I’m going to take a break from writing on the DARQ Arts to give some thoughts on current events here in Utah and around the nation. Last Monday, after a full day’s work, I sat down to dinner and almost immediately my youngest daughter mentioned Salt Lake’s Hawkeye and other issues trending on Instagram, Twitter, and the social media sphere. Her comments immediately started a broader discussion.
In general, I believe that most of the current protests are peaceful and people are legitimately concerned about very real issues, with the Covid-19 pandemic and related shut-down having more than a little to do with what is going on. I also believe that people are looking for a positive change and are handling it, in general, well. But those positive stories don’t “sell” with the media or social media (with the exception of Some Good News). People trend towards something with shock value so instead of seeing people handling matters right, we are served up things like some guy who shows up with a bow that keeps us from focusing on the core matters. So why am I mentioning this?
Unintentional and Incidental Crime versus Fraud
At the same time that the wannabe Avenger showed up in Salt Lake, I asked my daughter for an update on a true hero of mine, Kermit Washington. This man was instrumental in my life and a great mentor who provided direction at a turning point in my life. He is someone who believed in me when everyone else had lost hope. He also happens to be a former LA Laker, black and serving time in federal prison. My daughters all grew up hearing stories about him and what he did for me. It was because of these stories that my youngest daughter (by far the most sophisticated user of social media in my family) came to me and told me about Kermit’s situation. An amazing former student of mine, who also is in law school, and I will get to the bottom of the issue but the first thing that happened as I reflected on all Kermit did for me so long ago was to wonder aloud how such a good person could be in prison?
As much as it might seem like I’m building up to talk about race, that is not where I’m going with this. In short, what I’ve been able to figure out so far is that my very real hero was prosecuted for misuse of funds for a charity he set up. This immediately made me think of a case here in Utah where a former federal law enforcement officer set up a charity and was found to be paying himself, his immediate and extended family members excessive salaries. He simply got a stern warning and was asked to stop. While one man is indeed black and the other white, the two cases illustrate something else about our legal system that I regularly point out to my students.
Having taught fraud detection for several years, I always start out those lectures telling my students that one has to distinguish between unintentionally breaking the law, incidentally breaking the law, and intentional schemes to defraud. Ignorance of the law is no defense, and mitigating matters are somewhat subjectively weighed by judges and juries when analyzing these matters, but I make it clear that most of these people in these categories are not highly skilled or experienced in what they did. I also point out to my students that relatively more of the unintentional and incidental lawbreakers go to prison while relatively few of the intentional fraudsters do. After explaining this, I then ask them to think about this and I asked them why they think this is the case. While I’ve had many great answers over the years, there are a few things they always seem to say, foremost among them that the intentional fraudsters don’t often go to jail because they are so well prepared and resourced. Consider that for a moment yourself. That little insight often changes how my students think about fraud, fraud detection, and the greater cost to society.
The Bezzle and Economic Growth
Rooting out fraud is something that should be important to us all as we ensure our collective economic prosperity. But, why is this so important? After all, when one examines the amount of money lost to prosecuted fraud cases, it only amounts to a small percentage of the market capitalization of publicly traded firms. The point isn’t this specific amount of identified fraud losses, but rather that a culture of white-collar crime is tolerated and in effect fostered. Because these white-collar crime cases remain unprosecuted, the amount of unprosecuted fraud in our entire market grows under the surface. This collective fraud acts to “slow the ship of capitalism,” not unlike barnacles on a ship’s bottom. John Kenneth Galbraith was known to call this unprosecuted white-collar crime the “bezzle” in the economy and he also pointed out that bezzle has many negative indirect consequences. Let me give you an example.
I know of a person that was a major officer in one of the largest bankruptcies of a public company in the last twenty years. While bankruptcies are a part of the normal functioning of a capitalist economy, what’s most shocking in this case is that he and his partners had amazing conflicts of interest and made huge amounts of money in the process while their stock and bond investors lost over 98% of their money. I actually teach the case of their company in the “detecting financial manipulation” part of my valuation class, as do many of my colleagues around the world. These are not small losses, but billions of dollars. Now, did these people go to jail? The answer is not only a resounding “no,” but, in fact, there was not so much as a trail.
The reason nothing happened rests in an examination of the background of the main players. In short, they were “pros,” the CEO being the son of a man who had been involved in numerous similar circumstances over his career. They went into their business “lawyered up” and they were very careful in how they did and said everything. Those of us who know of them and their business practices do our best to stay away, but they always seem to find new people to do business with. Having met several of them over my career, I can confidently say they don’t seem menacing. Quite the contrary they seem like nice people that you’d trust. The CEO was actually a huge Boy Scouts supporter on a national level and was known to have said that everything he did, he did it to please God. Comments like that endeared him to many. But of course, that’s the point. It wouldn’t be a “con” if there was no confidence in what they inspired.
