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By Gordon Massie, BA 73, MBA 77
In 2005, Gordon Massie, BA 73 (Econ.), MBA 77, reached the pinnacle of his career, managing 60 professionals and $20 billion of the high-risk assets of insurance giant American International Group (AIG). He came to AIG through its acquisition of Houston-based American General in 2001.
Then Massie's life crumbled. After unsuccessfully pressing AIG to recognize losses on investments, he blew the whistle on accounting fraud and was fired after months of retaliation. Massie, who wrote a book about his experience, visited Haas this spring to share his story with students and CalBusiness. Here is an excerpt from his visit, condensed and edited for space.
AIG became notorious for blowing up in 2008, but you blew the whistle three years earlier. Explain the fraud that you exposed.
AIG was not properly writing down its high-yield bonds at the time of its negotiations to buy American General in 2001. AIG's high-yield portfolio was overstated by nearly $2 billion. AIG had the ugliest portfolio mankind had ever created. Many of their bonds were trading at pennies on the dollar. That value should have been written down before the merger. The AIG stock price should have been lower and AIG would have had to produce more stock to buy American General.
You said the inflated stock price was one reason you blew the whistle. What were other reasons?
In 2005, AIG was on the front page of the Wall Street Journal every day for accounting fraud. The regulators were coming out of the woodwork. So AIG created a code of ethics for employees that said if we knew of any accounting problems we were required to come forward. I also witnessed the impact of Enron's collapse on my friend and neighbor, Richard Causey, Enron's former chief accounting officer.
I felt it was the right thing to do. It was time for senior people to step up and create a more ethical culture. I also thought a lot about my mom and dad and what they expected of me.
For 20 years I had excellent reviews and increases in my compensation. But 30 days after I blew the whistle, the retaliation began. First they took the High-Yield Bond Department away from me. No explanation given. No advance notice. I was in a large employee meeting and it was publicly announced.
I then accepted a transfer from the Houston office to the New York office. I was promised many new responsibilities. AIG was paying $10,000 a month to have me work out of the New York office, but in the five months I was there, I was not given any new work. I was assigned to a tiny cubicle as far removed as possible. I was socially ostracized and physically isolated. I was left out of meetings and emails, and I was shunned by my peers. It was clear to me I was being set up for termination. I was angry, depressed, humiliated, lonely, and powerless.
So you hired a lawyer.
My lawyer said this was the most egregious case of retaliation in his 20 years of practicing law. We sent AIG a cease-and-desist order and I was fired on the spot. That was probably the darkest day I can remember.
But you settled with AIG, after you threatened to contact the Wall Street Journal.
Initially I was delighted with the settlement.
But for the next three years I couldn't shake
depression. Some days I couldn't get out of
bed. I couldn't stop reliving my decision to
blow the whistle.
That depression ended in September 2008, when AIG blew up. This was the beginning of my emotional recovery. When you're a whistleblower, people shun you. It's like death or disease. But with AIG blowing up, suddenly people were fascinated by my experience. I began to tell my story with pride.
Would you have had more impact if you had taken your story public in the Wall Street Journal?
After I received my settlement I felt guilty. I felt like I sold out. I felt this mixed emotion about accepting their money. I was an emotional wreck at the time it was resolved. But I am now telling my story.
What are the lessons you learned from the experience?
Money and greed can often trump ethics. Corporate America needs whistleblowers but regularly retaliates against them. There can be a high personal price to pay for acting in an ethical manner. However, doing nothing to stop fraud is not the same thing as doing nothing wrong.
Can ethics be taught in business school?
I think ethics can be influenced. If I've made the students more aware I've accomplished my job. Students need to be aware that when they become cognizant of fraud or corruption it's like being a little bit pregnant. They have to deal with it. They can't just put their head in the sand and pretend there are no consequences. If they do nothing, the fraud will continue. What I'm trying to teach students is that doing nothing is not the same thing as doing nothing wrong.
You mentioned thinking about your parents. What were they like?
My parents were highly ethical people. They welcomed people from all walks of life, all races, all cultures. We sponsored students from Cal’s I-House every year. We were a host family. We had men and women from all over the world in our Orinda home. This was during a period in history when there were a lot of racial issues. My parents were both Cal alums.
I also often wonder if my experience at Berkeley--which taught me to speak out against this sort of thing--played a role in my decision to challenge bad behavior. I think it did. I graduated in '73. I was scared to death of being drafted. I walked in Vietnam War protests. I wasn't militant, but I was certainly influenced by the Berkeley culture, which challenged conventional thinking and was not afraid to question our institutions.
What's your most vivid memory from that time?
I was in a fraternity. We were sitting on the porch drinking beer one day when suddenly the police came chasing war protesters up Durant. The protesters ran into our building, and the police threw tear gas into the fraternity for all to breath. It left the impression that maybe our government was being too heavy handed.
Massie's Warning Signs of Unethical Corporate Culture
Frequent earnings restatements
Weak management systems and controls
High employee turnover
Dictatorial, long-term CEO
Passive board of directors
Heavy use of stock options for management compensation
An accounting firm that is too small relative to their client company