Prof's Accounts Complicated

The business of accountants is to make the complicated simple. An accountant tries to reduce the most complex business enterprise into short, comprehensible reports and balance sheets.

Marc J. Epstein, a visiting professor who teaches accounting at Harvard Business School, last month had to explain to a Middlesex County court an accounting history which, he acknowledges, is anything but simple.

Epstein, according to bank officials and attorneys familiar with the case, defaulted on a $1.5 million loan he guaranteed from Los Angeles-based Mitsui Manufacturers Bank in 1988. But after a Los Angeles court ruled in 1992 that he was liable for the loan, interest and court costs, Epstein, by then a professor at Yeshiva University in New York City, had left town. The bank says he didn't leave a forwarding address.

So Mitsui Manufacturers Bank came to Harvard to find him. Last month, they filed suit in Middlesex County Superior Court seeking to recover the $2.7 million in damages he owed as part of the Los Angeles suit. Charging that he might flee Massachusetts if he learned about the new suit, the bank filed an ex parte motion which sought to dock his Harvard paycheck.

That motion failed, but the bank was able to win some money from Epstein. According to a document obtained by The Crimson, Epstein will pay $13,000 a year in equal monthly installments to Manufacturers Bank. At that rate, the $2.7 million will be paid off in 207 years.

Epstein, interviewed twice this week while attending a conference in Turku, Finland, repeatedly emphasized that the case was a matter of his personal finances and had been settled. He said he had guaranteed the loan for two companies, with which he was involved, and that he is pursuing unspecified action to recover the money he will be paying to Manufacturers.

A review of the situation conducted in March by officials both inside and outside the Business School concluded that there was no reason to prevent Epstein from returning to the school next fall for a second year as a visiting professor.

The court settlement and this review may complete the episode. But according to Epstein's colleagues and students at the Business School, the loan default, at best, raises questions about Epstein's judgment, and, at worst, raises questions about his ethics.

First and foremost, why does a professor of accounting have a messy financial past?

Epstein graduated from San Francisco State University in 1968 with a degree in Business Administration, according to the registrar's office there. He went on to the University of Oregon, where he first earned a master's degree in business administration and later a Ph.D in accounting.

Until four years ago, Epstein helped run Western Consulting Group Inc. and Western Business Investors Inc., which had the same address at 8718 Woodley Avenue in Sepulveda, Calif., according to the California secretary of state's office.

Epstein says he was chair of the board of Western Consulting, and the only employee of Western Business. The state government lists him as president of both.

The companies were heavily involved in the California real estate market, which boomed during the Reagan presidency and busted in recent years. Epstein says he was also involved in investments with the entertainment industry, and his Harvard students say he often told stories about his connection to the Hollywood elite during his class on financial reporting and management accounting last fall.

"We did do business management for some things in entertainment," Epstein says. "Real estate and general business."

Epstein says he remembers few details of both companies. "I don't remember the details of the company. I was involved in many companies," says Epstein. "Whether I was the founder [of Western Consulting] or someone else was the founder, I don't know."

But on one point, Epstein is sure. He says he had little to do with the financial demise of the two companies. Western Business Investors went out of business on October 1, 1991, and Western Consulting followed on October 15, 1992.

Epstein says he had tried to help "somebody else" out by guaranteeing the loan. He would not say who the other person or people had been.

"A lot of people benefited. I thought it was a very good thing to do," says Epstein. "I think everything has been done in a highly ethical manner."

According to Los Angeles attorney Richard Burdge, who represented Manufacturers Bank during the case in California, and a Business School official familiar with the situation, Epstein's California investment firms fell apart with the real estate market.

"When the real estate market went into the tank, the companies couldn't repay the loans," says Burdge. "Since he was in the companies and guaranteed them, we got a judgment against him for defaulting, too."

Epstein says the Middlesex court gave him a victory by ruling that Manufacturers could not dock his Harvard paycheck. He says the bank could have easily contacted him in New York. But Burdge disagrees, saying the $13,000 annual settlement will ensure the bank gets the money from Epstein even after he leaves Harvard.

"We didn't know where he was for a couple of years," says Burdge. "The court directed him to pay us the money instead of having the University give us the money from his paycheck. They ordered him to pay, and he has been."

James L. Rogal, his Boston lawyer, says the bank's charge that Epstein was a risk to flee the state was unfounded. He says Epstein's business dealings were ethical.

