CEOs in the slammer or what to do while your boss does time - white-collar crime - includes related articles on public relations, trademark theft, environmental pollution, crisis management planning - International Association of Business Communicators: 1970 - 1990: Section 3: An Era Ended

CRISIS PR has become second nature to Mary McGeachy. Not only has she been involved as Business Week's director of public relations during the three-year insider trading scandal that continues to haunt the US financial news magazine, but she's also been entrenched in publishing a "clear and unbiased" picture of America's eroding business ethic.

"When crisis calls, the corporate communicator's performance can make or break the company," admits McGeachy. "Every modern business must be prepared for the worst, even in the best of times.

The relationship you have with members of the press never goes back to the way it was after the crisis becomes yesterday's news."

More than three years ago, the first of several Business Week employees was accused of selling hot copies of the weekly magazine to a Connecticut securities dealer before the publication hit the newsstands. "He was immediately fired and eventually served time, but that was just the beginning," McGeachy explains.

Recently, the US Securities and Exchange Commission accused Business Week's typesetting company of insider trading, the fourth in a string of criminal charges filed against magazine employees and contractors. A production supervisor at an Applied Graphics Technology plant allegedly tipped off a group of investors to the profitable tune of US $50,000. Business Week is a McGraw-Hill publication.

"It's been tough to remain neutral and cover our own story, but these episodes at Business Week are just part of what's happening in corporate America," she adds. "We're not alone in the muck and mire."

Wall Street Journal Reads Like Police Gazette

Business Week's saga of white-collar crime is one of the corporate scandals that has made headlines during the past few years. Front-page columns of The Wall Street journal have read more like the Police GaZette with unrelenting tales of rascally characters and dirty-dealing. The stench of decaying ethics rose high into executive suites at the end of the eighties when prominent executives at prestigious investment banking firms were snared and handcuffed.

America's historic insider-trading crackdown began with the arrest of Drexel Bumham Lambert's former investment banker, Dennis Levine, who served a two-year sentence in the federal penitentiary in Lewisburg, Pa. Apparently the threat of ending up in the slammer, even one with a tennis court and extended visiting hours, had spurred accused insiders into squealing on their colleague. Levine sat in prison for a relatively short time in exchange for his cooperation in bringing down Ivan Boesky, arbitrage scoundrel who was once known as Wall Street's most powerful speculator. He received a three-year sentence in a California prison and settled civil charges by paying the government $100 million.

Since Boesky was nabbed late in 1986 and began cooperating with authorities, the Securities and Exchange Commission (SEC) has come down hard and fingered other top executives such as Martin Siegel, Drexel's former merger guru who pleaded guilty to felony charges. Michael Milken, another tumbled Drexel executive, has also been indicted and prosecuted for insider trading.

Drexel Struggles to Keep Face, and Loses

"Keeping face with the public has been our first priority," says Steven Anreder, spokesperson for the now defunct Drexel, who presents a brave front despite these government suits. Prior to February when the nation's sixth-largest securities firm filed for bankruptcy, Drexel counted such entrepreneurs as cable-TV pioneer Ted Turner, TWA chief Carl Icahn and oilman T. Boone Pickens as clients.

Drexel's last-ditch PR strategy, explains Anreder, had been to maintain a policy of "being accessible" to big players in the junk bond market as well as to the press. But, even now, with only a handful of employees left to sift through liquidation details, Anreder says it's difficult to "coordinate efforts and funnel information through a single spokesperson."

Much of Drexel's demise and decision to file for bankruptcy stems from the Boesky revelations and from a $650 million settlement with the government to avoid racketeering charges.

Anreder explains that he's remained in constant touch with Drexel leadership and legal counsel during these embroiled events. He adds that his company certainly hasn't cornered the SEC crime report. Former Goldman, Sachs & Co. arbitrager Robert Freeman faces sentencing after pleading guilty to mail fraud in connection with an insider-trading scheme. Kidder, Peabody's Vice President Richard Wigton was arrested for conspiracy to commit illegal insider stock trading while Merrill Lynch's Timothy Tabor was picked up by federal agents for similar charges.

Lengthy List of Crooks

The list of financial crooks in American business goes on to include others: Jacob Butcher, now serving a 20-year prison sentence after convicted of bank fraud in a Tennessee-based banking chain; Marvin Warner, former owner of State Savings Bank, sentenced to three years for his role in the Ohio thrift's collapse; Charles Atkins, tax-shelter promoter accused of $550 million in fraudulent write-offs; and Marc Rich, New York commodity trader who resides in Swiss exile after evading $48 million in US taxes.

