For more information, see this week’s Research Report.

by Ethics Newsline® editor Carl Hausman

A $50-billion dollar swindle (or, legally, alleged swindle) certainly captures one’s attention. But now, for those of us who write and report about ethics, things are going to get really interesting. In the coming months and years, the court system is going to be assigning blame, in relative proportions, to a variety of actors in the Bernard Madoff case.

The proportion of blame is important, because as the case wends its way through the various courts involved, investors will be seeking to recoup their losses and the law will have to decide how much of what’s left over they will receive. Part of that calculation involves whether investors bear any responsibility for their losses, and if so, how much.

In criminal court, prosecutors may move beyond Madoff and set their crosshairs on minor players in the sorry affair, and judges and juries may have to translate the percentage of involvement into fines and years behind bars.

While the repayment and retribution issues are couched in legality, at its heart this is really a moral question: Did the people who enabled Madoff — by attempting to profit from his deeds or consorting with him — act unethically? If so, how much of the consequences do they deserve?

Blaming the victim seems inherently unfair, but let’s face it: Some (but certainly not all) of these people really should have known better. Many were sophisticated institutional investors whose antennae should have picked up the signals of a swindle, such as unremitting high returns and oversight from a no-name audit firm. Many put all of their eggs in the Madoff basket, ignoring the fundamental principle of diversification extolled in texts as basic as Personal Finance for Dummies.

What about the people who smelled a rat and deserted? Interestingly, there’s a legal precedent holding that those who profit from a scheme stand to lose not only those profits but the original investment as well. According to a report from Newsweek, the standard was set in a case involving a Ponzi scheme called the Bayou Group. In 2008 a judge ruled that Bayou Group investors had to give back profit and principal if they abandoned ship because they suspected wrongdoing. While those investors eventually may be eligible to ask for a share of the recovered money, it is likely to be pennies on the dollar — a scenario that also may confront Madoff investors.

And what of the secondary players? Some wealthy and distinguished people who hung around the Palm Beach country club introducing prospective investors to Madoff — sometimes for a cut of the profits — now are wishing they hadn’t. These go-betweens, according to Forbes, could face prison time, even if they did not posses explicit “knowledge and intent,” which are the standard elements of a fraud case.

Instead, prosecutors may pursue the theory of “willful blindness.” Lawyers use a classic example: If you are in Colombia, handed a package, and offered $10,000 to deliver it to the United States, you’re culpable even if you had no specific knowledge or intent of participating in a drug deal.

It gets complicated because some of the big losers were investors in “feeder funds” that in turn invested with Madoff, meaning that some who bought in probably had no mechanism to receive clear signals that something was amiss. Others were individual investors lured into the deals by trusted friends.

Somewhere in the chain, though, somebody had to be willfully blind. I’m uncomfortable with the concept of blaming victims, but from an ethics standpoint I believe we do have to factor in some culpability for willful blindness.

Look at the broader implications. While it’s hard to believe that anything could dwarf the Madoff scandal, consider how a collective ethical blind eye contributed to moronic lending practices that precipitated the collapse of the real estate market, which in turn knocked the legs out from under Wall Street, which in turn pulverized the economy and produced damages that may total in the trillions of dollars.

What’s your opinion? Do some of the Madoff investors share the blame? Email me your view. If we get a sizeable collection of responses, we will summarize them in next week’s edition.

©2009 Institute for Global Ethics

Questions or comments? Write to newsline@globalethics.org.

For more on the Madoff scandal and the concept of willful blindness, see: Forbes, Jan. 7 — Newsweek, Jan. 3.

“If our field interrogators are being more impacted by Jack Bauer than by their training, then obviously ‘24′ shouldn’t be the one being skewered, it should be the training and the supervision of these field interrogators.”

– Howard Gordon, an executive producer of the popular Fox TV show “24,” spurning criticism of the show’s embrace of torturing terrorism suspects. The New York Times interviewed Gordon, noting that “in fall 2006 the creators of “24″ received a visit from the dean of the United States Military Academy at West Point and other experts in military interrogation, who told them that West Point cadets and soldiers in Iraq were being influenced by the uninhibited — and unrepentant — use of torture on the series.”

The Times piece examines Gordon’s efforts to counteract “24″’s promotion of torture, including taking part in a film for use by military educators that emphasizes that torture techniques “are rarely effective — or legal — in real life.” The show returned for its seventh season on Sunday night.

Source: New York Times, Jan. 8.

Law enforcement sources say they are pulling on many threads; meanwhile, investigators say checks found in Madoff’s desk were “ready to be sent out” and show his intent to hide assets from recovery

NEW YORK
Almost a month after Bernard Madoff’s arrest for securities fraud, investigators continue to struggle over untangling the many threads of the alleged $50 billion Ponzi scheme.

