Archive for the ‘fraud’ Category
It’s a quality control problem at best, and outright fraud at worst.
A recent study by researchers at the University of Guelph used genetic analysis to study a range of commercial herbal remedies and found a shocking disparity between what was on the label and what’s actually in the bottle.
According to the Vancouver Sun, the researchers looked at 44 herbal products sold by 12 companies, using DNA ‘barcode testing’ to determine what plant species were in the bottle.
The result: some products contained other generally inert species of plants (for example wheat, to which some people are allergic, and rice, to which some people are allergic), without those ingredients being listed on the label. Other products were adulterated with potentially toxic plants like St. John’s wort or senna. Others simply contained none of the active ingredient they were supposed to contain. And yet these products are commercially available at a major pharmacy chain near you.
The study didn’t name names — the study was effectively about quality control within the industry, rather than about naming-and-shaming particular companies. But it’s a damning indictment for the industry quite generally. (Just two companies among the 12 in the study sold products that were just what they said they were.)
Of course, many readers will know that this is not the first reason we’ve had to doubt the integrity of the herbal remedy industry, or the ‘natural’ health product industry more generally. As others have written elsewhere (including pharmacists with the scientific and critical-thinking chops to know the difference), Canada’s regulations regarding natural health products leave much to be desired.
But it’s nothing to laugh about. Unlike homeopathic remedies, which (unless adulterated) generally contain no active ingredients at all, herbal remedies can have actual effects, though those effects may not live up to the claims implied by their labels. Herbal remedies, while under-regulated, can at least have real biological effects. That’s a source of pride for makers of herbals, situated as they are within an alternative-medicine industry that is rife with outright fraud and delusion.
But it also means that the honest bottlers of herbal remedies should be at the front of the line, lobbying government hard for stricter regulations. Perhaps even more crucially they should be doing their best to convince the major chains that there’s a difference between them and the companies whose products failed the Guelph study so miserably. In the end, it’s as much an ethical matter as a matter of self-interest. The public deserves to be better served, and who better than those within the industry itself to make sure that it happens?
What is it that justifies the record-breaking $92.8m fine slapped on Raj Rajaratnam by the US Securities and Exchange Commission?
I’m not posing this question skeptically. That is, I don’t particularly doubt the fairness of the fine. But it’s still useful to ask what reasons lie behind particular instances of punishment, particularly when those punishments are record-breakers like this one.
It’s worth noting that Rajaratnam is also going to jail, as a result of a separate criminal proceeding related to the same wrongdoing. But let’s focus just on the monetary judgement issued as a result of the SEC’s civil case. There are at least 4 possible justifications for punishment by means of a fine.
1) Deterrence. Sometimes we punish in order to make the offender less likely to re-offend, or to set an example for others who might otherwise have been tempted to commit similar crimes.
2) Restoration. Sometimes a financial penalty can be used to “make whole” the parties harmed by the wrongdoer. This, of course, would require that (some of) the fine actually be given to those who lost out due to Rajaratnam’s hijinks. As far as I know, that’s not going to happen. But then, there’s a sense in which society as a whole loses out when someone violates market norms as aggressively as Rajaratnam did. So maybe American society is the ‘victim,’ here, and is being compensated through its representative, the SEC.
3) Retribution. The fine might just amount to imposing pain on a roughly eye-for-an-eye basis. From this kind of point of view, the goal isn’t to achieve any particular outcomes (like, say, deterring wrongdoing) but rather just to ‘get even’ with the wrongdoer. Retribution is rooted in some pretty primitive (and, frankly, ugly) emotions, but it certainly has its appeal and plenty of defenders.
4) Denunciation. Closely related to retribution, denunciation is essentially the act of saying “No!” in response to crime. From this point of view, a big fine is a way of saying, loud and clear, that the kind of behaviour in which Rajaratnam engaged is simply not OK in our society.
What does the SEC say?
“The penalty imposed today reflects the historic proportions of Raj Rajaratnam’s illegal conduct and its impact on the integrity of our markets,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.