While the culture of white-collar crime that is tolerated, and in certain homes even taught as a way of life, it is a bad thing. Possibly worst is that these people present themselves as innovators, making it hard for others to distinguish between them and true innovators. Some people even get to the point that they don’t believe that true innovators exist. This case in point, the CEO of the company that went spectacularly bankrupt was actually repeatedly compared to Jeff Bezos many years ago when Amazon was struggling to make it. It seemed logical to many, as this bankrupt CEO presented himself as a “young genius from finance” that was going to “change the world through technology” and “revolutionize a low-margin business” and use it as “a launching pad to change other low-margin businesses.” Sounds like Jeff Bezos, doesn’t’ it?
The main problem was that CEO that presided over the famous bankruptcy actually came from a wealthy family that had made its money the way he did (rolling up companies and using questionable accounting practices he termed “innovation”). That wealth helped the CEO cultivate an image of himself that relied on scrupulous media manipulation. The even bigger problem was that this CEO came around before Bezos, who actually was and is the way the other guy presented himself. The media tried to say that Bezos was just like him and Amazon would go bankrupt just like the previous company. Consider for a moment that we almost lost the collective benefit and wealth creation coming from Amazon to our society because this guy who came before Bezos muddied the waters and made it difficult for Amazon to gain vital support early on.
True Innovation and More Equal Economic Growth
There really is no simple solution to this other than keeping faith and moving forward, having hope in the future. Going back to Amazon, consider that if one were to take the collective losses of all the businesses related to this young CEO, his father, and their associates and compare them to the value created just by Amazon, the losses are dwarfed by the gains. I often think of this as I reflect on my childhood. The picture below says it all. Let me explain.
My father and mother were environmental crusaders before it was fashionable. Literally, thousands of articles were written and numerous television shows were done on my family’s fight. In this process, my family got to know people like Ed Bradley, the crusading journalist for 60 Minutes. In the 60 Minutes segment on my father’s fight, Mr. Bradley stated that the pollution problems plaguing my family’s ranch and others nearby were originating from corporate agriculture, an industry “not to be taken lightly as it was California’s single largest industry.” In a rare follow-up, Mr. Bradley went to the front door of the billionaire behind the poisoning and called him out personally. As painful as it is for me to watch the old media accounts of my family’s struggle, I smile when I go back and watch them today because technology has eclipsed agriculture as California’s single largest industry and the billionaire malefactor’s business is much diminished in political and economic power. This has all happened due to the rise of Silicon Valley and that has helped change the whole discussion.
Now to the picture. In 2016, I found myself in Palo Alto. In between meetings, I stopped by Stanford’s Cantor Museum, a place I used to love as a kid. Immediately upon entering, I saw a presentation highlighting how important water was to the state called California: The Art of Water. As I entered, I saw beautiful paintings and other art. To my total shock, the culmination of it all was an ugly picture of the Kesterson National Wildlife Refuge, made famous by my family’s fight. We lost everything in that fight, but that struggle helped make me what I am. I started a science fair experiment to prove to the world the environmental damage being done. I gained job offers from that project and eventually got a great job on a federal grant at the university using those same coding skills. That job led me to Columbia University, and it was there that I saw that I could affect the greatest change to the world through innovation, specifically in the area of financial technology. What most could consider a tragedy gave my life direction and purpose.
As I stood looking at the picture of the Kesterson Refuge, I saw it as appropriate and inspiring that the picture representing the culmination of something so important to California was displayed in an art museum in the heart of Silicon Valley built with financial technology money (Cantor was the guy who first addressed bond electronic trading). While some regret that the fruit orchards of Santa Clara became the corporate campuses of Silicon Valley, my hope for the future of humanity and for overcoming even the most pernicious of problems rests in the innovation and economic development fostered in places like Silicon Valley. We simply need to make sure that the playing field is leveled so all can experience the benefits.
Update on the ULISSES Project
Let me close this entry with an update on the ULISSES Project. Tae Jang, my first student intern, will be coming back to help out on the ULISSES Project, specifically working with Mark Parker to lead the AGORA Initiative. Among all our graduates, Tae is among those that I’m most proud to have been associated with. For more context, Tae graduated and went to work for the Utah State Auditor’s office, in effect becoming their Data Tzar, working with groups such as OpenGov.com and AWS to help realize the objectives of the Utah Transparency Initiative, a forward-thinking program that was started way back when Jon Huntsman, Jr. was the governor of Utah. The program languished for years until the Auditor’s office sought out someone who was community-minded and tech-savvy that could spearhead the program. I was honored to have been involved in some way as I spoke to the Auditor’s Office in detail about his background and accomplishments with the ULISSES Project and how that made him the perfect candidate. Now Tae is not only helping our local government in Utah get better but soon will be back helping us again with the AGORA Initiative, something he essentially began with me several years ago.