The sweeping allegations unsealed by federal prosecutors Tuesday that university coaches, wealthy parents, and others conspired to get unqualified kids into elite U.S. universities have already shaken up the business world.
By Wednesday, analysts had cut their ratings of Hercules Capital after news emerged that its former CEO, Manuel Henriquez, was charged in the scandal, which also ensnared other business leaders in addition to the actresses Lori Loughlin and Felicity Huffman.
Henriquez had “stepped aside” as CEO of the firm by 6 a.m. Wednesday, and Bill McGlashan, founder and partner of TPG Growth who was also charged, was put on “indefinite administrative leave.” There may be more fallout, as the scandal stirs up rage that may influence how the public views the corporations that employ or are led by people accused of gaming the system.
“This seems to be a legal and reputational issue and a moral disgust factor that rich people bribe to deprive others of their earned slots. I'm surely disgusted,” said Bruce Kogut, a professor at Columbia’s Business School who specializes in corporate governance and ethics.
“Consequences for their jobs depends always on their power, their connections, the reputational risk to the firm to keep them. What we might see is: should some lose their jobs or positions, this will cascade to place more pressure on the others,” Kogut added, in an email message.
‘We’re not talking about donating a building’
The pressure may be particularly acute because the more than 30 parents charged — including CEOs, figures in fashion, investors, and other wealthy individuals — have not elicited much sympathy from the public.
“They’re masters of the universe, and their kids are so dumb they can’t get in on their own merits,” noted Margarethe Wiersema, a professor of strategic management at the University of California, Irvine’s business school.
At the center of the alleged conspiracy is Rick Singer, who ran Edge College & Career Network LLC, known as “The Key.” Prosecutors say he bribed SAT and ACT administrators to falsify exams and also paid off athletic coaches and university administrators to help students gain bogus admission as athletes to schools including Stanford, Georgetown, Yale, the University of Southern California, and Wake Forest, among others. Parents gave him $25 million to pay off university administrators and coaches, according to prosecutors.
While wealthy parents have been known to pull strings to get their kids into college, as Andrew Lelling, the U.S. attorney who filed the charges, said on Wednesday, “We’re not talking about donating a building so that a school’s more likely to take your son or daughter.”
The actresses involved drew the most headlines, but many high- and lower-profile business people also face charges. Gordon Caplan, co-chair of the white-shoe law firm Willkie Farr, was charged, as was Greg Abbott, CEO of the publicly traded International Dispensing Corp. Bruce Isackson, president of commercial real estate firm WP Investments, was also accused of participating in the conspiracy.
‘An integrity trust issue’
While the alleged actions of these parents don’t relate to their jobs, the charges may spur consumers or investors to question their ethics. That could be particularly relevant for indicted parents working in the law or handling people’s money.
“It’s an integrity trust issue,” said Charles Elson, the director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “What’s the old joke? ‘Reputation is so hard to gain, so easy to lose.’”
If any of these parents are convicted in the conspiracy, they will certainly have to leave their jobs and may lose their professional licenses, Elson noted. In the meantime, they’ll likely go on leave, if only to have the time to defend themselves against the allegations.
For example, Stephen Semprevivo, one of the charged parents, has been suspended from outsourced sales company Cydcor “pending resolution of the case,” according to a statement from the company provided to Yahoo Finance. His LinkedIn page lists him as chief strategy and growth officer at the company, but as of Wednesday, he did not appear on its list of executives.
‘The evidence is so damning’
Firms may want to distance themselves from charged executives even before the case is resolved, according to Wiersema, the UC, Irvine professor. “I think even being implicated in this is sufficient for them to step down because the evidence is so damning,” she said.
That evidence includes wiretaps. In one instance, involving the Willkie Farr co-chair, Gordon Caplan, he said, “It’s just, to be honest, I’m not worried about the moral issue here. I’m worried about the, if she’s caught doing that, you know, she’s finished,” according to the criminal complaint. Caplan was placed on leave on Wednesday.
Company boards have a duty to investigate criminal allegations against their executive leadership, noted William Klepper, a professor of corporate governance at Columbia Business School. “You can distinguish, but not separate, a CEO’s behavior on-the-job or off,” he wrote in an email message.
The same logic may apply to other top business leaders implicated in the sprawling case, especially as more details are digested by the public — many of whom may be disgusted by an alleged scheme that sheds light on divisions between the ultra-wealthy and everybody else.
Erin Fuchs is deputy managing editor at Yahoo Finance.