Investments, Fraud and Fairness

Bernie Madoff is currently in jail for master-minding the largest Ponzi scheme in history. But the saga is far from over for his investors. Irving J. Picard is the bankruptcy trustee appointed by the court and charged with recovering funds and then ensuring the fair distribution of any recovered money. So far Mr. Picard has filed lawsuits seeking to recover money from Madoff’s immediate family, from the so-called “feeder funds” whose directors profited from the fraud, and from major individual investors who profited. One lawsuit, against the estate of investor Jeffrey Picower, was recently settled for 7.2 billion dollars. Another, against the owners of the New York Mets, is currently in mediation.

One of the features of a Ponzi scheme is that investors who enter the scheme earlier have the possibility to profit from the fraud, whether or not they are aware what is going on. Since the funds of later investors go to pay for the “earnings” of earlier investors, investors signing on later in the fraud have less possibility to recover any “profits” and are at risk of losing more than the earlier investors. Mr. Picard has asked any investors who recovered more money than they invested in the last six years of the fraud to return their “earnings.” For example, if someone had invested $100 000 with Madoff and withdrew the annual “profit” of 11% each year for six years, that investor is being asked to return $66 000. This seems fair. There was, in effect, no profit from investments because the funds weren’t really invested. The $66 000 “profit” was the money paid into the fund by later (unluckier) victims. Even though our $100 000 investor didn’t know what was going on, he or she benefited from the fraud at the expense of others.

Now here is where it gets a little more complicated (and ethically interesting): We can assume that our imaginary investor is fairly unsophisticated. He or she was not in a position to suspect that Madoff was a fraudster. (Presumably, if our investor had suspected as much, he or she would have invested elsewhere.) But not all of Madoff’s investors were equally unsophisticated. Mr. Picard has argued that “sophisticated” investors, such as the owners of the Mets, should have suspected Madoff, although there is no evidence that they did. These investors should be treated, in effect, as if they did know. This would mean treating them as if they acted “with actual intent to hinder, delay or defraud creditors.” Mr. Picard is asking Fred Wilpon and his associates for the return of the “profits” from the last six years (requested from all investors), as well as the $132 million in “profits” from earlier years. He has also argued that because Mr. Wilpon ignored numerous “red flags” about Madoff, he should pay back all of the money he invested – around $700 million.

Mr. Picard suggests, in effect, that there are two kinds of Madoff victims – “sophisticated investors” who should have known better and “unsophisticated investors” who can’t be expected to have known better. The legal issues here are very intricate and turn on past interpretations of the doctrine of caveat emptor (“let the buyer beware”). The ethical issues strike me as just as intricate. If Madoff was not a fraudster, but rather a legitimate investor whose holdings were wiped out in the economic downturn, would we want to say that sophisticated and unsophisticated investors should be treated differently? It can be argued that large investors, such as the owners of the Mets and the various banks who invested with Maddoff, contributed to the perception of legitimacy that the fund enjoyed. I can imagine an unsophisticated investor thinking, “If J.P. Morgan is invested, it must be a good bet.” If the actions of large sophisticated investors did contribute to the losses of unsophisticated investors, should the former be held financially responsible? Perhaps most importantly, what mechanisms should be in place for the future, so that all investors, whatever their level of sophistication, have adequate information to make informed decisions?

Why use Workplace Mediation (as opposed to another solution)?

When I took my mediation training, several of my fellow students were already working in human resources or employee relations. Despite their different perspectives, they could all agree on one thing: microwave ovens are a major source of conflict in the workplace. Whether one person is warming up food that another finds smelly, or someone else is hogging the oven so no one else can warm up their lunch, the microwave is all too often a source of tension.

I found this surprising at the time and I was reminded of the microwave-as-flashpoint when I read about the recent Superior Court review of an Ontario Human Rights Tribunal (OHRT) decision. In the original decision Maxcine Telfer, a small businesswoman, had been ordered to pay $36,000 to a former employee because of alleged discrimination and harassment. Among other things, the OHRT arbitrator found the staff microwave use policy to be discriminatory. The complainant said that she began to feel targeted after her boss complained about the smell when she warmed some curry in the microwave. Apparently Ms. Telfer is extremely sensitive to smells and the office had a strict “no scents” policy in place.

Conservative commentators have had a field day with this story, and I won’t say more about the original decision or its reversal by the Superior Court. What I found most interesting about the episode was how a relatively trivial matter can blow up into something much more serious. If they’re fortunate, employees will find ways to get along despite microwave abuse and other sources of tension. But what to do when a low-level conflict intensifies? Usually it isn’t possible or desireable simply to fire or transfer everyone involved in a conflict. Better yet, how to devise policies in such a way as to avoid unnecessary conflict in the first place?

