Roger H Ballou - Sarbanes-Oxley concerns CDI Corporation (1)

This is the first of the recent mails to Roger H Ballou, CDI Corp. It raises questions about CDI Corporations legal responsibility under Sarbanes-Oxley relating to the write-off of the debt of £170,477:60 UK Pounds (approximately $316,626 USD) that CDI Corporation and Management Recruiters International allowed Mr JW to grow over several years.

It should be a simple thing for Mr Roger H Ballou to clarify whether the write-off of this debt was handled correctly under the legal requirements of Sarbanes-Oxley. I have written to Roger H Ballou about this and he is unwilling to clarify whether this amount was declared correctly and when it was declared under Sarbanes-Oxley rules.

Read the correspondence below and form your own opinions on their legal compliance to Sarbanes-Oxley and and the ethics of CDI Corporation, owners of Management Recruiters International trading as MRINetwork.

---------------------- Start of 1st email described above sent to Roger H Ballou ----------------------

12th October 2006

Mr Roger Ballou
President and Chief Executive Officer
CDI Corporation

Mr Ballou

I am a shareholder in CDI Corporation and I am writing to you today in that capacity. I have some concerns over some specific financial reporting, and other issues highlighted below. I am writing this as an ‘open letter’ as I believe that other parties will also be interested in your answers to these questions.

Historical background:
As you are aware, MRI Worldwide Limited (MRIWW), formally Humana International Group, was acquired by CDI Corporation Inc in April 1999 and operated as the international arm of MRI Inc., a wholly owned subsidiary of CDI Corporation. Both MRI Inc and MRIWW are franchised recruitment companies and operated under one management team ultimately reporting to you.

Mr Steve Mills was the Chief Operating Officer of MRI Worldwide from 1st May 2001 and reported into your team in the USA. He continued in this position until April 2003 when he took on additional responsibilities for field support for the USA offices.

At the time of your acquisition in April 1999, MRI Worldwide Limited (MRIWW) had a particular UK Franchisee, who I shall refer to as Mr JW. Mr JW was represented by MRI as a regular bone-fide franchisee, in good standing, to all other franchisees within the global MRINetwork, not just at acquisition, but also for more than four years thereafter. I know this because I held an MRIWW franchise at that time. The truth about Mr JW however, was however, far from that. Mr JW defaulted on payment to me on split fee work I shared with him in the belief that he was a regular fellow MRI franchisee. After that default of payment to me, Mr Steve Mills revealed to me that Mr JW was in fact, in serious debt to MRI for non-payment of Franchise royalties. However Mr Mills’ revelation to me was only part of the whole truth about Mr JW. The truth is that Mr JW’s debt to MRI had been increasing year on year. In fact at acquisition in April 1999, Mr JW’s debt stood at £31,785 UK Pounds (approximately $59,027.62 USD USD). As the years progressed this debt was allowed to grow and at 11th March 2003 stood at £170,477.60 UK Pounds (approximately $316,626 USD). This point is confirmed by the Statutory Demand that MRIWW filed with the High Court of Justice, against Mr JW and/or his company, issued on 27th March 2003 for the sum of £170,477:60 UK Pounds.

It also emerged that Mr JW’s franchise agreement expired on 1st November 1999. This point is confirmed by Mr JW’s franchise agreement and a statement from Jonathon Taylor (MRI Network Financial controller) who wrote on 29th Jan 2003:

JW’s agreement expired on 1st November 1999…

He went on in that statement to say:

JW was never the easiest person to contact, but he became even more elusive. He moved offices, and we only found out by chance, voice messages and emails rarely yielded a response, and if he was ever in the office he never seemed able to take our phone call. Eventually, after weeks of such messages he would call us on his mobile and act in a very co-operative manner, but no payment was forthcoming. We continued to chase him throughout 2002, albeit at times sporadically.

Mr Steve Mills wrote to your Corporate Board Executives Mr Stuart Jay (Executive Vice President and Chief Financial Officer) and Mr Gregory Cowan (Senior Vice President and Chief Accounting Officer) on the 24th February 2003 about Mr JW stating:

In addition, he questioned the validity of our claim, as his contract had expired in 1999, and he questioned the validity of our demand.

Additionally, Mr Steve Mills swore under oath in a deposition on 4th May 2006 that:

* The first time he believed he spoke to Mr JW about his franchise agreement was 18th Feb 2003 (over 3 years after it expired)
* A repayment plan with Mr JW was put in place in 2001, but that it was not kept to.
* A repayment plan with Mr JW was put in place in 2002, but that was not kept to.
* That he did not believe any subsequent plans were put in place.
* That the first time he believed that he could not recover Mr JW’s debt was on or around the 18th February 2003.
* That he did not believe any money was subsequently recovered from Mr JW in 2003 or 2004 or 2005.

