Let’s digress slightly to look at this week’s scandal in the US of A, codenamed “Operation Varsity Blues”, and other events at home in Australia.
In my last post, we walked through the Hall of Infamy for white-collar crime and started looking at Dan Ariely’s research on dishonesty. Then, almost as if Hollywood was listening in, we had quite the week from the US of A.
Operation Varsity Blues
On Tuesday, the US Federal Bureau of Investigation (FBI) through its codenamed project “Operation Varsity Blues” (love it) revealed that it had cracked down on a fraudulent university admissions scheme. It swept up a bunch of US celebrities and the wealthy, including Desperate Housewives actor Felicity Huffman. Seems like the role-play got too real.
Amongst other things, the fraudulent scheme involved:
- bribing college entrance exam administrators to allow a third party to sit college entrance exams for the actual student, posing as the actual students, or providing students with answers during or after the exams; and
- bribing university athletic coaches and administrators who would claim that the actual students were athletic recruits—in some cases, the actual students did not even play the sport in question.
Wealthy parents funnelled their money through a “not-for-profit foundation” as part of the fraud. The founder of the scheme described it to one parent in wiretapped conversations:
“Okay, so, who we are– what we do is help the wealthiest families in the U.S. get their kids into school …. Every year there are– is a group of families, especially where I am right now in the Bay Area, Palo Alto, I just flew in. That they want guarantees, they want this thing done. They don’t want to be messing around with this thing. And so they want in at certain schools. So I did 761 what I would call, “side doors.” There is a front door which means you get in on your own. The back door is through institutional advancement, which is ten times as much money. And I’ve created this side door in. …”
The most comic part of this scheme was the blatant use of Photoshop. Parents collaborated to fabricate athletic “profiles” for their children, including fake honours on elite athletic teams that they had supposedly played on. In some cases, parents provided photographs of their children. Their heads would be Photoshopped onto the bodies of actual athletes found over the Internet. Really bizarre stuff.
If you have spare time, check out the Affidavit of Laura Smith in Support of Criminal Complaint filed on 11 March 2019 on Buzzfeed. It makes for some amusing reading and points to a sad state of affairs on how higher education operates (or doesn’t) in the US of A.
Heya, don’t forget Australia!
If you thought that Australia was utopia, think again.
Ultra Tune, the automotive servicing and roadside assist company, found itself in a pickle at the start of 2019. If you subscribe to my mailing list, you’ll know that the ACCC scored a victory against Ultra Tune in January for dodgy franchising practises.
Bromwich J of the Federal Court of Australia found that Ultra Tune breached the Franchising Code of Conduct and the Australian Consumer Law (ACL). The breaches included making false or misleading representations to the prospective franchisee about the price of the franchise. The Federal Court imposed a penalty of $2.6 million.
This isn’t the end of the franchising story.
On 14 March 2019, the Australian Federal Parliamentary Committee on Corporations and Financial Services released a report into franchising in Australia titled “Fairness in Franchising” (Report). It was a culmination of a year-long inquiry.
The Report starts by noting that “franchising is big business in Australia” and “estimated to contribute approximately 9 per cent of gross domestic product (GDP)”. Inherent in the business model is a significant power imbalance between franchisors and franchisees.
Importantly, the Report found serious and growing abuses within the franchising sector over the last ten years. It suggested giving ASIC and ACCC more powers to crack down on the franchising sector.
“When this committee inquired into franchising in 2008, it appeared that some franchisors were behaving opportunistically, but that the issues were relatively isolated. By contrast, the evidence to this inquiry indicates that the problems, including exploitation in certain franchise systems, are systemic. Resolving systemic issues requires a much broader and more comprehensive approach. The committee is therefore proposing substantial changes to the Franchising Code of Conduct (Franchising Code), to the sections of the Oil Code of Conduct (Oil Code) that relate to franchising, as well as to the responsibilities and powers of the regulator.”
—Report, Executive Summary on page xiii
One of the worst offenders was the Retail Food Group.
As at 11 December 2018, the Group owned and operated the following franchise brands:
- Brumby’s Bakery;
- Michel’s Patisserie;
- Donut King;
- Crust Gourmet Pizza;
- Pizza Capers;
- Gloria Jean’s;
- Cafe2U;
- The Coffee Guy;
- BB’s Café;
- Big Dad’s Pies; and
- Esquires Coffee.
Following the Report’s recommendation, its former and current directors and senior executives now face investigation for insider trading, tax avoidance and consumer law breaches.
Recommendation 4.2
The committee recommends that the Australian Competition and Consumer Commission, the Australian Securities and Investments Commission and the Australian Tax Office, conduct investigations into the operations and dealings of Retail Food Group, its former and current directors and senior executives and companies and trusts they own, direct, manage or hold a beneficial interest in, with regard to matters including, but not limited to, the Australian Consumer Law, the Franchising Code of Conduct, insider trading, short selling, market disclosure obligations (including related party obligations), compliance with directors’ duties, audit quality, valuation of assets (including goodwill), and tax avoidance.
These are serious allegations which, if proven, land Retail Food Group squarely in the white-collar crime space. Let’s see what unfolds.
In the next LB post, we’ll finally get to the important lessons on curbing dishonesty.
Thoughts? Leave a comment below!