The Nestl Infant Formula Controversy

and a Strange Web of Subsequent Business

Scandals

Colin Boyd

Journal of Business Ethics

ISSN 0167-4544
Volume 106
Number 3

J Bus Ethics (2012) 106:283-293

DOI 10.1007/s10551-011-0995-6

1 23
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 Author's personal copy
J Bus Ethics (2012) 106:283293
DOI 10.1007/s10551-011-0995-6
The Nestle Infant Formula Controversy and
a Strange Web of Subsequent Business Scandals
Colin Boyd
Received: 25 April 2011 / Accepted: 7 August 2011 / Published online: 21 August 2011
 Springer Science+Business Media B.V. 2011
Abstract The marketing of infant formula in third-world
countries in the 1970s by Nestle S.A. gave rise to a con-
sumer boycott that came to be a widely taught case study in
the field of Business Ethics. This article extends that case
study by identifying three specific individuals who were
associated with managing Nestles response to that boycott.
It reveals their subsequent direct involvement in a number
of additional classic 1980s business scandals (some of
which ended with major criminal trials and the imprison-
ment of eminent business figures)and describes tangen-
tial linkages to other business scandals of the time. The
article discloses a behind-the-scenes pattern of business
villainy, adding both depth and breadth to previous
accounts of these scandals. The article offers a conceptual
framework that goes beyond personal greed as an explan-
atory factor for such unethical behavior in the business
world, suggesting the presence of personal and organiza-
tional networks of intrigue and opportunity. The linkages
between the scandals suggest an epidemiological process
with the plotters acting as virus carriers contaminating
various corporate cultures.
Keywords Beech-Nut
Drexel Burnham

Ernest Saunders
Guinness
Infant formula

Insider trading
Nestle
C. Boyd (&)
Department of Management and Marketing, Edwards School
of Business, University of Saskatchewan, 25 Campus Drive,
Saskatoon, SK S7N 5A7, Canada
e-mail: boyd@edwards.usask.ca
Introduction
The field of Business Ethics relies on a relatively small
core of well-known cases of corporate behavior to illustrate
the themes of the subject. Near the top of this list of
familiar names (e.g., the Ford Pinto, Tylenol, and Bhopal)
is Nestle S.A., the Swiss food conglomerate. Of all the
business histories examined by students of ethics, Nestles
saga of controversy is perhaps one of most intriguing.
In the late 1960s, Nestle was criticized by social activ-
ists for its marketing of powdered milk formula for infants
in less developed countries. The case became a cause
cele`bre as Nestle became the victim of a well-organized
boycott campaign.
The conflict has become a popular case study in the
business school curriculum because it demonstrates the
need that companies have to constantly preserve and
enhance their legitimacy in the public eye. The dis-
cussion of legitimacy leads quite naturally into a dis-
cussion of issue management, and the consequences of
mismanaging a public issue (Post 1985 p. 127).
Although Nestle was the subject of the boycott, the infant
formula controversy may have initially been seen more as a
dispute over generic bad practices within the infant formula
industry rather than as a focused attack on one particular
firm, a perspective that Nestle itself may have wanted to
engineer. The original publication that stimulated the boy-
cott refers to an industry-wide pattern of marketing of infant
formula. (Muller 1974) To begin with Nestle was illustrative
of an overall malaise, and it is conceivable that if it had not
been the industry market leader then social activists might
have initially focused their attacks on an alternative firm in
the industry. Nestle was the unwilling representative of the
entire formula industry (Frederick et al. 1992, p. 563).
123
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284
The Nestle boycott evolved to be essentially impersonal,
therefore. It came to be directed at Nestle as an evil col-
lective corporate entity rather than at specific named
managers as particular villains within Nestle, individually
responsible for Nestles corporate actions.
Even if there had been individual identifiable villains
within Nestles senior management it was considered
unlikely that their unethical behavior would continue after
the boycott because of the need for pragmatism:
The corporate culture at Nestle has been profoundly
affected by ten years of conflict and a seven year
product boycott. Employee turnover and morale is
known to have been affected, and management
attention to the boycott has cost the company dearly
in terms of other business needs and decisions. One
factor that encouraged the company to act to end the
boycott is that Nestles new senior management has
wanted to turn from this issue to other, more pressing
business problems (Post 1985, p. 124).
This article explores the ethical conduct of Nestle and
some of the firms senior managers in those years follow-
ing the infant formula controversy. A priori, Nestle would
be expected to seek and achieve a reputation of good
conduct in the aftermath of the controversy, if only to avoid
the glare of further adverse publicity.
Unfortunately, the history of Nestles direct and indirect
involvement in some major business scandals in the 1980s,
as revealed below, suggests that some senior managers of
the firm were irredeemably unethical. Nestles role in
these further scandals leaves little doubt as to the historical
origins of the infant formula scandalNestle had a con-
tinually defective culture at the most senior level of
management.
This article attempts to extend our knowledge of the
Nestle infant formula controversy by naming specific
unethical individuals within Nestle. Their influence on
Nestles overall behavior has been previously overlooked,
as if there were no one who had been behind the steering
wheel causing Nestle to behave the way in which it did.
The article opens with a brief review of the infant for-
mula controversy, and then describes the recruitment of
Ernest Saunders to Nestle. He was put in charge of nego-
tiating the end of the Nestle consumer boycott. He became
head of a division of Nestle that then acquired the US baby
food firm, Beech-Nut Nutrition. This firm was subse-
quently fined for selling fake apple juice for babies, and its
senior executives sentenced to jail.