Boyd Jefferies, who founded the Los Angeles brokerage Jefferies & Company, which specializes in large block trading of listed and unlisted securities, pleaded guilty to stock manipulation and falsifying records. While he is barred from the securities business and currently is on probation, his company's performance as an investment banking leader has continued seemingly unscathed.

Twenty years ago misconduct would have hit right in the pocket-book, but nowadays the ethical equation has changed. Unethical behavior has become more the result of being too focused on financial gain than an overt intent to do something illegal, explains one conservative observer. Greed, coupled with corporate pressure to perform, has compelled executives to commit violations. The country's current bent toward materialism no doubt has driven professionals over the line.

Not since the reckless 1920s has the business world seen such scandals. Historian Arthur Schlesinger, Jr. describes in his book, "The Cycles of American History," periodic waves of selfishness and materialism that have punctuated US history. These rhythms usually coincide with broader social and political trends. Coincidentally, his "wave theory" predicted another trend similar to the greed of robber barons during the late 19th century would be due before 1990.

How Do Corporations Cope?

How can corporations, besieged by negative press and lawsuits, continue to save face with the public? What public relations tactics are best employed when the chairman of the board is behind bars? Is the "duck-and-cover" strategy appropriate with canned "no comment" responses, or should communication professionals face scrutinizing reporters in aggressive, head-on combat?

Viking Freight, a wholly owned subsidiary of Roadway Services, has been using the "play it cool" tactic by trying to direct negative media attention away from the company. Viking is trying to give the impression of "formally severed" relationships with its founder, Richard Bangham, even though Bangham's brother now runs the company. Bangham is charged with passing on information about a pending acquisition to a New Jersey man who profited from a jump in the company's stock when the deal went public.

"We feel that this is a personal matter between Richard Bangham and the SEC, and that Viking is not implicated in this matter," recites a Viking spokesperson.

The public relations department did circulate an internal employee memo to this effect, but they decided against any external press releases dismissing ramifications of the lawsuit involving Viking's past chairman.

GAF Takes Head-on Approach

While Viking's PR people have taken a passive stance in the aftermath of Bangham's alleged involvement, folks at GAF Corporation decided to meet legal charges head on and have adopted a more aggressive strategy. After a federal jury found this conglomerate and its vice chairman guilty on eight counts of a stock-manipulation and securities-fraud indictment, GAF sent out a harsh written statement in defense of James Sherwin.

"We will leave no stone unturned in pursuing every avenue of appeal," the release stated. "We continue to have complete confidence in Jim Sherwin." Today the company continues to support Sherwin in his position as a GAF officer even though he could face a maximum prison term of five years as well as a $2 million fine. The GAF case was the first securities fraud trial stemming from the Boesky insider-scandal.

Thomson McKinnon's Asset Management Group, another in the long list of corporations recently charged by the SEC with white-collar wrongdoings, has been sending mixed messages to the media. Only after they were named in a security law class action did the company sign on with an outside PR agency.

"The time was right and we needed some PR help in disseminating positive information about our investment advisors and services," comments Andrew Meyers, a Thomson vice president. "Management was trying to approach the lawsuit from a forthright, honest stance, but we felt we needed a professional public relations firm to communicate with our constituents. It should help make some sense out of the chaos."

Many observers attribute the SEC's recent crackdown on Wall Street and corporate America to the splashy campaign on financial abuses led by former enforcement chief Gary Lynch.

"Merger-mania and the bull market of the eighties both contributed to the insider-trading ring rooted out by the SEC," says Bruce Hiler, assistant director of the enforcement division. "Our efforts in that area will be as zealous as ever, but we're now seeing a different type of violation, more family insiders. Our new director also wants to double efforts in the area of financial fraud particularly as it impacts the small investor."

William McLucas, the new enforcement chief, will be working with an additional 25-person task force this year with the SEC's budget up 20 percent in 1990. The federal government, it seems, has no intention of loosening its grip on corporate negligence. One federal judge recently set a precedent by calling one company's chairman of the board to his witness stand, refusing to sentence a faceless corporate entity.

Judge Demands Pennwalt CEO Appear

US District judge jack Tanner would not accept guilty pleas from anyone but the chief executive of Pennwalt Corporation after the oil company's involvement in a 1985 toxic chemical spill. Tanner not only fined Pennwalt $1.1 million on five misdemeanor counts, but he also demanded that Edwin Tuttle, the company's chairman, swear in as a formal defendant and personally enter a guilty plea.

"The hearing took on a carnival atmosphere once our chairman was dragged into things," says Pete McCarthy, Pennwalt's vice president of public affairs. "We worked with legal counsel to decide what strategy was best for the company, and we went forward with answers that focused on what Pennwalt was going to do to clean up the spill and to restore public trust in the local community."

