Corporate Governance Al-Capone
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Transcript of Corporate Governance Al-Capone
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4/29/2013
Corporate Governance- USA vs. Al Capone
Authors:
M. Bin Zaheer
M. Umar Malik
Shireen Anis
Syed Intisar Haider
Submitted to:
Barrister Aun Mohammad
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Table of Contents:
Introduction 1 Move to Chicago and control in Cicero 1 Valentines Day Massacre 1 Conviction and Death 2 The Capone Organization 2 Alphonse Capone Second-Hand Furniture, Inc. 3 Beverage Division 5 Gaming Division 6 Entertainment Division 6 Insurance and Industrial Relations 7 Mergers and Acquisition 7 Prohibition ERA 8 Case 8 Analysis 11
o Alphonse Capone Second-Hand Furniture Inc. Corporate Governance Issueso Reasons of Alphonse Capone Second-Hand Furniture Inc. Downfall
Conclusion 13 References 15
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1 Introduction1.1 Al-Capone a.k.a The Big Guy a.k.a Scarface1.1.1 Alphonse Gabriel "Al" Capone (January 17, 1899January 25, 1947) was an American
gangster who owned and ran illegal activities and businesses in Chicago during the 1920s
which was the prohibition era. Also known as Scarface, Capone had a charmingpersonality and frequently ran charities and was labeled as the modern day Robin Hood
by masses at the time. All of this lead to him being called as one of the most successful
gangsters and mafia bosses of all time.
1.2 Childhood1.2.1 Al Capone was the fourth of nine children born to Gabriele and Teresina (Teresa)
Capone. He grew up in Brooklyn, New York. Capone had a pretty ordinary childhood.
His father was a barber and his mother was a house wife. They were a typical Italian
family who wanted to make it big in the new country. As it happens with migrated
families, all of his siblings dropped out of the school except him who left school at 14. In
the same period, Capone joined a street gang South Brooklyn Rippers and then later the
Five Points Juniors. These were groups of young boys who roamed the streets and were
involved in petty crimes like stealing.
1.3 Personal Life1.3.1 Al Capone married Mary ("Mae") Coughlin on December 30, 1918, three weeks after
their son (Albert Francis Capone, a.k.a. "Sonny") was born. Sonny was the only child to
Capone throughout his life. Throughout the rest of his life, Al Capone kept his family and
his business interests completely separate. Capone was a devoted father and husband as
he took great care of his family and made sure they stayed away from business and from
any related harm.2 Move to Chicago and control in Cicero2.1 Capone was recruited for Chicago by Johnny Torrio who was his boss of the gang he had
joined in New York. Torrio had seen many business opportunities in Chicago,
especially bootlegging following the implementation of Prohibition. Chicago's location on
Lake Michigan gave access to a vast inland territory, and it was well-served by railroads.
Much of Capone's family settled in Cicero as well as his brothers and sisters married there
and spread his business proceedings. The Torrio-Capone organization and the Sicilian-
American Genna crime-family were allies in Cicero. In 1925, Torrio was brutally wounded
in an attack and he handed over all business to Capone and moved out to Italy. It was then
that Capone started several divisions which dealt in illegal businesses like gambling and
prostitution whereas the highest amount of revenue came from alcohol sales.
3 Valentines Day Massacre3.1 It is widely believed that Capone ordered the 1929 Saint Valentine's Day Massacre in
the Lincoln Park neighborhood. Seven people were killed and no one was ever brought to
trial for the crime. These men appeared to be members of Capones rival gang who had
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been increasingly bold in hijacking the Outfit's trucks, assassinating two presidents of the
Outfit-controlled union and made multiple assassination attempts on Jack McGurn, one of
Capone's top enforcers. On the morning of Thursday February 14, 1929, Capone's lookouts
signaled gunmen disguised as police to start a 'raid'. The false police lined the seven
victims along a wall without a struggle then signaled for accomplices with machine
guns. Photos of the massacre victims shocked the public and damaged Capone's reputation.
Federal law enforcement worked to investigate his activities.
4 Conviction and Death4.1 The Bureau of Prohibition started an investigation into Capones businesses which were
violating the Prohibition Act. Frank J. Wilson was the lead investigator who also sought
evidences for Capones tax violations which the government decided were more material
for a conviction compared to violation of the Prohibition Act. His attorneys made a guilty
plea but the judge didnt allow the conditions put forth as he thought Capone wouldnt
follow them so the guilty plea was taken back. His attempt to bribe the jury members was
also failed due to OHares aid. He was sentenced to 11 years of jail which was the longest
tax evasion sentence ever along with heavy fines. His appeals against both the sentence
and fines were also refused. He served 8 years in jail at various prisons with his final years
spent at Alcatraz. In 1933, the Prohibition Act was ended which had a huge impact on his
earnings and hence on power which diminished afterwards. During his prison time, his
health was affected and upon release, he contracted pneumonia and a stroke which further
deteriorated his health. He suffered another fatal cardiac arrest on the very next day and
died on January 25, 1947 and is buried in Hillside, Illinois.
