Deck 1: Ethics Environment : Ethics Expectations

Question 1

Why are philosophical approaches to ethical decision making relevant to modern corporations and professional accountants?

Answer 1

According to the text, the philosophical approaches to ethical decision making for corporations and accountants are:
• Consequentialism : Consequentialism requires that ethical decisions have good consequences.
• Deontology : Deontology holds that an ethical act depends upon the duty, rights and justice involved.
• Virtue Ethics : Under virtue ethics, an act is considered ethical if it demonstrates the virtues expected by stakeholders of the participants.
These philosophical approaches are becoming more and more relevant because of the growing awareness, interest and power of stakeholders in building and maintaining a company's reputation (and success).

Question 2

In 1964, at the invitation of the Ecuadorian government, Texaco Inc. began operations through a subsidiary, TexPet, in the Amazon region of Ecuador. The purpose of the project was to "develop Ecuador's natural resources and encourage the colonization of the area." TexPet was a minority owner of the project and its partner was Petroecuador, the government-owned oil company. Over the years from 1968 to 1992, the consortium extracted 1.4 billion barrels of oil from the Ecuadorian operations. Ecuador benefited greatly during this period. Ecuador received approximately 98 percent of all moneys generated by the consortium in the form of royalties, taxes, and revenues. Altogether, this amount represented more than 50 percent of Ecuador's gross national product during that period. TexPet's operations over the years provided jobs for 840 employees and approximately 2,000 contract workers, thereby benefiting almost 3,000 Ecuadorian families directly, in addition to the thousands of Ecuadorian nationals who supplied the company's needs for goods and services. Also, TexPet made substantial contributions to the Quito, Guayaquil, and Loja Polytechnics and other institutions of higher education. Oil is Ecuador's life-blood-a $1 billion per year industry that accounts for 50 percent of the export earnings and 62 percent of its fiscal budget. Unfortunately, problems also arose. Although Petroecuador acquired 100 percent of the ownership of the Transecuadorian pipeline in 1986, TexPet still accounted for 88 percent of all oil production and operated the pipeline in 1987 when it ruptured and was buried by a landslide. A spill of 16.8 million gallons (4.4 million barrels) occurred, which Texaco attributed to a major earthquake that devastated Ecuador. Other spills apparently occurred as well. Although Texaco pulled out of the consortium in 1992 entirely (having retreated to be a silent minority partner in 1990), three lawsuits were filed against it in the United States-the Aquinda (November 1993), the Sequihua (August 1993), and the Jota (1994). The indigenous people who launched the lawsuits charged that, during two decades of oil drilling in the Amazon, Texaco dumped more than 3,000 gallons of crude oil a day-millions of gallons in total-into the environment. The indigenous people say their rivers, streams, and lakes are now contaminated, and the fish and wild game that once made up their food supply are now decimated. They asked in the lawsuit that Texaco compensate them and clean up their land and waters. Maria Aquinda, for whom the suit is named, says that contaminated water from nearby oil wells drilled by the Texaco subsidiary caused her to suffer chronic stomach ailments and rashes and that she lost scores of pigs and chickens. Aquinda and 76 other Amazonian residents filed a $1.5 billion lawsuit in New York against Texaco. The class-action suit, representing 30,000 people, further alleges that Texaco acted "with callous disregard for the health, wellbeing, and safety of the plaintiffs" and that "large-scale disposal of inadequately treated hazardous wastes and destruction of tropical rain forest habitats, caused harm to indigenous peoples and their property." According to the Ecuadorian environmental group Ecological Action, Texaco destroyed more than 1 million hectares of tropical forest, spilled 74 million liters of oil, and used obsolete technology that led to the dumping of 18 million liters of toxic waste. Rainforest Action Network, a San Francisco-based organization, says effects include poor crop production in the affected areas, invasion of tribal lands, sexual assaults committed by oil workers, and loss of game animals (which would be food supply for the indigenous peoples). Audits were conducted to address the impact of operations on the soil, water, and air and to assess compliance with environmental laws, regulations, and generally accepted operating practices. Two internationally recognized and independent consulting firms, AGRA Earth Environmental Ltd. and Fugro- McClelland, conducted audits in Ecuador. Each independently concluded that TexPet acted responsibly and that no lasting or significant environmental impact exists from its former operations. Nonetheless, TexPet agreed to remedy the limited and localized impacts attributable to its operations. On May 4, 1995, Ecuador's minister of energy and mines, the president of Petroecuador, and TexPet signed the Contract for Implementing of Environmental Remedial Work and Release from Obligations, Liability, and Claims following negotiations with Ecuadorian government officials representing the interests of indigenous groups in the Amazon. In this remediation effort, producing wells and pits formerly utilized by TexPet were closed, producing water systems were modified, cleared lands were replanted, and contaminated soil was remediated. All actions taken were inspected and certified by the Ecuadorian government. Additionally, TexPet funded social and health programs throughout the region of operations, such as medical dispensaries and sewage and potable water systems. That contract settled all claims by Petroecuador and the Republic of Ecuador against TexPet, Texaco, and their affiliates for all matters arising out of the consortium's operations. In the summer of 1998, the $40 million remediation project was completed. On September 30, 1998, Ecuador's minister of energy and mines, the president of Petroecuador, and the general manager of Petropro-duccion signed the Final Release of Claims and Delivery of Equipment. This document finalized the government of Ecuador's approval of TexPet's environmental remediation work and further stated that TexPet fully complied with all obligations established in the remediation agreement signed in 1995. Meanwhile, in the United States, Texaco made the following arguments against the three lawsuits:
• Activities were in compliance with Ecuadorian laws, and international oil industry standards.
• Activities were undertaken by a largely Ecuadorian workforce-which Texaco believed would always act in the interest of its community/country.
• All investments/operations were approved and monitored by the Ecuadorian government and Petroecuador.
• All activities were conducted with the oversight and approval of the Ecuadorian government.
• Environmentally friendly measures were used, such as helicopters instead of roads.
• The health of Ecuadorians increased during the years Texaco was in Ecuador. • Ninety-eight percent of the money generated stayed in Ecuador-50 percent of GDP during that period.
• Jobs were provided for 2,800.
• Money was provided for schools.
• Independent engineering firms found no lasting damage.
• A $40 million remediation program was started per an agreement with the Ecuadorian government.
• U.S. courts should not govern activities in a foreign country.
The three lawsuits were dismissed for similar reasons-the Sequihua in 1994, the Aquinda in 1996, and the Jota in 1997. The Aquinda lawsuit, for example, was launched in New York (where Texaco has its corporate headquarters) because Texaco no longer had business in Ecuador and could not be sued there. The case was dismissed by a New York court in November 1996 on the basis that it should be heard in Ecuador. Failing that, the Ecuadorian government should have been involved in the case as well, or that the case should have been filed against the government and the state-owned Petroecuador as well as Texaco. At that point, the Ecuadorian government did get involved and filed an appeal of the decision. This was the first time a foreign government had sued a U.S. oil company in the United States for environmental damage. In addition, in 1997, the plaintiffs in the Aquinda and Jota cases also appealed the district court's decisions.
On October 5, 1998, a U.S. court of appeals remanded both cases to the district court for further consideration as to whether they should proceed in Ecuador or the United States. Written submissions were filed on February 1, 1999. Texaco has long argued that the appropriate venue for these cases is Ecuador because the oilproducing operations took place in Ecuador under the control and supervision of Ecuador's government, and the Ecuadorian courts have heard similar cases against other companies. It is Texaco's position that U.S. courts should not govern the activities of a sovereign foreign nation, just as foreign courts should not govern the activities of the United States. In fact, Texaco claimed the ambassador of Ecuador, the official representative of the government of Ecuador, noted in a letter to the district court that Ecuador would not waive its sovereign immunity.
Notwithstanding Texaco's arguments, the case was sent back to the court that threw it out, on the basis that the government of Ecuador does have the right to intervene. The question of whether the case can and will finally be tried in the United States or Ecuador under these circumstances will now take many years to be decided. Texaco claims that it has done enough to repair any damage and disputes the scientific validity of the claims-the Amazonians (or their supporters) seem to have the resources to continue fighting this suit in the U.S. courts. Ultimately the company may prefer the fairness of U.S. courts.
Questions
Should Ecuadorians be able to sue Texaco in U.S. courts?

Answer 2

Yes, Ecuadorians should have the right to sue Texaco in U.S. courts based on Texaco's actions in Ecuador.
Texaco is a U.S. based corporation and therefore, is subject to U.S. laws and standards regarding its actions. Consider, for example, if those affected by BP's Gulf of Mexico oil spill could not seek reparations in the U.K. courts, if they were not subject to remedies under U.S. law?
If companies knew that they were only liable for behavior based on local country legal, moral and ethical standards, they would have little or no incentive to act ethically when their assets were located on foreign soil.

Question 3

On July 16, 2008, it was announced that several Chinese producers of baby milk powder had been adding melamine, a chemical usually used in countertops, to increase the "richness" of their milk powder and to increase the protein count. Shockingly, the melaminetainted milk powder was responsible for the deaths of four infants and the sickening of more than 6,200 more. Milk manufacturers had been using melamine as a low-cost way of "enriching" their product in both taste and protein count.
Melamine, a toxic chemical that makes countertops very durable, damages kidneys. This fact came to world attention on March 16, 2007, when Menu Foods of Streetsville, Ontario, Canada, recalled dog and cat foods that it had mixed in Canada from Chinese ingredients that were found to include melamine. Very quickly thereafter, pet owners claims and class action lawsuits threatened to put the company into bankruptcy until settlements were worked out. A subsequent investigation by the U.S. Food and Drug Administration (FDA) led to the recall of pet food by major manufacturers, including Del Monte, Nestle Purina, Menu Foods, and many others. On February 6, 2008, "the FDA announced that that two Chinese nationals and the businesses they operate, along with a U.S. company and its president and chief executive officer, were indicted by a federal grand jury for their roles in a scheme to import products purported to be wheat gluten into the United States that were contaminated with melamine." It will be interesting to follow what penalties are ultimately paid by the Chinese manufacturers.
Although the story of melamine-tainted ingredients broke in mid-March 2007, the similarly tainted-milk powder link did not come to light in China until sixteen months later. Governmental follow-up has not been speedy even though unmarked bags of "protein powder" had probably been added to several other products, including baking powder and feed for chickens thus contaminating eggs and meat. On October 8, 2008, the Chinese government stopped reporting updated figures of infant milk powder sufferers "because it is not an infectious disease, so it's not necessary to announce it to the public." Knowledgeable members of the Chinese public, however, have been using the suitcases of their visiting relatives to import U.S.- and Canadianmade milk formula for their children.
It is also fascinating to consider another aspect of life in China-rumored control of online news. Although there is no proof of the rumors, which might have been started by competitors, the Wall Street Journal's (WSJ) online service has reported that Baidu.com Inc., the company referred to as the "Google of China," is under attack for accepting payments to keep stories containing a specific milk manufacturing company's name from online searches about the tainted milk scandal even when the manufacturer was recalling the product. Local government officials also declined to confirm the milk manufacturer's problem during the same period.
Baidu.com "said it had been approached this week by several dairy producers but said that it 'flat out refused' to screen out unfavorable news and accused rivals of fanning the flames."9 In a statement, it said: "Baidu respects the truth, and our search results reflect that commitment."
Currently, there is no evidence that Baidu.com did accept the screen-out payments as rumored, but it does face some challenges of its own making in trying to restore it reputation. For example, unlike Google that separates or distinguishes paid advertisements from non-paid search results, Baidu.com integrated paid advertisements into its search listing until critics recently complained. In addition, companies could pay more and get a higher ranking for their ads. According to the WSJ article, a search for "mobile phone" generates a list where almost the entire first page consists of paid advertisements. Also, competitors fearing increased competition and new products from Baidu.com, which recently increased its market share to 64.4 percent, have begun to restrict Baidu's search software (spiders) from penetrating websites that the competitors control.
Baidu.com's profit growth had been strong, but for how long? Baidu.com, Inc. is traded on the U.S.'s NASDAQ Stock Market under the symbol BIDU. Since the rumors surfaced in late August/early September 2008, BIDU's share price has declined from $308 to almost $110 on November 20, 2008.
What steps could Baidu.com take to restore its reputation, and what challenges will it have to overcome?

Answer 3

The text outlines several steps that Baidu.com can take to restore its reputation:
• Prove that it is not guilty of the allegations of "pay for promotion"
• Disclose that it is guilty and steps it has taken to ensure that a similar situation will not recur. These steps can include improved policy disclosure and perhaps outside monitoring.
• Seek to build a reputation as a "good corporate citizen" through marketing, charitable work and similar actions
Baidu.com will likely face several challenges in efforts to restore its reputation:
• Stakeholders, customers and others who have a "once burned, twice shy" philosophy of forgiving misdeeds.
• Overcoming rumors of past misdeeds - real or apparent.
• Overcoming any internal or competitive hurdles to full-transparency at the company. This step may be particularly challenging for a company operating in a country known for secretive tendencies.

Question 4

In June 2002, Martha Stewart began to wrestle with allegations that she had improperly used inside information to sell a stock investment to an unsuspecting investing public. That was when her personal friend Sam Waksal was defending himself against Securities and Exchange Commission (SEC) allegations that he had tipped off his family members so they could sell their shares of ImClone Systems Inc. (ImClone) just before other investors learned that ImClone's fortunes were about to take a dive. Observers presumed that Martha was also tipped off and, even though she proclaimed her innocence, the rumors would not go away.
On TV daily as the reigning guru of homemaking, Martha is the multimillionaire proprietor, president, and driving force of Martha Stewart Living Omnimedia Inc. (MSO), of which, on March 18, 2002, she owned 30,713,475 (62.6 percent) of the class A, and 30,619,375 (100 percent) of the class B shares. On December 27, 2001, Martha's class A and class B shares were worth approximately $17 each, so on paper Martha's MSO class A shares alone were worth over $500 million. Class B shares are convertible into class A shares on a oneto- one basis.
Martha's personal life became public. The world did not know that Martha Stewart had sold 3,928 shares of ImClone for $58 each on December 27, 2001,until it surfaced in June 2002. The sale generated only $227,824 for Martha, and she avoided losing $45,673 when the stock price dropped the next day, but it has caused her endless personal grief and humiliation, and the loss of reputation, as well as a significant drop to $5.26 in the MSO share price.
What Happened?
Martha had made an investment in ImClone, a company that was trying to get the approval of the U.S. Food and Drug Administration (FDA) to bring to market an anti-colon cancer drug called Erbitux. Samuel Waksal, then the CEO of ImClone and a personal friend of Martha's, was apparently warned on or close to December 25, 2001, that the FDA was going to refuse5 to review Erbitux. According to SEC allegations, Sam relayed the information to his family so they could dump their ImClone shares on an unsuspecting public before the official announcement. Martha claims that she didn't get any inside information early from Sam, but regulators believe that she may have or from her broker or her broker's aide. The activities of several of Sam's friends, including Martha, are under investigation by the SEC.
Sam was arrested on June 12, 2002, and charged with "nine criminal counts of conspiracy, securities fraud and perjury, and then freed on $10 million bail." In a related civil complaint, the SEC alleged that Sam "tried to sell ImClone stock and tipped family members before ImClone's official FDA announcement on Dec. 28."
According to the SEC, two unidentified members of Sam's family sold about $10 million worth of ImClone stock in a twoday interval just before the announcement. Moreover, Sam also tried for two days to sell nearly 80,000 ImClone shares for about $5 million, but two different brokers refused to process the trades.
Martha has denied any wrongdoing. She was quoted as saying: "In placing my trade I had no improper information…. My transaction was entirely lawful." She admitted calling Sam after selling her shares, but claimed: "I did not reach Mr. Waksal, and he did not return my call." She maintained that she had an agreement with her broker to sell her remaining ImClone shares "if the stock dropped below $60 per share."
Martha's public, however, was skeptical. She was asked embarrassing questions when she appeared on TV for a cooking segment, and she declined to answer saying: "I am here to make my salad." Martha's interactions with her broker, Peter Bacanovic, and his assistant, Douglas Faneuil, are also being scrutinized. Merrill Lynch Co. suspended Bacanovic (who was also Sam Waksal's broker) and Faneuil, with pay, in late June. Later, since all phone calls to brokerages are taped and emails kept, it appeared to be damning when Bacanovic initially refused to provide his cell phone records to the House Energy and Commerce Commission for their investigation. Moreover, on October 4, 2001, Faneuil "pleaded guilty to a charge that he accepted gifts from his superior in return for keeping quiet about circumstances surrounding Stewart's controversial stock sale." Faneuil admitted that he received extra vacation time, including a free airline ticket from a Merrill Lynch employee in exchange for withholding information from SEC and FBI investigators.
According to the Washington Post report of Faneuil's appearance in court:
On the morning of Dec. 27, Faneuil received a telephone call from a Waksal family member who asked to sell 39,472 shares for almost $2.5 million, according to court records. Waksal's accountant also called Faneuil in an unsuccessful attempt to sell a large bloc of shares, the records show. Prosecutors allege that those orders "constituted material non-public information." But they alleged that Faneuil violated his duty to Merrill Lynch by calling a "tippee" to relate that Waksal family members were attempting to liquidate their holdings in ImClone. That person then sold "all the Tippee's shares of ImClone stock, approximately 3,928 shares, yielding proceeds of approximately $228,000" the court papers said.
One day later, on October 5th, it was announced that Martha resigned from her post as a director of the New York Stock Exchange-a post she held only four months-and the price of MSO shares declined more than 7 percent to $6.32 in afternoon trading. From June 12th to October 12th, the share price of MSO had declined by approximately 61 percent.
Martha's future took a further interesting turn on October 15th, when Sam Waksal pleaded guilty to six counts of his indictment, including: bank fraud, securities fraud, conspiracy to obstruct justice, and perjury. But he did not agree to cooperate with prosecutors, and did not incriminate Martha. Waksal's sentencing was postponed until 2003 so his lawyers could exchange information with U.S. District Judge William Pauley concerning Waksal's financial records.
After October 15th, the price of MSO shares rose, perhaps as the prospect of Martha's going to jail appeared to become more remote, and/or people began to consider MSO to be more than just Martha and her reputation. The gain from the low point of the MSO share price in October to December 9, 2002, was about 40 percent.
Martha still had a lot to think about, however. Apparently the SEC gave Martha notice in September of its intent to file civil securities fraud charges against her. Martha's lawyers responded and the SEC deliberated. Even if Martha were to get off with a fine, prosecutors could still bring a criminal case against her in the future. It is an interesting legal question, how, if Martha were to plead guilty to the civil charges, she could avoid criminal liability.
On June 4, 2003, Stewart was indicted on charges of obstructing justice and securities fraud. She then quit as Chairman and CEO of her company, but stayed on the Board and served as Chief Creative Officer. She appeared in court on January 20, 2004, and watched the proceedings throughout her trial. In addition to the testimony of Mr. Faneuil, Stewart's personal friend Mariana Pasternak testified that Stewart told her Waksal was trying to dump his shares shortly after selling her Imclone stock.24 Ultimately, the jury did not believe the counterclaim by Peter Bacanovic, Stewart's broker, that he and Martha had a prior agreement to sell Imclone if it went below $60. Although Judge Cedarbaum dismissed the charge of securities fraud for insider trading, on March 5, 2004, the jury found Stewart guilty on one charge of conspiracy, one of obstruction of justice, and two of making false statements to investigators. 25 The announcement caused the share price of her company to sink by $2.77 to $11.26 on the NYSE.

Martha immediately posted the following on her website:
I am obviously distressed by the jury's verdict, but I continue to take comfort in knowing that I have done nothing wrong and that I have the enduring support of my family and friends. I will appeal the verdict and continue to fight to clear my name. I believe in the fairness of the judicial system and remain confident that I will ultimately prevail.
Martha was subsequently sentenced to 5 months in prison and 5 months of home detention-a lower than maximum sentence under the U.S. Sentencing Guidelines-and she did appeal. Although she could have remained free during the appeal, on September 15, 2004, she asked for her sentence to start so she could be at home in time for the spring planting season. Martha's appeal cited "prosecutorial misconduct, extraneous influences on the jury and erroneous evidentiary rulings and jury instructions" but on January 6, 2006, her conviction was upheld.
Impact on Reputation
Martha may still disagree with the verdict. But there is little doubt that the allegations and her convictions had a major impact on Martha personally, and on the fortunes of MSO and the other shareholders that had faith in her and her company. Assuming a value per share of $13.50 on June 12th, the decline to a low of $5.26 in early October 2003 represents a loss of market capitalization (i.e., reputation capital as defined by Charles Fombrun30) of approximately $250 million, or 61 percent. The value of MSO's shares did return to close at $35.51 on February 7, 2005,31 but fell off to under $20 in early 2006. According to a New York brand-rating company, Brand-Keys, the Martha Stewart brand reached a peak of 120 (the baseline is 100) in May 2002, and sank to a low of 63 in March 2004.
What will the future hold? Martha has returned to TV with a version of The Apprentice as well as her usual homemaking and design shows, and her products and magazines continue to be sold. Will Martha regain her earlier distinction? Would she do it again to avoid losing $45,673?
Questions
Martha's overall net worth was huge relative to her investment in ImClone. Assuming she did not have inside information, was there any way she could have avoided the appearance of having it?

Question 5

What are the common elements of the three practical approaches to ethical decision making that are briefly outlined in this chapter?

Question 6

In July of 2008, Virgin Mobile USA began a 'Strip2Clothe' advertising campaign. There are millions of homeless teenagers in the United States, and Virgin Mobile's website said "someone out there needs clothes more than you." Virgin Mobile invited teenagers to upload videos of themselves disrobing. For every uploaded striptease video, Virgin Mobile would donate a new piece of clothing. For every five times the video was viewed, an additional piece of clothing would be donated. Virgin Mobile said that they would screen all the videos. The strippers had to be 18 or older, and there was to be no full nudity. By July 12, there were 20 videos on the site that had generated 51,291 pieces of donated clothing.
The campaign sparked immediate criticism. Rebecca Lentz of The Catholic Charities of St. Paul and Minneapolis called the advertising campaign "distasteful and inappropriate and exploitative." Parents were concerned that their under 18 year-old children would strip, zip the video, and not reveal their real age. On Tuesday July 15, The National Network for Youth (NN4Y) said that it would decline to partner with Virgin Mobile. Some of the 150 charities represented by NN4Y objected to the campaign saying that it was inappropriate given that many homeless teenagers are sexually exploited. NN4Y said that any member organizations that wished to receive clothing donations through the Strip2Clothe campaign would have to contact Virgin Mobile directly.
In response to the public outcry, Virgin Mobile altered its campaign. On July 21, it launched 'Blank2Clothe' in which the company would accept any kind of talent video such as walking, juggling, singing, riding, and so on. All of the striptease videos were removed and the strippers were asked to send in new, fully clothed videos.
The arguments against the campaign were that: it targeted youth; many homeless teenagers are sexually exploited; the homeless normally need shelter and safety rather than clothes; and the campaign was in poor taste. But there were some supporters. Rick Koca, founder of StandUp For Kids in San Diego, said that the campaign wasn't hurting anyone and was raising public awareness. In the one week ending July 19, the controversy and the campaign had resulted in a further 15,000 clothing donations.
The Strip2Clothe campaign may have been in questionable taste, but it did raise tens of thousands of pieces of clothing for the homeless. Does the end justify the means?

Question 7

On February 11, 2010, the leaders of the European Union (EU) agreed on a plan to bail out Greece, a country that had joined the EU in 1981 and was admitted to the European Monetary Union (EMU) allowing Greece to adopt the Euro as its currency in 2001. Greece had been unable to pay its bills, or to borrow more money to do so because it had overspent its income on its social programs and other projects. In the aftermath of providing Greece with bailout credit ultimately totaling €100 billion ($147 billion), questions were asked about how this could have happened. A spotlight was brought to bear on how Goldman Sachs (GS) had enabled Greece to qualify for adopting the Euro in the first place, and for providing the means to hide some transactions in which Greece pledged its future revenues in return for instant cash to spend. In a sense, GS helped Greece draw a veil over its finances with arrangements that were not transparent.
In 2001, Greece wanted to join the EMU but faced a requirement that its debt-to-GDP ratio be less than 60%.3 Unfortunately, Greece had some debt that was payable in U.S. dollars (USD) and other debt in Japanese Yen. Both currencies had grown in value relative to the Euro in 1999 and 2000. Under EU rules, such unhedged debt had to be valued and reported at the year-end exchange rates, so Greece faced the prospect reporting increased debt liabilities.
In late 2000 and 2001, GS proposed and arranged two types of hedges that reduced reported Greek debt by €2.367 billion, and allowed Greece to access unreported, off-balance sheet financing:
• Currency hedges that turned the USD and Yen debt payments into Euro payments, and subsequently the Greek swap portfolio into new cross currency swaps valued using a historical implied foreign exchange rate rather than market value exchange rate. Since the historical exchange rate was lower than the market rate at the time, the resulting valuation of the debt was reduced by almost €2.4 billion ($3.2 billion).
• Interest rate swaps that, when coupled with a bond, provided Greece with instant cash in 2001 in return for pledging future landing fees at its airports. GS was reportedly paid $300 million for this transaction. A similar deal in 2000 saw Greece pledge the future revenue from its national lottery in return for cash. Greece was obligated to pay GS substantial amounts until 2019 under these agreements, but chose to sell these interest rate swaps to the National Bank of Greece in 2005 after criticism in the Greek Parliament.
In essence, through these so-called interest rate swaps, Greece was converting a stream of variable future cash flows into instant cash. But, although there was a fierce debate among EU finance ministers, these obligations to pay out future cash flows were not required to be disclosed in 2001 and were therefore a type of "offbalance sheet financing." In 2002, the requirements changed and these obligations did require disclosure. Humorously, the 2000 deal related to a legal entity called Aeolos that was created for the purpose- Aeolos is the Greek goddess of wind.
In response to public criticism, GS argues on its website that "these transactions [both currency and interest rate hedges] were consistent with the Eurostat principles governing their use and disclosure at the time." In addition, GS argues that the reduction of €2.367 billion had "minimal effect on the country's overall fiscal situation in 2001" since its GDP was approximately $131 billion and its debt was 103.7% of GDP. However, it is not clear how much cash was provided by the so-called interest rate swaps that allowed Greece to report lower debt obligations in total.
What subsequent impacts could the transactions described above have on Goldman Sachs?