Bloomberg quotes unidentified law enforcement sources as saying they are poring over vast amounts of data, including transactions records and investors’ monthly statements.

There was a major development in the case last week as investigators claimed they found about 100 checks, worth a total of $173 million, “ready to be sent out” prior to his December 11 arrest, CNBC reports.

Prosecutors say the hoarded checks are evidence that Madoff was intending to distribute and hide assets as investigators closed in on him, according to Canada’s Financial Post.

The Associated Press reports that Madoff provoked further ire for mailing more than $1 million in jewelry to family and friends over the holidays.

On Monday afternoon, a federal magistrate refused to revoke Madoff’s $10 million dollar bail and jail him, saying Madoff was not a flight risk, the International Herald Tribune reports. Prosecutors had sought to jail Madoff, arguing that he’d violated terms of his bail by preparing to dispose of and hide assets.

Sources: International Herald Tribune, Jan. 12 — AP, Jan. 12 — Bloomberg, Jan. 9 — ABC News, Jan. 9 — Financial Post, Jan. 8 — CNN, Jan. 8.

For more information, see: Related Newsline Commentary, Jan. 5 — Related Newsline story, Jan. 5 — Related Newsline story, Dec. 22, 2008 — Related Newsline Commentary, Dec. 15, 2008 — Related Newsline story, Dec. 15, 2008.

Meanwhile, Blagojevich’s choice for vacated U.S. Senate seat closes in on swearing in

SPRINGFIELD, Ill.
The Illinois House voted Friday to impeach Gov. Rod Blagojevich, setting the stage for his trial in the Illinois Senate, which could remove him from office.

House members said there was no place in government for a man who sought to sell everything from state contracts to the U.S. Senate seat vacated by president-elect Barack Obama, reports the Chicago Tribune.

According to the Washington Post, Blagojevich is the first governor in Illinois history to be impeached and the sixteenth governor in the nation’s history.

But the disgraced governor also faces another trial — a criminal case filed against him by federal prosecutors. That case, according to TIME magazine, still is percolating after the prosecutor was granted more time to widen the probe.

Meanwhile, a related drama playing out in the U.S. Senate appears to be near resolution with Blagojevich’s appointee, Roland Burris, expected to be sworn in as early as this week.

Senate leaders, who at first flatly rejected the notion of Burris joining the Senate, seemed to warm to him by midweek after many of their legal arguments against seating him were rejected.

Burris’s attorneys said they would press his case in court, but Senate Democrats on Monday said they will accept him “as president-elect Barack Obama’s Senate successor and expect to swear him in soon,” according to the Associated Press.

Sources: AP, Jan. 12 — Chicago Sun-Times, Jan. 10 — Chicago Tribune, Jan. 10 — TIME, Jan. 9 — Washington Post, Jan. 9.

For more information, see: Related Newsline story, Jan. 5 — Related Newsline story, Dec. 22, 2008 — Related Newsline story, Dec. 15, 2008 — Related Newsline Commentary, Dec. 15, 2008 — Related Newsline Commentary, Dec. 15, 2008.

The head of the big computer firm resigns, faces arrest, after admitting he cooked the books

MUMBAI
The chair of Satyam Computer Services, a major Indian computer outsourcing firm, resigned last week after admitting that he had cooked the firm’s books for several years.

The Agence France-Presse reports that B. Ramalinga Raju was arrested over the weekend and was scheduled to appear in court on fraud charges.

In a letter to the company’s board early last week, Raju admitted to inflating the firm’s cash and bank balances by $1 billion and understating the company’s liabilities, reports Forbes.

According to the Times of India, the Satyam scandal is the biggest corporate fraud case in the nation’s history. Satyam stock plummeted more than 75 percent by week’s end.

India’s stock market also sunk under the weight of the news, losing 5.5 percent of its total value, with foreign investment expected to flag in the next few weeks as a result of the scandal, notes the Financial Times.

Sources: Financial Times, Jan. 10 — Times of India, Jan. 10 — AFP, Jan. 9 — Forbes, Jan. 8 — New York Times, Jan. 7.

For more information, see: Related Newsline story, Dec. 15, 2008 — Related Newsline story, Dec. 8, 2008 — Related Newsline story, July 28, 2008 — Related Newsline story, July 21, 2008 — Related Newsline story, July 7, 2008.

Ethicists say a gift is a gift, and you can’t get it back

NEW YORK
A New York State man, in the midst of a divorce battle, has crossed into a new legal and ethical frontier by demanding that his wife return a gift — the kidney he donated to her.