OK, that helps. But let’s get it from the horse’s mouth. Let’s look at the words of the judge. According to Judge Jed S Rakoff,
“S.E.C. civil penalties, most especially in a case involving such lucrative misconduct as insider trading, are designed, most importantly, to make such unlawful trading a money-losing proposition not just for this defendant, but for all who would consider it.” He added that it was a warning that, if caught, “you are going to pay severely in monetary terms.”
So there you have it. The rationale behind the historic fine is deterrence. The fine was a warning to others. Of course, the fact that deterrence was the goal doesn’t mean that the fine is actually going to deter anything, or that the outsized fine is going to be more effective in that regard than a more modest fine would have been. Does anyone seriously think that a $92.8m fine is going to work where a $50m fine would not have?
But anyway, the problem here is liable to be the same as that faced in trying to deter street crime, which is that no one expects to get caught. That’s likely to be doubly true of a man like Rajaratnam. After all, he was a Wall Street titan, a self-made billionaire. He was — to steal a phrase from Enron’s Jeff Skilling — the ‘smartest guy in the room.’ How could a man like that even imagine being caught by the mere mortals at the SEC and FBI? The result is that deterrence may well be futile. So what we really need is for our markets and regulatory agencies to be designed with the full expectation that, every once in a while there’s going to be a Raj Rajaratnam. We need institutions to put safeguards in place, precisely to deal with the inevitable lapses in conscience and lapses in our belief in our own fallibility.
Stem cell science is pretty sexy. And as the saying goes, “sex sells.” And if something sells, someone is liable to make a buck off it, whether it’s right to do so or not.
See this opinion piece (in The Scientist) by Zubin Master and David B. Resnik: Reforming Stem Cell Tourism.
As with many new areas of technological advancements, stem cell research has received its fair share of hype. Though much of the excitement is warranted, and the potential of stem cells promising, many have used that hype for their own monetary gain. … Young and elderly patients have died from receiving illegitimate stem cell treatments; others have developed tumors following stem cell transplantations….
Master and Resnik point to the need for patient education, and to the limits of international guidelines, but their main focus is on the ethical responsibilities of scientists — including the responsibility not to cooperate in various indirect ways with unscrupulous colleagues. (It is very, very hard to do clinical science in a vacuum, and so isolating unscrupulous scientists may be one way to put them out of business.)
But it’s important to point out that this is as much a story of business ethics as it is of scientific ethics. The unscrupulous individuals preying upon the sick aren’t doing it for free. What these clinics are doing is committing fraud, and endangering their customers in the process.
Now there’s nothing ethically subtle about that. You don’t need a Ph.D. in philosophy to know that fraud is bad. But there’s another, subtler, issue here, namely an underlying theme about the general lack of scientific literacy on the part of consumers and the ability of business to use it to their advantage. Companies of all kinds can do a lot of good in the world by promoting scientific literacy, and by being scrupulously careful about having the facts straight when they present their products to consumers and tell them, “this works.”
Now of course, we’re never going to prevent such behaviour entirely. As long as there are desperate people in the world, there will be snake-oil salesmen eager to make a buck from their misery. But as Master and Resnik suggest, that doesn’t mean we shouldn’t try.
Back in February I blogged about Russian Business Ethics, and about the way that watching a developing economy helps us see the significance of ethics in the functioning of any economy. If you want to understand the role of honesty, trust, and transparency in a market, you just need to look at a society experiencing a severe deficit of those things.
Here’s more in a similar vein, by Sergei L. Loiko, for the LA Times: Taking on Russian corruption
Moscow lawyer and blogger Alexei Navalny has been singlehandedly taking on Russia’s state-controlled energy giants, accusing them of large-scale embezzlement and corruption….
It’s perhaps worth pointing out that there really is no ethical debate over corruption: there is no pro-corruption case to be made. No one is in favour of corruption, generally — though of course the corrupt are in favour of those instances of corruption that help them. There just is no systemic upside to bribery, embezzlement, and unremediated conflict of interest. But this fact sometimes go unnoticed when people lump bribery, for example, in with various other dubious practices that North American companies might engage in overseas. I recently had a senior academic suggest to me, in the context of a discussion of labour standards, that third-world sweatshops are just another money-grubbing technique that corporations use whenever they can get away with it — just like, you know, bribery. But there is an important distinction to be made there: sweatshops may sometimes play the role of unfortunate-but-necessary engine of economic growth. Bribery is just a drag on an economy. As seen by competing businesses, it’s a zero-sum game: either my bribe works or yours does. From a social point of view, it results in misallocation of resources: contracts go not to the most efficient producer, but to the producer that excels at the bribery game. This is another example of why it’s so important, in our normative evaluation of business practices, to maintain a mental distinction between things that are unfortunate, and things that are wrong.
