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The Landscape They See

Trained in principled leadership, our Fellows face plenty of opportunity—and fraud.

In 300 BCE, a sea merchant named Hegestratos secretly planned the world’s first fraud. It involved a shipment of corn. When his crew found out, they rebelled, and he drowned trying to escape them. 

Fraud, self-dealing, and other unethical behaviors are ancient behaviors. But the human and financial costs of these behaviors have grown exponentially, and the sanctions more difficult to levy. 

The McGowan Fund has special insight into fraud. Our namesake, William G. McGowan was a profoundly ethical leader who, when he retired, turned over the reins of his brainchild, MCI, to executives who merged with WorldCom and perpetrated one of the largest financial frauds in American history. 

Fast forward a few years, and several giant Wall Street investment banks and at least one international accounting firm sparked an international financial crisis—with overstated assets, laughable accounting practices, deliberate destruction of information, inflated bonuses, and more. Ten million homeowners lost their homes; 8.8 million workers lost jobs. Hunger peaked for the first time in 14 years. 

McGowan Fund founded the Fellows Program. The program is 11 years old. We’ve sent more than 100 Fellows, drawn from top-tier MBA schools and trained in principled leadership, into the VUCA world. 

Today, we take a tour of the landscape they’re encountering. 

Sell, Don’t Tell

Currently, America’s one to watch is likely Elizabeth Holmes, founder and sometime CEO of Theranos. Holmes was a precocious and imaginative child—at age nine, she developed her own time machine—who brought her talents to Silicon Valley while still a teen, where she developed plans for a blood-testing device capable of detecting a range of illnesses. 

Theranos was a hit among investors, including businessman Rupert Murdoch. Former U.S. Secretary of State Henry Kissinger was on its all-star board. Missing on the board was anyone who had a medical or scientific background. Also missing: income statements, balance sheets, and cash-flow statements audited and signed by a public accounting firm. This is not required of private companies until they register with the Securities and Exchange Commission before selling to retail investors; on the other hand, companies planning an IPO need two years’ worth of audited financial statements. But secrecy was Theranos’s watchword. Holmes didn’t share glimpses of her technology. In short, no one knew much about Theranos until investigators found that Theranos had been doctoring its tech results, cheating investors, and putting vulnerable patients at risk.

Theranos is in court as we write. 

Media have blamed the “Fake it till you make it” ethos in Silicon Valley. But Holmes shares history with a long line of medical fraudsters. Extreme secrecy is often a tell. 

Interesting lookalikes: Nikola, which pushed one of its high-tech trucks downhill and called it a breakthrough. Boeing, which paid $2.5 billion for the 737 Max fraud. And for additional perspective, the Keely engine, which reportedly attracted the equivalence of somewhere between $5 million and $95 million in investments in the late 19th century, due to its capacity to extract energy from the luminiferous ether (which doesn’t exist). 

Sell, Sell, Sell

America’s long-distance runner in the scandal department is appropriately named Wells Fargo, after the famed stagecoach company. It was 2016 when Wells Fargo was caught holding two million fake consumer accounts, which inspired Congressional hearings and the CEO’s retirement. 

Four years later, Wells Fargo’s fraudulent behavior keeps on giving. Between 2016 and 2020, the bank uncovered more fake accounts—for a total of 3.5 million. Also discovered: 800,000 car loan customers who had insurance they didn’t need or didn’t know about. How did this happen? 

Historically, Wells Fargo had credibility. Its CEO was named 2013 Banker of the Year by American Banker. Gallup gave it a Great Workplace Award. Fortune magazine touted it as one bank that had avoided “the rest of the industry’s dumbest mistakes.” Emerging from the nation’s 2008 financial debacle relatively unscathed, Wells Fargo had a strong culture and an equally strong structure, both well codified. 

But in some ways, they were at war. With a decentralized structure, Wells Fargo pushed major responsibilities to its business units, where the culture was pressured, especially around cross-sales. Pressure is one of three components depicted in a classic model called the fraud triangle (the others are opportunity and rationalization). With incentives, humiliation, and promotions in the balance, employees created fake accounts, which some higher-ups could ignore, because of the decentralization. 

In 2020, five ex-officers were fined $37.5 million. The former CEO paid $2.5 million. The bank agreed to pay $3 billion to resolve federal criminal and civil investigations. More important: The 2020 settlement includes a deferred prosecution clause, which requires Wells Fargo to cooperate with further investigations. This means there may be more coming. 

Interesting lookalike: Hertz, where the CEO pressured employees to “find money,” and they did. 

Deal Me In

As COVID-19 dashed across the U.S., cities began looking for heroes. That’s when Andrei Doroshin, a Drexel University grad student, stepped up and promised fast dissemination of the COVID vaccine to the city of Philadelphia. His nonprofit, Philly Fighting COVID (PFC), was already running free testing sites when he made his vaccination pitch, promising efficient technology and operations. The 22-year-old was so convincing that once he’d been identified (not necessarily vetted) as the man for the job, city managers relaxed. Hence, the responsibility for oversight was overlooked. 

If ever a group of people needed oversight, PFC was it. The ties among PFC’s leadership gave new meaning to the word “ambiguous.” A Drexel neuroscience professor serviced as PFC’s science officer as well as Doroshin’s academic adviser, as well as adviser on Doroshin’s for-profit real estate venture, TALA Resorts. PFC’s head of systems ran a biotech firm, where Doroshin served as chief business officer. PFC had one doctor on staff, who lasted four days and tried to alert the city about problems at PFC. 

Meanwhile, PFC managed to vaccinate 20,000 people. But operations sputtered. Fumbles led to elderly folks believing they had appointments when they didn’t. PFC pre-loaded syringes, which shortened the lifespan of the drug to six hours, so they found themselves with leftover doses aging out. Leaders quickly realized PFC’s model wasn’t sustainable. They were amassing debt. Their solution: Sell personal data and charge insurance companies $28 for vaccines they were getting for free. They closed PFC’s free testing clinics in the neighborhoods and turned themselves into a for-profit, allegedly without mentioning the change. 

Then Doroshin was caught giving vaccines to ineligible friends. The city severed the PFC contract. 

Interesting lookalikes: Tiffany Carr, CEO of the Florida Coalition Against Domestic Violence, who dealt herself $7.5 million in organization funds. James R. Ramsey, who bilked millions of dollars from the University of Louisville’s foundation, which he headed, while also running the university itself. One to watch: Jack A. Brown, who runs CORE Services Group as well as several for-profits that serve CORE’s roach-infested homeless shelters via noncompetitive bids; salary, $1 million plus. And don’t forget Hegestratos, who wanted to keep his corn for himself. 

And the Sequel

Ancient history aside, fraud in the U.S. is increasing. According to PricewaterhouseCoopers, 56 percent of American companies saw fraud in 2020, up from 38 percent in 2016. Also up is senior management’s involvement, which now accounts for 26 percent of corporate fraud. 

Blame VUCA. Also blame that worrisome foundation of the fraud triangle: outsized pressure. For that matter, opportunity has expanded as well. Think hacking, electronic transfer of funds, a certain credulousness around breakthrough claims, especially those that come from young geniuses. And there’s rationalization. Research indicates that when employees see bad behavior from higher-ups, they feel license to do the same.

Why not give up and just blame the culture? 

Because culture is comprised of distinct behaviors, beliefs, experiences, and practices that an individual can subscribe to or not. It takes self-awareness and values to sort through these many components, and it takes courage to act accordingly. 

The Fund recognizes the difficulty of these times and continues to do what we can, as do our Fellows out there in the VUCA world.