The article describes how Ernest Saunders left Nestle to
become head of the UK brewing firm Guinness, appointing
his friend Arthur Furer, the Chairman and Managing
Director of Nestle, to be a director of Guinness. Another
director he appointed was Tom Ward, a US legal
123
C. Boyd
consultant to Nestle who had worked with Saunders and
Furer on the baby-milk case, and who had also been Beech-
Nuts attorney.
After engineering a takeover of one Scotch whisky firm,
Saunders later consulted with Ward and Furer over the
possibility of Guinness taking over the giant UK firm of
Distillers Ltd, the major player in the Scotch whisky
industry. The takeover, which involved a share swap,
eventually succeeded and was the largest ever takeover in
British business history at that time. However, as a result of
subsequent revelations by Ivan Boesky, the convicted
insider trader, Saunders was later jailed for stock manip-
ulation in the Guinness takeover of Distillers. Ward was
prosecuted for theft.
A major participant in the Guinness stock manipulation
scheme was Bank Leu, a Swiss bank coincidentally chaired
by Arthur Furer. The article further relates how Dennis
Levine, the disgraced insider trader from Drexel Burnham
Lambert, came to route all his illegal trades through Bank
Leu.
This set of scandals involves many of the most infamous
episodes in the history of business in the 1980s, some of
which ended with major criminal trials and the imprison-
ment of eminent business figures. At the core are three
individuals from Nestle who were involved in negotiating
the end of the Nestle boycott. The article concludes with an
analysis of the possible causes of the clustering of this
constellation of business scandals around the Nestle Furer
WardSaunders nexus. A Venn diagram showing the
relationships between these scandals is shown in Fig. 1.
The final section of this article examines a tangential
phenomenon illustrated in the diagram, the predation of
firms which themselves had suffered from scandals. Thus,
the article describes further links to the Thalidomide
tragedy, the Bhopal disaster, and the Perrier product recall.
Ernest Saunders and the Infant Formula Controversy
Nestle, the Swiss food conglomerate, was subject to con-
sumer boycotts in the 1970s because of its marketing of
powdered milk formula for infants in less developed
countries. Free samples were distributed at maternity units,
and by sales representatives dressed as quasi-medical per-
sonnel. The criticism was that third-world mothers were
being persuaded that infant formula was better for their
babies than breast milk. Once a mother switches to pow-
dered milk and stops breast feeding her baby, her produc-
tion of milk ceases, and the supplier has a locked-in
customer. (For fuller descriptions of the infant formula
controversy, see Murray 1981; Bucholz et al. 1985; Post
1985; Mokhiber 1988; Kuhn and Shriver 1991; Frederick
et al. 1992; Sethi 1994.)
 Author's personal copy
A Strange Web of Business Scandals
Fig. 1 A Venn Diagram of business scandals and relationships. The central scandals are encircled in bold. The dotted oval indicates a business
relationship. The individuals with underlined names were subjected to criminal prosecutions
Critics of Nestle argued that persuading mothers to
switch to formula feeding could cause infant deaths in three
ways: 1. babies were unprotected against illness because
they did not receive the essential antibodies contained in
breast milk; 2. mothers were either ignorant of the need to
use sterilized water, or could not afford to boil water, and
thus prepared infant formula with contaminated water, and;
3. mothers could not afford the price of the product and
saved money by diluting the amount of formula in each
feed, causing malnutrition.
The boycott of Nestle began in the United States in mid-
1977. Ernest Saunders had joined Nestle in Switzerland in
1976, after a career in the United Kingdom in consumer
goods marketing and retailing. His involvement with the
infant formula controversy was initially one of damage
control:
At Nestle, Saunders was assigned the task of counter-
ing the criticism raised by the World Health Organi-
zation (WHO) against the companys heavy marketing
of its powdered milk to the Third World.Saunders
mounted a campaign using public relations and the
media in an attempt to swing public opinion. On
Nestles behalf he sent $25,000 to a Washington
research centre to finance the commissioning of a
285
Fortune magazine article opposing the WHO cam-
paign. The article was unsuccessful, confirming rather
than allaying suspicions, and engendered more bad
publicity (Kets de Vries 1988, p. 4).
Part of Nestles strategy to handle WHO criticism was to
advocate an industry-wide response. Nestle worked closely
with the International Council of Infant Food Industries
(ICIFI), the industrys self-regulatory organization. Ernest
Saunders was eventually elected to the presidency of ICIFI,
initiating a process of negotiation with WHO that led to the
ending of the boycotts in 1984 (Saunders 1989, p. 48).1
According to Post (1985, p. 121), the boycott of Nestle
could have ended in mid-1981 rather than in 1984 if the
Reagan Administration had not voted against the WHO
code in 1981, thus making the US the sole opponent of the
code and stimulating further consumer agitation. Ernest
1
This information comes from James Saunders book about his
father, Nightmare: the Ernest Saunders Story. The genesis of this
book, published prior to Saunders trial in the Guinness stock
manipulation case, is described in Ernest Saunders Markets His
Innocence, Business Week, Aug. 14, 1989, pp. 9293. Although the
book is patently self-serving, there is no reason to doubt the validity
of the record of background facts from the book that are selectively
quoted within this article.
