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Lessons from the Dark Side

A disgraced human resource leader and his wife tell their story about falling into crime, struggling for redemption and learning valuable lessons through it all.

Wednesday, July 1, 2009
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Meet Nicholas and Carolyn Ryberg. Nick is a former vice president of HR for a Fortune 500 company; Carolyn is a former small business owner.

They are happily married, strive to be good parents and are comfortable in their hometown of Eagan, Minn., a bedroom community just outside of Minneapolis. They are both studying to receive Master of Divinity degrees from the Western Theological Seminary in Holland, Mich. Carolyn is also a resident seminarian at the Peace Reformed Church in Eagan.

They are "normal." They are also ex-cons.

These are not necessarily mutually exclusive conditions, but the Rybergs -- along with experts in ethical leadership -- warn that the current economic turmoil as well as other stressors can turn a high-potential executive into a criminal with unsettling ease. All it takes is a little shove -- and, they say, there's been a lot of shoving of late.

After a few minutes of conversation, it's easy to tell that the two Rybergs are high-achievers whose bold visions of the future are tinctured by a sense of shame for the past. They worked hard, provided for their two children and tasted the sweet fruits of their labors. But the taste turned bitter when their fraudulent scheme was found out. They went to prison and, as a result, lost their home, reputations and contact with their family.

This is their story. It's a cautionary tale, told exclusively to Human Resource Executive® magazine, but it's certainly not the first time the Rybergs have shared their tale of temptation and salvation, and it won't be the last. They both also say the final chapter has not been written, because there are other Rybergs out there who have yet to be discovered, and others yet to be tempted to walk the line between right and wrong.

In 2005, the Rybergs were sentenced to serve time in separate federal prisons for defrauding Koch Petroleum Group, a 2,000-employee refinery, of about $1 million. The company, a subsidiary of Koch Industries, headquartered in Wichita, Kan., has since changed its name to Flint Hills Resources.

"I had a pretty successful career in human resources," says Nick, who estimates that he had about a dozen reports, and upwards of 100 beneath those. "Fairly significant leadership roles for multibillion-dollar companies. I wasn't spending all day trying to figure out how to rip a company off."

The Rybergs' crime began simply enough. As the top HR leader for Koch, Nick had broad oversight in other departments; in addition to human resources, accounting, security, records management and IT all reported to him. Many companies might shy away from allowing such a broad management footprint, but Koch is driven by a market-based management philosophy, pioneered by Charles Koch, the company's chairman and CEO.

At its core, the philosophy allows every division in a company to operate with autonomy and encourages employees to tap into their entrepreneurial spirits.

By empowering virtually every employee through market-based management, "basically, the idea was, 'Get it done,' " says Nick.

He had ultimate approval and veto power over purchasing and services for the departments he oversaw. Carolyn operated an executive search business. It seemed like a match, at first, when Nick needed to fill some vacant positions.

One day in 1999, Nick proposed to Carolyn that they could make a little profit on the side by using Carolyn's executive-search business, and they could skirt questions of irregularities by keeping Carolyn's business registered in her maiden name, Kelly.

It was not a big deal, they reasoned at the time. Carolyn's business was legitimate; Nick's staffing requirements were also legit -- at least, at first.

"Nick came home one day and said, 'Hey, I know you're doing resumes, and we need some engineers,' " says Carolyn. "[He said], 'We can make some money on this, which will help you [work] on other things.' "

He suggested that Carolyn use the name Kelly when submitting invoices to her clients for search fulfillment, to avoid the appearance of a conflict of interest.

Carolyn pauses. "And I said ... 'OK,' " she says. She and Nick now know that this was the turning point.

Were there alarm bells? Sure, but Nick and Carolyn say they stifled them with rationalizations. Carolyn's passport was in her maiden name; her business was in her maiden name. Nick let his sense of autonomy take the wheel of his conscience. "I thought, 'I have the power to control this,' " he says. " 'At worst, it's a civil matter if it ever got that far, and we're not going to do it that often, anyway.' "

They wanted just a taste, they say.

"It doesn't happen one day, where you wake up and say, 'I want to steal $1 million today,' " says Carolyn. "A journey of 1,000 miles begins with one step, and $1 million begins with one penny."