Is it ethical for a business to profit from its customers’ false beliefs? Or, more to the point, is it ethical to profit from your customers’ beliefs when you think those beliefs are false? What if you encourage those beliefs?
Case in point: a number of businesses have sprung up to take advantage of the fact that a number of fundamentalist Christians believe that May 21, 2011 (i.e., tomorrow) is the day on which “The Rapture” will happen, which will involve the return to earth of Jesus Christ, the rescue of believers, and the start of a process culminating in the destruction of the world in October. Enter the profit-seeking atheists. Eternal Earth-Bound Pets, for example, will guarantee (for just $135) to come to a believer’s house, post-rapture, to rescue their pets. Salvation, after all, is for human believers only, so the faithful “know” that atheists and animals will be left behind. (For more details, and more examples, see this item from ABC News: May 21, 2011: Profiting on Doomsday?)
Profiting from this particular set of false (i.e., unsupported) beliefs seems, frankly, pretty innocuous. Those who hold such beliefs are few, and are liable to be mocked by the vast majority of Christians, who scoff at the idea that the exact date of the Rapture can be determined so precisely. When the Rapture ends up not happening (and I realize I’m going out on a limb, there) those who ponied up for the “service” offered by Eternal Earth-Bound Pets will be out $135, but other than that they’ll be no worse for wear. But what about other examples?
Let’s start with a fictional example to test our intuitions. What if I find out that you believe, for whatever reason, and despite the fact that you live far from any indigenous populations of elephants, that your rose garden is in imminent danger of being trampled by elephants. And let’s say you also believe (for whatever reason) that elephants are deterred by he sound of the revving of a Porsche engine. Am I justified in selling you a Porsche that you do not otherwise need, and that perhaps you cannot truly afford? Would that be predatory? Your belief, here, is clearly a crazy belief, and my profiting from your delusion seems not-quite-right. But then, as far as you’re concerned, I’m genuinely helping you. On the other hand, what if the reason you have that delusional belief in the first place is that I’ve convinced you of it?
Next, let’s get back to real-life examples. But let’s look at one that doesn’t revolve around a single event, like Rapture insurance does. What about, for example, selling homeopathy? Now, it’s one thing for a homeopath to prescribe and sell homeopathic treatments. After all, the homeopath presumably believes that such remedies work, in spite of the lack of evidence for that belief. Now, that belief itself might be culpable — if you’re going to sell a product, then ethically you ought to do what you can to make sure it really works — but at least the homeopath is selling in good (if misguided) faith. What about when licensed Pharmacists, people with the training to know perfectly well that homeopathic treatments cannot possibly work, sell them? That happens all the time. Shoppers Drug Mart, for example — Canada’s largest pharmacy chain — sells homeopathic treatments, and all the franchisees of that chain are required to be licensed Pharmacists. That is, they are people whose scientific training tells them that such remedies have zero scientific credibility. So they, too, are profiting from their customers’ false* beliefs — beliefs that they, the sellers, know to be false. Of course, the difference between selling homeopathy and selling Rapture insurance is that in the case of homeopathy, people’s lives really might be at stake.
Information is crucial to the efficient operation of a free market. Asymmetries of information constitute an entire category of situations in which economists will tell you market failures are liable to occur. Knowledge, alas, can never be perfect. So what we instead insist on is that transactions at least be made in good faith. It’s clear that that means the consumer needs to have enough information to know that the product she is about to buy will satisfy her desires; what’s less clear is whether the consumer must also know enough to know whether the product will satisfy her needs.
*Note: some of you may want to quibble with my use of the word “false” to refer to beliefs in either a) the Rapture or b) homeopathy. You may point out that saying that there’s a lack of evidence for a particular belief isn’t the same as saying that that belief is false. That’s technically true. But when a belief is implausible on the face of it, is unsupported by evidence, and conflicts with a great number of beliefs that are well-supported by evidence, it is entirely reasonable to call it “false.” At least until the Rapture.
