Roger McDaniels sat in front of his computer pondering hisimmediate future. He had just finished an impromptu meeting withBeth Sullivan from the internal audit department and his confidencewas shaken. Both Roger and Beth left the meeting wondering if theirrecent decisions were for the best.
Roger's accounting career began approximately ten years ago when hebecame a CPA. Over the last decade, Roger had been successfullyemployed in a variety of accounting positions. It therefore came asno surprise to Roger when three months ago, he was contacted by anexecutive recruiter and offered the CFO position at SolodorPharmaceuticals (SP). SP's mission was to conduct tests on Celenza,a new drug that had been developed to fight acute lymphoblasticleukemia. If successful, Celenza had the potential to increase theaverage life expectancy of affected patients by up to six years.Celenza offered terminal patients the most hope of any drug in overa decade. Although not stated publically, it was known in theindustry that other pharmaceutical companies did not want to incurthe significant costs associated with developing a similar drugbecause sales of a new drug would merely cannibalize sales fromtheir current, but less effective medications.
Upon accepting the employment offer from SP, Roger felt veryexhilarated. If SP's mission was successful, not only would Rogerbe handsomely rewarded (as his compensation package provided himwith numerous stock options, which in themselves would likely makeRoger a millionaire), but Roger would also play a part in extendingthe lives of numerous terminally ill patients. Given the history ofdeath in his family from various forms of cancer, more specificallythe death of his father from leukemia when he was only a child,Roger was all too aware of the pain and mental anguish associatedwith terminal illnesses.
Upon starting his new position, Roger was not surprised to learnthat, similar to other new pharmaceutical companies, SP wascurrently experiencing severe cash flow problems. Thus, theimmediate priority for Roger was to procure a round of additionalequity financing. If Celenza was shown to be successful, it had thepotential to be a cash cow. However, in its current state, SP hadno expectations of any Celenza sales occurring for at least twomore years because extensive testing was needed before the FDA'sCenter for Drug Evaluation and Research would even considerapproving the drug. Without obtaining a minimum of $5,500,000, SPwould run out of money and be forced to liquidate within the nextfour months. This would not only leave Roger unemployed but wouldmake his stock options worthless. It would also put Celenza'sfuture in jeopardy.
Roger recently held meetings with three different financiers andpessimistically awaited their responses. Due to the weak economy,raising significant equity financing was an extremely difficulttask. Therefore, when Steve Butler called to arrange a breakfastmeeting, Roger was anxious.
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Steve Butler was a senior vice-president of Cambridge, a venturecapital firm with access to over a billion dollars. If SP'smanagement team impressed Steve, Roger knew the firm's currentfinancial woes would be solved. However, if SP's management teamfailed to impress...well, Roger chose not to concentrate on thatoption.
The breakfast meeting between Roger and Steve came and went withSteve appearing to be extremely intrigued with the market potentialof Celenza. At the end of breakfast, Steve suggested that Cambridgewould potentially be willing to invest up to $5,500,000 but onlyafter conducting a thorough analysis of Celenza's researchprogress.
Accordingly, two weeks after the breakfast meeting, scientists fromCambridge spent ten days examining the research that SP hadconducted to date on Celenza. Roger was feeling cautiouslyoptimistic because Steve's team seemed to be impressed. However, asweeks went by Roger's pessimism began to return. It had been threeweeks since the team had visited SP and Roger had yet to hear fromSteve.
Two days later the phone rang in Roger's office. After realizing itwas Steve calling, Roger attempted not to act apprehensive. Duringthe call, Steve explained that his firm was in the process ofpreparing a share purchase agreement in which Cambridge wouldpurchase up to 55 percent of SP. Cambridge was willing to pay$100,000 for each 1 percent of SP ownership, conditional onobtaining a controlling interest in SP. After hanging up, Rogerexhaled deeply and exhaustively leaned back in his chair as heconsidered Cambridge's proposal. On the positive side, the news ofan equity purchase could not have come at a better time since SP'screditors were phoning daily requesting payment. On the negativeside, obtaining the required $5,500,000 meant Cambridge wouldeffectively control SP. Cambridge had a reputation for replacingthe management teams in firms that it acquired and for pursuing ahigh-price/low-volume marketing strategy. The possibility of beingfired would be catastrophic for Roger since he had to be employedby SP for at least one year before his stock options would fullyvest. Cambridge's marketing strategy would also be in contrast tothe desires of SP's current management team who wanted to maximizeprofitsâbut also planned on being socially responsible byimplementing a low price/high volume marketing strategy. Rogerclenched his jaw in agony because he knew that ahigh-price/low-volume strategy meant that Celenza would only beavailable to the wealthy and not available to those who werecovered by traditional health insurance policies.
After waiting a sleepless week during which no draft agreementappeared, Roger became increasingly agitated. Roger did not want toact hastily but after he could wait no longer he phoned Steve'soffice. Although Steve was out of the office, Roger reached Steve'sassistant and asked to see a draft of the purchase agreement. Theassistant agreed to overnight a hard copy of the deal.