123
 Author's personal copy
286
Saunders thus came close to defeating the boycott before
his departure from Nestle in late 1981.
Saunders was assisted in these negotiations by Tom
Ward, a long-standing external legal consultant to Nestles
US office: Ward had strong political connections in
Washington, and a skill for negotiating difficult political
issues. That was how Ernest first met Ward, who was also
working closely with Dr. Furer, the managing director [of
Nestle], on Washington-related measures (Saunders 1989,
p. 47). Ward continued his involvement in the WHO
negotiating process for Nestle after Ernest Saunders left to
join Guinness.
Dr. Arthur Furer, a Swiss financial expert, had started
working for Nestle in 1954. He became Nestles chief
executive officer in 1975 and was the chairman of Nestles
board of directors from 1982 to 1984 (Heer 1991, p. 374).
The initial relationship between Ernest Saunders and
Thomas Ward is elsewhere described as follows: Saun-
ders had first used his [Wards] talent for protecting trade
marks when he was at Nestlethere is some suggestion he
helped out Saunders in the Baby Milk Scandal in the US
and he had later used Ward at the Bells bid [at Guinness]
(Kochan and Pym 1987, p. 107).
Saunders was evidently heavily involved in cleaning up
the mess from the baby milk controversy for Nestle.
However, this was not his main role with his new
employerone of Saunders principal assignments at
Nestle was the establishment of a products group in
nutritional marketing to meet the anticipated demand for
healthier eating (Kets de Vries 1988, p. 3). His success in
developing nutritional marketing led to his appointment as
head of Nestles Specialist Nutrition and Infant Products
Group. According to his son, the product groups task was
to improve and broaden the range of nutritional products
for the so-called vulnerable groups within the population
babies, the elderly and those with specific nutritional
deficiencies (Saunders 1989, p. 45).
One of Ernest Saunders Divisions subsidiaries was the
US baby food company, Beech-Nut Nutrition, acquired by
Nestle in 1979.
The Acquisition of Beech-Nut
Beech-Nut was founded in the United States in 1891 as a
firm selling beech wood-smoked bacon and ham. It had a
strong corporate culture founded on its trademarks of
purity, high quality, and natural ingredients.2 Although
2
This abbreviated version of the Beech-Nut story is derived from the
following press articles: Welles (1988); OJ Wasnt 100% Pure, FDA
Says, USA Today, July 26, 1988, p. A1; Queenan (1988); Consumer
Reports (1989); Freedman (1989); Wong (1989); Monks and Minow
(1989). See also Boyd (1992, 1996).
123
C. Boyd
Beech-Nut was still a strong brand name, its most profit-
able divisions (such as the famous chewing gum division)
had long been sold off. The firm was reduced to a barely
profitable single product, baby food, with a small share of a
market dominated by Gerber Products. Nestle bought
Beech-Nut for $35 million in 1979.
The Beech-Nut subsidiary became a part of Ernest
Saunders Specialist Nutrition and Infant Products Group.
This link between Ernest Saunders and Beech-Nut has not
been strongly highlighted before.3 Nestles ownership of
Beech-Nut has been widely noted, but the fact that Saun-
ders, Ward and Furer are the human link between the full
set of three controversies (Nestle, Beech-Nut, and Guin-
ness) has not been previously disclosed.4
In accord with Saunders mandate to develop a nutri-
tional marketing thrust in his group, Nestle spent millions
of dollars to revamp Beech-Nuts marketing approach and
to modernize manufacturing facilities. In 19801981,
Beech-Nut lost $2.5 million on sales of $62 million. In
April 1981, Neils Hoyvald, a native of Denmark who had
joined the firm in 1980, was appointed to be Beech-Nuts
president. In September 1981, Saunders himself left Nestle
to take over the running of Guinness in London.
Saunders was thus the Nestle executive responsible for
Beech-Nut between its acquisition in 1979 and his depar-
ture in September 1981. Saunders almost certainly was
involved in appointing Hoyvald to the senior position in
Beech-Nut. Was Saunders directly or indirectly responsible
for the sensational scandal at Beech-Nut that was later
uncovered, a scandal that resulted in jail sentences for
Hoyvald and his deputy? Considering the scale of Nestles
investment, and the poor financial results, there must have
been intense Swiss pressure for an improvement in Beech-
Nuts performance.
The Fake Apple Juice Scandal
In 1977, Beech-Nut had started buying apple juice con-
centrate from a wholesaler whose prices were 20% below
market. Beech-Nut saved around $250,000 a year by
3
A 1991 search of Reuters Textline service revealed that in the UK
press, for example, there was only one short reference linking the
Guinness scandal to Nestles baby-milk controversy, printed in the
Evening Standard (London), Jan. 16, 1987, p. 54. Also, there was but
one short piece in the UK press linking Ward to the Beech-Nut
scandal, printed in The Observer, Feb. 28, 1988, p. 33.
4
There were rumors about Saunders past at the time of the contested
bid for Distillers, but this private mud-slinging seemed exclusively
directed at his involvement in the Nestle baby-milk controversy:
Unsolicited approaches were also made to Argyll with offers of
information about Guinness. There were many allegations about
Saunders career at Nestle and the baby milk scandal (Kochan and
Pym 1987, p. 127).