I am now also aware that this growing and uncontrolled debt was of concern to both MRI Inc and to CDI, and had been for years. For example, Doug Bugie, (Mr Mills predecessor) wrote to Mr JW on 13th June 2000 where he said:

Needless to say, the size of the arrearage is balance sheet destroying, it would wipe out our bad debt reserves. CDI, not only MRI is very concerned and looking for answers.

It is worth noting that this ‘balance sheet destroying’ debt referred to in 2000 was relatively modest compared with the amount that you allowed it to grow to over the following three years.

Additionally Jonathan Taylor wrote to Mr JW on 12th May 2000 about a repayment plan stating:

Please also remember that the agreement included a commitment to pay current royalties as they fall due. Without this you will find that the overall debt will continue to rise, instead of going down. We are being pressed very hard by both MRI and CDI on this so I would be grateful if you would confirm the above in writing.

Despite Mr JW’s growing debt to MRI and the fact that his franchise agreement expired in 1999, MRI continued to represent Mr JW to the rest of the MRI network (MRIWW and MRI Inc) as a bone-fide franchisee in good standing. This representation of Mr JW continued to be portrayed by MRI up to 26th March 2003 when Mr Steve Mills notified the MRINetwork by sending a mass mailing newsflash stating that Mr JW’s franchise agreement had been terminated. It is somewhat surprising that Mr Mills felt it appropriate at this stage to declare the termination of a franchise agreement that had expired some three years earlier.

I am aware that you were personally involved in some of the decisions regarding Mr JW and other related issues that were happening around 2003.

MRI’s profit has nearly always made up a sizeable part of CDI’s profit on an annual basis and is therefore very important to shareholders. For example, in 1995, MRI made up only 5.5% of CDI’s total revenue, but it amounted to 36.6% of its total operating profit, i.e. more than one third.

Several questions follow from this:

a) How was this debt of £170,477:60 UK Pounds (approximately $316,626 USD) and/or write-off of debt accounted for via your legal financial reporting responsibilities, Sarbanes-Oxley, specifically for 2003 and any previous and subsequent years or quarters that are were appropriate?

b) Where can I and other shareholders see evidence of how this growing debt of £170,477:60 UK Pounds (approximately $316,626 USD) was discharged under your responsibilities under Sarbanes-Oxley?

c) Was any of the outstanding debt £170,477:60 UK Pounds (approximately $316,626 USD) eventually recovered from Mr JW, and if so, how much and when?

d) Why did you choose to allow Mr JW’s debt to continue to rise year-on-year and not take appropriate action?

e) Bearing in mind that your annual overheads were already accounted for, this debt of £170,477:60 UK Pounds (approximately $316,626 USD) would be bottom line profit for CDI. Do you believe that your inaction over Mr JW’s very large and growing debt was fair, reasonable and responsible to your shareholders and showing sound leadership of your company?

f) Do you believe that your inaction over Mr JW’s very large and growing debt was fair, reasonable and responsible to your other franchisees and consistent with your contractual obligations under the franchise agreement that states:

Franchisor’s Continuing Obligations. Operate a system of co-operation between the Franchisee and other franchisees of the Franchisor to facilitate the interchange of candidates and position openings to enable the Humana Network to maximise business opportunities. (Extract taken from my franchise agreement that predates the CDI acquisition of Humana)

g) Why did you choose to represented Mr JW to the other MRI Inc and other MRI Worldwide franchisees, as a regular franchisee in good standing, when he was in default of his franchise agreement, that in any event had expired and had debts to you that grew year on year to £170,477:60 UK Pounds (approximately $316,626 USD)?

h) Bearing in mind that MRI train and repeatedly encourage franchisees to work together and share work and resulting money, what steps did you take to safeguard other franchisees from the problems of inter-working with Mr JW over his growing years of increasing debt and expired franchise agreement?

i) Do you consider that the representation of Mr JW as a regular franchisee to other franchisee within the MRI Worldwide Ltd. and MRI Inc. network to be Ethical?

To remind you, part of your published code of ethics states:

Be honest and fair in all business activities with customers, vendors and competitors.

j) The sharing of work by your franchisees (jobs and candidates and resulting fees) is a key part of the MRI ethos that is used to sell new franchise agreements to prospective franchisees. It is also a major selling tool to all existing franchisees, who are trained to explain to prospective clients the value of working with a network of experts across multi disciplines and geographical boundaries. Without that capability, the ‘global network’ is simply a group of offices working in isolation. The ability to share work ‘safely’ as trained and encouraged, therefore directly impacts upon the revenue and profit that CDI derives. Do you consider that the representation of Mr JW as a regular franchisee to other franchisees within the MRI Worldwide Ltd. and MRI Inc. network for years whilst his debts grew to £170,477:60 UK Pounds (approximately $316,626 USD) and for years after his franchise agreement had expired, to be consistent with your responsibility as CEO that should lead to enjoying long term growth and profit in partnership with its franchisees?

I would appreciate a return email confirming receipt of this and an indication of when I can expect your full answers.

Bob Stewart
CDI Corporation Shareholder

---------------------- End of 1st email described above sent to Roger H Ballou ----------------------

Also read: