Professional Documents
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4/29/2013
Table of Contents: Introduction Move to Chicago and control in Cicero Valentines Day Massacre Conviction and Death The Capone Organization Alphonse Capone Second-Hand Furniture, Inc. Beverage Division Gaming Division Entertainment Division Insurance and Industrial Relations Mergers and Acquisition Prohibition ERA Case Analysis 1 1 1 2 2 3 5 6 6 7 7 8 8 11
o Alphonse Capone Second-Hand Furniture Inc. Corporate Governance Issues o Reasons of Alphonse Capone Second-Hand Furniture Inc. Downfall Conclusion References 13 15
1 Introduction
1.1 Al-Capone a.k.a The Big Guy a.k.a Scarface 1.1.1 Alphonse Gabriel "Al" Capone (January 17, 1899 January 25, 1947) was an American gangster who owned and ran illegal activities and businesses in Chicago during the 1920s which was the prohibition era. Also known as Scarface, Capone had a charming personality and frequently ran charities and was labeled as the modern day Robin Hood by masses at the time. All of this lead to him being called as one of the most successful gangsters and mafia bosses of all time. 1.2 Childhood 1.2.1 Al Capone was the fourth of nine children born to Gabriele and Teresina (Teresa) Capone. He grew up in Brooklyn, New York. Capone had a pretty ordinary childhood. His father was a barber and his mother was a house wife. They were a typical Italian family who wanted to make it big in the new country. As it happens with migrated families, all of his siblings dropped out of the school except him who left school at 14. In the same period, Capone joined a street gang South Brooklyn Rippers and then later the Five Points Juniors. These were groups of young boys who roamed the streets and were involved in petty crimes like stealing. 1.3 Personal Life 1.3.1 Al Capone married Mary ("Mae") Coughlin on December 30, 1918, three weeks after their son (Albert Francis Capone, a.k.a. "Sonny") was born. Sonny was the only child to Capone throughout his life. Throughout the rest of his life, Al Capone kept his family and his business interests completely separate. Capone was a devoted father and husband as he took great care of his family and made sure they stayed away from business and from any related harm.
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5 The Capone Organization 5.1 Founded by Johnny Torrio and then lead by Capone himself, below are the key officers and directors of the organization: 5.2 Alphonse Capone 5.3 CEO, Chairman of the Board and major shareholder Member, Audit Committee Member, Compensation and Stock Options Committee
Frank The Enforcer Nitti Executive Vice President Member, Audit Committee Member, Compensation and Stock Options Committee
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Jack Machine Gun McGurn Vice President, Human Relations Member, Audit Committee Jack Greasy Thumb Guzik Comptroller Director, Head of Accounting Member, Audit Committee Member, Compensation and Stock Options Committee Mike De Pike Heitler (Deceased) Vice President, Entertainment Sam Golf Bag Hunt Director, Labor Relations Murray The Camel Humphreys Director, Appropriations
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The Outfit was very successful due to mafia enforcements with the revenues topping $105 million in 1930. As per the annual financial report of 1930, below is the division-wise revenue breakup:
Beverage Division
As the revenue breakup showed, the beverage division contributed heavily towards the overall revenues of the Outfit. The market share of the Outfit in beverage industry was huge and this division was probably the primary focus of the whole organization.
Figure 3: Sales
8 Gaming Division
8.1 Personal favorite of The Big Guy, the gaming division accounts for 17% of the overall revenues. In 1930, Eddie OHare joined Capone Organization. It helped grow the Outfits race track venues as well as added to the revenues as OHare owned the patents to that mechanical rabbit which the dogs chase as part of the race.
