Complaint

THE NATION’S NEWSPAPER BS2003-01b Collegiate Case Study Adelphia founder, 2 sons, 2 others arrested in fraud By David Lieberman and Greg Farrell www. usatodaycollege. com Accounting fraud Part II: The results “Creative accounting” is not a new technique, but it can certainly be a costly one. Businesses feel the pressure to appear profitable in order to attract investors and resources, but deceptive or fraudulent accounting practices often lead to drastic consequences. Are these so-called creative practices always illegal or can they ever be justified?

This case study will present examples of companies who have used inappropriate accounting practices, the results of their deceptions and the government’s plan to avoid future incidents. WorldCom scandal brings subpoenas, condmnation By Andrew Backover and Thor Vladmanis Andersen’s partners chart firm’s future today By Greg Farrell Client-starved Arthur Andersen cuts 7,000 jobs By Greg Farrell Dominoes hit WorldCom partners, clients By Michelle Kessler Adelphia plans to file Chapter 11 Cable firm expected to seek bankruptcy protection today NEW YORK — The waiting should be over today.

Adelphia Communications plans to file for bankruptcy protection, nearly three months after the onceproud No. 6 cable operator first disclosed dealings with the family of founder John Rigas that turned it into a symbol of corporate scandal. The company is expected to announce that it has raised as much as $1. 5 billion from banks led by J. P. Morgan Chase and Citigroup to keep operating while a bankruptcy judge decides how creditors will be paid. A Chapter 11 filing — the biggest in cable history — could help efforts to find a buyer for some, or all, of Adelphia’s systems, which serve 5. 7 million subscribers.

The court can protect an acquirer from unexpected liabilities, including those stemming from several shareholder lawsuits and investigations into Adelphia’s finances by two grand juries and the Securities and Exchange Commission. The company could pay off its estimated $19 billion in debt if it can sell systems for $3,500 per subscriber, roughly the industr y norm. But stockholders could lose their entire investments. Adelphia shares closed Friday at 15 cents in over-the-counter trading. Case Study Expert: John D. Martin, Ph. D. Professor of Finance, Baylor University USA TODAY Snapshots®

Politicians role in monitoring business Opinion leaders1 say government should be more involved in oversight and regulation of private enterprise2: 52% 45% Agree Disagree Source: Edelman Public Relations Worldwide/ StrategyOne Research survey of 400 respondents. 1 – College educated 35- to 64-year-olds with household incomes of more than $100,000 2 – Does not add up to 100% due to rounding By Darryl Haralson Marcy E. E. Mullins, USA TODAY By Darryl Haralson andand Marcy Mullins, USA TODAY Reprinted with permission. All rights reser ved. AS SEEN IN USA TODAY MONEY SECTION, MONDAY, JUNE 24, 2002

And a sale may devastate Coudersport, Pa. , where Adelphia is headquartered. It’s by far the largest employer in the rural, mountain town of 3,000. Meanwhile, Adelphia will tr y to reassure its subscribers. “Adelphia is committed to reversing its admittedly difficult present financial situation,” it wrote last week to 3,500 franchise officials. “Most importantly, there should be no change in service to Adelphia customers as a result of these developments. ” Adelphia’s downfall began on March 27, when it disclosed that a Rigas family partnership had borrowed $2. billion using company assets as collateral. The amount has since been raised to $3. 1 billion. That stunned analysts, who believed that the operator was already too deeply in debt. Barraged with questions, Adelphia put off release of its 2001 annual report. More questions were raised when it was confirmed that the SEC was investigating. As the stock plummeted, Nasdaq weighed delisting Adelphia shares. That took effect on June 3. After acknowledging that it would have to restate its earnings, Adelphia put several cable systems on the block.

The company defaulted on bank loans and failed to make interest payments on bonds. And Rigas and sons Timothy, Michael and James were forced to relinquish their jobs and board seats. Then new interim CEO Erland Kailbourne stunned company watchers by disclosing a series of cases where the Rigas family allegedly used Adelphia for private gain. Among other things, the company paid for their apartments in New York, built a golf course on Rigas-owned land, helped the purchase of the Buffalo Sabres hockey team, created a Rigas-run investment firm and subsidized a documentary film.

Cover story Adelphia founder, 2 sons, 2 others arrested in fraud Investigators say company was ‘personal piggy bank’ By David Lieberman and Greg Farrell USA TODAY NEW YORK — For 50 years, John Rigas lived the American Dream. Half a century ago, the son of Greek immigrants left a job making TV picture tubes at Sylvania. The World War II veteran bought a small movie house and a newfangled business — a cable TV company — in the remote town of Coudersport, Pa. , and was on his way to making a fortune. But his oversized ambitions led him this week into an American Nightmare.

Wednesday, Manhattan U. S. Attorney James Comey accused 77-year-old Rigas and two sons — Timothy and Michael — with “one of the largest and most egregious frauds ever perpetrated on investors and creditors. ” Rigas attorneys were unavailable for comment. With TV cameras capturing the humiliating moment, the founder of Adelphia Communications, the No. 6 U. S. cable company, was led away in handcuffs here. He became the first CEO arrested in the latest wave of corporate accounting scandals and the most vivid symbol of whitecollar crime since Michael Milken and Ivan Boesky in the 1980s.

Two other former Adelphia executives, James Brown and Michael Mulcahey, were picked up in Coudersport. Later in the day, Adelphia itself — which filed for bankruptcy-court protection last month — charged Rigas and his family with violating the Racketeer Influenced and Corrupt Organizations (RICO) Act, in a filing in Federal Reprinted with permission. All rights reser ved. Page 2 AS SEEN IN USA TODAY MONEY SECTION, THURSDAY, JULY 25, 2002 Bankruptcy Court in New York. The Rigases could be forced to pay three times any damages the court finds.

The lawsuit alleges about $1 billion in damages. Behind their “small-town facade,” the Adelphia lawsuit says, the Rigases “used their domination and control of Adelphia, and their isolation from the scrutiny of the outside world, to engage in one of the largest schemes of selfdealing and financial wrongdoing in American corporate history. ” The Justice Department and the U. S. Postal Inspection Service charged the five executives with securities, wire and bank fraud, saying they “looted Adelphia on a massive scale” and used it as a “personal piggy bank. Rigas private funds sloshed with Adelphia’s in the same cashmanagement system. A U. S. judge set bail for the Rigases at $10 million apiece, secured by cash and property. Allegations against the Rigases range from big schemes to hide financial problems at the cable company to relatively small-scale thievery. For example, Timothy was accused of using a company jet for an African safari vacation in 2000. Adelphia’s lawsuit adds that John’s daughter, Ellen, used company planes to bring guests to her wedding to Peter Venetis, who became an Adelphia board member.

The couple’s cozy position enabled them to save $150,000 since 1998: They lived rent-free in two Adelphia-owned apartments on Manhattan’s swank Upper East Side, the lawsuit says. In less than four years, the Rigases “stole hundreds of millions of dollars, and through their fraud (and) caused losses to investors of more than $60 billion,” Deputy Attorney General Larry Thompson says. The defendants could face jail time in the criminal case. By filing a complaint instead of a full-fledged indictment, the grand juries weighing evidence in the case can remain empaneled to approve charges against others.

They have 10 days to indict those arrested, and 20 days to charge others. Also Wednesday, the Securities and Exchange Commission filed a civil lawsuit in U. S. District Court that’s similar to the criminal complaint, and includes a third Rigas son, James. The SEC would bar the defendants from serving any publicly owned company. It also wants them and Adelphia to pay restitution and fines. Adelphia said in a statement that the claim against it would “only have the effect of further penalizing the company’s stakeholders who were the victims of the Rigas’ improper conduct. The Adelphia cases are low-hanging fruit for prosecutors eager to show that they’re getting tough on white-collar criminals. “This is an old fashioned hand-in-the-till case that’s easier to prosecute than an esoteric fraud like Enron,” says Jack Coffee, who teaches securities law at Columbia University. “To prosecute Enron, you’re going to have to teach the jury an intermediate college course in accounting. ” Jacob Frenkel of Smith Gambrell and Russell agrees. “This could be sexiest of all the cases,” he says. “Here, you’re talking about corporate looting.

Every guilty disposition arising out of this indictment should become a show-andtell in all business schools as the antithesis of public company management and stewardship. ” Talking tough, getting tough The arrests came as House and Senate negotiators agreed on tough measures, including jail time, for executives convicted of fraud. And Wall Street was impressed after weeks of growing fearfulness about a possible tsunami of corporate scandals. The Dow Jones industrial average soared 489 points Wednesday. That’s the second biggest one-day point gain ever.

