Designating this crowd as an arbiter of truth would be playing with fire. The prism of self-righteousness in the members of congress does not allow them to see the risk. To his credit, Mr. Zuckerberg does.

Two young London bankers who share an apartment, Darina Windsor and Benjamin Taylor, also shared inside information that they had on companies, such as Merck, Amgen, and Celgene,
with middlemen from 2012 to 2018. The middlemen then passed along that information to securities traders who were able to profit in the 7-figures range from the information. The two used burner phones and used cryptic and very literary code language and the code names “Pops” and “Popsy” in the e-mails to pass along what they had. One title in a e-mail was, “Once upon a time, there was a Pops searching for truffle in the Forest.” The two, now charged with insider trading, were also savvy with the spreadsheets. Popsy sent via e-mail an Excel spreadsheet in which she presented the amount of her cut. The spreadsheet took into account percentages for the participants, exchange rates, and the denomination of bills in her payments, i.e., how many Euro50 notes and $100 bills it would take to pay Pops and her.

The banks that employed Pops and Popsy remain unclear. There will however, be no further references allowed to truffles in work emails.

In instant messages from 2016 between Mark Forkner, then Boeing’s chief technical pilot for the Boeing 737 MAX, and Patrik Gustavsson, the two discuss the problems with the plane’s MCAS system (the flight-control system). Mr. Forkner had some problems in the simulator with the MCAS performance, “Granted, I suck at flying, but even this was egregious.” Mr. Forkner added that the MCAS was acting unpredictably, “It’s running rampant.”

Then Mr. Forkner added, “So, I basically lied to the regulators (unknowingly).” Mr. Forkner’s attorney explained that Mr. Forkner thought that the 737 MAX was safe and that the problem was with the simulator. Eight months before the instant messages were exchanged, Mr. Forkner had asked the FAA to remove mention of the MCAS from the pilot’s manual because the system would activate only rarely and there was no danger.

The issues of what Boeing knew about the MCAS and when remain at the heart of the FAA investigation. However, the fact that Boeing discovered the messages in February 2019 but did not turn them over until October 2019 only adds to the questions about Boeing’s culture and apparent pressure to get the 737 MAX into service.

The 737 MAX has crashed twice, killing all aboard on the planes, with most experts pointing to the problems with the MCAS system as the cause of both crashes.

Former Vice President and presidential candidate Joe Biden’s son, Hunter, has said some interesting things over the past few weeks as he sought to explain his involvement with businesses in Ukraine and China. The opportunities came during the Obama administration when his father was responsible for building relationships with those countries. Hunter accompanied his father on at least one trip to China. Only the quotes appear. No commentary necessary.

“I don’t think there’s a lot of things that would have happened in my life if my last name wasn’t Biden.”

On his being appointed to the board of Burisma in exchange for significant compensation (reports range from $50,000 to $83,000 per month):
“Did I make a mistake? Well maybe in the grand scheme of things, yeah. But did I make a mistake based upon some ethical lapse? Absolutely not.”

[Work abroad is a] “distraction, because I have to sit here and answer these questions. And so that’s why I have committed that I won’t serve on any boards or I won’t work directly for any boards or I won’t work directly for any foreign entities when my dad becomes president.”

“I gave a hook to some very unethical people to act in illegal ways to try to do some harm to my father. That’s where I made the mistake. So I take full responsibility for that. Did I do anything improper. No, not in any way. Not in any way whatsoever.”

From Joe Biden in response:
“My son made a judgment. I’m proud of the judgment he made.”

Whilst the Office of Inspector General (OIG) was reviewing the conduct of James Comey in the FBI’s handling of the Hillary Clinton e-mail investigation during the 2016 election, the OIG ran across some additional e-mails that implicated another FBI official in conduct not related to the Clinton e-mails. One never knows where the truth will percolate or how it will emerge, but eager it does. The e-mails discovered serendipitously showed that the FBI’s former director of the Office of Public Affairs accepted two tickets to a professional sports game as a gift from a CNN correspondent who regularly covered the FBI and DOJ, in violation of federal regulations. In fact, there was a bit of a cultural problem at the FBI with agents participating in golfing outings with media representatives, being treated to drinks and meals after work by reporters, and attending “nonpublic social events” (parties in non-OIG language as the guests of journalists.