 Author's personal copy
A Strange Web of Business Scandals
buying from this source. There were rumors of apple juice
adulteration in the industry, but there was no official
government test for apple juice purity. Beech-Nuts
Director of R&D, Jerome J. LiCari, was suspicious of the
low price charged by the juice supplier. On August 5, 1981
he sent a memo to senior executives voicing his fears about
Beech-Nuts supplier of apple juice concentrate. He called
for a top-level meeting to evaluate his evidence of
adulteration.
When he got no response, LiCari went to Beech-Nuts
new president, Neils Hoyvald, to present his case against
the supplier. LiCari left with the impression that Hoyvald
would react. Several months later LiCari resigned his
position because of the lack of response to his complaints.
He later blew the whistle to the Food and Drug Adminis-
tration (FDA).
Although Hoyvald was not at Beech-Nut when the apple
juice adulteration started, he had an opportunity to come
clean at the point when the FDA started investigating:
Beech-Nut could have avoided scandal at this point by
conceding that its juice was sugared water (Consumer
Reports 1989, p. 295).
Instead, Beech-Nut brazenly defied the FDA, blocking
the investigation while trying to sell off stocks of bogus
juice as fast as possible. Beech-Nut ran a special promo-
tionbuy 12 jars of baby food and get six jars of fruit
juice free, and exported the juice to Caribbean countries
outside the jurisdiction of US food and drug laws.
Hoyvalds attitude is clear in a memo he wrote to Nestle,
boasting about the $3.5 million he had saved by obstruct-
ing the FDAs recall of apple juice products:
It is our feeling that we can report safely now that the
apple juice recall has been completed. If the recall
had been effectuated in early June, over 700,000
cases in inventory would have been affected. due
to our many delays, we were only faced with having
to destroy approximately 20,000 cases (Consumer
Reports 1989, p. 296).
Hoyvald was subsequently sentenced to 1 year and a
day in jail, and fined $100,000 for selling bogus childrens
apple juice.5 The juice was revealed to be a mixture of beet
5
Hoyvald later made a successful appeal against his sentence, on the
grounds that the case had been tried in the wrong jurisdiction. The
author is unable to determine the subsequent disposition of this case.
Ethics professors may be intrigued by the fact that in the original trial
Hoyvalds lawyer, Brendan Sullivan, proposed that his client should
teach ethics seminars in colleges rather than serve time in prison. In
his Barrons article Juice Men: Ethics and the Beech-Nut Sen-
tences, Joe Queenan takes a satirical look at the consequences of
Hoyvald teaching ethics, had it occurred. He quotes imaginary ethics
professors who fear for their jobs in competition with big-time crooks.
In this scenario, he suggests that the classes might be filled with
students trying to learn unethical behavior firsthand! (Queenan 1988)
287
sugar, apple flavor, caramel coloring, and corn syrup,
despite a label proclaiming it to be 100% pure. Beech-Nut
itself was fined $2 million, six times the sum of the largest
previous FDA fine. The firm also settled a class-action suit
for $7.5 million.
Guinness and the Nestle Connection
In September 1981, Saunders resigned from Nestle to run the
brewing firm Guinness in London. He quickly revived sag-
ging sales of the companys flagship stout beer with heavy
expenditures on sophisticated ads. He disposed of various
peripheral businesses and initiated a set of strategic acqui-
sitions. In 1985, Guinness made a successful hostile takeover
bid for Arthur Bell & Sons, a mid-size Scotch producer. As
noted above, Tom Ward advised Guinness on the bid.
Later that year, the Argyll Group made a bid for Dis-
tillers, a conglomerate that was the largest producer of
Scotch whisky. Saunders did not wish to have this com-
petitor slip into Argylls hands, and he contemplated
making a rival bid for Distillers. If successful, the
2.3 billion takeover of Distillers would become the largest
in British history.
Saunders was uncertain about making a bid, and he
sought the advice of friends, including Dr. Arthur Furer, his
former boss at Nestle and now its Chairman. At the time
of the Distillers takeover Furer was also the Chairman of
the fifth-largest Swiss bank, Bank Leu (pronounced Loy, as
in toy.), In 1984, Saunders nominated Furer for appoint-
ment to the Guinness board of directors, thus formalizing
his link with the Nestle supremo. Saunders later nominated
Thomas Ward, his other long-time colleague from Nestle,
for appointment to the Guinness board in January 1985.
Saunders sons book describes a discussion at Christ-
mas 1985 between Saunders, Ward and Furer prior to the
launching of the Guinness bid for Distillers:
Tom Ward came over with his family. With their
wives, the two of them met Arthur Furer for dinner at
the Montreux Palace. As is the custom in Switzerland,
after dinner the wives were ushered away into a corner
while the men talked. The size of the Distillers bid did
not seem particularly spectacular to Furer, for Nestle
was itself huge. He was enthusiastic. Ernest said:
Furer talked about what he saw as the necessity
for getting Guinness shares quoted on the
worlds stock markets if we were to be a world-
scale company. I could see the glint in Furers
Footnote 5 continued
For a further odd twist on this theme, see footnote 6, which discloses
that an unrepentant Ernest Saunders was invited to lecture about
ethics to business school students after his bizarre release from jail.
123
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288
eye. Bank Leu, where he was a director, could
be put on the map by becoming the Swiss lead
bank in an international stock market listing
programme, which did later happen.
So, like many others involved in the battle, Furers
enthusiasm had other motives. Ward was also very
positive about the idea (Saunders 1989, p. 143).