At the start of the scheme, Nick's staffing requests to Carolyn were viable, and she successfully furnished candidates.

"At some point, there was less work, then no work done for invoices submitted," says Nick. "A kind of momentum started to build. There was more irrational thinking, more justification [and] more sense of need or incentive."

They fed the engine of the fraud by spinning new, phantom staffing firms. It began to pay off.

New kitchen? Absolutely. Better cars to reflect their position in their upscale neighborhood? Family vacations? Yes and yes -- they needed to "fit in," they say.

Soon, they were living better, only to discover that they were trapped by their own dynamo, fearing that suddenly ceasing their fraud would draw attention to their crime.

"A lot of times, stopping the process makes it more difficult than continuing it," says Nick.

Still, the narcotic quality of rationalization continued. Carolyn says the invoices were not slipped under the table, but were reviewed and processed in front of others in accounting. Nick says the difference between that process and other companies' invoice-review processes was that, at Koch, those in accounting reported to him. 

"And, I was accountable for budgets, and I was always within my budget," he says. "I'd present a targeted range of expenses for the year, and we'd meet that target. Everybody was happy," and, whether they knew or suspected anything, everybody stayed under the radar.

The Fraud Diamond

The Rybergs frequently use words such as "rationalization" and "opportunity" when they tell their story. The terms come from a report called The Fraud Diamond: Considering the Four Elements of Fraud, by David T. Wolfe, a forensic accountant, and Dana R. Hermanson, a professor of accounting at Coles College of Business at Kennesaw State University in Kennesaw, Ga.

The 2004 report cites four essential ingredients or personality traits that can lead to fraud in the workplace: incentive, opportunity, rationalization and capability. Nick knows the report well, he says.

"Opportunity opens the doorway to fraud, and incentive and rationalization can draw the person toward it," the report states.

Despite the extra cash, Nick says, the income was not the main incentive. Rather, it was the "open door" opportunity that was a part of the management style at Koch.

"That's a big part of it, the opportunity," he says. "In a lot of situations, there are not a lot of opportunities, because there are enough control points in purchasing and accounting and human resource systems."

Is he blaming "the system," then? "No, no," he says. "I take full accountability for our crime." Rather, he says, theirs is a classic case of The Fraud Diamond.

From what he's heard, John Jones says, he agrees. There are more Rybergs out there today because there are more economic stressors now, and the opportunities are increasing, says Jones, vice president and chief scientist for Vangent Inc., a human capital management service based in Chicago.

Jones refers to an earlier version of The Fraud Diamond entitled the Employee Risk Triangle, which includes need, opportunity and attitudes as its three points. He cites the triangle as one of the major theories of deviant business ethics in a recent Vangent study, Organizational Ethics and Counterproductivity Risks in an Economic Downturn. The study is based, in part, on a variety of surveys conducted by the Securities and Exchange Commission, Deloitte Financial Advisory Services and others.

"The [propensity] to engage in unethical behavior is higher [in today's downturn], because no one is meeting their earnings," says Jones. "Another [factor] is opportunity. Some of these companies are de-layering, so there are fewer audits, and people are focused on [laying off] staff and expense control."

Is HR any more susceptible to criminal behavior than other corporate functions? Jones doesn't think so, but does say the temptation to commit crimes in HR can be just as high as in other C-suite functions.

Combine fewer controls and more opportunity with static or declining salaries, disappearing bonuses and shriveled 401(k)s, Jones says, and the foundation of ethical standards begins to decay, pretty much across the board.

The bar for "what's considered orderly is set lower. What's considered ethical gets set lower," he says.

Jones, who started researching corporate ethics in 1978, believes ethical misdeeds increase in direct proportion to the perception of declining standards. He cites what is known as the "social-disorder theory," the notion that the more unkempt a neighborhood appears, the greater the likelihood of its harboring criminal activity.

"All of a sudden, I'm looking at companies that are not investing in facilities, that are laying off people; they're cutting back," he says. "And [executives] will shrug their shoulders and say, 'Well, what can we do about it?' And the minute that happens, there's going to be an increase in unethical behavior."

David Childers, CEO of EthicsPoint, a Portland, Ore.-based online Sarbanes-Oxley Act and compliance service, agrees that, where there's a low threshold for ethical standards and an economy that's stuck, "the risk factors for fraud and abuse go up significantly."

