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.
1. 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 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.
2. 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 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 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.
3. 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 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.
4. 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 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.
5. 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 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.
References:
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Chairman and CEO responsibilities (2018). Retrieved from https://www.southernwater.co.uk/chairman-and-ceo-responsibilities
Clifford, S., and Moynihan, C. (2018). Martin Shkreli Is Found Guilty of Fraud. The New York Times. Retrieved from https://www.nytimes.com/2017/08/04/business/dealbook/martin-shkreli-guilty.html
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Hill, C. A. (2016). The Rhetoric of Negative Externalities. Seattle UL Rev., 39, 517. Retrieved from https://scholarship.law.umn.edu/cgi/viewcontent.cgi?article=1570&context=faculty_articles
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