Sarbanes-Oxley compliance CDI Corporation - Roger H Ballou (2)

This is the 5th of the recent mails to Roger H Ballou, CEO of CDI Corporation. It raises questions for a second time about their 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, whilst they continued to represent him as a regular MRI Network franchisee.

It should be a simple thing for Mr Roger H Ballou, CEO of CDI Corporation www.cdicorp.com, 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. Is he hiding some SOX irregularity?


---------------------- Start of 5th email described above sent to Roger H Ballou -----------------------

30th March 2007

Mr Roger H Ballou
President and Chief Executive Officer
CDI Corporation

Mr Ballou

I am now in receipt of the letter on behalf of Mr Karlson dated 30th January 2007, relating to questions I raised with you over your personal responsibilities under the Sarbanes Oxley rules.

Firstly let me clarify the erroneous points about changes of my business address and your inability and delays in responding to me. The method I used for communication was email and you could have quite easily responded in the same fashion. You also have known my home address for many years. This was known in 1996 when I purchased a franchise from Humana International Group, the group that you acquired in April 1999. You have also personally emailed me directly in the past on other related matters and you have also regularly sent numerous items directly to my home address from the MRI group. MRI also requested if future correspondence could be sent to my home address, since we were forced to close our business premises when we lost money by working with Mr JW. Mr JW is the person you falsely represented to me, and the rest of the MRINetwork Group, as a regular MRI franchisee. However, the truth is that he had been in growing and substantial debt to you for many years by not paying royalties and who's franchise agreement had expired some years earlier.

Now to the main point:
In the response from your Audit Committee chairman (Mr Karlson), he states that the write off of the debt of Mr JW was done in accordance with the rules of Sarbanes-Oxley and that it is not your policy to disclose details. However the details of the years of growing debt are already known, and what you should have done in accordance with the Sarbanes-Oxley rules is also known, so that is another erroneous point. What is still in question, is whether you discharged your personal legal responsibilities within the rules of Sarbanes-Oxley correctly or whether you failed to do so.

Let me clarify the background and the growing debt that you allowed Mr JW to build over a number of years. Mr JW was originally a regular franchisee of the Humana International Group (HIG). He purchased his franchise on 31st October 1994 and it was for an agreed term of 5 years. It expired on 1st November 1999, some months after your acquisition of HIG. He did not fulfil his franchise agreement obligations of royalty payments to the initial franchisor, HIG, and started to amass debts. In April 1999 you acquired HIG and shortly afterwards renamed it to MRI Worldwide, the international arm of MRI Inc., your established franchise group operating in the USA, and latterly renamed the whole MRI operation to MRI Network. When you made the acquisition of HIG in 1999, you became the owners of the franchise, i.e. the franchisor. You inherited Mr JW's debt of 31,785 UK Pounds (approximately $59,027.62 USD). Instead of dealing with this problem, you chose to allow it to continue un-addressed. However this debt was only known to you and your corporate colleagues, and you chose to conceal it from all the franchisees within the MRI Network. You further compounded this deception by repeatedly representing Mr JW, to the whole MRINetwork, as a regular bone-fide franchisee. This, in my opinion, was a very foolish and irresponsible decision to make, as part of your business model is to actively encourage franchisees to work together on assignments and share resulting cash once completed successfully. That is the 'Inter Office Referral' or 'IOR'. Your chosen concealment of the facts around Mr JW debts and your misrepresentation to the network continued for years whilst Mr JW's debt to CDI/MRI grew year on year. In 2003 you had allowed this debt to grow to an astonishing amount in excess of 170,000 Pounds (approximately $316,000 USD). What is just as astonishing is that Mr JW's franchise agreement expired on 1st November 1999, i.e. a few months after you acquired HIG. So your deceit to the network was not only that Mr JW had an astonishingly large and growing debt to CDI/MRI by not paying royalties, but that after 1st November 1999 he did not even have a franchise agreement. Even if any such franchise agreement were in place (and it was NOT), he would not have been in breach of it, as he was not paying any royalties and his debts were growing year-on-year. This is the person that you continued to represent to all the other regular franchises within the MRINetwork as a regular franchisee with whom we are trained and repeatedly encourage to inter-work with (IOR). In fact when I did share work with Mr JW (IOR), Steve Mills actually congratulated me for doing so! Once again reconfirming the your deceit that Mr JW was simply another regular franchisee. It should have been no surprise to you that Mr JW defaulted on payment to me, in the same way that he had been defaulting on payment to you for many years. However, I was not privy to this track record of growing debts or the fact that his franchise agreement had expired since you chose to conceal that and misrepresent him as a regular franchisee. How reasonable is that Mr Ballou! Do you consider that to be sound management and stewardship of CDI Corporation and MRI? Do you believe that your actions or inactions are consistent with your declared fair dealing policy? To remind you of this it states:

Fair Dealing. 'Employees are expected to deal fairly with Company's customers, suppliers, competitors and employees and not to take unfair advantage through manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other unfair dealings'. Source CDI Corporation web site

I believe that you breached these ethical standards several times morally, ethically and simply by the letter of this. What do you believe Mr Ballou? This is not a rhetoric question, do you believe that you are compliant with your declared statements on Fair Dealing? What is your view Mr Ballou?

In my opinion, your chosen path of allowing this situation to go from bad to astonishingly worse (i.e. debts growing out of control year-on-year, franchise agreement expired whilst you continued to represent him as a regular franchisee) over 4 years is truly bad and unethical management and has a number of implications.