Tripped Up

Even before the economy took its most recent nosedive, the Rybergs' scheme had been paying off for four solid years, to the tune of more than $960,000. During that time, they would periodically "take a walk" to discuss the fraud, says Carolyn, but they continued to deceive themselves into believing that what they were doing could be managed.

There are, at times, those great unspoken realities -- the proverbial elephant in the room -- and there were just such times between Nick and Carolyn. "We were in a situation, on a personal level, where our relationship wasn't as open and healthy as it should have been," Nick says, "so we were able to rationalize with one another."

Carolyn puts it even more specifically, saying there are "cognitive-thinking errors and criminal-thinking errors." We all have cognitive-thinking errors, she says -- disconnects, poor wiring. We also all have the potential to become criminals, she adds.

"A lot of people will say, 'Well, I'm not a criminal, so I don't have criminal-thinking errors.' But we do. It's just whether you choose to act on them or not," she says.

One day in 2003, their gravy train flew off the rails. The company was undergoing a changeover in the way accounting systems worked with the IT group. It was during this time that Nick accidentally submitted a false invoice with an address that didn't match the Ryberg's phantom business.

The system flagged the invoice as an error, and "someone then called compliance," says Carolyn. An internal audit was conducted, the scheme was uncovered and Koch then notified its legal counsel and the U.S. Postal inspectors.

The deception between the Rybergs was finally over. In the two years before their sentencing, Nick and Carolyn saw everything they had acquired -- legally and illegally -- pulverized because of their fraud. They were broke, and broken.

In February 2005, Nick was sentenced to serve 30 months at the Federal Correctional Institute in Morgantown, W.Va. Carolyn was sentenced to 24 months at the Federal Prison Camp at Alderson, W.Va. Granted, neither was the worst place to be. Both are minimum-security. In fact, Alderson was sometimes derisively referred to as "Camp Cupcake" because it housed cooking maven and décor diva Martha Stewart at the time of Carolyn's sentencing.

But don't kid yourself, Carolyn says. Prison is prison; life is put on hold. The Rybergs were even forced to split up their daughters, 15 and 16 at the time -- Nick and Carolyn's daughter went to stay with a friend in Chicago, the other was sent to stay with her biological father in Los Angeles. Carolyn says it was a decision she and Nick made, rather than risk having the court decide how to handle the children.

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"You can't even imagine what these girls ... ," she pauses, sounding as if she's drawing her words from a deep well. "While the victim was Flint Hills and Koch ... on a broader scope, it's the family . ... Both these girls were separated and bled ... went through horrendous things. You can only imagine."

And while the Rybergs were shuddering to imagine their girls' lives from behind bars, they didn't even have each other's shoulder to cry on. Neither was allowed to speak to the other via telephone, although they regularly exchanged what Carolyn refers to as World War II-style "love letters."

The Road to Redemption

It was a single step that started them on the path to the penitentiary; and a single step that guided them to penitence. Even before she was sentenced, Carolyn says, she felt gratitude that she and Nick might have the opportunity to right their life's course, and maybe even serve others.

"I am deeply sorry for my criminal wrongdoings and the fruits they bore," Carolyn read from a statement she prepared on sentencing day. "To my children, and my family, I am deeply sorry for causing tremendous strife and grief in your life ... ."

She also apologized to Charles Koch "and the employees of the company. I have wronged you, I have caused great pain and suffering to your good corporate name, Flint Hills Resources." Sentencing Judge Joan N. Eriksen of the Federal District Court in St. Paul, Minn., applauded her statement. (At the time, Nick did not issue one.)

True enough, there are plenty of converts in foxholes, but Carolyn and Nick -- whom Carolyn says "turned the corner in prison" -- have, so far, made good on their word to pay restitution and pay a debt to society by helping others avoid the ethical trap of criminal behavior that they sprung on themselves.

