This will likely close out my series on the faux "rehabilitation" of Patricia Russo's CV.
Even though she was once (during the middle of 2009) legacy Schering-Plough's Compensation Committee chair, and its lead outside director -- and is presently GM's lead outside director -- it is important to note that she likely ought not have been allowed to serve, nor be presently sitting -- in any of these capacities. Especially so at Merck -- if one feels that her vanishing sense of reasonable diligence, and an (apparently) waifish level of curiousity (about internal public company affairs) -- is a career-long pattern.
It sure seems that's the SEC's view. During the dead "between holidays" week, the SEC announced a settled complaint with her former company, Alcatel-Lucent. She was in charge of that company during virtually the entire timeframe of the allegedly criminal activities described below (according to the SEC/DoJ). Significantly, the SEC repeatedly points out that senior executives, including members of the executive committee, either knew -- or were "severely reckless in not knowing" -- about this pervasive bribery of foreign officials (to illicitly win business). It went on for over five years, afterall. And Ms. Russo sat right on top of it all.
Here's the SEC's holiday week press release page, on it:
. . . .According to the SEC’s complaint filed in the Southern District of Florida, Alcatel’s bribes went to government officials in Costa Rica, Honduras, Malaysia, and Taiwan between December 2001 and June 2006. An Alcatel subsidiary provided at least $14.5 million to consulting firms through sham consulting agreements for use in the bribery scheme in Costa Rica. Various high-level government officials in Costa Rica received at least $7 million of the $14.5 million to ensure Alcatel obtained or retained three contracts to provide telephone services in Costa Rica.
The SEC alleges that the same Alcatel subsidiary bribed officials in the government of Honduras to obtain or retain five telecommunications contracts. Another Alcatel subsidiary made bribery payments to Malaysian government officials in order to procure a telecommunications contract. An Alcatel subsidiary also made illegal payments to various officials in the government of Taiwan to win a contract to supply railway axle counters to the Taiwan Railway Administration.
According to the SEC’s complaint, all of the bribery payments were undocumented or improperly recorded as consulting fees in the books of Alcatel’s subsidiaries and then consolidated into Alcatel’s financial statements. The leaders of several Alcatel subsidiaries and geographical regions, including some who reported directly to Alcatel’s executive committee, either knew or were severely reckless in not knowing about the misconduct. . . .
The SEC's charging complaint (a 24-page PDF file) goes into quite a bit of additional detail -- about just how weak (non-existent, actually) the operational enforcement of internal control processes was, at Lucent -- under Patti Russo's "leadership":
. . . .Alcatel, the parent issuer, was run by an executive committee made up of very senior officers, including the CEO [Patricia Russo] and CFO, and a handful of support staff. Alcatel itself did not conduct actual businesswith any customer. Starting in the 1990s, Alcatel utilized a consistent strategy to obtain contracts in many parts of the world, under which Alcatel typically used a
subsidiary in the country to obtain contracts. The subsidiary's "country senior officer" managed the subsidiary and selected business consultants purportedly to provide sales, marketing, and technical support and, in some cases, to lobby government officials to obtain public contracts in that country.
In every bribery scheme described in this complaint, the respective heads of the relevant subsidiaries and geographic regions either were aware of, or ignored, significant red flags that indicated that the respective country senior officers and other Alcatel employees were using business consultants to pay bribes to foreign government officials. . . .
Alcatel's internal controls over payments to its business consultants in foreign
countries were weak at best. Although at some point Alcatel utilized more than 235 business consultants in more than 70 countries, the employees responsible for reviewing due diligence reports on the company's business consultants sometimes did not speak the language in which these reports were written, and had little or no understanding of these consultants' background or the tasks they purportedly performed. . . .
While Alcatel had a company-wide FCPA training program, Alcatel's employees routinely disregarded or circumvented it. For example, a former high-level employee and the president of Alcatel Standard trained country senior officers, including those who conducted business in Latin America and Taiwan, on how to "paper" consulting agreements so that Alcatel Standard would authorize them. The controls Alcatel had in place were insufficient to prevent bribery because Alcatel employees either disregarded or circumvented them by providing incomplete and inaccurate information to those involved in the review process. Finally, although Alcatel had a risk assessment committee, it typically focused on issues that were likely to result in customer lawsuits and not on bribery or excessive commissions to business consultants. . . .
Alcatel failed to implement adequate internal controls to comply with the company's NYSE listing, including the detection and prevention of violations of the FCPA.
First, Alcatel and/or its subsidiaries falsified books and records, entered into agreements retroactively, and obscured the purpose for, and ultimate recipient of, illicit payments. Alcatel used business consultants and intermediaries to funnel bribes in at least four countries. Alcatel created and used false invoices and payment documentation under business consulting agreements that described services that were never intended to be rendered. Illicit payments were falsely recorded as expenses for consulting fees. . . .
An astonishing lesson -- and ample reason why Ms. Russo would not be a particularly worthy candidate -- at any reputable company, as its lead director. Is GM paying any attention here? How about Alcoa? The above, in my opinion -- and her lead role in ignoring the misdeeds of "Fast Freddie" Hassan, all while paying him what has become nearly $225 million -- should disqualify her from public company board leadership. And so, it is deeply unfortunate that Merck has selected her to continue -- as one of only three (out of 17) legacy Schering-Plough directors post the bust-up closing, in November 2009.
To be fair, here is Alcatel's SEC-filed version of these events -- but the gravamen of the SEC's complaint is undisputed. In fact, Alcatel makes much of the fact that it had already canned "prior management" (read: Russo) -- in response to the debacle, thus: "[Alcatel] has different management, including a new CEO, a new executive committee and a different Board of Directors. . . ."
Wow. But there she sits -- on Merck's board, without a single committee assignment. Wild.
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