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Walt Pavlo: Daylight fraud

07 November 2017 by Henry Ker

Walt Pavlo: Daylight fraud - Read more

A reformed fraudster discusses organisational culture, pay inequality, blind trust in leadership, and how everything came together for him to create a perfect storm

Walt Pavlo, Jr began working at MCI Communications, later part of WorldCom and then the US’ second largest telecoms business, in 1992 as a finance executive. As he rose within the company, the pressure to achieve impossible targets and hide mountains of bad corporate debt led to disillusionment with his job.

He became involved in a scheme to profit from the company’s situation, copying the techniques he was using to balance the company finances to funnel money into Cayman Islands accounts – embezzling $6 million before he was caught.

In March 2001, Pavlo reported to federal prison to begin a 41-month sentence, eventually serving two years. Since his release, he has published a book on his story – Stolen Without A Gun, written with Forbes journalist Neil Weinberg – and lectured at numerous business schools, accountancy firms, and even the FBI, to give an insight into what took place and how organisations can prevent it happening again.

How would you describe the culture at MCI when you joined?

It was entrepreneurial, with a flat management structure – one manager and many people working under them – where decision-making was encouraged at any level and was rewarded.

So if you were confident and good at making decisions, and they worked out, you would be given more responsibility. That is how you moved up.

I was so happy to be in that sort of management style, versus the bureaucratic regulation of my previous jobs. I was longing for that Wild West, with more decision-making, and more pressure.

You make it sound positive – which, given what happened, and the pressure to get results, surprises me.

That is how it felt when I joined. At the time, I did not see it as excessive pressure – I saw it as opportunity. It was a new industry, recently deregulated, and there were a lot of young people coming in.

When they deregulated, they converted an industry that was bureaucratic and established into something that was entrepreneurial. The company was looking for a type of person to fit that new model.

You say in your book your bosses left you with the impression that you had no choice but to cook the books. Were management and culture culpable?

We would not have said ‘culpable’ at that time, but the company just sought results, without asking how you obtained those results, which is perhaps a nice way of saying they were partially culpable. If you kept giving the answer they wanted to hear, you were rewarded within MCI.

The Walt you see in the book is someone who was isolated in making decisions. Reaching out for help was a sign of weakness and I knew that it would not be rewarded inside of that culture.

Were the incentive structures a problem?

We made an okay salary, but we could potentially make a lot more on stock options and it was an era when the stock options were the way people made millions – it was the American dream.

We all knew the value of the stock, because every day, when we walked into MCI – no matter which office you walked into – there was the stock price displayed.

“I saw a lot of people making a lot of money. And there did not seem to be any karma in the room”

When you look at that, you can do some quick calculation in your head about what that means to you personally. In that structure, the decisions one would make would be more self-serving, without regard for the best interests of the company and the shareholders.

I would hope that reward structures now do a better job at aligning people to long-term goals, and have a positive influence on people’s behaviour. But I still see problems, unfortunately. Most incentives are based on a short-term gain; executive compensation drives that and the attitude trickles down.

You said ‘greed, flashing enough dollar signs at people’s eyes and it blinds them to the stupidity of what they are doing’. Is that what happened?

We were working in a time of excess. I was living a lifestyle away from home that was different than the one that I lived with my family.

When I was eating out with MCI, I was at five-star restaurants. In contrast, when I was with my wife, I was going home and cutting out coupons for the grocery store and eating in.

I saw a lot of people making a lot of money. And there did not seem to be any karma in the room. It seemed like the worse the behaviour, the more everyone was rewarded. It did not make sense to me that people could be unethical, with low business standards, and be so rewarded.

I felt that I had two choices: one, call everyone out for what they were doing, or two, join in. Regrettably, I chose the latter.

You seemed to have a ‘Robin Hood’ attitude at the start, because the companies you were taking from were unethical and exploitative themselves. Do you agree with that?

It is part of the rationalisation. You are not an evil person, one that gets up every morning thinking: ‘I just cannot wait to commit a crime.’ That person is a unicorn; I doubt they even exist.

But the story that ends up being made public, in the newspapers, is a short, tight narrative: this person is bad, they got caught, we are throwing them in jail. No one can learn anything from that.

When you look at white-collar crime, there are three components: the pressure, the opportunity in the organisation, and how a person rationalises it.

“You are not an evil person, one that gets up every morning thinking: ‘I just cannot wait to commit a crime.’”

I want to find out about those three factors, find out how it happened, but also what the environment was like where the person worked; what was their interpretation of what they were asked to do; and what were the business’ values – the same questions you are asking.

There is context to the crime. But sometimes it all comes together and makes for the perfect storm. In this instance, it all aligned and allowed me to do what I did.

Everyone seemed to join you in the scheme without much convincing. Is that a fair reflection of what happened? Were they all just looking for that ‘quick buck’?

I ask myself the same question. I think that people look to leadership. As a management lesson, we should always be careful what we tell people to do, because they just might do it.

When I asked people to participate, I did not just come out and say: ‘Hey, we are going to commit a crime.’ They did know we would be crossing the line, but they trusted me, and had the attitude: ‘If you say it is ok, then let’s do it.’

I think that implicit trust is maybe just part of human nature.

You said: ‘The more I hated MCI, the more destructive I became.’ How did your feelings about the company affect things?

The company kept rewarding me; they liked me. Which made me resent them even more, because I did not like who I was! The more that I cooked the books on their behalf, the more that I wanted to do it for myself. It just fuelled a sense of resentment.