The book by Saunders son is clearly biased in its
reconstruction of the history of the Guinness bid for Dis-
tillers. The book makes no further mention of Bank Leu,
and yet Bank Leu was the largest player in the stock
manipulation scheme that was initially revealed by the
disgraced arbitrageur Ivan Boesky in his plea-bargaining
confessions to the US Securities and Exchange Commis-
sion (SEC) (Kirkland 1987; Kay 1987).
Following Boeskys tip-off, the UK Department of
Trade and Industry investigated the takeover of Distillers
Ltd. by Guinness plc. They discovered that Guinness had
orchestrated and underwritten an international buying
campaign that artificially inflated the value of its shares
during the fierce battle for Distillers. The Guinness offer
was largely a swap of its shares for Distillers, so that when
the value of Guinness shares rose in the market, the number
of shares it had to offer to buy Distillers was reduced. This
scandal was a major embarrassment for Londons financial
community and was intensely followed by the media.
Besides Boesky (later jailed for 3 years for insider
trading), and various Guinness executives, the others
involved were a group of leading British business execu-
tives, stockbrokers, and financiers. Trials and jail terms for
some of these individuals followed. The media largely
overlooked the roles of Arthur Furer and Bank Leu in the
scandal, partly perhaps because of the spectacular promi-
nence of these other players.
Bank Leus involvement in the stock manipulation
scandal was revealed in a letter to Guinness shareholders
from Norman Macfarlane, who was appointed acting
Chairman of Guinness following Saunders dismissal by
the board in January 1987. Macfarlanes letter reveals a
$100 million investment by Guinness in a fund run by Ivan
Boesky, and describes unlawful indemnities given to Bank
Leu by former Guinness directors. The letter said:
A number of serious disclosures have been made to
the board. It has been established that substantial
purchases of Distillers and Guinness shares were
made by wholly-owned subsidiaries of Bank Leu AG
on the strength of Guinnesss agreement to repur-
chase the shares at cost plus carrying chargesan
agreement which, at least as regards its own shares,
Guinness could not have legally fulfilled. It is also
alleged that these purchases may have been financed
123
C. Boyd
by Bank Leu and, in apparent breach of the
Companies Act, a Guinness subsidiary deposited
50 million with a Luxembourg subsidiary of Bank
Leu (Times 1987, p 21).
Bank Leu accepted the facts in Macfarlanes statement,
but denied any illegality. When the board dismissed
Saunders, it also asked for the resignations of Ward and
Furer from the Guinness board: both refused. Furer insisted
that he had not behaved wrongly; he claimed to have been
totally unaware of the transactions that Guinness had asked
Bank Leu to carry out (Times 1987, p. 21; Putka 1987).
Under intense pressure, Furer resigned the next day.
Ward was also forced off the board and was served with
a writ from Guinness asking for the return of a 5.2 million
fee paid in the name of Marketing and Acquisition Con-
sultants after the successful Distillers takeover bid. Ward
controlled this firm, and 3 million of this fee was later
transferred to a secret Swiss bank account held by Ernest
Saunders. Ward was subsequently charged with the theft of
this fee from Guinness, and fought a long battle to prevent
his extradition from the US to face this charge. He even-
tually appeared in a British court in January 1993, where he
was found not guilty of theft after a 5 week trial.
Despite their close links to Saunders and the stock
manipulation scheme, neither Arthur Furer nor Bank Leu
was prosecuted in Britain. Ernest Saunders, the Chairman
and Chief Executive of Guinness, was charged with theft,
conspiracy, false accounting, and violations of the Com-
panies Act. In 1990, he was sentenced to 5 years in jail. An
eminent British tycoon, Gerald Ronson, was also sentenced
to a year in jail in the same trial for his part in the stock
manipulation. He had met with Saunders and Ward in April
1985, and had put up a stake of 25 million as part of the
Guinness fan-club members share support scheme
(Ronson and Robinson 2009, p. 119).
Saunders was subsequently released from prison early on
medical grounds after serving only 10 months of his jail
sentence. This apparently humanitarian gesture (he was
diagnosed as suffering from Alzheimers disease) drew
intense criticism in the light of Saunders later behavior.
Here is a typical quotation from the satirical British journal
Private Eye:
I am delighted to see my old friend Deadly Ernest
Saunders, the convicted fraudster, alive and well at a
House of Lords cocktail party. He is typically modest
about making medical history by being the only man
ever to reverse the onset of senile dementiaa
complaint which, you may recall, procured his early
release from Ford prison (Private Eye 1992).6
6
Other negative press comment included Saunders Shows off
Powers of Recovery, Sunday Times, Apr. 26, 1992; Return to
 Author's personal copy
A Strange Web of Business Scandals
If his recent book, Gerald Ronson indicates that it was
he who suggested faking dementia to Saunders when they
were first serving time in jail together. Ronson recollects
saying the following to Saunders:
If you made out that youve got Alzheimers, nobody
could ever prove it, because if they looked inside
your head, what are they going to find?. It wouldnt
be difficult for you, because, besides being a psy-
chotic liar, you are mentally deranged (Ronson and
Robinson 2009, p. 154).
Ronson can also viewed making almost the same com-
ment (It shouldnt come hard for you, because you are a
psychotic liar) on a YouTube video clip posted by his
co-author (YouTube 2009). These damning comments
leave us in no doubt that Ronson, for one, was of the
opinion that Ernest Saunders was completely unethical.