Since their release, the Rybergs have been evangelizing the need for greater ethics in both personal and corporate affairs. Their Web site, Ethos-One (www.ethos-one.com), testifies to their mission of helping people and companies avoid criminal behavior. Their message is certainly timely, considering the string of C-suite crimes that have involved HR leaders in recent years:

* William Sinclair Jr., an HR executive with the Library of Congress, who was charged in December 2008 with conspiracy, wire fraud and identity theft for allegedly stealing names from the agency's database and passing them on to his cousin;

* Gregory Horton, former executive vice president of HR for America Online, who pled guilty in 2005 and did time for scamming AOL and others by billing for millions of dollars in phantom services;

* Nancy Tullos, former HR vice president for Broadcom Corp., who pled guilty to the role she played in an illegal stock-option backdating scandal involving Henry Nicholas, co-founder of the company, who was convicted in 2008;

* Gary A. Ray, former vice president and head of HR at KB Home, who pled guilty in February 2009 to falsifying reports and conspiring with CEO and Chairman Bruce E. Karatz to obstruct a Securities and Exchange Commission investigation into yet another case of stock-option backdating;

* Dennis M. Dowd, former senior manager of corporate benefits for Hitachi America, who pled guilty in March to setting up a fake bank account and stealing $6.1 million from the healthcare plan between 2000 and 2008;

* Elizabeth Billmeyer, human resource manager at Agriprocessors, a kosher meat-packing plant, who pled guilty after being charged in March to harboring undocumented alien workers for profit;

* Alejandro Urrutia-Garcia, HR manager for Universal Industrial Sales Inc., who got 36 months of probation in February for helping undocumented worker get jobs; and

* Christian Deeb Rahaim, a former human resource executive at Enron Corp., who was sentenced to five years and three months for wire fraud in 2007 after scamming nearly $3 million from the company. His crimes were committed years after Enron went bankrupt following what is now considered the mother of all ethical meltdowns -- the accounting scandal at the then-energy giant that was revealed in October 2001.

The Rybergs don't just stop at publicizing their pleas for more ethical corporate behavior, however; they also take their show on the road as part of a select group of fellow ex-cons who lecture to business and law students on ethical leadership.

The group is led by former Assistant U.S. Attorney Henry Shea, who founded the program seven years ago after an executive he had prosecuted for insider trading and securities fraud agreed to spread his cautionary tale to business leaders and students. It wasn't a gigantic leap for the convicted executive, at the time, since he was also a business instructor at the school -- the University of St. Thomas in St. Paul, Minn.

"I got a couple other people [for the presentation] who I had prosecuted, but he was the main draw," says Shea, now an instructor for the university's School of Law and for the Holloran Center for Ethical Leadership in the Professions. When he was flooded with requests to attend from students and community leaders, Shea knew he was onto something.

"So many people were coming up to me and telling me, 'This is so much more meaningful than some of the stuff they're teaching in the business schools and law schools in terms of ethics and personal responsibilities,' " he says.

The format of the presentation hasn't changed much in the intervening years. Shea refers to himself as "the set-up man," and lets his expanded list of disgraced executives present their cautionary tales of lapsed ethics. Throughout the year, Shea and his group appear before law and business students in the St. Paul area, and have begun traveling to other schools, as well.

This fall, the group will appear at Dartmouth College in Hanover, N.H.; Harvard University in Cambridge, Mass.; and Boston College in Boston.

He doesn't think his subject matter will fall out of fashion anytime soon. "As serious as our economic crisis is, it is far more serious a problem for the future of this country that we have had a failure of ethical leadership," he says. "It is throughout our country, in our communities, businesses and schools. There's plenty of evidence out there."

It's not as if top business schools are unaware that a problem exists. Nearly 20 percent of this year's graduating class of Harvard Business School signed a voluntary pledge, called "The M.B.A. Oath," in which they vow to conduct themselves ethically in the business world. Harvard's not alone, either.

At Columbia University's Graduate School of Business Administration in New York, all graduates are expected to pledge to act with integrity and to reject the temptations of cheating and stealing.

Are there other Rybergs out there in C-suites and in HR? "Absolutely," says Nick. "I do not think it's an anomaly. One thing I emphasize is that there have to be more accounting controls and transaction reviews. I'd also be looking at individuals with large span-of-control systems."

Like Jones, Nick says corporations that are de-layering risk more than staff if they're not careful. Although SOX has helped to clamp down on the potential for fraud, Nick says, "I still think there's a huge degree of vulnerability."

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