The Dalton Gang’s Last Stand and What is a Conflict of Interest?

Thomas Fox - Compliance Evangelist
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On this day in 1982, the fabled Dalton Gang rode into Coffeyville, Kansas, supremely confident in its ability to simultaneously rob two banks in the town. When the dust settled, four of the five gang members lay dead. The dead were Bob Dalton, his brother, Grat Dalton, and two others Dick Broadwell and Bill Powers. Only Emmett Dalton survived and he was wound, arrested, tried and sentenced to 14 years in jail. While they were robbing the two banks, townspeople gathered and shot them down as they tried to escape. But their victory was not without a price: the Dalton’s took four townspeople to their graves with them. After 14 years in prison Emmett won parole and he eventually leveraged his cachet as a former Wild West bandit into a position as a screenwriter in Hollywood. Several years after moving to California, he died at the age of 66 in 1937.

I thought about the Dalton Gang and their arrogance in trying to rob two banks simultaneously when I came up with today’s post. What if I told you that a company’s Conflict of Interest (COI) policy stated the following:

Examples of some conflicts of interest employees may face, include, but are not limited to, the following:

  • A conflict of interest may arise from an employee’s business or personal relationship with a customer, supplier, competitor, business partner, or other employee, if that relationship impairs the employee’s objective business judgment.
  • A conflict of interest may also arise when an employee and/or an employee’s friend or family member receives a personal benefit as a result of the employee’s position with the Company, including, any loan to, or guarantee of any obligation of, the employee and/or the employee’s friend or family member.

Now what if I asked you if an employee of a company solicited a loan from a company vendor and a new employee the company was about to bring on board; would you think there was a conflict of interest? How about a potential conflict of interest? How about the perception of a conflict of interest? Furthermore, what discipline, if any, should you deliver to the employee? If the employee violated the Code of Conduct, should that person receive a warning letter, suspension or termination? If you do not discipline the employee what will be the effect going forward on the rest of the employees? Will they take the Code of Conduct seriously or, indeed, any internal company regulation? What would it say about your company’s commitment to ethics and compliance? If that company is in an industry where environmental compliance is significant what might it say about that company’s commitment to applicable laws (think Volkswagen (VW)).

Now what if I changed the fact pattern and told you that a company Chief Executive Officer (CEO) borrowed funds from vendors and obtained a personal loan from a member of the company’s Board of Directors before the Director’s appointment to the Board. See any conflict of interest now? Unfortunately this very situation is facing the Houston based company Energy XXI. As reported by Collin Eaton in a Houston Chronicle article, entitled “Loans to CEO prompt review”, where he stated “Energy XXI says that it has learned that it’s CEO John Schiller, borrowed funds from acquaintances and some of the vendors and received a personal loan from a board member before the director’s appointment.” The above quoted Code of Business Conduct and Ethics is found on the Energy XXI’s public website.

Apparently the company had an internal investigation over these loans “but has found Schiller’s dealings in 2007, 2009 and 2014 were not illegal and didn’t affect the companies financial reporting or statements,” according to the company’s Chief Compliance Officer (CCO) Bruce Busmire, who made the statement during a conference call with investors last week. Rather amazingly Schiller said on the same conference call that “we’ve established a culture that is highly focused on efficient use of capital and keeping a strong focus on our cost at the same time.” Energy XXI “said it was revising its vendor policy to address any potential conflicts of interest that could arise of Mr. Schiller’s personal loans”. Finally, the article noted “Schiller’s overall executive compensation was $14.5 million in the fiscal year that ended June 30, 2014, regulatory filings show.”

What does it say about a company which has a CEO who borrows money from the company’s vendors? What does that say about the culture of compliance at the organization? Do you think any employee who engaged in such conduct would be allowed to stay on in such a business? Or would they be unceremoniously ‘escorted off the property’. The problem here is at least threefold. The first is the obvious violation of the company’s Code of Conduct. The second is what, if anything, those vendors will expect back for making the loans. Will those vendors expect a greater return on their contracts? Or in today’s energy market, do CEOs now feel they can shake down vendors into ‘pay-to-play’ or else we will go elsewhere with our business. Finally, if there are regulatory filings or other inconvenient legal requirements which ‘impede’ an energy company’s march towards profitability in today’s market, can they be ignored going forward?

If the Department of Justice (DOJ) or Securities and Exchange Commission (SEC) come knocking how would the company respond? What are the internal controls around the company’s Conflict of Interest policy? Is it simply a stop and think control that each employee signs a form that they are not in violation of the company’s Conflict of Interest policy or is it something more robust? What would a more robust control look like for a company CEO? In his article Eaton quoted Bud Weinstein, an associate director of Southern Methodist University’s Maguire Energy Institute, for the following, “It’s fair to say the oil and gas industry is not well loved. In today’s politically charged environment, it’s absolutely critical that oil and gas companies be transparent.”

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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