Jay and I are back to consider some of the top compliance articles and stories which caught our eye this week. Of course, we look into the MLB sign-stealing scandal which has embroiled the Houston Astros, may embroil the Boston Red Sox and let to the Mets firing their newest manager before he managed one game. All this and more in the Say it ain’t so edition.

  1. MLB lays down the hammer on the Astros. Are the Red Sox next? Tom’s multipart series, Part 1, Part 2and Part 3. His cognitive dissonance is explored in the FCPA Blog.
  2. Mike Volkov says its time to move from reactive to proactive compliance, in a 3-part series on Corrruption Crime and Compliance. Part 1, Part 2 and Part 3
  3. What do DOJ changes mean for the compliance practitioner? Jay explores in his CCI
  4. What is the SEC Enforcement Network? Verity Winship explains in NYU’s Compliance and Enforcement Blog.
  5. Will the Fraud Section now refocus on commodities trading cases? Aitan Goelman in NYU’s Compliance and Enforcement Blog.
  6. What are Red Flags? Gini Dietrich explains in Spin Sucks. Harry Cassin says look out for expensive watches, in the FCPA Blog.
  7. Corporate governance and behavioral ethics, all in the Harvard Law Review on Corporate Governance.
  8. The trouble with transparency. Vera Cherepanova explains in the FCPA Blog.
  9. How Queen informs your compliance program (Hint: Pressure). Matt Kelly, the coolest guy in compliance in Radical Compliance.
  10. On the Compliance Podcast Network, Tom continues his 31 Days to a More Effective Compliance Program series.This week saw the following offerings: Day 13 reviews institutional justice ; Day 14considers risk assessments; Day 15 looks at evaluating a risk assessment; Day 16 details the 3rd party risk management process; Day 17 explains how to manage a 3rd Note 31 Days to a More Effective Compliance Program now has its own iTunes channel. If you want to binge out and listen to only these episodes, click here.

Tom Fox is the Compliance Evangelist and can be reached at tfox@tfoxlaw.com. Jay Rosen is Mr. Monitor and can be reached at jrosen@affiliatedmonitors.com.

I am in the midst of a multi-part exploration of the Major League Baseball (MLB) investigation into allegations that the Houston Astros engaged in a multi-year scheme to steal signs and signals from opposing teams. MLB issued a Statement of the Commissioner (MLB Report) detailing the investigation protocol, findings, disciplinary actions taken and conclusions. The entire sordid affair provides every compliance practitioner with multiple lessons to be learned that they can use in every corporate compliance program. Yesterday, I focused on the penalties assessed against Jeff Luhnow and A.J. Hinch. Today, I want to take a look at some of the lessons learned for the compliance professional.

Galileo’s principle (or the Law of Intended Consequences or No Good Deed Goes Unpunished). Tim Harford, the Undercover Economist, coined this term as “the steps we take to make ourselves safe sometimes lead us into danger”. This entire cheating scandal began around a technological innovation by MLB. In 2014 MLB began video review of umpires calls. To facilitate this innovation, MLB put a camera in centerfield. In 2017, MLB allowed teams to put monitors in the video replay review room to review these feeds so they could better determine if a challenge was warranted.

Early in that season, according to the MLB Report, “employees in the Astros’ video replay review room began using the live game feed from the center field camera to attempt to decode and transmit opposing teams’ sign sequences (i.e., which sign flashed by the catcher is the actual sign) for use when an Astros runner was on second base. Once the sign sequence was decoded, a player in the video replay review room would act as a “runner” to relay the information to the dugout, and a person in the dugout would notify the players in the dugout or signal the sign sequence to the runner on second base, who in turn would decipher the catcher’s sign and signal to the batter from second base.”

What is the risk that a team might abuse this new tech innovation? Is it up to MLB to actively assess the risk, manage the risk and then monitor the risk (i.e., the risk management process)? Afterall cheating in general and sign-stealing in particular have long been time-honored traditions in baseball. Up until the September 2017 Memo, electronic sign-stealing had not been addressed but it was considered ‘wrong’ while sign stealing from second base was considered good baseball.

Compliance Lesson – Every time you make a business change, your risk profile changes. Centralize a function and it can lead to inertia and misunderstanding with the business in the field. Decentralize your compliance program and it could well lead cooption of your compliance by the business unit in the field. Equally important, do you simply expect your employees to follow the rules or do you train them? Do you communicate ethical expectations? If not, why not?

Don’t Speak Softly and Carry a Big Stick. Speak Loudly. Manager Hinch was fully aware of the sign stealing scheme. Twice he took a very big stick in the form of a baseball bat to the monitor to damage it so badly that it had to be replaced. Yet he apparently never said anything to the players or Bench Manager Cora to stop the activity. The MLB Report stated, “Hinch admits he did not stop it and he did not notify players or Cora that he disapproved of it, even after the Red Sox were disciplined in September 2017. Similarly, he knew of and did not stop the communication of sign information from the replay review room, although he disagreed with this practice as well and specifically voiced his concerns on at least one occasion about the use of the replay phone for this purpose.” Moreover, if he had said anything, to either his direct report, Cora, or the players, it would have ended. Once again from the report, “Players stated that if Manager A.J. Hinch told them to stop engaging in the conduct, they would have immediately stopped.”