Question 8

In June 2002, Martha Stewart began to wrestle with allegations that she had improperly used inside information to sell a stock investment to an unsuspecting investing public. That was when her personal friend Sam Waksal was defending himself against Securities and Exchange Commission (SEC) allegations that he had tipped off his family members so they could sell their shares of ImClone Systems Inc. (ImClone) just before other investors learned that ImClone's fortunes were about to take a dive. Observers presumed that Martha was also tipped off and, even though she proclaimed her innocence, the rumors would not go away.
On TV daily as the reigning guru of homemaking, Martha is the multimillionaire proprietor, president, and driving force of Martha Stewart Living Omnimedia Inc. (MSO), of which, on March 18, 2002, she owned 30,713,475 (62.6 percent) of the class A, and 30,619,375 (100 percent) of the class B shares. On December 27, 2001, Martha's class A and class B shares were worth approximately $17 each, so on paper Martha's MSO class A shares alone were worth over $500 million. Class B shares are convertible into class A shares on a oneto- one basis.
Martha's personal life became public. The world did not know that Martha Stewart had sold 3,928 shares of ImClone for $58 each on December 27, 2001,until it surfaced in June 2002. The sale generated only $227,824 for Martha, and she avoided losing $45,673 when the stock price dropped the next day, but it has caused her endless personal grief and humiliation, and the loss of reputation, as well as a significant drop to $5.26 in the MSO share price.
What Happened?
Martha had made an investment in ImClone, a company that was trying to get the approval of the U.S. Food and Drug Administration (FDA) to bring to market an anti-colon cancer drug called Erbitux. Samuel Waksal, then the CEO of ImClone and a personal friend of Martha's, was apparently warned on or close to December 25, 2001, that the FDA was going to refuse5 to review Erbitux. According to SEC allegations, Sam relayed the information to his family so they could dump their ImClone shares on an unsuspecting public before the official announcement. Martha claims that she didn't get any inside information early from Sam, but regulators believe that she may have or from her broker or her broker's aide. The activities of several of Sam's friends, including Martha, are under investigation by the SEC.
Sam was arrested on June 12, 2002, and charged with "nine criminal counts of conspiracy, securities fraud and perjury, and then freed on $10 million bail." In a related civil complaint, the SEC alleged that Sam "tried to sell ImClone stock and tipped family members before ImClone's official FDA announcement on Dec. 28."
According to the SEC, two unidentified members of Sam's family sold about $10 million worth of ImClone stock in a twoday interval just before the announcement. Moreover, Sam also tried for two days to sell nearly 80,000 ImClone shares for about $5 million, but two different brokers refused to process the trades.
Martha has denied any wrongdoing. She was quoted as saying: "In placing my trade I had no improper information…. My transaction was entirely lawful." She admitted calling Sam after selling her shares, but claimed: "I did not reach Mr. Waksal, and he did not return my call." She maintained that she had an agreement with her broker to sell her remaining ImClone shares "if the stock dropped below $60 per share."
Martha's public, however, was skeptical. She was asked embarrassing questions when she appeared on TV for a cooking segment, and she declined to answer saying: "I am here to make my salad." Martha's interactions with her broker, Peter Bacanovic, and his assistant, Douglas Faneuil, are also being scrutinized. Merrill Lynch Co. suspended Bacanovic (who was also Sam Waksal's broker) and Faneuil, with pay, in late June. Later, since all phone calls to brokerages are taped and emails kept, it appeared to be damning when Bacanovic initially refused to provide his cell phone records to the House Energy and Commerce Commission for their investigation. Moreover, on October 4, 2001, Faneuil "pleaded guilty to a charge that he accepted gifts from his superior in return for keeping quiet about circumstances surrounding Stewart's controversial stock sale." Faneuil admitted that he received extra vacation time, including a free airline ticket from a Merrill Lynch employee in exchange for withholding information from SEC and FBI investigators.
According to the Washington Post report of Faneuil's appearance in court:
On the morning of Dec. 27, Faneuil received a telephone call from a Waksal family member who asked to sell 39,472 shares for almost $2.5 million, according to court records. Waksal's accountant also called Faneuil in an unsuccessful attempt to sell a large bloc of shares, the records show. Prosecutors allege that those orders "constituted material non-public information." But they alleged that Faneuil violated his duty to Merrill Lynch by calling a "tippee" to relate that Waksal family members were attempting to liquidate their holdings in ImClone. That person then sold "all the Tippee's shares of ImClone stock, approximately 3,928 shares, yielding proceeds of approximately $228,000" the court papers said.
One day later, on October 5th, it was announced that Martha resigned from her post as a director of the New York Stock Exchange-a post she held only four months-and the price of MSO shares declined more than 7 percent to $6.32 in afternoon trading. From June 12th to October 12th, the share price of MSO had declined by approximately 61 percent.
Martha's future took a further interesting turn on October 15th, when Sam Waksal pleaded guilty to six counts of his indictment, including: bank fraud, securities fraud, conspiracy to obstruct justice, and perjury. But he did not agree to cooperate with prosecutors, and did not incriminate Martha. Waksal's sentencing was postponed until 2003 so his lawyers could exchange information with U.S. District Judge William Pauley concerning Waksal's financial records.
After October 15th, the price of MSO shares rose, perhaps as the prospect of Martha's going to jail appeared to become more remote, and/or people began to consider MSO to be more than just Martha and her reputation. The gain from the low point of the MSO share price in October to December 9, 2002, was about 40 percent.
Martha still had a lot to think about, however. Apparently the SEC gave Martha notice in September of its intent to file civil securities fraud charges against her. Martha's lawyers responded and the SEC deliberated. Even if Martha were to get off with a fine, prosecutors could still bring a criminal case against her in the future. It is an interesting legal question, how, if Martha were to plead guilty to the civil charges, she could avoid criminal liability.
On June 4, 2003, Stewart was indicted on charges of obstructing justice and securities fraud. She then quit as Chairman and CEO of her company, but stayed on the Board and served as Chief Creative Officer. She appeared in court on January 20, 2004, and watched the proceedings throughout her trial. In addition to the testimony of Mr. Faneuil, Stewart's personal friend Mariana Pasternak testified that Stewart told her Waksal was trying to dump his shares shortly after selling her Imclone stock.24 Ultimately, the jury did not believe the counterclaim by Peter Bacanovic, Stewart's broker, that he and Martha had a prior agreement to sell Imclone if it went below $60. Although Judge Cedarbaum dismissed the charge of securities fraud for insider trading, on March 5, 2004, the jury found Stewart guilty on one charge of conspiracy, one of obstruction of justice, and two of making false statements to investigators. 25 The announcement caused the share price of her company to sink by $2.77 to $11.26 on the NYSE.

Martha immediately posted the following on her website:
I am obviously distressed by the jury's verdict, but I continue to take comfort in knowing that I have done nothing wrong and that I have the enduring support of my family and friends. I will appeal the verdict and continue to fight to clear my name. I believe in the fairness of the judicial system and remain confident that I will ultimately prevail.
Martha was subsequently sentenced to 5 months in prison and 5 months of home detention-a lower than maximum sentence under the U.S. Sentencing Guidelines-and she did appeal. Although she could have remained free during the appeal, on September 15, 2004, she asked for her sentence to start so she could be at home in time for the spring planting season. Martha's appeal cited "prosecutorial misconduct, extraneous influences on the jury and erroneous evidentiary rulings and jury instructions" but on January 6, 2006, her conviction was upheld.
Impact on Reputation
Martha may still disagree with the verdict. But there is little doubt that the allegations and her convictions had a major impact on Martha personally, and on the fortunes of MSO and the other shareholders that had faith in her and her company. Assuming a value per share of $13.50 on June 12th, the decline to a low of $5.26 in early October 2003 represents a loss of market capitalization (i.e., reputation capital as defined by Charles Fombrun30) of approximately $250 million, or 61 percent. The value of MSO's shares did return to close at $35.51 on February 7, 2005,31 but fell off to under $20 in early 2006. According to a New York brand-rating company, Brand-Keys, the Martha Stewart brand reached a peak of 120 (the baseline is 100) in May 2002, and sank to a low of 63 in March 2004.
What will the future hold? Martha has returned to TV with a version of The Apprentice as well as her usual homemaking and design shows, and her products and magazines continue to be sold. Will Martha regain her earlier distinction? Would she do it again to avoid losing $45,673?
Questions
How could Martha have handled this crisis better?

Question 9

Is a professional accountant a businessperson pursuing profit or a fiduciary that is to act in the public interest?

Question 10

"Sam, I'm really in trouble. I've always wanted to be an accountant. But here I am just about to apply to the accounting firms for a job after graduation from the university, and I'm not sure I want to be an accountant after all."
"Why, Norm? In all those accounting courses we took together, you worked super hard because you were really interested. What's your problem now?"
"Well, I've been reading the business newspapers, reports, and accounting journals lately, and things just don't add up. For instance, you know how we have always been told that accountants have expertise in measurement and disclosure, that they are supposed to prepare reports with integrity, and that they ought to root out fraud if they suspect it? Well, it doesn't look like they have been doing a good job. At least, they haven't been doing what I would have expected." "Remember, Norm, we're still students with a lot to learn. Maybe you are missing something. What have you been reading about?" "OK, Sam, here are a few stories for you to think about:
1. In this article, 'Accountants and the S L Crisis,' which was in Management Accounting in February 1993, I found the argument that the $200 million fiasco was due to the regulators and to a downturn in the real estate market, not to accounting fraud … but I don't buy it entirely. According to this article, rising interest rates and fixed lending rates resulted in negative cash flow at the same time as a decline in value of the real estate market reduced the value underlying S L loan assets. As a result, the net worth of many S Ls fell, and regulators decided to change some accounting practices to make it appear that the S Ls were still above the minimum capital requirements mandated to protect depositors' funds. Just look at this list of the seven accounting practices or problems that were cited:
• write-off of losses on loans sold over the life of the loan rather than when the loss occurred,
• use of government-issued Net Worth Certificates to be counted as S L capital,
• use of deals involving up-front money and near-term cash flow, which would bolster current earnings at the expense of later,
• inadequate loan loss provisions due to poor loan monitoring,
• write-off of goodwill created on the merger of sound S Ls with bankrupt S Ls over a forty-year period,
• write-ups of owned property based on appraisal values, and
• lack of market-based reporting to reflect economic reality. The problem, for me, is that many of these practices are not in accord with generally accepted accounting principles [GAAP] and yet the accountants went along-at least they didn't object or improve their practices enough to change the outcome. Why not? Where were the accountants?"
2. "I am also concerned about the expertise the accounting profession claims to have in terms of measurement and disclosure. For example, recently there have been many articles on the health costs created by smoking, yet there are no accountants involved. For instance, a May 1994 report by the Center on Addiction and Substance Abuse at Columbia University estimates that 'in 1994 dollars, substance abuse will cost Medicare $20 billion in inpatient hospital costs alone' and that tobacco accounts for 80 percent of those hospitalizations. Over the next twenty years, substance abuse will cost the Medicare program $1 trillion. No wonder the trustees of the Medicare Trust Fund released a report on April 21 'predicting that the Fund would run out of money in seven years.' These are important issues. Why do we have to wait for economists and special interest groups to make these calculations? Shouldn't accountants be able to make them and lend credibility and balance in the process? Wouldn't society benefit? Where were the accountants?"
3. "What about the finding of fraud? Are auditors doing enough to prevent and catch fraudulent behavior? I know what our professors say: auditors can't be expected to catch everything; their job is not to search for fraud unless suspicions are aroused during other activities; and their primary task is to audit the financial statements. But aren't the auditors just reacting to discovered problems, when they could be proactive? Couldn't they stress the importance of using codes of conduct and the encouragement of employees to bring forward their concerns over unethical acts? Why is proactive management appropriate in some other areas, such as ironing out personnel problems, but reactive behavior is appropriate when dealing with fraud? Reactive behavior will just close the barn door after the horse has been stolen. In the case of the Bank of Credit Commerce International (BCCI), for example, at least $1.7 billion was missing."
"I guess I'm having second thoughts about becoming a professional accountant. Can you help me out, Sam?"
What would you tell Norm?

Question 11

Google is the world's largest search engine. In 2009, it had approximately 400 million web users, of which 200 million are located in the United States. Its global revenue from advertising amounted to $23.6 billion. China is the world's third-largest economy. China has a potential 384 million Internet users and advertising revenue from China is estimated to be $15 to $20 billion annually. In 2006, Google began operations in China as Google.cn. Part of the agreement with the Chinese government was that the Google.cn search engine would censor information from topics that had been banned by the Chinese government.
In January 2010, Google threatened to pull out of China after it claimed that Google and some twenty other large companies had been subjected, in December 2009, to "a highly sophisticated and targeted attack" designed to steal software codes. The alleged purpose of the attack was so that the Chinese government could break into the Gmail accounts of Chinese human rights activists. Although the attack was unsuccessful, Google decided it should review its operations in China. "We have decided that we are no longer willing to continue censoring our results on Google.cn, and so over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all. We recognize that this may well mean having to shut down Google.cn, and potentially our offices in China."
Three months later, in March 2010, Google closed Google.cn and began directing its Chinese customers to a search engine in Hong Kong, Google.com.hk. Hong Kong is a special administrative region and so the Google.com.hk search engine is not subject to Chinese government censorship. The Chinese government complained that this was a violation of the written promise Google had made when it began operations in China in 2006.
The license for Google to operate in China was up for renewal on June 30, 2010. Without the license "Google would effectively go dark in China." Then, in July, a compromise was reached. The Chinese government renewed Google's license to operate in China, and Google said that it would not automatically redirect its Chinese users to the uncensored Hong Kong site. Instead, users would go to a landing page on Google.cn that is linked to Google.com.hk. In other words, users would have to double-click in order to get to the Hong Kong site. This solution saved face. Google agreed to obey Chinese laws, while at the same time, by providing access to the Hong Kong site, the company could say that it was maintaining its anticensorship policies. "As a company we aspire to make information available to users everywhere, including China. It's why we have worked so hard to keep Google.cn alive, as well as to continue our research and development work in China. This new approach is consistent with our commitment not to self censor [sic] and, we believe, with local law." After the announcement that Google's Chinese license had been renewed, the company's stock rose 2.8 percent.
Do for-profit businesses, such as Google, have an ethical responsibility to lobby for human rights and against censorship in the various countries in which they have commercial operations?

Question 12

In June 2002, Martha Stewart began to wrestle with allegations that she had improperly used inside information to sell a stock investment to an unsuspecting investing public. That was when her personal friend Sam Waksal was defending himself against Securities and Exchange Commission (SEC) allegations that he had tipped off his family members so they could sell their shares of ImClone Systems Inc. (ImClone) just before other investors learned that ImClone's fortunes were about to take a dive. Observers presumed that Martha was also tipped off and, even though she proclaimed her innocence, the rumors would not go away.
On TV daily as the reigning guru of homemaking, Martha is the multimillionaire proprietor, president, and driving force of Martha Stewart Living Omnimedia Inc. (MSO), of which, on March 18, 2002, she owned 30,713,475 (62.6 percent) of the class A, and 30,619,375 (100 percent) of the class B shares. On December 27, 2001, Martha's class A and class B shares were worth approximately $17 each, so on paper Martha's MSO class A shares alone were worth over $500 million. Class B shares are convertible into class A shares on a oneto- one basis.
Martha's personal life became public. The world did not know that Martha Stewart had sold 3,928 shares of ImClone for $58 each on December 27, 2001,until it surfaced in June 2002. The sale generated only $227,824 for Martha, and she avoided losing $45,673 when the stock price dropped the next day, but it has caused her endless personal grief and humiliation, and the loss of reputation, as well as a significant drop to $5.26 in the MSO share price.
What Happened?
Martha had made an investment in ImClone, a company that was trying to get the approval of the U.S. Food and Drug Administration (FDA) to bring to market an anti-colon cancer drug called Erbitux. Samuel Waksal, then the CEO of ImClone and a personal friend of Martha's, was apparently warned on or close to December 25, 2001, that the FDA was going to refuse5 to review Erbitux. According to SEC allegations, Sam relayed the information to his family so they could dump their ImClone shares on an unsuspecting public before the official announcement. Martha claims that she didn't get any inside information early from Sam, but regulators believe that she may have or from her broker or her broker's aide. The activities of several of Sam's friends, including Martha, are under investigation by the SEC.
Sam was arrested on June 12, 2002, and charged with "nine criminal counts of conspiracy, securities fraud and perjury, and then freed on $10 million bail." In a related civil complaint, the SEC alleged that Sam "tried to sell ImClone stock and tipped family members before ImClone's official FDA announcement on Dec. 28."
According to the SEC, two unidentified members of Sam's family sold about $10 million worth of ImClone stock in a twoday interval just before the announcement. Moreover, Sam also tried for two days to sell nearly 80,000 ImClone shares for about $5 million, but two different brokers refused to process the trades.
Martha has denied any wrongdoing. She was quoted as saying: "In placing my trade I had no improper information…. My transaction was entirely lawful." She admitted calling Sam after selling her shares, but claimed: "I did not reach Mr. Waksal, and he did not return my call." She maintained that she had an agreement with her broker to sell her remaining ImClone shares "if the stock dropped below $60 per share."
Martha's public, however, was skeptical. She was asked embarrassing questions when she appeared on TV for a cooking segment, and she declined to answer saying: "I am here to make my salad." Martha's interactions with her broker, Peter Bacanovic, and his assistant, Douglas Faneuil, are also being scrutinized. Merrill Lynch Co. suspended Bacanovic (who was also Sam Waksal's broker) and Faneuil, with pay, in late June. Later, since all phone calls to brokerages are taped and emails kept, it appeared to be damning when Bacanovic initially refused to provide his cell phone records to the House Energy and Commerce Commission for their investigation. Moreover, on October 4, 2001, Faneuil "pleaded guilty to a charge that he accepted gifts from his superior in return for keeping quiet about circumstances surrounding Stewart's controversial stock sale." Faneuil admitted that he received extra vacation time, including a free airline ticket from a Merrill Lynch employee in exchange for withholding information from SEC and FBI investigators.
According to the Washington Post report of Faneuil's appearance in court:
On the morning of Dec. 27, Faneuil received a telephone call from a Waksal family member who asked to sell 39,472 shares for almost $2.5 million, according to court records. Waksal's accountant also called Faneuil in an unsuccessful attempt to sell a large bloc of shares, the records show. Prosecutors allege that those orders "constituted material non-public information." But they alleged that Faneuil violated his duty to Merrill Lynch by calling a "tippee" to relate that Waksal family members were attempting to liquidate their holdings in ImClone. That person then sold "all the Tippee's shares of ImClone stock, approximately 3,928 shares, yielding proceeds of approximately $228,000" the court papers said.
One day later, on October 5th, it was announced that Martha resigned from her post as a director of the New York Stock Exchange-a post she held only four months-and the price of MSO shares declined more than 7 percent to $6.32 in afternoon trading. From June 12th to October 12th, the share price of MSO had declined by approximately 61 percent.
Martha's future took a further interesting turn on October 15th, when Sam Waksal pleaded guilty to six counts of his indictment, including: bank fraud, securities fraud, conspiracy to obstruct justice, and perjury. But he did not agree to cooperate with prosecutors, and did not incriminate Martha. Waksal's sentencing was postponed until 2003 so his lawyers could exchange information with U.S. District Judge William Pauley concerning Waksal's financial records.
After October 15th, the price of MSO shares rose, perhaps as the prospect of Martha's going to jail appeared to become more remote, and/or people began to consider MSO to be more than just Martha and her reputation. The gain from the low point of the MSO share price in October to December 9, 2002, was about 40 percent.
Martha still had a lot to think about, however. Apparently the SEC gave Martha notice in September of its intent to file civil securities fraud charges against her. Martha's lawyers responded and the SEC deliberated. Even if Martha were to get off with a fine, prosecutors could still bring a criminal case against her in the future. It is an interesting legal question, how, if Martha were to plead guilty to the civil charges, she could avoid criminal liability.
On June 4, 2003, Stewart was indicted on charges of obstructing justice and securities fraud. She then quit as Chairman and CEO of her company, but stayed on the Board and served as Chief Creative Officer. She appeared in court on January 20, 2004, and watched the proceedings throughout her trial. In addition to the testimony of Mr. Faneuil, Stewart's personal friend Mariana Pasternak testified that Stewart told her Waksal was trying to dump his shares shortly after selling her Imclone stock.24 Ultimately, the jury did not believe the counterclaim by Peter Bacanovic, Stewart's broker, that he and Martha had a prior agreement to sell Imclone if it went below $60. Although Judge Cedarbaum dismissed the charge of securities fraud for insider trading, on March 5, 2004, the jury found Stewart guilty on one charge of conspiracy, one of obstruction of justice, and two of making false statements to investigators. 25 The announcement caused the share price of her company to sink by $2.77 to $11.26 on the NYSE.

Martha immediately posted the following on her website:
I am obviously distressed by the jury's verdict, but I continue to take comfort in knowing that I have done nothing wrong and that I have the enduring support of my family and friends. I will appeal the verdict and continue to fight to clear my name. I believe in the fairness of the judicial system and remain confident that I will ultimately prevail.
Martha was subsequently sentenced to 5 months in prison and 5 months of home detention-a lower than maximum sentence under the U.S. Sentencing Guidelines-and she did appeal. Although she could have remained free during the appeal, on September 15, 2004, she asked for her sentence to start so she could be at home in time for the spring planting season. Martha's appeal cited "prosecutorial misconduct, extraneous influences on the jury and erroneous evidentiary rulings and jury instructions" but on January 6, 2006, her conviction was upheld.
Impact on Reputation
Martha may still disagree with the verdict. But there is little doubt that the allegations and her convictions had a major impact on Martha personally, and on the fortunes of MSO and the other shareholders that had faith in her and her company. Assuming a value per share of $13.50 on June 12th, the decline to a low of $5.26 in early October 2003 represents a loss of market capitalization (i.e., reputation capital as defined by Charles Fombrun30) of approximately $250 million, or 61 percent. The value of MSO's shares did return to close at $35.51 on February 7, 2005,31 but fell off to under $20 in early 2006. According to a New York brand-rating company, Brand-Keys, the Martha Stewart brand reached a peak of 120 (the baseline is 100) in May 2002, and sank to a low of 63 in March 2004.
What will the future hold? Martha has returned to TV with a version of The Apprentice as well as her usual homemaking and design shows, and her products and magazines continue to be sold. Will Martha regain her earlier distinction? Would she do it again to avoid losing $45,673?
Questions
Why is insider trading considered harmful? Should insider trading be banned if it assists in moving a stock price to new a equilibrium quickly, so that non-insiders are trading at appropriate prices sooner?

Question 13

Why is it important for a professional accountant to understand the ethical trends discussed in this chapter?