At the same time, I was ripping them off. It was the same with the clients – MCI’s customers were ripping off MCI themselves. I put the company and the clients in the same bucket. I felt like I was getting one up on people who were trying to one up me.

I was taking a significant amount of risk on behalf of the company. But it was not equating one-to-one in a monetary sense.

What was offered to me by working with Harold [Mann – Walt’s partner in the fraud, who served four years in federal prison], was the ability to turn what I was already doing for the company, into money for now. It was a more immediate reward than I was ever able to get with the stock.

I cannot take my wife out to dinner on a stock option but I can take her out to dinner on money in a Cayman Island account.

The disparity in pay that contributed to your resentment of the company resonated with me given the current debate about executive remuneration. Do you think the pay inequality in today’s society will breed a similar sentiment in employees?

Pay is a problem for companies to address; it is not going away. The disparity between the lowest paid employee and the CEO has continued to grow out of control, with the CEO making tens of millions of dollars, contrasting against someone at the bottom making $15 an hour. It is an unbelievable disparity.

Typically, the people that do the hardest work, the manual work, are the junior staff. That disparity is not unnoticed, but that is the way that we see corporate America.

You put your time in when you are young and then, by the time you are middle-aged, you sit on your arse, somebody else does the hard work, and you make more of the money.

It is kind of a weird model and when you are young you do not understand it.

‘...Pavlo wrote his name and Social Security number on Howard’s [a Cayman Islands consultant] notepad and gave him his driver’s licence to copy. He became the beneficial owner of Parnell Investments, a limited liability corporation based in George Town, Grand Cayman. He was now officially an international money launderer.’ [From Stolen Without A Gun]

Your description of becoming ‘officially an international money launderer’ was so nonchalant. Was it really that easy?

I did not know that I was technically laundering money until I was charged with the crime.

When I look back at some of the things that I was doing, at trying to rationalise my behaviour, I went to great steps to distance myself from money. I put a lot of agreements and paperwork in place to make it look somewhat legitimate, at least to myself.

One person at an MBA school in the US asked why I did not go to one of these indebted telecoms companies, that had all this money on the table, and say ‘give me that million dollars and I will make $5 million of your invoices disappear’. But that was too obviously stealing.

When it collapsed WorldCom was the largest bankruptcy in history. What were your thoughts on it – was it so rotten that it had to go?

One of the things that I did not realise about my actions at the time, is that I was actually sawing off the branch that I was sitting on. I was ripping off a company, diverting all this money, and somehow I thought this is going to go unnoticed, or is not going to hurt anybody.

And in many ways, I think that is also exactly what happened with the company itself, on a larger scale. With all the hiding of bad debt, they were sawing off the old branch that they were sitting on – eventually it came down and took them with it.

But when it came down, I was still just as shocked as everybody else that the fraud was so big there was no way it could recover. It was past the point of no return. I would never have guessed it would turn out to be the largest fraud in US history.

WorldCom bankruptcy

At one point the United States’ second largest long-distance telephone company, WorldCom filed for bankruptcy on 21 July 2002 after a small team of internal auditors revealed $3.8 billion worth of fraud.By the end of 2003, further investigation meant it was estimated that the company’s assets had been inflated by as much as $11 billion. Listing over $100 billion in assets, it was the largest bankruptcy in US history.

What did your experience in prison teach you?

It is an effective punishment and it most definitely works. It is a time of reflection; you do not just pay a penance to society for what you have done, but you also achieve closure. It was a relief to stop running and stop being chased. To bring it all to an end.

I used my time to reflect on a lot of the things that we talked about earlier. Why did I do what I did? Would I have done it in another way? What other choices could I have made?

You have since worked with the FBI, among others, in an advisory capacity. What is your most important lesson for enforcers and businesses?

I try to help them understand the situation where I made the decisions that I did, because I do not think that I am that different a person from most. I do not think I am a diabolical person – but I made
some bad choices.

It is important for the authorities, or the businesses, to be able to understand and recognise why an otherwise good person will make such bad choices.

People can say, ‘oh, he is full of bullshit’ or think ‘I would have done something different’. That is their prerogative. But this is what happened to me and this is why I did what I did.

What do you think of the current system of governance and regulation, and what would you change?

It is much improved, and has a higher profile than it ever did. I know that people have been critical in the US of Sarbanes-Oxley, because it has not led to a lot of convictions, but I do not think you should equate convictions with a better business environment.

“It is important for the authorities to understand why an otherwise good person will make such bad choices”

I think there has been a lot of headway to help people speak up and say when something is going wrong, whether through a whistleblowing hotline, or talking to compliance. It is not perfect, but it is better.

Compliance does need to relate more to the pressures that the worker is under and they should be more collaborative. The compliance people are there to help the frontline worker, not to hinder or hurt them.

You say in your author’s note: ‘I’m no longer the young man whose selfish and careless decisions will be on these pages.’ How would you describe yourself instead?

When we first put the book together, it was written in first person. I went to a meeting with Neil [Weinberg] and found was that I was not doing a good job of disclosing everything.

And that was because I did not want to have said or done those things. When we went to third person and made me a character, I was able to take a step back, look at the things that I did, and have a better reflection of what I did wrong.

When I read the book now, I look at myself as an interesting, flawed character. I see that I had some big issues with how I saw the world. I would never want to be involved in corporate America again.

I saw things in myself where I strive to please people, and what people thought of me was important. It made me vulnerable in the position that I was in and I would not care to go back there.

Now all I am doing is telling the truth.

Interview by Henry Ker, editor of Governance and Compliance

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