Whistle-blowers: The New Corporate Watchdog
In February of 2010, at the invitation of Professor Mark Mallinger, I addressed an audience at Pepperdine Business School. One guest from the audience asked me about a new whistle-blower initiative by the Securities and Exchange Commission that encouraged people who engaged in fraud or had knowledge of an ongoing fraud to report wrongdoing to authorities. In the past, whistle-blowers laws (codified under Title 18 of the U.S. Code, Section 1514 A) protected employees who reported wrongdoing from retaliation by employers. Under the new initiatives, whistle-blower laws would go far beyond protecting company informants from retaliation. Indeed, even if the whistle-blowers participated in fraudulent activities, new regulations could shield them from prosecution and provide them with economic incentives that included 30 percent of any assets recovered under the fraud.
Those whistle-blower laws were designed to help authorities lower the levels of fraud, deceit, swindles, and wrongdoing. In time, I expected them to bring many more white-collar crimes to the attention of law enforcement. With potential informants all around them, business executives had even more reason to strengthen their ethical cores. Through honest practices, business professionals would keep their good reputations intact; they would also avoids the kinds of cascading personal implosions and humiliations that Eric, one of my clients, expressed after a whistle-blower helped launch an investigation that put everything he held dear in peril.
Eric retained me for mitigation and prison consulting services that would help him prepare before he surrendered to federal prison. He had been a senior executive for a health care company, yet some regrettable decisions he made as a corporate leader resulted in his federal indictment, conviction, and three-year prison term. For our first meeting, I agreed to meet Eric for dinner at Katsuya, one of the most popular sushi restaurants in Los Angeles.
I watched as Eric parked his black Mercedes sedan with fancy rims. When he stepped out from the luxury automobile, anyone’s first impression of the man would have been that he personified success. He was in his mid-forties, tall with an athletic build, tanned face, and silver hair; he wore a blue suit of the highest quality, crisp white shirt with a gray tie. When we shook hands, he glanced at his watch and apologized for being a few minutes late. The heavy bracelet of his gold Rolex was one more sign of the status symbols he valued, and it suggested that the austerity of imprisonment would not suit him.
After being seated in the trendy restaurant, I asked Eric to tell me more about his life. When he began speaking, he exuded confidence and pride in the considerable accomplishments of his career. In 1996 he earned a business degree at UCLA and then began working for a business that employed more than 100 people. Eric began his career in the accounting department of the company that provided services to the health care industry. After he married, in 1998, he said that aspirations to earn a higher income led him to transition from the accounting department to sales. In 2002 he was promoted to management with the title of vice president of operations.
“Were the prospects of earning a higher income the sole motivation for your switch from accounting to sales?” I wanted Eric to open up about the values that drove him.
“You can’t really live in LA without being conscious of statues, and I saw limitations in accounting.” Eric pulled out his wallet to show me a photograph of his wife. “When Sheila and I married I was auditing the financials. It was all in the numbers. They convinced me that the guys making real money were those on the sales force. If I was going to afford a house in Santa Monica, I knew I’d have to switch from the fixed salary structure of accounting and move into sales.”
“Did the earnings meet your expectations?”
“To an extent. With year-end bonuses I’ve worked my way to pulling down about three hundo, but it’s never really enough. I know it sounds okay, but with taxes taking a big bite, at the end of the day we’re left with less than 15 a month. Not easy keeping up in this town on that kind of scratch. What are you going to do?”
I smiled and nodded in empathy, remembering my days as a broker when I was chained up with the same pressures. Since leaving prison I’ve earned only a fraction of what I used to earn, but my sense of fulfillment exceeds anything I’ve ever known.
“How is your wife handling these challenges you’re facing with the law?” I asked, wanting to know more about his home life.
“Fine.” A blank look crossed over Eric’s face as if vitality left him.
“Does she grasp the severity of your prison sentence?”
He shrugged his shoulders, and at once I could see the affected composure vanish. He compressed his lips, brought his closed hand to his chin and lowered his gaze to the table.
“I know this isn’t easy,” I tried to soothe his nerves, to lift some of the weight that was crushing him. “I’ve gone through it. In order to help you find your way, I need to know what you’re going through, what happened.”
Eric shook his head in silence for a moment, then dabbed his eyes with his finger and thumb. “Sheila’s left me,” he raised his head to look at me, more lines etched into his face, a portrait of sadness. “She called me a loser, a liar, and said she was going to file for divorce. I can’t believe this has happened. Everything I’ve done has been for her, to give her the house she wanted, the cars, the clothes. I didn’t need any of it. I just wanted to please her. But it was never enough. Now she’s gone. It’s all gone. I can’t go to prison,” he shook his head. “Three years…I’d rather be dead.”
“Don’t say such things, Eric. I know it feels like the end, like you’ve lost everything. But you can pull through this, and I’ll help you. Let’s start from the beginning. Tell me how you got into this mess. We’ll find the way out.”