Question 14

On April 13, 2006, Bausch Lomb's (B L) CEO, Ron Zarrella, indicated that B L would not be recalling their soft contact lens cleaner Renu with MoistureLoc. Drugstores in the U.S.A. were, however, removing the product from their shelves due to a concern over reported infections related to Fusarium keratitis, a fungus frequently found in drains and sinks. Zarrella went on to say that Renu kills the fungus that causes the infection, and he was considering how to rebuild the brand and mitigate the "ripple-effect" caused to other B L products. Up to April 12th, B L's shares had fallen by 7 percent due to these health concerns.
On May 31, 2006, B L indicated that it was halting worldwide sales of Renu because tests showed that misuse could cause blindness due to Fusarium fungal infection. "B L said it appeared common, if frowned-upon, lens care practices-like topping off solution in storage instead of replacing it-could leave a film on lenses that shielded Fusarium from the sterilizing agent in MoistureLoc." The company also found unacceptable manufacturing practices in the company's Greenville, South Carolina factory, but said they did not relate to the infection problem.
When Zarrella was first questioned, he knew that there had been a number of incidents of infection in Hong Kong, which B L had reported to the U.S. Centers for Disease Control and Prevention in December 2005, as well as other reports in the U.S.A. However, another product from the Greenville plant was also implicated. Although the incidence of infection were five times higher for Renu than for any other cleaner, the evidence was not enough to halt production and sales. At the time, lens care contributed 20 percent of the company's revenue, which had amounted to $1.75 billion in the first nine months of 2006. When the recall was announced, the company's stock rose 12.7 percent, but was $10 below its early April level. Lawsuits subsequently occurred.
What should Zarrella have done, and when?

Question 15

In June 2002, Martha Stewart began to wrestle with allegations that she had improperly used inside information to sell a stock investment to an unsuspecting investing public. That was when her personal friend Sam Waksal was defending himself against Securities and Exchange Commission (SEC) allegations that he had tipped off his family members so they could sell their shares of ImClone Systems Inc. (ImClone) just before other investors learned that ImClone's fortunes were about to take a dive. Observers presumed that Martha was also tipped off and, even though she proclaimed her innocence, the rumors would not go away.
On TV daily as the reigning guru of homemaking, Martha is the multimillionaire proprietor, president, and driving force of Martha Stewart Living Omnimedia Inc. (MSO), of which, on March 18, 2002, she owned 30,713,475 (62.6 percent) of the class A, and 30,619,375 (100 percent) of the class B shares. On December 27, 2001, Martha's class A and class B shares were worth approximately $17 each, so on paper Martha's MSO class A shares alone were worth over $500 million. Class B shares are convertible into class A shares on a oneto- one basis.
Martha's personal life became public. The world did not know that Martha Stewart had sold 3,928 shares of ImClone for $58 each on December 27, 2001,until it surfaced in June 2002. The sale generated only $227,824 for Martha, and she avoided losing $45,673 when the stock price dropped the next day, but it has caused her endless personal grief and humiliation, and the loss of reputation, as well as a significant drop to $5.26 in the MSO share price.
What Happened?
Martha had made an investment in ImClone, a company that was trying to get the approval of the U.S. Food and Drug Administration (FDA) to bring to market an anti-colon cancer drug called Erbitux. Samuel Waksal, then the CEO of ImClone and a personal friend of Martha's, was apparently warned on or close to December 25, 2001, that the FDA was going to refuse5 to review Erbitux. According to SEC allegations, Sam relayed the information to his family so they could dump their ImClone shares on an unsuspecting public before the official announcement. Martha claims that she didn't get any inside information early from Sam, but regulators believe that she may have or from her broker or her broker's aide. The activities of several of Sam's friends, including Martha, are under investigation by the SEC.
Sam was arrested on June 12, 2002, and charged with "nine criminal counts of conspiracy, securities fraud and perjury, and then freed on $10 million bail." In a related civil complaint, the SEC alleged that Sam "tried to sell ImClone stock and tipped family members before ImClone's official FDA announcement on Dec. 28."
According to the SEC, two unidentified members of Sam's family sold about $10 million worth of ImClone stock in a twoday interval just before the announcement. Moreover, Sam also tried for two days to sell nearly 80,000 ImClone shares for about $5 million, but two different brokers refused to process the trades.
Martha has denied any wrongdoing. She was quoted as saying: "In placing my trade I had no improper information…. My transaction was entirely lawful." She admitted calling Sam after selling her shares, but claimed: "I did not reach Mr. Waksal, and he did not return my call." She maintained that she had an agreement with her broker to sell her remaining ImClone shares "if the stock dropped below $60 per share."
Martha's public, however, was skeptical. She was asked embarrassing questions when she appeared on TV for a cooking segment, and she declined to answer saying: "I am here to make my salad." Martha's interactions with her broker, Peter Bacanovic, and his assistant, Douglas Faneuil, are also being scrutinized. Merrill Lynch Co. suspended Bacanovic (who was also Sam Waksal's broker) and Faneuil, with pay, in late June. Later, since all phone calls to brokerages are taped and emails kept, it appeared to be damning when Bacanovic initially refused to provide his cell phone records to the House Energy and Commerce Commission for their investigation. Moreover, on October 4, 2001, Faneuil "pleaded guilty to a charge that he accepted gifts from his superior in return for keeping quiet about circumstances surrounding Stewart's controversial stock sale." Faneuil admitted that he received extra vacation time, including a free airline ticket from a Merrill Lynch employee in exchange for withholding information from SEC and FBI investigators.
According to the Washington Post report of Faneuil's appearance in court:
On the morning of Dec. 27, Faneuil received a telephone call from a Waksal family member who asked to sell 39,472 shares for almost $2.5 million, according to court records. Waksal's accountant also called Faneuil in an unsuccessful attempt to sell a large bloc of shares, the records show. Prosecutors allege that those orders "constituted material non-public information." But they alleged that Faneuil violated his duty to Merrill Lynch by calling a "tippee" to relate that Waksal family members were attempting to liquidate their holdings in ImClone. That person then sold "all the Tippee's shares of ImClone stock, approximately 3,928 shares, yielding proceeds of approximately $228,000" the court papers said.
One day later, on October 5th, it was announced that Martha resigned from her post as a director of the New York Stock Exchange-a post she held only four months-and the price of MSO shares declined more than 7 percent to $6.32 in afternoon trading. From June 12th to October 12th, the share price of MSO had declined by approximately 61 percent.
Martha's future took a further interesting turn on October 15th, when Sam Waksal pleaded guilty to six counts of his indictment, including: bank fraud, securities fraud, conspiracy to obstruct justice, and perjury. But he did not agree to cooperate with prosecutors, and did not incriminate Martha. Waksal's sentencing was postponed until 2003 so his lawyers could exchange information with U.S. District Judge William Pauley concerning Waksal's financial records.
After October 15th, the price of MSO shares rose, perhaps as the prospect of Martha's going to jail appeared to become more remote, and/or people began to consider MSO to be more than just Martha and her reputation. The gain from the low point of the MSO share price in October to December 9, 2002, was about 40 percent.
Martha still had a lot to think about, however. Apparently the SEC gave Martha notice in September of its intent to file civil securities fraud charges against her. Martha's lawyers responded and the SEC deliberated. Even if Martha were to get off with a fine, prosecutors could still bring a criminal case against her in the future. It is an interesting legal question, how, if Martha were to plead guilty to the civil charges, she could avoid criminal liability.
On June 4, 2003, Stewart was indicted on charges of obstructing justice and securities fraud. She then quit as Chairman and CEO of her company, but stayed on the Board and served as Chief Creative Officer. She appeared in court on January 20, 2004, and watched the proceedings throughout her trial. In addition to the testimony of Mr. Faneuil, Stewart's personal friend Mariana Pasternak testified that Stewart told her Waksal was trying to dump his shares shortly after selling her Imclone stock.24 Ultimately, the jury did not believe the counterclaim by Peter Bacanovic, Stewart's broker, that he and Martha had a prior agreement to sell Imclone if it went below $60. Although Judge Cedarbaum dismissed the charge of securities fraud for insider trading, on March 5, 2004, the jury found Stewart guilty on one charge of conspiracy, one of obstruction of justice, and two of making false statements to investigators. 25 The announcement caused the share price of her company to sink by $2.77 to $11.26 on the NYSE.

Martha immediately posted the following on her website:
I am obviously distressed by the jury's verdict, but I continue to take comfort in knowing that I have done nothing wrong and that I have the enduring support of my family and friends. I will appeal the verdict and continue to fight to clear my name. I believe in the fairness of the judicial system and remain confident that I will ultimately prevail.
Martha was subsequently sentenced to 5 months in prison and 5 months of home detention-a lower than maximum sentence under the U.S. Sentencing Guidelines-and she did appeal. Although she could have remained free during the appeal, on September 15, 2004, she asked for her sentence to start so she could be at home in time for the spring planting season. Martha's appeal cited "prosecutorial misconduct, extraneous influences on the jury and erroneous evidentiary rulings and jury instructions" but on January 6, 2006, her conviction was upheld.
Impact on Reputation
Martha may still disagree with the verdict. But there is little doubt that the allegations and her convictions had a major impact on Martha personally, and on the fortunes of MSO and the other shareholders that had faith in her and her company. Assuming a value per share of $13.50 on June 12th, the decline to a low of $5.26 in early October 2003 represents a loss of market capitalization (i.e., reputation capital as defined by Charles Fombrun30) of approximately $250 million, or 61 percent. The value of MSO's shares did return to close at $35.51 on February 7, 2005,31 but fell off to under $20 in early 2006. According to a New York brand-rating company, Brand-Keys, the Martha Stewart brand reached a peak of 120 (the baseline is 100) in May 2002, and sank to a low of 63 in March 2004.
What will the future hold? Martha has returned to TV with a version of The Apprentice as well as her usual homemaking and design shows, and her products and magazines continue to be sold. Will Martha regain her earlier distinction? Would she do it again to avoid losing $45,673?
Questions
Who is Martha Stewart's target market?

Question 16

In June 2002, Martha Stewart began to wrestle with allegations that she had improperly used inside information to sell a stock investment to an unsuspecting investing public. That was when her personal friend Sam Waksal was defending himself against Securities and Exchange Commission (SEC) allegations that he had tipped off his family members so they could sell their shares of ImClone Systems Inc. (ImClone) just before other investors learned that ImClone's fortunes were about to take a dive. Observers presumed that Martha was also tipped off and, even though she proclaimed her innocence, the rumors would not go away.
On TV daily as the reigning guru of homemaking, Martha is the multimillionaire proprietor, president, and driving force of Martha Stewart Living Omnimedia Inc. (MSO), of which, on March 18, 2002, she owned 30,713,475 (62.6 percent) of the class A, and 30,619,375 (100 percent) of the class B shares. On December 27, 2001, Martha's class A and class B shares were worth approximately $17 each, so on paper Martha's MSO class A shares alone were worth over $500 million. Class B shares are convertible into class A shares on a oneto- one basis.
Martha's personal life became public. The world did not know that Martha Stewart had sold 3,928 shares of ImClone for $58 each on December 27, 2001,until it surfaced in June 2002. The sale generated only $227,824 for Martha, and she avoided losing $45,673 when the stock price dropped the next day, but it has caused her endless personal grief and humiliation, and the loss of reputation, as well as a significant drop to $5.26 in the MSO share price.
What Happened?
Martha had made an investment in ImClone, a company that was trying to get the approval of the U.S. Food and Drug Administration (FDA) to bring to market an anti-colon cancer drug called Erbitux. Samuel Waksal, then the CEO of ImClone and a personal friend of Martha's, was apparently warned on or close to December 25, 2001, that the FDA was going to refuse5 to review Erbitux. According to SEC allegations, Sam relayed the information to his family so they could dump their ImClone shares on an unsuspecting public before the official announcement. Martha claims that she didn't get any inside information early from Sam, but regulators believe that she may have or from her broker or her broker's aide. The activities of several of Sam's friends, including Martha, are under investigation by the SEC.
Sam was arrested on June 12, 2002, and charged with "nine criminal counts of conspiracy, securities fraud and perjury, and then freed on $10 million bail." In a related civil complaint, the SEC alleged that Sam "tried to sell ImClone stock and tipped family members before ImClone's official FDA announcement on Dec. 28."
According to the SEC, two unidentified members of Sam's family sold about $10 million worth of ImClone stock in a twoday interval just before the announcement. Moreover, Sam also tried for two days to sell nearly 80,000 ImClone shares for about $5 million, but two different brokers refused to process the trades.
Martha has denied any wrongdoing. She was quoted as saying: "In placing my trade I had no improper information…. My transaction was entirely lawful." She admitted calling Sam after selling her shares, but claimed: "I did not reach Mr. Waksal, and he did not return my call." She maintained that she had an agreement with her broker to sell her remaining ImClone shares "if the stock dropped below $60 per share."
Martha's public, however, was skeptical. She was asked embarrassing questions when she appeared on TV for a cooking segment, and she declined to answer saying: "I am here to make my salad." Martha's interactions with her broker, Peter Bacanovic, and his assistant, Douglas Faneuil, are also being scrutinized. Merrill Lynch Co. suspended Bacanovic (who was also Sam Waksal's broker) and Faneuil, with pay, in late June. Later, since all phone calls to brokerages are taped and emails kept, it appeared to be damning when Bacanovic initially refused to provide his cell phone records to the House Energy and Commerce Commission for their investigation. Moreover, on October 4, 2001, Faneuil "pleaded guilty to a charge that he accepted gifts from his superior in return for keeping quiet about circumstances surrounding Stewart's controversial stock sale." Faneuil admitted that he received extra vacation time, including a free airline ticket from a Merrill Lynch employee in exchange for withholding information from SEC and FBI investigators.
According to the Washington Post report of Faneuil's appearance in court:
On the morning of Dec. 27, Faneuil received a telephone call from a Waksal family member who asked to sell 39,472 shares for almost $2.5 million, according to court records. Waksal's accountant also called Faneuil in an unsuccessful attempt to sell a large bloc of shares, the records show. Prosecutors allege that those orders "constituted material non-public information." But they alleged that Faneuil violated his duty to Merrill Lynch by calling a "tippee" to relate that Waksal family members were attempting to liquidate their holdings in ImClone. That person then sold "all the Tippee's shares of ImClone stock, approximately 3,928 shares, yielding proceeds of approximately $228,000" the court papers said.
One day later, on October 5th, it was announced that Martha resigned from her post as a director of the New York Stock Exchange-a post she held only four months-and the price of MSO shares declined more than 7 percent to $6.32 in afternoon trading. From June 12th to October 12th, the share price of MSO had declined by approximately 61 percent.
Martha's future took a further interesting turn on October 15th, when Sam Waksal pleaded guilty to six counts of his indictment, including: bank fraud, securities fraud, conspiracy to obstruct justice, and perjury. But he did not agree to cooperate with prosecutors, and did not incriminate Martha. Waksal's sentencing was postponed until 2003 so his lawyers could exchange information with U.S. District Judge William Pauley concerning Waksal's financial records.
After October 15th, the price of MSO shares rose, perhaps as the prospect of Martha's going to jail appeared to become more remote, and/or people began to consider MSO to be more than just Martha and her reputation. The gain from the low point of the MSO share price in October to December 9, 2002, was about 40 percent.
Martha still had a lot to think about, however. Apparently the SEC gave Martha notice in September of its intent to file civil securities fraud charges against her. Martha's lawyers responded and the SEC deliberated. Even if Martha were to get off with a fine, prosecutors could still bring a criminal case against her in the future. It is an interesting legal question, how, if Martha were to plead guilty to the civil charges, she could avoid criminal liability.
On June 4, 2003, Stewart was indicted on charges of obstructing justice and securities fraud. She then quit as Chairman and CEO of her company, but stayed on the Board and served as Chief Creative Officer. She appeared in court on January 20, 2004, and watched the proceedings throughout her trial. In addition to the testimony of Mr. Faneuil, Stewart's personal friend Mariana Pasternak testified that Stewart told her Waksal was trying to dump his shares shortly after selling her Imclone stock.24 Ultimately, the jury did not believe the counterclaim by Peter Bacanovic, Stewart's broker, that he and Martha had a prior agreement to sell Imclone if it went below $60. Although Judge Cedarbaum dismissed the charge of securities fraud for insider trading, on March 5, 2004, the jury found Stewart guilty on one charge of conspiracy, one of obstruction of justice, and two of making false statements to investigators. 25 The announcement caused the share price of her company to sink by $2.77 to $11.26 on the NYSE.

Martha immediately posted the following on her website:
I am obviously distressed by the jury's verdict, but I continue to take comfort in knowing that I have done nothing wrong and that I have the enduring support of my family and friends. I will appeal the verdict and continue to fight to clear my name. I believe in the fairness of the judicial system and remain confident that I will ultimately prevail.
Martha was subsequently sentenced to 5 months in prison and 5 months of home detention-a lower than maximum sentence under the U.S. Sentencing Guidelines-and she did appeal. Although she could have remained free during the appeal, on September 15, 2004, she asked for her sentence to start so she could be at home in time for the spring planting season. Martha's appeal cited "prosecutorial misconduct, extraneous influences on the jury and erroneous evidentiary rulings and jury instructions" but on January 6, 2006, her conviction was upheld.
Impact on Reputation
Martha may still disagree with the verdict. But there is little doubt that the allegations and her convictions had a major impact on Martha personally, and on the fortunes of MSO and the other shareholders that had faith in her and her company. Assuming a value per share of $13.50 on June 12th, the decline to a low of $5.26 in early October 2003 represents a loss of market capitalization (i.e., reputation capital as defined by Charles Fombrun30) of approximately $250 million, or 61 percent. The value of MSO's shares did return to close at $35.51 on February 7, 2005,31 but fell off to under $20 in early 2006. According to a New York brand-rating company, Brand-Keys, the Martha Stewart brand reached a peak of 120 (the baseline is 100) in May 2002, and sank to a low of 63 in March 2004.
What will the future hold? Martha has returned to TV with a version of The Apprentice as well as her usual homemaking and design shows, and her products and magazines continue to be sold. Will Martha regain her earlier distinction? Would she do it again to avoid losing $45,673?
Questions
If you wished to sell an investment in a company where one of your friends is an insider, or even a significant employee, should you call your friend to advise him you are about to sell? Why, or why not?

Question 17

Why should a professional accountant be aware of the Ethics Code of the International Federation of Accountants?

Question 18

On April 24, 1985, Warren M. Anderson, the sixty-three-year-old chairman of Union Carbide Corporation, had to make a disappointing announcement to angry stockholders at their annual meeting in Danbury, Connecticut. Anderson, who had been jailed briefly by the government of India on charges of "negligence and criminal corporate liability," had been devoting all his attention to the company's mushrooming problems. His announcement concerned the complete breakdown of negotiations with officials in the Indian government: they had rejected as inadequate an estimated $200 million in compensation for the deaths of 2,000 people and the injuries of 200,000 others, which had been caused in December 1984 by a poisonous leak of methyl isocyanate gas from a Union Carbide pesticide plant located in Bhopal, India.1 In the wake of more than $35 billion in suits filed against the company's liability coverage, reported to total only about $200 million, the company's stock tumbled. Angry stockholders filed suit, charging that they had suffered losses of more than $1 billion because the company's managers had failed to warn them of the risks at the Indian plant. Analysts predicted the company would be forced into bankruptcy. Ironically, the Union Carbide plant in Bhopal had been losing money for several years and Anderson had considered closing it.
The deadly methyl isocyanate gas that leaked from the Union Carbide plant is a volatile and highly toxic chemical used to make pesticides. It is 500 times more poisonous than cyanide, and it reacts explosively with almost any substance, including water. Late on the night of December 2, 1984, the methyl isocyanate stored in a tank at the Bhopal factory started boiling violently when water or some other agent accidentally entered the tank. A cooling unit that should have switched on automatically had been disabled for at least a year. Shakil Qureshi, a manager on duty at the time, and Suman Dey, the senior operator on duty, both distrusted the initial readings on their gauges in the control room. "Instruments often didn't work," Qureshi said later. "They got corroded, and crystals would form on them."
By 11:30 P.M. the plant workers' eyes were burning. But the workers remained unconcerned because, as they later reported, minor leaks were common at the plant and were often first detected in this way. Many of the illiterate workers were unaware of the deadly properties of the chemical. Not until 12:40 A.M., as workers began choking on the fumes, did they realize something was drastically wrong. Five minutes later, emergency valves on the storage tank exploded and white toxic gas began shooting out of a pipestack and drifting toward the shantytowns downwind from the plant. An alarm sounded as manager Dey shouted into the factory loudspeaker that a massive leak had erupted and the workers should flee the area. Meanwhile, Qureshi ordered company fire trucks to spray the escaping gas with water to neutralize the chemical. But water pressure was too low to reach the top of the 120- foot-high pipestack. Dey then rushed to turn on a vent scrubber that should have neutralized the escaping gas with caustic soda. Unfortunately, the scrubber had been shut down for maintenance fifteen days earlier. As white clouds continued to pour out of the pipestack, Qureshi shouted to workers to turn on a nearby flare tower to burn off the gas. The flare, however, would not go on because its pipes had corroded and were still being repaired.
Panicked workers poured out of the plant, and the lethal cloud settled over the neighboring shantytowns of Jaipraksh and Chola. Hundreds died in their beds, choking helplessly in violent spasms as their burning lungs filled with fluid. Thousands were blinded by the caustic gas, and thousands of others suffered burns and lesions in their nasal and bronchial passages. When it was over, at least 2,000 lay dead and 200,000 were injured. The majority of the dead were squatters who had illegally built huts next to the factory. Surviving residents of the slums, most of them illiterate, declared afterward that they had built their shacks there because they did not understand the danger and thought the factory made healthy "medicine for plants." Union Carbide managers from the United States built the Bhopal plant in 1969 with the blessing of the Indian government, which was anxious to increase production of the pesticides it desperately needed to raise food for India's huge population. Over the next fifteen years, pesticides enabled India to cut its annual grain losses from 25 percent to 15 percent, a saving of 15 million tons of grain, or enough to feed 70 million people for a full year. Indian officials willingly accepted the technology, skills, and equipment that Union Carbide provided, and Indian workers were thankful for the company jobs, without which they would have had to beg or starve, as India has no welfare system. In return, India offered the company cheap labor, low taxes, and few laws requiring expensive environmental equipment or costly workplace protections. In comparison with other factories in India, the Union Carbide plant was considered a model, law-abiding citizen with a good safety record. Said a government official: "They never refused to install what we asked."
At the time of the disaster, the pesticide plant in Bhopal was operated by Union Carbide India Ltd., a subsidiary of the Union Carbide Corporation of Danbury, Connecticut, which had a controlling interest of 50.9 percent in the Indian company. The board of directors of Union Carbide India Ltd. included one top manager from the parent Union Carbide Corporation in the United States and four managers from another Union Carbide subsidiary, based in Hong Kong. Reports from the Indian company were regularly reviewed by the managers in Danbury, who had the authority to exercise financial and technical control over Union Carbide India Ltd. Although day-to-day details were left to the Indian managers, the American managers controlled budgets, set major policies, and issued technical directives for operating and maintaining the plant.
Before the tragedy, the Indian subsidiary had been doing poorly. In an effort to contain annual losses of $4 million from the unprofitable plant, local company managers had initiated several cost-cutting programs. Only a year before, the number of equipment operators on each shift had been reduced from twelve to five; morale dropped and many of the best operators quit and were replaced with workers whose education was below that required by company manuals. Although Warren Anderson and other Union Carbide Corporation (U.S.) managers insisted that responsibility for the plant's operations rested with the local Indian managers, they hastened to say that all cost-cutting measures had been justified.
Two years before the disaster, the American managers had sent three engineers from the United States to survey the plant and, as a result, had told the Indian managers to remedy ten major flaws in safety equipment and procedures. The Indian managers had written back that the problems were corrected. "We have no reason to believe that what was represented to us by Union Carbide India Ltd. did not in fact occur," said the U.S. managers. The U.S. managers had considered closing the failing plant a year earlier, but Indian city and state officials had asked that the company remain open to preserve the jobs of thousands of workers in the plant and in dependent local industries.
Did the legal doctrine of "limited liability" apply to protect the shareholders of Union Carbide Corporation (U.S.)?

Question 19

Mega Brands has been selling Magnetix toys for many years. It also sells Mega Bloks, construction toys based on Spider-Man, Pirates of the Caribbean, as well as other products in over 100 countries. In 2006, Mega Brands had over $547 million in revenue, including over $100 from magnetic toys, but its share price fell approximately $27 to $20.30 in mid-July 2007. One reason for the fall was that a child, who had swallowed a magnet that had fallen out of a toy, had died in the late fall of 2005. The U.S. Consumer Products Safety Commission (CPSC) had issued a product recall in March 2006.
Subsequently, a number of lawsuits appeared involving other children who had suffered bowel complications. The symptoms resulting from a child swallowing a magnet are similar to those of a stomach ache, cold or flu, and so the problem is sometimes misdiagnosed. The consequences can be much worse if a child swallows more than one magnet, particularly if they are the super-powerful magnets like those in Magnetix toys. They are so strong that they do not pass through the child's digestive system; instead, the magnets rip through tissue as they are attracted to each other. Complex surgery is required for extraction and complications can continue afterward.
After refusing twice, Mega Brands engaged in two voluntary recalls at the request of the Commission in March 2006 and April 2007. Defective merchandise was still found on store shelves by CPSC investigators in April. Even then, at a hearing on June 18, 2007, Senator Robert Durban stated: "The company did everything in its power to derail the commission's effort to take the product off the shelf." In frustration, Senator Durban commented: "When a company is selling dangerous products in America and refuses to co-operate with the CPSC, we have few laws and few tools to use to protect consumers."
In addition, the company did not quickly comply with CPSC requests for information and violated the terms of one recall. Finally, on December 1, 2007, after failing to respond on time to a subpoena, data was submitted covering 1,500 complaint reports made to Mega Brands or to Rose Art Industries, the toy's manufacturer. Mega Brands asserted that they had to search through warehouses to gather the data, because they lacked an organized comprehensive reporting system.
A new product, supposedly improved, has been introduced with new labeling that indicates the suitable minimum age to be six instead of three.
Should the CPSC have more powers to deal with such hazards and companies? If so, what would they be? If not, why not?

