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3/31/2006
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Money, Power, And Principle

A lawsuit against Morgan Stanley provides a rare look into high-stakes IT deals and begs the question: Are you crossing the line?

Morgan Stanley headquartersDinner and drinks at posh restaurants, vendor-provided tickets to premium events, quid pro quo contracts awarded to big customers: They're part of the way big business is done. But in this litigious age of regulatory hyperawareness, companies are getting stricter about how contracts are evaluated and relationships cultivated. The fear: If they don't keep a close eye on their employees' wheelings and dealings, sharp-toothed watchdogs like Eliot Spitzer and the Securities and Exchange Commission will.

IT execs who control multimillion-dollar budgets are among those tempted with the richest of swag: trips, golf outings, celebrity-packed affairs. And in the past, anything went-well, almost anything. Retired CIO James Hatch once fired an underling for accepting "entertainment" from a vendor -- a prostitute. "He was gone," says Hatch, who most recently ran IT for Pactiv.

Nowadays, companies are scrutinizing even the minor stuff. A good night on the town is hardly worth a visit from the SEC or a tarnished reputation. "Anything that smells like a quid pro quo is out," says Ron Strachan, CIO at HealthEast Care System. "No one wants to step out of line." With Sarbanes-Oxley and other regulations to abide by, "a little paranoia is healthy," Strachan says. He's waiting to hear back from HealthEast Care's compliance officer about a proposed trip to a vendor's demo center. It's a precaution he now takes "if anything gray comes up."

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The ethics issue was in the spotlight last week when the plaintiff in a 2-month-old wrongful-dismissal lawsuit against Morgan Stanley provided new evidence, introduced in federal court in New York, that depicts potentially unethical and illegal activities by current and former IT and business executives at the investment banking firm. The evidence comprises dozens of pages of internal E-mails he copied from the company's archive.

The dubious conduct ranges from CTO Guy Chiarello requesting and apparently receiving hard-to-get sports tickets and other favors from tech vendors doing business with the firm, to Morgan Stanley investment bankers pressuring the IT department to buy from certain vendors as a way to win or keep their business. In one series of E-mail exchanges over several months in 2003, an account manager with EMC acts as Chiarello's personal ticket agent, offering him choice seats at premier sporting events. "Just make sure we're covered for the World Series," Chiarello, a Yankee fan, writes to EMC's Lennox Stuart in one message.

Chiarello-who declined to comment-deserves the benefit of the doubt. Other CIOs have faced conflict-of-interest allegations that turned out to be baseless. That was the case last year when Peter Quinn, director of IT for the state of Massachusetts, was accused of violating state regulations by attending conferences sponsored by supporters of a technical standard he favored. A review by state investigators later found that Quinn, who's no longer employed by the state, got the OK from his boss because the trips were relevant to Quinn's job.

Hatch once was wrongfully accused of accepting bribes. He had awarded a mainframe contract that was widely expected to go to IBM to an IBM competitor, and rumors spread that he was on the take. Hatch didn't know of the scuttlebutt until the CEO called him in. Hatch was told that he'd been investigated and that the company concluded the rumors were false. "I was flabbergasted," he says.

Despite E-mail evidence to the contrary, a Morgan Stanley spokesman insists Chiarello didn't violate the company's ethics policy. That policy states: "You and members of your family may not accept gifts or special favors-other than an occasional non-cash gift of nominal value-from any person or organization with which the Firm has a current or potential business relationship."

It's too late to ask Morgan Stanley's compliance officer, Eric Dinallo, about any of this. Dinallo left the firm last week to become general counsel at insurance broker Willis Group Holdings. Morgan Stanley says Dinallo's departure is unrelated to the E-mail imbroglio.

Some companies evaluate gift giving case by case. Equity One recently returned four iPods that were a gift from a vendor that had just sealed a big deal with the shopping center operator, CIO Ilan Zachar says. Equity One, however, will allow gifts or trips from vendors provided there are valid business reasons, he says.

What about dinner and drinks? The local Ruby Tuesday is fine, but "taking me to Morton's steak house every night" is a no-no, says James McGovern, an enterprise architect manager at The Hartford.

IT staffers at winemaker E.&J. Gallo must read and sign the company's ethics policy annually. Among other things, it forbids them from accepting gifts worth more than $25, a common guideline at other companies. Gallo employees must pay for their own meals when dining with vendors, and meetings must alternate between the company's Modesto, Calif., headquarters and the vendor's premises, Gallo CIO Kent Kushar says.

Who's In The Wrong?
The Morgan Stanley case involves allegations of unethical behavior on both sides. The plaintiff in the suit-Arthur Riel, who managed the IT systems that support the investment bank's legal department-claimed in January that he was fired five months earlier for uncovering E-mail that revealed misconduct at the firm. Copies of some of the internal messages were filed with the suit in January and more were submitted by Riel's attorney last week. Riel, whose salary was around $500,000, is seeking $10 million from his former employer. He's seeking an additional $10 million in a related suit filed with the Occupational Safety and Health Administration.

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