Concerning Conduct: Quarterly Cases - Q2 2024

A summary of recent cases concerning culture and conduct.

1. UK and US to co-operate on AI testing.  
2. Ajax suspends CEO over insider trading.
3. EY accused of asset stripping, but gets a bit of a break over Wirecard audit failings.  
4. Lloyds to cut back on risk roles to remove “blocks” to strategy.  
5. €600m of assets seized over EU recovery fund fraud.
6. KPMG fined $25m over exam cheating.
7. Dedicated staff to oversee AI developments.
8. Citadel describes Trump Media CEO as a “loser”.
9. NYSE polls participants over 24 hours trading.
10. US FTC bans non-compete agreements.
11. Goldman Sachs scraps the UK bonus cap.
12. Auditors fined over failings at London Capital & Finance.
13. FTX creditors set to get all of their money back.
14. BBVA launches €12bn hostile bid for Sabadell.
15. Two investment bankers involved in inappropriate sexual conduct at Stifel in London.
16. Jeremy Hunt hosts summit on homegrown tech listings.
17. Increase in female US executives is stalling.
18. Worries over UK auditors’ ability to foresee failure.
19. US DoJ files civil complaint against Live Nation/Ticketmaster.
20. UK CMA to look at the veterinary sector.
21. UK government stake in NatWest cut to 22.5%.
22. Research shows ESG funds flows are trending negative.
23. LSE pushes for outdoor screen in the mould of the US exchanges.
24. Lynch found not guilty over Autonomy sale to Hewlett Packard.
25. IMF deputy MD urges the US to tackle mounting debt.
26. LSE struggles blamed on pension funds’ conservative investment.
27. BP increases workplace intimacy rules for its executives.
28. Wells Fargo staff created false impression of active work.
29. Musk’s $56bn pay package reapproved.
30. Moelis banker filmed punching someone leaves the firm.

UK and US to co-operate on AI testing.

The US and the UK signed a deal to formally co-operate on how to test and assess risk from emerging artificial intelligence models. The UK’s AI Safety Institute (AISI) and its US equivalent will exchange expertise and work together on how to evaluate private AI models.   

Ajax suspends CEO over insider trading.

Dutch football club Ajax, which is listed on the Amsterdam stock exchange, suspended its CEO. The suspension was for purchasing shares in the club a week before being appointed as CEO. The CEO, Alex Kroes, argues that his decision was “not the wisest” but that he did not have access to any confidential information at the time.

EY accused of asset stripping, but gets a bit of a break over Wirecard audit failings.

EY in Germany was accused of asset stripping in an attempt to limit the damages over its allegedly flawed audits of collapsed payment processor Wirecard. EY issued unqualified audits for almost a decade until Wirecard’s collapse in 2020. EY Germany has carved out its highly profitable consulting, tax and M&A advisory operations from its auditing business, ring-fencing the firm’s non-audit operations from the legal entity that is facing damages claims over Wirecard audit failings. Lawyers representing shareholders in Wirecard said it was a “brazen move to protect the bulk of EY’s assets in Germany from the Wirecard litigation”. Subsequently, Germany’s audit oversight body, Apas, found that the audits were “negligent” and potentially “grossly negligent” and that it issued “objectively inaccurate audit opinions”. This was seen as a relief at EY because no criminal intent, such as knowingly or deliberately issuing wrong audit opinions, was established. Criminal misconduct could have meant up to three years in jail under German law, and the possibility of the firm facing unlimited liability for damages claims.

Lloyds to cut back on risk roles to remove “blocks” to strategy.

Lloyds Banking Group is resetting its approach to risk management to remove aspects of the function that act as “blocks” to the group’s transformation. Lloyds’ chief risk officer said two-thirds of executives saw risk management as blocking progress while “less than half our workforce believe intelligent risk-taking is encouraged”. It is thought that around 150 permanent posts in risk will go.

€600m of assets seized over EU recovery fund fraud.

A fraud on the EU’s €800bn post-pandemic recovery fund saw the Italian police seize €600m worth of assets and make 22 arrests. It appears that a multi-national criminal association applied for €600m of EU grants between 2021 and 2023 using fictitious companies, alleging the funds were required for international expansion. The assets seized included a Lamborghini, a Porsche, an Audi as well as Rolex watches and Cartier jewellery. 