Question 20

Why is an ethical corporate culture important?

Question 21

On July 16, 2008, it was announced that several Chinese producers of baby milk powder had been adding melamine, a chemical usually used in countertops, to increase the "richness" of their milk powder and to increase the protein count. Shockingly, the melaminetainted milk powder was responsible for the deaths of four infants and the sickening of more than 6,200 more. Milk manufacturers had been using melamine as a low-cost way of "enriching" their product in both taste and protein count.
Melamine, a toxic chemical that makes countertops very durable, damages kidneys. This fact came to world attention on March 16, 2007, when Menu Foods of Streetsville, Ontario, Canada, recalled dog and cat foods that it had mixed in Canada from Chinese ingredients that were found to include melamine. Very quickly thereafter, pet owners claims and class action lawsuits threatened to put the company into bankruptcy until settlements were worked out. A subsequent investigation by the U.S. Food and Drug Administration (FDA) led to the recall of pet food by major manufacturers, including Del Monte, Nestle Purina, Menu Foods, and many others. On February 6, 2008, "the FDA announced that that two Chinese nationals and the businesses they operate, along with a U.S. company and its president and chief executive officer, were indicted by a federal grand jury for their roles in a scheme to import products purported to be wheat gluten into the United States that were contaminated with melamine." It will be interesting to follow what penalties are ultimately paid by the Chinese manufacturers.
Although the story of melamine-tainted ingredients broke in mid-March 2007, the similarly tainted-milk powder link did not come to light in China until sixteen months later. Governmental follow-up has not been speedy even though unmarked bags of "protein powder" had probably been added to several other products, including baking powder and feed for chickens thus contaminating eggs and meat. On October 8, 2008, the Chinese government stopped reporting updated figures of infant milk powder sufferers "because it is not an infectious disease, so it's not necessary to announce it to the public." Knowledgeable members of the Chinese public, however, have been using the suitcases of their visiting relatives to import U.S.- and Canadianmade milk formula for their children.
It is also fascinating to consider another aspect of life in China-rumored control of online news. Although there is no proof of the rumors, which might have been started by competitors, the Wall Street Journal's (WSJ) online service has reported that Baidu.com Inc., the company referred to as the "Google of China," is under attack for accepting payments to keep stories containing a specific milk manufacturing company's name from online searches about the tainted milk scandal even when the manufacturer was recalling the product. Local government officials also declined to confirm the milk manufacturer's problem during the same period.
Baidu.com "said it had been approached this week by several dairy producers but said that it 'flat out refused' to screen out unfavorable news and accused rivals of fanning the flames."9 In a statement, it said: "Baidu respects the truth, and our search results reflect that commitment."
Currently, there is no evidence that Baidu.com did accept the screen-out payments as rumored, but it does face some challenges of its own making in trying to restore it reputation. For example, unlike Google that separates or distinguishes paid advertisements from non-paid search results, Baidu.com integrated paid advertisements into its search listing until critics recently complained. In addition, companies could pay more and get a higher ranking for their ads. According to the WSJ article, a search for "mobile phone" generates a list where almost the entire first page consists of paid advertisements. Also, competitors fearing increased competition and new products from Baidu.com, which recently increased its market share to 64.4 percent, have begun to restrict Baidu's search software (spiders) from penetrating websites that the competitors control.
Baidu.com's profit growth had been strong, but for how long? Baidu.com, Inc. is traded on the U.S.'s NASDAQ Stock Market under the symbol BIDU. Since the rumors surfaced in late August/early September 2008, BIDU's share price has declined from $308 to almost $110 on November 20, 2008.
What would future reputational damage affect, and how could it be measured?

Question 22

In October 2009, PepsiCo Inc. launched, apologized, and then pulled an iPhone application called "AMP Up Before You Score," designed to promote its Amp Energy drink. The drink's target market is males between the ages of 18 and 24. Released on October 8, the app stereotyped women into two dozen groups, including "rebound girl," "sorority girl," "cougar," and "foreign exchange student." Users could flip through a series of digital cards that provided background information on each type of woman, including how to calculate a carbon footprint to score with a "treehugger," as well as strategies on how to seduce a "married" girl. It also provided some pick-up lines: "Wasn't I in Space Academy with you?" for the "nerd," and for the "artist" it suggested "You know the Mona Lisa has no eyebrows. I wonder what else she shaves." The app included a "Brag List" so that guys who "scored" could post a name, the date, and any other information on their Facebook or Twitter accounts.
Pepsi was inundated with criticism from blogs, emails, and the media. The app was accused of being sexist because it degraded and objectified women. On October 12, Pepsi apologized through its Tweeter page: "Our app tried 2 show the humorous lengths guys go 2 pick up women. We apologize if it's in bad taste appreciate your feedback."1 But not all the feedback was negative. Many males said that they considered it to be funny. Nevertheless, on October 22 Pepsi announced that it was withdrawing the app. "We have decided to discontinue the AMP iPhone application. We've listened to a variety of audiences and determined this was the most appropriate course of action."
Are advertising campaigns that are in bad taste also unethical?

Question 23

Why have concerns over pollution become so important for management and directors?

Question 24

On April 13, 2006, Bausch Lomb's (B L) CEO, Ron Zarrella, indicated that B L would not be recalling their soft contact lens cleaner Renu with MoistureLoc. Drugstores in the U.S.A. were, however, removing the product from their shelves due to a concern over reported infections related to Fusarium keratitis, a fungus frequently found in drains and sinks. Zarrella went on to say that Renu kills the fungus that causes the infection, and he was considering how to rebuild the brand and mitigate the "ripple-effect" caused to other B L products. Up to April 12th, B L's shares had fallen by 7 percent due to these health concerns.
On May 31, 2006, B L indicated that it was halting worldwide sales of Renu because tests showed that misuse could cause blindness due to Fusarium fungal infection. "B L said it appeared common, if frowned-upon, lens care practices-like topping off solution in storage instead of replacing it-could leave a film on lenses that shielded Fusarium from the sterilizing agent in MoistureLoc." The company also found unacceptable manufacturing practices in the company's Greenville, South Carolina factory, but said they did not relate to the infection problem.
When Zarrella was first questioned, he knew that there had been a number of incidents of infection in Hong Kong, which B L had reported to the U.S. Centers for Disease Control and Prevention in December 2005, as well as other reports in the U.S.A. However, another product from the Greenville plant was also implicated. Although the incidence of infection were five times higher for Renu than for any other cleaner, the evidence was not enough to halt production and sales. At the time, lens care contributed 20 percent of the company's revenue, which had amounted to $1.75 billion in the first nine months of 2006. When the recall was announced, the company's stock rose 12.7 percent, but was $10 below its early April level. Lawsuits subsequently occurred.
What lessons should be taken from B L's Renu experience?

Question 25

On February 11, 2010, the leaders of the European Union (EU) agreed on a plan to bail out Greece, a country that had joined the EU in 1981 and was admitted to the European Monetary Union (EMU) allowing Greece to adopt the Euro as its currency in 2001. Greece had been unable to pay its bills, or to borrow more money to do so because it had overspent its income on its social programs and other projects. In the aftermath of providing Greece with bailout credit ultimately totaling €100 billion ($147 billion), questions were asked about how this could have happened. A spotlight was brought to bear on how Goldman Sachs (GS) had enabled Greece to qualify for adopting the Euro in the first place, and for providing the means to hide some transactions in which Greece pledged its future revenues in return for instant cash to spend. In a sense, GS helped Greece draw a veil over its finances with arrangements that were not transparent.
In 2001, Greece wanted to join the EMU but faced a requirement that its debt-to-GDP ratio be less than 60%.3 Unfortunately, Greece had some debt that was payable in U.S. dollars (USD) and other debt in Japanese Yen. Both currencies had grown in value relative to the Euro in 1999 and 2000. Under EU rules, such unhedged debt had to be valued and reported at the year-end exchange rates, so Greece faced the prospect reporting increased debt liabilities.
In late 2000 and 2001, GS proposed and arranged two types of hedges that reduced reported Greek debt by €2.367 billion, and allowed Greece to access unreported, off-balance sheet financing:
• Currency hedges that turned the USD and Yen debt payments into Euro payments, and subsequently the Greek swap portfolio into new cross currency swaps valued using a historical implied foreign exchange rate rather than market value exchange rate. Since the historical exchange rate was lower than the market rate at the time, the resulting valuation of the debt was reduced by almost €2.4 billion ($3.2 billion).
• Interest rate swaps that, when coupled with a bond, provided Greece with instant cash in 2001 in return for pledging future landing fees at its airports. GS was reportedly paid $300 million for this transaction. A similar deal in 2000 saw Greece pledge the future revenue from its national lottery in return for cash. Greece was obligated to pay GS substantial amounts until 2019 under these agreements, but chose to sell these interest rate swaps to the National Bank of Greece in 2005 after criticism in the Greek Parliament.
In essence, through these so-called interest rate swaps, Greece was converting a stream of variable future cash flows into instant cash. But, although there was a fierce debate among EU finance ministers, these obligations to pay out future cash flows were not required to be disclosed in 2001 and were therefore a type of "offbalance sheet financing." In 2002, the requirements changed and these obligations did require disclosure. Humorously, the 2000 deal related to a legal entity called Aeolos that was created for the purpose- Aeolos is the Greek goddess of wind.
In response to public criticism, GS argues on its website that "these transactions [both currency and interest rate hedges] were consistent with the Eurostat principles governing their use and disclosure at the time." In addition, GS argues that the reduction of €2.367 billion had "minimal effect on the country's overall fiscal situation in 2001" since its GDP was approximately $131 billion and its debt was 103.7% of GDP. However, it is not clear how much cash was provided by the so-called interest rate swaps that allowed Greece to report lower debt obligations in total.
Would it make a difference if other investment bankers were also providing such services?

Question 26

In 1964, at the invitation of the Ecuadorian government, Texaco Inc. began operations through a subsidiary, TexPet, in the Amazon region of Ecuador. The purpose of the project was to "develop Ecuador's natural resources and encourage the colonization of the area." TexPet was a minority owner of the project and its partner was Petroecuador, the government-owned oil company. Over the years from 1968 to 1992, the consortium extracted 1.4 billion barrels of oil from the Ecuadorian operations. Ecuador benefited greatly during this period. Ecuador received approximately 98 percent of all moneys generated by the consortium in the form of royalties, taxes, and revenues. Altogether, this amount represented more than 50 percent of Ecuador's gross national product during that period. TexPet's operations over the years provided jobs for 840 employees and approximately 2,000 contract workers, thereby benefiting almost 3,000 Ecuadorian families directly, in addition to the thousands of Ecuadorian nationals who supplied the company's needs for goods and services. Also, TexPet made substantial contributions to the Quito, Guayaquil, and Loja Polytechnics and other institutions of higher education. Oil is Ecuador's life-blood-a $1 billion per year industry that accounts for 50 percent of the export earnings and 62 percent of its fiscal budget. Unfortunately, problems also arose. Although Petroecuador acquired 100 percent of the ownership of the Transecuadorian pipeline in 1986, TexPet still accounted for 88 percent of all oil production and operated the pipeline in 1987 when it ruptured and was buried by a landslide. A spill of 16.8 million gallons (4.4 million barrels) occurred, which Texaco attributed to a major earthquake that devastated Ecuador. Other spills apparently occurred as well. Although Texaco pulled out of the consortium in 1992 entirely (having retreated to be a silent minority partner in 1990), three lawsuits were filed against it in the United States-the Aquinda (November 1993), the Sequihua (August 1993), and the Jota (1994). The indigenous people who launched the lawsuits charged that, during two decades of oil drilling in the Amazon, Texaco dumped more than 3,000 gallons of crude oil a day-millions of gallons in total-into the environment. The indigenous people say their rivers, streams, and lakes are now contaminated, and the fish and wild game that once made up their food supply are now decimated. They asked in the lawsuit that Texaco compensate them and clean up their land and waters. Maria Aquinda, for whom the suit is named, says that contaminated water from nearby oil wells drilled by the Texaco subsidiary caused her to suffer chronic stomach ailments and rashes and that she lost scores of pigs and chickens. Aquinda and 76 other Amazonian residents filed a $1.5 billion lawsuit in New York against Texaco. The class-action suit, representing 30,000 people, further alleges that Texaco acted "with callous disregard for the health, wellbeing, and safety of the plaintiffs" and that "large-scale disposal of inadequately treated hazardous wastes and destruction of tropical rain forest habitats, caused harm to indigenous peoples and their property." According to the Ecuadorian environmental group Ecological Action, Texaco destroyed more than 1 million hectares of tropical forest, spilled 74 million liters of oil, and used obsolete technology that led to the dumping of 18 million liters of toxic waste. Rainforest Action Network, a San Francisco-based organization, says effects include poor crop production in the affected areas, invasion of tribal lands, sexual assaults committed by oil workers, and loss of game animals (which would be food supply for the indigenous peoples). Audits were conducted to address the impact of operations on the soil, water, and air and to assess compliance with environmental laws, regulations, and generally accepted operating practices. Two internationally recognized and independent consulting firms, AGRA Earth Environmental Ltd. and Fugro- McClelland, conducted audits in Ecuador. Each independently concluded that TexPet acted responsibly and that no lasting or significant environmental impact exists from its former operations. Nonetheless, TexPet agreed to remedy the limited and localized impacts attributable to its operations. On May 4, 1995, Ecuador's minister of energy and mines, the president of Petroecuador, and TexPet signed the Contract for Implementing of Environmental Remedial Work and Release from Obligations, Liability, and Claims following negotiations with Ecuadorian government officials representing the interests of indigenous groups in the Amazon. In this remediation effort, producing wells and pits formerly utilized by TexPet were closed, producing water systems were modified, cleared lands were replanted, and contaminated soil was remediated. All actions taken were inspected and certified by the Ecuadorian government. Additionally, TexPet funded social and health programs throughout the region of operations, such as medical dispensaries and sewage and potable water systems. That contract settled all claims by Petroecuador and the Republic of Ecuador against TexPet, Texaco, and their affiliates for all matters arising out of the consortium's operations. In the summer of 1998, the $40 million remediation project was completed. On September 30, 1998, Ecuador's minister of energy and mines, the president of Petroecuador, and the general manager of Petropro-duccion signed the Final Release of Claims and Delivery of Equipment. This document finalized the government of Ecuador's approval of TexPet's environmental remediation work and further stated that TexPet fully complied with all obligations established in the remediation agreement signed in 1995. Meanwhile, in the United States, Texaco made the following arguments against the three lawsuits:
• Activities were in compliance with Ecuadorian laws, and international oil industry standards.
• Activities were undertaken by a largely Ecuadorian workforce-which Texaco believed would always act in the interest of its community/country.
• All investments/operations were approved and monitored by the Ecuadorian government and Petroecuador.
• All activities were conducted with the oversight and approval of the Ecuadorian government.
• Environmentally friendly measures were used, such as helicopters instead of roads.
• The health of Ecuadorians increased during the years Texaco was in Ecuador. • Ninety-eight percent of the money generated stayed in Ecuador-50 percent of GDP during that period.
• Jobs were provided for 2,800.
• Money was provided for schools.
• Independent engineering firms found no lasting damage.
• A $40 million remediation program was started per an agreement with the Ecuadorian government.
• U.S. courts should not govern activities in a foreign country.
The three lawsuits were dismissed for similar reasons-the Sequihua in 1994, the Aquinda in 1996, and the Jota in 1997. The Aquinda lawsuit, for example, was launched in New York (where Texaco has its corporate headquarters) because Texaco no longer had business in Ecuador and could not be sued there. The case was dismissed by a New York court in November 1996 on the basis that it should be heard in Ecuador. Failing that, the Ecuadorian government should have been involved in the case as well, or that the case should have been filed against the government and the state-owned Petroecuador as well as Texaco. At that point, the Ecuadorian government did get involved and filed an appeal of the decision. This was the first time a foreign government had sued a U.S. oil company in the United States for environmental damage. In addition, in 1997, the plaintiffs in the Aquinda and Jota cases also appealed the district court's decisions.
On October 5, 1998, a U.S. court of appeals remanded both cases to the district court for further consideration as to whether they should proceed in Ecuador or the United States. Written submissions were filed on February 1, 1999. Texaco has long argued that the appropriate venue for these cases is Ecuador because the oilproducing operations took place in Ecuador under the control and supervision of Ecuador's government, and the Ecuadorian courts have heard similar cases against other companies. It is Texaco's position that U.S. courts should not govern the activities of a sovereign foreign nation, just as foreign courts should not govern the activities of the United States. In fact, Texaco claimed the ambassador of Ecuador, the official representative of the government of Ecuador, noted in a letter to the district court that Ecuador would not waive its sovereign immunity.
Notwithstanding Texaco's arguments, the case was sent back to the court that threw it out, on the basis that the government of Ecuador does have the right to intervene. The question of whether the case can and will finally be tried in the United States or Ecuador under these circumstances will now take many years to be decided. Texaco claims that it has done enough to repair any damage and disputes the scientific validity of the claims-the Amazonians (or their supporters) seem to have the resources to continue fighting this suit in the U.S. courts. Ultimately the company may prefer the fairness of U.S. courts.
Questions
Do you find Texaco's arguments against the lawsuits convincing? Why and why not?

Question 27

Why are we more concerned now than our parents were about fair treatment of employees?

Question 28

On April 24, 1985, Warren M. Anderson, the sixty-three-year-old chairman of Union Carbide Corporation, had to make a disappointing announcement to angry stockholders at their annual meeting in Danbury, Connecticut. Anderson, who had been jailed briefly by the government of India on charges of "negligence and criminal corporate liability," had been devoting all his attention to the company's mushrooming problems. His announcement concerned the complete breakdown of negotiations with officials in the Indian government: they had rejected as inadequate an estimated $200 million in compensation for the deaths of 2,000 people and the injuries of 200,000 others, which had been caused in December 1984 by a poisonous leak of methyl isocyanate gas from a Union Carbide pesticide plant located in Bhopal, India.1 In the wake of more than $35 billion in suits filed against the company's liability coverage, reported to total only about $200 million, the company's stock tumbled. Angry stockholders filed suit, charging that they had suffered losses of more than $1 billion because the company's managers had failed to warn them of the risks at the Indian plant. Analysts predicted the company would be forced into bankruptcy. Ironically, the Union Carbide plant in Bhopal had been losing money for several years and Anderson had considered closing it.
The deadly methyl isocyanate gas that leaked from the Union Carbide plant is a volatile and highly toxic chemical used to make pesticides. It is 500 times more poisonous than cyanide, and it reacts explosively with almost any substance, including water. Late on the night of December 2, 1984, the methyl isocyanate stored in a tank at the Bhopal factory started boiling violently when water or some other agent accidentally entered the tank. A cooling unit that should have switched on automatically had been disabled for at least a year. Shakil Qureshi, a manager on duty at the time, and Suman Dey, the senior operator on duty, both distrusted the initial readings on their gauges in the control room. "Instruments often didn't work," Qureshi said later. "They got corroded, and crystals would form on them."
By 11:30 P.M. the plant workers' eyes were burning. But the workers remained unconcerned because, as they later reported, minor leaks were common at the plant and were often first detected in this way. Many of the illiterate workers were unaware of the deadly properties of the chemical. Not until 12:40 A.M., as workers began choking on the fumes, did they realize something was drastically wrong. Five minutes later, emergency valves on the storage tank exploded and white toxic gas began shooting out of a pipestack and drifting toward the shantytowns downwind from the plant. An alarm sounded as manager Dey shouted into the factory loudspeaker that a massive leak had erupted and the workers should flee the area. Meanwhile, Qureshi ordered company fire trucks to spray the escaping gas with water to neutralize the chemical. But water pressure was too low to reach the top of the 120- foot-high pipestack. Dey then rushed to turn on a vent scrubber that should have neutralized the escaping gas with caustic soda. Unfortunately, the scrubber had been shut down for maintenance fifteen days earlier. As white clouds continued to pour out of the pipestack, Qureshi shouted to workers to turn on a nearby flare tower to burn off the gas. The flare, however, would not go on because its pipes had corroded and were still being repaired.
Panicked workers poured out of the plant, and the lethal cloud settled over the neighboring shantytowns of Jaipraksh and Chola. Hundreds died in their beds, choking helplessly in violent spasms as their burning lungs filled with fluid. Thousands were blinded by the caustic gas, and thousands of others suffered burns and lesions in their nasal and bronchial passages. When it was over, at least 2,000 lay dead and 200,000 were injured. The majority of the dead were squatters who had illegally built huts next to the factory. Surviving residents of the slums, most of them illiterate, declared afterward that they had built their shacks there because they did not understand the danger and thought the factory made healthy "medicine for plants." Union Carbide managers from the United States built the Bhopal plant in 1969 with the blessing of the Indian government, which was anxious to increase production of the pesticides it desperately needed to raise food for India's huge population. Over the next fifteen years, pesticides enabled India to cut its annual grain losses from 25 percent to 15 percent, a saving of 15 million tons of grain, or enough to feed 70 million people for a full year. Indian officials willingly accepted the technology, skills, and equipment that Union Carbide provided, and Indian workers were thankful for the company jobs, without which they would have had to beg or starve, as India has no welfare system. In return, India offered the company cheap labor, low taxes, and few laws requiring expensive environmental equipment or costly workplace protections. In comparison with other factories in India, the Union Carbide plant was considered a model, law-abiding citizen with a good safety record. Said a government official: "They never refused to install what we asked."
At the time of the disaster, the pesticide plant in Bhopal was operated by Union Carbide India Ltd., a subsidiary of the Union Carbide Corporation of Danbury, Connecticut, which had a controlling interest of 50.9 percent in the Indian company. The board of directors of Union Carbide India Ltd. included one top manager from the parent Union Carbide Corporation in the United States and four managers from another Union Carbide subsidiary, based in Hong Kong. Reports from the Indian company were regularly reviewed by the managers in Danbury, who had the authority to exercise financial and technical control over Union Carbide India Ltd. Although day-to-day details were left to the Indian managers, the American managers controlled budgets, set major policies, and issued technical directives for operating and maintaining the plant.
Before the tragedy, the Indian subsidiary had been doing poorly. In an effort to contain annual losses of $4 million from the unprofitable plant, local company managers had initiated several cost-cutting programs. Only a year before, the number of equipment operators on each shift had been reduced from twelve to five; morale dropped and many of the best operators quit and were replaced with workers whose education was below that required by company manuals. Although Warren Anderson and other Union Carbide Corporation (U.S.) managers insisted that responsibility for the plant's operations rested with the local Indian managers, they hastened to say that all cost-cutting measures had been justified.
Two years before the disaster, the American managers had sent three engineers from the United States to survey the plant and, as a result, had told the Indian managers to remedy ten major flaws in safety equipment and procedures. The Indian managers had written back that the problems were corrected. "We have no reason to believe that what was represented to us by Union Carbide India Ltd. did not in fact occur," said the U.S. managers. The U.S. managers had considered closing the failing plant a year earlier, but Indian city and state officials had asked that the company remain open to preserve the jobs of thousands of workers in the plant and in dependent local industries.
What are the ethical issues raised by this case?

Question 29

Google is the world's largest search engine. In 2009, it had approximately 400 million web users, of which 200 million are located in the United States. Its global revenue from advertising amounted to $23.6 billion. China is the world's third-largest economy. China has a potential 384 million Internet users and advertising revenue from China is estimated to be $15 to $20 billion annually. In 2006, Google began operations in China as Google.cn. Part of the agreement with the Chinese government was that the Google.cn search engine would censor information from topics that had been banned by the Chinese government.
In January 2010, Google threatened to pull out of China after it claimed that Google and some twenty other large companies had been subjected, in December 2009, to "a highly sophisticated and targeted attack" designed to steal software codes. The alleged purpose of the attack was so that the Chinese government could break into the Gmail accounts of Chinese human rights activists. Although the attack was unsuccessful, Google decided it should review its operations in China. "We have decided that we are no longer willing to continue censoring our results on Google.cn, and so over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all. We recognize that this may well mean having to shut down Google.cn, and potentially our offices in China."
Three months later, in March 2010, Google closed Google.cn and began directing its Chinese customers to a search engine in Hong Kong, Google.com.hk. Hong Kong is a special administrative region and so the Google.com.hk search engine is not subject to Chinese government censorship. The Chinese government complained that this was a violation of the written promise Google had made when it began operations in China in 2006.
The license for Google to operate in China was up for renewal on June 30, 2010. Without the license "Google would effectively go dark in China." Then, in July, a compromise was reached. The Chinese government renewed Google's license to operate in China, and Google said that it would not automatically redirect its Chinese users to the uncensored Hong Kong site. Instead, users would go to a landing page on Google.cn that is linked to Google.com.hk. In other words, users would have to double-click in order to get to the Hong Kong site. This solution saved face. Google agreed to obey Chinese laws, while at the same time, by providing access to the Hong Kong site, the company could say that it was maintaining its anticensorship policies. "As a company we aspire to make information available to users everywhere, including China. It's why we have worked so hard to keep Google.cn alive, as well as to continue our research and development work in China. This new approach is consistent with our commitment not to self censor [sic] and, we believe, with local law." After the announcement that Google's Chinese license had been renewed, the company's stock rose 2.8 percent.
Google derives its revenue by selling advertising. Should Google be concerned about the type of information
that users access through the various Google search engines?

