A snitch in time - by Matthew McClearn: On June 14, 1995, Russell Hayes penned the letter that ended his career. It was addressed to J. E. Soos, then CEO of Montreal-based Canadian Marconi Co. (now CMC Electronics Inc.), where Hayes worked as a senior manager. The subject was difficult.

On June 14, 1995, Russell Hayes penned the letter that ended his career. It was addressed to J. E. Soos, then CEO of Montreal-based Canadian Marconi Co. (now CMC Electronics Inc.), where Hayes worked as a senior manager. The subject was difficult. In the letter, Hayes laid out allegations of how and why his company defrauded its customers, among them the U.S. government. He wrote of falsified invoices and of changed serial numbers in short, the stuff of potentially great embarrassment to any military contractor.
Hayes's action was rooted in a costly miscalculation: in his words, "I thought they'd fix things." Instead, it precipitated his departure from CMC. "Things aren't all that bad," admits Hayes, 58, now retired and living in suburban Montreal. "But they could have been a lot better." Today, he's embroiled in a court battle in which he's helping the U.S. Department of Justice sue his former employer. (Citing that legal action, CMC declined comment. In court documents, the company denies most of the allegations levelled against it by Hayes and the U.S. government.)

Hayes's version of events supports several well-established observations about whistle-blowing. One: whistle-blowers seldom anticipate the consequences of their actions. Two: organizations typically respond poorly to criticism from within. And three: many lack a system that protects complainants from retaliation. These observations hold particular relevance in Canada, where policies that help whistle-blowers raise concerns and protect them from abuse have largely been absent. The result, all too frequently, is that whistle-blowers are intimidated, alienated and drummed out of the organizations they work for.

That climate is changing, however. Both public institutions and private corporations are becoming increasingly aware of the benefits of improving their response to internal allegations of wrongdoing. The changing landscape seems to be slowly affecting workplace attitudes: one recent study, the 2003 National Business Ethics Survey, conducted by the non-profit Ethics Resource Center in Washington, D.C., found that American employees are more likely to report misconduct than they were a decade ago. Whereas only 48% said they reported misconduct during a similar survey in 1994, that number rose to 65% in this year's study.

That said, whistle-blowing remains perilous. And workers know it. According to the ethics study, 44% of non-management employees said they donâ€Tt report misconduct. Participants frequently said they believed no corrective action would be taken, or feared that their concerns would not remain confidential. Some organizational theorists say that's bad news. As the modern workplace becomes increasingly complex, specialized and opaque, organizations are becoming more reliant on their employees to report incidences of fraud, abuse and waste that will otherwise not come to the fore. And it's in the long-term interests of most companies to deal with problems at the earliest possible date. "Generally, it seems that if you have a good system that protects whistle-blowers, this will cause the company"and therefore the country "less harm than if you didn't," says P. K. Pal, a corporate governance lawyer with Flavell Kubrick in Ottawa. "Offensive acts can be nipped in the bud, so to speak, without becoming public matters."

Hayes's fateful letter to his boss was not a product of outrage, an epiphany or a sudden shocking discovery. In fact, Hayes says he knew all along what his company was doing and, indeed, actively participated. His alleged involvement can at least partly be explained by how much he had to lose. Bearing only a high-school education, he had accumulated years of experience in sales, marketing, contracts and program management. By the early 1990s "a time when the defence sector suffered greatly" he was earning in the neighbourhood of $77,000 a year as project manager for CMC. â€oIf you looked at an organization chart, I wasn't far from the CEO," Hayes says. "There was the CEO, the vice-presidents and some senior vice-presidents. Under that, there were the program managers. We ran the show."

Among other products, CMC's military communications division manufactured and sold the AN/GRC-103 (V)1, a tactical radio developed in the 1960s that found extensive military application, particularly among members of the North Atlantic Treaty Organization. A combination of five portable components, it provides secure, line-of-sight communications "essentially serving as a sort of wireless telephone" within a range of up to 80 kilometres. During its heyday, the popular 103 was a cash cow for CMC.