Figure 5: Revenues
9 Entertainment Division
9.1 It involved those professions which everyone hated on the face of it yet most of them were the customers. It mainly includes three contributors: Prostitution Stage and Screen Performers
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12 Prohibition ERA
12.1 During Prohibition, the manufacture, transportation, import, export, and sale of alcoholic beverages were restricted or illegal. Prohibition was supposed to lower crime and corruption, reduce social problems, lower taxes needed to support prisons and poorhouses, and improve health and hygiene in America. Instead, Alcohol became more dangerous to consume; organized crime blossomed; courts and prisons systems became overloaded; and endemic corruption of police and public officials occurred. 12.2 In 1919, the requisite number of legislatures of the States ratified The 18th Amendment to the Federal Constitution, enabling national Prohibition within one year of ratification. Many women, notably the Womens Christian Temperance Union, had been pivotal in bringing about national Prohibition in the United States of America, believing it would protect families, women and children from the effects of abuse of alchohol. 12.3 Prohibition began on January 16, 1920, when the Eighteenth Amendment went into effect. Federal Prohibition agents (police) were given the task of enforcing the law. Even though the sale of alcohol was illegal, alcoholic drinks were still widely available at "speakeasies" and other underground drinking establishments. Many people also kept private bars to serve their guests. Large quantities of alcohol were smuggled in from Canada, overland and via the Great Lakes. 12.4 Prohibition also presented lucrative opportunities for organized crime to take over the importing ("bootlegging"), manufacturing, and distributing of alcoholic drinks. Al Capone, one of the most infamous bootleggers of them all, was able to build his criminal empire largely on profits from illegal alcohol. 13 Case 13.1 The popular belief in the 1920s and 30s was that illegal gambling earnings were not taxable income. However, the 1927 Sullivan ruling claimed that illegal profits were in fact taxable. The government wanted to indict Capone for income tax evasion, Capone never filed an income tax return, owned nothing in his own name, and never made a declaration of assets or income. He did all his business through front men so that he was anonymous when it came to income. Frank Wilson from the IRS's Special Intelligence Unit was assigned to focus on Capone. Wilson accidentally found a cash receipts ledger that not only showed the operation's net profits for a gambling house, but also contained Capone's name; it was a record of Capone's income. Later Capone's own tax lawyer Lawrence P. Mattingly admitted in a letter to the government that Capone had an income. Wilson's ledger, Mattingly's letter, and the coercion of witnesses were the main evidence used to convict Capone. 13.2 In 1931, Capone was indicted for income tax evasion for the years 1925-29. He was also charged with the misdemeanor of failing to file tax returns for the years 1928 and 1929. The government charged that Capone owed $215,080 in taxes from his gambling profits. A
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13.2.1 "The income tax law is a lot of bunk. The government can't collect legal taxes from illegal money." Al Capone 13.3 United States v. Sullivan 13.3.1 The conviction of Capone was based on the 1927 U.S. Supreme Court ruling in the United States v. Sullivan case. In that particular case, the defendant did not pay income tax on his gains from illicit traffic in liquor. The defense was based on the fact that according to the Fifth Amendment to the Constitution of the United States of America, no person shall be compelled in any criminal case to be a witness against himself. The U.S. Supreme Court decided the following: 13.3.1.1 Gains from illicit traffic in liquor are subject to the income tax. 13.3.1.2 The Fifth Amendment does not protect the recipient of such income from prosecution for willful refusal to make any return under the income tax law. 13.3.1.3 If disclosures called for by the return are privileged by the Amendment, the privilege should be claimed in the return. 13.3.2 This means that persons who earn income by illegal means are required to report unlawful gains as income when filing tax returns, but they are entitled to invoke the Fifth Amendment if any more details are required concerning their illegal income. 13.3.3 However, the system of income taxation is based on the self-assessment method, which means that tax liability is not calculated by the tax authority but by the taxpayer himself. The payment of tax must be preceded by the filing of a return declaring the actual amount of tax due. The amount declared in the return is to be checked by the tax authority, which
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Analysis
14 Alphonse Capone Second-Hand Furniture Inc. Corporate Governance Issues