Workplace mediation can help. In mediation, each party in the dispute has a chance to express their point of view. Parties get the opportunity to listen to and understand each other’s perspective, and then work together to come up with creative ways of resolving their difficulties. Bringing in a mediator to facilitate discussion, whether this means an outsider or someone already in the company with mediation training, is a good idea for a number of reasons. Research indicates that people are more likely to respect a policy or decision that they have had a hand in crafting. If the boss simply devises and hands down a policy inevitably there will be someone who doesn’t feel that their concerns were taken into consideration. This can be bad for morale. A policy that the boss has devised without fully consulting employees may not really address all of the issues that are important to them. A group of people working together is more likely to devise a workable solution than a single person working alone. Moreover, while having a fair and reasonable, say, “microwave use policy” may be the single most important element in a happy workplace, it is not the sort of thing that most employers will want to spend a lot of time thinking about. Mediation is a way of sharing the burden.

Ethics and the Culture of Overwork

A friend recently told me that she hadn’t seen much of her husband lately. At first I wondered if their relationship was on the rocks. Instead it turns out that the new head of his division insists on 12-hour days from all the senior people. Now, I’ve put in my share of 12-hour days. When I had my first jobs teaching philosophy in university I had to work very hard and sometimes kept long hours. But I liked the work and I didn’t mind that much. I understood that many people have to keep even longer hours at jobs that they don’t find so rewarding, and I realized that companies sometimes have “crunch” times when they must make excessive demands of their staff.

My friend’s husband – I’ll just call him “Simon” – does not work for a struggling start-up, and he doesn’t have the kind of job (like, say, in a law firm) where there is a direct relationship between the hours he works and the amount of money he brings in. He works for a major company in a profitable industry. And while the industry does provide a socially useful function, it isn’t as if he’s about to find a cure for AIDS or devise a way to stop global warming. Simon is good at what he does and well compensated for it. I suppose that if the long hours bothered him that much he might decide to seek work elsewhere.

So while I understand that 12-hour (and longer) days might sometimes be necessary, I find it a bit troubling that a 12-hour day is the expected norm. What will they do when a crunch really does arrive – provide sleeping bags and a catered breakfast so that employees don’t even have to go home? I imagine that Simon’s boss has made his demand in order to establish a certain culture in the company. Any ambitious man or woman a little lower down in the hierarchy need only to consider the hours of the senior people to know what they must do to get ahead.

The boss’s ukase strikes me as bad management for a number of reasons. Demanding that employees put in twelve-hour days is not the same as demanding that they do 12 hours worth of work. The jobs that are affected are knowledge-based, requiring creativity and advanced problem-solving skills. It is not the sort of work that you can do effectively for long hours many days at a stretch. This means that some of those compelled to put in a 12-hour day are doing their usual seven or eight hours of work and stretching it out to take up 12 hours. What a waste of time and human potential! It probably also means that some of the twelve hours are taken up by non-productive, time-wasting exercises. I can imagine endless boring and irrelevant meetings and long back-logs of unread emails that one should never have been sent in the first place. When you factor in the stress of long days, resentment at the fact that employees can no longer make time for the gym or other interests, and the added strain on their families, you end up with a pretty unhappy (not to say dysfunctional) workplace.

It is puzzling to me that a company would hire people they believe to be smart and capable, and then treat them like coal miners who must spend a certain number of hours chipping away underground. Let’s set aside the question of whether this amounts to bad management. Are such demands unethical? There are reasons to think so. The company Simon works for is in an industry in which there is a certain amount of hand-wringing at the under-representation of women. I’m willing to bet that every major company in the industry has a policy to address this concern. Insisting that employees regularly spend twelve hours at the office if they want to get ahead is especially hard on women, who often have non-negotiable family obligations. A corporate culture of overwork is just one more barrier to their success.

What to Look for in a Mediator

My friend Valerie says that there is a mediator out there for everyone. With so many mediators to choose from and so many different approaches, how can you find the right mediator for you? Mediation is a confidential process, so it’s unlikely that you’ll be able to see a particular mediator in action before hiring. You can ask around or look for reviews on the internet, but that won’t necessarily lead you to the right person for your conflict. Even the mediator who helped your best friend won’t automatically be the best one for you.