Dr. Richard Batista claims his wife repaid his kindness by having an affair with her physical therapist, according to the New York Daily News. Batista wants either the kidney or $1.5 million, reports MSNBC.

Medical ethicists interviewed by the Long Island paper Newsday say the case is likely to go nowhere. Arthur Caplan from the University of Pennsylvania’s Center for Bioethics said the likelihood of Batista getting the kidney or his cash was “somewhere between impossible and completely impossible.”

Georgetown medical ethicist Robert Veatch noted that “it’s illegal for an organ to be exchanged for anything of value…. When you give something,” Veatch said, “you can’t get it back.”

A lawyer for Batista says his client really doesn’t want the kidney back, but is using the demand to draw attention to an alleged violation of the couple’s child-custody arrangement.

Sources: MSNBC Jan. 9 — New York Daily News, Jan. 8 — UPI, Jan. 8 — Newsday, Jan. 8.

For more information, see: Related Newsline story, Dec. 22, 2008 — Related Newsline story, Aug. 25, 2008 — Related Newsline story, June 30, 2008 — Related Newsline story, June 16, 2008 — Related Newsline story, May 19, 2008.

Controversies center on exploitation and basic decency

VARIOUS DATELINES
Last week’s headlines included a run of interesting stories from the intersection of ethics and digital technology. Among them:

• Canadian model Liskula Cohen is suing Google to demand that the company reveal the identity of people she says posted rude and offensive remarks about her on a blog, Vogue magazine reports. Under U.S. federal law, though, Google itself cannot be held liable for posts on its Blogger service, although it can be compelled to turn over user data if subpoenaed by a court, according to the Toronto Globe & Mail. To add insult to insult, InformationWeek reports, various malware sites are manipulating search phrases to fool surfers looking for the comments to click on sites that will fool the users into downloading spyware and other rogue programs.
• If illegal downloading is wrong, is stopping it by infecting the downloader’s computer with a virus right? The Los Angeles Times investigated a recent anti-piracy virus that blocks access to piracy Web hubs and instigates pop-ups saying “Piracy is Wrong.” The origin of the virus — technically, a “Trojan,” a program that appears disguised as something else — was not known as this issue of Newsline went to press, although speculation leaned toward the virus being the work of an anonymous prankster. The Times’s Mark Millian notes that “it’s not too often that a Trojan comes along in support of a morality message.”
• Firing people by email — a trend becoming known as cyber-sacking — has sparked a debate as workers, employers, and lawyers weigh in on whether the process is ethical, legal, or just plain tacky. The Calgary Herald reports that a Canadian beauty-parlor employee who was sacked via Facebook is the latest to complain about her treatment. Lawyers interviewed by the Herald say there are cases where a cavalier firing method can be cause for damages, but most experts interviewed by the paper advise against email sackings on the ground of basic decency.

Sources: Los Angeles Times, Jan. 8 — Calgary Herald, Jan. 8 — Globe & Mail, Jan. 7 — Vogue, Jan. 7 — InformationWeek, Jan. 6.

For more information, see: Related Newsline story, Nov. 17, 2008 — Related Newsline story, Nov. 17, 2008 — Related Newsline story, Nov. 3, 2008 — Related Newsline story, July 7, 2008 — Related Newsline story, Apr. 21, 2008.

Iraq wants reporters to sign ethics pledge; proposed nomination of TV reporter as U.S. surgeon general raises ethics questions; new business model for PR firm raises ire of media ethicist

VARIOUS DATELINES
The week’s top stories about ethics and media covered a range of issues from upcoming Iraq elections to U.S. government appointments. Among the stories:

• Iraq is insisting that foreign and Iraqi journalists sign a code of conduct if they want to attend provincial elections scheduled for later this month. The Associated Press reports that parts of the 14-page code require “balanced” coverage and bar stories on candidates two days before the election. While news organizations are reported to be studying the document, there is widespread concern that the code is a method to censor the news and would undermine independent media coverage.
• The proposed appointment of a physician/TV news reporter as U.S. surgeon general has provoked some ethics debate. The CBC reports that while CNN reporter Sanjay Gupta has solid medical credentials — he’s a practicing neurosurgeon — some are questioning whether he has enough public policy experience. Moreover, the New Scientist reports that questions have been raised about his connections to the drug industry, particularly his relationship with a firm that supplies television programming to doctors’ waiting rooms. While the issue plays out, CNN has removed Gupta from covering any political stories.
• A noted media ethics professor says a new PR firm launched by former MSNBC anchor Dan Abrams “skates on the thinnest of ice when it comes to fundamental principles governing conflict of interest.” In an opinion piece published in the Atlanta Journal-Constitution, Edward Wasserman, Knight professor of journalism ethics at Washington and Lee University, says Abrams Research “will offer qualified and well-connected journalists lucrative off-screen engagements with private entities that need a hand with their media relations — managing a PR crisis, positioning a product rollout, fashioning a new sports sponsorship.” Wasserman says his larger concern is that the business model of the Abrams firm, “though ethically problematic, accurately reflects the professional realities of the new media world…. More and more, wage-earners in the knowledge industries are odd-jobbing as journalists, teachers, marketers, publicists, or all of the above. Moonlighting is no longer an income supplement, it’s a career path, conducted amid an unavoidable potential for conflicts of interest.”

