Internal Investigations Blog

News and Opinions on Corporate Inquiries

 

Casual Dining Industry Should Act on News of Slavery in Shrimp Supply Chain

Last month, it was reported that major players in the supermarket game were to meet in Thailand to tackle the problem of slavery in the shrimp production industry in Southeast Asia.  The abhorrent conditions of human trafficking and involuntary servitude are said to occur in the supply chains of Charoen Pokphand Foods, a Thailand-based shrimp supplier to global retailers, with annual sales of $33 billion.  While such a risk has been identified for years in private counsels from this corner, it has now made a big splash on the pages of one of the world’s most-read newspapers.  Businesses obtaining seafood products from the Pacific Rim should take renewed stock of their own due diligence and internal investigations efforts as regards identifying slavery and human trafficking among participants in their supply chains, if any.

On July 30, 2014, The Guardian reported that U.S. and British supermarket groups were in Thailand that same week to create a task force to tackle human trafficking and forced labor in the shrimp feed industry.  The three-day meeting was hosted by CP Foods, the world’s largest prawn farmer, which The Guardian had earlier found to be buying fishmeal from suppliers that own, operate or buy from boats manned with slave labor.  Among U.S. retailers, Whole Foods had already cancelled contracts with CP Foods, while Costco US was expected to attend the talks before deciding how to proceed.  International catering and food-service giant Sodexo was also likely to be there.

According to the same article, the aim of the meeting was to agree on the terms of an industry action group, which will work with CP Foods to establish a global benchmark in sustainable shrimp-feed production. It will also help the Thai government create a strategy to halt human trafficking and slave labor in the seafood supply chain.  To date, the results of that meeting and what steps toward achieving these goals have been taken are unknown.

The late-July report of this meeting by The Guardian was preceded by an earlier story on June 10, 2014, revealing the findings of its own investigation of the shrimp industry in Thailand.  It found that that:

“ . . . large numbers of men bought and sold like animals and held against their will on fishing boats off Thailand are integral to the production of prawns (commonly called shrimp in the US) sold in leading supermarkets around the world, including the top four global retailers: Walmart, Carrefour, Costco and Tesco.

The investigation found that the world’s largest prawn farmer [CP Foods] buys fishmeal, which it feeds to its farmed prawns, from some suppliers that own, operate or buy from fishing boats manned with slaves.

Men who have managed to escape from boats supplying CP Foods and other companies like it told the Guardian of horrific conditions, including 20-hour shifts, regular beatings, torture and execution-style killings. Some were at sea for years; some were regularly offered methamphetamines to keep them going. Some had seen fellow slaves murdered in front of them.

Fifteen migrant workers from Burma and Cambodia also told how they had been enslaved. They said they had paid brokers to help them find work in Thailand in factories or on building sites. But they had been sold instead to boat captains, sometimes for as little as £250.

‘I thought I was going to die,’ said Vuthy, a former monk from Cambodia who was sold from captain to captain. ‘They kept me chained up, they didn’t care about me or give me any food … They sold us like animals, but we are not animals – we are human beings.’

Another trafficking victim said he had seen as many as 20 fellow slaves killed in front of him, one of whom was tied, limb by limb, to the bows of four boats and pulled apart at sea.

‘We’d get beaten even if we worked hard,’ said another. ‘All the Burmese, [even] on all the other boats, were trafficked. There were so many of us [slaves] it would be impossible to count them all.’

CP Foods – a company with an annual turnover of $33bn (£20bn) that brands itself as ‘the kitchen of the world’ – sells its own-brand prawn feed to other farms, and supplies international supermarkets, as well as food manufacturers and food retailers, with frozen or cooked prawns and ready-made meals. It also sells raw prawn materials for food distributors.

In addition to Walmart, Carrefour, Costco and Tesco, the Guardian has identified Aldi, Morrison’s, the Co-operative and Iceland as customers of CP Foods. They all sell frozen or cooked prawns, or ready meals such as prawn stir fry, supplied by CP Foods and its subsidiaries. CP Foods admits that slave labour is part of its supply chain.

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The supply chain works in this way: Slave ships plying international waters off Thailand scoop up huge quantities of ‘trash fish’, infant or inedible fish. The Guardian traced this fish on landing to factories where it is ground down into fishmeal for onward sale to CP Foods. The company uses this fishmeal to feed its farmed prawns, which it then ships to international customers.”

In light of this investigation, not only should U.S. and supermarket chains elsewhere look to re-tool due diligence and internal investigations into their seafood supply chain, but so too should the restaurant industry.  This is particularly true for the casual dining chains that dominate much of the U.S. market.  One would have to think that not just every bag of bulk shrimp at Costco, but every Fillet-o-Fish from McDonald’s, runs the risk of having been caught, processed, flash-frozen, and/or shipped by workers held in involuntary servitude, if any of those functions occur in Southeast Asia.  The cost of doing a deep dive into those suppliers to make sure that is not the case pales in comparison to the costs of not doing so.

Amazon Should Break Out Shovels on In-App Sales

One can only guess that in advance of its being sued by the Federal Trade Commission, Amazon conducted an internal investigation into the alleged sales of its In-Apps to children without parental approval.  If not, it is certainly digging for the facts as it ramps up its defense to the injunctive relief, damages, and disgorgement  requested by the FTC in the United States District Court for the Western District of Washington.  Amazon’s supposed and last stop-gap solution to the problem – which wasn’t – is one place where the digging should be especially deep.