Eric told me that he was charged with numerous crimes related to his indictment in a multi-million-dollar Medicare fraud. At the conclusion of his trial, the jury convicted him of conspiring to defraud the United States by making false statements to Medicare agents both verbally and through letters he sent. The jury also convicted Eric for obstructing a Medicare audit by directing his subordinates falsely to represent that his company was in full compliance with government regulations, and for obstructing a criminal investigation by making false statements to federal agents. A whistle-blower who worked in Eric’s company brought the wrongdoing to attention of authorities, and the responses Eric gave to investigators had an escalating influence on the problems he faced.
“I get that a whistle-blower turned you in, Eric. But that doesn’t help me understand what it was that you did. Sometimes, to set ourselves back on the right course, we have to begin by reflecting on the decisions we made. At least that was what helped me when I was ready to start putting my life back in order.”
Eric nodded. “I had responsibilities as VPO.”
“What’s that,” I asked, “VPO?”
“Vice president of operations. I oversaw several divisions of our company, one of which was testing services for pacemakers.”
“Is that the medical device for patients with heart complications?”
“That’s right,” Eric nodded. “Those devices need regular testing and my company was of the nation’s largest test providers.”
“How do you test pacemakers?”
“Well I don’t do the testing personally.” Eric was having a difficult time moving out of denial mode.
“Eric, I understand,” I smiled. “I’m not here to prosecute you. The trial’s over. I’m just trying to understand why you were charged with federal crimes. It
would help if you could explain for me how to test pacemakers.”
“We have teams of trained technicians who work in our various facilities.” Eric explained. “The technicians use our equipment to test the pacemaker’s operation
over the telephone lines. Medicare calls it a 30-30-30 test.”
“And how does that test work?”
“The technician calls the patient and asks the patient to set up a portable device from home. It transmits signals from the pacemaker that our equipment converts into a conventional ECG report.”
“What’s an ECG?”
“An electrocardiogram report,” Eric continued. “Cardiologists rely on those reports to make sure everything’s in order with the pacemaker.”
“And was your crime related to those tests that your company performed?”
Eric nodded. “I was found guilty of setting up procedures to shorten the tests, and also for lying about them.”
“What would be the motivation for shortening the tests?”
“I’m an operations guy,” Eric leaned back in his chair and scratched his scalp. “My job was to increase shareholder value. There were two ways to reach such a goal,” he held up one finger, “I could increase revenues,” he held up his second finger, “or I could cut costs by running operations more efficiently. Medicare paid a fixed rate for testing each pacemaker, so my job was to increase efficiencies.”
“Medicare’s 30-30-30 test was really three tests that the technician performed,” Eric said. “Each test was supposed to last for 30 seconds. The first 30-second test recorded on a magnetic strip the pacemaker’s operation in a free running or ‘demand mode.’ During the first test, the pacemaker supplied an electric charge to the heart only when it sensed that the heart was falling behind the programmed heart rate.”
“Okay,” I said, following Eric’s explanation.
“After that test, the technician recorded on a magnetic strip the pacemaker’s operation for 30 seconds in a ‘magnetic code’, during which the patient would use a magnet to close a switch inside the pacemaker. The magnet caused the pacemaker to send an electric charge to the heart at regular intervals, and the results of the test would reveal for the cardiologist who reviewed the test whether everything was in working order.
“The third 30-second test was when the technician recorded the pacemaker results in the ‘demand-after-magnet-mode.’ It was a waste of time, really, because it only measured whether the pacemaker returned to free running functioning—but the technician could tell this by listening. Cardiologists only wanted to review results from the first two tests.”
“So what happened?”
“The techs had been required to hit a quota of performing four 30-30-30 tests an hour, or 32 tests a shift. But with costs being what they were, and with Medicare refusing to pay more for the tests, the division wasn’t really hitting its numbers of 32 tests a day. After considering the data, I didn’t see any reason that the technicians couldn’t step up their performance to average five tests an hour, or 40 tests per day.”
“Would one more test per hour really make that much of a difference?” I asked.
“Not for a single technician, but in the aggregate, when you’ve got hundreds of technicians performing 40 tests a day instead of 32 tests a day…well, you do the math. The increased quotas would result in 25 percent more revenues without much additional costs to operation.”
“Were the technicians able to meet the higher quotas?”
“That became a problem,” Eric acknowledged. “To meet the performance quotas, the technicians fudged some on the third test. First they cut it down to 15 seconds, then they stopped running the third test altogether, relying instead on their experience to ensure that they left the pacemaker in its normal functioning mode.
Since cardiologists never requested data from the third test,” Eric shrugged, “no harm, no foul. There wouldn’t have been a problem if one of the technicians who wasn’t making the quotas hadn’t notified the Department of Health and Human Services.”
“Did he report that your company wasn’t performing the third test?”
“That’s right,” Eric said. “One of the managers had fired him after repeated warnings because he wasn’t keeping up with the new quotas. To get even, he caused all kinds of problems, and it’s pretty much because of him that I’m on my way to prison.”
“What happened after the employee notified the government?”
“Well, the first blowup that happened was that the government contractor responsible for disbursing Medicare payments sent a letter to my company announcing that it refused to pay for our pacemaker monitoring because we weren’t in compliance with the 30-30-30 test. It was also seeking reimbursement for the Medicare claims it had already paid. The fiasco was going to result in millions of dollars in lost revenues.”
