MGT 1102 – ETHICS

MOVIE REVIEW

The Boiler Room

Behnoush Sorkhpar

Maximilian Smith

Evgenia Suvorova

Ryan Levenberg

Sheena Shaikh

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TABLE OF CONTENTS

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EXECUTIVE SUMMARY

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1.0 OVERVIEW OF PLOT

“There's an important phrase that we use here, and think it's time that you all learned it. ‘Act as if’. You understand what that means? Act as if you are the fucking President of this firm. Okay?” Jim Young (Ben Affleck)

The Boiler Room story is told through the eyes of Seth Davis, a college dropout who is

seeking the approval of his by-the-book judge father. Seth prides himself on the underground

gambling business he runs out of his apartment in the suburbs of Queens, New York which after

the urging of his father and a new employment prospect at a brokerage firm, Seth reluctantly

shuts down. Seth’s fortunes seem to change when he meets a successful man who promises him

a lavish lifestyle and his first million within three years if he comes to work at the brokerage

firm, J.T. Marlin.

Primarily to appease his father, Seth decides to visit J.T. Marlin to pursue what he thinks

is a legitimate career as a stock broker. The story traces Seth’s humble beginnings as a junior

associate, learning the ropes of the ruthless business world to his quick progression as one of the

fastest learning, results oriented employees at the firm. Seth finds that he is beginning to become

part of the firm’s brotherhood but starts to question the unusually high commissions that J.T.

Marlin is able to pay its brokers. This hesitation continues throughout the movie, as he uncovers

more evidence related to dishonest business practises. Seth goes through a moral battle in which

he tries to deny the harm that the firm is causing regular people in favour of his ego and lifestyle.

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2.0 ETHICAL CONCERNS

2.1 Corporate Governance

In a corporation, the ethical environment and the company’s system of values begins with

the Chief Executive Officer. Leadership must stress the importance of abiding by ethical

frameworks and lead by example. In the Boiler Room the ethical tone of the organization was set

by its founder and leader Michael Brantley which was spread across to the sales managers and

eventually to all employees of the corporation. Leaders at J.T. Marlin did not embody ethical

governance, which meant appropriate policies and guidelines for behaviour were not set out nor

enforced. The stock brokers would knowingly coerce individuals into buying certain investments

based on false information. The brokers clearly violated the National Association of Securities

Dealer (NASD) Code of Conduct since representatives owe customers “due diligence to learn

essential facts relative to every customer, every order”1. In addition, the compliance officer at

J.T. Marlin was shown shredding documents in order to cover fraudulent evidence. Not only was

the conduct of employees unethical inside the firm, Michael Brantley and the sales managers

promoted a lifestyle of drugs, prostitution and violence outside of the firm as well. Personal gain

and self interest lead some businesses to forget their responsibility to the society at large.

Businesses are accountable to stakeholders and society, a fact J.T. Marlin ignores. Additionally,

the actions of a business can have several repercussions on the profession a whole. When Seth

Davis persuades a middle income man with a family to support to invest his life savings in bogus

stocks, it brings the profession of brokerage into disrepute. The ripple effect of one firm’s actions

on the industry as a whole should not be underestimated.

1 http://resources.lawinfo.com/en/Articles/Stock-Broker-Fraud/Federal/stock-broker-ethics.html

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2.2 Human Resources & Decision Making

J.T. Marlin’s human resource policy is simple: hire young employees who do not have

the credentials to work at an established brokerage house and those who don’t ask too many

questions. The firm actively seeks to hire individuals who can be classified as those in stage

three of Kohlberg’s stages of moral development2. Stage three individuals are those whose moral

behaviour originates from peer pressure. These individuals are people who can be easily coerced

and manipulated into engaging in unethical behaviour. J.T. Marlin declined various quality

prospective employees because they have had previous broker experience or their Level 7

securities license. These people were declined because they were more likely to be ethical

individuals higher on Kohlberg’s stages of moral development. The sales recruits in the movie

knowingly involved themselves with the corrupt firm because of social pressures. In Seth’s case,

he believed working at J.T. Marlin would gain his father’s respect. J.T. Marlin had to ensure that

its newest recruits were just as corrupt as the managers in order to avoid any possibility of

litigation. Employees at the firm are trained to make decisions as consequentialists. At J.T.