As reported last month by Joe Mont of Compliance Week, the government sued the online retailer for allegedly doing nothing to prevent millions of dollars in unauthorized In-App purchases by children despite internal warnings among Amazon employees as early as 2011 that allowing unlimited charges without any parental passwords was causing problems for many customers.  According to his story:

“The complaint alleges that Amazon’s setup allowed children . . . to spend unlimited amounts of money to pay for virtual items within the apps such as ‘coins,’ ‘stars,’ and ‘acorns’ without parental involvement or authorization. [It further] alleges that when Amazon introduced in-app (sic) charges to the Amazon Appstore in November 2011, there were no password requirements of any kind on in-app (sic) charges, including in kids’ games and other apps that appeal to children. Amazon pockets 30 percent of all in-app (sic) charges.

In March 2012, according to the complaint, Amazon updated its in-app (sic) charge system to require an account owner to enter a password only for individual in-app (sic) charges over $20. Amazon, however, continued to allow children to make an unlimited number of individual purchases of less than $20 without a parent’s approval. An Amazon employee noted at the time of the change that ‘it’s much easier to get upset about Amazon letting your child purchase a $99 product without any password protection than a $20 product,’ according to the complaint. In July 2012, internal emails again described consumer complaints about in-app (sic) charges as a ‘house on fire’ situation. ‘Even Amazon’s own employees recognized the serious problem its process created,’ FTC Chairman Edith Ramirez said in a statement.

 And then this, at Paragraph 21 of the Complaint:

 “Not until early 2013 did Amazon adjust its in-app (sic) charge framework to require password entry in connection with any other in-app charges. Even then, Amazon’s modifications took effect at different times for different device models and, in some instances, have operated in different ways for different apps and different account holders. The password prompts also function differently from the password prompt described in paragraph 20, in that completing the prompt “caches” (that is, stores) the password for a billing window ranging from fifteen minutes to an hour. The net result was that, unbeknownst to many consumers, Amazon sometimes would present account holders with a password prompt to confirm an in-app (sic) charge and sometimes would not.”

What this meant – as noted by CW – was that even when a parent was prompted for a password to authorize a single In-App charge made by a child, that one authorization often opened an undisclosed window of fifteen minutes to an hour during which the child could then make unlimited charges without further authorization.

This is where someone should be moving  a lot of dirt on behalf of Amazon, so as to explain these workings to a number of people, including its Board, FTC enforcers, and a prospective jury in on the West Coast full of parents and others who like kids and hate losing money.  Because, while the first two efforts by Amazon can be characterized as software design oversights, the allegation contained in Paragraph 21 looks more like an ingeniously-crafted component of a larger illicit scheme to continue to permit unauthorized purchases by children while – this time around – providing plausible deniability.  And that could prove very costly to Amazon in the end.

 

The Humphrey – Yu Verdicts and What They May Mean

Last Friday, the Shanghai No. 1 Intermediate Court found Briton Peter Humphrey and his American wife, Yu Yingzeng, guilty of illegally obtaining private information about Chinese citizens.  Humphrey’s company, ChinaWhys, was known to have done work for GlaxoSmithKline and it is assumed that his conviction and that of his wife was tied to work being done for the British pharmaceuticals giant, although that was never explicitly stated.  Whether it is material or not depends upon your perspective.

Initial reports on the arrest and detention of Humphrey and Yu just over a year ago were sketchy at best.  They painted a drab picture of a pair of westerners who had gotten caught buying information that they shouldn’t have.  Not much to see here, keep on moving people. Indeed, one long-time China handicapper expressed thoughts over late-night cocktails in Miami Beach as being a not-so-shocking example of Humphrey and his wife (whom he knew and had worked with) crossing the wrong people and paying the unfortunate price for it.

This evaluation – whether prescient or informed from the inside – seemed to be confirmed with later stories that spiced up the notion of a cross as the trial approached.  Indeed, as the trial drew near, it was learned that sex, lies, videotape, and family connections lay at the heart of Humphrey’s and Yu’s work.  BBC News China – among others – reported that:

“Early in 2013, an [anonymous] e-mail was sent to GSK’s London-based CEO Andrew Witty accusing GSK China’s general manager Mark Reilly of being behind systematic corruption in the company’s China operation.

A sex tape featuring Mr Reilly and his girlfriend was later also sent.

Mr Humphrey’s corporate investigations company, ChinaWhys, was asked to find out who had sent the email and how the video had been filmed.

GSK suspected a former senior staff member, [Vivian Shi,] said to have top-level political connections. [She is reported to have family at the top echelons of power in Shanghai.  GSK had tasked Mr. Humphrey with investigating her for possibly orchestrating a smear campaign against the company.]

In June, ChinaWhys delivered its report. Chinese authorities shortly afterwards opened a bribery investigation into GSK and then arrested Mr Humphrey and his wife.”

With these later-developing facts, the Humphrey – Yu prosecution and conviction last week certainly seemed to fit the simple revenge template.  If were as easy as that, then the lesson learned would be to tread lightly when doing an investigation or due diligence project in China.  But at least one author sees the Humphrey case not as an isolated instance of Shanghai vengeance realized, but as a symptom of a much larger political disease emanating from Beijing that not only continues to be a hazard for westerners working in-country, but also one that threatens to set China’s economic development tumbling backwards to the Mao era.

At Forbes, contributor Gordon C. Chang wrote:

“Everyone, however, links the Humphrey – Yu case to Glaxo. In the course of their work for the company the husband and wife investigated Vivian Shi, head of government affairs in China for Glaxo until she was fired in 2012 for submitting false expense reports. Shi, who denied the accusation, was the wrong person to cross. She is the daughter of a Shanghai government official and is known to b e well connected in the city. The criminal prosecution against the ChinaWhys principals, many suspect, is payback.

Whether or not those suspicions are correct, the case is a reminder that, despite more than three decades of economic reform and progress, foreigners remain very much at risk in the People’s Republic. Chinese leader Xi Jinping has presided over a period during which foreign companies have been under increasing attack by the central government, especially since July of last year. The essential problem up to now has been highly discriminatory enforcement of the law. As Time asked at the end of last month, ‘Is no famous foreign brand safe in China?’