5
The Capone Organization5.1 Founded by Johnny Torrio and then lead by Capone himself, below are the key officers
and directors of the organization:
5.2 Alphonse Capone CEO, Chairman of the Board and major shareholder Member, Audit Committee Member, Compensation and Stock Options Committee
5.3 Frank The Enforcer Nitti Executive Vice President Member, Audit Committee Member, Compensation and Stock Options Committee
5.4 Ralph Capone (Alphonses brother) Vice President, Head of Gaming Division
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Member, Audit Committee Member, Compensation and Stock Options Committee
5.5 Jack Machine Gun McGurn Vice President, Human Relations Member, Audit Committee
5.6 Jack Greasy Thumb Guzik ComptrollerDirector, Head of Accounting Member, Audit Committee Member, Compensation and Stock Options Committee
5.7 Mike De Pike Heitler (Deceased) Vice President, Entertainment Sam Golf Bag Hunt Director, Labor Relations
5.8 Murray The Camel Humphreys Director, Appropriations
5.9 Tony Lombardo Director, Consigliore
5.10 Charley Fischetti (Alphonses cousin) Director
5.11 Frank Diamond Maritote(Alphonses brother-in-law) Director
5.12 Rocco Fischetti (Alphonses cousin) DirectorChief Bagman
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6 Alphonse Capone Second-Hand Furniture, Inc.6.1 Commonly referred to by the customers and employees as The Outfit and had a
diversified portfolio which offered a wide variety of products and services, though most of
them illegal. Founded in 1920 and incorporated in 1924. It was listed on the New York
Stock Exchange and most of the preferred stock was held by Capone himself. Theheadquarters were in Lexington Hotel, Chicago and the main focus areas of business were
Chicago, Cicero and Florida. The business segments are:
Beverage manufacturing and distribution Gaming Entertainment Services Insurance and Industrial Relations
6.2 The Outfit was very successful due to mafia enforcements with the revenues topping $105million in 1930. As per the annual financial report of 1930, below is the division-wise
revenue breakup:
Figure 1: Revenues (millions) Figure 2: Share of Revenues
7 Beverage Division7.1 As the revenue breakup showed, the beverage division contributed heavily towards the
overall revenues of the Outfit. The market share of the Outfit in beverage industry washuge and this division was probably the primary focus of the whole organization.
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Figure 3: Sales Figure 4: Market Share
8 Gaming Division8.1 Personal favorite of The Big Guy, the gaming division accounts for 17% of the overall
revenues. In 1930, Eddie OHare joined Capone Organization. It helped grow the Outfitsrace track venues as well as added to the revenues as OHare owned the patents to that
mechanical rabbit which the dogs chase as part of the race.
Figure 5: Revenues Figure 6: Revenue Breakup
9 Entertainment Division9.1 It involved those professions which everyone hated on the face of it yet most of them were
the customers. It mainly includes three contributors:
Prostitution Stage and Screen Performers
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12Prohibition ERA12.1 During Prohibition, the manufacture, transportation, import, export, and sale of alcoholic
beverages were restricted or illegal. Prohibition was supposed to lower crime and
corruption, reduce social problems, lower taxes needed to support prisons and poorhouses,
and improve health and hygiene in America. Instead, Alcohol became more dangerous toconsume; organized crime blossomed; courts and prisons systems became overloaded; and
endemic corruption of police and public officials occurred.
12.2 In 1919, the requisite number of legislatures of the States ratified The 18th Amendment tothe Federal Constitution, enabling national Prohibition within one year of ratification.
Many women, notably the Womens Christian Temperance Union, had been pivotal in
bringing about national Prohibition in the United States of America, believing it would
protect families, women and children from the effects of abuse of alchohol.
12.3 Prohibition began on January 16, 1920, when the Eighteenth Amendment went into effect.Federal Prohibition agents (police) were given the task of enforcing the law. Even though
the sale of alcohol was illegal, alcoholic drinks were still widely available at "speakeasies"
and other underground drinking establishments. Many people also kept private bars to
serve their guests. Large quantities of alcohol were smuggled in from Canada, overland
and via the Great Lakes.