Marlin, employees believe that the people they are scamming are rich types who have enough

money to go around and therefore their fraudulent acts are not really hurting anyone. However,

the flaw is that the end result of their actions is not good for all concerned. This becomes

apparent when Seth persuades an average income individual to invest in stocks.

2.3 Motivation for Fraud

Fraud is thought to be the function of three factors: need (financial or otherwise),

opportunity and the willingness to rationalize the fraudulent act. In the Boiler Room, employees

at J.T. Marlin rationalise their fraudulent behaviour by claiming that they target whales (rich

2 Len Brooks, Business & Professional Ethics for Directors & Executives, 264

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people) that probably will not even miss the money. Poor internal controls and misguided

leadership coupled with an overaggressive corporate culture provide the opportunity for

employees at the firm to engage in unethical and deceptive behaviour. The core of fraudster

motivation stems from personal needs. The protagonist, Seth Davis, needs the approval of his by-

the-book judge father. Additionally, he desires money and luxurious and expensive indulgences.

More importantly, as his character develops, there is a need for recognition and self

actualization. This link between need and fraudulent behaviour is strong and often the root cause

of deceptive and illegal behaviour. Management at J.T. Marlin feed on these needs to encourage

employees to emulate the chop shop way of business. As shown in the movie, needs become so

consuming that characters rationalize their behaviour with reasons such as entitlement, a

victimless hustle, and denial of responsibility. This behaviour is urged on by the company’s

military like micro culture which has employees obeying orders out of fear and without question.

These are typically attributes of firms which have experienced a downfall due to fraud and other

illegal scams.

3.0 RISK MANAGEMENT

3.1 Internal Controls

The main cause of the ethical concerns in the Boiler Room were deficiencies in J.T.

Marlin’s organizational structure. Had there been effective internal controls established within

the organization, the fraudulent actions of the sales representatives would have been monitored,

detected and prevented. However, since JT Marlin lacked ethical governance, internal controls

were overlooked. Internal controls are incorporated in the structure of organizations to identify,

detect and prevent adverse risks to the company. In J.T. Marlin’s case, the sales managers were

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only concerned about maximizing short-term commissions without any consideration to future

risks (i.e. criminal offense). In an organization with effective internal controls, management is

assured that it is in every individual’s interest to administer activities that add value in order

move the firm towards accomplishing its long-term goals and objectives. In such organizations,

employees are responsible to obey the appropriate framework of internal controls set out by

management which includes: documenting detailed transaction information, ensuring a duty of

care to clients by monitoring sales calls, segregating essential task among management and

safeguarding confidential information.

3.2 Whistles-Blowers

All the employees of the brokerage house, either the team leaders, Chris Varick, or the

trainees (Seth and his peers) should have exercised their own conscience. A stock broker is

expected to exercise professional judgement and should refrain from blindly following the

demands of superiors. Employees should have a sense of what is right and wrong and should

have to right to speak-out when actions seem erroneous. For this reason, a special whistle-blower

protection program should have been developed by the organization to encourage employees to

come forward without grave consequences. The whistle-blower system should promote a

corporate environment where employees are expected to re-solve issues within the organization

as to minimize the risk of impairing the company’s reputation or to seek legal counsel.

In The Boiler Room, Seth Davis voiced his concern about the way employees earned

commissions and how the clients are affected to one his supervisors, Mr. Varick, only to end up

without a response. In fact, when faced with such questions, Chris immediately dismissed the

thought and encouraged Seth to think of the outcome rather than the means. Lack of appropriate

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whistle blowing procedures and internal controls systems were the primary causes of unethical

behaviour within J.T. Marlin.