Yesterday, Raj Rajaratnam, founder and head of hedge-fund management firm, The Galleon Group, was found guilty of 14 separate counts of securities fraud and conspiracy.
I think two things are worth talking about, with regard to this case.
1) One is the extent to which Rajaratnam was apparently a master of the so-called ‘soft skills’ of business. Rajaratnam’s success (and his eventual downfall) was rooted to a large extent in his talent for extracting insider information from his network of corporate contacts, charming them into revealing their employers’ secrets. To get a sense of this, it’s worth reading this richly detailed piece by Peter Lattman and Azad Ahmed, for the New York Times: Galleon Chief’s Web of Friends Proved Crucial to Scheme. Here’s a taste:
In his soft-spoken manner, shaped by his years at secondary school and college in England, Mr. Rajaratnam alternately prodded, chided, ridiculed and flattered his sources. Above all, he was a good listener, saying little as those on the other end of the phone, eager to impress the hedge fund titan, kept talking….
In other words, this ‘hedge fund titan’ used the same interpersonal skills in pursuit of millions as the common scam artist uses in pursuit of the little old lady’s retirement savings. This fact reinforces the importance of teaching these skills — and teaching about the dangers inherent in misusing them — in business schools.
2) The second point worth discussing has to do with grey zones and slippery slopes. Rajaratnam was found guilty of a criminal variant of something that professional investors do all the time, namely gathering information from people who know stuff about the firms those investors are considering investing in. In order to make their case, prosecutors would have had to convince the jury that Rajaratnam’s intelligence-gathering wasn’t just the run-of-the-mill kind.
But it’s also worth pointing out that there’s more than just a binary distinction to be made here. Somewhere between benign information-gathering, on one hand, and criminal insider trading, on the other, is a category of ethically-suspect behaviour that involves asking corporate insiders to provide ‘perspective’ or an ‘overview’ of, for example, the financial health of their firms. Such behaviour can be unethical for the same reason actual insider trading is illegal. Corporate insiders have fiduciary duties — duties rooted in trust — and providing information to outsiders so that they can have a trading advantage is a betrayal of that trust. And Rajaratnam’s methods played on his accomplices’ uncertainty about where to draw the relevant lines. The slope from benign to unethical to illegal is, it seems, quite slippery, especially when that slope is greased with flattery and a few hundred thousand dollars.
A couple of people have asked me recently about what business ethics issues arise in the wake of the Japanese earthquake, tsunami, and nuclear crisis. As far as I’ve seen, the media hasn’t paid much attention to business ethics issues, or even on businesses at all, in their coverage of the disaster(s). But certainly there are a number of relevant issues within which appropriate business behaviour is going to be a significant question. Here are a few suggestion of areas in which the study of business ethics might be relevant:
1) The nuclear crisis. Although their role has not been front-and-centre (unlike, for example, the BP oil spill), at least a couple of companies have played a significant role in the crisis at the Fukushima I Nuclear Power Plant. The reactors there were designed by General Electric, who surely face questions about the adequacy of that design and the relevant safeguards. And the plant is owned by the Tokyo Electric Power Company (TEPCO). TEPCO has been criticized for its handling of the disaster, including its notable lack of transparency. TEPCO also faces a difficult set of questions with regard to the ongoing risks to employees, including those who have vowed “to die if necessary” in order to protect the public from further risk. (For more information, see the wikipedia page about the Fukushima I nuclear accidents.)
2) Disaster relief. There is clearly an opportunity for many companies, both Japanese and foreign, to participate in the disaster relief effort. Whether they have an obligation to do so (i.e., a true corporate social responsibility) is an interesting question, as is the question of the terms on which they should participate. I’ve blogged before about the essential role that credit card companies play in disaster relief by facilitating donations; do credit card companies (and other companies) have an obligation to help out on a not-for-profit basis, or is it OK to make a profit in such situations?