The answer, as we now know, is no. Xi has essentially declared open season on outsiders, and there will be no early end to what is certainly an orchestrated campaign against them.

Unfortunately, the Humphrey – Yu case, which is shaking the foreign community in China, adds a critical obstacle for business there. The ChinaWhys firm had a multitude of multinational clients, and now China has criminalized its business. The official Xinhua News Agency reports that this is the first prosecution of foreigners for illegal investigation.

The case against the couple is an intensification of Beijing’s effort to undermine foreign competitors. ‘The verdict is the latest in a string of signals from Chinese authorities that suggest an increasing desire to control access to information, often in ways that limit the scope for foreign businesses to use it,’ noted The Wall Street Journal on Friday, after the announcement of the two convictions.

Another of those signals, according to the paper, is the central government’s persistent efforts to classify accounting data as “state secrets,” even data of companies listed abroad. Similarly, Beijing has been doing its best to make sure that foreign auditors no longer work in China for such companies.

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 Modern economies run on information. The conviction of Mr. Humphrey and Ms. Yu—and the torture and incarceration of Mr. Xue—means that China is condemning itself to a backwater of the global economy.

 China flourished when it opened up its economy after the isolationism of the Maoist decades. Now, however, Xi Jinping is reversing course. He often talks about reform but is in fact sponsoring regressive economic moves. Perhaps it is too early to say he has abandoned Deng Xiaoping’s transformational policies—encapsulated by the phrase “reform and opening up”—but he is cutting China off from the rest of the world.

 No country today can prosper for long by retreating from an increasingly globalized economy. Not surprisingly, foreigners are cooling on China recently. In the first half of this year, foreign direct investment increased only 2.2%. It will fall as multinationals begin to think through the meaning of Beijing’s assault on information.”

Whether the Humphrey – Yu prosecution is a one-time payback or something larger, the near-future result will be the same.  Investigators and due diligence professionals in China are going to tread very carefully in getting their information.  But if Chang is correct that a full-fledged war on western business is unfolding there – be reminded of the massive industrial espionage being conducted on American companies from People’s Liberation Army Building No. 61398 in Beijing – then internal investigations and due diligence may ultimately be grinding to a halt in China.

“Victim” Donks Ohio State Marching Band Investigation

The Ohio State University Marching Band – “The Best Damned Band in the Land”, as it is known – is caught in the midst of a scandal that has probably gone unnoticed in most other places.  After the release last month of a report into the “sexualized” character of the OSUMB that was determined to be violative of the school’s Sexual Harassment Policy 1.5 and Title IX, Director Jonathan Waters was fired.  In something that is rarely seen, one of the investigation’s interviewees and alleged victims spoke out against the investigation, the report, the black mark given the Marching Band, and the firing of Waters.

The Investigation Report into the Complaint against Jonathan Waters, Director of the OSU Marching Band was sparked by a complaint from the parent of a band member to Ohio State’s Office of University Compliance and Integrity.  The parent was “concerned that the Band’s culture was sexualized and that its members were made to swear secrecy oaths about objectionable traditions and customs.”  The parent requested – and got – an investigation.

Within the pages of the report, it is learned that the OSU band geeks (used here with affection) – like most other college kids – talk and joke about sex.  They annually march into the famed Horseshoe at midnight in their underwear as a right of passage; give each other bawdy, single- or double-entendre nicknames; harass each other; roughhouse and change clothes on event buses; and compose incredibly creative but obscene versions of alma maters and fight songs.  Think back to the Pi Delta Pi sisters serenading the Lambda, Lambda, Lambda nerds with “♫ Alpha Betas are okay, if you like sweat socks.  ♫ We prefer your high IQs to their . . . ” and you get the idea.

The band has such a gas with this stuff that even the OSUMB alumni are in on the act.   And, of course, Director Waters and his right hand men, Associate Director Christopher Hoch and Assistant Director Michael Smith, sort of ride shotgun over these shenanigans.  Some of these things they see and some they don’t, but the report makes clear that they know what the OSUMB is about when it’s not playing.  Unfortunately, it is about violations of a very serious school rule and federal law.

None of the foregoing tongue-in-cheekedness is meant to diminish the investigation. It was very capably done in-house and pursuant to the guidelines set forth by OSU’s Office for Civil Rights.  The documentation contained in its appendices is very good and its random-sampling interview strategy _ assuming that it was – a common audit practice.  Yet, according to one former OSUMB member, Jocelyn Smallwood a.k.a. “Donk”, the investigation is fatally flawed.  On her Facebook page, she wrote:

“I have spent a great amount of time the past few days weighing whether or not I should write to you. I ultimately chose to do so only because I felt my comments would add a unique and valuable perspective to the conversation regarding the recent dismissal of Jonathan Waters. Like several of my female colleagues in the band, my name was included in the 23-page report released last week. However, so far as I know, I was one of the few who were actually interviewed during the investigation. 

While I take issue with much of the report that was compiled by the university, my greatest concern was echoed recently by several of my female colleagues in the band. Many of us were surprised to find ourselves included in a list of “sexually explicit” nicknames. Even more surprising to me was that at no time during my interview can I remember being asked about the details of my nickname, the circumstances under which it was given to me, or, perhaps most important, my feelings about my nickname. While the authors of the report may feel confident in their ability to draw their own conclusions about the feelings, opinions and intentions of others without asking them, I would argue that in this case, their clairvoyance has failed them miserably. Thus, I feel it is my right and duty to clear up several issues about the fourth name listed in the report: Donk.

Donk is not a malicious or offensive nickname. Donk is a person. Donk is a five-year member of the band, a former i-dotter, and a two-time squad leader of KL-Row, which also happens to be a predominately male row. Donk is a daughter, sister, friend, a woman and, most importantly, an independent, clear-minded person. Donk is not a moniker that was placed upon me without my consent, and it is most certainly not something of which I am ashamed.

