Month: January 2010

Global Ethics Summit Update

Global Ethics Summit

Dow Jones and Ethisphere Institute are teaming up to present the 2010 Global Ethics Summit on February 23-24, 2010 at the Grand Hyatt New York City.

I will be attending, thanks to an offer from the event’s organizers. If you are interested in attending I can offer you a 15% discount on regular conference fees, available by registering online (http://www.globalethicssummit.com/register) with the code “GES10P”.

They just added two new keynote speakers:

  • Mark Mendelsohn, Deputy Chief of Fraud Section, Criminal Division, U.S. Department of Justice
  • C. Turney Stevens, Dean, College of Business, Lipscomb University

They will be joining the other previously announced speakers:

  • Brackett Denniston, Senior Vice President & General Counsel, General Electric
  • Charles L. Harrington, Chairman & CEO, Parsons
  • Andy Hinton, Chief Compliance Officer & Associate General Counsel, Google
  • Georg Kell, Executive Director, United Nations Global Compact
  • Douglas M. Lankler, Senior Vice President & Chief Compliance Officer, Pfizer

I also need to disclose that they gave me a pass to attend as a media sponsor of the event. You can see Compliance Building listed as a media sponsor. In exchange, I’m writing a few blog posts leading up to the summit and will be live-blogging from it.

Global Ethics Summitt main banner

But Everyone Else is Doing it

In my hasty post on last week’s FCPA sting operation my focus was on the aggressive use of an undercover operation to catch violations of the Foreign Corrupt Practices Act. That was big news. It’s the first time that’s happened. The indictments did not disclose the companies involved.

It’s now clear that this sting operation was much bigger deal. The Department of Justice went after an entire industry. Richard Cassin dug around and found that those arrested came from dozens of different companies. Small companies, big companies, private companies, public companies.

Twenty-one of the arrests happened at the Shooting, Hunting, Outdoor Trade Show and Conference (SHOT Show), “the largest and most comprehensive trade show for all professionals involved with the shooting sports and hunting industries.” The SHOT show attracts tens of thousands of people from across the US and the world, with 1,800 exhibitors covering 700,000 square feet.

The sting was clearly a statement that the Department of Justice is not going to take an excuse that “everyone else is doing it.”

It does not matter if greasing palms happens to be a common way to transact commerce in the industry. They are willing to take on an entire industry. They are willing to use undercover operations. They are willing to make a big splash at a big media event.

Sources:

Compliance Bits and Pieces for January 22

Some interesting stories from the past week:

Investor Relations Website Best Practices from the Q4 Blog

On January 14, Catherine Crofton, Q4’s VP Sales & Marketing hosted an IR Website Best Practices webinar. Her presentation focused on how to build investor confidence through effective online communications. The presentation includes a lot of great examples of companies using best practices and how they can be applied to your own IR website.

Lawyers, Anthropologists, and Revolutionaries by Paul Lippe

But now as the changes wrought by technology become ever more pervasive, and as they coincide with the most significant challenge to US global leadership in a Century – the rise of China – we need to think about the anthropology of technology at a societal level, and look at how well core institutions are adapting.

‘Perp Walks’ Undermine Presumption of Innocence by Howard W. Goldstein of Fried, Frank, Harris, Shriver & Jacobson LLP in the New York Law Journal

But the Puritan practice of shaming and today’s perp walks are different in one critical respect. The shamed Puritans had already been convicted; today’s perp walkers have only been arrested and are theoretically cloaked with the presumption of innocence.

Lessons From FCPAscam by Richard Cassin in The FCPA Blog

That’s a Smith and Wesson and you’ve had your six.

~ James Bond to an out-of-ammo assailant in “Dr. No”

Our six shots. Here’s an early look at what the case means: …

Insider Trading … in Mutual Fund Shares? by Bruce Carton for Compliance Week’s Enforcement Action

Today, though, the SEC filed a settled enforcement action charging Charles J. Marquardt with insider trading in the shares of the Evergreen Ultra Short Opportunities Fund (the “Ultra Fund”), a mutual fund that invested primarily in mortgage-backed securities.

A Rare Moment Of Reflection: I Am Privileged To Be A Lawyer by Brian Tannebaum in My Law License

I’m in my 15th year of practice. I’ve walked into courtrooms hundreds of times. I remember thinking after I was admitted to the Bar how great it was that I could “talk in court.” I remember telling people how cool it was that the Florida Supreme Court gave me a license to go into court and represent people. I still think that, but I say it much less.