That contrasts with the 179-point drop on July 9, when President Bush called for a new era of corporate responsibility. The arrests aren’t “about Democrats and Republicans,” says Lynn Turner, former chief accountant of the SEC under President Clinton. “This is about investors, and they like what they’re seeing now. ” Even people who aren’t obsessed with stocks seem to like the idea of big shots getting a comeuppance. “We are angry, and we have every right to be angry,” says futurist and consumer expert Marian Salzman of Euro RSCG Worldwide. There’s a feeling that we need to kick out the evil-doers in the industry. ” But some might recoil at the image of a dignified old man being led before the cameras in handcuffs. “They’re actually going to look sympathetic,” says Robin Cohn, author of The PR Crisis Bible. “Why would you Reprinted with permission. All rights reser ved. Page 3 AS SEEN IN USA TODAY MONEY SECTION, THURSDAY, JULY 25, 2002 handcuff an old man? He’s not a murderer and a rapist. That’s not to say they aren’t crooks. But I think the public would rather see somebody they know in handcuffs — like (former Enron CEO) Ken Lay. And the incident could make the government look somewhat silly, she says. “I can’t imagine Saturday Night Live not doing anything with this. ” Corporate crime is in the spotlight these days. Last month, federal prosecutors arrested former ImClone CEO Sam Waksal on charges of illegal trading on inside information and obstruction of justice. Their investigation has expanded to include friends and family of Waksal, who also might have illegally traded on inside information about ImClone last December.

Investigators are trying to determine whether any inside information was passed to Waksal’s friend Martha Stewart, who sold her ImClone stock just before a Food and Drug Administration announcement, denying an application to market a cancer-fighting drug, drove the stock price down. In coming months, the Justice Department is expected to charge top executives of Enron and WorldCom with fraud. The department’s Enron Task Force won one court battle last month when a Houston jury found auditor Arthur Andersen criminally guilty of obstruction of justice.

It appears, though, that officials wanted to start off with a bang as they arrested the Rigases. “What’s unusual here is the level of detail included in the criminal complaint, and the number of defendants arrested simultaneously,” says former prosecutor Robert Mintz, now at McCarter & English. “Usually, the government builds a case slowly, with eventual defections among defendants. Here, it has leveled a wide range of allegations against upper management. That suggests that the government believes it has strong case and that they expect a rush to the prosecutor’s door by defendants who will vie to strike deals. The cases build on information that began to come out in late March. Adelphia disclosed then that the Rigases had used assets of the already debt-heavy company to secure loans to private, family-run partnerships. That borrowing is now put at $3. 1 billion. Independent directors forced the Rigases out of their executive positions and board seats, installing former banker Erland Kailbourne as interim CEO. When they investigated the company’s condition, they found and disclosed case after case in which the Rigases made no distinction between their personal funds and businesses and Adelphia’s.

Bad news gets worse But Adelphia was already in a tailspin. Investors lost confidence. Auditors refused to certify the company’s financial reports. And lenders cut it off, leading the company to miss interest and dividend payments. Among the charges leading to the Rigases’ arrest: u That the family began using Adelphia as collateral for private loans in 1996, even though the company “was one of the largest junk bond issuers in the United States. ” Investors weren’t told. u That the Rigases secretly inflated Adelphia’s cable TV subscription numbers to make investors think it was still growing at a healthy pace.

In 2000 they began to count subscribers from systems in Brazil and Venezuela, where Adelphia owns a minority stake. In 2001, Adelphia began adding customers who just ordered high-speed Internet services from the Rigases’ non-Adelphia systems. And earlier this year, they folded in people who ordered home security services from Adelphia. u That they used accounting legerdemain to disguise Adelphia’s actual expenses for digital decoder boxes. In 2001 the company claimed that it sold 525,000 boxes for $101 million to an unaudited Rigas-owned company that has no cable systems. That, starting in 2000, Adelphia spent $13 million to build a golf club on land mostly owned by John Rigas. u That in 1999, they told analysts that Adelphia could provide two-way communications to 50% of its customers. The real number was 35%. u And that the Rigases took more than $252 million from Adelphia to pay for margin calls on their purchases as the company’s stock price fell. Contributing: Michael McCarthy Reprinted with permission. All rights reser ved. Page 4 AS SEEN IN USA TODAY NEWS SECTION, FRIDAY, JUNE 28, 2002

WorldCom scandal brings subpoenas, condemnation Accounting rumors rattle Wall Street By Andrew Backover and Thor Valdmanis USA TODAY The accounting scandal that enveloped WorldCom reverberated through Wall Street and Washington on Thursday. u Congress subpoenaed top WorldCom executives. u President Bush and Treasury Secretary Paul O’Neill separately railed at corporate wrongdoers. u Unfounded rumors of accounting problems hit stocks of other companies. WorldCom on Tuesday revealed what could be one of the biggest accounting frauds ever. Company officials said $3. billion in expenses had been hidden in financial statements, inflating profits in 2001 and the first quarter of 2002. The Securities and Exchange Commission has since charged WorldCom with fraud. Bush, at an economic summit in Canada, said he is concerned about the economic impact from “some corporate leaders who have not upheld their responsibility. ” O’Neill, a former chief executive of Alcoa, said in an interview on ABC’s Good Morning America that the people responsible should be prosecuted to the full extent of the law. WorldCom has raised fears and rumors about more business accounting scandals.

Trading was halted for General Motors stock Thursday afternoon because of rumors of accounting irregularities. GM said they were untrue. Broadcast giant Clear Channel Communications denied it is under an SEC investigation, yet its stock fell almost 13%. The House Financial Services Committee set a July 8 hearing into the WorldCom case. Subpoenas went to: u Current WorldCom CEO John Sidgmore. u Former chief financial officer Scott Sullivan, who was fired this week. * Former WorldCom chief executive Bernie Ebbers, who was ousted in April and who owes WorldCom $408 million for personal loans. Salomon Smith Barney telecom analyst Jack Grubman. Once one of WorldCom’s most bullish supporters on Wall Street, he has been criticized for possible conflicts of interest. His firm collected millions of dollars in fees as a WorldCom financial adviser. WorldCom spokesman Brad Burns declined comment on whether Sidgmore would invoke his Fifth Amendment right not to testify. Ebbers and Sullivan couldn’t be reached. Salomon says Grubman “will fully cooperate. ” And there could be more investigations. The House Energy and Commerce Committee told WorldCom to turn over financial records by July 11.

WorldCom, strained by $30 billion in debt, will cut 17,000 jobs, or 21% of its workers, starting today. Workers will get severance pay, Burns says. Reprinted with permission. All rights reser ved. Page 5 AS SEEN IN USA TODAY MONEY SECTION, THURSDAY, MARCH 28, 2002 Andersen’s partners chart firm’s future today By Greg Farrell USA TODAY NEW YORK — Arthur Andersen’s U. S. partners will huddle in a nationwide teleconference today to determine the firm’s immediate future. At issue: who should lead the firm’s U. S. operations on an interim basis, and what steps Andersen should take to remain in business.

According to senior partners briefed on the meeting’s agenda, Andersen’s 1,700 U. S. par tners will decide whether to ask Paul Volcker to assume control of Andersen’s domestic operations. In February, Andersen CEO Joseph Berardino asked the former Federal Reserve chairman to head an oversight board dedicated to fixing the firm. A month later, a federal grand jur y indicted Andersen on a charge of obstruction of justice for its role in shredding Enron documents last October. Friday, in a last-ditch effort to stanch client depar tures and restore confidence in Andersen, Volcker offered to lead Andersen if its top par tners asked him.

On Tuesday, Berardino resigned. Managing partner C. E. Andrews will meet with Volcker today to discuss his takeover plan. While many obser vers think Volcker’s arrival could persuade the J ustice Depar tment to drop the indictment, some Andersen partners are wary of being the subject of an idealistic experiment in transforming the accounting industry. The partners will also discuss, and probably adopt, a “Renaissance” program aimed at returning Andersen to its roots as a highly regarded auditing firm.

This proposal, supported by Andrews, has gained support among older partners who want to stay and rebuild the firm. In other developments: u At federal cour t in Houston, Contributing: Thor Valdmanis J ustice Depar tment lawyers will respond to Andersen’s motion to halt further grand jury testimony prior to a May 6 trial. If Judge Melinda Harmon sides with Andersen, it will make the government’s obstruction of justice case against Andersen more difficult to win. u Andersen’s top global partners will meet Tuesday in London to pick an interim CEO. Andersen’s global operations continue to fragment. Its Japanese affiliate, Asahi & Co. , announced plans to merge this fall with rival KPMG. Andersen has also discussed selling affiliates to Deloitte Touche Tohmatsu. Wednesday night, Deloitte spokesman Matthew Batters suggested the firm was only interested in hiring individual Andersen partners and picking up clients leaving the firm. Reprinted with permission. All rights reser ved. Page 6 AS SEEN IN USA TODAY MONEY SECTION, TUESDAY, APRIL 9, 2002 Client-starved Arthur Andersen cuts 7,000 jobs

Long expected, layoffs offer first tangible sign of firm’s distress By Greg Farrell USA TODAY WorldCom has engaged in what could be one of the bArthur Andersen fired one partner in January for his role in shredding Enron documents. On Monday, the auditing firm announced it will lay off 7,000 of its 26,000 U. S. employees because of the consequences of that shredding. The job cuts at Andersen have been expected for weeks, ever since the Justice Department unsealed an indictment against the firm for its role in destroying its paperwork just as a Securities and Exchange Commission inquiry into Enron was about to begin.

Since the indictment, unsealed on March 14, scores of clients have deserted Andersen. As Andersen partners leave the firm for opportunities at other Big Five rivals, more clients are expected to migrate. So far, Andersen has weathered the crisis without filing for bankruptcy protection. But the layoffs, announced Monday, are the first tangible sign of financial distress at the firm. Of the 7,000 employees being let go, the vast majority are auditing staffers and managers, as well as administrative personnel. A small number of Andersen’s 1,700 U.

