Corporate Governance, Financial Crime, Ethics and Control

This essay investigates the case of Martin Shkreli and his financial crimes using the concepts of fraud triangle, theories like Agency, stakeholder and shareholders along with an ethical overview.

Corporate Governance, Financial Crime, Ethics and Control
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DECLARATIONS
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has been provided to the different sources, be it of any medium in the reference list
attached herein with this report.
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Introduction:
Financial crimes have become rampant in the last 30 years and have become a cause
of concern for the governments around the world. It is performed by different people, ranging
from corrupt heads of states, business leaders, government officials and many others. The
repercussions of these kinds of crimes, are both short and of long term nature. The case of
medicine executive Martin Shkreli is no exception to all these. In this essay, the case of Mr
Shkreli and his financial crimes have been investigated using the various concepts of fraud
triangle, theories like Agency, stakeholder and shareholders along with an ethical overview.
Q1.
Ethics refers to that division of philosophy which is concerned with the principles of
morality and well defined standards of what is right and wrong, which helps in ensuring the
delivery and exercise of rights, rules, fairness and justice across the society. Primarily there
are three kinds of ethical theories, Utilitarian, Deontological and Virtue ethics. Utilitarian
emphasises upon the greatest good done for people for largest number of people (Hoffman,
Frederick, and Schwartz, 2014). Deontological ensures that people are treated with respect
and self-esteem. Virtue ethics emphasises on the importance of character and virtue.
Business ethics involves planning and executing business related activities keeping in mind
proper principles and practices of ethics (Hill, 2016). It refers to all those activities, which
bars the company from indulging in any kind of discrimination, insider trading, speculation
of shares, corrupt practices and other kind of business malpractices, which goes against the
moral fabric of conducting business in a fair manner.
Mr Martin Shkreli had been arrested for stock fraud, mail and wire fraud
charges and not because he had increased the price of Daraprim, by a
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mammoth 5000%, but because of the fraud he had committed in two
previous hedge funds and a previous biopharmaceutical company,
Retrophin (Paradise, 2016). He had duped the investors of the company and
has let greed take the better of him. He subscribed to the theory of
dishonesty and greed, which led to face jail time of seven years and a fine
of $7.4 million (Clifford and Moynihan, 2018). According to, the scammers
portray a specific set of characters, such as they look down upon their
victims and others, traits of a narcissist, they are not only driven by greed
alone and also want to earn respect , fame and glory as they believe in
the grandiose of their dreams. All these character traits were seen in Mr
Martin Skhreli, which makes him a typical scammer having a complicated
mind-set. He had violated the trust of the investors and the other
stakeholders of his company, which tantamount to blatant violations of
the ethical practices of a company.
Q2.
Fraud triangle is a framework, which is designed for the purpose of
explaining the rationale and reasoning behind the person’s decision of
committing the fraud, at his or her workplace. It consists of three stages,
consisting of pressure, opportunity and rationalisation (Free, 2015). Pressure
is the motivation behind the reason for committing the crime. It can be
classified into financial, physiological pressure or workplace pressure.
According to the individual, this problem, would not be solved through the
traditional and legal manner, which compels them to resort to crimes like
above. Mr Skhreli was compelled to resort to all these financial frauds, as
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he wanted to pay off the dues of his old hedge funds, by manipulating the
accounts Retrophin.
Opportunity is the mechanism by which the concerned individual, aims to
defraud the business entity. Here, the individual sees a perfect procedure
to execute the operations, by abusing his or her powers and
responsibilities (Manurung and Hadian, 2013). Mr Skhreli, resorted to false, lies
and deceit in his pursuit of money. He duped the investors of MSMB
Capital and MSMB Healthcare, made excuses, delayed their payments,
and violated the trust entrusted upon him by the investors by lying to
them about his previous hedge funds
Rationalisation is a cognitive stage, where the individual justifies his or her
crime, which is acceptable in accordance with the moral compass of the
individual committing the crime and his or her confederate (CBC News,
2018). Here, Mr Skhreli, rationalises his crime, by putting forth the reason
that the money would be used for the research and development in the
area of treatment of rare diseases and its medicines.
White Collar Crimes are different from any other crimes, where use of
physical violence plays a crucial role, here on the contrary, the criminal
acts are performed with the aim of making a financial gain, and is
committed in the normal course of business, right under the nose of the
business parties. Some of these prominent frauds are bribery,
embezzlement and cybercrime (Benson and Simpson, 2014). Security fraud
consists of inducing the investors in the stock market, of purchasing and
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selling shares based on false and deceitful information. This amounts to
clear violations of the security laws.