Obama Wants More Restrictions on Banks

President Barack Obama proposed  new rules designed to restrict the size and activities of the U.S.’s biggest banks. The text of his proposal has not been released yet. All we have is the video, embedded below.

The White House wants commercial banks that take deposits from customers to be barred from proprietary trading,  owning hedge funds or owning private equity firms. It sounds like Goldman Sachs and Morgan Lewis would give back their back charters. (Of course, they only grabbed those charters in order to get the liquidity from the TARP.)

The White House also wants new limits on the size and concentration of financial institutions. He mentioned the existing cap on customer deposits and seems to want to reduce that cap. I think Bank of America is the only bank that is currently close to that cap.

In the end this is just proposed legislation from the White House. They would still need to convince Senator Dodd to revise his proposed legislation and get the votes to pass it in the Senate, reconcile it with the House bill and get it passed by the full Congress.

The Drunkard’s Walk, The Butterfly Effect and The Black Swan

drunkards walk

The “drunkard’s walk” refers to the Brownian motion, the seemingly random movement of particles suspended in a fluid. The original thought was that you might be able to calculate the movement by measuring and calculating the interaction. It proved impossible. There are too many factors and too many interactions.

Small changes in a system can dramatically affect the outcome. This is the butterfly effect. The origin cam from a meteorologist who was using a computer model to rerun a weather prediction and one of the numbers he used was shortened from six decimal points to three decimal points. The result was a completely different weather scenario. It’s not that a butterfly can cause the problem. It’s that a seemingly inconsequential random event can lead to a big change in an outcome.

Leonard Mlodinow addressed this topic in The Drunkard’s Walk: How Randomness Rules Our Lives. (I mentioned the book previously in Criticism and Praise.) There is much more randomness in our lives than we give credit.

We poorly understand the effect of randomness.

He explores his concepts using the backdrop of Pearl Harbor. In hindsight there were many signs pointing to the eventual attack. “In any complex string of events in which each event unfolds with some element of uncertainty, there is a fundamental asymmetry between past and future.” It’s nearly impossible to predict before the fact, but relatively easy to understand afterward. We have seen the same 20/20 hindsight with the 9/11 attacks.

That’s why it is easy to explain why the weather happened three days ago, but have trouble getting the weather forecast right three days into the future.

Mlodinow never mentions it, but for me the next step is the theory of the Black Swan. How do you end up with high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations?

Combining the Black Swan with the Drunkard’s Walk and the Butterfly Effect, you see that a combination of small events can lead to an over-sized outcome. We get used to being able to calculate and measure so many things. There will always be factors that we miss, or overweight or underweight.

Not to be depressing. The Drunkard’s Walk leaves you feeling in less control than when you started. But there is a factor you can control: the number of chances that you take. “Even a coin weighted toward failure will sometimes land on success.” Keep flipping the coin.

The Drunkard’s Walk is worth reading if you deal with risk.

Social Networking Compliance

Think Before You Tweet!

What are the challenges for broker/dealers and investment advisers trying to use social networking sites?

Complinet hosted a webinar on this topic with Clifford Kirsch from Sutherland Asbill & Brennan LLP and Debbie Corej, Vice President, Compliance – Insurance Division, Prudential.

Clifford started the discussion by pointing out the need to think about who is using these communication tools and what they are using them for. There is not a single source for the legal rules on how to use social networking tools in compliance with the regulatory requirements. You have to fit these tools into the established regulatory frameworks.

Broker/Dealer

With respect to the supervisory structure, you should look at FINRA Rule 3010. You need a policy, whether you allow use of these tools or not. You should start by looking at FINRA’s Guide to the Internet.

The next focus is whether the tools are being used as advertising and sales literature. If so, then there are content requirements, filing requirements and reviews. There is new proposed FINRA Rule 09-55 that would streamline the approach to advertising. There is no specific reference to social networking. Many commenters did request some specific discussion of social networking.

Then next hurdle is record-keeping. Some site are easy to integrate with record-keeping. SEC Rule 17A-4 has extensive requirements.

Another issue is keeping track of complaints and filing complaints. That is hard to do in the free flow of information on social networking sites. What do you do if someone complains on Twitter?

Investment Advisers

As with brokers you still need a supervisory structure and examinations for risk. You should have a policy, pro or con.

With advertising and sales literature, the requirements are not as difficult as broker/dealers. There are no filing or pre-approval requirements. SEC Rule 206(4)-1 prohibits testimonials and selective discussion of past performance.