S. partners are also being let go. According to managing partner Grover Wray, most partners are still needed to serve Andersen’s remaining clients. Rather than hand out severance checks to laid-off employees, Wray says Andersen is implementing a program called “salary continuation. ” nder this plan, laid-off workers will continue to be paid for a certain number of weeks, depending on how long they’ve been with the firm. During that period, these employees will keep their benefits and be free to use their office space to search for new jobs. We are trying to treat our people with a level of dignity,” Wray says. In addition to client defections, Andersen also faces major liabilities for the role it played in Enron’s collapse into bankruptcy last fall. Plaintiffs lawyer Bill Lerach filed an expanded complaint Monday against Andersen and former Enron managers in federal court in Houston. But the expanded lawsuit, on behalf of a major Enron shareholder — the University of California system — adds nine Wall Street investment banks and two law firms to the list of defendants.

Representatives from the banks — JP Morgan Chase, Citigroup, CS First Boston, Canadian Imperial Bank of Commerce, Bank of America, Merrill Lynch, Deutsche Bank, Barclays and Lehman Bros. — either declined comment on Monday or denied the complaint’s allegations of complicity in Enron’s collapse. Notably, Lerach’s complaint leaves out two key players in Enron’s demise — Michael Kopper, who headed some of the special purpose entities that kept Enron liabilities off the company’s balance sheet, and Ben Glisan, the former Enron treasurer accused of facilitating some of Enron’s dubious accounting practices.

Glisan is now believed to be cooperating with the Justice Department probe of Enron’s activities. Lerach would not comment on whether the pair supplied his investigators with information. But Larry Finder, a former U. S. Attorney now in private practice in Houston, doubts either is helping Lerach. Finder says that if either of them is providing information, it would be to the Justice Department first, where they face criminal liability. And the Justice Department wouldn’t necessarily welcome a decision by a witness to cooperate in civil litigation. Reprinted with permission.

All rights reser ved. Page 7 AS SEEN IN USA TODAY MONEY SECTION, TUESDAY, JULY 9, 2002 Dominoes hit WorldCom partners, clients Unpleasant ripple effect also spreads to vendors, charities, sponsored events By Michelle Kessler USA TODAY The WB television network, PGA Tour and Texas Parks and Wildlife service aren’t in telecom, but they’ve already been hurt by the WorldCom scandal. That’s because they all did business with WorldCom, as did thousands of other companies. Now they’re all trying to figure out where they stand with the struggling giant — and coming up with backup plans. This is not going to be pleasant for a lot of companies,” says Kerry Adler, CEO of WorldCom customer Webhelp. Among those affected: u V e n d o r s . WorldCom repor ted that its capital expenditures dropped 42% to about $1. 3 billion in the first quarter from a year ago, yet it remained a big customer for many telecom equipment makers. While it’s unclear how accurate WorldCom’s numbers are because of the accounting scandal, what is clear is that its spending has slowed. The hardest hit is Juniper Networks, says Banc of America Securities analyst Christopher Crespi.

WorldCom provided about 10% of Juniper’s annual revenue, including “less than $7 million” this quarter, Juniper says. If WorldCom stops buying, that could dampen Juniper’s forecast for the year. “It could easily subtract $50 million or $60 million off their top line,” says Soundview Technology analyst Ryan Molloy. Customers Cisco Systems, Nortel Networks and Redback Networks could also get stung, but WorldCom accounts for just a small percentage of total sales, says U. S. Bancorp Piper Jaffray analyst Edward Jackson.

All telecom equipment makers could be affected in coming months, even if they didn’t do business directly with WorldCom, analysts say. WorldCom was known for buying the latest, most high-tech equipment, forcing competitors to do the same if they wanted to keep up. With WorldCom out of the picture, spending could lag. u Contractors. In 1999, when consulting firm EDS signed an 11-year, $6. 4 billion contract to provide technology services to WorldCom, telecom was a growing industry. EDS is stuck with the deal and a related pledge to buy $6 billion worth of telecom services during that period.

Now, EDS says it no longer wants to spend that much with WorldCom. It’s in talks to work out a deal. RMH Teleservices has a five-year contract to provide customer service for WorldCom’s MCI division. That accounted for 19. 5% of RMH’s revenue from October to March. “While we cannot predict the future . . . we expect to continue to provide these services for MCI,” RMH leader John Fellows said in a statement. u Business partners. Last year, WorldCom pledged to buy millions of dollars in advertising from AOL Time Warner over several years. The exact terms were not disclosed.

Now, that deal could be off, meaning fewer ads for Time magazine, cable’s TBS and the WB television network. WorldCom also provides service to the company’s AOL Internet division. AOL says it has backup providers in case WorldCom service is disrupted. Satellite cable provider DirecTV is holding meetings to determine how to handle its 4-month-old partnership with WorldCom. WorldCom was to provide the underlying network for part of DirecTV’s high-speed Internet access service. Similar questions are being asked at Internet Security Systems, a software company that agreed in May to provide security services to WorldCom customers.

The value of the two deals was not disclosed. * Sponsored events. Last week’s Fourth of July fireworks Reprinted with permission. All rights reser ved. Page 8 AS SEEN IN USA TODAY MONEY SECTION, TUESDAY, JULY 9, 2002 celebration on the Mall in Washington was supposed to be paid for by WorldCom, which has sponsored part of the festivities for five years. But the company pulled out. The National Parks Foundation scrambled to find new funding from AT. Also in Washington, the MCI Center arena might soon be looking for a new sponsor and name. The WorldCom Classic, an annual PGA Tour stop in Hilton Head, S.

C. , is in the same situation. u Charities. Each month, about 10,000 teachers receive free training in math, science and the arts from the MarcoPolo project, which is sponsored by WorldCom’s charity arm. Now, program administrators and partners — including the National Geographic Society, American Association for the Advancement of Science and The Kennedy Center — are tr ying to make the proj ect independent of the struggling company. Last week, they pulled WorldCom’s logos from the MarcoPolo Web site. They’re applying to make it a “public charity,” says Caleb Schutz, president of WorldCom Foundation. There’s a lot to lose if the company . . . pulled the plug. ” For now, WorldCom still funds MarcoPolo. u Customers. The Texas Parks and Wildlife department spent last week printing temporary fishing and hunting licenses as a quick contingency plan. The department relies on a WorldCom computer network to transmit license information to 2,500 vendors. “We certainly have to consider what might happen to our contract,” says Suzy Whittenton, a wildlife director. Webhelp, which outsources customer service for companies such as Microsoft, uses WorldCom to connect its overseas technology specialists with help-seekers in the USA.

Because of a contract, Webhelp can’t switch providers but was forced to get a backup provider in case WorldCom fails. That means twice the bills. “It’s expensive, and at the end of the day, our clients pay for that,” says CEO Adler. Reprinted with permission. All rights reser ved. Page 9 Behind the Story: A Reporter’s Notebook The collapse of Enron and WorldCom, precipitated by revelations that both companies had misrepresented how profitable they were, threatens the health of the the nation’s stock markets.

If investors can’t believe earnings numbers issued by the biggest companies in the USA, they won’t put their money into the market. And when investors take their money out of the market, as they’ve been doing for more than two years, businesses suffer. They can’t invest, they can’t grow as quickly and they can’t afford to hire more people. Greg Farrell Money reporter USA TODAY As the Enron and WorldCom examples demonstrate, there’s no room in a public marketplace for “creative accounting. ” Once a few cheaters are revealed, the integrity of the entire marketplace is open to question.

Greg Farrell is a reporter in USA TODAY’s Money section. He writes about fraud and white collar crime. In the past year, he has been reporting on Enron, Arthur Andersen, Martha Stewart and the Securities and Exchange Commission. Page 10 For discussion ADELPHIA PLANS TO FILE CHAPTER 11; ADELPHIA FOUNDER, 2 SONS, 2 OTHERS ARRESTED IN FRAUD (LIEBERMAN AND FARRELL) 1. Adelphia Corporation was the sixth largest cable company at the time of its collapse. The company was accused of a number of fraudulent activities including the manipulation of its financial reports.

Specifically, the firm was accused of misreporting its cable subscription numbers in order to give the impression that the firm was growing faster than it was. For example, they counted subscribers from systems in Brazil and Venezuela where the company owns a minority stake in the company’s total subscribers. They also counted customers who ordered high-speed Internet services from companies owned by the Rigas family and clients that ordered home security services from Adelphia. Why would Adelphia’s management engage in what appears to be blatant misrepresentation of their number of subscribers? 2.

When CEO John Regas of Adelphia was led away in handcuffs on racketeering charges, some complained that the justice department was making too public a display of its tough stance on white-collar crime. This type of treatment is normally associated with murderers and rapists. How do you feel about the importance of making a public spectacle of white-collar criminals? 3. The Adelphia lawsuit stated that the Rigases “used their domination and control of Adelphia, and their isolation from the scrutiny of the outside world, to engage in one of the largest schemes of self-dealing and financial wrong doing in American corporate history. Financial economists refer to this type of behavior as an agency cost since corporate executives are the agents of the firm’s owners or principals. How can stockholders protect themselves from the potential for self-dealing by corporate executives? ANDERSEN’S PARTNERS CHART FIRM’S FUTURE TODAY (FARRELL) 1. Arthur Andersen was once the premier public accounting firm but a string of high profile financial reporting disasters that culminated with the failure of Enron caused the demise of the once proud firm. Andersen’s failure highlights the fact that the principal asset of a public accounting firm is the firm’s reputation.