What angers me the most is that, in spite of my feelings, I along with several others on the list have been mischaracterized as victims of “sexual harassment” without being asked directly for our input. Never in my life have I felt uncomfortable being known as Donk. It has appeared on shirts, social media, in papers for classes; in the label I stuck in my band hat and on a piece of duct tape in my raincoat not because it is a joke, but because it is my name. It is who I am.

Although when I say ‘never in my life,’ what I really mean is never before last Thursday. I now find my nickname listed in myriad news reports as proof of the alleged horrible, sexually aggressive culture of the OSUMB. While I am just as disappointed in the media for not bothering to do their homework, I would hope that a report dealing with an issue as serious as terminating the employment of one of the university’s most visible, respected figures would have been undertaken with more care. In my five years in the band and since my graduation, I’ve discussed my nickname and where it came from with my friends, family, coworkers, bosses, alumni and random people passing me on the street. Odd then, that seemingly the only people who were uninterested in learning more about my nickname were those responsible for putting together a report about sexual harassment in the band.

But, at the center of this issue is an investigation that I feel was deeply flawed and executed with great carelessness and little concern for finding the truth. As someone with a deep understanding of the band, I would think that the hour I spent in the interview would have been used to gather the information I have about these issues and experiences. But as I recall, I was asked only a few general questions about the majority of the content in this report. Had you asked me, I could have told you that many of the examples in the report occurred long before Jonathan Waters was director. I could have told you that before we name rookies, we speak to each of them individually to ensure that nothing in their name touches upon any area they might find offensive. Had you bothered to ask, I could have told you that a large amount of the evidence on which the report relies is outdated or inaccurate. Or, perhaps, that is why they didn’t ask me?

I am well aware of the fact that the opinions of individuals often differ greatly. And I would guess that few people are making the argument that there is nothing in the culture of the band that needed to change. I am also certain that you have heard numerous examples of how the man you fired last week was the fiercest advocate for culture change in the band, joined in his efforts by Chris Hoch and Mike Smith and the majority of the band members. And had I been asked, I also could have offered numerous examples.

The truth is that this band makes strong women. It makes strong, smart, witty, confident and, therefore, beautiful women. As I have said before publicly, this band creates strong women because it treats us as equals. To make the band, individuals must be proficient in two areas: they must play well and march well. Gender, race, sexual orientation, religion, political view and socioeconomic status do not matter. In November, 2012, an African-American woman named Donk dotted-the-i against Michigan. It wasn’t because the men in my section decided to let me. It was because I worked hard and emerged on top. And on November 24th, when I realized my dream in front of more than 105,000 screaming fans, my fellow band members celebrated alongside me, not because I had broken a gender/racial barrier, but because we’re family and that’s what we do. Appropriately, last Thursday night, I once again found myself being supported by those same people. They are not nicknames on a list. They are not details in an investigation. They are not examples of harassment. They are my family. And the report does little justice to the truth that this band supports and nurtures women.

Please do not insult me as an individual by suggesting that I am so ignorant and so helpless that I somehow have managed to spend five years being consistently sexually harassed and not realize it. Do not treat my name as something that should be condemned when it is something I will continue to wear as a badge of pride.

There are negative things in our world—this is a fact of life. That does not mean that nothing can or should be done about them. However, it seems a shortsighted response to paint an entire organization with a broad brush when you only bothered to interview a handful of people about what has happened. The characterization of my name is simply one facet of this carelessness.

In closing, I still care deeply not only for the band, but for my university. That is why I write to you. The manner in which this report was put together is alarming. And if it is alarming to a twenty-three year old recent college graduate, I would hope that after hearing my story you as leaders, would, at the very least, look at this report and the manner in which it was produced with more scrutiny than you have up to the present time. Good management decisions must be based on accurate, well-researched, timely information. The report produced by the University’s compliance office, which served as the basis for the decision to fire Jonathan Waters, was none of those things.”

Smallwood’s missive is terrific – well thought out, well written, obviously passionate – but wrong. 

Despite her indictment of the investigation for allegedly interviewing too few people, talking to another one hundred or another one thousand people would not have changed the results, because the facts are not really in dispute.  And when Waters – himself an alumnus of the organization – admitted in varying degrees to not only observing and participating in the offending behavior as a student, but also as the OSUMB’s leader, his goose was cooked.  There is no such thing as being a little pregnant.

What Smallwood’s complaint really speaks to is the harshness of policies and codes that are rooted in zero tolerance.  Even if OSU investigators had interviewed all of the band’s 225 current members and all of its alums and together they unanimously said that they did not feel sexually harassed or subject to a harsh environment while in the Band, as long as one potential offended person is out there, the complained-of rules violations would have been and will be found to exist.

Despite being a political favorite, zero tolerance policies have a way of working harsh results, particularly on voluntary associations of seemingly like-minded people.  Being a very bright young graduate, Donk may want to challenge the wisdom of having rules that do this.

Time for FCPA-Style Due Diligence in Health Care Sector?

Due diligence investigations are warranted whenever, wherever businesses are caused to rely on third parties.  In the world of the Foreign Corrupt Practices Act, it has exploded into an industry unto itself thanks to ramped-up enforcement by the Department of Justice and the Securities and Exchange Commission.  Probes of potential suppliers, vendors, and partners can goes as wide and as deep as necessary to satisfy whomever or whatever is making the call, in order to ensure that those third parties are clean.  Perhaps some of that ought to be adopted in at least one domestic pursuit.