Compliance Lesson – Actions matter but words matter. If you are in management, when you see something SAY something. You cannot simply throw a bad practice, habit, ethical violation or Code of Conduct violation away. Sometimes saying “stop it” will work.

Make discipline matter. Both General Manager (GM) Luhnow and Manager AJ Hinch were suspended by MLB for one year. Hinch was not only suspended for one year but “must not be present in any Major League, Minor League, or Spring Training facilities, including stadiums, and he may not travel with or on behalf of the Club. If Hinch is found to engage in any future material violations of the Major League Rules, he will be placed on the permanently ineligible list.” In other words, he cannot even go to a stadium. Luhnow received a similar proscription. Further, they were both fired by Astros owner Jim Crane.

The two principals involved with the scheme, then Astros Bench Coach Alex Cora and Carlos Beltrán, had moved on to managerial roles with other teams, the Boston Red Sox and New York Mets respectively. They were both fired this week by their clubs. Cora was fired before MLB laid down a multi-year suspension on him for his actions in bringing the sign stealing scheme to the Boston club in 2018 when he became manager.

Beltrán’s situation was a bit different as he had been a player during his transgressions and players were given immunity. Yet, as Tom Verducci, in SI.com, said “His tenure as manager of the team would begin with a news conference in which he not only would have to account for being a mastermind in the team’s systematic cheating, but also have to answer detailed questions about his misuse of technology, such as why he didn’t stop when warned, what he did in the 2017 World Series and when his unethical espionage began.”

But the bottom line for all four is that they may well never manage in baseball again. Indeed, they may never work in their chosen profession at all. Those questions which Verducci said Beltrán would be required to answer will be asked of the other three as well wherever they might go. Or the question could be as simple as ‘are you cheating now like you did before and denying it again’?

 Compliance Lesson – If you really want to change behavior make the penalty harsh. If you want people to engage in ethical behavior make sure that if they break the rules, they are punished. This is even truer for management. They are expected to lead, expected to speak up and expected to stop unethical behavior.

In the next blog post, some reflections on the MLB Report.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2020

Richard Lummis and I are back. Today, we take a look at leadership lessons from a trifecta of failed leaders, including Adam Neumann, the founder and former CEO of WeWork, Elizabeth Holmes, founder and former CEO of Theranos and Travis Kalanick, founder and former CEO of Uber.

Highlights of this podcast include:

  1. What happens when charismatic leaders have disruptive visions?
  2. What happens when a brilliant jerk is a CEO?
  3. They all had and maintained asymmetrical power, total control and maintained dual-class ownership structures.
  4. What happens when the CEO creates a cult of personality?
  5. All three valued opaqueness over transparency so that they could control the flow of information.
  6. Where was the Board of Directors?

Resources

Is Your CEO Brilliant, a Jerk or Both?

When to fire the boss?

CEOs are not here to save us

I am in the midst of a multipart exploration of the Major League Baseball (MLB) investigation into allegations that the Houston Astros engaged in a multi-year scheme to steal signs and signals from opposing teams. MLB issued a Statement of the Commissioner (MLB Report) detailing the investigation protocol, findings, disciplinary actions taken and conclusions. The entire sordid affair provides every compliance practitioner with multiple lessons to be learned that they can use in every corporate compliance program. Yesterday, I looked at the background. Today, I want to focus on the penalties assessed against Jeff Luhnow and AJ Hinch.

Even after the September 15, 2017 Memo from MLB Commissioner Rob Manfred making illegal precisely the type of sign stealing scheme the Astros were using, they continued to do so for the remainder of the 2017, including through their 2017 World Series championship run. The only difference is that it was now illegal under MLB law. In March 2018, the Commission’s office issued another Memo on the subject had the following highlighted in bold “To be clear, the use of any equipment in the clubhouse or in a Club’s replay or video rooms to decode an opposing Club’s signs during the game violates this Regulation.” Once again it does not appear that General Manager Luhnow circulated it to the team or “confirm that the players and field staff were in compliance with MLB rules and the memoranda.”

Unfortunately for the Astros, in the early part of the 2018 season, they continued their illegal sign stealing, cheating scheme. They ended the scheme for about as banal a business reason as you could imagine; the players no longer thought it helped them. From the MLB Report, it seems the Astros players knew they were cheating at the time they were doing it. The MLB Report stated, “Many of the players who were interviewed admitted that they knew the scheme was wrong because it crossed the line from what the player believed was fair competition and/or violated MLB rules. Players stated that if Manager A.J. Hinch told them to stop engaging in the conduct, they would have immediately stopped.” Further they went out of their way to hide the evidence when opposing teams got too close to finding the monitor and other physical evidence of the cheating scheme.

