By Joshua Schneyer and Brian Grow
MIDLAND, Michigan (Reuters) - Just before he left the company almost two years ago, the former chief auditor at Dow Chemical Co sent a two-page memo to his boss. It was labelled "DOW CONFIDENTIAL."
In the July 31, 2013 memo, which has never been made public, Doug Anderson detailed concerns that he feared could put Dow in legal peril. Almost all these concerns revolved around Dow's high-profile chief executive, Andrew Liveris, and whether Dow may have misled shareholders and U.S. regulators about projects or expenses linked to the CEO.
Anderson hadn't been the only employee to question whether Liveris, 61, was exploiting his position at Dow to finance his lifestyle, further his personal pursuits, or favour his family and friends.
Since 2008, at least three other Dow employees reported similar concerns to top company officials, a Reuters investigation has found. The four employees, including Anderson, have since left Dow.
In more than 2,000 pages of documents reviewed by Reuters, new details and allegations call into question how Liveris, close to presidents past and present, has been running the $58 billion (£38 billion) company. The materials offer an inside look at how one of America's largest multinational corporations conducts itself, and how its internal watchdogs battled their renowned chief executive over what they considered inappropriate practices and perks.
Specific allegations of improper spending involving Liveris first surfaced in lawsuits last year, which Reuters and others reported [http://reut.rs/1bgYO52]. The claims were filed in state and federal court by Kimberly Wood, a former fraud investigator for the company who worked under Anderson during his nine years as Dow's top auditor.
Her suits, and a complaint she filed with the U.S. Occupational Safety and Health Administration, claimed that Dow had fired her in retaliation for raising concerns about Liveris. She alleged that Dow money had financed vacations, sports junkets and other perks for the CEO and his family.
In 2011, Dow disclosed that Liveris had reimbursed the company $719,923 for expenses incurred from 2007 to 2010. Its annual proxy statement offered no details about the expenses, beyond characterizing them as "not primarily business related."
In her lawsuits and OSHA complaint, Wood listed an array of perks that, she claimed, the company had improperly financed for Liveris, his family and friends. Among them: a safari; hundreds of thousands of dollars for Super Bowl parties; and $13,000 in uniforms for his son's basketball team.
Wood claimed that internal auditors identified $13 million in cost overruns on the renovation of a company-owned hotel involving the CEO's wife, Paula Liveris. And Wood alleged that Dow was using its $16 million contract with a consulting firm to channel money to a charity co-founded by Liveris – a claim that Dow's lawyers called "shrill," "reckless" and "utterly unsupported."
Initially, Dow pledged to fight the lawsuits, characterizing them as "baseless" claims filed by a "disgruntled" former employee. In February, the matter seemed to have been put to rest when Dow settled with Wood and both sides agreed not to discuss the cases.
The documents reviewed for this story include more than 1,000 pages from Wood's federal and state lawsuits. Hundreds of other documents that are part of her OSHA complaint were obtained through the Freedom of Information Act. Reuters also reviewed the sworn testimony given by Anderson, as well as Dow's rebuttals to Wood's allegations – information that has never been made public.
The materials show how Dow dealt with the concerns of its auditors.
'LET THESE THINGS GO'
In a response to Wood's OSHA complaint, for instance, Dow confirmed the role of the CEO's wife in the costly hotel project. "Simply put, federal law does not prohibit corporate renovation projects from running over-budget," the company's lawyers wrote. "Nor do they prohibit executives' spouses from being involved in such projects."
Liveris also told top Dow executives that it was "time for retirement" for one manager who had voiced concerns about the hotel cost overruns, according to emails included in Wood's OSHA complaint. According to the complaint, Dow's chief counsel, Charles Kalil, replied to Liveris the next day: "Remind me never to piss you off."
In his deposition in the Wood lawsuit, taken on Dec. 17, Anderson also mentioned Kalil. He testified that Kalil, among Dow's highest-paid executives, encouraged him to ignore the questioned expenses involving Liveris, advising Anderson to "let these things go."
Anderson became so disillusioned by what his investigators found, he testified, that he retracted years of annual reports he had submitted to the audit committee of the company's board. His concern: that the reports vouching for the expenses of company executives were inaccurate.
It isn't clear what action, if any, Dow took in response to Anderson's retraction of the reports, a step that governance specialists characterized as unusual for a company's top auditor.
Contacted by Reuters, Anderson said an agreement he signed with Dow prevents him from making disparaging comments about the company. In the "DOW CONFIDENTIAL" memo, however, Anderson repeatedly cited concerns about possible "errors in tax and proxy reporting."
