Tuesday, January 29, 2008

Reputational Risk, in Two Modes

by Ken Houghton

The headline news is that fraud may have destroyed a company.
The largest creditor of Axium International Inc. sued the company's former principal owners on Tuesday, alleging massive fraud and theft a week after the Hollywood payroll service provider filed for liquidation bankruptcy.

In a lawsuit filed in federal court in Los Angeles, investment firm GoldenTree Asset Management said Axium's former principals, John Visconti and Ron Garber, treated the company "as their own personal piggy bank to finance their extravagant lifestyles."

The undercurrent is that one of the company's subsidiaries provides payroll services to a lot of companies and agencies.
Also on Tuesday, Ehrenberg, the bankruptcy trustee, said he had identified potential buyers for the assets of Axium and one of its subsidiary companies: Ensemble Chimes Global, or ECG, a provider of contract workers and other personnel services.

ECG's assets will be auctioned in U.S. Bankruptcy Court in Los Angeles on Jan. 23, Ehrenberg said. The opening bid for the company is $7.5 million. Last year, Axium paid $80 million in cash to acquire Chimes Inc., which was combined with another Axium subsidiary to form ECG.

Now, there are two things a company working through Chimes/Axium can do at that point. So let us compare examples. The first was sent in early January, within a day or two of the bankruptcy announcement:
I wanted to update you on a situation that has recently arisen. As of yesterday, CHIMES has filed for bankruptcy and has closed their doors at all their clients, including ******.

I am writing this email to let you know that while this situation is being sorted out, your assignment at ****** is still intact and you will continue to be paid weekly by *******. We are a large company that can afford to pay employees.

Please continue to focus on your assignment and if you have any questions, please direct them to me and not your ***** manager.

****** will continue to partner with ****** and provide them our assistance as they work through this situation.

As more information becomes available, I will be sure to reach out to you directly to provide you with any relevant updates. [emphases mine]

That is proactive management. There are quick assurances of the strength of the company, the strength of the contract, and ability of the firm to manage the risk it took on.

The second company's e-mail was sent several days later, without warning, and did not necessarily reach all of those affected in a timely manner (i.e., before they expected to receive a check). Let's do this in parts:
By now you are no doubt aware of the recent developments regarding Ensemble Chimes Global's Chapter 7 filing. We are currently in touch with each client that has been using Chimes as their consultant payment system. They have each told us that they are in the process of evaluating the situation and have asked us to please allow them time to determine how to move forward.

So far, so good. So why are several of us reaching to make certain we still have our wallet?
However, we feel that we must inform you of the possibility that monies caught in the gap of being paid to chimes and not paid to ****** or monies not paid yet to Chimes prior to the time of their Chapter 7 filing are in some jeopardy. We sincerely hope that this jeopardy will be eliminated as soon as possible.

Let us remember that agencies are generally paid net-30, net-60, or net-90, and build that into their cut of the rate. And they extract concessions from consultants (who often work through an agency primarily because they want to smooth cash flows) on the basis of assuming that risk.
Therefore we are encouraging our clients to pay ****** directly and pay Chimes ONLY the fee that they are entitled to and nothing more. This would enable ****** to keep all payments due consultant contractors up to date.

That "would" is worrisome, since any reasonable firm has alternative means of covering the gap—and any other one is suggesting that their risk-management skills, for which they are being compensated by their consultants, is not so good as advertised.
They will keep us abreast of all decisions, and we in turn will contact you with the updates. Our payments to your firm are "based upon remittance of funds to ****** from the client covered by that Purchase Order". ****** has reached out to each client for them to provide a guarantee of payment, so that our future payments to your firm will not be held up.

There was, you will note, absolutely nothing in this note so far indicating that the currently-expected payment was not being made. Nor, given the normal timeframes of payment, would there be any expectation that checks in January for December work would be withheld.
We are committed to partnering with you to minimize the impact of this sudden event, while at the same time ensuring that the client's operations are not adversely affected.

I believe this translates to "you should keep working, but we won't pay you."

The reputation of Chimes may be salvageable.* That of the second company appears to be another matter.

*As part of a larger organization, now:
Richard White, president of Beeline, said in a statement that the firm will work closely with Chimes' customers. "We are aware that many Chimes' clients have suffered recent disruptions to their operations due to Axium's bankruptcy filing. We are ready and able to jump in and provide the resources and solutions necessary to get these clients back online and operating efficiently."

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