3) Pricing. The topic of price-gouging often arises during and after a natural disaster, though I haven’t heard any reports of this in the wake of the earthquake in Japan. It’s a difficult ethical question. On one hand, companies that engage in true price gouging — preying on the vulnerable in a truly cynical and opportunistic way — are rightly singled out for moral criticism. On the other hand, prices naturally go up in the wake of disaster: picture the additional costs and risks that any company is going to face in trying to get their product into an area affected by an earthquake, a tsunami, and/or a nuclear meltdown.
4) Investment and trade. A major part of Japan’s recovery will depend on investment, both investment by foreign companies in Japan and investment by Japanese companies in the stricken areas of that country. This is clearly less of a concern than it would be in a less-economically developed country (like Haiti, for instance), but it’s still relevant. So the question arises: do companies have an obligation to help Japan rebuild by investing? If a company is, for example, deciding whether to build a new factory in either Japan or another country, should that decision be influenced by the desire to help Japan rebuild?
5) Consumer behaviour. Just as companies have to decide whether to invest in disaster-stricken nations or regions, so do consumers. Do you, as an individual, have any obligation to “buy Japanese,” in order to help rebuild the Japanese economy? Does it matter that Japan is a modern industrialized nation, as opposed to a developing one?
This is the second in a 3-part series on the ethics of profit.
As I noted in the first in this series, profit is often subject to ethical criticism. But the reasons for that are not clear. To begin our analysis, we need to distinguish between the ethical evaluation of profit itself, and the ethical evaluation of the profit motive. The first 2 parts in this series are focused on profits per se. The next one will focus on the profit motive.
Our focus last day was on unjustly large profits. Today’s focus is on profits that are gained unjustly, regardless of the size of those profits.
There are several distinct circumstances in which profits might be said (by at least some people) to have been unjustly gained.
- Profits gained through exploitation. Under this heading, we might include the profits earned by drug companies that jack up the prices for life-saving drugs, or profits earned by tow-truck operators who cruise the highways during snowstorms, offering to rescue stranded motorists at exaggerated prices. I’ve blogged before about exploitation, and in particular about how hard it is to define. The big problem is that, generally, situations that get called “exploitative” involve none of the usual factors that make transactions unethical, factors like force, fraud, or deception. When we say that profits have been gained through “exploitation,” we typically mean that the situation in which such profits were earned were — in some vague way — unfair, but it is notoriously difficult to say just what is unfair about them.
- Profiting from vice. Under this heading, we might include profiting from legal sale of tobacco, alcohol, pornography, and sexual services. Many people think one or more of these ways of making a living are morally suspect. We might want to distinguish among different cases, however, including based on factors such as choice and information and power. The janitor at a cigarett company, for example, might be held less blameworthy than the company’s lawyers and advertising executives.. We might also include, under the general heading “profiting from vice,” things like doing business with bloodthirsty dictators.
- Profits from financial speculation. This one may strike some as odd. But there is a long history of suspicion with regard to those who engage in financial speculation, including especially things like short selling (which involves betting that the price of a stock will fall). After all, the speculator is essentially a gambler, and the sense that many people have is that such gambling is of no social value: speculators don’t build things, after all. And there are worries that speculators contribute to the growth of dangerous market bubbles. But defenders of speculation argue that speculators, unlike gamblers, do have beneficial effects. They add liquidity to markets, and their speculation, made visible by their investments, adds valuable information to the market.
- Unethical business practices. Here we have what is potentially an enormous grab-bag of business practices that constitute legal, but unethical, ways to make a profit. I tend to agree with Joseph Heath’s view*, that we should delineate the boundaries of this category in terms of what Heath calls (socially) “non-preferred competitive strategies”. Heath’s idea is basically that agressive competitive behaviour on the part of companies is generally a good thing (when, e.g., they compete by innovating and by seeking efficiencies), but their behaviour becomes fundamentally anti-social when they compete by using strategies that tend to make markets work worse overall (i.e., make markets less able to perform their social function of increasing social well-being). So the “forbidden” strategies here would include any attempt to profit from information asymmetries (e.g., by misleading customers), externalities (e.g., pollution) or monopoly. Profits gained in those ways may rightly be criticized.
We might add to this list the gaining of profit by individuals or institutions that we think ought, for various reasons, not make profits at all. For some people, at least, that includes government agencies and public universities.
