HIGH-RANKING NAVAL OFFICERS IN SCAM

The “Fat Leonard” scandal involving top-of-the-line naval officers and a naval supply contractor has reached a new level of corruption that has been under investigation by U.S. officials for the past seven years. Previously indicted naval officers and the perpetrator, Leonard Glenn Francis, are currently working their way through the court system.

In early March further investigations were unsealed by the San Diego Federal Court implicating even more high-ranking naval officers, including a retired rear admiral. Most of the new evidence collaborated what had previously been publicized about a group of naval officers that conspired to direct naval vessels to Asian ports where “Fat Leonard” was an exclusive supplier.

The catch was that Leonard overcharged for the materials he was furnishing to the naval ships to an amount probably exceeding $35 million over a period of seven years. The officers involved had a command position to steer the naval vessels into those selected ports of call.

What was the reward for taking this risk for a career naval officer? Leonard was a clever schemer who lured high-ranking officers with bribes of pleasure activities in exchange for their cooperation in steering the ships to his foreign supply stations.

And what did the naval officers receive for their services? Fully paid shore leave at luxury hotels, elaborate parties with prostitutes and expensive gifts.

It seems so unlikely that a high ranking naval officer would risk his career for some frivolous good times. Was Leonard so convincing with his bribes? Were the officers aware of his scam? There seems to be no logical explanation for the officers’ collaboration except for greed and deceit.

The indicted officers were a form of brotherhood carefully screened by the members. They communicated through a foreign country email service using an identity of “Cool Kids.” Besides the rear admiral, there were three captains and two commanders in the indictments.

“Fat Leonard” pleaded guilty and is cooperating with investigators. It seems strange that the overcharging for supplies and services at Leonard’s naval supply stations for so many years was not detected by government officials. I suppose the tight military code of rank did not encourage any whistle blowers in the lower chain of command.

A similar culture of high-ranking executive officers in the financial world seeking personal gain by use of fraudulent business activity was exposed at Wells Fargo Bank. Millions of bank customers were involuntarily registered into bank services they did not request, or even knew their accounts were being charged a fee.

The incentive here was rigid company policy imposed on middle-level employees to enhance their promotion or bonus. Those who failed their quotas were fired. Such a scheme to increase company revenues had to come from the top, yet the CEO claimed he knew nothing about the scam for five years, then let it continue. He was forced to retire while the board of directors were looking the other way. One reporter wrote that the board was “out of the loop.”

What was the motivation to condone such illicit business practice? Not very different than the naval officers’ scam: greed and deceit. Business executives have bonus and stock option plans based on the company’s profits. More profit, more stock options and salary increases.

Well, two Wells Fargo executives did not get away with all their ill-earned bonus incentives. They were ordered to return $75 million in compensation and relinquish $60 million in stock options. A term new for me was applied: clawback.

Clawback is a term that can be applied to money or benefits that have been given but need to be returned. It was not a common business restitution until the Wall Street and financial market scams became big business two decades ago. Clawbacks among the Fortune 100 companies increased from 3% prior to 2005 up to 82% in 2010.

The term is also used in bankruptcy cases when insiders raid assets before filing. Government regulations since 2002 can trigger accounting restatements that affect executive compensation. The erosion of business ethics in the top echelons of corporate America has disturbed me for several years.

Besides the housecleaning at Wells Fargo, the innocent losers are the stockholders. They have seen their investment in the bank decline by 2. 7% while the financial sector has increased by 5%.

Corruption in business and government is becoming endemic where the stakes are high. As the old story says, a crook never expects to be caught.