That kind of culture certainly explains why the OIG found significant media leaks from FBI employees to the media. They were all on the same team.

But back to the official, who has since been identified as Michael Kortan, the former director of the FBI Office of Public affairs who retired earlier this year. The OIG investigation found that Mr. Kortan accepted tickets from CNN and New York Times reporters. Here are some excerpts from the e-mail exchanges between Mr. Kortan and a CNN reporter:

CNN correspondent: “I have an extra ticket for tomorrow nights Nats game. Would you like to join?” adding, “Good seats.”

Kortan: “I’m in!”

CNN correspondent. “Great.”

Follow-up e-mails show that the two met for beers and then headed to the game. Cozy.

But there was more. Another e-mail exchange with the CNN correspondent (never identified in the report):

CNN correspondent: “Nats v Marlins Friday night. I have to be away. Can you use four tix?”

Kortan: “I’m good for 2 tix if that’s OK.”

Kortan took another FBI employee and had a full night with the $65 per ticket freebie.

Mr. Kortan initially told the OIG, under oath, that he had paid back the reporter. He had not because the OIG fond no messages documenting the repayment nor could Mr. Kortan produce any proof of repayment. Mr. Kortan was also not forthcoming when asked who used the other ticket. Eventually admitted that the ticket went to a young, female FBI employee. Mr. Kortan did go back to the OIG to say that he was mistaken about the repayment. The game was rained out and that he was told by the correspondent not to repay him. As long as he was cleaning that up, Ortan did confess to the tagging along of the female FBI employee. Mr. Kortan resigned prior to the conclusion of the investigation.

The DOJ declined to prosecute the case. Not sure what happen with Mr. Kortan. but General Michael Flynn awaits sentencing for allegedly “lying to the FBI.” Funny how agents seem aloof, not apologetic, when they are caught. Methinks that the FBI has a huge culture problem. Check the e-mails. Even FBI agents fancy them to be private.

Presidential candidate Elizabeth Warren has been spinning a yarn about her days as a teacher for special ed students. She said she was 22, visibly pregnant, and the principal did what Senator Warren said all principals did at that time: He refused to renew her contract for another year because she was “visibly pregnant,” and he hired another teacher to take her place. As part of the story, Senator Warren has told crowds, “I loved that work, and I would probably still be doing that work today, but my story has more turns.”

However, since the story became public, Megan Jacobin, a writer for a socialist magazine recalled an interview with then-Professor Warren in 2007 (and the video is available). In that interview, then-Professor Warren told a different tale as to why she left teaching: she did not have the education courses, she did not feel that type of job was for her, and so she went back to graduate school. The “visibly pregnant” story did not make its way into that interview.

In addition, since the story become public, the school district have turned over their side of the story. Mrs. Warren declined an offer of another year. The school board members also sent her a letter that expressed their sadness at her departure.

Between this story and the realization in her 70th decade here on earth that she might not be of the Cherokee tribe (once the DNA came back), Senator Warren emerges as an enigma. Professor Warren certainly enjoyed considerable success as a law school professor. Her work spawned the Consumer Financial Protection Board (whether for good or for bad is a different issue). Why the tales to paint herself as a victim or as a member of a protected class? That question goes beyond the Barometer’s expertise. However, there is a lesson in her actions for all of us: Truth percolates. This uncanny force has a way of emerging in ways that defy probability.

A socialist writer, a school-board member, and an old video emerge t challenge a tale of pregnancy discrimination. What are the chances? When truth is involved, the chances are fairly good. Truth takes its time, but it does get to the surface.

The NBA gets the Barometer’s Annual Duplicity Award. Houston Rockets General Manager Daryl Morey tweeted the following on Friday, October 4: “Fight for freedom, stand with Hong Kong.” The Chinese consulate in Houston was offended, the owner of the Houston Rockets contemplated termination of Morey, and there was considerable upheaval. That Twitter. Enter the NBA on Sunday, October 6 with this statement released in English in the United States:

“We recognize that the views expressed by Houston Rockets General Manager Daryl Morey have deeply offended many of our friends and fans in China, which is regrettable. While Daryl has made it clear that his tweet does not represent the Rockets or the NBA, the values of the league support individuals’ educating themselves and sharing their views on matters important to them. We have great respect for the history and culture of China and hope that sports and the NBA can be used as a unifying force to bridge cultural divides and bring people together.”