By the early 1990s, however, new digital models were replacing the analog, aging 103. Sales slowed, and per-unit manufacturing costs increased. Also, â€othe division was in serious trouble, in terms of meeting revenue forecasts," Hayes recalls. "We had executives in from England [from the headquarters of CMC's then owner, General Electric PLC] on a monthly basis to review the division's forecasts. Our boss would walk around saying, "That's it! I'm out of a job." The pressure was tremendous."

At the same time, Hayes says, U.S. military bases and depots were closing, and gear deployed in the Middle East during the first Persian Gulf War of 1990-91 was repatriated. Consequently, hundreds of 103 radios appeared on the surplus market. To prevent surplus gear from competing with newly manufactured units, Hayes alleges, CMC quietly began buying the more intact units from surplus dealers in late 1991. In fact, Hayes claims he did much of the buying himself.

CMC admits to buying a single used part in 1991, but denies that large quantities of surplus equipment existed. However, Paul Keys, a surplus dealer in Somis, Calif., largely agrees with Hayes: "I'm not sure why they sold them, but the U.S. army disposed of quite a few sets." Keys, who bought hundreds of old 103s at the time, says it's standard industry practice for surplus dealers to notify manufacturers after"and sometimes even before" buying surplus gear to line up potential buyers. "That's the first thing most savvy surplus dealers do," he says.

Assembling radios using surplus and used parts would cost 80% less than manufacturing new ones, Hayes estimates. However, most contracts specifically prohibited this" and where permissible, doing so would significantly reduce the amount CMC could charge. Nevertheless, in documents filed at the U.S. district court of New Jersey, Hayes alleges that CMC used the old gear to fill contracts, without informing customers. He says he learned about the practice early on. "I warned them in writing to be careful who they sold [used gear] to" that was my initial thought,â" Hayes claims. "I was more or less told, "Get with the program, or else." So I did. "

The 103 radio is a critical component of the American Patriot air defense system. Patriot missiles are used to shoot down ballistic missiles and other aerial threats. The 103s allow communications between the various vehicles, radar stations and other mobile units that comprise the Patriot system. The U.S. government sometimes provides Patriot systems to allies under its foreign military sales program; in 1993, it awarded CMC a contract to supply 97 radio sets for Saudi Arabia's Patriot program.

Hayes alleges in court documents that, contrary to specific contractual provisions, CMC built radios from used, reconditioned and overhauled components. He further alleges that serial numbers were changed, and that the radios in question were shipped with new packaging and documentation. What's more, Hayes claims CMC overbilled by charging for support, integration, training and other costs that it never actually incurred. "They took a US$20,000 radio and sold it for US $122,000--that's the bottom line," Hayes maintains. "The executives all knew it was going on and were thrilled that they were making money."

None of these allegations have been proven in court, and CMC's version of events, also spelled out in court filings, is entirely different. Though the company admits to " small percentage of new and unused surplus parts and components" in the units it supplied to the Saudis, it says this was permitted by the terms of its contract. Costs were not inflated, CMC asserts, nor were false invoices issued.

It wasn't until 1995 that Hayes raised his allegations a second time. According to him, CMC's marketer in Saudi Arabia wrote letters to company executives complaining that the 103 radios supplied to the Saudi Patriot program were malfunctioning. This raised concerns that CMC would lose a followup contract for about 200 more units. In fact, Hayes says, the failures originated from newly manufactured meters, not surplus parts" but the internal wrangling worried him. "I didn't want to get blamed," he explains.
Hayes knew nothing about whistle-blowing, and itâ€Ts unclear what processes CMC had in place to handle internal complaints. Hayes, however, says he collected two boxes of documents. And then he wrote to Soos. Subsequently, he went on paid leave and vowed he wouldn't return until the problem was rectified.

According to Hayes, he was again encouraged to toe the line, but this time he wouldn't budge. After many months and several discussions, CMC offered him an arrangement under which he would leave on permanent disability provided by Sun Life Insurance Co. It gave him a lump-sum payment of $22,723, plus undisclosed monthly payments until 2011. Oddly, Hayes says nothing more than a 15-minute consultation with a psychiatrist was required"and he insists he's in good health now, as he was then. "It's pretty much hush money," Hayes asserts

Hayes had a lawyer review the agreement. She wasn't pleased, nor was he. "But I was getting into my 50s," Hayes says. "I'm not an engineer. To go and find a job with the money I was making was almost impossible. I could go find a job flipping hamburgers or selling cars, but I said, "Screw it." He signed the agreement in February 1996--and hasn't worked since.