Question 30

In July of 2008, Virgin Mobile USA began a 'Strip2Clothe' advertising campaign. There are millions of homeless teenagers in the United States, and Virgin Mobile's website said "someone out there needs clothes more than you." Virgin Mobile invited teenagers to upload videos of themselves disrobing. For every uploaded striptease video, Virgin Mobile would donate a new piece of clothing. For every five times the video was viewed, an additional piece of clothing would be donated. Virgin Mobile said that they would screen all the videos. The strippers had to be 18 or older, and there was to be no full nudity. By July 12, there were 20 videos on the site that had generated 51,291 pieces of donated clothing.
The campaign sparked immediate criticism. Rebecca Lentz of The Catholic Charities of St. Paul and Minneapolis called the advertising campaign "distasteful and inappropriate and exploitative." Parents were concerned that their under 18 year-old children would strip, zip the video, and not reveal their real age. On Tuesday July 15, The National Network for Youth (NN4Y) said that it would decline to partner with Virgin Mobile. Some of the 150 charities represented by NN4Y objected to the campaign saying that it was inappropriate given that many homeless teenagers are sexually exploited. NN4Y said that any member organizations that wished to receive clothing donations through the Strip2Clothe campaign would have to contact Virgin Mobile directly.
In response to the public outcry, Virgin Mobile altered its campaign. On July 21, it launched 'Blank2Clothe' in which the company would accept any kind of talent video such as walking, juggling, singing, riding, and so on. All of the striptease videos were removed and the strippers were asked to send in new, fully clothed videos.
The arguments against the campaign were that: it targeted youth; many homeless teenagers are sexually exploited; the homeless normally need shelter and safety rather than clothes; and the campaign was in poor taste. But there were some supporters. Rick Koca, founder of StandUp For Kids in San Diego, said that the campaign wasn't hurting anyone and was raising public awareness. In the one week ending July 19, the controversy and the campaign had resulted in a further 15,000 clothing donations.
Some years before, the Benetton Group S.p.A. developed the United Colors of Benetton Campaign, originally to draw attention to prejudice against black people. The campaign broadened over time to include other prejudices and consist of a series of shocking pictures published in unexpected venues. For example, there were pictures of a nun kissing a priest, a bombed car in a street, a white dog kissing a black lamb, an AIDS activist on his death bed in front of a picture of a crucified Christ, and a white girl portrayed with an angelic halo and a black boy with hair like horns. Is the Virgin campaign substantively different that the Benetton campaign of 1992?

Question 31

What could professional accountants have done to prevent the development of the credibility gap and the expectations gap?

Question 32

On July 16, 2008, it was announced that several Chinese producers of baby milk powder had been adding melamine, a chemical usually used in countertops, to increase the "richness" of their milk powder and to increase the protein count. Shockingly, the melaminetainted milk powder was responsible for the deaths of four infants and the sickening of more than 6,200 more. Milk manufacturers had been using melamine as a low-cost way of "enriching" their product in both taste and protein count.
Melamine, a toxic chemical that makes countertops very durable, damages kidneys. This fact came to world attention on March 16, 2007, when Menu Foods of Streetsville, Ontario, Canada, recalled dog and cat foods that it had mixed in Canada from Chinese ingredients that were found to include melamine. Very quickly thereafter, pet owners claims and class action lawsuits threatened to put the company into bankruptcy until settlements were worked out. A subsequent investigation by the U.S. Food and Drug Administration (FDA) led to the recall of pet food by major manufacturers, including Del Monte, Nestle Purina, Menu Foods, and many others. On February 6, 2008, "the FDA announced that that two Chinese nationals and the businesses they operate, along with a U.S. company and its president and chief executive officer, were indicted by a federal grand jury for their roles in a scheme to import products purported to be wheat gluten into the United States that were contaminated with melamine." It will be interesting to follow what penalties are ultimately paid by the Chinese manufacturers.
Although the story of melamine-tainted ingredients broke in mid-March 2007, the similarly tainted-milk powder link did not come to light in China until sixteen months later. Governmental follow-up has not been speedy even though unmarked bags of "protein powder" had probably been added to several other products, including baking powder and feed for chickens thus contaminating eggs and meat. On October 8, 2008, the Chinese government stopped reporting updated figures of infant milk powder sufferers "because it is not an infectious disease, so it's not necessary to announce it to the public." Knowledgeable members of the Chinese public, however, have been using the suitcases of their visiting relatives to import U.S.- and Canadianmade milk formula for their children.
It is also fascinating to consider another aspect of life in China-rumored control of online news. Although there is no proof of the rumors, which might have been started by competitors, the Wall Street Journal's (WSJ) online service has reported that Baidu.com Inc., the company referred to as the "Google of China," is under attack for accepting payments to keep stories containing a specific milk manufacturing company's name from online searches about the tainted milk scandal even when the manufacturer was recalling the product. Local government officials also declined to confirm the milk manufacturer's problem during the same period.
Baidu.com "said it had been approached this week by several dairy producers but said that it 'flat out refused' to screen out unfavorable news and accused rivals of fanning the flames."9 In a statement, it said: "Baidu respects the truth, and our search results reflect that commitment."
Currently, there is no evidence that Baidu.com did accept the screen-out payments as rumored, but it does face some challenges of its own making in trying to restore it reputation. For example, unlike Google that separates or distinguishes paid advertisements from non-paid search results, Baidu.com integrated paid advertisements into its search listing until critics recently complained. In addition, companies could pay more and get a higher ranking for their ads. According to the WSJ article, a search for "mobile phone" generates a list where almost the entire first page consists of paid advertisements. Also, competitors fearing increased competition and new products from Baidu.com, which recently increased its market share to 64.4 percent, have begun to restrict Baidu's search software (spiders) from penetrating websites that the competitors control.
Baidu.com's profit growth had been strong, but for how long? Baidu.com, Inc. is traded on the U.S.'s NASDAQ Stock Market under the symbol BIDU. Since the rumors surfaced in late August/early September 2008, BIDU's share price has declined from $308 to almost $110 on November 20, 2008.
Given strong profit growth, has there been any damage to Baidu.com's reputation?

Question 33

In June 2002, Martha Stewart began to wrestle with allegations that she had improperly used inside information to sell a stock investment to an unsuspecting investing public. That was when her personal friend Sam Waksal was defending himself against Securities and Exchange Commission (SEC) allegations that he had tipped off his family members so they could sell their shares of ImClone Systems Inc. (ImClone) just before other investors learned that ImClone's fortunes were about to take a dive. Observers presumed that Martha was also tipped off and, even though she proclaimed her innocence, the rumors would not go away.
On TV daily as the reigning guru of homemaking, Martha is the multimillionaire proprietor, president, and driving force of Martha Stewart Living Omnimedia Inc. (MSO), of which, on March 18, 2002, she owned 30,713,475 (62.6 percent) of the class A, and 30,619,375 (100 percent) of the class B shares. On December 27, 2001, Martha's class A and class B shares were worth approximately $17 each, so on paper Martha's MSO class A shares alone were worth over $500 million. Class B shares are convertible into class A shares on a oneto- one basis.
Martha's personal life became public. The world did not know that Martha Stewart had sold 3,928 shares of ImClone for $58 each on December 27, 2001,until it surfaced in June 2002. The sale generated only $227,824 for Martha, and she avoided losing $45,673 when the stock price dropped the next day, but it has caused her endless personal grief and humiliation, and the loss of reputation, as well as a significant drop to $5.26 in the MSO share price.
What Happened?
Martha had made an investment in ImClone, a company that was trying to get the approval of the U.S. Food and Drug Administration (FDA) to bring to market an anti-colon cancer drug called Erbitux. Samuel Waksal, then the CEO of ImClone and a personal friend of Martha's, was apparently warned on or close to December 25, 2001, that the FDA was going to refuse5 to review Erbitux. According to SEC allegations, Sam relayed the information to his family so they could dump their ImClone shares on an unsuspecting public before the official announcement. Martha claims that she didn't get any inside information early from Sam, but regulators believe that she may have or from her broker or her broker's aide. The activities of several of Sam's friends, including Martha, are under investigation by the SEC.
Sam was arrested on June 12, 2002, and charged with "nine criminal counts of conspiracy, securities fraud and perjury, and then freed on $10 million bail." In a related civil complaint, the SEC alleged that Sam "tried to sell ImClone stock and tipped family members before ImClone's official FDA announcement on Dec. 28."
According to the SEC, two unidentified members of Sam's family sold about $10 million worth of ImClone stock in a twoday interval just before the announcement. Moreover, Sam also tried for two days to sell nearly 80,000 ImClone shares for about $5 million, but two different brokers refused to process the trades.
Martha has denied any wrongdoing. She was quoted as saying: "In placing my trade I had no improper information…. My transaction was entirely lawful." She admitted calling Sam after selling her shares, but claimed: "I did not reach Mr. Waksal, and he did not return my call." She maintained that she had an agreement with her broker to sell her remaining ImClone shares "if the stock dropped below $60 per share."
Martha's public, however, was skeptical. She was asked embarrassing questions when she appeared on TV for a cooking segment, and she declined to answer saying: "I am here to make my salad." Martha's interactions with her broker, Peter Bacanovic, and his assistant, Douglas Faneuil, are also being scrutinized. Merrill Lynch Co. suspended Bacanovic (who was also Sam Waksal's broker) and Faneuil, with pay, in late June. Later, since all phone calls to brokerages are taped and emails kept, it appeared to be damning when Bacanovic initially refused to provide his cell phone records to the House Energy and Commerce Commission for their investigation. Moreover, on October 4, 2001, Faneuil "pleaded guilty to a charge that he accepted gifts from his superior in return for keeping quiet about circumstances surrounding Stewart's controversial stock sale." Faneuil admitted that he received extra vacation time, including a free airline ticket from a Merrill Lynch employee in exchange for withholding information from SEC and FBI investigators.
According to the Washington Post report of Faneuil's appearance in court:
On the morning of Dec. 27, Faneuil received a telephone call from a Waksal family member who asked to sell 39,472 shares for almost $2.5 million, according to court records. Waksal's accountant also called Faneuil in an unsuccessful attempt to sell a large bloc of shares, the records show. Prosecutors allege that those orders "constituted material non-public information." But they alleged that Faneuil violated his duty to Merrill Lynch by calling a "tippee" to relate that Waksal family members were attempting to liquidate their holdings in ImClone. That person then sold "all the Tippee's shares of ImClone stock, approximately 3,928 shares, yielding proceeds of approximately $228,000" the court papers said.
One day later, on October 5th, it was announced that Martha resigned from her post as a director of the New York Stock Exchange-a post she held only four months-and the price of MSO shares declined more than 7 percent to $6.32 in afternoon trading. From June 12th to October 12th, the share price of MSO had declined by approximately 61 percent.
Martha's future took a further interesting turn on October 15th, when Sam Waksal pleaded guilty to six counts of his indictment, including: bank fraud, securities fraud, conspiracy to obstruct justice, and perjury. But he did not agree to cooperate with prosecutors, and did not incriminate Martha. Waksal's sentencing was postponed until 2003 so his lawyers could exchange information with U.S. District Judge William Pauley concerning Waksal's financial records.
After October 15th, the price of MSO shares rose, perhaps as the prospect of Martha's going to jail appeared to become more remote, and/or people began to consider MSO to be more than just Martha and her reputation. The gain from the low point of the MSO share price in October to December 9, 2002, was about 40 percent.
Martha still had a lot to think about, however. Apparently the SEC gave Martha notice in September of its intent to file civil securities fraud charges against her. Martha's lawyers responded and the SEC deliberated. Even if Martha were to get off with a fine, prosecutors could still bring a criminal case against her in the future. It is an interesting legal question, how, if Martha were to plead guilty to the civil charges, she could avoid criminal liability.
On June 4, 2003, Stewart was indicted on charges of obstructing justice and securities fraud. She then quit as Chairman and CEO of her company, but stayed on the Board and served as Chief Creative Officer. She appeared in court on January 20, 2004, and watched the proceedings throughout her trial. In addition to the testimony of Mr. Faneuil, Stewart's personal friend Mariana Pasternak testified that Stewart told her Waksal was trying to dump his shares shortly after selling her Imclone stock.24 Ultimately, the jury did not believe the counterclaim by Peter Bacanovic, Stewart's broker, that he and Martha had a prior agreement to sell Imclone if it went below $60. Although Judge Cedarbaum dismissed the charge of securities fraud for insider trading, on March 5, 2004, the jury found Stewart guilty on one charge of conspiracy, one of obstruction of justice, and two of making false statements to investigators. 25 The announcement caused the share price of her company to sink by $2.77 to $11.26 on the NYSE.

Martha immediately posted the following on her website:
I am obviously distressed by the jury's verdict, but I continue to take comfort in knowing that I have done nothing wrong and that I have the enduring support of my family and friends. I will appeal the verdict and continue to fight to clear my name. I believe in the fairness of the judicial system and remain confident that I will ultimately prevail.
Martha was subsequently sentenced to 5 months in prison and 5 months of home detention-a lower than maximum sentence under the U.S. Sentencing Guidelines-and she did appeal. Although she could have remained free during the appeal, on September 15, 2004, she asked for her sentence to start so she could be at home in time for the spring planting season. Martha's appeal cited "prosecutorial misconduct, extraneous influences on the jury and erroneous evidentiary rulings and jury instructions" but on January 6, 2006, her conviction was upheld.
Impact on Reputation
Martha may still disagree with the verdict. But there is little doubt that the allegations and her convictions had a major impact on Martha personally, and on the fortunes of MSO and the other shareholders that had faith in her and her company. Assuming a value per share of $13.50 on June 12th, the decline to a low of $5.26 in early October 2003 represents a loss of market capitalization (i.e., reputation capital as defined by Charles Fombrun30) of approximately $250 million, or 61 percent. The value of MSO's shares did return to close at $35.51 on February 7, 2005,31 but fell off to under $20 in early 2006. According to a New York brand-rating company, Brand-Keys, the Martha Stewart brand reached a peak of 120 (the baseline is 100) in May 2002, and sank to a low of 63 in March 2004.
What will the future hold? Martha has returned to TV with a version of The Apprentice as well as her usual homemaking and design shows, and her products and magazines continue to be sold. Will Martha regain her earlier distinction? Would she do it again to avoid losing $45,673?
Questions
Why did MSO's stock price decline due to Martha Stewart's loss of reputation?

Question 34

On July 16, 2008, it was announced that several Chinese producers of baby milk powder had been adding melamine, a chemical usually used in countertops, to increase the "richness" of their milk powder and to increase the protein count. Shockingly, the melaminetainted milk powder was responsible for the deaths of four infants and the sickening of more than 6,200 more. Milk manufacturers had been using melamine as a low-cost way of "enriching" their product in both taste and protein count.
Melamine, a toxic chemical that makes countertops very durable, damages kidneys. This fact came to world attention on March 16, 2007, when Menu Foods of Streetsville, Ontario, Canada, recalled dog and cat foods that it had mixed in Canada from Chinese ingredients that were found to include melamine. Very quickly thereafter, pet owners claims and class action lawsuits threatened to put the company into bankruptcy until settlements were worked out. A subsequent investigation by the U.S. Food and Drug Administration (FDA) led to the recall of pet food by major manufacturers, including Del Monte, Nestle Purina, Menu Foods, and many others. On February 6, 2008, "the FDA announced that that two Chinese nationals and the businesses they operate, along with a U.S. company and its president and chief executive officer, were indicted by a federal grand jury for their roles in a scheme to import products purported to be wheat gluten into the United States that were contaminated with melamine." It will be interesting to follow what penalties are ultimately paid by the Chinese manufacturers.
Although the story of melamine-tainted ingredients broke in mid-March 2007, the similarly tainted-milk powder link did not come to light in China until sixteen months later. Governmental follow-up has not been speedy even though unmarked bags of "protein powder" had probably been added to several other products, including baking powder and feed for chickens thus contaminating eggs and meat. On October 8, 2008, the Chinese government stopped reporting updated figures of infant milk powder sufferers "because it is not an infectious disease, so it's not necessary to announce it to the public." Knowledgeable members of the Chinese public, however, have been using the suitcases of their visiting relatives to import U.S.- and Canadianmade milk formula for their children.
It is also fascinating to consider another aspect of life in China-rumored control of online news. Although there is no proof of the rumors, which might have been started by competitors, the Wall Street Journal's (WSJ) online service has reported that Baidu.com Inc., the company referred to as the "Google of China," is under attack for accepting payments to keep stories containing a specific milk manufacturing company's name from online searches about the tainted milk scandal even when the manufacturer was recalling the product. Local government officials also declined to confirm the milk manufacturer's problem during the same period.
Baidu.com "said it had been approached this week by several dairy producers but said that it 'flat out refused' to screen out unfavorable news and accused rivals of fanning the flames."9 In a statement, it said: "Baidu respects the truth, and our search results reflect that commitment."
Currently, there is no evidence that Baidu.com did accept the screen-out payments as rumored, but it does face some challenges of its own making in trying to restore it reputation. For example, unlike Google that separates or distinguishes paid advertisements from non-paid search results, Baidu.com integrated paid advertisements into its search listing until critics recently complained. In addition, companies could pay more and get a higher ranking for their ads. According to the WSJ article, a search for "mobile phone" generates a list where almost the entire first page consists of paid advertisements. Also, competitors fearing increased competition and new products from Baidu.com, which recently increased its market share to 64.4 percent, have begun to restrict Baidu's search software (spiders) from penetrating websites that the competitors control.
Baidu.com's profit growth had been strong, but for how long? Baidu.com, Inc. is traded on the U.S.'s NASDAQ Stock Market under the symbol BIDU. Since the rumors surfaced in late August/early September 2008, BIDU's share price has declined from $308 to almost $110 on November 20, 2008.
Governments throughout the world have been slow to react publicly to serious problems such as SARS, mad cow disease, and now melamine contamination. Who benefits and who loses because of these delays?

Question 35

Why might ethical corporate behavior lead to higher profitability?

Question 36

On February 11, 2010, the leaders of the European Union (EU) agreed on a plan to bail out Greece, a country that had joined the EU in 1981 and was admitted to the European Monetary Union (EMU) allowing Greece to adopt the Euro as its currency in 2001. Greece had been unable to pay its bills, or to borrow more money to do so because it had overspent its income on its social programs and other projects. In the aftermath of providing Greece with bailout credit ultimately totaling €100 billion ($147 billion), questions were asked about how this could have happened. A spotlight was brought to bear on how Goldman Sachs (GS) had enabled Greece to qualify for adopting the Euro in the first place, and for providing the means to hide some transactions in which Greece pledged its future revenues in return for instant cash to spend. In a sense, GS helped Greece draw a veil over its finances with arrangements that were not transparent.
In 2001, Greece wanted to join the EMU but faced a requirement that its debt-to-GDP ratio be less than 60%.3 Unfortunately, Greece had some debt that was payable in U.S. dollars (USD) and other debt in Japanese Yen. Both currencies had grown in value relative to the Euro in 1999 and 2000. Under EU rules, such unhedged debt had to be valued and reported at the year-end exchange rates, so Greece faced the prospect reporting increased debt liabilities.
In late 2000 and 2001, GS proposed and arranged two types of hedges that reduced reported Greek debt by €2.367 billion, and allowed Greece to access unreported, off-balance sheet financing:
• Currency hedges that turned the USD and Yen debt payments into Euro payments, and subsequently the Greek swap portfolio into new cross currency swaps valued using a historical implied foreign exchange rate rather than market value exchange rate. Since the historical exchange rate was lower than the market rate at the time, the resulting valuation of the debt was reduced by almost €2.4 billion ($3.2 billion).
• Interest rate swaps that, when coupled with a bond, provided Greece with instant cash in 2001 in return for pledging future landing fees at its airports. GS was reportedly paid $300 million for this transaction. A similar deal in 2000 saw Greece pledge the future revenue from its national lottery in return for cash. Greece was obligated to pay GS substantial amounts until 2019 under these agreements, but chose to sell these interest rate swaps to the National Bank of Greece in 2005 after criticism in the Greek Parliament.
In essence, through these so-called interest rate swaps, Greece was converting a stream of variable future cash flows into instant cash. But, although there was a fierce debate among EU finance ministers, these obligations to pay out future cash flows were not required to be disclosed in 2001 and were therefore a type of "offbalance sheet financing." In 2002, the requirements changed and these obligations did require disclosure. Humorously, the 2000 deal related to a legal entity called Aeolos that was created for the purpose- Aeolos is the Greek goddess of wind.
In response to public criticism, GS argues on its website that "these transactions [both currency and interest rate hedges] were consistent with the Eurostat principles governing their use and disclosure at the time." In addition, GS argues that the reduction of €2.367 billion had "minimal effect on the country's overall fiscal situation in 2001" since its GDP was approximately $131 billion and its debt was 103.7% of GDP. However, it is not clear how much cash was provided by the so-called interest rate swaps that allowed Greece to report lower debt obligations in total.
Did Goldman Sachs do anything wrong legally or ethically? Explain your answer.

Question 37

Mega Brands has been selling Magnetix toys for many years. It also sells Mega Bloks, construction toys based on Spider-Man, Pirates of the Caribbean, as well as other products in over 100 countries. In 2006, Mega Brands had over $547 million in revenue, including over $100 from magnetic toys, but its share price fell approximately $27 to $20.30 in mid-July 2007. One reason for the fall was that a child, who had swallowed a magnet that had fallen out of a toy, had died in the late fall of 2005. The U.S. Consumer Products Safety Commission (CPSC) had issued a product recall in March 2006.
Subsequently, a number of lawsuits appeared involving other children who had suffered bowel complications. The symptoms resulting from a child swallowing a magnet are similar to those of a stomach ache, cold or flu, and so the problem is sometimes misdiagnosed. The consequences can be much worse if a child swallows more than one magnet, particularly if they are the super-powerful magnets like those in Magnetix toys. They are so strong that they do not pass through the child's digestive system; instead, the magnets rip through tissue as they are attracted to each other. Complex surgery is required for extraction and complications can continue afterward.
After refusing twice, Mega Brands engaged in two voluntary recalls at the request of the Commission in March 2006 and April 2007. Defective merchandise was still found on store shelves by CPSC investigators in April. Even then, at a hearing on June 18, 2007, Senator Robert Durban stated: "The company did everything in its power to derail the commission's effort to take the product off the shelf." In frustration, Senator Durban commented: "When a company is selling dangerous products in America and refuses to co-operate with the CPSC, we have few laws and few tools to use to protect consumers."
In addition, the company did not quickly comply with CPSC requests for information and violated the terms of one recall. Finally, on December 1, 2007, after failing to respond on time to a subpoena, data was submitted covering 1,500 complaint reports made to Mega Brands or to Rose Art Industries, the toy's manufacturer. Mega Brands asserted that they had to search through warehouses to gather the data, because they lacked an organized comprehensive reporting system.
A new product, supposedly improved, has been introduced with new labeling that indicates the suitable minimum age to be six instead of three.
If the CEO didn't pay any attention, what would you do?