Margaret Scavotto, of Management Performance Associates, on its Breaking Compliance News Blog, recently wrote of an Iowa Nursing home that got dinged by the DOJ for the actions of a third party provider that it contracted with for patient services.  Paraphrasing the original DOJ release she noted that:

“The United States Department of Justice recently entered a $500,000 settlement with an Iowa skilled nursing facility, to resolve allegations that the SNF billed the government for improper therapy provided by a third party therapy services contractor.

The Medicare claims at issue involved therapy services that ‘were not justified by…residents’ conditions’ The government also asserted that ‘by including costs for the therapy services in cost reports submitted to the Medicaid program, [the skilled nursing facility] erroneously submitted inflated cost reports.’” [Emphasis original.]

Her ensuing analysis indicates that:

“This is an eye-opening settlement for nursing homes and therapy companies. Nursing homes often believe that if the government finds false claims arising out of unnecessary therapy, the therapy company will be responsible (after all, they provided the services). Likewise, therapy companies often believe the nursing home will be responsible (after all, the SNF is submitting the bills under its Medicare number). We have known for some time that the government holds therapy companies responsible.  Now we know SNFs will be held accountable, too.” [Emphasis added.]

What then, to do?

Certainly, more careful oversight of providers and billing practices are a large part of the solution.  And this ought to entail random audits and similar samplings and reviews to ensure that patients both require and are getting the care for which they are prescribed.  But maybe borrowing a bit from the FCPA crime-fighter’s tool belt might not be a bad idea.  Advance, boots-on-the-ground due diligence in the area of third-party medical providers might not be too bad an idea for skilled nursing facilities and similar institutions that outsource care for which they bill or re-bill the government and private insurance companies.

And boots on the ground is probably the key in all of this.

Surely, SNFs or consortiums of SNFs could hire due diligence vendors to provide them with laundry lists of third party providers who have run afoul of the government or been sued to recover overpayments by private insurance carriers.  But to take one look at the news releases at Stop Medicare Fraud is to quickly discover that shady providers change names and morph into other entities with the same frequency that most people change shirts.

Winnowing the good from the bad in the giant field of ever-changing third-party providers should require some good old gum-shoeing in order to be truly effective.  That may not be happy news to the business units of SNFs, but the cost ought to be far cheaper that the penalties paid if the unplanned-for happens.

GM Investigation Misses Chance to Size Up Milliken for Haircut

Because analysts can never get enough . . .

After the initial General Motors post in this corner, a loyal reader and former GC-type expressed a bit of disappointment that it did not tear into the General Counsel’s office like Mr. Plow on a snow-drifted highway. While it’s not the aim of this forum to take scalps, they do occasionally appear as a by-product of commentary on the targets, methodologies, and scopes of internal probes.  This post takes the initial review of the GM internal investigation to the next step and gives a closer haircut to Michael Milliken without deviating from the purpose of this space.

The premise behind The Most Disturbing Facet of GM’s Ignitiongate was that it is inconceivable that worker bees, supervisors, and senior executives in any silo at GM – research and development, product testing, customer service, legal – could know that consumers had perished in their vehicles because of unknown causes and not considered whatever the issue was a safety risk.  This especially includes the Law Department.

Recall that, according to Page 103 of the Valukas Report, awareness of the fatalities associated with the ignition switch failures hit GM legal when wrongful death litigation landed on its desks in 2006.  At Page 104, it is made known that the lawyers in charge of safety issues and those tasked with product litigation both had reporting tie-ins at the General Counsel of GM North America.   These divisions of labor were headed by top-notch in-house attorneys with a crossover of information to ensure that safety lawyers knew of litigation developments and that litigators knew of issues coming down the safety pike.

When it came to resolving lawsuits, GM had three tiers of settlement approval as described on Page 106, et seq. Cases valued at less than $100,000 could be settled on the authority of product liability staff attorneys.  Those from $100,000 to $1.5 million (later $2 million) had to be approved by “The Roundtable”, a group of GM lawyers that was led by its Litigation Practice Area Manager.  Settlement of cases valued between $2 million and $5 million had to be approved by the Settlement Review Committee, another group of GM lawyers that included the GC of North America and GM’s Counsel for Global Engineering Organization.  Various ignition defect cases passed through each of these levels of review.

That’s a lot of supposedly smart people – lawyers – at Ground Zero and yet nobody sought or felt compelled to ring the alarm that an obvious safety issue of some sort was involved when GM customers were dying in GM vehicles under questionable Or at least to pass it up the chain of command to a C-suite that should know to do the right thing.

As the loyal reader referenced above so eloquently pointed out:

“GC 101: A general counsel that claims “I never knew” has failed, miserably.  As a GC, you make it clear to your people that not sharing critical information will shorten their careers dramatically.  In addition, you develop redundant sources so that if one of your subordinates does not follow Dictate #1 above, you find out anyway.  And then you find out why you weren’t told.  I understand that there has been a lot going on at GM, but not knowing information of this magnitude is simply inexcusable.  You either address the span of control or bandwidth or “tell me the bad news or else” issue, whatever you want to call it, or you need more or different warm bodies”.

Dale Buss over at Forbes detailed others seeing it the same way in “Barra is Protecting GM Top Lawyer Milliken – But Should She Be?” where he wrote:

“Mary Barra may have developed a blind spot with her resolute defense of General Motors chief legal counsel in the wake of Michael Millikin’s suspect role in the company’s handling of safety recalls as GM’s approach became sclerotic and even irresponsible over the years.

That’s the view of some expert observers with legal and GM backgrounds. They believe Barra should be nudging Millikin to fall on his sword — into resignation or “retirement” — instead of stoutly defending a performance by her 65-year-old chief counsel that, at best, suggested awful things happening on his watch and, at worst, may have made him at least negligent  in some of the most inexcusable aspects of the company’s continuing recall crisis.