Are there other ways in which profits (even small profits) can be unethical, ways that don’t fit into one of the categories above?
*Heath’s argument about non-preferred competitive strategies can be found in his paper, “Business Ethics Without Stakeholders,” Business Ethics Quarterly, 2006 (Vol. 16, No.3).
It takes two to tango. How many does it take to sustain a ponzi scheme?
See this tantalizing piece by Diana B. Henriques, for the NY Times: From Prison, Madoff Says Banks ‘Had to Know’ of Fraud
In many ways…Mr. Madoff seemed unchanged. He spoke with great intensity and fluency about his dealings with various banks and hedge funds, pointing to their “willful blindness” and their failure to examine discrepancies between his regulatory filings and other information available to them.
“They had to know,” Mr. Madoff said. “But the attitude was sort of, ‘If you’re doing something wrong, we don’t want to know….’”
Of course, as Henriques notes, “Mr. Madoff’s claims must be weighed against his tenuous credibility.”
But Madoff’s claims that others, including financial institutions and sophisticated investors, “had to know” something was wrong will ring true to anyone who knows the Enron story in detail. For a wonderful, if exhausting, tour through the Enron scandal, see Bethany McLean and Peter Elkind’s Enron: The Smartest Guys in the Room. As McLean and Elkind make clear, Enron’s shenanigans only went on as long as they did because a lot of people, at a lot of financial institutions (and accounting firms and law firms) spent years and years with their eyebrows raised but kept their mouths shut.
Needless to say, the industry I myself work in — higher education — is in no way immune from sub-par business ethics. (Those of us involved in the teaching end of higher education don’t like to think of it as a business, but at some level that’s what it is, as long as a fee is being charged.) And what else can I call it but bad ethics, when a university offers courses teaching students to manipulate forces that don’t exist in order to generate effects that don’t happen?
Check out this article, from Common Ground magazine: Integrative energy healing
The Integrative Energy Healing (IEH) Certificate Program at Langara College in Vancouver is actively involved in weaving together the science and research of energy-based healing with its practice. For eight years, this program has worked to offer a three-year certificate program in IEH, which offers an in-depth study of the various Eastern and Western scientific theories underlying energy-based healing. It is also an exploration of the human condition and the practice of different types of energy-based treatments….
Sounds groovy. The problem: they’re teaching something that doesn’t work. “Energy Healing” is part of a cluster of practices that claims to diagnose and treat illness by examining and modifying energy fields that flow around and through the human body. These practices have been pretty well investigated, and they’re simply baseless. The physical starting points of these practices conflict with fundamental physics, and experiments have proven that they just don’t work. One of the main sources supposedly supporting the value of energy medicine, cited in the article above, is Energy Medicine (Oschman, 2000).
Here’s an article reviewing Oschman’s book: Energy Medicine, reprinted from Skeptic Magazine. The review is pretty devastating.
Of course, it’s not hard to find others who have found Energy “Medicine” at least worth looking at. The Common Ground article cites the US National Institutes of Health (NIH) “formally recognizes and encourages the study of energy therapies.” What the article leaves out is that funding has so far turned up zero in the way of useful therapies, and there have recently been significant calls by scientists for the NIH to stop funding this pseudoscience.
So, what is there to say about a university teaching this stuff? Well, to the extent that students believe they’re learning real health science, they’re being ripped off. And since the practices being taught are part of the enormous alternative medicine industry, students are being taught a set of practices intended to be sold to customers: they’re being taught to sell a bogus product. Oh, and in the process, Langara is cheapening the entire notion of higher education.
A final thought, for those of you not yet convinced that it’s problematic for an institution of higher learning to be teaching a highly-questionable practice like “Energy Healing.” What would our reaction be if a parallel university-based programme were started up with the intention not of teaching students to “heal” patients, but to build bridges? What if, instead of using math and physics to build bridges safely, we taught engineers to simply lay their hands on iron beams to “feel” whether they were strong enough?
Just a bit of clarification: the story above is about Langara College. But I refer to it throughout as “a university.” Technically, colleges & universities are different kinds of institutions in Canada (they’re provincially regulated & mostly provincially funded, so the details vary). But everything I say above applies to higher education institutions of all kinds.