As noted, General Manager Jeff Luhnow was “adamant” in claiming he was not aware or nor did he participate in the sign stealing scheme. However the MLB Report does note “there is both documentary and testimonial evidence that indicates Luhnow had some knowledge of those efforts, but he did not give it much attention.” What was made clear in the MLB Report is that the General Manager did not circulate either the September 2017 Memo or March 2018 to the team or take any steps to assure compliance with either Memo.

Field Manager AJ Hinch “neither devised the banging scheme nor participated in it.” Indeed he did not support it and took an aforementioned baseball to the monitor more than once. Each time he did so it was repaired or replaced. Beyond this, Hinch appears to have done nothing to stop the practice. He did not tell the players to stop and did not even tell his Bench Coach, Alex Cora to stop his involvement. Commissioner Manfred found Hinch’s conduct unacceptable, stating, “As the person with responsibility for managing his players and coaches, there simply is no justification for Hinch’s failure to act.” Both men were assessed penalties of one-year suspensions by the Commissioner and subsequently both men were terminated by Houston Astros owner Jim Crane. Luhnow was also required to take an “appropriate program of management/leadership training to ensure that no incidents of the type described in this report occur in the future.” Hinch was further banned from “Major League, Minor League, or Spring Training facilities, including stadiums”.

The responses from both men were telling. Hinch accepted full responsibility for his actions, or rather his inactions. He released a Statement which said, in part “As a leader and Major League Manager, it is my responsibility to lead players and staff with integrity that represents the game in the best possible way. While the evidence consistently showed I didn’t participate in the sign stealing practices, I failed to stop them and I am deeply sorry.” Luhnow took very different approach, releasing a Statement that intoned “I am not a cheater” and that anyone who knows him can attest to his “integrity”. He blamed the players and Bench Coach Alex Cora. I guess he forgot he was in charge.

While not as damning as the cheating allegations, perhaps an equally troubling aspect of the findings by MLB was about the culture of the Astros. The actions of Brandon Taubman during the MLB playoffs were revisited. As reported in SI.com, this affair began when the (now former) Assistant General Manager of the Houston Astro, Brandon Taubman, screamed at a reporter, Stephanie Apstein and three other female reporters ““Thank God we got Osuna! I’m so f—— glad we got Osuna!”. Taubman referring to Roberto Osuna, the closer the Astros acquired while he was suspended 75 games for violating MLB’s domestic-violence policy, during the time he played for the Toronto Blue Jays. One of the reporters he targeted was wearing a domestic-violence awareness bracelet.

The Astros initially claimed that this female reporter made up the story and refused to apologize or even acknowledge the error. Finally, the Astros began to heal this huge FUBAR with a letter sent from owner Jim Crane to Sports Illustrated reporter Stephanie Apstein, which read in full, “On behalf of the entire Astros organization, I want to personally apologize for the statement we issued on Monday October 21st,” Crane wrote. “We were wrong and I am sorry that we initially questioned your professionalism. We retract that statement, and I assure you that the Houston Astros will learn from this experience.”

The Astros culture was broken, toxic and this culture lead directly to both the Taubman incident and the sign stealing, cheating scandal. The MLB report stated, “it is very clear to me that the culture of the baseball operations department, manifesting itself in the way its employees are treated, its relations with other Clubs, and its relations with the media and external stakeholders, has been very problematic. At least in my view, the baseball operations department’s insular culture – one that valued and rewarded results over other considerations, combined with a staff of individuals who often lacked direction or sufficient oversight, led, at least in part, to the Brandon Taubman incident, the Club’s admittedly inappropriate and inaccurate response to that incident, and finally, to an environment that allowed the conduct described in this report to have occurred.”

Tomorrow I will consider lessons for the compliance professional from this imbroglio.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2020

Compliance into the Weeds is the only weekly podcast which takes a deep dive into a compliance related topic, literally going into the weeds to more fully explore a subject. Welcome to the first Into the Weeds podcast of the new decade and the new year. In this Part 2 of a two-part podcast series, Matt Kelly and I take a look at ten issues that we think will be significant for the compliance professional in the upcoming year.

Some of the highlights include:

  • The Institutional Shareholder Services lawsuit against the SEC. What will this and other court cases against the Trump Administration’s attempt to gut shareholder protects by the SEC?
  • Effective sanctions compliance programs. Will there be congruity or discrepancies in the interpretation of what constitutes a best practices compliance program by the DOJ and OFAC.
  • Compliance convergence. We are moving to do away with anti-corruption compliance, trade sanction and export control compliance, AML compliance to a role which is simply compliance.
  • Data, data and more data. Regulators now expect data analytics, continuous monitoring and continuous improvement in your compliance program.
  • The ethical edge. How more effective compliance creates more efficient business process equating to greater profitability.

Resources

Matt’s blog post 7 Compliance Items to Watch in 2020 in Radical Compliance.

Tom’s blog post 4 Compliance Insights for 2020 and Beyond in the FCPA Compliance and Ethics Blog.