In my opinion:

  • 1) It demonstrates a lack of management of your company and reflects on you personally as I know you had personal knowledge and involvement of this situation.
  • 2) It demonstrates a lack of responsibility to CDI Corporation shareholders.
  • 3) It demonstrates a lack of responsibility as a franchisor.
  • 4) It demonstrates a lack of duty of care to your genuine franchisees, by exposing them to Mr JW and representing him as a regular bone-fide franchisee when only you and your colleagues knew that this was false and that he was a growing and substantial financial risk.
  • 5) It demonstrates deceit to your franchisees. You continued to represent Mr JW as a regular franchisee, when he was in serious growing debt and with no current franchise agreement.
  • 6) It undermines your whole franchise business model of a network that is based on inter-working seamlessly across all franchised offices.
  • 7) It demonstrates breach of my franchise agreement, which 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 Corporation acquisition of Humana and the renaming of it to MRI, but also ran over the period in question under your control).

Mr Ballou, I believe that you failed in your continuing obligation to 'operate' that system of co-operation between franchisees by falsely representing Mr JW as a regular franchisee. The truth about Mr JW is that only you and your management team knew was that he was in serious and growing financial difficulty for years. Only you and your management knew that his franchise agreement had expired. Despite this dire situation, you chose to continue to repeatedly represent him as a regular franchisee even after his franchise agreement had expired. This was not a transitory issue Mr Ballou, it went on for years. During that time there is also evidence that CDI was intimately involved in this. For example: I am now also aware that this growing and uncontrolled debt was of concern to both MRI Inc and to CDI Corporation, and had been for years. For example, shortly after your acquisition, Mr Doug Bugie, (Mr Steve Mills predecessor) wrote to Mr JW on 13th June 2000 were he said:

'Needless to say, the size of the arrearage is balance sheet destroying, it would wipe out our bad debt reserves. CDI Corporation, 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 Corporation on this so I would be grateful if you would confirm the above in writing."

Mr Steve Mills has declared in his sworn affidavit that this and other repayment plans was not adhered to by Mr JW.

  • 8) It jeopardises your entire MRINetwork revenue as I also believe that your have breached the contract of all other franchises who share this or a similar clause in their franchise agreements. I believe that all such franchisees could justifiably use this to terminate their agreements with you for breach of contract. As MRI provides a very significant part of your group profit. This could be quite devastating to your company profits and to my fellow shareholders.

So the real issue here Mr Ballou is not whether you wish to discuss details of MR JW's growing debt and your deception and misrepresentation to the network, but whether you correctly dealt with your personal Sarbanes-Oxley responsibilities in this known quantity debt write-off.

The key questions are:

1) What was the exact Dollar amount that you wrote off for Mr JW's debt, under your Sarbanes Oxley responsibilities?
2) Which dates did you write the amount off in your audited accounts?

These should not be difficult questions to answer, I assume that you don't write-off huge debts like this every quarter. If you have discharged you Sarbanes-Oxley responsibilities correctly, this should not be a problem to answer and close this aspect. If you choose to not answer this question, it will continue to raise the obvious question as to what are you hiding?

How much worse can it get? Here are the known facts:

It is known that you allowed Mr JW's debt to grown over years, from your point of acquisition in April 1999 to culminate at 170,477:60 UK Pounds (approximately $316,626 USD) in March 2003.

It is known that Mr JW's franchise agreement expired on 1st Nov 1999.

It is known that you chose to continually represent Mr JW to the whole of the global MRINetwork as a bone-fide regular franchisee throughout all of this period from your acquisition in April 1999 up until 26th March 2003 when you eventually decided to tell the network that Mr JW was no longer a franchisee. However, for the previous 4 years, you chose to represent Mr JW as a regular franchisee, even though he was in serious and mounting debt and even though his franchise agreement had expired in 1999!

Did you compound this astonishingly bad situation by not discharging your legal Sarbanes-Oxley responsibilities correctly? Your handling of this legal requirement in clarifying exactly when, and the Dollar amount, you wrote-off what against your Sarbanes-Oxley legal requirements is still in question. The amount that you should have written off is not in question, as it is clearly known. That was a debt of 170,477:60 UK Pounds (approximately $316,626 USD). The Statutory Demand that you raised against Mr JW and/or his company on 27th March 2003 corroborates that fact. However, the money was never collected according to Mr Steve Mills' affidavit.

So once again Mr Ballou, I urge you to clarify whether or not you wrote-off the correct amount (i.e. exactly how many Dollars) and which quarter(s) did you write-off this amount? If you fail to answer these questions you are likely to lead people to think you have something more to hide and are likely to be asked the same question by other relevant parties too.

I also note that you have chosen to fail to acknowledge receipt or respond to my last correspondence, sent on 4th December 2006, relating to question of truthfulness of Joseph Seiders affidavit statement made to the Ohio Court on 1st June 2005. You will recall that I contrasted his statements against a number of facts that appeared to show a number of his affidavit statements to be false. Your silence on this topic does nothing to help resolve the questions I raised about his truthfulness. Why are you silent on the question on the ethics of one of your most senior executives? Surely, if you believe that your Senior Vice President & General Counsel (Mr Joseph Seiders) has told the truth, it is in your interest (I mean as leader of CDI Corporation and owners of MRINetwork) to clarify where the apparent lies and misstatements are in fact not lies or misstatement, and return some credibility to the company and organisation relating to ethical standards. I attach another copy of those apparent contradictions for you to reconsider this.

Please acknowledge receipt of this mail by return and indicate when I can expect a reply.

Sincerely
Bob Stewart
CDI Corporation Shareholder



------------------------ End of 5th email described above sent to Roger H Ballou ------------------------

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