Annual proxy reports detail executive compensation and are closely monitored by shareholders and the U.S. Securities and Exchange Commission. Companies and their CEOs are required by law to ensure the statements are accurate.
Anderson acknowledged in the memo that his concerns came from information he heard "first, second, and third-hand." In at least one of the seven matters he cited – the renovation of Dow's H Hotel – an independent auditor determined that the company had broken no rules.
SERIOUS QUESTIONS
Even so, the memo contains serious questions that warrant scrutiny, in part because of Anderson's concerns about misstatements in the company proxy, said Jordan Thomas, a former assistant director of enforcement at the SEC. Thomas, who reviewed Anderson's memo for Reuters, said the memo should have triggered "an independent investigation and, if substantiated, potential referral to law enforcement authorities."
Some view the memo differently. Dow "may have determined that there was no information to take to the audit committee," said Norman Marks, former vice president of internal audit at technology firm Business Objects. Marks said it "would have been advisable and good practice" for the company to examine the issues Anderson raised. But "there is no clear-cut obligation," he said.
Through a spokesman, Dow declined to comment or make Liveris and other top Dow executives available. In response to questions by Reuters, however, Dow waived a claim of confidentiality and asked OSHA to release to the news agency two of the company's responses to Wood's complaint.
The company said in one response that Anderson's "DOW CONFIDENTIAL" memo, in some instances, "does not corroborate" Wood's allegations but "merely reacts to them or repeats them."
Dow contended that Wood made erroneous claims about at least one company policy, illustrating a "carelessness with the facts" and a "willingness to shoot first based on incomplete information and ask questions later – or not at all." The company also said Wood's attorney sought a $6 million settlement with a warning that, if the lawsuits were not resolved, "the conduct of the CEO will be front and centre."
Wood's lawyer, Victor Mastromarco, declined to comment on Dow's responses, citing the confidentiality agreement in the settlement of her cases.
Unlike former fraud investigator Wood, whom the company said was making unfounded claims in pursuit of money, Anderson has not sued Dow. In none of the documents reviewed by Reuters does the company impugn his reputation, and nothing in Dow's reply to Wood's OSHA complaint raises questions about Anderson's motives.
For part of his 22 years at Dow, Anderson was one of the company's Global Leaders, a term Dow uses for its top tier of executives. For nine years, Anderson served as chief internal auditor, responsible for audits, fraud investigations and contract compliance. Wood was among the 80 or so employees working under Anderson, but she did not report directly to him.
Outside Dow, Anderson served as a board member of the Institute of Internal Auditors, a professional association. He now teaches accounting at Saginaw Valley State University in University City, Michigan.
STEWARDSHIP CONCERNS
The Australian-born Liveris has spent 11 years leading Dow, and during that time has become one of the best-known CEOs in the world. He has earned more than $20 million annually and serves as an adviser to U.S. President Barack Obama.
Visitor logs show that Liveris, sometimes accompanied by his wife, has visited the White House for dinners or Oval Office meetings at least 20 times since December 2009. The logs indicate that a majority of the visits involved events and meetings that included Obama himself.
In 2012, Liveris co-founded The Hellenic Initiative, a charity aimed at assisting Greece, the recession-wracked land of his ancestors. The next year, Greece issued 250,000 postage stamps bearing the Dow CEO's likeness. A replica of the stamp was featured atop cupcakes served at a 60th birthday party for the CEO, held last summer at the Liveris villa on the Greek island of Kastellorizo. The guests included the prime minister of Greece at the time, Antonis Samaras.
In addition to running Dow, Liveris serves on the board of International Business Machines (NYSE:IBM) Corp and has been a keynote speaker at the World Economic Forum in Davos, Switzerland.
His financial performance has drawn some criticism, however. Last year, activist investor Daniel Loeb's Third Point hedge fund acquired a 2 percent stake in Dow. Loeb launched a campaign chastising Liveris for a series of alleged "broken promises" – from cutting dividend payments to ill-timed acquisitions. These steps, Loeb said, left Dow under-valued.
In November, Dow agreed to appoint two new directors of Third Point's choosing, and Loeb pledged not to criticize Dow for a year.
Loeb's critique has focused on the effectiveness of Liveris. What troubled Wood and Anderson, according to documents reviewed by Reuters, were matters touching upon the CEO's personal conduct.
At large publicly traded companies, internal auditors, investigators and compliance officers are often tasked with identifying unauthorized spending, conflicts of interest and other breaches of the corporate code of conduct. These watchdogs also help to ensure the accuracy of information the firm reports to shareholders and the SEC.
Internal auditors are supposed to have independence from company management. And the chief auditor "must communicate and interact directly with the board," according to standards set by the Institute of Internal Auditors.