Whatever qualities you feel are important in a mediator, probably the best place to start is with the professional association of mediators in your area. In Toronto, that would be the Alternative Dispute Resolution Institute of Ontario. A mediator who belongs to such an organization has made a commitment to the profession and to professional development. Depending on the rules of the organization, he or she will have been educated about the causes and dynamics of conflict, and about different approaches to conflict resolution. If you are looking for a mediator to help you facilitate a separation agreement or divorce, you should look for someone who has had training in family mediation. Such training usually includes an over-view of the relevant family laws. Of course, a mediator can inform you about the law but ordinarily will not (and should not) offer legal advice.

Very broadly speaking, the main difference among mediators is whether they take an evaluative or a more facilitative approach. Mediators who are strongly evaluative will not hesitate to tell you their views on your dispute and what they think an appropriate resolution would be. Mediators who are more towards the facilitative end of the spectrum may offer suggestions to help you solve specific problems, but their focus will be on helping the parties in the dispute arrive at their own resolutions. The thinking behind this approach is that the parties involved are likely the most knowledgeable about the details of their own situation and so the best equipped to come up with durable solutions. There is also a good deal of evidence that people are more likely to respect agreements that they themselves have had a hand in crafting, rather than settlements that have been foisted upon them.

It is perfectly acceptable (and probably a good idea) before you hire a mediator to ask about their training and about their style and approach. Whatever the nature of your conflict, it is crucial that you feel comfortable with the mediator and can develop a sense of trust. Even over the phone, you should have the feeling that the mediator is really listening to you, not just waiting for you to stop talking. It is very important that a mediator give the impression of being impartial about your conflict from the beginning. He or she will listen sympathetically but will not readily take your side no matter how compellingly you present it. Don’t be disappointed about this. While it is understandable that you would want an ally in an emotionally charged situation, do not try to put a mediator into that role. Mediators are able to do a better job in the end if all parties respect them as neutral in the dispute.

The Alternative Dispute Resolution Institute of Ontario currently has about 850 members. Whether your conflict involves a business, family members, co-workers, or the whole neighbourhood, one of them will be the right person to help you.

Mandatory Marriage and Divorce Counseling?

Divorce rates in the state of Wyoming are among the highest in the U.S., and legislators there have come up with a strategy they hope will change that. If a proposed bill is passed, couples who plan to marry or divorce will have to attend three hours of counseling at their own expense. Couples who refuse counseling will have to wait a “cooling off” period of one year before being granted a license. Judges will have the right to waive the divorce counseling requirement in situations of domestic violence. The Catholic Church and some other religious institutions already insist that couples who plan to marry in the church receive premarital counseling. Yet while couples who didn’t want to go through such counseling have always had the possibility of opting for a civil ceremony, a marriage license is a requirement for any kind of ceremony. Is Wyoming’s proposed legislation an inspired response to a difficult social problem, or an unacceptable intrusion by the state into the private lives of its citizens?

Critics of the bill have been quick to argue that marriage is a personal decision, between two free individuals, and that “big government” has no place butting in. But this criticism won’t fly. Whether we like it or not, the state is already firmly involved in the institution of marriage. Marriage may be a personal matter, but it isn’t a private one. In choosing to marry (rather than co-habitate) individuals ask the state to recognize their union. Furthermore, many costs of a high divorce rate – in adult and child poverty, strain on the legal system, and higher bankruptcy rates – are borne by the state. The sponsor of the bill, Representative Ed Buchanan (Republican), says that it should help people understand the consequences of life-changing decisions. If internet family law forums are a valid indicator, many people contemplating marriage or divorce have very little understanding of their legal rights and obligations. Helping them to become more aware can only be a good thing.

Right now, there are very low barriers to marriage in Wyoming and its neighbouring states. Obtaining a marriage license will set you back $25 in Wyoming, $30 in Colorado, and a measly $15 in Nebraska. (For comparison, in Ontario a marriage license costs $130.) Making marriage and divorce more difficult might encourage some people to consider their decisions more thoughtfully, and this in turn might affect the divorce rate. Yet despite the good intentions of those who support the bill, I can see a few problems. First, there is nothing to stop couples in Wyoming from crossing the border to get married in another state. Second, I don’t know how strictly the counseling profession is regulated in Wyoming, and it isn’t clear what requirements marriage counselors would have to fulfill and what kind of expertise they would be expected to have. For example, would counseling by members of the clergy be acceptable? The issue of counselors’ training and expertise is all the more pressing when you consider that the issue of whether marriage counseling works at all is controversial. (Click here for an article from the New York Times Magazine that surveys some of the evidence for and against the effectiveness of couples counseling.)