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And Sen. Dean Heller (R., Nev.) told The Wall Street Journal: “I was surprised at the bear hug that [Barra] gave Millikin in that hearing. Even if he didn’t know, he had an obligation to know.” Sen. Richard Blumenthal (D., Conn.) told the newspaper that Barra has “a blind spot” in regard to Millikin.

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[An] attorney with long ties to GM, added that “it looks like the secretive nature of the legal department played a big role in the delay. Even if [Millikin] didn’t know, he should have known. He was in charge of a department that screwed up.”

And that’s but one of a number or avenues that this internal investigation should have driven down to its very end:  What did Michael Milliken know and when did he know it?  Or, if he didn’t know anything about the mystery crashes and mystery deaths, why not?

[Thanks, BW.]

Guest Post with Thoughts on “GM’s Ignitiongate”

Like the child of a parent wary of strangers, the IIB has never been allowed to wander off with a guest post.  But Lisa McClennon, a global enforcement and compliance executive with a large, multi-national organization and an impressive resume from the trenches, penned a swift response to  “The Most Disturbing Facet of GM’s Ignitiongate” that pulled together some excellent thoughts that are surely equal to anything that has previously appeared in this space.  Gratefully, here they are:

When General Motors began its internal review of the issue, there was likely much pressure felt by the review team.  Typically, any company that manufacturers products that pose a consumer health or safety risk must prove that the products work before final installation approval for retail use is given.  It sounds like there was a paradigm shift when the engineers were sent out on this inquiry.  They may have also been placed under tremendous pressure to make sure GM didn’t do anything wrong.  I am curious to know it they were told to duplicate the problem and prove that the part doesn’t work. In their testing, the switch probably functioned as designed exponentially more times than not, allowing someone to explain away the problem as “customer convenience.”

It is a shame that more was not learned from the Challenger disaster where NASA placed its contractor in the same adjusted-perspective position. Then, contrast that event to the Tylenol tampering situation of a few years ago.  NASA reversed the paradigm on its contractor and demanded proof that the O-rings would fail, while Johnson & Johnson foreswore cost concerns and immediately chose consumer health and safety with few questions. NASA experienced a catastrophic failure that caused seven people to die in a 71-second event that no one has forgotten. J&J saw seven people die in a week and ordered a total recall of all 31 billion bottles of its children’s caplets, an event that hardly anyone remembers.

A pre-production discovery of the defect, an admission that “a business decision” was made to make cars available on the retail market, and six fatalities later, and GM labeled the situation a “customer convenience” issue. As a result, GM will justly pay to make this situation as right as can be for a long time; a short and long term hit to their bottom line and reputation. An ethics or optics review would have made a difference. If the company had unnecessarily required an evidence examination or an impact study, its outcome would not have changed the review results. This is a common occurrence in companies that have a “to market at all cost”, “everything is blissful with blinders on”, or “the duck that quacks gets shot” culture.

Choosing optics over evidence can be a very conservative approach at times but is almost always beneficial to the organization. In this type of situation, companies are sometimes blinded by the benefit of the transaction and unable to see the risks to the relationships. Unfortunately, the cost/benefit analysis was measured against the bottom line in an environment where there was likely strong institutional inertia for GM to just be right. A risk assessment of the potential consumer health and safety concerns through the lens of the just and righteous thing to do to prevent loss of life may have pinched in the moment but likely would have lessened any long term bottom line impact.  In those instances, it is up to the legal department and those with a conscience to get the attention of someone who can make a change and a difference.

 

 

The Most Disturbing Facet of GM’s Ignitiongate

There are a number of posts that will likely be inspired by General Motors’ Ignitiongate probe led by Anton Valukas of Jenner Block.  But the one that just keeps bubbling to the forefront is this:  that the ignition malfunctions at the heart of this matter were not deemed safety issues by the auto giant and that the investigation report does not run down and document – or explain why it hasn’t – a fatal decision that delayed the eventual implementation of a long-overdue recall.

For those who have been in a coma for the past six months, the Ignitiongate problem arose in 2002, when a GM engineer approved and ignition switch that fell below the company’s own performance standards for the part.  Essentially, the ignition switches on the steering column of the Chevrolet Cobalt and other GM models that shared this common part were loose enough so as to allow the switch to move out of the “run” position and shut the car off while still in motion.

While admittedly only from a former shade-tree mechanic’s vantage point, think of it like this:

In almost every vehicle, a key goes into the ignition switch and is turned forward in order to start the car or truck.  Normally, there is a small amount of resistance built into the switch (presumably to defeat accidental starts) that has to be overcome by pushing the switch plate inward and forward at the same time in order to get the key into the “run” position.  In order to turn the vehicle off, a similar amount of resistance must be overcome (presumably to defeat accidental shut-offs).

The critical problem for GM in this instance was that the original ignition switch put into the vehicle models now subject to recall did not meet the tolerance level that would prevent accidental shutoffs.  In other words, the switches could slide from the “run” position into the “off” without overcoming the normal amount of resistance.  This shutting off of the vehicle – termed a “moving stall” by company engineers – could and did occur in a number of instances such as when a vehicle hit bumps in the road; when a driver’s leg bumped his or her keys while they were in the ignition; or even when the weight of a keychain jangled it out of position.

Characteristic of moving stalls was the loss of power to, and control of, some of the most critical systems of the vehicle.  It doesn’t take a mechanical engineering degree to comprehend that if and when a vehicle’s engine is shut down, not only is the power train affected.  The other vehicle systems that depend upon the engine to provide their power through the its belt configuration also lose functionality.  As one might expect, this would include the power steering and braking systems which transition from being operated with ease to requiring the strength of Hercules within seconds of shut-off.  Post-mortem investigations of crashed vehicles indicated that the air-bag system also shut down or off when moving stalls occurred.