McCarthy describes Pennwalt's public relations policy as "an honest approach with statements directed to the future" of Pennwalt and of Tacoma, Wash., where sodium dichromate poured into the Hylebos waterway after a 180,000-gallon storage tank ruptured. Sodium dichromate contains hexavalent chromium, a cancer-causing agent.

"We did hold private interviews with local and national media, but we refused to answer further questions about the spill," McCarthy adds. "We have given our sincere apologies, but now we're ready to move on and to talk about the years ahead. Our focus is on tomorrow instead of on yesterday."

Beech-Nut Execs Serve Time

The PR folks at Beech-Nut Nutrition are also "focusing on tomorrow" since the food company's recent past remains tainted with violations for selling bogus apple juice, million-dollar fines imposed by the Food and Drug Administration, and two top executives serving time. Beech-Nut, purchased by Ralston Purina last year, pleaded guilty to 215 counts of introducing adulterated food into commerce. The company's president and vice president of operation were also found guilty of similar charges and sentenced to one year in jail.

"We've put the apple juice scandal behind us now," comments Pat Farrell, PR director for Ralston. "It's not something we want to bring up again. The people who were involved are no longer with the company. We've given Beech-Nut a clean slate and are putting that whole episode behind us."

Like so many other reputable companies, Beech-Nut has found that putting market share and profit margins ahead of ethical conduct ultimately leads to a breach of public trust, loss of capital, a myriad of legal confrontations and lingering consequences. Perhaps no other company has learned this better than Manville, which played an active role in mining and selling asbestos for more than two decades without fully disclosing the dangers of disease. For years Johns-Manville, as it was previously known, was a master at stonewalling public complaints until lawsuits began coming in by the thousands.

After filing for bankruptcy, paying out $350 million in settlements, and a new president at the helm, Manville is finally coming clean and has established an open-ended trust to fund compensation for an additional 80,000 claims. The final tally could result in payments of over $3 billion.

Manville Comes Clean

"Our bottom-line strategy is to be honest because this whole asbestos issue has taught us how to deal honestly with product health issues," explains Dave Samson, senior manager with Manville's corporate relations. "Since filing for Chapter 11, we've utilized our president, Tom Stephens, as our singular spokesperson. He's articulate, knowledgeable and extremely credible as the chief executive of the firm."

As a rule, Manville PR people also tape record all media interviews, circulate a daily clip report to senior management, coordinate uniform responses from appropriate legal counsel, and work closely with various health and safety groups,

"One thing we're sure to do now is to announce any negative news ourselves rather than sitting on the side lines like duck decoys," adds Samson. "We take the lead and tell on ourselves. This gives us control over the initial tone of the news, and normally other media follow the tone we set. And one last rule is that we remain accessible. It doesn't matter when or where, you have to get back to people or the relationship suffers, the company suffers, and in the case of Manville, the environment suffers."

Pollution: Crime of the '90s

Violating environmental regulations stands to become the corporate crime of the '90s at a time of growing public support for harsh punishment of alleged polluters. Irvine, Calif.-based Diceon Electronics has been in the headlines recently for illegal disposal of hazardous waste and now faces huge fines as well as jail sentences for two top executives. Politicians are introducing tough environmental laws, including provisions that hold company executives accountable for pollution violations.

Occupational crimes are also on the agenda for corporate prosecution in the nineties. In March of last year, the Illinois Supreme Court handed down a landmark decision that allows criminal prosecution of executives in connection with work place injuries. Previously, penalties assessed by the US Occupational Safety & Health Administration were the only sanctions available for wrongful conduct that threatened serious injury or death to workers. As a result, five senior executives of Chicago Magnet Wire Corporation at this point stand accused of allowing workers to suffer nerve and lung disorders from exposure to hazardous chemicals.

"After closely following the story of corporate crime in America, and after dealing with our own scandal for the past three years, the folks at Business Week are here to tell you that it could happen to your company too," McGeachy warns. "To be perfectly immodest, we handled our own crisis quite well and dealt with the press in a fair and credible manner. But if you don't have a disaster plan, if your public relations department isn't ready to handle this kind of time bomb when it drops in your lap, you've already got one strike against you."

IS YOUR ORGANIZATION READY FOR A CRISIS?

"The organization that has developed a contingency plan will find it provides ready-made answers or actions which won't have to be made under stress of crisis," says Hal Warner, executive vice president of Manning, Selvage & Lee. Warner directs this PR company's national US practice for crisis management out of his office in Washington, DC.

* "Crisis occurs in a fishbowl," he explains. "The media will move in to cover disaster and as in any crisis situation, your company's privacy will be tom away." Warner adds that corporate communication professionals who have mapped out a crisis strategy before any crisis hits are far more likely to "do things right" and handle media relations with ease.