If the bill passes, I hope that someone will do follow-up research. How many couples who receive mandatory counseling will revisit their decisions to either marry or divorce? Will the change have any effect on Wyoming’s divorce or marriage rate? Perhaps the idea will catch on, and mandatory counseling requirement for civil marriage will one day come to be seen as unremarkable as the requirement to undergo a blood test once was.

When to hire a mediator (rather than do nothing)?

People often ask me in what circumstances they would need a mediator. Mediators are experts in conflict resolution, and mediators work in many different settings. There are mediators on the international stage, mediators in family courts, schools, workplaces, prisons, and out on the streets. But when should you hire a mediator rather than doing nothing? I think that there are two basic factors:

1. A decision needs to be made.
2. Something of value is at stake.

Let me explain: We all have conflicts with others. Many of these, thankfully, have little effect on our daily lives. We can avoid the neighbour whose early morning leaf-blower is a weekly annoyance. We can change the subject when our brother-in-law brings up politics or the economy. We can agree to disagree with the other parents in the playground when the topic of our children’s “screen time” comes up. But sometimes we have to co-ordinate and work together with others and conflict becomes unavoidable. And sometimes, despite conflict and differences of opinion, decisions have to be made. For example, will the children of divorced parents spend the weekends with their father or mother? Will they continue to attend the neighbourhood school or transfer to a private school? Where will they spend the holidays? Who will be in charge of their religious instruction?

It isn’t only divorced couples who need to make decisions together. Mediators also work with couples who plan to marry, to help them frankly discuss and then plan for the financial and “business” aspects of their relationship. They help married couples who plan to stay together, but need assistance to communicate effectively. And a whole range of potential conflicts can arise among adult siblings. When an elderly parent can no longer live independently, who will decide the best course of action? Who will take away grandpa’s car keys if his driving is putting others at risk? What is to be done if the family farm or business is no longer viable in its present form?

What all of these different situations share is that a decision needs to be made, and there is something of value at stake. The question of what counts as “something of value” is in the end a personal matter. I’ve seen families nearly torn apart over the issue of who will host Christmas dinner! While this isn’t something that I personally would seek help with, I know others for whom a couple of hours with a mediator to resolve this issue would be a sound investment in future family relations and personal happiness.

In general the cost of mediating a particular conflict can be weighed against the cost of doing nothing. Sometimes, if we’re fortunate, the cost of doing nothing is low. But the costs of inaction and indecision are sometimes very high. Failing to act can allow conflict to fester and can end up costing as much or more than taking action. And it has to be remembered that the costs of many conflicts are both financial and emotional – with the emotional costs being much harder to calculate.

Mediator – One of the Best Careers for 2011?

“Mediator” made the list of U.S. News & World Report’s 50 best careers for 2011. They predict that in the U.S. – one of the most litigious countries in the world – employment in alternative dispute resolution will increase by 22% between 2008 and 2018. Jurisdictions all over the world now require disputants to try mediation before bringing their disputes into the courtroom. I think that this reflects a greater awareness of alternative approaches to conflict, and a growing acceptance of the view that the courtroom may not be the best place for every kind of dispute.

Mediation is being used in an expanding variety of circumstances. In the wake of the housing crisis in the U.S. many states have suggested or required mediation between banks and homeowners before allowing foreclosure. (Interestingly, researchers have found that mandatory mediation has a higher rate of success than voluntary mediation. See my earlier posting, “Is Mandatory Mediation an Oxymoron?”) A&E has been airing “The Peacemaker,” a series on Malik Spellman, a former gang member who now works to mediate violent disputes between gangs in L.A. And mediation continues to be used as a way of addressing conflicts over environmental resources. Bill Ritter, the governor of Colorado, recently ordered the creation of a “River Access Mediation Commission” to resolve disputes between boaters and property owners.

But increasing opportunity is not the only reason to be excited about a career in mediation. Being a mediator can be rewarding in itself. Mediators help individuals in difficult situations who often can’t see a way out on their own. For example, mediated parenting plans can help defuse the often wretched emotions involved in marital break ups. A more startling example is that tribal mediators in Yemen were recently able to resolve a nine year family conflict over land. Three people had died and twenty-one were injured in the cycle of revenge violence. While I don’t know of any such dramatic cases in Canada, mediators everywhere help others to resolve their conflicts, reduce the stress in their lives, and return to meaningful activity. To do this as one’s job is a privilege.

Happy new year.