KPMG fined $25m over exam cheating.

The Dutch arm of KPMG was fined $25m by the US audit regulator (the Public Company Accounting Oversight Board) over the sharing of questions and answers to mandatory internal exams covering US auditing standards, professional ethics and managing conflicts of interests. The former head of audit was also fined $150k and banned for life from working for a firm that audits US public companies.

Dedicated staff to oversee AI developments.

Artificial intelligence is typically within the domain of the chief technology officer, but the FT reported that companies are increasingly appointing dedicated chief AI officers. Reflecting the growing importance of AI, the chief AI officer (or CAIO) is tasked with overseeing the deployment of AI and generative AI within the organisation.

Citadel describes Trump Media CEO as a “loser”.

Citadel Securities responded to criticism from the CEO of Trump Media & Technology Group by branding him a “loser”. Trump CEO Devin Nunes wrote to the head of Nasdaq about “potential market manipulation” in relation to naked short selling naming four equity market makers including Citadel. Citadel’s response was to describe Nunes as a “proverbial loser” trying to “blame naked short selling for his falling share price”.

NYSE polls participants over 24 hours trading.

The New York Stock Exchange polled its members about their views on 24/7 trading – whether they felt round the clock trading should take place over weekdays and potentially weekends. It also asked for views on how investors might be protected from price swings.

US FTC bans non-compete agreements.

In a shake-up that will impact many Wall Street firms, the US Federal Trade Commission voted to invalidate most existing and new non-compete agreements. Non-competes allow firms to impose “gardening leave” when an employee leaves to join a competitor.

Goldman Sachs scraps the UK bonus cap.

Goldman Sachs became the first bank to take advantage of the UK’s removal of the EU-derived remuneration incentive restrictions when it removed the caps on bankers’ bonuses.

Auditors fined over failings at London Capital & Finance.

London Capital & Finance (LCF) raised some £237m from mainly retail investors in the form of mini-bonds, only to collapse in 2019. The UK’s Financial Reporting Council imposed substantial fines on the auditors of LCF for “multiple breaches” in their work on the financial statements in 2015, 2016 and 2017. The 2015 auditor, Oliver Clive & Co was fined £42,000, PwC was fined £4.9m for failings related to its audit in 2016 and EY was fined £4.4m for failings on the 2017 financial statements.

FTX creditors set to get all of their money back.

FTX, the bankrupt crypto currency exchange whose founder (Sam Bankman Fried) is facing 25 years in prison, is set to repay most of its creditors more than 100% of their official claims. FTX has gathered around $15bn from selling venture capital investments made by the exchange and its affiliate Alameda Research.

BBVA launches €12bn hostile bid for Sabadell.

Spanish banking group BBVA took its bid for rival Sabadell hostile after the target’s board rejected the all-share bid as “significantly undervaluing” the bank. BBVA is offering one new share for every 4.83 Sabadell shares, valuing the target at around €12bn.

Two investment bankers involved in inappropriate sexual conduct at Stifel in London.

Several media outlets reported that a senior and a junior trader at the London office of US investment bank Stifel have been fired. They were discovered to have had "sexual liaisons with the same office cleaner" both "in the toilets and other locations within the building at night”.

Jeremy Hunt hosts summit on homegrown tech listings.

UK chancellor Jeremy Hunt hosted a gathering of tech CEOs to explore how the UK could create its own tech giants. In an interview he said he would “like to see a homegrown company with a trillion-dollar (market) cap”.

Increase in female US executives is stalling.

Despite an improvement in the percentage of female board members in Russell 3000 Index companies from 29.4% at the end of 2023 to 30% currently, there appears to be a mixed picture on female representation. S&P analysis of senior management roles beneath the executive level showed a slowing of growth in women’s representation in 2023 to the lowest in more than a decade. Board representation is nowhere near equity between male and female with just 42 female CEOs in the S&P 500 and none in the 30 companies in the Dow Jones Industrial Average.

Worries over UK auditors’ ability to foresee failure.