"As you know, Dr. Epstein travels all over the place," says Rogal. "I don't think there's an issue of avoiding litigation. In fact, he appeared for his court date."

The first anyone at the Business School learned of this was in March of this year, when Manufacturers Bank filed suit in Middle-sex County. "There was no reason to [inform Harvard], in my opinion," Epstein says.

But the lawsuit touched off a review of the situation by officials from both inside and outside the Business School. The review, which consisted of informal interviews with Epstein and financial experts, involved several officials, including University Attorney Allan A. Ryan Jr., Senior Associate Dean Robert H. Hayes, Assistant Dean of Educational Affairs Deborah N. Mauger and Dickinson Professor of Accounting Robert S. Kaplan, the head of Epstein's department.

"We were very concerned about the allegation of fraud," says Hayes. "But we talked to Professor Epstein, talked to people in California. Mr. Ryan called some of his friends out in California, and they said there was nothing like this involved."

Hayes and other Business School officials say they are unfamiliar with many of the details of Epstein's situation. Hayes and Kaplan both say they based their decision to keep the professor largely on their impression of him as a person, and neither administrator says they recall Epstein's specific role in the two investment firms.

"As I remember it, he tried to do something good for some people so they wouldn't lose money," says Kaplan. "There was a partnership in which he was involved."

Ryan says cases like Epstein's are common, and he says the matter was little more than a dispute between Manufacturers Bank and the professor.

"The existence of a legal suit does not disqualify a person from being a faculty member," says Kaplan. "If that were the case, a lot of us couldn't teach here."

Professors who know him say they have respect for Epstein, who has focused much of his study on legal and ethical responsibilities and the use of corporate reports by shareholders. But even professors who say they are close friends of Epstein say they were totally unaware of the loan or the failed businesses.

"He's an excellent teacher," says Yeshiva University assistant professor of accounting Moses Pava, who co-authored the paper that Epstein presented last week in Finland. "He won the teacher of the year award [at Yeshiva] for '91-'92."

"He mentioned he had some real estate interests," says Pava. "Otherwise, I don't know anything about what you're talking about."

Professor of Business Administration William J. Bruns, a friend of Epstein's since his days at the University of Oregon, says that while the professor may have exercised bad judgment in signing onto the loan, his financial history should not be a public issue.

"From what I know of Marc, if he says he's made his peace with the court, then it's not the issue," says Bruns. "If he has an obligation, he's going to work something out with the court like a lot of us do when we make mistakes."

But Business School students interviewed on condition of anonymity say they believe Epstein's past is significant. Students from Epstein's fall class say they found their teacher both accessible and knowledgeable. But some say they wonder about the ethics of Epstein's actions.

"He's an extremely skilled accountant and financial adviser," says one first-year student, speaking on condition of anonymity. "He seemed very ethical, but this bothers me."

Other students say they worry about how or if Epstein's behavior dovetails with the Business School's stated commitment to promote ethics in the classroom.

"It's kind of questionable and kind of interesting," says another student, adding that he admires Epstein as a professor. "Intelligence and ethics don't necessarily go together."

But three experts in ethics interviewed last week say that there is no clear-cut evidence of any wrongdoing in this case. In matters of loans, judging ethics has to do with the individual facts of the borrowing agreement, they say.

"I don't know if there are any general principles that apply," says Lecturer in Business Administration Joseph L. Badaracco Jr., an expert in business ethics. "I imagine this case and others like it depend on some very specific facts."

Those facts may remain unclear for some time. Epstein is in Helsinki, Finland, until the end of this week.

But the questions burn. What is the legal action Epstein says he has undertaken against past business associates? How deeply involved was he in the failures of Western Consulting Group and Western Business Investors? What impact, if any, will this have on his ability to teach accounting?

Whatever the resolution, students, faculty and attorneys say, getting a good accounting of Epstein's past accounts won't be simple.

"There are many other factors...that will be resolved and what is often the case with civil litigation is that it often drags on for years," says Epstein. "I expect that when all of this is resolved it will be resolved in my favor."

Stephen E. Frank '95 contributed to the reporting of this story.

Until four years ago, Marc J. Epstein was a player in the California real estate market. But two investment companies with which Epstein was associated have gone under in the past two years. Last year, a California court ruled that he would have to pay $2.7 million on a loan he guaranteed for the two companies. Now an accounting professor at Harvard Business School, a California bank has recently forced Epstein to...

