Sunday, September 27, 2009
This past Monday, the 21st of September, I addressed 5 Accounting Classes at USC’s Marshall School of Business. A couple of weeks ago, I sent an introductory e-mail to scores of professors at USC, explaining why my experience in the corporate world could help their students. In my e-mail, I also attached the Ethics Chapter from my book, Lessons From Prison. I must admit I was not exactly sure what type of response I would receive. Within minutes my anxiety was replaced with gratitude. Not only did dozens of professors respond to my e-mail, but some even called to thank me for offering to share my experience. As an alumni of USC it was both humbling and incredibly fulfilling to have professors tell me that my work was poignant and exceptional.
For three of the classes the professor and I pulled material from Lessons From Prison. Specifically, we presented to the students the dynamics of the meeting where I learned that my client was clearly running a fraudulent hedge fund. For an hour or so before my presentation the students debated what they would have done if they were me, or my former partner, or my former client, or UBS. Like I fly on a wall, I just sat in the back of the room listening. The students did not know that I was in the room nor did they know that I was going to speak. Then after an hour of intense debate and discussion the professor told the students, “well, Justin is here today and he is going to tell us why he did what he did”. Many of the students seemed shocked when they saw me walk to the front of the room to address them. Too often, in my opinion, case studies do not tell the whole story. Sometimes for the message to stick the audience needs to hear directly from the person who made the decisions. That is part of the reason I am so excited about Lessons From Prison. The students can read the work, dissect the myriad ethical dilemmas, and then hear directly from the person that made the decisions. It is a one-two punch that has a lasting effect.
Below is the case study presented to the students. I have also attached a handful of comments from the students.
UBS Accounting Case – Fall 2009
Thanks to your excellent work at USC, two strategic summer internships, and some connections you have made through the Trojan network, you find yourself having graduated from USC and having landed a plum job at UBS, the Swiss banking firm. Headquartered in Zurich and Basel, Switzerland, UBS is one of the world’s leading financial firms. It describes itself on its website as serving “a discerning, international client base” in the areas of wealth management, investment banking, and asset management businesses.
As one of the many accountants on staff at UBS, you have been pleasantly surprised by how things have played out since leaving USC. Even though it was only two years ago that you graduated, it seems more like ten. Leaving school with $80,000 in student loans, and a $25,000 new car loan, your monthly debt obligations were $920/mo. for your student loans, and $492/mo. for your car loan. You were delighted to start your career at Bear Stearns, in their downtown LA office, with an $80,000/yr. starting salary, which easily covered the cost of the loans.
But Bear Stearns wasn’t what you had hoped, and your take-home pay after taxes left you with much less than you expected. Instead of the roughly $6,000/mo. paycheck you were expecting, between taxes and health insurance and a few other odds and ends, your monthly take home pay was just $5,500/mo. That was okay, but your rent and utilities for just a modest apartment in Santa Monica was $2,000/mo., leaving you with approximately just $2,000/mo. left over. That seemed like a lot at first, but between paying for gas, car insurance, cable TV, and other mundane items, it quickly became apparent that $2,000/mo. simply wouldn’t leave enough to save up to buy a house, as you had been hoping to do. You quickly began to wonder how you were going to boost your earning power, and were already starting to think about going back to school for an MBA.
But that was only for six months. At a conference in Las Vegas, you were unbelievably lucky to meet Justin Paperny and his partner Kenny, both former Trojans now working for UBS in the New York office. They offered you a $15,000 signing bonus and $100,000/yr. to come and work with them in New York. You sign on, grateful to be with them. You are especially impressed by Justin—a baseball player for USC, he was only a few years older than you, and making several hundred thousand a yr., even though he was only 27. You are hoping to pursue a similar trajectory.
Justin quickly becomes your mentor. He is eager to teach you the ropes; and you are eager to learn. Together, Justin and Kenny manage well over $150 million in accounts, most of which are either portfolios of professional athletes or hedge funds. In the course of the past 18 months, you seem to have landed on your feet: a great mentor, a promising career, and a good life that you are starting to build for yourself in New York City. Due to your work with Justin and Kenny, you’ve even managed to meet quite a few professional athletes—something you never dreamed could happen when you were a student sitting in class just two years ago in Rose Layton’s accounting class. Enjoying your good fortune, you treat one of your old classmates to a seven-course meal at a nice New York restaurant. You each lift a glass in grateful acknowledgement of your time at USC.
One day, Justin calls you into his office. One of his clients’ accounts is a hedge fund called the GLT Venture Fund. This fund generates excellent trading commissions for Justin, Kenny, and of course for UBS, ranging from anywhere between $50,000-$100,000/mo. The client who runs the fund is named Keith, and Keith has just called requesting that Justin meet together with him and one of Keith’s major investors who, together with his legal and financial advisors, are seeking reassurance that the client’s money is in good hands. Keith thinks that Justin can help put their minds at ease. Would you like to come to the meeting and listen in?