Once the firm’s “credibility” is challenged its clients are no longer willing to pay for its auditing services. What is it that a public accounting firm does that requires it to have a sterling reputation for honesty? 2. Anderson’s initial lay off was 7,000 of its 26,000 employees before the firm completely collapsed and all employees lost their jobs. However, all of Andersen’s clients still needed auditing services so in many instances the employees continued to audit the same firms they had audited for Andersen, just for another auditing firm. If the employees just moved from one firm to another, was there really a layoff?

Did Andersen employees really suffer from the demise of Arthur Andersen? Isn’t this also true of the Adelphia, Enron, and WorldCom employees? For more information, log on to http://www. usatodaycollege. com Page 11 Future implications WORLDCOM SCANDAL BRINGS SUBPOENAS, CONDEMNATION (BACKOVER AND VALDMANIS); DOMINOS HIT WORLDCOM PARTNERS, CLIENTS (KESSLER) The financial press coverage of the failures of Adelphia, Enron, and WorldCom have focused principally on stockholders who have lost everything they invested and creditors who stand to lose a portion of what they have loaned the company.

However, other important consequences of these high profile failures are often overlooked including: (1) the financial and emotional losses suffered by employees who lose their jobs and face the prospect of a lengthy period of unemployment and possibly the dislocation costs of moving to another community to find work, (2) the local community public services and school systems who lose valuable tax revenues, and (3) the budget crises created for local charities and the arts that depend on corporate contributions for their continued survival. Bankruptcy courts focus on the contractual obligations of the firm to creditors and suppliers.

It has been argued that the corporation is a “guest” of the society and as such has obligations to the entire web of stakeholders that have a financial stake in the firm’s survival. Should the claims of these “silent stakeholders” also be considered when a firm fails? About The Expert John D. Martin,Ph. D. Professor of Finance Carr P. Collins Chair Hankamer School of Business Baylor University From 1980 until 1998 John Martin taught at the University of Texas at Austin where he was the Margaret and Eugene McDermott Centennial Professor of Finance. Currently holding the Carr P.

Collins Chair in Finance at Baylor University in Waco, Dr. Martin teaches corporate finance and financial modeling. His research interests are in corporate governance, the evaluation of firm performance, and the design of incentive compensation programs. Dr. Martin publishes widely in both academic and professional journals. Included among his academic publications are papers in the Journal of Financial Economics, Journal of Finance, Journal of Monetary Economics, Journal of Financial and Quantitative Analysis, Financial Management, and Management Science.

Professional publications include papers in Directors and Boards, Financial Analysts’ Journal, Journal of Portfolio Management, and Bank of America Journal of Applied Corporate Finance. u Dr. Martin co-authors several books including the following: u Financial Management, 9th edition (Prentice Hall Publishing Company) u Foundations of Finance, 4th Edition (Prentice Hall Publishing Company) u Financial Analysis (McGraw Hill Publishing Company) u The Theory of Finance (Dryden Press) Dr.

Martin consults with a number of firms including Citgo, Hewlett Packard, Shell Chemical, Shell E, Texas Instruments and The Associates. Additional resources Working Paper Series — Financial Engineering, Corporate Governance, and the Collapse of Enron http://www. be. udel. edu/ccg/research_files/CCGWP2002-1. pdf For more information, log on to http://www. usatodaycollege. com Page 12

Definition Consumer awareness is making the consumer aware of his/her rights. Consumer awareness it a marketing term. It means that consumers note or are aware of  products or services, its characteristics and the other marketing P’s (place to buy, price,and promotion). Usually commercials and ads increase consumer awareness, as well as “word of mouth”(a comment from someone you know about a product or service).

1. Need : we need it so we will not be misled by producers,it explains if what we buy is worth toour money.. nd not harmful to us and to environment . Many people are ignorant of their rights to get protected against the exploitation by somany others. So when there is a forum for such redress of grievances there seems to beno such exploitation by many; and becomes a rare one. So in order to get a clear pictureof the level of exploitation of consumers, the awareness is required.
2. Role of producers proper labeling, full information, health warnings, handling information, expiration date,etc. eep to requirements, norms, standards label products according requirements, providing true facts They have to produce and deliver the goods/services of right qualityat right price at right time at right place at right quantity with right faceIf they are providing a service they should carry it out with due skill and care. They mustalso make sure that any materials they provide as part of this service are fit for the purpose. It is also illegal for a supplier to cut off, or threaten to cut off, supply to areseller (wholesale or retail) because they have been discounting goods or advertisingdiscounts below prices set by the supplier.

Some of the common methods of exploitation are:

1. Under weight and under measurements –not measured or weighed correctly.
2. Substandard Quality – defective home appliances and medicines beyond expirydate
3. High prices—charging above the retail price
4. Duplicate Articles—selling fake items in the name of the original
5. Adulteration and Impurity—is done to get higher profits
6. Lack of safety Devices—absence of inbuilt safe guards in appliances
7. Artificial Scarcity—hoarding and black marketing
8. False and Incomplete Information—misleading information on quality, durability,and safety.
9. Unsatisfactory after sales Service—high cost items like electronics and carsrequire constant and regular service.
10. Rough behavior and Undue conditions—harassment in getting LPG connection or a telephone connection.

Factors causing exploitation of Consumers:

1. Limited Information— providing full and correct information will help in thechoice
2. Limited Supplies— when goods and services are in short supply then price shootsup
3. Limited Competition. — single producer may manipulate the market in terms of  price and stocks.
4.  Low Literacy—i lliteracy leads to exploitation.

Hence Consumer Awareness isessential. Rise of consumer Awareness Kautilya was one of the earliest to write in his Arthashastra about the need for Consumer awareness and protection. With the growth of private sector there is a greater need for discipline and regulation of the market. Consumers must be aware of the sale and purchase of goods, the health and security aspects also. Ensuring the safety of food itemssold in the market is essential these days. Legal measures for consumer safety and consumer awareness must be uniform, andtransparent in terms of prices, quality of goods, and stocks.

Consumers must have thetools to combat malpractices and protect their rights. Rights and Duties of Consumers As codified under the Indian laws the consumers have the following rights:

1. Right to safety—to protect against hazardous goods.
2. Right to be informed—about price, quality, purity.
3. Right to choose—access to a variety of goods and services at competitive prices.
4. Right to be heard—consumers interest and welfare must be taken care of.
5. Right to seek redressal—protection against unfair trade practicesand settlinggenuine grievances.
6. Right to consumer education.

Knowledge about goods and issues related toconsumers.

Duties:

1. Get a bill for every important purchase and also the Warranty card
2. Check the ISI mark or Agmark on the goods.
3. Form consumer awareness groups4. Make a complaint on genuine grievances.
4. Consumers must know to exercise their rights.

A separate department of consumer affairs wasset up at the state and central government. A three tier system of consumer courts at the National, State and District levels were set up. These agencies have done good work byhandling lakhs of cases.

Public Distribution System .

To protect the poor from price rise and black marketing the government food security tothe poor by supplying essentials through the ration or Fair price shops.

Standardisation of Products .

These are done to assure the quality of products.

The ISI stamp on goods is placed by theBureau of Indian standards. This caters to industrial and consumer goods. These goodscan be trusted to confirm to specific standards. Agmark is meant for Agricultural products. At the International level the International Organization for Standardization (ISO) locatedin Geneva sets common standards. The FAO and WHO provide food standards. 4. Legal formalities for filing a complaint .The complaint can be written on plain paper. The supporting documents like the warrantycard must be attached. A lawyer is not required. We can argue our case

• Discuss the concept of corporate veil. Define.

Prior to the inception of the ‘corporate entity’, a partner in a partnership was held personally liable for all the debts of the company. As the demand for huge capital investment gained momentum and individual investors were reluctant to invest as the risk involved in undertaking virtually all the debt of the business, a new form of business called ‘corporation’ was born.  A corporation is a legal entity, an artificial ‘person’ created by the law. It is legally entitled to many of the rights, obligations, responsibilities and privileges as an individual.

In spite of the corporation being a ‘pretended’ or fictitious person, in the eyes of law it as an entity different from the shareholders and controllers who won and run the corporation. The concept of corporate veil implies that the law recognizes difference between the corporation and its shareholders by recognizing that a kind of ‘veil’ separates the corporation on one side and its shareholders and controllers on the other side, meaning thereby that the owners of the business normally do not hold personal liability for any of the corporation’s liabilities or obligations in excess of their investment in the corporation.

As a reason of it, as an acceptable rule, creditors and other claimants should not go at the back of the corporate veil to reach for the personal assets of the shareholders. The reason for this concept of limited liability of the shareholders of a corporation has its logic on reasonable economic policy. This kind of structure also helps in increasing enterprise and entrepreneurship, and thus competition. Raising of funds and public ownership of corporations is also greatly facilitated. All these benefits finally culminate into benefit to the economy and the consumer.