And then there was the version in Chinese that appeared in that country:

“We are extremely disappointed with the inappropriate comments made by Houston Rockets general manager Daryl Morey, who has undoubtedly seriously hurt the feelings of Chinese fans. Morey has clarified that his remarks do not represent the position of the Rockets and the NBA. Under the values of the NBA, people can learn more about what they are interested in and share their opinions. We respect China’s history and culture with great respect. We hope that sports and the NBA, as a positive energy of unity, will continue to build bridges for international cultural exchanges and bring people together.”

The NBA’s position is that the translation was not correct in the Chinese statement and that the English version is the NBA’s position.. “Views expressed” and “inappropriate comments” do not translate the same way in any language.

Then we had the clarifying remarks from Adam Silver, NBA Commissioner, who the Barometer believes appeared in Grant Wood’s painting, “American Gothic”:

“I recognize our initial statement left people angered, confused or unclear on who we are or what the NBA stands for. Let me be more clear. Over the last three decades, the NBA has developed a great affinity for the people of China. We have seen how basketball can be an important form of people-to-people exchange that deepens ties between the United States and China.At the same time, we recognize that our two countries have different political systems and beliefs. And like many global brands, we bring our business to places with different political systems around the world. But for those who question our motivation, this is about far more than growing our business. Values of equality, respect and freedom of expression have long defined the NBA — and will continue to do so. As an American-based basketball league operating globally, among our greatest contributions are these values of the game. In fact, one of the enduring strengths of the NBA is our diversity — of views, backgrounds, ethnicities, genders and religions. Twenty-five percent of NBA players were born outside of the United States and our colleagues work in league offices around the world, including in Beijing, Hong Kong, Shanghai and Taipei. With that diversity comes the belief that whatever our differences, we respect and value each other; and, what we have in common, including a belief in the power of sports to make a difference, remains our bedrock principle. It is inevitable that people around the world — including from America and China — will have different viewpoints over different issues. It is not the role of the NBA to adjudicate those differences. However, the NBA will not put itself in a position of regulating what players, employees and team owners say or will not say on these issues. We simply could not operate that way.Basketball runs deep in the hearts and minds of our two peoples. At a time when divides between nations grow deeper and wider, we believe sports can be a unifying force that focuses on what we have in common as human beings rather than our differences.”

That’s telling’ em, Commish! A little late, and a lot compromised.

The whole human rights issue goes out the window (or at least stops at the U.S. border), along with social justice, social responsibility, and plastic straw judgments, when shoe contracts and the Chinese fan base are at risk. Funny how the sports world tolerates every mollycoddled athlete who has a grievance against the United States. But let a general manager post a tweet about freedom to support a movement for just that, and the tweet must come down, a job hangs in the balance, and NBA panic sets in. Prepositional sentence-endings aside, the NBA is one fine mess. Amoebas have more structure than these various and sundry positions. Pea soup has more clarity.

There was an editorial in China about the NBA kerfuffle with this sentence, “Sports loses out when politics enters play.” Good advice for actors, athletes, and Adam.

Gordon Caplan, once the co-chairman of the Willkie Farr & Gallagher law firm and American Lawyer‘s “Dealmaker of the Year,” was sentenced to one month in prison, a fine of $50,000, 250 hours of community service, and one year of supervised release. Mr. Kaplan entered a guilty plea to paying Rick Singer $75,000 to have his daughter’s ACT score increased from a 22 to a 32. Mr. Caplan’s statement at sentencing was contrite and representative of the tragedy we see unfolding daily:

“This whole episode was at least in large part my own ambition for my daughter going to school. I lost sight of what is means to be a good father, as I obviously did not act in the best interest of my daughter. . . . Shame and humiliation haunt me.”