“How did you respond to the letter?”
“I immediately drafted a letter to appeal the reimbursement demands and to assert that our company was in complete compliance with all relevant Medicare regulations.”
“Wait a minute,” I interrupted, “I thought you said that the technicians weren’t performing the last test.”
Eric held up his hands, palms open, giving me the signal to slow down. “I was overseeing operations, not involved in the minutia of performing thousands of tests. I didn’t want to know anything about noncompliance with Medicare.”
“But did you know?”
“What I knew was that in order to reach our financial performance objectives we had to increase efficiencies. The managers of each facility oversaw the technicians.”
“Did you check with the facility managers before you wrote the letter saying that you were in compliance with all Medicare regulations?”
Eric put down his chopsticks, then scratched his forehead. “You don’t know the pressure I was under. When I wrote the letter I was trying to keep the quarterly results from blowing up in my face. Everything was tied to the revenues generated from those tests. If Medicare was going to cease payments and demand reimbursements for the payments it made in the past, well I could see the fallout that would follow. I was just trying to stop the fire before if started burning out of control. I didn’t know it was going to keep spreading.”
The jury at Eric’s trial found him guilty of intentionally making a false statement. When he sent the letters, prosecutors alleged that Eric knew his company was not in compliance with Medicare regulations for the 30-30-30 tests. Jurors unanimously agreed. The United States Code at title 18, section 1001 makes it illegal for anyone to make false statements to the government.
Whatever the motivations were for Eric to tell the first lie, the problems only grew more severe. After he sent the initial letter in protest of Medicare’s refusal to pay for the pacemaker monitoring, the government began to investigate whether Eric’s company was in compliance as his letter represented. Investigators spoke with Eric and he verbally told them his company was in compliance. Yet by offering testimony at trial from various facility managers who oversaw the technicians, prosecutors proved to the satisfaction of the jury that Eric was lying when he spoke to investigators. Indeed, the facility managers had testified that they had complained to Eric about the problems that stemmed from the unreasonable quotas he had demanded.
Those lies he told investigators brought additional convictions for Eric, and they led to a government audit.
The United States criminal code under Title 18, section 371, makes “conspiracy to commit offense or to defraud United States” a federal crime. Title 18, section 1516, makes “obstruction of a Federal audit” another federal crime. Both of those statutes carried maximum penalties of five years imprisonment. When Eric sent an e-mail message that instructed the facility managers to tell the government auditors that his company followed the required Medicare procedures (despite his managers having told Eric that in order to meet his quotas the technicians had ceased to perform the final tests), he broke both of those laws and the jury convicted him.
Title 18, chapter 47 alone of the U.S. criminal code lists 38 separate categories of federal crimes that fall under the heading “fraud and false statements.” Eric did not set out to commit a federal crime—or a series of federal crimes. His only concern, he said, was to increase the financial performance of his company. By improving corporate results, he could justify his bonus, but when he wrote the initial letter, Eric insisted that he was simply trying to protect the company that employed him—not his own compensation. He didn’t know that writing a letter could lead to a series of federal criminal charges.
After listening to Eric, I questioned whether mere knowledge of the law would in itself have been sufficient to keep him in compliance. For Eric, the law was nothing more than a book of rules. The deeper problem, I thought, was that Eric’s code of values was out of whack. Expecting Eric to have understood thousands of criminal statues, or rules, would have been unreasonable. All he really needed was to understand the importance of making values-based decisions.
Eric’s problems did not stem from the letters he wrote or the directions he provided. He may have held the position of corporate leader, but good leadership required an individual to make good decisions, even when confronting challenges. Medicare reimbursement policies may have threatened the profit potential in Eric’s firm, but the pursuit of profits did not excuse the responsibilities to act with integrity.
Eric was living beyond his means. The decisions he made in his personal life weakened him, making him vulnerable to bad decisions in his professional life. Such pressure caused him to place thoughts about his potential bonus ahead of his duty to lead. That pressure was the root of Eric’s problem, not his ignorance of the law.
As a consequence of Eric’s concentration on profits (and prospects for his bonus) he neglected his duty to lead. By pressuring his subordinates to circumvent services for which his company was billing, Eric broke numerous laws—despite his denial about “hands on participation.” He then made matters worse by lying or dissembling to cover up criminal behavior.
Various fraud and conspiracy statutes were too numerous to count. But in light of their existence, executives in today’s environment had all the more reason to cultivate principles of good character. They needed to understand that whistle blower laws made every employee and business partner a law enforcement ally. Someone was always watching, and the government provided meaningful incentives for whistleblowers who reported wrongdoing. Rather than focusing on esoteric laws or rulebooks, executives could avoid the complications that were drowning Eric by following Aristotle’s advice on working daily to cultivate character.
Chapter Four Questions
1. How can employers encourage executives to make values-based decisions?
2. How do whistle-blower incentives influence decision making for employees?
3. What differences in culpability exist between the individual who breaks a law from the individual who influenced him to break the law?