Research showed that audit firms failed to raise the alarm before three-quarters of big UK corporate collapses since 2010. A report by the Audit Reform Lab found that, of the 250 largest listed companies that collapsed between 2010 and 2022, EY gave going concern warnings for one of the five it audited in the year before collapse. PwC, Deloitte and KPMG warned on 23%, 36% and 38% of their audits respectively. Auditors outside the ‘big four’ provided warnings on just 17% of those that failed.

US DoJ files civil complaint against Live Nation/Ticketmaster.

The US Department of Justice launched an antitrust civil complaint over the monopoly power wielded by Ticketmaster and its parent Live Nation Entertainment. Live Nation, a concert promoter, and Ticketmaster, a ticket selling platform, were merged in 2010. Since then, concern has grown over the stranglehold the two have over US live concert venues.

UK CMA to look at the veterinary sector.

The UK’s Competition and Markets Authority (CMA) is undertaking a full investigation into the veterinary sector over concerns about high prices and lack of choice. The sector has seen increasing consolidation, especially involving the larger private equity firms.

UK government stake in NatWest cut to 22.5%.

The UK government’s ownership of NatWest bank went down to 22.5% after the bank bought back 392.4m shares for £1.24bn, a 4.5% stake. The UK government had planned a retail share sale, but in light of the upcoming general election, opted to engineer a buyback instead.

Research shows ESG funds flows are trending negative.

Research from Barclays showed a net $40bn has been withdrawn from environmental, social and governance (ESG) funds in 2024. The outflows are thought to be the result of three major factors: poor performance, scandals over greenwashing and the US Republican backlash that sees ESG as partisan activism.

LSE pushes for outdoor screen in the mould of the US exchanges.

The London Stock Exchange CEO is campaigning for permission to put a screen in front of its building in Paternoster Square near St Pauls to enable what she described as “celebrating” the successes and making them “visible on the outside”. Both Nasdaq and the NYSE in the US use their frontages to promote activities such as IPOs.

Lynch found not guilty over Autonomy sale to Hewlett Packard.

The former CEO of Autonomy, Mike Lynch, was found not guilty in a San Francisco court of fraudulently boosting the value of the tech company when it was sold to Hewlett Packard. Autonomy was sold for $11bn in 2011, and one year later the CEO of Hewlett Packard accused the UK company of falsely inflating revenues causing an overpayment of around $5bn.

IMF deputy MD urges the US to tackle mounting debt.

The deputy managing director of the International Monetary Fund said she saw “ample ground” for the US to reduce the size of its fiscal deficit that is expected to reach 7.1% next year. “The temptation to finance all spending through borrowing really is something that countries should avoid” said Gita Gopinath, adding that fundamental reforms were needed to pension systems and medical spending as populations age.

LSE struggles blamed on pension funds’ conservative investment.

The chair of M&S, Archie Norman, blamed the struggles to attract IPOs and maintain listings on the London Stock Exchange on UK pension funds’ investment for low risk and low return, rather than a longer-term growth strategy. The strategy adopted by UK’s corporate pension funds is largely the result of an accounting change in 2000 that led to defined benefit schemes investing in bonds rather than equities to better match the schemes’ liabilities.

BP increases workplace intimacy rules for its executives.

After the sacking of CEO Bernard Looney over the failure to disclose workplace relationships, oil giant BP tightened its rules regarding intimate relationships at work. The new rules require senior executives to disclose any intimate relationships with colleagues during the past three years, or face possible disciplinary action.

Wells Fargo staff created false impression of active work.

Wells Fargo dismissed several employees who, during Covid-era hybrid working, tried to fool their bosses that they were working when they were not. It appears that the staff members were “simulating keyboard activity” according to regulatory filings.

Musk’s $56bn pay package reapproved.

Elon Musk’s $56bn pay deal that had been voided by a Delaware court was emphatically reapproved by 77% of voting stockholders at Tesla’s annual meeting. The planned move to reincorporate Tesla in Texas from Delaware was also passed, winning 63% backing.

Moelis banker filmed punching someone leaves the firm.

A New York based Moelis investment banker who was filmed punching someone during a City Pride event has resigned from the firm. A short clip of Jonathan Kaye, who ran Moelis’s global business services franchise, punching someone and then walking away was widely circulated on social media platform, X and also attracted much comment on industry message boards such as Wall Street Oasis.