Sun Life says it agreed to pay Hayes's claim because a psychiatrist's report concluded he was suffering from depression. Nick Thomas, spokesman for the insurer, says that companies holding group policies sometimes ask insurers to pay an employee's claim without subjecting it to the usual scrutiny. However, he adds that Sun Life has been unable to determine why Hayes was exempted, in part because certain employees involved in drafting his long-term disability agreement have since left the company. Sun Life says it was unaware of Mr. Hayes's allegations prior to being contacted by Canadian Business, and is monitoring the situation.

Hayes says CMC did not fire him, nor did it even threaten to. Statistically, dismissal is a frequent outcome. The Washington-based National Whistleblower Center, a non-profit organization that aims to assist whistle-blowers disclose legal and environmental violations within government and industry, conducted a survey in 2002. It found that of 200 participating whistle-blowers, half said they'd been fired after reporting misconduct." A manager who wants to "get even" with a reporting employee can write performance appraisals that gradually build a case for the employee's termination for "poor performance," notes one paper published in July by the New York-based Conference Board, a non-profit disseminator of business and management information. "Slow, deliberate retribution is difficult to prove."

Retribution can take other forms. Whistle-blowers may find themselves threatened, isolated from co-workers, sidelined to corporate Siberia, assigned to demeaning tasks, humiliated or even sued. Those who seek new jobs elsewhere often find themselves blacklisted. Others find themselves victims of smear campaigns. Not infrequently, deterioration in a whistle-blower's career has fallout in other aspects of their lives: lost homes and broken marriages, for instance.

Understanding why organizations typically respond poorly to dissidents is not particularly difficult. You need only think of the world's best-known"such as Jeffrey Wigand at Brown & Williamson Tobacco Corp., Sherron Watkins at Enron Corp. or Cynthia Cooper of WorldCom. Wigand's co-operation with U.S. government investigations into the tobacco industry contributed to tougher industry regulation and dozens of lawsuits, and forced tobacco CEOs to admit nicotine is addictive" something they'd previously denied. Watkins confronted her CEO, Kenneth Lay, about Enron's use of special-purpose entities" and the company went bankrupt within weeks. A similar fate befell WorldCom when Cooper, an internal auditor, discovered that company executives were inflating profits.

It's ironic, then, that organizations frequently request" and sometimes require" that employees bring misconduct to the attention of their superiors. TD Bank's guideline of conduct, for example, requires employees to "immediately and without exception report any irregular business activities."Rules and conventions within certain professions" such as medicine, engineering and law"also encourage whistle-blowing.

Canadian Business conducted an informal survey of the Top 25 companies in its most recent annual ranking of corporate boards, published in August. Of the 18 companies that responded, 16 said they had whistle-blowing polices of some kind. Typically, these mechanisms are embedded in codes of conduct, ethics or business principles. Some, like those at Shell Canada and the Royal Bank of Canada, have been in place for decades. Others, such as the ones at Finning International and TransAlta, are new this year.
The recent surge in whistle-blowing policies is a direct result of the Sarbanes-Oxley Act in the United States. The legislation allows employees of public companies to sue for retaliation following a whistle-blowing incident, and also provides criminal penalties for those who retaliate against informants, including up to 10 years in prison. It also requires audit committees to develop procedures for employees to anonymously raise concerns about accounting issues. Congress believes such provisions will prevent market fraud. U.S. lawyers now advise corporate clients to establish whistle-blowing procedures, create cultures that encourage such behaviour and protect complainants from retribution.

Such provisions are unlikely to become part of Canadian law anytime soon: the recent five-year review of Ontario's Securities Act supported whistle-blower protection in principle but suggested it should be included in corporate or employment-related legislation, not securities laws. Nevertheless, many Canadian firms are following the U.S. example, and Canadian companies that list on U.S. exchanges have little choice. Some firms, like Shell Canada, have gone beyond de facto legal and regulatory requirements by creating an ombudsman to provide greater confidentiality to complainants.