Thus the term ‘corporate veil’ may be defined as a concept that implies separation of entity, liabilities, rights and obligations between a shareholder and a corporation.

• Does the above help or harm the society? Explain.

The concept of corporate veil stems from economic sense. It has come into being in order to facilitate huge investments and big ventures. There are many advantages of keeping the corporation and its owners separate entities in respect of rights and liabilities and that is why it exists and is acceptable by the public.

As a shareholder does not put an amount of investment in a corporation that is as substantial as a partner puts in the partnership, he normally does not have the incentive to monitor on the daily business of the corporation. The corporation may be run by a group of professionals who have expertise and experience in running a business and who report to the directors who, in turn, are appointed to take care of and enhance the interests of the individual shareholders who have contributed to the capital of the corporation.

Other business forms like partnerships would not find it feasible to venture into businesses where substantial amount of investment is needed. The corporate form of business allows pooling of small investments from various shareholders and makes huge investments possible. Simultaneously, the concept of corporate veil limits the individual shareholders’ liabilities only to the extent of investment made by them.

Limited liability also implies reduction of risk from the point of view of an investor. The investor makes small investments in different kind of businesses and thus creates what is called a ‘portfolio’ of investments for him. If one of the businesses where he has invested is not run properly, what he is going to lose is that part of his total investment which is invested in that particular business.

However, the veil of separate corporate entity also poses some problems, chiefly to the creditors of the corporation. If the company goes bankrupt, the shareholders can guard themselves behind the corporate veil and the creditors can not ask the shareholders to pay the company’s debt from their private assets. Thus in such cases, the owners and managers of the corporation are protected while the creditors and other claimants are on the losing side.

Further, given that the managers and owners of the corporation are safe behind the corporate veil, they tend to take risky decisions sometimes. They may not take ‘propriety’ decisions which otherwise any owner of business who has his business at stake would take. However, this is what corporate governance is all about and this disadvantage is seriously being dealt with.

The concept of corporate in itself is not harmful to the society. In fact, it is beneficial to the economic health of the society as explained in the previous page.

However, when some wrongful act is done by the corporation, rather, the owners or managers of the corporation, they tend to escape their responsibility by taking undue advantage of the corporate veil. They try to prove that it was the corporation who had committed the wrongdoing and not the owners themselves personally and thus the corporation should be punished and not them personally.

However, in such cases, the courts ‘pierce’ the corporate veil for the purpose of finding the owners or managers liable for the misconduct committed on behalf of the corporation. The court inspects what is going on within the corporation for the purpose of making a judgment with regard to the actions or association of the owners and managers, in place of plainly assuming distinctness of the corporation from its owners and managers.

• Discuss if whether corporate veil was pierced in the book’s case. If so why?

The question in case of Buffalo Creek Disaster was whether to hold the owner of the mine i.e. the Buffalo Mining Co. or the ultimate entity behind the act i.e. Pittston liable for damages to the survivors of the disaster. Pittston was the sole stockholder of the Buffalo Mining Co. Stern argued that the Buffalo Mining Co. was operated just as a division of Pittston. He also quoted Mr. Reineke, the president of Pittston, telling New York Times that the responsibility is Pittston’s in the long range. Pittston’s president also testified that Buffalo Mining Co.’s vice-president was acting as Pittston’s agent.

To be able to recover against the parent and to preserve diversity jurisdiction, only Pittston was named, on a piercing the corporate veil theory.

Moreover, there were apprehensions in Stern’s mind that the coal companies had more influence within the West Virginia courts than they do within the less political federal courts. If he sues Buffalo Mining Co. which is a West Virginia corporation, he will have to sue only before a West Virginia State Court which had the possibility of undermining the interest of the plaintiffs. On the other hand, if they sue Pittston which is a New York based company he would be able to do it in a Federal Court.

To sue Pittston, it was necessary to pierce the corporate veil. It was necessary to show the Court that who operated Buffalo Mining Co. were not independent management team of the corporation but were the representatives of the ultimate sole stockholder of the corporation i.e. Pittston and thus the ultimate parent company was responsible for the act of the subsidiary.

• Take the steps of the civil suit and relate them to the books case.

Steps in a civil suit

1. Filings of complaints by the plaintiff – Complaints were filed against Pittston in the name of individuals who had suffered physically, financially and of course emotionally and mentally due to the disaster. The Buffalo Mining Co. started to offer immediate but rather small cash payments as compensation primarily for loss of property but the residents of Buffalo Creek wanted to obtain recovery for communal and psychological losses suffered by them in the disaster.
2. Service of the complaint on all defendants – In this case the complaint was served to Pittston (the parent company) instead of The Buffalo Mining Co. who owned the mine. The former was a major coal company and effectively owned the dam.
3. Answer or demurrer by the defendant – Pittston responded with explanations of the complaints. They argued that it was not a proper party to the action and it was the Buffalo Mining Co. and not Pittston who owned and therefore responsible for the coal mine. Additionally, the defendant sought to challenge the claim that the plaintiffs have suffered psychological injury. They sought a “more definite statement” of the said complaint of psychological injury.
4. Cross-complaint or counterclaim filed and served by a defendant – No such cross- complaint or counterclaim was filed by Pittston.
5. Discovery of the facts (informal and formal interrogatories, depositions, disclosure of experts, requests for admissions, etc.) – The Plaintiffs were allowed to depose Pittston’s officials and learn all the facts. In addition to that, the defendants also undertook a comprehensive program of summary. Due to extensive efforts by both the parties to the suit, practically all the mechanisms of Federal Rules were used.
6. Motions to the court by any party to the lawsuit (either to restrict the extent of discovery, compel compliance with discovery requests or to resolve issues based upon evidence revealed during discovery) – The judge ruled that Pittston’s motion to dismiss the case would not be entertained for the time being till the plaintiffs were given chance of full discovery on all the issues in the case. Also, after the discovery program was completed, Pittston filed a summary judgment motion. They argued that majority of plaintiffs did not suffer any physical injury due to the flood waters and thus under the laws of West Virginia they cannot claim damages for psychological suffering. The motion too was defeated and the emotional stress that people of Buffalo Creek suffered was recognized.
7. Pretrial proceedings such as case management conferences, settlement conferences, referral to mediation or arbitration, preliminary motions to allow or exclude evidence at trial, pretrial briefs (statements of the facts and applicable law covering the issues to be presented at trial) and jury instructions (if required).
8. Rendering of a judgment by the judge or jury – The plaintiffs and the defendants agreed to end the suit without a trial and thus agreed to a settlement. Thus nearly two years after the date of the disaster, the plaintiffs were able to obtain a settlement of US$ 13.5 million partly for the property losses but significantly for the “psychic impairment”.
9. Post trial motions such as motion for mistrial or motion for reconsideration – No such motions were filed by any of the parties to the suit.
10. Appeal of the judgment – As the case was settled out of court, no appeal of the judgment was filed.

References

1. Litigation – Civil Law Suits – Steps In. Retrieved April 28, 2007. http://law.freeadvice.com/litigation/civil_law_suits/lawsuit_steps.htm
2. “JUS” d’orange, the Buffalo Creek Disaster, A Book by Gerald Stern. Retrieved April 28, 2007 http://members.fortunecity.com/jusdo/id61.htm
3. Arnold ; Porter LLP – Articles: Pro Bono Rebuilding a Community: The Buffalo Creek Case – J Bradway Butler Retrieved April 29, 2007 http://www.arnoldporter.com/publications_articles.cfm?practice_ID=91;publication_id=990

Julia B 304

Task C: Organisational requirements for dealing with complaints

Company should have Concerns and Complaints Policy in place. The main aim of it is to ensure that complaints procedure is properly and effectively implemented and that service users feel confident that their complaints and worries are listened to and acted upon promptly and fairly.

When dealing with complaints company are to ensure that: service users and their representatives, carers and visitors are aware of how to complain and that company provides easy to use opportunities for them to register complaints a named person is responsible for administartion of the procedure every written complaint is acknowledged within two working days investigations into written complaints are held within 28 days all complaints are responded to in writting by company omplaints are dealt with promptly, fairly and sensitively with due regard to the upset and worry that they cause to both staff and service users Company believes that complaints are best dealt with on a local level between the complainant and the home, but if either of the parties is not satisfied by a local process the case should be reffered to the Care Quality Commission. Legal requirements for dealing with complaints Legal requirement for dealing with complaints is to follow Health and Social Care Act 2010 and National Minimum Standards – complaint policy.

Related article:

These standards require care home managers to have clear procedures that enable service users to make their views, concerns and worries known, and that reassure them that appropriate action will be taken. Policies and procedures for dealing with suspicion or evidence of physical, financial or material, psychological or sexual abuse, neglect, self harm or degrading behaviour should also be put in place. Standards requiers that every care home: have clear and effective complaints procedure, which includes the stage of, and ime scales, for the process and that service users know how and to whom complain staff listen and act on the views and concerns of service users and others before they develop into formal complaints complaint procedure is explained to service users in appropriate language and format all complaints are responded within 28 days servise users, if they wish, can make a complaint one-to-one with a staff member or independent advocacy/interpreters of their choice service users and their families are assured they will not be victimised for making a complaint a record of raised complaints is kept and checked at least three-monthly

Steinberg v The Chicago Medical School Appellate Court of Illinois, First District, Third Division. Mejda, P. J. , and McGloon, J DEMPSEY, Justice: In December 1973 the plaintiff, Robert Steinberg, applied for admission to the defendant, the Chicago Medical School, as a first-year student for the academic year 1974–75 and paid an application fee of $15.