14.1 Transparency/Dishonesty 14.1.1 There was lack of transparency issues in the company because how the business is being conducted is not shown or open to public as it was a public limited company listed on stock exchange. The operation of the company and the way the business is run was not clear to anyone. Shareholders only get their dividends without knowing exactly that how the company is earning and making profits. As this company was ran by Gangsters and Mafia people, so main reason behind this was to hide illegal methods that were used to run the company/business. 14.2 Disclosure 14.2.1 There is also a big issue of disclosures of business transactions by the company that when and how they were made and why because there were many unclear transactions in the name of company which was not even traceable. The main reason of this was to hide their illegal financial transactions which were done by doing different illegal things like ransom money, protection money, money laundering etc. 14.3 Accountability/Carelessness 14.3.1 Then there was no concept of accountability, all financial books were cooked. Window dressing was used before publishing financial statements to public. The company was using double accounting methods to hide their illegal money and earnings obtained from different sources in which the company was involved. The only accountability method they have internally used was death. 14.4 Social Responsibility 14.4.1 There was some sort of CSR (Corporate Social Responsibility) activity as well done by this company like its soup kitchen feed three thousand people a day. But all this CSR work got overlapped or diminished by other illegal activities that this company was involved in. The company was selling alcohol and gambling and prostitution were also their prime businesses hence doing a CSR activity like this dont make any sense. At one end they were killing people who didnt come to terms with them and those who were not being killed were being fed with alcohol to make sales. Hence the overarching purpose of this CSR activity was never the welfare of the people, but a way to make a better image of them so that the illegal activities can be continued. 14.5 Truthfulness 14.5.1 The company was not truthful at all because its overall image was not good in the eyes of public as everyone knew that this company is involved in those businesses or activities which were officially/lawfully prohibited/illegal or ethically not right. So this was also
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15.1 Too much power in hand of Chairman and Chief Executive 15.1.1 This company had all of its power concentrated in one person hand i.e. Alphonse Capone himself as Chairman of Board and Chief Executive Officer of the company. Which is not a suitable option in order to run a company well because Chairmans duty is to develop strategy for the company and Chief Executive duty is to run day to day operations of the company so a conflict of interest can occur while decision making. 15.2 Spectacular Share Price Performance 15.2.1 As this was the listed company in stock exchange and ran by Gangsters so its share price promised higher returns but have limited value because all of it was based on illegal activities & businesses. So those who were investing in the Capone Organization till its downfall made significant amount of returns and those investing during the trial and conviction suffered heavy losses. 15.3 Complexity of Financial Statements and Structure 15.3.1 As there was black and illegal money involved in companies operations so they used complex and double accounting methods for their financial statements that were declared publically so that all there illegal financial transactions were hidden under it. 15.4 Audit Function 15.4.1 No audit function what so ever was present. No internal auditing was done or conducted on companys financial position. So people and shareholders were bound to believe whatever company is stating in the financial statements. The Ries and Shumway were the external accountants but their reports never revealed any ambiguity or hiding in financial transactions which again shows their corruption and manipulations. The failed to perform the due duties of the external auditors, as they just served Al Capone and acted according to his orders. 15.5 Board of Directors 15.5.1 There were 12 directors that were part of the BOD including Chairman. There were no executive or non-executive directors as well as no concept of Independent director.
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Conclusion
16.1 The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. Corporate governance is the fancy term for the way in which directors and auditors handle their responsibilities towards shareholders. Others use the expression as if it were synonymous with shareholder democracy. Corporate governance is a topic recently conceived, as yet ill-defined, and consequently blurred at the edge. 16.2 The very new concepts of corporate governance at the present if traced back to 1920s and 30s , makes us realize that Al Capone had no link with any aspect of it. His empire was built on bloodshed, money laundering, illegal gambling, prostitution etc. If Al Capone had been tried in the present era, he would have had to face many additional charges also. Under the present laws of corporate governance in USA, he would not have been able to get the company listed with his poor but clever auditing policies and false financial disclosures. In this case it can also be witnessed that there was no role of directors and auditors as one man the Scar face was responsible for every decision that is there to make. Too much power in the hands of one person resulted in the doom of Al-Capone Empire. It was not a typical case of a corporate governance failure like Enron, BCCI, Shell etc. But it can be related to these different examples like the role of Auditors over here was very similar to that in Enron or BCCI. Plus like in BCCI creative accounting was being used to hide their true financial losses, in Al-Capone misappropriation of financial position was being done to hide the income for tax evasion. One thing that is unique to this case is the criminal ways of getting things done. Killing, threatening, torturing was the way of life.
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