The case of Nick Leeson had brought the downfall of the oldest banks of
England, the Barings Bank, where even the Queen of England had an
account. He was the head of the Singapore office of the bank and traded
at the Singapore Exchange. He was an aggressive trader, known for his
infallibility. In July, 1992, a new Barings employee had suffered a loss,
which Nick wanted to hide, as it could have compromised his reputation.
He hid the losses in an account named’88888’, and hid the further losses,
in this account itself (RBA, 2018). He had doubled the bets, in order to get
out of the losses, and wanted to make this up through more and more
speculative trading, but failed miserable, leading to the world wide
exposure, which had brought down the 211 year old bank. The two cases
of Mr Leeson and Mr Skhreli are quite different and the impact and
implications have been on an entirely different scale. Although in both the
cases, both the parties resorted to deceit, lies and false claims towards
the investors and the company they served. Thus, in the larger context,
both the individuals were on the same page, but one followed his greed,
the other his infallibility status.
Q3.
The responsibility of the Chairman includes, providing leadership
and appropriate governance of the company board and ensuring that all
the important issues are discussed by the board, ensuring that all the
policies and plans, of the board are properly implemented and ensuring
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that effective communication exists between the board, management and
the shareholders (Southernwater, 2018). The CEO has the responsibility of
leading the management in the daily operations of the business in
accordance with the business plans, maintaining a close liaison kind
communication with the Chairman and the board for regarding issues
faced by the company, ensures that the management provides timely and
authentic information to the board and the Chairman.
When Tilles takes over the company, he could have taken some concrete
steps to prevent fraud. He should setup an inventory control policies to
keep track of all the supplies and inventory, setup an information
protection team for keeping track of the vital information of the company.
He should have decreased the price of Daraprim with immediate effect
(CBC, 2018). Tilles should have initiated an independent enquiry into the
medicines prices and the hedge fund controversies, performed by Ex-CEO
Martin Shkreli.
Q4.
Mr Shkreli lied to his investors about his two hedge funds, MSMB
Capital and the MSMB Healthcare. He ran a Ponzi like scheme, where
he used to transfer money from his investors, without their prior
knowledge to form a new company Retrophin Inc. He used to use this
money for the purpose of financing his debts of his old company.
Through this procedure he looted a total of $11 million of Retrophin
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assets to pay off the old debts (Walters, 2018). He had committed a
criminal offence on three charges where he was accused of swindling
the investors. He was punished by sentencing for a period of seven
years in prison for committing securities fraud and conspiracy. All this
could have been avoided, if he could have pleaded guilty during his
ongoing court trials. The prosecutors and the senators, were convinced
that he lacked genuine remorse, for his misdeeds, as he was adamant
and had continued to disrespect the senators who were present at the
hearings (CBC, 2018). He further had continued to invoke his 5th
constitutional amendment and refused to answer any question. If he
had pleaded guilty and cooperated with the prosecutors and senators,
all these abuses and prosecution, could have been reduced.
Q5.
Agency theory explains the relationship between the principle and the
agent in any business. It delves into the execution of the different
activities of the principles by the agents. Shareholders (Principal) and
Company Executives (Agent) is an example. Mr Shkreli (Agent) misused
his position and influence leading to the act of betraying his Investors
(Principal). Shareholder theory explains that the solitary duty of any
business is to make profits. It is based on the assumption that
management is employed to serve the interests of its employers
(Harrison and Wicks, 2013). Here, Mr Shkreli emphasised that he intended
to increase the investor’s profits but on the contrary, he betrayed his
investors and used their profits to pay off his old debts Stakeholder
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theory takes into account proper functioning of the business for
ensuring the benefit of all the stakeholders and not only the
shareholders and their profits (Hasnas, 2013). Mr Shkreli violated this
theory and looked after his own needs and requirements.
Conclusion:
In conclusion, it can be said that ethics plays a crucial role in
eliminating fraud in an organisation. Development of a clear code of
conduct, proper training of employees backed with a strict disciplinary
policy, leadership by example by keeping in mind all the ethical code of
conduct, establishing whistleblowing mechanisms and hotlines could
go a long way in reducing fraud.
Word count: 1651
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