'We didn't know where he was for a couple of years. The court directed him to pay us the money instead of having the University give us the money from his paycheck. They ordered him to pay, and he has been.' Richard Burdge attorney representing Mitsui Manufacturers Bank

'The existence of a legal suit does not disqualify a person from being a faculty member. If that were the case, a lot of us couldn't teach here.' Robert S. Kaplan Dickinson professor of accounting Harvard Business School

'I don't remember the details of the company. I was involved in many companies. Whether I was the founder [of Western Consulting] or someone else was the founder, I don't know.' Marc J. Epstein visting professor Harvard Business School

Epstein, interviewed twice this week while attending a conference in Turku, Finland, repeatedly emphasized that the case was a matter of his personal finances and had been settled. He said he had guaranteed the loan for two companies, with which he was involved, and that he is pursuing unspecified action to recover the money he will be paying to Manufacturers.

A review of the situation conducted in March by officials both inside and outside the Business School concluded that there was no reason to prevent Epstein from returning to the school next fall for a second year as a visiting professor.

The court settlement and this review may complete the episode. But according to Epstein's colleagues and students at the Business School, the loan default, at best, raises questions about Epstein's judgment, and, at worst, raises questions about his ethics.

First and foremost, why does a professor of accounting have a messy financial past?

Epstein graduated from San Francisco State University in 1968 with a degree in Business Administration, according to the registrar's office there. He went on to the University of Oregon, where he first earned a master's degree in business administration and later a Ph.D in accounting.

Until four years ago, Epstein helped run Western Consulting Group Inc. and Western Business Investors Inc., which had the same address at 8718 Woodley Avenue in Sepulveda, Calif., according to the California secretary of state's office.

Epstein says he was chair of the board of Western Consulting, and the only employee of Western Business. The state government lists him as president of both.

The companies were heavily involved in the California real estate market, which boomed during the Reagan presidency and busted in recent years. Epstein says he was also involved in investments with the entertainment industry, and his Harvard students say he often told stories about his connection to the Hollywood elite during his class on financial reporting and management accounting last fall.

"We did do business management for some things in entertainment," Epstein says. "Real estate and general business."

Epstein says he remembers few details of both companies. "I don't remember the details of the company. I was involved in many companies," says Epstein. "Whether I was the founder [of Western Consulting] or someone else was the founder, I don't know."

But on one point, Epstein is sure. He says he had little to do with the financial demise of the two companies. Western Business Investors went out of business on October 1, 1991, and Western Consulting followed on October 15, 1992.

Epstein says he had tried to help "somebody else" out by guaranteeing the loan. He would not say who the other person or people had been.

"A lot of people benefited. I thought it was a very good thing to do," says Epstein. "I think everything has been done in a highly ethical manner."

According to Los Angeles attorney Richard Burdge, who represented Manufacturers Bank during the case in California, and a Business School official familiar with the situation, Epstein's California investment firms fell apart with the real estate market.

"When the real estate market went into the tank, the companies couldn't repay the loans," says Burdge. "Since he was in the companies and guaranteed them, we got a judgment against him for defaulting, too."

Epstein says the Middlesex court gave him a victory by ruling that Manufacturers could not dock his Harvard paycheck. He says the bank could have easily contacted him in New York. But Burdge disagrees, saying the $13,000 annual settlement will ensure the bank gets the money from Epstein even after he leaves Harvard.

"We didn't know where he was for a couple of years," says Burdge. "The court directed him to pay us the money instead of having the University give us the money from his paycheck. They ordered him to pay, and he has been."

James L. Rogal, his Boston lawyer, says the bank's charge that Epstein was a risk to flee the state was unfounded. He says Epstein's business dealings were ethical.

"As you know, Dr. Epstein travels all over the place," says Rogal. "I don't think there's an issue of avoiding litigation. In fact, he appeared for his court date."

The first anyone at the Business School learned of this was in March of this year, when Manufacturers Bank filed suit in Middle-sex County. "There was no reason to [inform Harvard], in my opinion," Epstein says.

But the lawsuit touched off a review of the situation by officials from both inside and outside the Business School. The review, which consisted of informal interviews with Epstein and financial experts, involved several officials, including University Attorney Allan A. Ryan Jr., Senior Associate Dean Robert H. Hayes, Assistant Dean of Educational Affairs Deborah N. Mauger and Dickinson Professor of Accounting Robert S. Kaplan, the head of Epstein's department.