At Dow, scrutiny can extend to any of the 52,000 employees in the company's more than 200 locations worldwide.
During his time as Dow's chief auditor, Anderson said in his deposition, he filed annual reports on executive spending to the company's audit committee.
In 2010, Anderson testified, he found something disturbing in the records of one Dow unit: the Customer Events Department. He and Wood said they uncovered evidence that Liveris was receiving unusual services and perks from the department, whose mission is to arrange meetings and entertainment for customers and suppliers.
The discovery prompted Anderson to take a dramatic step.
"I officially retracted all prior reports because I knew they were inaccurate," he testified. "There were clearly business and personal expenses of the executives buried in the…customer events budget."
‘REAL FUNNY STUFF'
Anderson said the audit of the Customer Events Department began in much the same way other audits did: through office gossip, or what he called "whisperings."
His team was unfamiliar with the department. "Nobody knew much about this group, nobody watched it very carefully, and the expenses were kind of high," Anderson testified. "…there was a lot of money flowing through there."
He said he wanted to examine the department without it "becoming a political issue." So, Anderson said he tucked the investigation into the audit plan that he typically submitted to the Dow audit committee. That way, the inquiry would appear no different than many of the other audits his unit undertook.
Not long after the examination began, Anderson testified, the audit team "came back to me and said, ‘We're seeing some real funny stuff in here.' I said, ‘What kind of funny stuff are you seeing?' 'Well, we're seeing Super Bowl parties, we're seeing Andrew's vacations, we're seeing all sorts of things in here.'"
Among the expenses auditors were examining were an African safari and a $218,938 trip to the 2010 Super Bowl in Miami between the New Orleans Saints and the Indianapolis Colts. Liveris and family members were along for both. Dow declined to comment on whether customers were present.
Anderson said he brought in Wood, a fraud investigator at Dow, not long after. He testified that the probe's initial findings showed "evidence of potential wrongdoing from Liveris from the documentation we're seeing … and from the vague answers we're getting." Precisely what Anderson meant is unclear from the documents reviewed by Reuters.
The head of the Customer Events Department, Robert Long, had spent more than three decades at Dow. His role included organising company-funded outings to sporting events for Dow customers and vendors.
Long also offered another service: He was "the go-to guy" for Liveris and family, Anderson testified. Emails between Liveris and Long were frequent. Anderson knew this, he testified, because company fraud investigators had installed software on Long's computer to document the exchanges.
"We can easily see emails back and forth, you know, like a minute apart.…It was frequent communication between those two to set up events for – for things that Andrew wanted, you know, the son's birthday party at the Piston's suite … going to the cricket, World Cup down in Barbados…" The emails he cited were not among the documents Reuters reviewed.
Auditors reported finding that Dow was billed for a party for the CEO's son and his friends, held in a suite at the arena of the National Basketball Association's Detroit Pistons, Anderson testified. The company also was billed for a vacation that Liveris family friends took in Barbados, where matches for cricket's 2007 World Cup were being played, Anderson testified.
What struck Anderson was that, in many cases, the primary customer served by the Customer Events Department was the Liveris family.
MAJOR CUSTOMER
"You would think customer events would have a customer," Anderson testified. "There were a number of events there was not a single customer there."
Auditors determined that Liveris owed around $1 million in personal expenses to Dow. With that tally in hand, Anderson said he called a meeting in 2010 with top executives. In attendance, he testified, were Dow's chief financial officer, its head of human resources, its director of ethics and compliance, and its general counsel, Kalil. Dow declined to make those executives available for comment.
"I presented the information, went through it, and immediately they started to argue…," Anderson testified. "Kalil was the most vocal in arguing with me as to what was a valid business expense and that I should basically stand down and let these things go."
In the deposition, Anderson recounted his efforts to recoup the money. He said Dow's chief financial officer, Bill Weideman, acted as an intermediary between him and Liveris.
"Bill goes back and talks to Andrew, comes up with (a) hundred and something thousand. I tell him it's not enough," Anderson testified. "He goes back and gets some more. It drips and drabbles in over time because the corporate auditor is saying, no, not enough."
Weideman, who retired from Dow last year, did not respond to requests for comment.
It's unclear when Liveris first saw the findings from the internal investigation. After he was presented with them, wife Paula wrote Dow a check, dated Sept. 20, 2010. It was for $124,446.60, according to Michigan court records.
Again, Anderson testified that he determined the amount wasn't enough. The company's audit committee then hired the law firm Gibson Dunn & Crutcher and forensic accountants from PriceWaterhouseCoopers to independently review the expenses.