The public sector is also under pressure. The federal government has offered some protection for whistle-blowers who draw attention to environmental or occupational health and safety problems, but has generally resisted calls to enact broader protections. More recently, various arms of government proposed new provisions in certain pieces of legislation that protect whistle-blowers" and observers want more. "Giving full protection to anyone who reports any wrongdoing, especially workers, is a very efficient and effective way to enhance the enforcement of laws, regulations and codes," says Duff Conacher, co-ordinator of Democracy Watch, an Ottawa-based organization that's pressing for whistle-blower provisions in both government and business.

Apart from new laws and public pressure, organizations have other compelling motives to allow employees to raise concerns internally. Hayes's case demonstrates one: if an employer won't listen to complaints, maybe somebody else will.

Following his departure from CMC, Hayes settled into what might seem a typical retirement. He took to reading, mowing the lawn at his Kirkland home, just west of Montreal, golfing at inexpensive courses, and adopting a new frugality as required by his reduced income. His wife, a high-school teacher, returned to work. Dental expenses, no longer covered by the company's health plan, began to sting. Though he continued to receive payments from Sun Life, Hayes nevertheless increasingly began to feel he had been wronged.

A report on CBS's 60 Minutes clinched it. The story, which aired in 1997, discussed what the so-called Lincoln Law" variously known as the False Claims Act or the Federal Qui Tam (Latin for â€ohe who brings an action for the king as well as for himself" Statute. This powerful device allows citizens to file lawsuits on the U.S. government's behalf and receive up to 30% of any fine recovered. "During the Civil War, the Union army would buy horses for their cavalry," Hayes explains, "and the horse dealers would come back at night, steal them, and sell them back the following day. The only way to stop it was to have people on the inside." Signed into law by President Abraham Lincoln in 1863, the act was given sharper teeth through a revision in 1986.

Hayes says he immediately recognized parallels with his own situation. He eventually tracked down Joseph Black and James Moody, two Washington-based lawyers who specialize in the False Claims Act. Black and Moody determined that the use of old, surplus equipment was something of a red herring; the real offense, they thought, was the alleged methods CMC used to inflate the contract's value""something they called a "pricing defect." They informed the U.S. Attorney's Office in Washington of Hayes's allegations, and, soon, several arms of the U.S. government began investigating. After years of delay, the U.S. Attorney's Office officially intervened in the case last April.

CMC is familiar with the False Claims Act, having settled one such case in 1995 along with a fellow contractor for US$3.2 million. (The two companies were alleged to have sold radios to the U.S. army that didn't function well in desert and tropical heat, as required by the contract.) This time, the stakes could be higher. According to Hayes, the U.S. government suffered damages of US$14.6 million. The act permits penalties up to triple the original damages" so CMC could theoretically face a fine exceeding US$43 million.

That would be tough medicine for a company that earned just $358 million in revenue during fiscal 2002. It's unclear what effect an unfavourable outcome would have on CMC's relationships with the U.S. government. Recently, the company has won contracts to supply satellite communications systems to upgrade avionics equipment on the U.S. Navy's fleet of F-14B fighters and a US$110-million contract to supply flight systems for 1,200 U.S. army Black Hawk helicopters.

CMC asked the court to dismiss the case, arguing the False Claims Act didn't apply because the contract was funded entirely by the Saudis, thus precluding the U.S. government from suffering damages. Judge Faith Hochberg rejected that argument in early December. She noted that should Hayes's allegations prove true, the Saudis may demand damages. â€oIt is possible that Saudi Arabia will have less money to spend on other defense needs," she added, "thereby forcing the U.S. to increase its expenditures by a like amount to obtain the same level of global security." Meanwhile, lawyers representing Hayes, the U.S. government and CMC continue to meet in settlement talks. But so far, they haven't reached an agreement.

The CMC of today is much changed from what it was in Hayes's day. The company was bought by Gerry Schwartz's ONCAP LP, the Onex small-cap fund, in 2001, which sold the military communications division to Britain's Ultra Electronics Holdings PLC for US$33.7 million in August 2002. As for Hayes, he now regrets raising his concerns with management. If he had it to do over again, he "would have stayed with the company," he says. "I would have done it for selfish reasons. I would have had that nice paycheque. I did the right thing from a moral point of view, absolutely. But if you're morally right and broke, who gives a shit?"