12.4 Prohibition also presented lucrative opportunities for organized crime to take over theimporting ("bootlegging"), manufacturing, and distributing of alcoholic drinks. Al Capone,
one of the most infamous bootleggers of them all, was able to build his criminal empire
largely on profits from illegal alcohol.
13 Case13.1 The popular belief in the 1920s and 30s was that illegal gambling earnings were not
taxable income. However, the 1927 Sullivan ruling claimed that illegal profits were in fact
taxable. The government wanted to indict Capone for income tax evasion, Capone never
filed an income tax return, owned nothing in his own name, and never made a declaration
of assets or income. He did all his business through front men so that he was anonymous
when it came to income. Frank Wilson from the IRS's Special Intelligence Unit was
assigned to focus on Capone. Wilson accidentally found a cash receipts ledger that not
only showed the operation's net profits for a gambling house, but also contained Capone's
name; it was a record of Capone's income. Later Capone's own tax lawyer Lawrence P.
Mattingly admitted in a letter to the government that Capone had an income. Wilson's
ledger, Mattingly's letter, and the coercion of witnesses were the main evidence used to
convict Capone.
13.2 In 1931, Capone was indicted for income tax evasion for the years 1925-29. He was alsocharged with the misdemeanor of failing to file tax returns for the years 1928 and 1929.
The government charged that Capone owed $215,080 in taxes from his gambling profits. A
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means that the authority assesses the correctness of the type and calculated amount of
income declared, therefore the taxpayer is obliged to possess records and documents that
prove the amount and type of income. In the absence of a legal type of income, however,
the tax authority can report the suspicion of crime to criminal authorities. Furthermore, in
the case of a prosecution, the declared income without a legal source can be used as
evidence against the defendant in court. For instance, in the case Garner v. United States,
the income tax returns in which Garner revealed himself to be a gambler were introduced
in evidence as proof of the federal gambling conspiracy offense with which he was
charged.
13.3.4 In consequence, the obligation to declare illegally earned income is indirect self-incrimination and therefore contrary to the Fifth Amendment. If there are no obligation to
declare the income, however, the crime of tax evasion cannot be committed.
13.3.5 As a general rule, countries have had a long standing difficulty to seize their fair share ofillegal income. Instead of proving the crime and confiscating the proceeds, or when the
proceeds are spent imposing a fine, the states in many cases attempt to tax the earnings,because proving the existence of income or wealth is often much easier. In addition,
taxation can be used to imprison people who commit a crime that is hard to prove.
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Analysis
14 Alphonse Capone Second-Hand Furniture Inc. Corporate GovernanceIssues
14.1 Transparency/Dishonesty14.1.1 There was lack of transparency issues in the company because how the business is being
conducted is not shown or open to public as it was a public limited company listed on
stock exchange. The operation of the company and the way the business is run was not
clear to anyone. Shareholders only get their dividends without knowing exactly that how
the company is earning and making profits. As this company was ran by Gangsters and
Mafia people, so main reason behind this was to hide illegal methods that were used to
run the company/business.
14.2 Disclosure14.2.1 There is also a big issue of disclosures of business transactions by the company that when
and how they were made and why because there were many unclear transactions in the
name of company which was not even traceable. The main reason of this was to hide
their illegal financial transactions which were done by doing different illegal things like
ransom money, protection money, money laundering etc.
14.3 Accountability/Carelessness14.3.1 Then there was no concept of accountability, all financial books were cooked. Window
dressing was used before publishing financial statements to public. The company was
using double accounting methods to hide their illegal money and earnings obtained from
different sources in which the company was involved. The only accountability methodthey have internally used was death.
14.4 Social Responsibility14.4.1 There was some sort of CSR (Corporate Social Responsibility) activity as well done by
this company like its soup kitchen feed three thousand people a day. But all this CSR
work got overlapped or diminished by other illegal activities that this company was
involved in. The company was selling alcohol and gambling and prostitution were also
their prime businesses hence doing a CSR activity like this dont make any sense. At one
end they were killing people who didnt come to terms with them and those who were not
being killed were being fed with alcohol to make sales. Hence the overarching purpose of
this CSR activity was never the welfare of the people, but a way to make a better imageof them so that the illegal activities can be continued.
14.5 Truthfulness14.5.1 The company was not truthful at all because its overall image was not good in the eyes of
public as everyone knew that this company is involved in those businesses or activities
which were officially/lawfully prohibited/illegal or ethically not right. So this was also
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alarming or lack of confidence for its shareholders but as this company was run by
Gangsters so nobody ever asked about it because they know its end result.
14.6 Internal / External Audits14.6.1 One of the major issues of this company was Auditing. There was no concept of Internal
auditing of the companys financial statements or accounting books. So everything that
was stated by company internally was published by the so called independent auditors.