Question 38

Google is the world's largest search engine. In 2009, it had approximately 400 million web users, of which 200 million are located in the United States. Its global revenue from advertising amounted to $23.6 billion. China is the world's third-largest economy. China has a potential 384 million Internet users and advertising revenue from China is estimated to be $15 to $20 billion annually. In 2006, Google began operations in China as Google.cn. Part of the agreement with the Chinese government was that the Google.cn search engine would censor information from topics that had been banned by the Chinese government.
In January 2010, Google threatened to pull out of China after it claimed that Google and some twenty other large companies had been subjected, in December 2009, to "a highly sophisticated and targeted attack" designed to steal software codes. The alleged purpose of the attack was so that the Chinese government could break into the Gmail accounts of Chinese human rights activists. Although the attack was unsuccessful, Google decided it should review its operations in China. "We have decided that we are no longer willing to continue censoring our results on Google.cn, and so over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all. We recognize that this may well mean having to shut down Google.cn, and potentially our offices in China."
Three months later, in March 2010, Google closed Google.cn and began directing its Chinese customers to a search engine in Hong Kong, Google.com.hk. Hong Kong is a special administrative region and so the Google.com.hk search engine is not subject to Chinese government censorship. The Chinese government complained that this was a violation of the written promise Google had made when it began operations in China in 2006.
The license for Google to operate in China was up for renewal on June 30, 2010. Without the license "Google would effectively go dark in China." Then, in July, a compromise was reached. The Chinese government renewed Google's license to operate in China, and Google said that it would not automatically redirect its Chinese users to the uncensored Hong Kong site. Instead, users would go to a landing page on Google.cn that is linked to Google.com.hk. In other words, users would have to double-click in order to get to the Hong Kong site. This solution saved face. Google agreed to obey Chinese laws, while at the same time, by providing access to the Hong Kong site, the company could say that it was maintaining its anticensorship policies. "As a company we aspire to make information available to users everywhere, including China. It's why we have worked so hard to keep Google.cn alive, as well as to continue our research and development work in China. This new approach is consistent with our commitment not to self censor [sic] and, we believe, with local law." After the announcement that Google's Chinese license had been renewed, the company's stock rose 2.8 percent.
After the December 2009 attack, Google enhanced the security for all of its users. Does Google have any additional ethical responsibility to human rights activists to provide them with even more sophisticated architectural and infrastructure improvements so that their specific Gmail accounts cannot be compromised?

Question 39

Why is it important for the clients of professional accountants to be ethical?

Question 40

Google is the world's largest search engine. In 2009, it had approximately 400 million web users, of which 200 million are located in the United States. Its global revenue from advertising amounted to $23.6 billion. China is the world's third-largest economy. China has a potential 384 million Internet users and advertising revenue from China is estimated to be $15 to $20 billion annually. In 2006, Google began operations in China as Google.cn. Part of the agreement with the Chinese government was that the Google.cn search engine would censor information from topics that had been banned by the Chinese government.
In January 2010, Google threatened to pull out of China after it claimed that Google and some twenty other large companies had been subjected, in December 2009, to "a highly sophisticated and targeted attack" designed to steal software codes. The alleged purpose of the attack was so that the Chinese government could break into the Gmail accounts of Chinese human rights activists. Although the attack was unsuccessful, Google decided it should review its operations in China. "We have decided that we are no longer willing to continue censoring our results on Google.cn, and so over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all. We recognize that this may well mean having to shut down Google.cn, and potentially our offices in China."
Three months later, in March 2010, Google closed Google.cn and began directing its Chinese customers to a search engine in Hong Kong, Google.com.hk. Hong Kong is a special administrative region and so the Google.com.hk search engine is not subject to Chinese government censorship. The Chinese government complained that this was a violation of the written promise Google had made when it began operations in China in 2006.
The license for Google to operate in China was up for renewal on June 30, 2010. Without the license "Google would effectively go dark in China." Then, in July, a compromise was reached. The Chinese government renewed Google's license to operate in China, and Google said that it would not automatically redirect its Chinese users to the uncensored Hong Kong site. Instead, users would go to a landing page on Google.cn that is linked to Google.com.hk. In other words, users would have to double-click in order to get to the Hong Kong site. This solution saved face. Google agreed to obey Chinese laws, while at the same time, by providing access to the Hong Kong site, the company could say that it was maintaining its anticensorship policies. "As a company we aspire to make information available to users everywhere, including China. It's why we have worked so hard to keep Google.cn alive, as well as to continue our research and development work in China. This new approach is consistent with our commitment not to self censor [sic] and, we believe, with local law." After the announcement that Google's Chinese license had been renewed, the company's stock rose 2.8 percent.
When it began operations in China in 2006, Google had agreed to have the search engine Google.cn censor information. Did Google have an ethical right to renege on its agreement in 2010 by directing its Chinese users to the uncensored search engine Google.com.hk?

Question 41

In October 2009, PepsiCo Inc. launched, apologized, and then pulled an iPhone application called "AMP Up Before You Score," designed to promote its Amp Energy drink. The drink's target market is males between the ages of 18 and 24. Released on October 8, the app stereotyped women into two dozen groups, including "rebound girl," "sorority girl," "cougar," and "foreign exchange student." Users could flip through a series of digital cards that provided background information on each type of woman, including how to calculate a carbon footprint to score with a "treehugger," as well as strategies on how to seduce a "married" girl. It also provided some pick-up lines: "Wasn't I in Space Academy with you?" for the "nerd," and for the "artist" it suggested "You know the Mona Lisa has no eyebrows. I wonder what else she shaves." The app included a "Brag List" so that guys who "scored" could post a name, the date, and any other information on their Facebook or Twitter accounts.
Pepsi was inundated with criticism from blogs, emails, and the media. The app was accused of being sexist because it degraded and objectified women. On October 12, Pepsi apologized through its Tweeter page: "Our app tried 2 show the humorous lengths guys go 2 pick up women. We apologize if it's in bad taste appreciate your feedback."1 But not all the feedback was negative. Many males said that they considered it to be funny. Nevertheless, on October 22 Pepsi announced that it was withdrawing the app. "We have decided to discontinue the AMP iPhone application. We've listened to a variety of audiences and determined this was the most appropriate course of action."
The target market of Amp Energy is males between the ages of 18 and 24. If this group of consumers found the iPhone amp to be funny and acceptable, then why did Pepsi withdraw the app?

Question 42

In June 2002, Martha Stewart began to wrestle with allegations that she had improperly used inside information to sell a stock investment to an unsuspecting investing public. That was when her personal friend Sam Waksal was defending himself against Securities and Exchange Commission (SEC) allegations that he had tipped off his family members so they could sell their shares of ImClone Systems Inc. (ImClone) just before other investors learned that ImClone's fortunes were about to take a dive. Observers presumed that Martha was also tipped off and, even though she proclaimed her innocence, the rumors would not go away.
On TV daily as the reigning guru of homemaking, Martha is the multimillionaire proprietor, president, and driving force of Martha Stewart Living Omnimedia Inc. (MSO), of which, on March 18, 2002, she owned 30,713,475 (62.6 percent) of the class A, and 30,619,375 (100 percent) of the class B shares. On December 27, 2001, Martha's class A and class B shares were worth approximately $17 each, so on paper Martha's MSO class A shares alone were worth over $500 million. Class B shares are convertible into class A shares on a oneto- one basis.
Martha's personal life became public. The world did not know that Martha Stewart had sold 3,928 shares of ImClone for $58 each on December 27, 2001,until it surfaced in June 2002. The sale generated only $227,824 for Martha, and she avoided losing $45,673 when the stock price dropped the next day, but it has caused her endless personal grief and humiliation, and the loss of reputation, as well as a significant drop to $5.26 in the MSO share price.
What Happened?
Martha had made an investment in ImClone, a company that was trying to get the approval of the U.S. Food and Drug Administration (FDA) to bring to market an anti-colon cancer drug called Erbitux. Samuel Waksal, then the CEO of ImClone and a personal friend of Martha's, was apparently warned on or close to December 25, 2001, that the FDA was going to refuse5 to review Erbitux. According to SEC allegations, Sam relayed the information to his family so they could dump their ImClone shares on an unsuspecting public before the official announcement. Martha claims that she didn't get any inside information early from Sam, but regulators believe that she may have or from her broker or her broker's aide. The activities of several of Sam's friends, including Martha, are under investigation by the SEC.
Sam was arrested on June 12, 2002, and charged with "nine criminal counts of conspiracy, securities fraud and perjury, and then freed on $10 million bail." In a related civil complaint, the SEC alleged that Sam "tried to sell ImClone stock and tipped family members before ImClone's official FDA announcement on Dec. 28."
According to the SEC, two unidentified members of Sam's family sold about $10 million worth of ImClone stock in a twoday interval just before the announcement. Moreover, Sam also tried for two days to sell nearly 80,000 ImClone shares for about $5 million, but two different brokers refused to process the trades.
Martha has denied any wrongdoing. She was quoted as saying: "In placing my trade I had no improper information…. My transaction was entirely lawful." She admitted calling Sam after selling her shares, but claimed: "I did not reach Mr. Waksal, and he did not return my call." She maintained that she had an agreement with her broker to sell her remaining ImClone shares "if the stock dropped below $60 per share."
Martha's public, however, was skeptical. She was asked embarrassing questions when she appeared on TV for a cooking segment, and she declined to answer saying: "I am here to make my salad." Martha's interactions with her broker, Peter Bacanovic, and his assistant, Douglas Faneuil, are also being scrutinized. Merrill Lynch Co. suspended Bacanovic (who was also Sam Waksal's broker) and Faneuil, with pay, in late June. Later, since all phone calls to brokerages are taped and emails kept, it appeared to be damning when Bacanovic initially refused to provide his cell phone records to the House Energy and Commerce Commission for their investigation. Moreover, on October 4, 2001, Faneuil "pleaded guilty to a charge that he accepted gifts from his superior in return for keeping quiet about circumstances surrounding Stewart's controversial stock sale." Faneuil admitted that he received extra vacation time, including a free airline ticket from a Merrill Lynch employee in exchange for withholding information from SEC and FBI investigators.
According to the Washington Post report of Faneuil's appearance in court:
On the morning of Dec. 27, Faneuil received a telephone call from a Waksal family member who asked to sell 39,472 shares for almost $2.5 million, according to court records. Waksal's accountant also called Faneuil in an unsuccessful attempt to sell a large bloc of shares, the records show. Prosecutors allege that those orders "constituted material non-public information." But they alleged that Faneuil violated his duty to Merrill Lynch by calling a "tippee" to relate that Waksal family members were attempting to liquidate their holdings in ImClone. That person then sold "all the Tippee's shares of ImClone stock, approximately 3,928 shares, yielding proceeds of approximately $228,000" the court papers said.
One day later, on October 5th, it was announced that Martha resigned from her post as a director of the New York Stock Exchange-a post she held only four months-and the price of MSO shares declined more than 7 percent to $6.32 in afternoon trading. From June 12th to October 12th, the share price of MSO had declined by approximately 61 percent.
Martha's future took a further interesting turn on October 15th, when Sam Waksal pleaded guilty to six counts of his indictment, including: bank fraud, securities fraud, conspiracy to obstruct justice, and perjury. But he did not agree to cooperate with prosecutors, and did not incriminate Martha. Waksal's sentencing was postponed until 2003 so his lawyers could exchange information with U.S. District Judge William Pauley concerning Waksal's financial records.
After October 15th, the price of MSO shares rose, perhaps as the prospect of Martha's going to jail appeared to become more remote, and/or people began to consider MSO to be more than just Martha and her reputation. The gain from the low point of the MSO share price in October to December 9, 2002, was about 40 percent.
Martha still had a lot to think about, however. Apparently the SEC gave Martha notice in September of its intent to file civil securities fraud charges against her. Martha's lawyers responded and the SEC deliberated. Even if Martha were to get off with a fine, prosecutors could still bring a criminal case against her in the future. It is an interesting legal question, how, if Martha were to plead guilty to the civil charges, she could avoid criminal liability.
On June 4, 2003, Stewart was indicted on charges of obstructing justice and securities fraud. She then quit as Chairman and CEO of her company, but stayed on the Board and served as Chief Creative Officer. She appeared in court on January 20, 2004, and watched the proceedings throughout her trial. In addition to the testimony of Mr. Faneuil, Stewart's personal friend Mariana Pasternak testified that Stewart told her Waksal was trying to dump his shares shortly after selling her Imclone stock.24 Ultimately, the jury did not believe the counterclaim by Peter Bacanovic, Stewart's broker, that he and Martha had a prior agreement to sell Imclone if it went below $60. Although Judge Cedarbaum dismissed the charge of securities fraud for insider trading, on March 5, 2004, the jury found Stewart guilty on one charge of conspiracy, one of obstruction of justice, and two of making false statements to investigators. 25 The announcement caused the share price of her company to sink by $2.77 to $11.26 on the NYSE.

Martha immediately posted the following on her website:
I am obviously distressed by the jury's verdict, but I continue to take comfort in knowing that I have done nothing wrong and that I have the enduring support of my family and friends. I will appeal the verdict and continue to fight to clear my name. I believe in the fairness of the judicial system and remain confident that I will ultimately prevail.
Martha was subsequently sentenced to 5 months in prison and 5 months of home detention-a lower than maximum sentence under the U.S. Sentencing Guidelines-and she did appeal. Although she could have remained free during the appeal, on September 15, 2004, she asked for her sentence to start so she could be at home in time for the spring planting season. Martha's appeal cited "prosecutorial misconduct, extraneous influences on the jury and erroneous evidentiary rulings and jury instructions" but on January 6, 2006, her conviction was upheld.
Impact on Reputation
Martha may still disagree with the verdict. But there is little doubt that the allegations and her convictions had a major impact on Martha personally, and on the fortunes of MSO and the other shareholders that had faith in her and her company. Assuming a value per share of $13.50 on June 12th, the decline to a low of $5.26 in early October 2003 represents a loss of market capitalization (i.e., reputation capital as defined by Charles Fombrun30) of approximately $250 million, or 61 percent. The value of MSO's shares did return to close at $35.51 on February 7, 2005,31 but fell off to under $20 in early 2006. According to a New York brand-rating company, Brand-Keys, the Martha Stewart brand reached a peak of 120 (the baseline is 100) in May 2002, and sank to a low of 63 in March 2004.
What will the future hold? Martha has returned to TV with a version of The Apprentice as well as her usual homemaking and design shows, and her products and magazines continue to be sold. Will Martha regain her earlier distinction? Would she do it again to avoid losing $45,673?
Questions
What qualities were associated with the Martha Stewart brand, before the controversy? Which of these were affected by the accusations of insider trading, and how? How would you find out for sure?

Question 43

How can corporations ensure that their employees behave ethically?

Question 44

In June 2002, Martha Stewart began to wrestle with allegations that she had improperly used inside information to sell a stock investment to an unsuspecting investing public. That was when her personal friend Sam Waksal was defending himself against Securities and Exchange Commission (SEC) allegations that he had tipped off his family members so they could sell their shares of ImClone Systems Inc. (ImClone) just before other investors learned that ImClone's fortunes were about to take a dive. Observers presumed that Martha was also tipped off and, even though she proclaimed her innocence, the rumors would not go away.
On TV daily as the reigning guru of homemaking, Martha is the multimillionaire proprietor, president, and driving force of Martha Stewart Living Omnimedia Inc. (MSO), of which, on March 18, 2002, she owned 30,713,475 (62.6 percent) of the class A, and 30,619,375 (100 percent) of the class B shares. On December 27, 2001, Martha's class A and class B shares were worth approximately $17 each, so on paper Martha's MSO class A shares alone were worth over $500 million. Class B shares are convertible into class A shares on a oneto- one basis.
Martha's personal life became public. The world did not know that Martha Stewart had sold 3,928 shares of ImClone for $58 each on December 27, 2001,until it surfaced in June 2002. The sale generated only $227,824 for Martha, and she avoided losing $45,673 when the stock price dropped the next day, but it has caused her endless personal grief and humiliation, and the loss of reputation, as well as a significant drop to $5.26 in the MSO share price.
What Happened?
Martha had made an investment in ImClone, a company that was trying to get the approval of the U.S. Food and Drug Administration (FDA) to bring to market an anti-colon cancer drug called Erbitux. Samuel Waksal, then the CEO of ImClone and a personal friend of Martha's, was apparently warned on or close to December 25, 2001, that the FDA was going to refuse5 to review Erbitux. According to SEC allegations, Sam relayed the information to his family so they could dump their ImClone shares on an unsuspecting public before the official announcement. Martha claims that she didn't get any inside information early from Sam, but regulators believe that she may have or from her broker or her broker's aide. The activities of several of Sam's friends, including Martha, are under investigation by the SEC.
Sam was arrested on June 12, 2002, and charged with "nine criminal counts of conspiracy, securities fraud and perjury, and then freed on $10 million bail." In a related civil complaint, the SEC alleged that Sam "tried to sell ImClone stock and tipped family members before ImClone's official FDA announcement on Dec. 28."
According to the SEC, two unidentified members of Sam's family sold about $10 million worth of ImClone stock in a twoday interval just before the announcement. Moreover, Sam also tried for two days to sell nearly 80,000 ImClone shares for about $5 million, but two different brokers refused to process the trades.
Martha has denied any wrongdoing. She was quoted as saying: "In placing my trade I had no improper information…. My transaction was entirely lawful." She admitted calling Sam after selling her shares, but claimed: "I did not reach Mr. Waksal, and he did not return my call." She maintained that she had an agreement with her broker to sell her remaining ImClone shares "if the stock dropped below $60 per share."
Martha's public, however, was skeptical. She was asked embarrassing questions when she appeared on TV for a cooking segment, and she declined to answer saying: "I am here to make my salad." Martha's interactions with her broker, Peter Bacanovic, and his assistant, Douglas Faneuil, are also being scrutinized. Merrill Lynch Co. suspended Bacanovic (who was also Sam Waksal's broker) and Faneuil, with pay, in late June. Later, since all phone calls to brokerages are taped and emails kept, it appeared to be damning when Bacanovic initially refused to provide his cell phone records to the House Energy and Commerce Commission for their investigation. Moreover, on October 4, 2001, Faneuil "pleaded guilty to a charge that he accepted gifts from his superior in return for keeping quiet about circumstances surrounding Stewart's controversial stock sale." Faneuil admitted that he received extra vacation time, including a free airline ticket from a Merrill Lynch employee in exchange for withholding information from SEC and FBI investigators.
According to the Washington Post report of Faneuil's appearance in court:
On the morning of Dec. 27, Faneuil received a telephone call from a Waksal family member who asked to sell 39,472 shares for almost $2.5 million, according to court records. Waksal's accountant also called Faneuil in an unsuccessful attempt to sell a large bloc of shares, the records show. Prosecutors allege that those orders "constituted material non-public information." But they alleged that Faneuil violated his duty to Merrill Lynch by calling a "tippee" to relate that Waksal family members were attempting to liquidate their holdings in ImClone. That person then sold "all the Tippee's shares of ImClone stock, approximately 3,928 shares, yielding proceeds of approximately $228,000" the court papers said.
One day later, on October 5th, it was announced that Martha resigned from her post as a director of the New York Stock Exchange-a post she held only four months-and the price of MSO shares declined more than 7 percent to $6.32 in afternoon trading. From June 12th to October 12th, the share price of MSO had declined by approximately 61 percent.
Martha's future took a further interesting turn on October 15th, when Sam Waksal pleaded guilty to six counts of his indictment, including: bank fraud, securities fraud, conspiracy to obstruct justice, and perjury. But he did not agree to cooperate with prosecutors, and did not incriminate Martha. Waksal's sentencing was postponed until 2003 so his lawyers could exchange information with U.S. District Judge William Pauley concerning Waksal's financial records.
After October 15th, the price of MSO shares rose, perhaps as the prospect of Martha's going to jail appeared to become more remote, and/or people began to consider MSO to be more than just Martha and her reputation. The gain from the low point of the MSO share price in October to December 9, 2002, was about 40 percent.
Martha still had a lot to think about, however. Apparently the SEC gave Martha notice in September of its intent to file civil securities fraud charges against her. Martha's lawyers responded and the SEC deliberated. Even if Martha were to get off with a fine, prosecutors could still bring a criminal case against her in the future. It is an interesting legal question, how, if Martha were to plead guilty to the civil charges, she could avoid criminal liability.
On June 4, 2003, Stewart was indicted on charges of obstructing justice and securities fraud. She then quit as Chairman and CEO of her company, but stayed on the Board and served as Chief Creative Officer. She appeared in court on January 20, 2004, and watched the proceedings throughout her trial. In addition to the testimony of Mr. Faneuil, Stewart's personal friend Mariana Pasternak testified that Stewart told her Waksal was trying to dump his shares shortly after selling her Imclone stock.24 Ultimately, the jury did not believe the counterclaim by Peter Bacanovic, Stewart's broker, that he and Martha had a prior agreement to sell Imclone if it went below $60. Although Judge Cedarbaum dismissed the charge of securities fraud for insider trading, on March 5, 2004, the jury found Stewart guilty on one charge of conspiracy, one of obstruction of justice, and two of making false statements to investigators. 25 The announcement caused the share price of her company to sink by $2.77 to $11.26 on the NYSE.

Martha immediately posted the following on her website:
I am obviously distressed by the jury's verdict, but I continue to take comfort in knowing that I have done nothing wrong and that I have the enduring support of my family and friends. I will appeal the verdict and continue to fight to clear my name. I believe in the fairness of the judicial system and remain confident that I will ultimately prevail.
Martha was subsequently sentenced to 5 months in prison and 5 months of home detention-a lower than maximum sentence under the U.S. Sentencing Guidelines-and she did appeal. Although she could have remained free during the appeal, on September 15, 2004, she asked for her sentence to start so she could be at home in time for the spring planting season. Martha's appeal cited "prosecutorial misconduct, extraneous influences on the jury and erroneous evidentiary rulings and jury instructions" but on January 6, 2006, her conviction was upheld.
Impact on Reputation
Martha may still disagree with the verdict. But there is little doubt that the allegations and her convictions had a major impact on Martha personally, and on the fortunes of MSO and the other shareholders that had faith in her and her company. Assuming a value per share of $13.50 on June 12th, the decline to a low of $5.26 in early October 2003 represents a loss of market capitalization (i.e., reputation capital as defined by Charles Fombrun30) of approximately $250 million, or 61 percent. The value of MSO's shares did return to close at $35.51 on February 7, 2005,31 but fell off to under $20 in early 2006. According to a New York brand-rating company, Brand-Keys, the Martha Stewart brand reached a peak of 120 (the baseline is 100) in May 2002, and sank to a low of 63 in March 2004.
What will the future hold? Martha has returned to TV with a version of The Apprentice as well as her usual homemaking and design shows, and her products and magazines continue to be sold. Will Martha regain her earlier distinction? Would she do it again to avoid losing $45,673?
Questions
What was the basis of Martha Stewart's reputation?

Question 45

The Prairieland Bank was a medium-sized, midwestern financial institution. The management had a good reputation for backing successful deals, but the CEO (and significant shareholder) had recently moved to San Francisco to be "close to the big-bank center of activity." He commuted into the Prairieland head office for two or three days each week to oversee major deals.
Lately the bank's profitability had decreased, and the management had begun to renegotiate many loans on which payments had fallen behind. By doing so, the bank was able to disclose them as current, rather than non-performing, as the unpaid interest was simply added to the principal to arrive at the new principal amount. Discussions were also under way on changing some accounting policies to make them less conservative.
Ben Hunt, the audit partner on the Prairieland Bank account, was becoming concerned about the risk associated with giving an opinion on the fairness of the financial statements. During the early days of the audit, it became evident that the provision for doubtful loans was far too low, and he made an appointment to discuss the problem with the CEO and his vice president of finance. At the interview, Ben was told that the executives knew the provision was too low, but they did not want to increase it because that would decrease their reported profits. Instead, they had approached a company that provided insurance to protect leased equipment, such as earth movers, against damage during the lease, and arranged for insurance against nonpayment on the maturity of their loans. As a result, they said, any defaults on their loans would be made up from the insurance company, so they did not see any point to increasing the provision for loan losses or disclosing the insurance arrangement.
When he heard of this, Ben expressed concern to the Prairieland management, but they were adamant. Because Prairieland was such a large account, he sought the counsel of James London, the senior partner in his firm who was in charge of assessing such accounting treatments and the related risk to the auditing firm. James flew out to confer with Ben, and they decided that the best course of action was to visit the client and indicate their intent to resign, which they did.
After dinner, James was waiting at the airport for his plane home. By coincidence, he met Jack Lane, who held responsibilities similar to his own at one of the competing firms. Jack was returning home as well and was in good spirits. On the flight, Jack let it slip that he had just picked up an old client of James' firm, Prairieland Bank.
What should James do?

Question 46

In July of 2008, Virgin Mobile USA began a 'Strip2Clothe' advertising campaign. There are millions of homeless teenagers in the United States, and Virgin Mobile's website said "someone out there needs clothes more than you." Virgin Mobile invited teenagers to upload videos of themselves disrobing. For every uploaded striptease video, Virgin Mobile would donate a new piece of clothing. For every five times the video was viewed, an additional piece of clothing would be donated. Virgin Mobile said that they would screen all the videos. The strippers had to be 18 or older, and there was to be no full nudity. By July 12, there were 20 videos on the site that had generated 51,291 pieces of donated clothing.
The campaign sparked immediate criticism. Rebecca Lentz of The Catholic Charities of St. Paul and Minneapolis called the advertising campaign "distasteful and inappropriate and exploitative." Parents were concerned that their under 18 year-old children would strip, zip the video, and not reveal their real age. On Tuesday July 15, The National Network for Youth (NN4Y) said that it would decline to partner with Virgin Mobile. Some of the 150 charities represented by NN4Y objected to the campaign saying that it was inappropriate given that many homeless teenagers are sexually exploited. NN4Y said that any member organizations that wished to receive clothing donations through the Strip2Clothe campaign would have to contact Virgin Mobile directly.
In response to the public outcry, Virgin Mobile altered its campaign. On July 21, it launched 'Blank2Clothe' in which the company would accept any kind of talent video such as walking, juggling, singing, riding, and so on. All of the striptease videos were removed and the strippers were asked to send in new, fully clothed videos.
The arguments against the campaign were that: it targeted youth; many homeless teenagers are sexually exploited; the homeless normally need shelter and safety rather than clothes; and the campaign was in poor taste. But there were some supporters. Rick Koca, founder of StandUp For Kids in San Diego, said that the campaign wasn't hurting anyone and was raising public awareness. In the one week ending July 19, the controversy and the campaign had resulted in a further 15,000 clothing donations.
What rule would you put forward that would differentiate ethical from unethical advertising campaigns?