As an aside, the Venn diagram shown above reveals a
further networking relationship between two of the indi-
viduals involved in these scandals. When Gerald Ronson
was released from jail, his ailing business empire (Heron
International) was rescued from financial failure by former
junk-bond king Michael Milken (Bill 2009; Ronson and
Robinson 2009 pp. 181187). Milken himself was not long
out of jail for participation in the insider trading scandals
described in the next section.
Ronson also claims to have been the person who con-
nected Saunders and Ward to Ivan Boesky in the first place:
I admit, though, that I was the one who gave them
Boeskys phone number. Saunders told me that
Thomas Ward wanted to meet Boesky and asked me
if I knew him. As it happened I had his number [and]
my secretary passed the number on to Ward. (Ronson
and Robinson 2009, p. 121).
Bank Leu and the Insider Traders
Meanwhile, Bank Leu was coincidentally the bank chosen
by Dennis Levine, a former managing director of Drexel
Burnham Lambert7, to be the offshore bank that would
Footnote 6 continued
Health and Wealth, The Times, Mar. 14, 1992; So, Just How Ill
Were They? Daily Telegraph, Mar. 10, 1992; and Looking For
Work In EarnestErnest Saunders Enjoys New Lease Of Life,
Independent, Feb. 21, 1992. Saunders later defiantly appeared before
an audience of business school students to give his version of the
Guinness storysee Ernest Saunders In Ethics Talk To Students
Daily Telegraph, Mar. 17, 1992.
7
Strangely, given the magnitude of prior press coverage in the UK,
there is no mention of the Guinness scandal or of Bank Leu in The
Predators Ball, the best-selling US book about The Inside Story of
Drexel Burnham Lambert (Bruck, 1988).
289
handle all of his insider trades. In his subsequent book
about his criminal activities Levine tells of first using a
branch of one Swiss bank in the Bahamas. This bank soon
refused to handle his questionable stock trades, forcing him
to select another. He describes his choice of Bank Leu:
When I arrived (in Nassau)I flagged a cab and
headed for Bay Street. I simply stopped at a phone
booth and looked up banks in the local version of the
Yellow Pages. The first ad to catch my eye was that of
Bank Leu International Ltd. It was described as a
wholly owned subsidiary of Bank Leu Ltd. Zurich
(Switzerland), the oldest private Swiss bank, founded
1755. Among its listing of services offered was Inter-
national Portfolio Management. I located the office in
the Bernard Sunley Building in Rosen Square and
walked in (Levine and Hoffer 1991, p. 23).
Levine soon became Bank Leus biggest customer in the
Bahamas, using public telephones and code names to
communicate his trading instructions. The bank branch and
its Swiss headquarters, according to Levine, were fully
cognizant of the nature of his trades and of the need to
conceal them from detection. Following an SEC inquiry
into one particular trade executed by Bank Leus New
York brokers, there were conversations about Levines
trades between the branch and Switzerland:
[The bank] concluded that there was no problem
with my trading, even if it was based upon inside
information, because it was not a violation of Baha-
mian law. Nonetheless, [Switzerland] advised cau-
tion. Following this, Fraysee [the branch manager]
ordered that several new brokerage accounts be
opened at various offices in the US. This was a
defensive measure to spread my transactions around
other brokers and was a clear indication that Bank
Leu valued my business and wanted to ensure its
continuity (Levine and Hoffer 1991, p. 117).
Unknown to Levine, the SEC later got on his trail not
because of his own trades, but because of the greed of the
staff in Bank Leu. They had noticed the success of his
trades, and began piggybacking on Levines trades. His
recollection of a confrontation with Bank Leus personnel
explains their actions:
Let me get this straight, I said, feeling the level of
my voice rise. I place an order for stock. Now I am
discovering that not only were my orders filled, but
you bought the same stocks for your personal
accounts and for other accounts here at the bank, and
then your brokers in New York bought for themselves
and other people.
123
 Author's personal copy
290
They had a cottage industry going here! They had
piggybacked my trades and magnified the effects in
markets around the world. I gulped and asked, Well,
how many of your so-called managed accounts did
you make these trades in?
Twenty-five or thirty.
Oh, my God! And you did most of this through one
broker?
Meier nodded (Levine and Hoffer 1991, p. 239).
Levine was clearly appalled at the ethics of the Bank
Leu managers, or, at least, by their amateurishness. The
relative lack of concealment of these personal orders
allowed the SEC to trace their source back to the Nassau
branch of Bank Leu. During this SEC investigation, Bank
Leu offered to further conceal Levines activities within a
set of phony managed accounts. Bank officers told Levine
that the Bahamian and Swiss bank secrecy laws would
protect his anonymity: [They] all assured me that
the Bahamian secrecy defense as well as the managed
accounts defense had all been approved by their superiors
in Zurich (Levine and Hoffer 1991, p. 252).
Levines reliance on Swiss and Bahamian secrecy laws
was misplaced, for it was Bank Leu itself that finally
revealed his identity to the SEC when the pressure of the
investigation became too strong. Levine expresses his
dismay at what he regarded as an unconscionable act of
betrayal: It was the first time in history that a Swiss or
Bahamian bank had agreed to such a clear and willful
violation of secrecy laws in order to protect itself (Levine
and Hoffer 1991, p. 289).
Levine was eventually jailed for 2 years. One of his
insider partners was Ivan Boesky, who made $50 million
from Levines inside tips (Levine and Hoffer 1991, p. 304).