Of course, you agree; and Justin asks you to take a quick look at Keith account with UBS just before the meeting. It looks unexceptional; you note that the account has just under $1 million in assets, and with that brief background, you head for the meeting.
When you get to the meeting, you see a 90-year old rabbi, with his financial and legal advisors on either side of him. Keith and Justin are also there, and after some introductions and pleasantries, the meeting gets started. Several matters are discussed, but it soon becomes clear that the rabbi’s advisors are concerned about whether the GLT Venture Fund is really the right place for the rabbi’s funds. All of the sudden, out of the blue, one of the rabbi’s advisors asks a question that comes at Justin like a 100-mph fastball aimed straight for his head: “Justin, we need your answer to this question: Here we have a gentleman who has invested his life’s savings in the GLT Venture Fund. Does UBS think it wise for a 90-year-old rabbi to invest all of this—$3 million—into into what is essentially a basket of growth stocks?”
In a flash of horrible realization, Justin, like you, realizes that there must be massive fraud occurring in the GLT fund, if the rabbi’s advisors think there is $3 million there. Clearly there is a problem, as there was only $1 million in the fund as of this morning. Imagine yourself in Justin’s place. How would you answer the question? (Unlike Justin, you get to have 10 minutes to think of an answer. Try to come up with an answer that your group can agree on.)
UBS Accounting Case – Fall 2009
With his instincts honed from years playing baseball, Justin chooses to do what any good athlete will do when a fastball is aimed at his head: he ducks. In the heat of the moment, Justin chooses not to raise the matter of the troubling discrepancy between the $3 million that the rabbi’s advisors believe is in his account, and the merely $1 million that he knows represents the total assets of the GLT Fund. “Well,” says Justin, weighing his words carefully, “you know that UBS is only the custodian of the GLT account. As our letter of disclosure indicated, Keith is solely responsible for allocating client assets.”
“We understand that,” the accountant persists, “but would UBS recommend that an elderly client invest his life savings in growth stocks?”
Justin again answers carefully. “Although we don’t presume to know the investment strategies of those in the GLT Fund, at UBS, it is true—we would typically recommend a much more conservative allocation for an elderly gentleman. We would include a much higher percentage of government bonds that offered a fixed-income stream.”
As the meeting proceeds, the fastballs keep coming, and it becomes clear that Justin needs to do something, so he appeases them by giving the old rabbi and his advisors assurances that he will assist Gilabert in restructuring the rabbi’s account.
After the meeting, Justin realizes the magnitude of the deception he has just participated in, and he is livid. “What did you just do to me?” he shouts at Keith
“Please,” pleads Keith, “Just help me get through this. I have some new accounts coming in that will set things right with the rabbi. I can make it up.”
Things have happened so rapidly that neither Justin nor Keith are aware that you have been present throughout all the events that have transpired, and you have heard everything. You and Justin know two things: Keith is a fraud; and your bonuses and good standing at UBS essentially are made possible largely through the commissions that the GLT Fund generates.
Student Comments from USC Accounting Classes 9/21/09
Ethics is commonly taught but extremely difficult to follow. This class period, particularly the surprises of having Justin come and talk, did more for me than any and all other class sessions on ethics.
The most useful thing was the guest speaker’s “presentation”. Talking about his own experience was very helpful, useful, and interesting. I felt I could relate more because he was young and the real life situation feels closer as I can actually picture the situation more clearly.
Hearing Justin talk was one of the most important, enlightening, classes I’ve been in at USC. This was perhaps one of the most valuable life lessons I could have learned. Before today, I always feared I was probably smart enough to deceive, but listening to Justin truly teaches you that it is not at all worth it.
The most valuable thing about the session today was getting to hear and work with an actual case. Working with made up scenarios is not as effective as hearing the real thing from an actual person. Also, just talking through what we would do is not as good as actually hearing what happened and the consequences of those decisions.
From my economics class, we were told that maximizing profits was one of the most important things in business. However, now I noticed that maximizing profits in a right and ethical way is the key. It is the only way you will not regret and be proud of what you get.
While I’ve been in USC I’ve been attended a lot of “Ethics” discussions. This presentation was the most realistic and touchable presentation I’ve ever had. I realized that telling the truth is hard and also the most needed part.
The most important takeaway that I got from today’s lecture was that I learned how those that are sent to prison for fraud aren’t completely immoral people but just people that get caught up in the corporate world.
The most important lesson I learned is that there will be business situations where my integrity will be challenged and courage will be needed. The big question is, will I stand my ground and do the right thing at all times or will I give in to the pressures of unethical forces? I choose to always be of integrity.
Today’s lecture was effective because it was real. The guest speaker made the entire lecture very credible. Also explaining how the circumstances arise helped to better understand.
This lecture made me realize the seriousness of the ramifications of fraud. Hearing it from a person who has actually experienced fraud and the consequences that come along with it is just devastating.
What I thought was valuable when Justin tells us that we sit in these classrooms thinking we’re never going to engage in fraud. He talked about corporate culture & how it dehumanizes people. I think that this is valuable because students get a glimpse of what to expect in the business world.