NewNotables – Issue 69

Lehman Whistle-Blower’s Fate: Fired

The Wall Street Journal, March 16, 2010

Lehman Brothers Holdings Inc. ousted a whistle-blower just weeks after he raised red flags about Lehman’s accounting in 2008. Mr. Lee, a 14-year Lehman veteran, was let go in late June 2008 amid steep losses at Lehman as it tried to maneuver through the global financial crisis. In early June he had raised concerns with Leman’s auditor, Ernst & Young, that the securities firm was temporarily moving $50 billion in assets off its balance sheet. This accounting maneuver helped mask the risks Lehman was taking amid scrutiny by investors and regulators about the health of Wall Street firms.

Lehman stated that Mr. Lee was let go as part of a broader down-sizing at the firm. Mr. Lee has alleged that Lehman misled investors by using, among other things, an unusual accounting device known internally as “Repo 105” to park assets temporarily off its balance sheet. Mr. Lee first raised concerns on May 16, 2008, when he sent a letter to senior management about his concerns over the firm’s valuations of illiquid investments and the quality of its accounting controls. In June 2008, Lehman’s board instructed Ernst & Young to investigate Mr. Lee’s allegations. An E&Y auditor team interviewed Mr. Lee on June 12, according to the bankruptcy report, at which point he raised the issue of Repo 105. Ernst & Young said that Lehman’s management investigated Mr. Lee’s allegations and informed the board that the allegations were unfounded and there were no material issues involved. Lehman filed for bankruptcy in September 2008 and its assets were sold off.

Comment: The case of whether Mr. Lee was terminated as part of a broader downsizing at Lehman or whether he got the axe due to being a whistle-blower is extremely hard to prove one way or the other. What we do know is that Lehman was fighting for their existence due to a faulty and very risky investment strategy, and attempted to cover up a portion by shifting questionable illiquid assets off its balance sheet to buy time. The “financial crisis” obviously exposed Lehman and caused them to implode and file for bankruptcy, which created financial losses for their investors, including myself. Ernst & Young’s role will be clarified during the bankruptcy proceedings.

Food for Thought: Do You Need Farmers for a Farmers Market?

The Wall Street Journal, April 29, 2010

Farmers markets, with their hodgepodge of organic kale, artisan rye bread and peach preserves, have surged in popularity in recent years. But now authorities are questioning whether they’re missing a crucial ingredient: real farmers. In a Wisconsin city, where a farmers market has operated for the past decade in a downtown park, a dispute has cropped up.

A local farmer who grows his own apples and blueberries just outside of town, says resellers are buying up produce at an auction and peddling it at the farmers market, sometimes undercutting his own prices. The farmer, who insists he’s looking after the interests of consumers, has prodded the local city council to decide whether or not to ban resellers from the market.

Whose business is it? The Farmers Market Coalition, a national group, recently assembled a task force to come up with an official definition for farmers market. “We really need to protect the image of farmers markets as places that foster community, that support local farmers and that provide access points for healthy food in neighborhoods,” says Stacy Miller, the group’s executive director. There are some 5,300 farmers markets in the U.S., nearly double the level ten years ago. A 2006 survey of farmers markets conducted by the Department of Agriculture found that 63% of markets stipulate that “vendors can sell only products they produced themselves.

Comment: Nationally, there are thousands of stories and accusations of whether produce is grown by local farmers or being resold, especially where fruit is sold out of season but claimed to be grown locally. The solution seems pretty easy but I’m sure I’m a little naive. Either (1) separate produce grown by farmers themselves on one side of the market and produce being resold on the other, or (2) prohibit resellers from selling their produce at “farmers markets.”

PepsiCo Cuts Sugary Drinks from Schools

Associated Press, March 16, 2010

PepsiCo plans to remove sugary drinks from schools worldwide following the success of programs in the U.S. aimed at reducing childhood obesity. Both PepsiCo, the world’s second largest soft drink maker, and Coca-Cola, the world’s largest soft drink maker, adopted guidelines to discontinue selling sugary drinks in schools in the United States in 2006. PepsiCo has now stated that it will remove full calorie, sweetened drinks from schools in more than 200 countries by 2012, making the first such move by a major producer.

The World Heart Federation has been negotiating with soft drink makers to have them remove beverages from schools as it attempts to fight a rise in childhood obesity, which can lead to diabetes, heart problems and other ailments. The Federation is pleased with PepsiCo’s decision because it affects students through 18. Coca-Cola this month changed its global sales policy stating it won’t sell any of its drinks worldwide in primary schools unless parents or school districts ask. As for secondary schools, Coca-Cola believes authorities “should have the right to choose what is best for their schools.” The World Heart Federation, on the other hand, wants all drinks with added sugars removed from schools with children through 18.

In primary schools, PepsiCo will sell only water, fat-free or low-fat milk, and juice with no added sugar. In secondary schools, it will sell those drinks along with low-calorie soft drinks, such as Diet Pepsi. Sport drinks are permissible when they’re sold to students participating in sports or other physical activities.

In the U.S., the industry has swapped lower-calorie options into the schools to replace sugary drinks. Sales of full- calorie soft drinks fell 95% in U.S. schools between fall 2004 and fall 2009, the American Beverage Association reported.

Comment: Obesity in children has skyrocketed in the last few years. Defeating or substantially reducing obesity isn’t as simple as just removing sugary drinks from schools. Students must also exercise and eat better, not just at school but at home as well. Children need good adult role models, but unfortunately, obesity of the adult population has also increased dramatically. That said, I applaud soft-drink makers for taking actions to reduce sugary drinks, even though they may have been coerced into making the move.

roger eigsti thumb

By Roger Eigsti
Board President,
Institute for Business, Technology and Ethics