The Chicago Medical School is a private, not-for-profit educational institution, incorporated in the State of Illinois. His application for admission was rejected and Steinberg filed a class action against the school, claiming that it had failed to evaluate his application and those of other applicants according to the academic entrance criteria printed in the school’s bulletin.

Specifically, his complaint alleged that the school’s decision to accept or reject a particular applicant for the first-year class was primarily based on such nonacademic considerations as the *806 prospective student’s familial relationship to members of the school’s faculty and to members of its board of trustees, and the ability of the applicant or his family to pledge or make payment of large sums of money to the school.

The complaint further alleged that by using such unpublished criteria to evaluate applicants the school had breached the contract, which Steinberg contended was created when the school accepted his application fee. In his prayer for relief Steinberg sought an injunction against the school prohibiting the continuation of such admission practices, and an accounting of all application fees, donations, contributions and other sums of money collected by the school from its applicants during a ten-year period prior to the filing of his suit.

He did not ask the court to direct the school to admit him, to review his application or to return his fee. The defendant filed a motion to dismiss, arguing that the complaint failed to state a cause of action because no contract came into existence during its transaction with Steinberg inasmuch as the school’s informational publication did not constitute a valid offer. The trial court sustained the motion to dismiss and Steinberg appeals from this order. The 1974–75 bulletin of the school, which was distributed to prospective students, epresented that the following criteria would be used by the school in determining whether applicants would be accepted as first-year medical students: ‘Students are selected on the basis of scholarship, character, and motivation without regard to race, creed, or sex. The student’s potential for the study and practice of medicine will be evaluated on the basis of academic achievement, Medical College Admission Test results, personal appraisals by a pre-professional advisory committee or individual instructors, and the personal interview, if requested by the Committee on Admissions. In his four-count complaint Steinberg alleged, in addition to his claim that the school breached its contract (Count I), that the school’s practice of using selection standards which were not disclosed in the school’s informational brochure, constituted a violation of the Consumer Fraud and Deceptive Business Practices Act (Ill. Rev. Stat. , **589 1973, ch. 121 1/2, par. 261, et seq. ) and of the Uniform Deceptive Trade Practices Act (Ill. Rev. Stat. , 1973, ch. 121 1/2, par. 311, et seq. ) (Count II); fraud (Count III), and unjust enrichment (Count IV).

Since we are in accord with the trial court’s decision that the complaint did not state a cause of action under Counts II, III and IV, we shall limit our discussion to Count I. A contract is an agreement between competent parties, based upon a consideration sufficient in law, to do or not do a particular thing. It is a promise or a set of promises for the breach of which the law gives a *807 remedy, or the performance of which the law in some way recognizes as a duty. Rynearson v. Odin-Svenson Development Corp. (1969), 108 Ill. App. 2d 125, 246 N. E. 2d 823.

A contract’s essential requirements are: competent parties, valid subject matter, legal consideration, mutuality of obligation and mutuality of agreement. Generally, parties may contract in any situation where there is no legal prohibition, since the law acts by restraint and not by conferring rights. Berry v. De Bruyn (1898), 77 Ill. App. 359. However, it is basic contract law that in order for a contract to be binding the terms of the contract must be reasonably certain and definite. Kraftco Corp v. Koblus (1971), 1 Ill. App. 3d 635, 274 N. E. 2d 153. A contract, in order to be legally binding, must be based on consideration. Wickstrom v.

Vern E. Alden Co. (1968), 99 Ill. App. 2d 254, 240 N. E. 2d 401. Consideration has been defined to consist of some right, interest, profit or benefit accruing to one party or some forbearance, disadvantage, detriment, loss or responsibility given, suffered or undertaken by the other. Riddle v. La Salle National Bank (1962), 34 Ill. App. 2d 116, 180 N. E. 2d 719. Money its a valuable consideration and its transfer or payment or promises to pay it or the benefit from the right to its use, will support a contract. In forming a contract, it is required that both parties assent to the same thing in the same sense (La Salle National Bank v.

International Limited (1970), 129 Ill. App. 2d 381, 263 N. E. 2d 506) and that their minds meet on the essential terms and conditions. Richton v. Farina (1973), 14 Ill. App. 3d 697, 303 N. E. 2d 218. Furthermore, the mutual consent essential to the formation of a contract, must be gathered from the language employed by the parties or manifested by their words or acts. The intention of the parties gives character to the transaction and if either party contracts in good faith he is entitled to the benefit of his contract no matter what may have been the secret purpose or intention of the other party.

Kelly v. Williams (1911), 162 Ill. App. 571. Steinberg contends that the Chicago Medical School’s informational brochure constituted an invitation to make an offer; that his subsequent application and the submission of his $15 fee to the school amounted to an offer; that the school’s voluntary reception of his fee constituted an acceptance and because of these events a contract was created between the school and himself.

He contends that the school was duty bound under the terms of the contract to evaluate his application according to its stated standards and that the deviation from these standards not only breached the contract, but amounted to an arbitrary selection which constituted a violation of due process and equal protection.

He concludes that such a breach did in fact take place each and every time during the past ten years that the school evaluated applicants according to their *808 relationship to the school’s faculty members or members of its board of trustees, or in accordance with their ability to make or pledge large sums of money to the school. Finally, he asserts that he is a member and a proper representative of the class that has been damaged by the school’s practice. The school counters that no contract came into being because informational brochures, such as its bulletin, do not constitute **590 offers, but are onstrued by the courts to be general proposals to consider, examine and negotiate. The school points out that this doctrine has been specifically applied in Illinois to university informational publications. People ex rel. Tinkoff v. Northwestern University (1947), 333 Ill. App. 224, 77 N. E. 2d 345. In Tinkoff, a rejected applicant sued to force Northwestern to admit him, claiming that the university had violated the contract that arose when he demonstrated that he had met the school’s academic entrance requirements and had submitted his application and fee.

His primary contention was that the school’s brochure was an offer and that his completion of the acts, required by the bulletin for application, constituted his acceptance. In rejecting this argument, the court stated: ‘Plaintiffs complain Tinkoff, Jr. was denied the right to contract as guaranteed by the Illinois and United States constitutions. We need only say that he had no right to contract with the University. His right to contract for and pursue an education is limited by the right which the University has under its charter.

We see no merit to plaintiff’s contention that the rules and regulations were an offer of contract and his compliance therewith and acceptance giving rise to a binding contract. The wording of the bulletin required further action by the University in admitting Tinkoff, Jr. before a contract between them would arise. ‘ The court based its holding on the fact that Northwestern, as a private educational institution, had reserved in its State charter the right to reject any application for any reason it deemed adequate.

Although the facts of the Tinkoff case are similar to the present situation, we believe that the defendant’s reliance upon it is misplaced. First, Steinberg is not claiming that his submission of the application and the $15 constituted an acceptance by him; he is merely maintaining that it was an offer, which required the subsequent acceptance of the school to create a contract. Also, it is obvious that his assertion that the bulletin of the school only amounted to an invitation to make an offer, is consistent with the prevailing law and the school’s own position.

More importantly, Steinberg is not requesting that the school be ordered to admit him as a student, pursuant to the contract, but only that the school be prohibited from misleading prospective students by stating *809 in its informational literature, evaluation standards that are not subsequently used in the selection of students. Furthermore, the school does not allege, nor did it demonstrate by way of its bulletin or its charter that it had reserved the right to reject any applicant for any reason. It only stated certain narrow standards by which each and every applicant was to be evaluated.

In relation to the preceding argument, the school also maintains that the $15 application fee did not amount to a legal consideration, but only constituted a pre-contracting expense. Consequently, the school argues that as a matter of law the $15 is not recoverable as damage even if a contract was eventually entered into and breached. Chicago Coliseum Club v. Dempsey (1932), 265 Ill. App. 542. In the Dempsey case, boxing promoters incurred expenses and entered into several contracts that were necessary for the staging of a heavyweight championship fight.

However, most of the contracts were entered into prior to signing Dempsey (the then heavywright champion) for the event. For example, approximately a week prior to Dempsey’s signing, the plaintiff entered into a contract with a fighter named Wills, who was to be the champion’s opponent. Dempsey signed a contract but later breached it, and the fight promoters sued him for expenses incurred by them under the Wills contract and under other contracts **591 which had been entered into by them in anticipation of the champion signing a contract and fulfilling his obligation thereunder.