* The public interest is involved in crisis and the organization must mount actions that foster speedy relief and recovery, reduce uncertainty, minimize liabilities, and protect the organization's credibility. According to Warner, five overriding principles apply in the decision-making process as it relates to public disclosure. 1) Primary objective must be public interest and public safety. 2) Getting the accurate facts. 3) Designate a trained spokesperson to respond or announce. 4) Immediate release of information necessary to prevent further damage. 5) Maintain log of aU calls with information about dates, who caned, what was asked and what reply was given.

* "Be caring. Don't speculate or blame or be evasive," says Warner. "All this can be reduced to a policy that says do what is right."

* Warner and other MS&L executives have developed a Crisis Vulnerability Survey that contains a scale to help an organization deter, mine its level of crisis preparation. Take the test and see how well prepared you are if your company became involved in a financial, environmental or other crisis.

1. Does your organization have a
crisis management plan in place?
  YES
  NO
2. If yes, is it kept current?
  YES
  NO
3. Has it been pre-tested?
  YES
  NO
4. Have you a designated spokes,
person?
  YES
  NO
5. If yes, has the spokesperson
been trained in key message
delivery?
  YES
  NO
6. Do you have backup spokespersons?
   YES
   NO
7. Does your management have a
"desired result" philosophy for
handling crises?
   YES
   NO
8. Does your organization see the
media as serving the public
interest?
   YES
   NO
9. Has your organization evaluated
what types of crises are most
probable for it and which kind will
have the most severe impact?
   a. takeover attempt
   YES
   NO
   b. product recall
   YES
   NO
   c. executive criminal act
   YES
   NO

THIS GUY SUCKED EVERYBODY IN

In 1984 Donald D. Sheelen took over as CEO of the ailing Regina vacuum cleaner company in Rahway, N. J. "What happened to the company is a tale of the '80s", reported Business Week magazine . ..... an overzealous MBA entrepreneur, cheerleading Wall Street analysts and independent auditors who failed to uncover a less, than-subtle fraud."

Sheelen was a belluva vacuum cleaner salesman, and not a bad chef when it came to cooking the books. He pleaded guilty to fraud, and is serving time in a work-release correctional center.

SUITS TARGET ACTIVISTS

Business and government officials are suing private citizens through litigation termed Strategic Lawsuits Against Public Participation. The purpose, according to an article in PR Reporter newsletter, is to quell the avalanche of suits that frequently hold up land developers, waste disposal firms and other organizations whose actions affect communities. The costs of delays often are high.

"What's shocking about this type of litigation is that it is a direct violation of the First Amendment right to petition the government," said George Pring, Univ. of Denver, Colo. professor. "If every time you try to participate, you get slapped with a multimillion dollar lawsuit, you are going to get the message that the First Amendment is a fraud and a myth," he added.

TRADEMARK THEFT IN THE BILLIONS

The US loses more than $23 billion a year from theft of intellectual property, according to a December 5,1989 article in the Wall Street journal.

Based on a survey of 245 Large US companies, the following countries accounted for losses (in 1986) by either not having or not enforcing laws against trademark and copyright theft-. Taiwan $752.5 million; Mexico $533.4 million; and Korea $496.1 million.

"Copycat goods and trademarks are epidemic in South Korea," said the article. "Going well beyond pirated computer software and fake designer goods from struggling mom and pop factories and backyard markets, copycat products are solidly in the Korean mainstream: Even the biggest companies mimic some of the world's best-known products, and they sell their wares in the best department stores and supermarkets."

PR TAKES ITS LUMPS

While there are those who would say influence peddling is what PR is all about, the practice landed Washington governmental affairs hotshots Michael Deaver and Lyn Nofzigger in jail for selling White House favors in the eighties. In another ethical skirmish, US presidential press secretary Larry Speakes lefts his job under a cloud for writing a tattletale book stating he had made up quotes attributed to his boss Ronald Reagan.

Closer to home, Anthony Franco, head of a Detroit PR agency of the same name, resigned as national president of PRSA shortly after pleading "no contest" to charges of insider trading in 1986.

EXXON INDICTMENT SIGN OF TIMES

The nineties promises to be a grinding and expensive era for polluters. The public mood was reflected most dramatically in the US federal grand jury indictment of Exxon corp. Over the Valdez oil spill. If convicted of all five ed" counts, Exxon could face fines in excess of US$1.6 million, that, of course is in addition to the billion. plus Exxon has spent so far on clean-up.

COPYRIGHT 1990 International Association of Business Communicators
COPYRIGHT 2004 Gale Group