In the wake of two moving stalls being reported in Summer/Fall, 2004, GM assigned engineers and quality assurance committees to look into the problem.  At that juncture, its people had to prioritize the nature of the problem on a scale of one (most serious) to four (least serious).  They called the moving stalls problem a “customer convenience issue” and not a safety issue and place it squarely at level three on the severity scale referenced above.  Had it been designated a safety issue, this would have triggered a reporting of the problem to the National Transportation Highway Safety Administration pursuant to the Transportation Recall, Enhancement, Accountability, and Documentation Act, 49 U.S.C. 30101-30170, and perhaps a recall of vehicle containing the faulty ignition switch.  This would have certainly lit a fire under GM to find and fix the problem or be hit hard in the pocketbook.  It also would have likely pulled defective cars off the road before fatalities started being seen.

As can be seen throughout the Valukas Report, the “customer convenience” label and low priority score dogged the ignition switch problem for an intolerable amount of time.  It also slowed to a crawl the solving of its riddle and the generation of a recall until early 2014.

The glaring question in all of this is:

What GM employee or committee in a sane and rational state of mind would label its unexpected shut-off while in motion a CONVENIENCE issue?  Which of them can – with a straight face – picture themselves driving down I-75 at 70 miles per hour only to lose steering, braking, the defroster’s blower motor, and the air bags, only to think, “Well, that’s inconvenient!”

Except it isn’t; it’s life and death and that makes it a SAFETY issue.

And this is certainly one place where the Valukas Report falls short.  With multiple individuals, committees, and departments dealing with deaths resulting from crashes involving Cobalts and defective ignition switches, it is inconceivable that there was not discussion of the problem among all of these personnel.  It is equally inconceivable that there was no discussion of the “convenience” versus “safety” determination in advance of it being made and in retrospect, particularly as people were dying in the wake of moving stalls.

So where are the e-mails referencing this critical decision and the undoubted revisiting of this issue at later dates and when the bodies began to pile up?

The Report concentrates heavily on GM’s lawyers and what they did do, could have done, and should do in the future.  Lawyers worth their salt are worrisome little creatures that ask a lot of questions and muse about “what ifs” ad nauseum.  In 2012, one of GM’s in-house attorneys wondered if this weren’t a safety issue and that a recall might be the solution.  Odds are others voiced the same concerns throughout the years – not just in Legal, but elsewhere – and that there are e-mails, memoranda, and correspondence to this effect somewhere in the halls or on the servers of GM.

The “convenience” over “safety” call was not only critical, but ultimately fatal to some GM customers.  Unless the automaker employed zombies, people within the company had to have talked about it and revisited that topic for years.  The investigators owed it to Mary Barra and the Board to determine who made that call, who knew about it and when – in Engineering, in Legal, in the business unit, and in the C-suite – and to produce documentary evidence to that effect or explain why there was none.

Bridgegate and the Work Product Doctrine

The ink was not yet dry on Gibson Dunn’s Bridgegate report, when New Jersey Senate Democrats began demanding access to the law firm’s file on the matter. The preceding sentence should have raised eyebrows among readers and had them uttering the term “work product” in exited tones. Thus, despite being out of the news cycle for some time now, the Bridgegate investigation presents a teachable moment in understanding why that protection might or might not apply.

In the immediate aftermath of the report’s release – whose 360 pages were quickly dismissed by state Democrats as “a whitewash – a top New Jersey legislator vowed to subpoena Governor Chris Christie’s office or Gibson Dunn if documents that supported the review were not handed over in short order. Assemblyman John Wisniewski, the co-chairman of the investigative committee, said at the time that the panel’s attorney, Reid Schar, was in active talks to obtain transcripts or recordings of the 70 interviews conducted by Gibson Dunn as part of its investigation.

As reported by capitalnewyork.com:

“Wisniewski said it was crucial the legislative committee know what was said in those interviews, which Mastro used to support much of the narrative presented in his report.

‘Those 70 individuals are not footnoted, nor are any summaries, transcripts, or documents related to those interviews made available,’ the Democratic lawmaker said of the report during a press conference in Trenton, where he was joined by the other chair, Democrat state senator Loretta Weinberg. ‘We’ve instructed our counsel to seek them out, either from Gibson Dunn or the governor’s office. We also gave a firm deadline, after which we will avail ourselves of the methods we have assigned to us by the resolution to compel production.’”

Toward that same end, Reuters reported that

“’We instructed our counsel to seek them out from either Gibson Dunn or the governor’s office,’ Wisniewski told reporters after a closed-door hearing on the matter by the committee leading the probe. ‘The ultimate tool the committee has is the subpoena authority which would compel the production of documents.’

In both the capitalnewyork and Reuters stories, as well as one that ran in the ABA Journal, the materials that lawmakers sought were described as “transcripts” and whether or not that is what they actually are will be critical to resolving the issue of legislators gaining or not gaining access to them.

At a very basic level, the “work product doctrine” protects the thoughts, notes, impressions, and strategies of attorneys as they work up a case for trial or other dispute resolution or administrative alternatives. It is safeguarded so as to keep lawyers from being compelled to tip their hands and show their plans of attack to opposing counsel.

“Transcripts” are not these types of materials. Rather, they are documentary evidence that, however created, are discoverable by opposing and outside parties. It matters not that they were created after the trigger event to which they speak or that they were created by or at the direction of lawyers. Nor does it matter if they were committed to videotape, audiotape, or simple paper. They are witness statements and as such are expectedly subject to discovery, subpoena, and other means of access.

It is interesting that the ABA Journal reported:

“Wisniewksi told Bloomberg that ‘whatever is in the notes should be fair game.’

If Gibson Dunn claims the notes are privileged communications or attorney work product, Weinberg told Bloomberg, ‘then the public cannot draw any conclusions that this report was done objectively’”

If what is sought by New Jersey legislators actually turns out to be Gibson Dunn notes – summaries of what witnesses said, descriptions of how they said it, and/or the related thoughts and ideas of the lawyers conducting the Bridgegate interviews – then the Wisniewski quote about these materials being fair game is likely wrong. They would customarily be considered as work product and protected, as described above.