Question 47

Should executives and directors be sent to jail for the acts of their corporation's employees?

Question 48

Mega Brands has been selling Magnetix toys for many years. It also sells Mega Bloks, construction toys based on Spider-Man, Pirates of the Caribbean, as well as other products in over 100 countries. In 2006, Mega Brands had over $547 million in revenue, including over $100 from magnetic toys, but its share price fell approximately $27 to $20.30 in mid-July 2007. One reason for the fall was that a child, who had swallowed a magnet that had fallen out of a toy, had died in the late fall of 2005. The U.S. Consumer Products Safety Commission (CPSC) had issued a product recall in March 2006.
Subsequently, a number of lawsuits appeared involving other children who had suffered bowel complications. The symptoms resulting from a child swallowing a magnet are similar to those of a stomach ache, cold or flu, and so the problem is sometimes misdiagnosed. The consequences can be much worse if a child swallows more than one magnet, particularly if they are the super-powerful magnets like those in Magnetix toys. They are so strong that they do not pass through the child's digestive system; instead, the magnets rip through tissue as they are attracted to each other. Complex surgery is required for extraction and complications can continue afterward.
After refusing twice, Mega Brands engaged in two voluntary recalls at the request of the Commission in March 2006 and April 2007. Defective merchandise was still found on store shelves by CPSC investigators in April. Even then, at a hearing on June 18, 2007, Senator Robert Durban stated: "The company did everything in its power to derail the commission's effort to take the product off the shelf." In frustration, Senator Durban commented: "When a company is selling dangerous products in America and refuses to co-operate with the CPSC, we have few laws and few tools to use to protect consumers."
In addition, the company did not quickly comply with CPSC requests for information and violated the terms of one recall. Finally, on December 1, 2007, after failing to respond on time to a subpoena, data was submitted covering 1,500 complaint reports made to Mega Brands or to Rose Art Industries, the toy's manufacturer. Mega Brands asserted that they had to search through warehouses to gather the data, because they lacked an organized comprehensive reporting system.
A new product, supposedly improved, has been introduced with new labeling that indicates the suitable minimum age to be six instead of three.
If you were an executive of Mega Brands, what concerns would you express to the CEO about the Magnetix toy issues noted above?

Question 49

Telus Corp., the second largest wireless company in Canada, introduced an "adult content" service to their cell phone customers in 2007. Customers were charged $3-4 for downloads, and the company expected to make very large amounts of money based on observable internet trends.
Fairly quickly, however, Telus was under pressure from customers rather than the government to discontinue the service, even though the service was apparently legal. In response, Telus' company spokespeople argued that:
• the service consisted of photographs and videos featuring "full and partial nudity, but no sex"
• customers would be age verified very rigorously to prove they were adults, and
• the service was already universally available, although Telus was the first wireless carrier in North America to offer such a service.
There were many complaints in the form of calls from cell phone users and the Roman Catholic Church threatening to discontinue their contracts with Telus. According to Archbishop Roussin, the service "takes the accessibility of pornographic material further into the public realm."
At the same time, Telus was developing a community support program involving community investment boards and ambassadors in an effort to improve its reputation and acceptance. On its website at the time, Telus stated that:
"At Telus, we aspire to be Canada's premier corporate citizen.We are committed to building a corporate culture of giving, and engaging the hearts and minds of our team members and retirees to improve the quality of life in our communities. We recognize that leading the way in corporate social responsibility is as important as our financial performance. We have made a commitment to our customers, shareholders and all stakeholders to stay ahead or our competitors in all aspects of business-economically, environmentally and socially. Corporate social responsibility remains an integral part of what we do-it defines our business practices and culture as we strive to achieve long-term sustainable growth."
Ultimately, Telus withdrew the 'adult content' service.
Given such legal and profitable opportunities, should Telus abandon its corporate social responsibility initiative? Why or why not?

Question 50

On July 16, 2008, it was announced that several Chinese producers of baby milk powder had been adding melamine, a chemical usually used in countertops, to increase the "richness" of their milk powder and to increase the protein count. Shockingly, the melaminetainted milk powder was responsible for the deaths of four infants and the sickening of more than 6,200 more. Milk manufacturers had been using melamine as a low-cost way of "enriching" their product in both taste and protein count.
Melamine, a toxic chemical that makes countertops very durable, damages kidneys. This fact came to world attention on March 16, 2007, when Menu Foods of Streetsville, Ontario, Canada, recalled dog and cat foods that it had mixed in Canada from Chinese ingredients that were found to include melamine. Very quickly thereafter, pet owners claims and class action lawsuits threatened to put the company into bankruptcy until settlements were worked out. A subsequent investigation by the U.S. Food and Drug Administration (FDA) led to the recall of pet food by major manufacturers, including Del Monte, Nestle Purina, Menu Foods, and many others. On February 6, 2008, "the FDA announced that that two Chinese nationals and the businesses they operate, along with a U.S. company and its president and chief executive officer, were indicted by a federal grand jury for their roles in a scheme to import products purported to be wheat gluten into the United States that were contaminated with melamine." It will be interesting to follow what penalties are ultimately paid by the Chinese manufacturers.
Although the story of melamine-tainted ingredients broke in mid-March 2007, the similarly tainted-milk powder link did not come to light in China until sixteen months later. Governmental follow-up has not been speedy even though unmarked bags of "protein powder" had probably been added to several other products, including baking powder and feed for chickens thus contaminating eggs and meat. On October 8, 2008, the Chinese government stopped reporting updated figures of infant milk powder sufferers "because it is not an infectious disease, so it's not necessary to announce it to the public." Knowledgeable members of the Chinese public, however, have been using the suitcases of their visiting relatives to import U.S.- and Canadianmade milk formula for their children.
It is also fascinating to consider another aspect of life in China-rumored control of online news. Although there is no proof of the rumors, which might have been started by competitors, the Wall Street Journal's (WSJ) online service has reported that Baidu.com Inc., the company referred to as the "Google of China," is under attack for accepting payments to keep stories containing a specific milk manufacturing company's name from online searches about the tainted milk scandal even when the manufacturer was recalling the product. Local government officials also declined to confirm the milk manufacturer's problem during the same period.
Baidu.com "said it had been approached this week by several dairy producers but said that it 'flat out refused' to screen out unfavorable news and accused rivals of fanning the flames."9 In a statement, it said: "Baidu respects the truth, and our search results reflect that commitment."
Currently, there is no evidence that Baidu.com did accept the screen-out payments as rumored, but it does face some challenges of its own making in trying to restore it reputation. For example, unlike Google that separates or distinguishes paid advertisements from non-paid search results, Baidu.com integrated paid advertisements into its search listing until critics recently complained. In addition, companies could pay more and get a higher ranking for their ads. According to the WSJ article, a search for "mobile phone" generates a list where almost the entire first page consists of paid advertisements. Also, competitors fearing increased competition and new products from Baidu.com, which recently increased its market share to 64.4 percent, have begun to restrict Baidu's search software (spiders) from penetrating websites that the competitors control.
Baidu.com's profit growth had been strong, but for how long? Baidu.com, Inc. is traded on the U.S.'s NASDAQ Stock Market under the symbol BIDU. Since the rumors surfaced in late August/early September 2008, BIDU's share price has declined from $308 to almost $110 on November 20, 2008.
In some cultures, a "culture of secrecy" or manipulation of the news is tolerated more than others. How can this be remedied by other governments, corporations, investors, and members of the public?

Question 51

Why are the expectations of a corporation's stakeholders important to the reputation of the corporation and to its profitability?

Question 52

In October 2009, PepsiCo Inc. launched, apologized, and then pulled an iPhone application called "AMP Up Before You Score," designed to promote its Amp Energy drink. The drink's target market is males between the ages of 18 and 24. Released on October 8, the app stereotyped women into two dozen groups, including "rebound girl," "sorority girl," "cougar," and "foreign exchange student." Users could flip through a series of digital cards that provided background information on each type of woman, including how to calculate a carbon footprint to score with a "treehugger," as well as strategies on how to seduce a "married" girl. It also provided some pick-up lines: "Wasn't I in Space Academy with you?" for the "nerd," and for the "artist" it suggested "You know the Mona Lisa has no eyebrows. I wonder what else she shaves." The app included a "Brag List" so that guys who "scored" could post a name, the date, and any other information on their Facebook or Twitter accounts.
Pepsi was inundated with criticism from blogs, emails, and the media. The app was accused of being sexist because it degraded and objectified women. On October 12, Pepsi apologized through its Tweeter page: "Our app tried 2 show the humorous lengths guys go 2 pick up women. We apologize if it's in bad taste appreciate your feedback."1 But not all the feedback was negative. Many males said that they considered it to be funny. Nevertheless, on October 22 Pepsi announced that it was withdrawing the app. "We have decided to discontinue the AMP iPhone application. We've listened to a variety of audiences and determined this was the most appropriate course of action."
Do you find it interesting that most of the critics were women and the media, but those who considered the app to be funny were young men?

Question 53

In 1964, at the invitation of the Ecuadorian government, Texaco Inc. began operations through a subsidiary, TexPet, in the Amazon region of Ecuador. The purpose of the project was to "develop Ecuador's natural resources and encourage the colonization of the area." TexPet was a minority owner of the project and its partner was Petroecuador, the government-owned oil company. Over the years from 1968 to 1992, the consortium extracted 1.4 billion barrels of oil from the Ecuadorian operations. Ecuador benefited greatly during this period. Ecuador received approximately 98 percent of all moneys generated by the consortium in the form of royalties, taxes, and revenues. Altogether, this amount represented more than 50 percent of Ecuador's gross national product during that period. TexPet's operations over the years provided jobs for 840 employees and approximately 2,000 contract workers, thereby benefiting almost 3,000 Ecuadorian families directly, in addition to the thousands of Ecuadorian nationals who supplied the company's needs for goods and services. Also, TexPet made substantial contributions to the Quito, Guayaquil, and Loja Polytechnics and other institutions of higher education. Oil is Ecuador's life-blood-a $1 billion per year industry that accounts for 50 percent of the export earnings and 62 percent of its fiscal budget. Unfortunately, problems also arose. Although Petroecuador acquired 100 percent of the ownership of the Transecuadorian pipeline in 1986, TexPet still accounted for 88 percent of all oil production and operated the pipeline in 1987 when it ruptured and was buried by a landslide. A spill of 16.8 million gallons (4.4 million barrels) occurred, which Texaco attributed to a major earthquake that devastated Ecuador. Other spills apparently occurred as well. Although Texaco pulled out of the consortium in 1992 entirely (having retreated to be a silent minority partner in 1990), three lawsuits were filed against it in the United States-the Aquinda (November 1993), the Sequihua (August 1993), and the Jota (1994). The indigenous people who launched the lawsuits charged that, during two decades of oil drilling in the Amazon, Texaco dumped more than 3,000 gallons of crude oil a day-millions of gallons in total-into the environment. The indigenous people say their rivers, streams, and lakes are now contaminated, and the fish and wild game that once made up their food supply are now decimated. They asked in the lawsuit that Texaco compensate them and clean up their land and waters. Maria Aquinda, for whom the suit is named, says that contaminated water from nearby oil wells drilled by the Texaco subsidiary caused her to suffer chronic stomach ailments and rashes and that she lost scores of pigs and chickens. Aquinda and 76 other Amazonian residents filed a $1.5 billion lawsuit in New York against Texaco. The class-action suit, representing 30,000 people, further alleges that Texaco acted "with callous disregard for the health, wellbeing, and safety of the plaintiffs" and that "large-scale disposal of inadequately treated hazardous wastes and destruction of tropical rain forest habitats, caused harm to indigenous peoples and their property." According to the Ecuadorian environmental group Ecological Action, Texaco destroyed more than 1 million hectares of tropical forest, spilled 74 million liters of oil, and used obsolete technology that led to the dumping of 18 million liters of toxic waste. Rainforest Action Network, a San Francisco-based organization, says effects include poor crop production in the affected areas, invasion of tribal lands, sexual assaults committed by oil workers, and loss of game animals (which would be food supply for the indigenous peoples). Audits were conducted to address the impact of operations on the soil, water, and air and to assess compliance with environmental laws, regulations, and generally accepted operating practices. Two internationally recognized and independent consulting firms, AGRA Earth Environmental Ltd. and Fugro- McClelland, conducted audits in Ecuador. Each independently concluded that TexPet acted responsibly and that no lasting or significant environmental impact exists from its former operations. Nonetheless, TexPet agreed to remedy the limited and localized impacts attributable to its operations. On May 4, 1995, Ecuador's minister of energy and mines, the president of Petroecuador, and TexPet signed the Contract for Implementing of Environmental Remedial Work and Release from Obligations, Liability, and Claims following negotiations with Ecuadorian government officials representing the interests of indigenous groups in the Amazon. In this remediation effort, producing wells and pits formerly utilized by TexPet were closed, producing water systems were modified, cleared lands were replanted, and contaminated soil was remediated. All actions taken were inspected and certified by the Ecuadorian government. Additionally, TexPet funded social and health programs throughout the region of operations, such as medical dispensaries and sewage and potable water systems. That contract settled all claims by Petroecuador and the Republic of Ecuador against TexPet, Texaco, and their affiliates for all matters arising out of the consortium's operations. In the summer of 1998, the $40 million remediation project was completed. On September 30, 1998, Ecuador's minister of energy and mines, the president of Petroecuador, and the general manager of Petropro-duccion signed the Final Release of Claims and Delivery of Equipment. This document finalized the government of Ecuador's approval of TexPet's environmental remediation work and further stated that TexPet fully complied with all obligations established in the remediation agreement signed in 1995. Meanwhile, in the United States, Texaco made the following arguments against the three lawsuits:
• Activities were in compliance with Ecuadorian laws, and international oil industry standards.
• Activities were undertaken by a largely Ecuadorian workforce-which Texaco believed would always act in the interest of its community/country.
• All investments/operations were approved and monitored by the Ecuadorian government and Petroecuador.
• All activities were conducted with the oversight and approval of the Ecuadorian government.
• Environmentally friendly measures were used, such as helicopters instead of roads.
• The health of Ecuadorians increased during the years Texaco was in Ecuador. • Ninety-eight percent of the money generated stayed in Ecuador-50 percent of GDP during that period.
• Jobs were provided for 2,800.
• Money was provided for schools.
• Independent engineering firms found no lasting damage.
• A $40 million remediation program was started per an agreement with the Ecuadorian government.
• U.S. courts should not govern activities in a foreign country.
The three lawsuits were dismissed for similar reasons-the Sequihua in 1994, the Aquinda in 1996, and the Jota in 1997. The Aquinda lawsuit, for example, was launched in New York (where Texaco has its corporate headquarters) because Texaco no longer had business in Ecuador and could not be sued there. The case was dismissed by a New York court in November 1996 on the basis that it should be heard in Ecuador. Failing that, the Ecuadorian government should have been involved in the case as well, or that the case should have been filed against the government and the state-owned Petroecuador as well as Texaco. At that point, the Ecuadorian government did get involved and filed an appeal of the decision. This was the first time a foreign government had sued a U.S. oil company in the United States for environmental damage. In addition, in 1997, the plaintiffs in the Aquinda and Jota cases also appealed the district court's decisions.
On October 5, 1998, a U.S. court of appeals remanded both cases to the district court for further consideration as to whether they should proceed in Ecuador or the United States. Written submissions were filed on February 1, 1999. Texaco has long argued that the appropriate venue for these cases is Ecuador because the oilproducing operations took place in Ecuador under the control and supervision of Ecuador's government, and the Ecuadorian courts have heard similar cases against other companies. It is Texaco's position that U.S. courts should not govern the activities of a sovereign foreign nation, just as foreign courts should not govern the activities of the United States. In fact, Texaco claimed the ambassador of Ecuador, the official representative of the government of Ecuador, noted in a letter to the district court that Ecuador would not waive its sovereign immunity.
Notwithstanding Texaco's arguments, the case was sent back to the court that threw it out, on the basis that the government of Ecuador does have the right to intervene. The question of whether the case can and will finally be tried in the United States or Ecuador under these circumstances will now take many years to be decided. Texaco claims that it has done enough to repair any damage and disputes the scientific validity of the claims-the Amazonians (or their supporters) seem to have the resources to continue fighting this suit in the U.S. courts. Ultimately the company may prefer the fairness of U.S. courts.
Questions
If an oil spill was caused by an act of God, an earthquake, should Texaco be held responsible?

Question 54

In June 2002, Martha Stewart began to wrestle with allegations that she had improperly used inside information to sell a stock investment to an unsuspecting investing public. That was when her personal friend Sam Waksal was defending himself against Securities and Exchange Commission (SEC) allegations that he had tipped off his family members so they could sell their shares of ImClone Systems Inc. (ImClone) just before other investors learned that ImClone's fortunes were about to take a dive. Observers presumed that Martha was also tipped off and, even though she proclaimed her innocence, the rumors would not go away.
On TV daily as the reigning guru of homemaking, Martha is the multimillionaire proprietor, president, and driving force of Martha Stewart Living Omnimedia Inc. (MSO), of which, on March 18, 2002, she owned 30,713,475 (62.6 percent) of the class A, and 30,619,375 (100 percent) of the class B shares. On December 27, 2001, Martha's class A and class B shares were worth approximately $17 each, so on paper Martha's MSO class A shares alone were worth over $500 million. Class B shares are convertible into class A shares on a oneto- one basis.
Martha's personal life became public. The world did not know that Martha Stewart had sold 3,928 shares of ImClone for $58 each on December 27, 2001,until it surfaced in June 2002. The sale generated only $227,824 for Martha, and she avoided losing $45,673 when the stock price dropped the next day, but it has caused her endless personal grief and humiliation, and the loss of reputation, as well as a significant drop to $5.26 in the MSO share price.
What Happened?
Martha had made an investment in ImClone, a company that was trying to get the approval of the U.S. Food and Drug Administration (FDA) to bring to market an anti-colon cancer drug called Erbitux. Samuel Waksal, then the CEO of ImClone and a personal friend of Martha's, was apparently warned on or close to December 25, 2001, that the FDA was going to refuse5 to review Erbitux. According to SEC allegations, Sam relayed the information to his family so they could dump their ImClone shares on an unsuspecting public before the official announcement. Martha claims that she didn't get any inside information early from Sam, but regulators believe that she may have or from her broker or her broker's aide. The activities of several of Sam's friends, including Martha, are under investigation by the SEC.
Sam was arrested on June 12, 2002, and charged with "nine criminal counts of conspiracy, securities fraud and perjury, and then freed on $10 million bail." In a related civil complaint, the SEC alleged that Sam "tried to sell ImClone stock and tipped family members before ImClone's official FDA announcement on Dec. 28."
According to the SEC, two unidentified members of Sam's family sold about $10 million worth of ImClone stock in a twoday interval just before the announcement. Moreover, Sam also tried for two days to sell nearly 80,000 ImClone shares for about $5 million, but two different brokers refused to process the trades.
Martha has denied any wrongdoing. She was quoted as saying: "In placing my trade I had no improper information…. My transaction was entirely lawful." She admitted calling Sam after selling her shares, but claimed: "I did not reach Mr. Waksal, and he did not return my call." She maintained that she had an agreement with her broker to sell her remaining ImClone shares "if the stock dropped below $60 per share."
Martha's public, however, was skeptical. She was asked embarrassing questions when she appeared on TV for a cooking segment, and she declined to answer saying: "I am here to make my salad." Martha's interactions with her broker, Peter Bacanovic, and his assistant, Douglas Faneuil, are also being scrutinized. Merrill Lynch Co. suspended Bacanovic (who was also Sam Waksal's broker) and Faneuil, with pay, in late June. Later, since all phone calls to brokerages are taped and emails kept, it appeared to be damning when Bacanovic initially refused to provide his cell phone records to the House Energy and Commerce Commission for their investigation. Moreover, on October 4, 2001, Faneuil "pleaded guilty to a charge that he accepted gifts from his superior in return for keeping quiet about circumstances surrounding Stewart's controversial stock sale." Faneuil admitted that he received extra vacation time, including a free airline ticket from a Merrill Lynch employee in exchange for withholding information from SEC and FBI investigators.
According to the Washington Post report of Faneuil's appearance in court:
On the morning of Dec. 27, Faneuil received a telephone call from a Waksal family member who asked to sell 39,472 shares for almost $2.5 million, according to court records. Waksal's accountant also called Faneuil in an unsuccessful attempt to sell a large bloc of shares, the records show. Prosecutors allege that those orders "constituted material non-public information." But they alleged that Faneuil violated his duty to Merrill Lynch by calling a "tippee" to relate that Waksal family members were attempting to liquidate their holdings in ImClone. That person then sold "all the Tippee's shares of ImClone stock, approximately 3,928 shares, yielding proceeds of approximately $228,000" the court papers said.
One day later, on October 5th, it was announced that Martha resigned from her post as a director of the New York Stock Exchange-a post she held only four months-and the price of MSO shares declined more than 7 percent to $6.32 in afternoon trading. From June 12th to October 12th, the share price of MSO had declined by approximately 61 percent.
Martha's future took a further interesting turn on October 15th, when Sam Waksal pleaded guilty to six counts of his indictment, including: bank fraud, securities fraud, conspiracy to obstruct justice, and perjury. But he did not agree to cooperate with prosecutors, and did not incriminate Martha. Waksal's sentencing was postponed until 2003 so his lawyers could exchange information with U.S. District Judge William Pauley concerning Waksal's financial records.
After October 15th, the price of MSO shares rose, perhaps as the prospect of Martha's going to jail appeared to become more remote, and/or people began to consider MSO to be more than just Martha and her reputation. The gain from the low point of the MSO share price in October to December 9, 2002, was about 40 percent.
Martha still had a lot to think about, however. Apparently the SEC gave Martha notice in September of its intent to file civil securities fraud charges against her. Martha's lawyers responded and the SEC deliberated. Even if Martha were to get off with a fine, prosecutors could still bring a criminal case against her in the future. It is an interesting legal question, how, if Martha were to plead guilty to the civil charges, she could avoid criminal liability.
On June 4, 2003, Stewart was indicted on charges of obstructing justice and securities fraud. She then quit as Chairman and CEO of her company, but stayed on the Board and served as Chief Creative Officer. She appeared in court on January 20, 2004, and watched the proceedings throughout her trial. In addition to the testimony of Mr. Faneuil, Stewart's personal friend Mariana Pasternak testified that Stewart told her Waksal was trying to dump his shares shortly after selling her Imclone stock.24 Ultimately, the jury did not believe the counterclaim by Peter Bacanovic, Stewart's broker, that he and Martha had a prior agreement to sell Imclone if it went below $60. Although Judge Cedarbaum dismissed the charge of securities fraud for insider trading, on March 5, 2004, the jury found Stewart guilty on one charge of conspiracy, one of obstruction of justice, and two of making false statements to investigators. 25 The announcement caused the share price of her company to sink by $2.77 to $11.26 on the NYSE.

Martha immediately posted the following on her website:
I am obviously distressed by the jury's verdict, but I continue to take comfort in knowing that I have done nothing wrong and that I have the enduring support of my family and friends. I will appeal the verdict and continue to fight to clear my name. I believe in the fairness of the judicial system and remain confident that I will ultimately prevail.
Martha was subsequently sentenced to 5 months in prison and 5 months of home detention-a lower than maximum sentence under the U.S. Sentencing Guidelines-and she did appeal. Although she could have remained free during the appeal, on September 15, 2004, she asked for her sentence to start so she could be at home in time for the spring planting season. Martha's appeal cited "prosecutorial misconduct, extraneous influences on the jury and erroneous evidentiary rulings and jury instructions" but on January 6, 2006, her conviction was upheld.
Impact on Reputation
Martha may still disagree with the verdict. But there is little doubt that the allegations and her convictions had a major impact on Martha personally, and on the fortunes of MSO and the other shareholders that had faith in her and her company. Assuming a value per share of $13.50 on June 12th, the decline to a low of $5.26 in early October 2003 represents a loss of market capitalization (i.e., reputation capital as defined by Charles Fombrun30) of approximately $250 million, or 61 percent. The value of MSO's shares did return to close at $35.51 on February 7, 2005,31 but fell off to under $20 in early 2006. According to a New York brand-rating company, Brand-Keys, the Martha Stewart brand reached a peak of 120 (the baseline is 100) in May 2002, and sank to a low of 63 in March 2004.
What will the future hold? Martha has returned to TV with a version of The Apprentice as well as her usual homemaking and design shows, and her products and magazines continue to be sold. Will Martha regain her earlier distinction? Would she do it again to avoid losing $45,673?
Questions
What level of sales and profits would MSO have reached if Martha's reputation had not been harmed? Refer to the SEC or MSO websites for information on financial trends.