Their reports were largely manipulated due to the dominance of Capone. No cross
checking was done by anyone unless that case of Tax Evasion came on scene.
15 Reasons of Alphonse Capone Second-Hand Furniture Inc.Downfall
15.1 Too much power in hand of Chairman and Chief Executive15.1.1 This company had all of its power concentrated in one person hand i.e. Alphonse
Capone himself as Chairman of Board and Chief Executive Officer of the company.Which is not a suitable option in order to run a company well because Chairmans duty is
to develop strategy for the company and Chief Executive duty is to run day to day
operations of the company so a conflict of interest can occur while decision making.
15.2 Spectacular Share Price Performance15.2.1 As this was the listed company in stock exchange and ran by Gangsters so its share price
promised higher returns but have limited value because all of it was based on illegal
activities & businesses. So those who were investing in the Capone Organization till its
downfall made significant amount of returns and those investing during the trial and
conviction suffered heavy losses.
15.3 Complexity of Financial Statements and Structure15.3.1 As there was black and illegal money involved in companies operations so they used
complex and double accounting methods for their financial statements that were declared
publically so that all there illegal financial transactions were hidden under it.
15.4 Audit Function15.4.1No audit function what so ever was present. No internal auditing was done or conducted
on companys financial position. So people and shareholders were bound to believe
whatever company is stating in the financial statements. The Ries and Shumway were the
external accountants but their reports never revealed any ambiguity or hiding in financial
transactions which again shows their corruption and manipulations. The failed to perform
the due duties of the external auditors, as they just served Al Capone and acted according
to his orders.
15.5 Board of Directors15.5.1 There were 12 directors that were part of the BOD including Chairman. There were no
executive or non-executive directors as well as no concept of Independent director.
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Moreover all decision power resides only with one person that is Chairman of the BOD
as well as CEO of the company.
15.6 Whistle Blower15.6.1 Eddie OHare was the whistle blower in this case, who was part of this company in a
Joint venture. Also he was also acting as police informer by providing company s internal
information which was prevented by other members till date when TAX evasion case
came into scene. He was one of the closest allies of the Capone organization and his
patent of mechanical rabbit was a significant reason for him being joined by Capone and
his race tracks were also a source of revenue for the Outfit hence he was one of the tested
allies of Capone which meant he knew much more than an average employee of the
Outfit. So for a person like him, the whistleblowing was poised to be revealing very
important information and thats exactly what happened as it was OHares information
which ultimately proved out to be the decisive factor for the Capone case and a key
turning point in his life. Although just before Capones release, OHare was murdered.
But he did what he had to do i.e. provide key information and evidence for Caponestrial. This act of whistleblowing leads to the downfall of AL Capone and ultimately the
end of the whole organization.
16 Conclusion16.1 The corporate governance structure specifies the distribution of rights and responsibilities
among different participants in the corporation, such as, the board, managers, shareholders
and other stakeholders, and spells out the rules and procedures for making decisions on
corporate affairs. Corporate governance is the fancy term for the way in which directors
and auditors handle their responsibilities towards shareholders. Others use the expression
as if it were synonymous with shareholder democracy. Corporate governance is a topicrecently conceived, as yet ill-defined, and consequently blurred at the edge.
16.2 The very new concepts of corporate governance at the present if traced back to 1920s and30s , makes us realize that Al Capone had no link with any aspect of it. His empire was
built on bloodshed, money laundering, illegal gambling, prostitution etc. If Al Capone had
been tried in the present era, he would have had to face many additional charges also.
Under the present laws of corporate governance in USA, he would not have been able to
get the company listed with his poor but clever auditing policies and false financial
disclosures. In this case it can also be witnessed that there was no role of directors and
auditors as one man the Scar face was responsible for every decision that is there to
make. Too much power in the hands of one person resulted in the doom of Al-CaponeEmpire. It was not a typical case of a corporate governance failure like Enron, BCCI, Shell
etc. But it can be related to these different examples like the role of Auditors over here was
very similar to that in Enron or BCCI. Plus like in BCCI creative accounting was being
used to hide their true financial losses, in Al-Capone misappropriation of financial position
was being done to hide the income for tax evasion. One thing that is unique to this case is
the criminal ways of getting things done. Killing, threatening, torturing was the way of life.
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Al-Capone though called himself a businessman was essentially a gangster, that is the
reason for operating in such an unethical and unacceptable way.
16.3 Another aspect of the case is the importance of financial investigations, as these details canhave an overpowering impact on the jury. Effective financial investigative tools and
techniques are essential for the money laundering cases. Through this case IRS developed
a system of documentation that has been used effectively in many other prosecutions to the
present day.