Sources: Atlanta Journal-Constitution, Jan. 9 — New Scientist, Jan. 9 — CBC, Jan. 9 — ABC News, Jan. 9 — AP, Jan. 9.

For more information, see: Related Newsline story, Jan. 5 — Related Newsline story, Nov. 24, 2008 — Related Newsline story, Nov. 24, 2008 — Related Newsline Commentary, Nov. 17, 2008 — Related Newsline story, Oct. 6, 2008.

Critics say the tests, used by retailers when hiring, actually screen out honest people and reward liars

NEW YORK
The shortage of retail jobs is creating a culture of cheating among job applicants, many of whom use the Internet to crib the correct answers to automated personality tests, according to a report from the Wall Street Journal.

Reporter Vanessa O’Connell notes that many retailers have largely automated the hiring process with computerized personality tests that pose questions that purportedly judge an applicant’s integrity and temperament.

One question: “You have to give up on some things before you start.” The direction from an online cheat sheet: “Strongly disagree.”

O’Connell reports that in addition to spawning a widespread culture of cheating, the use of automated personality tests is raising questions of fairness “even as it becomes a critical determinant of who gets a job and who doesn’t in a stressful era of rising unemployment.”

Critics, including some workers who have been coached in the “correct” answers by friends who have already taken the test or sought out correct responses from various websites say the tests actually weed out honest applicants and select those who lie.

Answer keys are available on a wide variety of sites, according to the Journal.

Industry representatives tell the Journal that the incidence of cheating is low and there is no evidence of erosion of the tests’ effectiveness.

Source: Wall Street Journal, Jan. 7.

For more information, see: Related Newsline story, May 19, 2008 — Related Newsline story, Jan. 28, 2008 — Related Newsline story, July 16, 2007 — Related Newsline story, Dec. 4, 2006 — Related Newsline story, Dec. 5, 2005.

“Gains seen on minority discrimination, but little else,” poll finds

From the Pew Research Center for the People & the Press:

“As Barack Obama prepares to take office, majorities say the country is losing ground on any number of key issues, particularly economic ones. Nearly eight-in-ten (79%) say the country is falling further behind on the federal budget deficit, far more than said that during the mid-1990s when the deficit was a top-tier policy issue.

“Fully 72% say the country is losing ground on the availability of good-paying jobs — up 25 points since February 2007. Nearly as many (69%) say the country is losing ground on the cost of living.

“Notably, the only issue where most people see progress being achieved is no doubt related to Obama’s historic election: 53% say the country is making progress on discrimination against minorities, compared with just 15% who say the country is losing ground, and 28% who see little change. During the mid-1990s, far fewer people said progress was being achieved reducing discrimination (40% in 1995, 38% in 1994).

“The survey … finds that Republicans and Democrats generally agree that the country is losing ground on the budget deficit and jobs. In addition, majorities of Democrats (59%) and Republicans (54%), as well as 62% of independents, say the country is losing ground in competing with other countries economically….

“Seven-in-ten Democrats (70%) say the country is losing ground on the gap between rich and poor; just 42% of Republicans agree. Democrats also are far more likely than Republicans to see the country losing ground on poverty and homelessness.

“By contrast, more than six-in-ten Republicans express pessimism about the country’s progress on illegal immigration (62% say we are losing ground) and on moral and ethical standards (68%). Fewer than half of Democrats say the country is losing ground in those areas (42% and 49%, respectively)….

“Most Republicans (62%) say the United States is making progress in Iraq, while 26% say things are about the same as they have been and just 8% say the United States is losing ground there. Democrats are more evenly divided, with 41% saying things are about the same, 39% saying the country is losing ground, and just 16% saying progress is being made.

“Americans generally express less positive opinions about the war in Afghanistan than they do about the country’s involvement in Iraq. About one-in-five say the country is making progress on the war in Afghanistan (21%), just over four-in-ten say things are the same as they have been (42%), and 31% say the country is losing ground on the war in Afghanistan….”

For the full press release from Pew, Jan. 7, click here.

“It is often easier to fight for a principle than to live up to it.”

– Adlai E. Stevenson (U.S. politician, 1900-1965)