The court stated: ‘The general rule is that in an action for a breach of contract a party can recover only on damages which naturally flow from and are the result of the act complained of. . . . The Wills contract was entered into prior to the contract with the defendant and was not made contingent upon the plaintiff’s obtaining a similar agreement with the defendant Dempsey. Under the circumstances the plaintiff speculated as to the result of his efforts to procure the Dempsey contract. . . Any obligations assumed by the plaintiff prior to that time (of contracting with Mr. Dempsey) are not chargeable to the defendant. ‘ The defendant’s reliance on the Dempsey case is also misplaced. Although it is a leading case for the proposition that expenses incurred during preliminary negotiations to procure a contract are not recoverable as damages, it has no relevance to the allegations of Steinberg’s complaint. The defendant misconceives and misstates his position when it asserts that the Tinkoff and Dempsey cases ‘are completely ispositive of plaintiff’s argument that the informational brochure constituted an ‘offer’ to evaluate applicants solely on the basis of criteria set forth therein, and the submission of an application with the $15. 00 fee the ‘consideration’ *810 binding that offer and effecting a consummated contract. ‘ He does not claim that the brochure was an offer and his submission of a fee an acceptance of that offer. To repeat, what he does claim is that the brochure was an invitation to make an offer; that his response was an offer, and that the school’s retention of his fee was an acceptance of that offer.

We agree with Steinberg’s position. We believe that he and the school entered into an enforceable contract; that the school’s obligation under the contract was stated in the school’s bulletin in a definitive the school’s stated criteria. application fee–a valuable consideration–the school bound itself to fulfill its promises. Steinberg accepted the school’s promises in good faith and he was entitled to have his application judged according to the school’s stated creiteria.

The school argues that he should not be allowed to recover because his complaint did not state a causal connection between the rejection of his application and the school’s alleged use of unpublished evaluation criteria. It points out that there is an equal probability that his application was rejected for failing to meet the stated standards, and since the cause of his damages is left to conjecture they may be attributed as easily to a condition for which there is no liability as to one for which there is. This argument focuses on the wrong point.

Once again, Steinberg did not allege that he was damaged when the school rejected his application. He alleged that he was damaged when the school used evaluation criteria other than those published in the school’s bulletin. This ultimate, well-pleaded allegation was admitted by the school’s motion to dismiss. Logan v. Presbyterian-St. Luke’s Hospital (1968), 92 Ill. App. 2d 68, 235 N. E. 2d 851. The primary purpose of pleadings is to inform the opposite party and the court of the nature of the action and the facts on which it is based.

The Civil Practice Act of Illinois provides that pleadings shall be liberally construed to the end that controversies may be settled on their merits. Jorgensen v. Baker (1959), 21 Ill. App. 2d 196, 157 N. E. 2d 773; Ill. Rev. Stat. , 1973, ch. 110, par. 33(3). Therefore, a cause of action should not be dismissed unless it clearly appears that no set of facts can be proven under the pleadings which will entitle the plaintiff to recover. **592 Herman v. Prudence Mutual Casualty Co. (1968), 92 Ill. App. 2d 222, 235 N.

E. 2d 346. Additionally, a complaint will not be dismissed for failure to state a cause of action if the facts essential to its claim appear by reasonable implication. Johnson v. Illini Mutual Insurance Co. (1958), 18 Ill. App. 2d 211, 151 N. E. 2d 634. A complaint is not required to make out a case which will entitle the plaintiff to all of the sought-after relief, but it need only raise a fair question as to the existence of the right. People ex rel. Clark v. McCurdie (1966), 75 Ill. App. 2d 217, 220 N. E. 2d 318.

Count I of Steinberg’s complaint stated a valid cause of action, and the portion of the trial court’s order dismissing that count will be reversed and remanded. Alternatively, the school asserts that if Steinberg is entitled to recover, the recovery should be limited to $15 because he is not a proper representative of the class of applicants that was supposed to be damaged by the school’s use of unpublished entrance standards. Fundamentally, it argues that it had no contract with Steinberg and since he does not have a cause of action, he cannot represent a class of people who may have similar claims.

We have found, however, that he does have a cause of action. The primary test for the validity of a class action is whether the members of the class have a community of interest in the subject matter and the remedy. Smyth v. Kaspar American State Bank (1956), 9 Ill. 2d 27, 136 N. E. 2d 796. Even if the wrongs were suffered in unrelated transactions, a class action may stand as long as there are common factual and legal issues. Gaffney v. Shell Oil Co. (1974), 19 Ill. App. 3d 987, 312 N.

E. 2d 753. The legal issue in this case would be the same as to each member of the class, and the factual issue–the amount payed by each member, an application fee of $15– identical. Steinberg alleged that in applying for admission to the school, each member of the class assumed that the school would use the selection factors set out in its 1974–75 bulletin, and that admission fees were paid and contracts created, but that each contract we breached in the same manner as his.

This allegation established a community of interest between him and the other members of the class in terms of subject matter and remedy, and since he has a valid cause of action against the school, the class has also. He is a proper representative of the class and his suit is a proper vehicle to resolve the common factual and legal issues involved even though the members of the class suffered damage in separate transactions. However, the class action cannot be as extensive as Steinberg’s complaint requested.

Recovery cannot be had by everyone who applied to the medical school during the ten years prior to the filing of his complaint. His action was predicated on standards described in the school’s 1974–75 brochure; therefore, the class to be represented is restricted to those applicants who sought admission in reliance on the standards in that brochure. We agree with the school’s contention that a State through its courts does not have the authority to interfere with the power of the trustees of a private medical school to make rules concerning the admission of students.

The requirement in the case of public schools, applicable because they belong to the public, that admission regulations *812 must be reasonable is not pertinent in the case of a private school or university. 33 I. L. P. Schools, s 312. We also agree that using unpublished entrance requirements would not violate an applicant’s right to due process and equal protection of law. The provisions of the due process clause of the Federal constitution are inhibitions upon the power of government and not upon the freedom of action of private individuals. 16 Am.

Jur. 2d, **593 Constitutional Law, sec. 557. The equal protection clause of the 14th Amendment does not prohibit the individual invasion of individual rights. Gilmore v. City of Montgomery (1974), 417 U. S. 556, 94 S. Ct. 2416, 41 L. Ed. 2d 304. The order dismissing Counts II, III and IV is affirmed. The order dismissing Count I is reversed. The cause is remanded for further proceedings not inconsistent with the views expressed in this opinion. Affirmed in part; reversed in part and remanded with directions. MEJDA, P. J. , and McGLOON, J. , concur.

McKell v. Washington Mutual Bank (2006) is a case for consumer rights highlighting the prerogative of the consumers to ‘buy at the right price.’  In this case, the consumers were not buying goods and services.  Rather, the market consisted of real property; and one of the stakeholders – Washington Mutual, Inc. – was overstating the prices of “underwriting, tax services, and wire transfer fees in conjunction with home loans.” [1]  Washington Mutual Bank had overcharged the buyers for these services – alleged the plaintiffs (few of the buyers) – when the actual prices that the bank had paid to service providers for the self same services were less.

The defendants (Washington Mutual) were simply making a profit on the services they had bought off different providers and selling to other members of society that needed them at the time.  Is this kind of profit making unlawful? – From the viewpoint of consumers, it may very well be unlawful, seeing that all consumers want to pay the ‘best prices.’  However, if the consumers were to stop using the services of Washington Mutual Bank, they would possibly have to visit various service providers for underwriting, tax services, and wire transfers, and still come to the defendants for home loans.

In the integrative business of Washington Mutual, everything is taken care of.  In view of this, it was decided by a trial court in California that the complaint made by the plaintiffs must be dismissed on the grounds that there had been no written agreement between the parties to state that Washington Mutual, Inc. cannot charge in excess of the prices that it pays to the service providers.  The case went into appeal.  It is going to continue being considered; in fact, the California Court of Appeal has agreed with a part of the plaintiff’s complaint and agreed to review this consumer case further.[2]

The main reason why the McKell v. Washington Mutual Bank case has still not been shut is that consumers feel deceived when they are told that they are being charged simply the prices of the services bought, when in fact the sellers have overcharged.  Although profit making is not considered illegal, in this case the consumers feel cheated because they had been informed by Washington Mutual that they were being charged the prices of certain services that cost a certain amount.

As it turned out, the prices charged included a huge markup, while the consumers continued to believe that they were paying the ‘right prices.’  The plaintiffs failed to produce all necessary documents to support their allegations.  Nevertheless, the fact that Washington Mutual had failed to mention to the consumers that a service fee was being added for the services in question – has landed the bank in hot water.  Moreover, by charging a price that is higher than the market price, the bank is responsible for going against “Congress’s stated intent to protect consumers from unnecessarily high settlement charges.”[3]  Indeed, this is the strongest argument to keep the McKell v. Washington Mutual case going in the near future.

Washington Mutual Bank may be charged with near-monopolistic practices in the coming days, although it has not been determined whether the bank’s competitors are charging markups that are vastly dissimilar.  Assuming that the competitors of the bank are charging much less than Washington Mutual, the justice system may very well decide that Washington Mutual must pay the legal charges of unfair competition.

Seeing that both federal and state laws demur near-monopolistic practices, that is, charging prices that are much higher than those at the market equilibrium – the Californian courts may eventually end up with a strong hand protecting the interests of the consumer and charging Washington Mutual Bank much more than it charged its consumers through allegedly “unfair” practices.[4]

Works Cited

McKell v. Washington Mutual: IN THE COURT OF APPEAL OF THE STATE OF

CALIFORNIA, SECOND APPELLATE COURT, DIVISION ONE. 2006. 4 June 2007.

<http://classactiondefense.jmbm.com/mckellclassactiondefense_opn.pdf>.