Upon returning from lunch the next day, Roger noticed a UPS packageresting on the corner of his desk. As he tore open the documentRoger's heart palpitated with nervous excitement. As he glancedover the first sheets he immediately noticed that this wasnot
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a draft of the agreement between Cambridge and SP but a final copyof a deal between Cambridge and Dugas Incorporated that was to beannounced the next day.
Roger's first instinct was to throw away the draft without readingit because it was obvious to Roger that Steve's assistant had madea mistake and sent him a copy of the wrong deal. However, curiositygot the best of Roger so he decided to read over the entiredocument. Afterward, Roger checked the Internet for details ofDugas Incorporated. There did not seem to be any public informationavailable about a deal between Cambridge and Dugas Incorporated.Now consumed with interest, Roger noticed that Dugas Incorporatedwas currently trading on the New York Stock Exchange at $3.14 pershare, down from a yearly high of $28.45. He next reviewed a fewfinancial news articles that expressed concern regarding DugasIncorporated's cash flow. The articles also expressed doubt thatDugas Incorporated would be able to obtain the additional financingit needed to stay afloat.
Roger reclined in his chair realizing that he was privy to a verysignificant piece of information. In less than 24 hours DugasIncorporated would announce Cambridge's investment. This news wassure to have a significant impact on the price of DugasIncorporated's stock. Roger contemplated just how high their stockprice would go, maybe $10, maybe $15, maybe even past its yearlyhigh.
Roger could not believe his good fortune. A grin slowly creptacross Roger's mouth as he accessed SP's operating account and usedevery last dollar to purchase 470,000 shares in Dugas Incorporated.Roger was actually giddy with excitement and found that he couldbarely contain himself. With the profits that SP would make oncethe news regarding Dugas Incorporated went public, he had singlehandedly prevented SP from surrendering control to Cambridge. Hehad never felt better about himself. Roger was now fully confidentthat he would remain at SP long enough for his options to vest. AsRoger left his office that day he realized that his actions wouldstop Cambridge from imposing a high-price/low-volume marketingstrategy on SP such that only the very wealthy could affordCelenza. Roger found it satisfying to help people who sodesperately needed it.
A month later, Roger's actions were discovered by Beth Sullivan, aninternal auditor at SP, while performing a routine test on astratified sample of cash transactions. Beth discovered that Rogerused SP's operating funds to purchase shares in Dugas Incorporatedjust one day before the stock price skyrocketed. This discovery ledBeth, who was unsure if she should further investigate thetransaction, to request an impromptu meeting with Roger. Beth choseto discuss the situation with Roger rather than her immediatesuperior because SP's corporate structure was such that the head ofthe internal audit department ultimately reported to Roger, theCFO.
The meeting had only begun when Roger somewhat aggressivelyinstructed her to simply drop the transaction from her sample. Tounderscore his point he made sure to mention that he was her boss'sboss, and ultimately the person in charge of the internal auditdepartment. Sensing that Beth was uncomfortable with hisinstructions, Roger
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slumped forward exhaustively and elaborated on his heartfeltreasons for having used corporate funds to purchase the shares inDugas Incorporated. After her meeting with Roger, Beth experiencedan uneasy feeling in the pit of her stomach.
It was now two months since Beth's meeting with Roger but Bethstill felt queasy when she contemplated Roger's actions. She hadlain in bed the previous night tossing and turning unable to sleep.As she showered that morning she considered that it was importantto ensure that she acted legally in spite of ethicality. Peoplewere thrown in jail for violating the law not for violating ethics.She resolved that in spite of thinking that perhaps Roger hadbehaved ethically, she had to behave rationally. If she reportedRoger's actions, there was no way by which she could be heldlegally responsible for any of Roger's actions. There was also nomeans by which Roger or SP could fire her, for the Sarbanes-OxleyAct of 2002 (SOX, U.S. House of Representatives 2002) provided herwith protection from their retribution. She never realized thatreading the Occupational Safety and Health Administration (OSHA)fact sheet in SP's lunchroom would help her resolve such asignificant dilemma. After many bored lunch breaks she could nowrecall the fact sheet verbatim:
An employer covered under SOX may not discharge or in any mannerretaliate against an employee because he or she: providedinformation, caused information to be provided, or assisted in aninvestigation by a federal regulatory or law enforcement agency, amember or committee of Congress, or an internal investigation bythe company relating to alleged mail fraud, wire fraud, bank fraud,securities fraud, violation(s) of SEC rules and regulations, orviolation(s) of federal law relating to fraud against shareholders.(OSHA 2011)
As Beth arrived at work that morning, after a brief stop at thelocal coffee shop, she confidently wrote a letter to SP's Board ofDirectors informing them of Roger's actions.
Answer the following Questions:
1. Identify and briefly discuss the key issue(s) in the case.
2. What was the ethical dilemma faced by Beth Sullivan?
3. Do you think Beth acted ethically? Why or why not?
4. Are there any other alternative courses of action possible forBeth?