Both Levine and Boesky shared information with Michael
Milken, himself later jailed for insider trading.
Perceiving himself to be a victim of an unscrupulous
Swiss bank, Levine adds an indignant postscript to the Wall
Street insider trading scandal when he refers to the Guin-
nessDistillersBoeskyBank Leu scandal in his book: I
found diabolical pleasure in learning that Bank Leu AG of
Switzerland was the major co-conspirator, involved in half
the purchases (Levine and Hoffer 1991, p. 363).
The Relationship Between the Scandals
What are the possible reasons for the grouping of this set of
scandals? There are several conjectures that can be made.
The first is related to the structure of the contextis there is
something inherent in the structure of the business environ-
ment that links this set of scandals? The most obvious
123
C. Boyd
structural factor is that of business secrecy, specifically the
secrecy laws of Swiss banks (now largely eliminated) and of
off-shore financial centers such as the Bahamas.
It is obvious that individuals intent on unscrupulous or
illegal business acts will seek the maximum amount of
camouflage to disguise their activities. Industries or coun-
tries with secrecy rules offer the most attractive haven for
the conduct of unethical business practices. It should not be
surprising, therefore, to discover that a group of prominent
business scandals are clustered together, adjacent to envi-
ronments that offer the greatest concealment of this scan-
dalous behavior.
The second conjecture relates to the Swiss connection
between the set of scandals. Is there something patholog-
ical about Swiss business culture that differentiates the
conduct of Swiss firms from that of other Western-based
firms? There are other cases of notorious conduct in
modern Swiss business history; most notably involving the
pharmaceutical firm Hoffman-La Roche.
That firm had been implicated in two major prior
scandals. The first involved excessive pricing of the pat-
ented prescription drugs Librium and Valium. In a suc-
cession of countries the firm was investigated for charging
up to $4,000 a kilogram for raw materials that were shown
to cost around $25 a kilo to manufacture in Italy, where
drugs were not protected by patents (see Monopolies
Commission 1973; Constable 1979). The second scandal
involved the revelation to the European Economic Com-
munity (EEC) of Hoffman-La Roches control and
manipulation of the world market for vitamins. Stanley
Adams, a senior La Roche executive, blew the whistle to
the EEC before leaving the firm and moving out of
Switzerland.8
Adams provides some critical comments on Swiss
business culture in his description of his decision to blow
the whistle:
I was a foreigner, which probably helped. I had not
been brought up under the Swiss System with the
belief that corporate loyalty is inviolable at all times,
and that what the company does must be good,
because your welfare is dependent on the companys
welfare, and the companys welfare is dependent on
the welfare of all companies put together, and the
chain may not and cannot be broken without grave
8
Stanley Adams suffered enormously as a result of blowing the
whistle on Hoffman-La Roche. The EEC failed to keep his identity
secret, and he was arrested when he re-entered Switzerland to visit his
wifes relatives on New Years Eve, 1984. He was charged with
industrial espionage. He was released from custody 3 months later,
following his wifes suicide. She had apparently been misled by
police into thinking that he would receive a sentence of 20 years
imprisonment. He later successfully sued the EEC for the damages
caused by their failure to protect his anonymity.
 Author's personal copy
A Strange Web of Business Scandals
consequences to all concerned. To me, business was
just business. It could be moral or immoral,
depending on the way individuals chose to conduct it,
and if the good of the company demanded ruthless
suppression of the individual or the smaller busi-
nesses, then there was something wrong (Newbigging
1986: based on Adams 1985).
From the understandably jaundiced perspective of
Adams it seems reasonable to infer that the web of scandals
might have some basic origin in a perverted sense of Swiss
corporate loyalty. Can the behaviors of Nestle, Bank Leu,
and Hoffman-La Roche be extrapolated to be indicative of
Swiss business culture as a whole? In the absence of evi-
dence of similar behavior by other firms such a strong
conclusion seems unjustified.
The third conjecture pertains to culture, and the manner in
which deviant corporate cultures might transmit their influ-
ence to other corporate environments. If it is theorized that
Nestle had a corporate culture that tolerated unethical busi-
ness practices in the 1970s, then the evolution of the Beech-
Nut, Guinness, and Bank Leu scandals are all explicable as
infections emanating from a rotten core culture.
This theory of transmission of tolerance or even encour-
agement of unethical acts from one corporate culture to
another is essentially an epidemiological theory. The anal-
ogy between the transmission of disease and the transmission
of evil is implicit in some of the metaphors used to describe
unethical behaviorthe rotten apple in the barrel must be
removed if the rest of the population is to survive untainted.
If the set of scandals described above are linked by epide-
miology, then the transmission of the disease from the Nestle
culture to the Beech-Nut culture to the Guinness culture was
clearly attributable to the networking efforts of one or more
of the three central characters in this story: Ernest Saunders,
Arthur Furer, and Thomas Ward.
There is evidently something more than just randomness
in the intersections between the scandals. Levines asso-
ciation with Bank Leu, for example, was not exactly ran-
dom. He was rebuffed by one Swiss bank (thus discrediting
any theory that Swiss business culture is distorted), so he
went and found another. He just happened to have the good
fortune to find Bank Leu on his second try, while looking in
a place where unethical trading was more likely to be
tolerated.
Levine searched for a structural defect that would sup-
port his lust to profit by his inside knowledge. Protected by
the structure of secrecy, the willing supplier was a Swiss
bank, chaired by an individual whose other directorships
included firms that indulged in questionable business
practices.