Most current and former federal and many current and former state law enforcement officers have been trained to take annotated notes of the statements witnesses make and not transcribe what they say, precisely to avoid intentionally or unintentionally creating new documentary evidence. And although an internal investigation client can specify to the contrary and request transcription of witness statements, many – if not most – do not, in order to avail themselves of the protection offered by the work-product doctrine.

Patton Boggs with Chance to Set Self-Examination Trend

Law giant Patton Boggs took it on the chin at the end of last week, when word leaked out that it struck a deal to settle fraud claims brought against it by Chevron at the price of $15 million. As determined by a federal judge in New York, the firm picked the wrong Ecuadoran horse to hitch its wagon to and will pay the price for that. Patton Boggs – whose services include government investigations and white collar defense – might want to think about turning that practice group loose on the larger firm, in order to get out in front of any disciplinary inquiry that might be in the offing somewhere.

In 2010, Patton Boggs jumped onto a train of lawyers, law firms, and litigation funding groups that were involved in litigation in Ecuador against oil giant Chevron. In so doing, it joined forces with New York lawyer Steven Donziger, who spearheaded a case on behalf of Ecuadorans from the country’s Lago Agrio region that claimed they were affected by toxic sludge produced by Chevron. In 2011, the plaintiffs won a widely-reported $9.5 billion verdict against the oil producer in an Ecuadoran court.

Patton Boggs’ role was to help the plaintiffs draft a post-trial brief on the effects of Chevron’s toxic remains and to advise plaintiffs on their efforts to enforce the immense judgment in various parts of the world. It was later learned that the law firm’s compensation package for its services included up to a five percent (5%) stake – potentially as much as $475 million – in the judgment. The problem was that Chevron did not take the verdict laying down and immediately began to fight to overturn the verdict or otherwise check its collectability.

About the same time as Patton Boggs had come on board with Donziger and the Ecuadorans, the oil company hired a Gibson, Dunn & Crutcher team that knew how to ferret out bad actors. It was led by Randy Mastro, who was last seen in this corner captaining the “Bridgegate” investigation of the New Jersey governor, Chris Christie.

In 2011, Chevron commenced litigation against Patton Boggs sounding in fraud and simultaneously asserted racketeering claims against Donziger. The crux of these cases was that the $9.5 billion Ecuadoran judgment was obtained through bribery, collusion, and misrepresentations to Ecuadoran judges.

In reaching a decision on that issue, CNNMoney reported that:

“[Southern District of New York] Judge Lewis Kaplan ruled in March that Donziger had committed extortion, mail fraud, wire fraud, bribery, obstruction of justice, witness tampering, money laundering, and Foreign Corrupt Practices Act violations in the course of winning the $9.5 billion judgment, and that the entire 188-page Ecuadorian (sic) judgment had been secretly ghostwritten by the plaintiffs team – an accommodation achieved by its having promised the presiding judge $500,000 from any eventual recovery. Kaplan issued an order barring Donziger and his associates from attempting to profit from the case in any way.”

The New York Law Journal reported it this way:

“’The decision in the Lago Agrio case was obtained by corrupt means,’ the judge said.

Kaplan documented the global litigation strategy employed by Donziger and the entry of Patton Boggs into the case both as Donziger’s counterweight to Gibson Dunn and as a means for Donziger to obtain litigation funding.

Patton Boggs, led by [partner James E.] Tyrrell, [Jr.], authored the so-called ‘Invictus’ memo, which laid out a strategy of maximum pressure on Chevron by filing attachment actions in amenable jurisdictions, including those countries where the powerhouse lobbying firm could use its extensive contacts to work its influence.

In a separate lawsuit in 2012, Patton Boggs sued Chevron for execution of a $21.8 million bond, attorney fees, malicious prosecution and unjust enrichment for claims Chevron made against the firm.

In that lawsuit, Kaplan allowed Chevron in late March 2014 to pursue counterclaims against the firm that its lawyers made misrepresentations to Ecuadorian (sic) judges and engaged in other misconduct while attempting to enforce the $9.5 billion environmental judgment.

Shortly afterward, Patton Boggs retained Elkan Abramowitz, a partner at Morvillo Abramowitz Grand Iason & Anello. In late April, Kaplan dismissed all of Patton Boggs’ claims against Chevron.”

Seemingly reading the handwriting on the wall, Patton Boggs elected to settle with Chevron. In the settlement agreement that was made public last Wednesday, the firm agreed to withdraw as counsel in any litigation against Chevron related to the Ecuadoran case; pay the oil giant $15 million and assign to Chevron any money to which it would be entitled from representing the Ecuadorans; and help Chevron with discovery in continuing litigation against other parties. Additionally and in a rare move, Patton Boggs also publicly admitted regret for its role in the case. In turn, Chevron agreed to release any claims against the legal heavyweight and to a dismissal of the litigation in the Southern District.

Is this ugly episode over for Patton Boggs? One would think not. With domestic offices in five states and the District of Columbia, there ought to be one or more disciplinary inquiries are in the pipeline for individual attorneys involved in the Ecuadoran litigation or the firm as a whole.

Colleagues Donna Boehme and Joe Murphy like to point out that law firms – organizations like any other under the USSG – ought to not only talk the talk, but walk the walk and have their own robust Compliance functions, but frequently don’t. While the Patton Boggs website does not list such a department, it does boast a 54-lawyer strong Government Investigations and White Collar Defense practice group that could help it get bonus points for cooperation in any coming disciplinary inquiry by launching an internal probe of the firm’s involvement in the Ecuadoran litigation. Or it could make the more credible choice of engaging an outside law firm to do so.