"We were very concerned about the allegation of fraud," says Hayes. "But we talked to Professor Epstein, talked to people in California. Mr. Ryan called some of his friends out in California, and they said there was nothing like this involved."

Hayes and other Business School officials say they are unfamiliar with many of the details of Epstein's situation. Hayes and Kaplan both say they based their decision to keep the professor largely on their impression of him as a person, and neither administrator says they recall Epstein's specific role in the two investment firms.

"As I remember it, he tried to do something good for some people so they wouldn't lose money," says Kaplan. "There was a partnership in which he was involved."

Ryan says cases like Epstein's are common, and he says the matter was little more than a dispute between Manufacturers Bank and the professor.

"The existence of a legal suit does not disqualify a person from being a faculty member," says Kaplan. "If that were the case, a lot of us couldn't teach here."

Professors who know him say they have respect for Epstein, who has focused much of his study on legal and ethical responsibilities and the use of corporate reports by shareholders. But even professors who say they are close friends of Epstein say they were totally unaware of the loan or the failed businesses.

"He's an excellent teacher," says Yeshiva University assistant professor of accounting Moses Pava, who co-authored the paper that Epstein presented last week in Finland. "He won the teacher of the year award [at Yeshiva] for '91-'92."

"He mentioned he had some real estate interests," says Pava. "Otherwise, I don't know anything about what you're talking about."

Professor of Business Administration William J. Bruns, a friend of Epstein's since his days at the University of Oregon, says that while the professor may have exercised bad judgment in signing onto the loan, his financial history should not be a public issue.

"From what I know of Marc, if he says he's made his peace with the court, then it's not the issue," says Bruns. "If he has an obligation, he's going to work something out with the court like a lot of us do when we make mistakes."

But Business School students interviewed on condition of anonymity say they believe Epstein's past is significant. Students from Epstein's fall class say they found their teacher both accessible and knowledgeable. But some say they wonder about the ethics of Epstein's actions.

"He's an extremely skilled accountant and financial adviser," says one first-year student, speaking on condition of anonymity. "He seemed very ethical, but this bothers me."

Other students say they worry about how or if Epstein's behavior dovetails with the Business School's stated commitment to promote ethics in the classroom.

"It's kind of questionable and kind of interesting," says another student, adding that he admires Epstein as a professor. "Intelligence and ethics don't necessarily go together."

But three experts in ethics interviewed last week say that there is no clear-cut evidence of any wrongdoing in this case. In matters of loans, judging ethics has to do with the individual facts of the borrowing agreement, they say.

"I don't know if there are any general principles that apply," says Lecturer in Business Administration Joseph L. Badaracco Jr., an expert in business ethics. "I imagine this case and others like it depend on some very specific facts."

Those facts may remain unclear for some time. Epstein is in Helsinki, Finland, until the end of this week.

But the questions burn. What is the legal action Epstein says he has undertaken against past business associates? How deeply involved was he in the failures of Western Consulting Group and Western Business Investors? What impact, if any, will this have on his ability to teach accounting?

Whatever the resolution, students, faculty and attorneys say, getting a good accounting of Epstein's past accounts won't be simple.

"There are many other factors...that will be resolved and what is often the case with civil litigation is that it often drags on for years," says Epstein. "I expect that when all of this is resolved it will be resolved in my favor."

Stephen E. Frank '95 contributed to the reporting of this story.

Until four years ago, Marc J. Epstein was a player in the California real estate market. But two investment companies with which Epstein was associated have gone under in the past two years. Last year, a California court ruled that he would have to pay $2.7 million on a loan he guaranteed for the two companies. Now an accounting professor at Harvard Business School, a California bank has recently forced Epstein to...

'We didn't know where he was for a couple of years. The court directed him to pay us the money instead of having the University give us the money from his paycheck. They ordered him to pay, and he has been.' Richard Burdge attorney representing Mitsui Manufacturers Bank

'The existence of a legal suit does not disqualify a person from being a faculty member. If that were the case, a lot of us couldn't teach here.' Robert S. Kaplan Dickinson professor of accounting Harvard Business School

'I don't remember the details of the company. I was involved in many companies. Whether I was the founder [of Western Consulting] or someone else was the founder, I don't know.' Marc J. Epstein visting professor Harvard Business School