The outside review showed that Liveris owed more than he had repaid – another $595,476.95. After that review, Liveris' wife wrote Dow a check for that amount on Dec. 31, 2010. Dow disclosed the total amount that Liveris repaid in its 2011 proxy.
That total was still less than the roughly $1 million that Dow auditors believed Liveris owed, Anderson testified. But by the time the investigation concluded, the longtime chief auditor had been reassigned to a new department at Dow, working as a finance director for the company's controller.
CHARITY AND PROXY
Almost three years later, in the "DOW CONFIDENTIAL" memo he submitted upon leaving the company in 2013, Anderson listed among his concerns Dow's "direct and indirect financial support of The Hellenic Initiative," a charity especially dear to Liveris.
In 2012, Liveris co-founded the non-profit to help Greece recover from a financial crisis that has devastated the country's economy. At the charity's inaugural conference in Athens that summer, Liveris sat next to former U.S. President Bill Clinton, who delivered a speech praising the efforts of Liveris and the charity.
But inside Dow, Anderson said he and Wood were troubled by the company's dealings with The Hellenic Initiative.
Specifically, Wood said she was puzzled by a sharp increase in Dow's payments to a consulting company, Teneo Holdings. In 2011, Dow paid the consulting company $2.8 million; in 2012, the year the charity started, its payments to Teneo increased to at least $16 million, Wood alleged. Teneo was listed by Hellenic as a sponsor in the charity's 2014 annual report.
In her OSHA complaint, Wood said she suspected some of the additional money was being funnelled to Hellenic, and a "lack of required detail" in the invoices made it impossible for her to determine how the funds were spent.
In its reply to Wood's complaint, Dow said its payments to Teneo rose because it consolidated a number of contracts in Teneo's hands, saving Dow money. Teneo declined to comment.
In his deposition, Anderson said he was troubled that Dow employees were performing work for the charity. "We had Andrew Liveris, the CEO, saying we're going to do this.… And then people who have full-time Dow jobs are all of a sudden engaged in directly supporting (Hellenic) and their activity," he testified.
Currently, the charity's website lists Louis Vega, Liveris' chief of staff, and Chris Chrisafides, a vice president in Dow's polyurethane division, as "co-secretaries" of The Hellenic Initiative.
Dow declined to comment or make the two employees available. In its response to Wood's OSHA complaint, Dow said the company's support of Hellenic, and related expenses, "were proper and consistent with Company policy."
In the charity's 2014 annual report, Hellenic listed Liveris and Dow Chemical among its largest donors. Each gave "$50,000 and above." In a 2013 tax filing, The Dow Chemical Company (NYSE:DOW) Foundation separately reported that it gave $100,000 to Hellenic.
Mark Arey, Hellenic's executive director, scoffed at Wood's claim that Dow was using its $16 million contract with a consulting firm to funnel money to Hellenic. "I wish we did have that much money to give to Greek charities," Arey said. "We don't. There's no impropriety."
BAREFOOT ON THE BEACH
Another concern Anderson cited in his "DOW CONFIDENTIAL" memo involved the CEO's reimbursement of personal expenses.
Anderson doesn't ask that the company reopen its investigation into the Customer Events Department. Rather, he claims that Dow wasn't forthright in how it characterized the matter in the 2011 proxy.
Possible misstatements in the proxy, Anderson wrote, included the "nature and timeliness of discussions and resolutions with Liveris" and the "implication that (the) total reimbursed was complete." Those issues and others, Anderson wrote, could result in "errors in tax and proxy reporting" or violations of Dow's conflict of interest policy.
Dow has never described in any detail the expenses it wrongly paid for Liveris, and it isn't legally obliged to do so. The proxy described the charges only as "not primarily business related," and stated that the Customer Events Department should have billed the costs to Liveris.
The Liveris expenses were not business-related at all, Anderson alleged. "The word ‘primarily' misleads." Moreover, Anderson said, the Customer Events Department would never have billed Liveris. Customer Events "never billed anybody for anything," Anderson testified. "This was not just ‘Oops, we forgot to bill.'"
Weeks after Dow issued the 2011 proxy statement, the head of the unit, Robert Long, left the company. Long now works for a vendor that does business with Dow. He did not respond to requests for comment.
After Long's departure, Wood continued to question whether the company was financing Liveris' lifestyle. In her OSHA complaint, Wood said she challenged the business purpose for a trip Liveris and his wife took over the 2012 New Year to their native Australia. The getaway, she said, cost Dow $18,000.
In a speech that January at the Australian Consulate in New York, Liveris characterized the trip this way. "I spent a whole three weeks in Australia over the holidays – and never put on shoes once," he said. "Admittedly I was on the beach on the Gold Coast, but you get my point!"
(Edited by Blake Morrison)