Case: Hank Greenberg and AIG and Steve Cohen and SAC Capital
Hank Greenberg was the formidable CEO of AIG, the largest insurer in the United States. Mr. Greenberg was removed from his position when the SEC raised issues regarding the company’s accounting practices and the accuracy of its financial statements. AIG eventually released financial statements that reduced its profits by $4.4 billion and, by 2008, had to be bailed out by the federal government in order to preserve the financial markets. Mr. Greenberg maintained then and maintains now that he did nothing wrong.
A story from his youth offers some insight into his ethical philosophy. When he was stationed in London during World War II, the United States and its military command were concerned about the conduct of U.S. soldiers and the impressions they left. They also recognized the need for the soldiers to have some recreation. The commanding offi- cers gave the soldiers extra leave days if they used them for cultural events. The com- manding officers had the theater, the symphony, and the ballet in mind as culture, not the usual activities for leave, such as drinking and chasing women (and, all too often, catching the women). The only requirement for the extra leave day was that the soldiers had to bring back a playbill or program from whatever cultural event they had attended. Mr. Greenberg would buy a ticket to the theater, go in, collect the playbill, and then head out the side exit to spend the time on other activities, the types of activities the comman- ders were trying to have the soldiers avoid, to wit, carousing. Mr. Greenberg had his proof of cultural activities, but he also had his usual fun.
SAC’s Cohen
There is another example involving another wealthy and iconic financial CEO. SAC Capital Advisors appeared in the financial press nearly every day between 2011 and 2013. For the right reasons, such as outstanding performance, such coverage would be welcome. However, the coverage includes not only a reference to the firm’s success but also to the ongoing arrests of analysts, traders, or other financial professionals who are somehow connected, through direct or intricate webs, to SAC. As of this writing, Steven A. Cohen, the owner of SAC, remains untouched by warrant, arrest, or regulatory actions. However, both SAC and Mr. Cohen have been affected as its clients begin to withdraw funds and distance themselves from the firm under fire.
Had investors conducted a little background research, they would have found that Mr. Cohen had an interesting background prior to his phenomenal performance at SAC. In 2009, Mr. Cohen’s former wife, Patricia Cohen, filed a suit against Mr. Cohen that alleged that Mr. Cohen made a $20-million profit by trading in advance of the GE takeover of RCA based on a tip that he had received. The case was dismissed and no charges were brought. However, in 1991, Mr. Cohen was censured by the NYSE and barred from trading for four weeks because the NYSE alleged that he made a trade to inflate the price of stock that he held so as to cut a potential loss. The inflation trade cut his loss in half. Mr. Cohen was fired from that job for his conduct, and it was then that he founded SAC. While trotting around the gray area to a large extent, Mr. Cohen’s decisions prior to SAC could have predicted the legal maelstrom in which SAC is now emerged. Conduct in the gray area is a form of a red flag.
Discussion Questions
1. Did Mr. Greenberg violate any rules as a soldier? Isn’t the lack of clarity on the part of the commanding officers what caused the problem? What’s wrong with using a loophole in the system?
2. Apply the various schools of thought to see whether you can fit Mr. Greenberg into one or more. As you do, think about the following excerpt from an editorial Mr. Greenberg wrote for the Wall Street Journal: “So, in order to stay out of the crosshairs of government regulators, companies are avoiding risks they might otherwise take to innovate or grow their busi- nesses: ‘Keep your head down.’”
3. Do you believe that both men had established patterns that surfaced as they ran their companies?
4. In a 2006 AP survey of adults, 33 percent stated that it is “okay” to lie about your age, although only to make yourself younger, not for purposes of underage drinking. What rationalization(s) are the 33 percent using?