McKell v. Washington Mutual-Class Action Defense Cases: Defense Motion To Dismiss Class

Action Improperly Granted As To Breach of Contract And UCL Claims Based On Federal RESPA Violations California Court Holds. Class Action Defense Blog. 2007. 4 June 2007 <http://classactiondefense.jmbm.com/2006/09/class_action_defense_casesmcke_1.html>.

[1] “McKell v. Washington Mutual-Class Action Defense Cases: Defense Motion To Dismiss Class Action Improperly Granted As To Breach of Contract And UCL Claims Based On Federal RESPA Violations California Court Holds,” Class Action Defense Blog, 2007, 4 June 2007 <http://classactiondefense.jmbm.com/2006/09/class_action_defense_casesmcke_1.html>.

[2] “McKell v. Washington Mutual: IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA, SECOND APPELLATE COURT, DIVISION ONE,” 2006, 4 June 2007, <http://classactiondefense.jmbm.com/mckellclassactiondefense_opn.pdf>.
[3] “McKell v. Washington Mutual-Class Action Defense Cases.”
[4] Ibid.

Introduction Cafe de Coral is one of the popular restaurants in Hong Kong. However, it also has some customer complaints. In this report, it will talk about one of the case of it. The contents include the background of Cafe de Coral, the causes of the customer complaint, which elements of procedural and personal sides of customer service were not fulfilled by the concerned service provider. Last one is what would we do to turn the dissatisfied customers to become satisfied ones, or motivate them to become loyal customers. News content

In this article, Miss Tse who ordered a hot pot meal in Cafe de Coral. When she got the meal after twenty minutes, around ten cockroaches run outside from the hot pot. Miss Tse and her family even the other costumers were so scared and felt disgusted immediately. After that, Miss Tse complained to the manager for providing the “cockroaches” hot pot but the manager said that he or she only changed it to a new one. Also, the manager did not apologize to her. Finally, Miss Tse got the drawback and complained the Cafe de Coral restaurant through Food and Environmental Hygiene Department.

Background of Cafe de Coral Frist ,it will talk about the background of Cafe de Coral. Cafe de Coral Group is a listed company at the Hong Kong Stock Exchange. It is the largest Chinese restaurant chain in the world with business ps the four corners of the world. The group has over 580 operational units specialized in fast food, institutional catering, specialty restaurants, food manufacturing, distribution and other overseas food and beverage businesses. Cafe de Coral is one of the restaurants under Cafe de Coral Group. It is a Chinese restaurant chain.

The first Cafe de Coral foothold on Sugar Street, Causeway Bay in 1968. Nowadays, Cafe de Coral has over 140 restaurants and serving more than 300,000 Hong Kong customers on an average day. It seems Cafe de Coral is a popular choice when Hong Kong citizen dinning outside. In additions, Cafe de Coral is a leader in Chinese fast food market in Hong Kong. Cafe de Coral promise that they will continue to thrive on the company philosophy of making customers the topmost priority and constantly outperforming itself. Besides, they will fulfill their motto of “A Hundred Points of Excellence”.

Based on “A Hundred Points of Excellence”, the staffs of Cafe de Coral make “customer satisfaction” a top priority and all members of their staff take the concept of “heartfelt services” to heart. In order to have the regular training activities for employee to strengthen their skills and put team spirit into practice, Cafe de Coral has established the “Cafe de Coral Management Academy” as its training headquarters. Cafe de Coral also review the service attitudes and performance of staff through an objective “mystery shoppers” program. This practice helps enhance the quality of services.

The service that Cafe de Coral has provided is catering. It is tangible. It can be measured , weighed, inspected, touched, smelled and tasted . And their target market is Hong Kong citizen, especial is Chinese . Cafe de Coral is very common in Hong Kong , the branches of Cafe de Coral are throughout Hong Kong. Moreover, the cost of catering is very cheap and the waiting time of foods is short. It attracts a lot of students and working people to dinning here. The case of complaint and the element of procedural and personal side of customer service

In this article, Miss Tse who ordered a hot pot meal in Cafe de Coral. When she got the meal after twenty minutes, around ten cockroaches run outside from the hot pot. Miss Tse and her family even the other costumers were so scared and felt disgusted immediately. After that, Miss Tse complained to the manager for providing the “cockroaches” hot pot but the manager said that he or she only changed it to a new one. Also, the manager did not apologize to her. Finally, Miss Tse got the drawback and complained the Cafe de Coral restaurant through Food and Environmental Hygiene Department.

There are some causes of the customer complaint. Firstly, around ten cockroaches run outside from the hot pot. This cause is reflected this Cafe de Coral restaurant in North Point is very dirty. Secondly, the manager did not apologize to Miss Tse. The manager did not respect the customer obviously and Miss Tse so angry about that. In this case, there are some elements of procedural sides of customer service were not fulfilled by the concerned service provider. The element of timeliness was not fulfilled. Miss Tse waited twenty minutes for the meal, also not many costumers in this restaurant.

The service of this restaurant cannot satisfy the customer expectation. In quick service restaurant, efficient service is essential. Unfortunately, this fast-food restaurant cannot provide a quick service to Miss Tse. There is no reason that this restaurant provide the food slowly. Because the staffs were not busy in that time so they should provide the food in standard time. The element of anticipation was not fulfilled. Miss Tse felt disgusted after many cockroaches run outside from the hot pot. The manager should apologize to Miss Tse but he or she did not say that.

The manager did not be one step ahead of Miss Tse’s needs because Miss Tse expects that the manager apologize to her and helped her to move out the hot pot but the manager did not meet her expectation. The element of communication was not fulfilled. The manager did not ask Miss Tse some question and try to improve the service. For example, the manager did not comfort Miss Tse and also asked her that did she need some help so Miss Tse has emotional block toward the manager like anger. Moreover, the manager failed to seek and encourage the feedback.

For example, the manager did not ask anything before Miss Tse left. The manager did not seek any improve feedback from Miss Tse. There are 7 points about the personal dimension: attitude of body language, tone of voice, selling skill, attentiveness, guidance and product knowledge. In this case, there are some elements of personal side of customer service were not fulfilled by concerned service provider. Firstly, there is a poor attitude of the manager. When Miss Tse call the manager to handle this case, but the manager say that she can only change the hot pot and take away the pot.

It is no any apologize to Miss Tse. It is very important that the restaurant should provide the clean food to the customers. Unfortunately, they cannot do this principle. Also, when the customers complained to the restaurant, they had a poor attitude to face Miss Tse. The manager took away the hot pot without any apologize. The manager was very not respect to Miss Tse. Moreover, after Miss Tse complained the hot pot was having ten cockroaches, the manager just said that he or she had changed a new hot pot to you. The manager spoke to Miss Tse with poor tone of voice.

The manager should apologize to Miss Tse with appropriate tone of voice but the manager did not do that. The manager did not feel sorry for Miss Tse and the manager did not treat Miss Tse as a loyalty costumer. Finally, the manager did not take care the feeling of the Miss Tse and the other costumers. After Miss Tse saw many cockroaches run outside from the hot pot, she was already felt very nausea and disappointed with the restaurant. She expected the manager will apologize and gave her interpretation to calm down herself. But the manager cannot meet her expectation. And also did not give any feedback to Miss Tse.

To fulfill the dissatisfied customers If we were the manager of the concerned organization, we would follow some steps below. There is complaint in the company. We need to turn the dissatisfy customers to become satisfied ones, or even motivate them to become loyal customers. Since the poor customers services will bring lots of negative effects to the company. Customers will share their experiences to their family and friends. Lastly, company will be lost over 20% of their customers each year. That is important for the company to act how to dispose the complaint. Now, there are some points to dispose the complaint.

The first one, we need to express concern about the complaint. We would like to introduce ourselves . And then invite them to the place where are away from the restaurant. Avoid affect other customers. Next point, we should listen to the customer what they are happen. To the time, we should keep calm and don’t interrupt the customer’s speech. We also observe the customer’s emotional. Such as, we should observe at their body language and tone. The important the think that is we also need to down the notes for dispose the problem before. The second one, we need to confirm that we should understand the problems of the complaint.

We should repeat, their speech to exhibit we understand. For example, Miss, there are many cockroaches came out from the pot’s edge, right? In this part, we should be politely to settle her angry, and this is repeat question skill. It can avoid for misunderstand problem. The third one, we need to act consensus with customer. This means that we should be advice some solution which is agreement of customer. Such us, we give them some money for apologize and give them some coupons for buy food after. And then, we promise that we will as soon as possible to solve.

If the customers do not agree with our suggestion, we will have further discussion with customer. We will seek the best solution to deal with the problems. Lastly, we need to solve the problems quickly. We should set the times to deal with the problems. For examples, we need to solve the problems less than 5 day. And then, we should review this problem with all the staff. Finally, we try our best to advice this problem will happen at next time, and give a high-quality service and product. To sum up, we need to group moment of truth. We should turn the unfavorable time to become favorable time.

Also, we create a favorable time to increase company’s sales and create after moment, of truth to keep the customers. Since, moments of truth will affect company’s development after, so that it is important to the company. Conclusion To conclude, dispose the complaint of costumer efficiently is the responsible of the service provider so that the service provider can improve their service quality and the tackle the main problem of the costumer. If the service provider improve their service quality and establish word of mouth among the costumer, the costumer will be satisfied by the good service and turn the costumer become a loyalty one.