The nexus is that in part of the Swiss business com-
munity there was a source of unethical behavior which
291
infected several other corporate environments which, in
turn, when shielded by a structure of secrecy attracted the
activities of other unethical individuals. The original
source was the corporate culture of Nestle: it is evident that
the original Nestle infant formula controversy needs to be
reconsidered in the light of this subsequent succession of
related scandals.
A Postscript
Thalidomide, Bhopal, and Perrier: The Vulnerability
of the Scandal-Plagued Firm
There are several other controversial business events that
are less directly linked to the main NestleSaunders
FurerBank Leu axis of scandals described above, but
which are of interest nevertheless. Manfred Kets de Vries
suggests a fascinating reason why Distillers was an easy
target for takeover by Guinness:
Perhaps Distillers malaise had a more subtle origin
than simply poor leadership, competitive pressures or
organizational politics. An attempt in the late 1950s
to diversify into pharmaceuticals went disastrously
wrong. Thalidomide, a sedative frequently prescribed
for pregnant women, caused over 8,000 babies to be
born with appalling deformities before it was with-
drawn. The shock to the management and board was
total and affected company morale for nearly a dec-
ade as victims fought to gain compensation. To a
group of reticent Scottish gentlemen it brought public
exposure of the worst kind and a moral conundrum
that seemed insoluble. Whether the affair sapped
management confidence to the point of inertia is still
debated (Kets de Vries 1988, p. 9).
The NestleBeech-NutDistillers path of encounters in
Saunders career thus provides a link between firms whose
controversial activities involved babies in one way or
another. It is heart rending in the extreme to consider that
such a vulnerable group in society, for whom we might
expect the very highest standards of duty and ethical care,
should be the victims of this particular set of scandals.
Kets de Vries analysis suggests that the sapping of
management morale by an ethical scandal induces below-
par performance. The resulting under-valuation of the firm
puts it into play as a takeover target. Ironically, Bank Leu
itself became a victim of this phenomenon! Dennis Levine
takes some self-serving glee in describing the banks
eventual demise:
Reeling from the revelations of its role in my activ-
ities and its apparent violation of Bahamian and
123
 Author's personal copy
292
Swiss banking laws, coupled with the scandal of its
central role in the Guinness affair, Bank Leu sold out
to Credit Suisse in May 1990 (Levine and Hoffer
1991, p. 411).
Another irony emerges from the last macabre insider
deal that Levine channeled through Bank Leu. He bought
100,000 shares in Union Carbide for $6.3 million, acting
on Michael Milkens tip to him that Drexel Burnham
Lambert was arranging a $3.5 billion financing package to
enable GAF Corporation to launch what would turn out to
be an unsuccessful bid for Union Carbide. Once again, a
corporate disaster put the victim into play, as Levine
explains:
In December 1984, a leak of poisonous gas from a
Union Carbide plant in Bhopal, India, killed more
than 2,000 people. Quite apart from the personal
horrors, the event was a financial tragedy for the
company. One year later, Union Carbides stock was
still severely depressed, leading GAF, less than one-
tenth as large, to the decision that it could mount a
takeover bid (Levine and Hoffer 1991, p. 271).
In yet one more irony, James Sherwin, the Vice-Presi-
dent of GAF Corporation was later charged with stock
manipulation when he tried to sell the Union Carbide
shares that GAF had acquired as a result of the attempted
takeover bid. He was tried three times for this crime, and
eventually found guilty and sentenced to 6 months in jail.
This verdict was later overturned on appeal. A description
of Sherwins successive trials appears in his defense
attorneys autobiography (Liman 2002, pp. 250264),
which coincidentally features a description of his later role
as Michael Milkens chief defense lawyer (pp. 265296).
In yet another apparent coincidence Nestle itself later
emerged as the victorious bidder in a takeover battle for
Perrier, the French mineral water firm. This takeover
aroused intense hostility in France. Nestles bid for Perrier
had strong echoes of the takeovers of Distillers and Union
Carbide, for Perrier had recently had a corporate catastro-
phe that made it vulnerable (Economist 1991). In early
1990, traces of benzene were found in samples of Perrier
sparkling mineral water. Perrier issued a worldwide recall,
only the second global withdrawal of a consumer branded
product and the first not to be caused by malicious
tampering.
There had been a previous takeover by Nestle which had
also produced controversy, and which even linked Ivan
Boesky to the baby milk scandal. In 1984, Boesky made his
largest-ever insider-dealing profit by speculating in the
shares of Carnation Co., the old-line food company. He had
learnt that Carnation was about to be taken over by Nestle
in a friendly merger offer (Stewart 1992, p. 171).
123
C. Boyd
Nestle later used Carnation as a vehicle to launch a new
brand of infant formula. In a now-familiar scenario, the
methods used by Nestle to market the new Carnation-brand
formula in the United States drew criticism from the
American Academy of Pediatrics, a body representing
20,000 US pediatricians (Siler 1990).
Acknowledgments This article was originally produced in 1992,
but unfortunately its path to eventual publication was frustrated at that
time. This version is essentially the same as the one initially written,
but with updates and revisions provided from post-1992 sources.
I wish to thank William C. Frederick (Katz Graduate School of
Business, University of Pittsburgh) for encouraging the papers res-
urrection, and for his inevitably wise comments and reflections on the
unethical behaviors described in the article.
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