3.3 Integrity of brokers

Though brokers are not responsible for the investment losses of their clients, that does not mean

that they do not have professional responsibilities. Most clients base their decision on whether to

invest or not, buy stocks in large amounts or wait, mainly on the advice of the broker, what

means that broker’s expertise and knowledge is very important for the client. Therefore, the

stock broker has a fiduciary relationship to the client and is expected to perform its services with

competence, integrity, confidentiality and discipline. Before making any recommendation stock

broker has to understand client’s objective and financial situation. Broker has to find the

investment that matches the needs of every specific client. He has to follow rules of conduct and

client’s needs have to be of first priority. For example, it is illegal and unethical for the broker to

guarantee the client that he will have no losses from the deals what every broker in J.T. Marlin

did; and it is evident, that they cannot make money on their own client’s transactions. Broker has

to act with honesty and loyalty. There is a duty of complete disclosure, that is to say the broker

has to inform the client of all the facts and details. It is crucial for the success of the company in

long term that ethical and moral principles are introduced and maintained; otherwise, if there are

no values established within the company itself and there is no respect for the peers and

customers, the whole organization is at risk of losing its credibility and reputation. Moreover, the

profession of stockbroker will suffer in general, as there will be no trust from the public.

3.4 Ethical Environment

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Ethical competence can be defined as “a learned capability based on ethical intelligence

that results in smooth harmonious and peaceful relationships at every level in the society.3” The

proper discharge of the ethical value of competence relies above all upon the personal ethical

values of the professional. Often, the professional is not aware of the potential ethical dilemmas

or has no knowledge of the consequences for those who must bear the impact.4 In Boiler Room,

Seth Davis was perfectly able to carry out the responsibilities of the job and since the job

required no work ethics, he was one of the best recent additions to JT Marlin. However, as he

mentioned in the movie “I have a very strong work ethic. The problem was my ethics in work5.”

also suggesting that he was knowingly violated the code of conduct. Since corporate ethics were

never enforced at JT Marlin, competence was only measured by the employee’s ability to earn

commissions. Had J.T. Marlin enforced an ethical code of conduct from the top down, the

company’s corporate environment would have changed from coercive to compliant.

4.0 RECENT CHANGES TO CORPORATE GOVERNANCE

There have been significant developments since 2000 when the Boiler Room was filmed.

A decade later, the world has experienced a number of corporate scandals which have led to

major reforms in corporate governance. The awareness of fraud and misrepresentation has

increased substantially in the minds of the public due to vast media coverage of the various

scandals. This heightened awareness has lead to the adoption of stricter rules and regulations

relating to corporate governance.

4.1 SOX Impact

3 http://www.ethicalleadership.com/content/Ethical%20Competence%20Framework%20Intro.pdf 4 Len Brooks, 355 5 Boiler Room –

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After approving the Sarbanes Oxley act into in July 2002, the manner in which public

corporations communicated their financial information with users was forever changed. The

unethical actions that stock traders in the Boiler Room were performing were also

simultaneously taking place in real life corporations, except that they were affecting society and

not just Hollywood actors. Corporate Responsibility is clearly outlined in the act as a process in

which executives take individual responsibility for the financial statements that are produced, as

well as Criminal Fraud Accountability which notifies executives or related parties that their

actions could potentially have judicial consequences. In the Boiler Room, the executives had

clear knowledge that their actions were misleading and blatantly incorrect, which had become a

trend in the business community, and thus specific sections of the act were included to educate

and warn all executives for a final time. In order to monitor and punish corporations, the SEC

had doubled its budget compared to the pre-SOX era which allowed the SEC to investigate

additional illegal activity claims and whistleblower reports. Had this practise been the norm

during the time the Boiler Room was filmed, it is quite likely that the SEC regulator who worked

in the JT Marlin office would have had more integrity and reported the illegal activity, instead of

shredding the incriminating documents. In the post-SOX era, the Boiler Room plot should be

considered a little farfetched and even though it is Hollywood, it should be noted that corporate

governance is now thought of in a different light compared to the pre-SOX era.

4. Canadian Influence

Although the SOX Act only directly affected business in the United States, most

industrial countries around the world followed suite. In Canada, there were significant changes to

the Rules of Professional Conduct and other professional governing bodies. The reforms were

enacted primarily to limit conflicts of interests and to ensure compliance with proper corporate

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governing procedures. Many firms began to adopt strict and complex systems of internal controls

to minimize the risks of corporate crime. In addition, we have seen the strong growth in

companies hiring Ombudsman and Ethic Officers responsible for promoting and enforcing

ethical policies in the working environment. Finally, corporations are more aware than ever of

their impact on the society at large. They are continually trying to mitigate the risk of negatively

affecting society and exhibit a stronger sense of corporate social responsibility.

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