Question 55

How can a corporation show respect for its stakeholders?

Question 56

The Prairieland Bank was a medium-sized, midwestern financial institution. The management had a good reputation for backing successful deals, but the CEO (and significant shareholder) had recently moved to San Francisco to be "close to the big-bank center of activity." He commuted into the Prairieland head office for two or three days each week to oversee major deals.
Lately the bank's profitability had decreased, and the management had begun to renegotiate many loans on which payments had fallen behind. By doing so, the bank was able to disclose them as current, rather than non-performing, as the unpaid interest was simply added to the principal to arrive at the new principal amount. Discussions were also under way on changing some accounting policies to make them less conservative.
Ben Hunt, the audit partner on the Prairieland Bank account, was becoming concerned about the risk associated with giving an opinion on the fairness of the financial statements. During the early days of the audit, it became evident that the provision for doubtful loans was far too low, and he made an appointment to discuss the problem with the CEO and his vice president of finance. At the interview, Ben was told that the executives knew the provision was too low, but they did not want to increase it because that would decrease their reported profits. Instead, they had approached a company that provided insurance to protect leased equipment, such as earth movers, against damage during the lease, and arranged for insurance against nonpayment on the maturity of their loans. As a result, they said, any defaults on their loans would be made up from the insurance company, so they did not see any point to increasing the provision for loan losses or disclosing the insurance arrangement.
When he heard of this, Ben expressed concern to the Prairieland management, but they were adamant. Because Prairieland was such a large account, he sought the counsel of James London, the senior partner in his firm who was in charge of assessing such accounting treatments and the related risk to the auditing firm. James flew out to confer with Ben, and they decided that the best course of action was to visit the client and indicate their intent to resign, which they did.
After dinner, James was waiting at the airport for his plane home. By coincidence, he met Jack Lane, who held responsibilities similar to his own at one of the competing firms. Jack was returning home as well and was in good spirits. On the flight, Jack let it slip that he had just picked up an old client of James' firm, Prairieland Bank.
Which decision was right: to resign or to serve?

Question 57

In July of 2008, Virgin Mobile USA began a 'Strip2Clothe' advertising campaign. There are millions of homeless teenagers in the United States, and Virgin Mobile's website said "someone out there needs clothes more than you." Virgin Mobile invited teenagers to upload videos of themselves disrobing. For every uploaded striptease video, Virgin Mobile would donate a new piece of clothing. For every five times the video was viewed, an additional piece of clothing would be donated. Virgin Mobile said that they would screen all the videos. The strippers had to be 18 or older, and there was to be no full nudity. By July 12, there were 20 videos on the site that had generated 51,291 pieces of donated clothing.
The campaign sparked immediate criticism. Rebecca Lentz of The Catholic Charities of St. Paul and Minneapolis called the advertising campaign "distasteful and inappropriate and exploitative." Parents were concerned that their under 18 year-old children would strip, zip the video, and not reveal their real age. On Tuesday July 15, The National Network for Youth (NN4Y) said that it would decline to partner with Virgin Mobile. Some of the 150 charities represented by NN4Y objected to the campaign saying that it was inappropriate given that many homeless teenagers are sexually exploited. NN4Y said that any member organizations that wished to receive clothing donations through the Strip2Clothe campaign would have to contact Virgin Mobile directly.
In response to the public outcry, Virgin Mobile altered its campaign. On July 21, it launched 'Blank2Clothe' in which the company would accept any kind of talent video such as walking, juggling, singing, riding, and so on. All of the striptease videos were removed and the strippers were asked to send in new, fully clothed videos.
The arguments against the campaign were that: it targeted youth; many homeless teenagers are sexually exploited; the homeless normally need shelter and safety rather than clothes; and the campaign was in poor taste. But there were some supporters. Rick Koca, founder of StandUp For Kids in San Diego, said that the campaign wasn't hurting anyone and was raising public awareness. In the one week ending July 19, the controversy and the campaign had resulted in a further 15,000 clothing donations.
Virgin Mobile has a history of using cutting edge advertisements. It poked fun at religion in its 2004 holiday commercial "Christmas-hanukwanzakah," and it had the company's founder, Sir Richard Branson, stand in a nude suit in New York's Times Square as part of a "Nothing to Hide" campaign. Are marketing tactics that are tasteless and risqué also unethical?

Question 58

On July 16, 2008, it was announced that several Chinese producers of baby milk powder had been adding melamine, a chemical usually used in countertops, to increase the "richness" of their milk powder and to increase the protein count. Shockingly, the melaminetainted milk powder was responsible for the deaths of four infants and the sickening of more than 6,200 more. Milk manufacturers had been using melamine as a low-cost way of "enriching" their product in both taste and protein count.
Melamine, a toxic chemical that makes countertops very durable, damages kidneys. This fact came to world attention on March 16, 2007, when Menu Foods of Streetsville, Ontario, Canada, recalled dog and cat foods that it had mixed in Canada from Chinese ingredients that were found to include melamine. Very quickly thereafter, pet owners claims and class action lawsuits threatened to put the company into bankruptcy until settlements were worked out. A subsequent investigation by the U.S. Food and Drug Administration (FDA) led to the recall of pet food by major manufacturers, including Del Monte, Nestle Purina, Menu Foods, and many others. On February 6, 2008, "the FDA announced that that two Chinese nationals and the businesses they operate, along with a U.S. company and its president and chief executive officer, were indicted by a federal grand jury for their roles in a scheme to import products purported to be wheat gluten into the United States that were contaminated with melamine." It will be interesting to follow what penalties are ultimately paid by the Chinese manufacturers.
Although the story of melamine-tainted ingredients broke in mid-March 2007, the similarly tainted-milk powder link did not come to light in China until sixteen months later. Governmental follow-up has not been speedy even though unmarked bags of "protein powder" had probably been added to several other products, including baking powder and feed for chickens thus contaminating eggs and meat. On October 8, 2008, the Chinese government stopped reporting updated figures of infant milk powder sufferers "because it is not an infectious disease, so it's not necessary to announce it to the public." Knowledgeable members of the Chinese public, however, have been using the suitcases of their visiting relatives to import U.S.- and Canadianmade milk formula for their children.
It is also fascinating to consider another aspect of life in China-rumored control of online news. Although there is no proof of the rumors, which might have been started by competitors, the Wall Street Journal's (WSJ) online service has reported that Baidu.com Inc., the company referred to as the "Google of China," is under attack for accepting payments to keep stories containing a specific milk manufacturing company's name from online searches about the tainted milk scandal even when the manufacturer was recalling the product. Local government officials also declined to confirm the milk manufacturer's problem during the same period.
Baidu.com "said it had been approached this week by several dairy producers but said that it 'flat out refused' to screen out unfavorable news and accused rivals of fanning the flames."9 In a statement, it said: "Baidu respects the truth, and our search results reflect that commitment."
Currently, there is no evidence that Baidu.com did accept the screen-out payments as rumored, but it does face some challenges of its own making in trying to restore it reputation. For example, unlike Google that separates or distinguishes paid advertisements from non-paid search results, Baidu.com integrated paid advertisements into its search listing until critics recently complained. In addition, companies could pay more and get a higher ranking for their ads. According to the WSJ article, a search for "mobile phone" generates a list where almost the entire first page consists of paid advertisements. Also, competitors fearing increased competition and new products from Baidu.com, which recently increased its market share to 64.4 percent, have begun to restrict Baidu's search software (spiders) from penetrating websites that the competitors control.
Baidu.com's profit growth had been strong, but for how long? Baidu.com, Inc. is traded on the U.S.'s NASDAQ Stock Market under the symbol BIDU. Since the rumors surfaced in late August/early September 2008, BIDU's share price has declined from $308 to almost $110 on November 20, 2008.
Many other companies with long supply chains, including subcontractors in far-off lands, have found themselves in difficulty. For example, in 1995, Nike was accused of employing child labor in Pakistan and Cambodia through its subcontractors and subsequently changed its policy and practices with respect to the minimum age of employees working in contract factories. However, it is very difficult to verify age when people do not have birth certificates or when they can be bought cheaply on the black market.
a. Under such conditions, what are a firm's responsibilities with respect to checking that each stage in the supply chain is complying with company policy?
b. Are there organizations that can help companies set standards and confirm adherence to them? If so, what are the organizations' mandates and website addresses?
c. Should Menu Foods be held responsible for the melamine found in its products?
d. Would your response be different if it was the lives of people that were at stake rather than the lives of animals?
e. How and why does Nike disclose its policies and practices with regard to supply chain responsibility, and what are the major factors covered?

Question 59

How can conflicts between the interests of stakeholders be resolved by a corporation's management?

Question 60

Telus Corp., the second largest wireless company in Canada, introduced an "adult content" service to their cell phone customers in 2007. Customers were charged $3-4 for downloads, and the company expected to make very large amounts of money based on observable internet trends.
Fairly quickly, however, Telus was under pressure from customers rather than the government to discontinue the service, even though the service was apparently legal. In response, Telus' company spokespeople argued that:
• the service consisted of photographs and videos featuring "full and partial nudity, but no sex"
• customers would be age verified very rigorously to prove they were adults, and
• the service was already universally available, although Telus was the first wireless carrier in North America to offer such a service.
There were many complaints in the form of calls from cell phone users and the Roman Catholic Church threatening to discontinue their contracts with Telus. According to Archbishop Roussin, the service "takes the accessibility of pornographic material further into the public realm."
At the same time, Telus was developing a community support program involving community investment boards and ambassadors in an effort to improve its reputation and acceptance. On its website at the time, Telus stated that:
"At Telus, we aspire to be Canada's premier corporate citizen.We are committed to building a corporate culture of giving, and engaging the hearts and minds of our team members and retirees to improve the quality of life in our communities. We recognize that leading the way in corporate social responsibility is as important as our financial performance. We have made a commitment to our customers, shareholders and all stakeholders to stay ahead or our competitors in all aspects of business-economically, environmentally and socially. Corporate social responsibility remains an integral part of what we do-it defines our business practices and culture as we strive to achieve long-term sustainable growth."
Ultimately, Telus withdrew the 'adult content' service.
If the porn service was legal, very profitable, and readily available elsewhere, was Telus right in shutting their service down. Why or why not?

Question 61

On April 24, 1985, Warren M. Anderson, the sixty-three-year-old chairman of Union Carbide Corporation, had to make a disappointing announcement to angry stockholders at their annual meeting in Danbury, Connecticut. Anderson, who had been jailed briefly by the government of India on charges of "negligence and criminal corporate liability," had been devoting all his attention to the company's mushrooming problems. His announcement concerned the complete breakdown of negotiations with officials in the Indian government: they had rejected as inadequate an estimated $200 million in compensation for the deaths of 2,000 people and the injuries of 200,000 others, which had been caused in December 1984 by a poisonous leak of methyl isocyanate gas from a Union Carbide pesticide plant located in Bhopal, India.1 In the wake of more than $35 billion in suits filed against the company's liability coverage, reported to total only about $200 million, the company's stock tumbled. Angry stockholders filed suit, charging that they had suffered losses of more than $1 billion because the company's managers had failed to warn them of the risks at the Indian plant. Analysts predicted the company would be forced into bankruptcy. Ironically, the Union Carbide plant in Bhopal had been losing money for several years and Anderson had considered closing it.
The deadly methyl isocyanate gas that leaked from the Union Carbide plant is a volatile and highly toxic chemical used to make pesticides. It is 500 times more poisonous than cyanide, and it reacts explosively with almost any substance, including water. Late on the night of December 2, 1984, the methyl isocyanate stored in a tank at the Bhopal factory started boiling violently when water or some other agent accidentally entered the tank. A cooling unit that should have switched on automatically had been disabled for at least a year. Shakil Qureshi, a manager on duty at the time, and Suman Dey, the senior operator on duty, both distrusted the initial readings on their gauges in the control room. "Instruments often didn't work," Qureshi said later. "They got corroded, and crystals would form on them."
By 11:30 P.M. the plant workers' eyes were burning. But the workers remained unconcerned because, as they later reported, minor leaks were common at the plant and were often first detected in this way. Many of the illiterate workers were unaware of the deadly properties of the chemical. Not until 12:40 A.M., as workers began choking on the fumes, did they realize something was drastically wrong. Five minutes later, emergency valves on the storage tank exploded and white toxic gas began shooting out of a pipestack and drifting toward the shantytowns downwind from the plant. An alarm sounded as manager Dey shouted into the factory loudspeaker that a massive leak had erupted and the workers should flee the area. Meanwhile, Qureshi ordered company fire trucks to spray the escaping gas with water to neutralize the chemical. But water pressure was too low to reach the top of the 120- foot-high pipestack. Dey then rushed to turn on a vent scrubber that should have neutralized the escaping gas with caustic soda. Unfortunately, the scrubber had been shut down for maintenance fifteen days earlier. As white clouds continued to pour out of the pipestack, Qureshi shouted to workers to turn on a nearby flare tower to burn off the gas. The flare, however, would not go on because its pipes had corroded and were still being repaired.
Panicked workers poured out of the plant, and the lethal cloud settled over the neighboring shantytowns of Jaipraksh and Chola. Hundreds died in their beds, choking helplessly in violent spasms as their burning lungs filled with fluid. Thousands were blinded by the caustic gas, and thousands of others suffered burns and lesions in their nasal and bronchial passages. When it was over, at least 2,000 lay dead and 200,000 were injured. The majority of the dead were squatters who had illegally built huts next to the factory. Surviving residents of the slums, most of them illiterate, declared afterward that they had built their shacks there because they did not understand the danger and thought the factory made healthy "medicine for plants." Union Carbide managers from the United States built the Bhopal plant in 1969 with the blessing of the Indian government, which was anxious to increase production of the pesticides it desperately needed to raise food for India's huge population. Over the next fifteen years, pesticides enabled India to cut its annual grain losses from 25 percent to 15 percent, a saving of 15 million tons of grain, or enough to feed 70 million people for a full year. Indian officials willingly accepted the technology, skills, and equipment that Union Carbide provided, and Indian workers were thankful for the company jobs, without which they would have had to beg or starve, as India has no welfare system. In return, India offered the company cheap labor, low taxes, and few laws requiring expensive environmental equipment or costly workplace protections. In comparison with other factories in India, the Union Carbide plant was considered a model, law-abiding citizen with a good safety record. Said a government official: "They never refused to install what we asked."
At the time of the disaster, the pesticide plant in Bhopal was operated by Union Carbide India Ltd., a subsidiary of the Union Carbide Corporation of Danbury, Connecticut, which had a controlling interest of 50.9 percent in the Indian company. The board of directors of Union Carbide India Ltd. included one top manager from the parent Union Carbide Corporation in the United States and four managers from another Union Carbide subsidiary, based in Hong Kong. Reports from the Indian company were regularly reviewed by the managers in Danbury, who had the authority to exercise financial and technical control over Union Carbide India Ltd. Although day-to-day details were left to the Indian managers, the American managers controlled budgets, set major policies, and issued technical directives for operating and maintaining the plant.
Before the tragedy, the Indian subsidiary had been doing poorly. In an effort to contain annual losses of $4 million from the unprofitable plant, local company managers had initiated several cost-cutting programs. Only a year before, the number of equipment operators on each shift had been reduced from twelve to five; morale dropped and many of the best operators quit and were replaced with workers whose education was below that required by company manuals. Although Warren Anderson and other Union Carbide Corporation (U.S.) managers insisted that responsibility for the plant's operations rested with the local Indian managers, they hastened to say that all cost-cutting measures had been justified.
Two years before the disaster, the American managers had sent three engineers from the United States to survey the plant and, as a result, had told the Indian managers to remedy ten major flaws in safety equipment and procedures. The Indian managers had written back that the problems were corrected. "We have no reason to believe that what was represented to us by Union Carbide India Ltd. did not in fact occur," said the U.S. managers. The U.S. managers had considered closing the failing plant a year earlier, but Indian city and state officials had asked that the company remain open to preserve the jobs of thousands of workers in the plant and in dependent local industries.
Were the Indian operations, which were being overseen by the managers of Union Carbide Corporation (U.S.), in compliance with legal, moral, or ethical standards?

Question 62

In June 2002, Martha Stewart began to wrestle with allegations that she had improperly used inside information to sell a stock investment to an unsuspecting investing public. That was when her personal friend Sam Waksal was defending himself against Securities and Exchange Commission (SEC) allegations that he had tipped off his family members so they could sell their shares of ImClone Systems Inc. (ImClone) just before other investors learned that ImClone's fortunes were about to take a dive. Observers presumed that Martha was also tipped off and, even though she proclaimed her innocence, the rumors would not go away.
On TV daily as the reigning guru of homemaking, Martha is the multimillionaire proprietor, president, and driving force of Martha Stewart Living Omnimedia Inc. (MSO), of which, on March 18, 2002, she owned 30,713,475 (62.6 percent) of the class A, and 30,619,375 (100 percent) of the class B shares. On December 27, 2001, Martha's class A and class B shares were worth approximately $17 each, so on paper Martha's MSO class A shares alone were worth over $500 million. Class B shares are convertible into class A shares on a oneto- one basis.
Martha's personal life became public. The world did not know that Martha Stewart had sold 3,928 shares of ImClone for $58 each on December 27, 2001,until it surfaced in June 2002. The sale generated only $227,824 for Martha, and she avoided losing $45,673 when the stock price dropped the next day, but it has caused her endless personal grief and humiliation, and the loss of reputation, as well as a significant drop to $5.26 in the MSO share price.
What Happened?
Martha had made an investment in ImClone, a company that was trying to get the approval of the U.S. Food and Drug Administration (FDA) to bring to market an anti-colon cancer drug called Erbitux. Samuel Waksal, then the CEO of ImClone and a personal friend of Martha's, was apparently warned on or close to December 25, 2001, that the FDA was going to refuse5 to review Erbitux. According to SEC allegations, Sam relayed the information to his family so they could dump their ImClone shares on an unsuspecting public before the official announcement. Martha claims that she didn't get any inside information early from Sam, but regulators believe that she may have or from her broker or her broker's aide. The activities of several of Sam's friends, including Martha, are under investigation by the SEC.
Sam was arrested on June 12, 2002, and charged with "nine criminal counts of conspiracy, securities fraud and perjury, and then freed on $10 million bail." In a related civil complaint, the SEC alleged that Sam "tried to sell ImClone stock and tipped family members before ImClone's official FDA announcement on Dec. 28."
According to the SEC, two unidentified members of Sam's family sold about $10 million worth of ImClone stock in a twoday interval just before the announcement. Moreover, Sam also tried for two days to sell nearly 80,000 ImClone shares for about $5 million, but two different brokers refused to process the trades.
Martha has denied any wrongdoing. She was quoted as saying: "In placing my trade I had no improper information…. My transaction was entirely lawful." She admitted calling Sam after selling her shares, but claimed: "I did not reach Mr. Waksal, and he did not return my call." She maintained that she had an agreement with her broker to sell her remaining ImClone shares "if the stock dropped below $60 per share."
Martha's public, however, was skeptical. She was asked embarrassing questions when she appeared on TV for a cooking segment, and she declined to answer saying: "I am here to make my salad." Martha's interactions with her broker, Peter Bacanovic, and his assistant, Douglas Faneuil, are also being scrutinized. Merrill Lynch Co. suspended Bacanovic (who was also Sam Waksal's broker) and Faneuil, with pay, in late June. Later, since all phone calls to brokerages are taped and emails kept, it appeared to be damning when Bacanovic initially refused to provide his cell phone records to the House Energy and Commerce Commission for their investigation. Moreover, on October 4, 2001, Faneuil "pleaded guilty to a charge that he accepted gifts from his superior in return for keeping quiet about circumstances surrounding Stewart's controversial stock sale." Faneuil admitted that he received extra vacation time, including a free airline ticket from a Merrill Lynch employee in exchange for withholding information from SEC and FBI investigators.
According to the Washington Post report of Faneuil's appearance in court:
On the morning of Dec. 27, Faneuil received a telephone call from a Waksal family member who asked to sell 39,472 shares for almost $2.5 million, according to court records. Waksal's accountant also called Faneuil in an unsuccessful attempt to sell a large bloc of shares, the records show. Prosecutors allege that those orders "constituted material non-public information." But they alleged that Faneuil violated his duty to Merrill Lynch by calling a "tippee" to relate that Waksal family members were attempting to liquidate their holdings in ImClone. That person then sold "all the Tippee's shares of ImClone stock, approximately 3,928 shares, yielding proceeds of approximately $228,000" the court papers said.
One day later, on October 5th, it was announced that Martha resigned from her post as a director of the New York Stock Exchange-a post she held only four months-and the price of MSO shares declined more than 7 percent to $6.32 in afternoon trading. From June 12th to October 12th, the share price of MSO had declined by approximately 61 percent.
Martha's future took a further interesting turn on October 15th, when Sam Waksal pleaded guilty to six counts of his indictment, including: bank fraud, securities fraud, conspiracy to obstruct justice, and perjury. But he did not agree to cooperate with prosecutors, and did not incriminate Martha. Waksal's sentencing was postponed until 2003 so his lawyers could exchange information with U.S. District Judge William Pauley concerning Waksal's financial records.
After October 15th, the price of MSO shares rose, perhaps as the prospect of Martha's going to jail appeared to become more remote, and/or people began to consider MSO to be more than just Martha and her reputation. The gain from the low point of the MSO share price in October to December 9, 2002, was about 40 percent.
Martha still had a lot to think about, however. Apparently the SEC gave Martha notice in September of its intent to file civil securities fraud charges against her. Martha's lawyers responded and the SEC deliberated. Even if Martha were to get off with a fine, prosecutors could still bring a criminal case against her in the future. It is an interesting legal question, how, if Martha were to plead guilty to the civil charges, she could avoid criminal liability.
On June 4, 2003, Stewart was indicted on charges of obstructing justice and securities fraud. She then quit as Chairman and CEO of her company, but stayed on the Board and served as Chief Creative Officer. She appeared in court on January 20, 2004, and watched the proceedings throughout her trial. In addition to the testimony of Mr. Faneuil, Stewart's personal friend Mariana Pasternak testified that Stewart told her Waksal was trying to dump his shares shortly after selling her Imclone stock.24 Ultimately, the jury did not believe the counterclaim by Peter Bacanovic, Stewart's broker, that he and Martha had a prior agreement to sell Imclone if it went below $60. Although Judge Cedarbaum dismissed the charge of securities fraud for insider trading, on March 5, 2004, the jury found Stewart guilty on one charge of conspiracy, one of obstruction of justice, and two of making false statements to investigators. 25 The announcement caused the share price of her company to sink by $2.77 to $11.26 on the NYSE.

Martha immediately posted the following on her website:
I am obviously distressed by the jury's verdict, but I continue to take comfort in knowing that I have done nothing wrong and that I have the enduring support of my family and friends. I will appeal the verdict and continue to fight to clear my name. I believe in the fairness of the judicial system and remain confident that I will ultimately prevail.
Martha was subsequently sentenced to 5 months in prison and 5 months of home detention-a lower than maximum sentence under the U.S. Sentencing Guidelines-and she did appeal. Although she could have remained free during the appeal, on September 15, 2004, she asked for her sentence to start so she could be at home in time for the spring planting season. Martha's appeal cited "prosecutorial misconduct, extraneous influences on the jury and erroneous evidentiary rulings and jury instructions" but on January 6, 2006, her conviction was upheld.
Impact on Reputation
Martha may still disagree with the verdict. But there is little doubt that the allegations and her convictions had a major impact on Martha personally, and on the fortunes of MSO and the other shareholders that had faith in her and her company. Assuming a value per share of $13.50 on June 12th, the decline to a low of $5.26 in early October 2003 represents a loss of market capitalization (i.e., reputation capital as defined by Charles Fombrun30) of approximately $250 million, or 61 percent. The value of MSO's shares did return to close at $35.51 on February 7, 2005,31 but fell off to under $20 in early 2006. According to a New York brand-rating company, Brand-Keys, the Martha Stewart brand reached a peak of 120 (the baseline is 100) in May 2002, and sank to a low of 63 in March 2004.
What will the future hold? Martha has returned to TV with a version of The Apprentice as well as her usual homemaking and design shows, and her products and magazines continue to be sold. Will Martha regain her earlier distinction? Would she do it again to avoid losing $45,673?
Questions
What range would the stock price have been in at the end of 2002, based on your estimates?