There are record-keeping requirements, so you need a system in place for preserving the records, even though they are created on a third party social networking site.

Real Life with Social Networking at Prudential

Debbie turned to some of the challenges in her organization. They have a big umbrella. Part of the challenge is controlling the technology itself.

Prudential does block some sites and is looking at ways to open access in a way they can control. There are competing interests in the company. Recruiters have a different use than marketing. Everybody has some need to use the tools to stay connected with colleagues and experts.

There are some vendors out there trying to meet the compliance requirements. But they are all new and untested. FINRA is not giving any particular blessing on a tool.

It is important that compliance understand the different features of a site and the terms and conditions for that site. Any one social social networking site is likely to have features that fall into multiple categories for compliance requirements.

For example, you should prohibit the recommendations feature of LinkedIn. You should have an internal person as a connection so that they get a notice of updates to profiles.

You need to have people submit correspondence for record-keeping internally and then review the account to make sure all of the correspondence has been submitted.

It is important to have a policy. It is also important that the policy is not freestanding but integrated with other policies, such as confidentiality. It’s possible that if you do not prohibit a tool, you may be implicitly allowing the use of that tool.

Of course you need to test compliance with the policies. If you are banning, you should search the site for employees’ names and your company name.

FINRA Task Force

FINRA has created a task force to look at social networking. (Debbie is on the task force.) FINRA is very interested in the topic and how the mechanisms can work in compliance. At the company-level it is easier to control and monitor than at the individual registered-representative level.

There is the problem of using the sites in personal level is hard to contain. What if a friend asks you a professional question?

FINRA is hosting a March 17 webinar: Compliance Considerations for Social Networking Sites.

DOJ Nets 22 in FCPA Sting

“The largest single investigation and prosecution against individuals in the history of DOJ’s enforcement of the Foreign Corrupt Practices Act”

The Department of Justice has gotten serious about the FCPA.

“This ongoing investigation is the first large-scale use of undercover law enforcement techniques to uncover FCPA violations and the largest action ever undertaken by the Justice Department against individuals for FCPA violations,” said Assistant Attorney General Lanny A. Breuer. In connection with these indictments, approximately 150 FBI agents executed 14 search warrants in locations across the United States. Plus, the United Kingdom’s City of London Police executed seven search warrants.

According to the indictments, the defendants agreed to pay a 20 percent “commission” to a sales agent who the defendants believed represented the minister of defense for a country in Africa to win a portion of a $15 million deal. The “sales agent” was actually an undercover FBI agent. The defendants were told that half of that commission would be paid directly to the minister of defense. The defendants allegedly agreed to create two price quotes in connection with the deals, with one quote representing the true cost of the goods and the second quote representing the true cost, plus the 20 percent commission. The defendants also allegedly agreed to engage in a small “test” deal to show the minister of defense that he would personally receive the 10 percent bribe.

I have not gotten through all of the indictments, but the DOJ purposefully omitted the name of the employers of the indicted individuals. I would guess that he have not heard the end of this. People can run; companies cannot.

Sources:

SEC’s New Enforcement Cooperation Initiative

The Securities and Exchange Commission announced a new initiative encouraging cooperation. They put on a big media blitz. Big enough that they even allowed me to ask a question of SEC Enforcement Director Robert Khuzami.

For the first time, the SEC set out how it will evaluate whether, how much, and in what manner to credit cooperation, to serve as an incentive to report violations and cooperate fully and promptly in enforcement cases.

The SEC will have some new cooperation tools at its disposal:

  • Cooperation Agreements — Formal written agreements in which the Enforcement Division agrees to recommend to the Commission that a cooperator receive credit for cooperating in investigations or related enforcement actions if the cooperator provides substantial assistance such as full and truthful information and testimony.
  • Deferred Prosecution Agreements — Formal written agreements in which the Commission agrees to forego an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and to comply with express prohibitions and undertakings during a period of deferred prosecution.
  • Non-prosecution Agreements — Formal written agreements, entered into under limited and appropriate circumstances, in which the Commission agrees not to pursue an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and comply with express undertakings.

One thing that came out of my discussion with Khuzami (I’m not sure I should call him Rob.) is that the SEC is looking towards the Department of Justice and criminal prosecutions on how to use these tools. But the SEC, as a civil enforcement agency, is not used to having the benefit of these tools.

Plus, the enforcement division can only make a recommendation to the Commission with a cooperation agreement. The Commission can ignore the cooperation and still bring down its full hammer on a someone even if they are a whistle blower and cooperating with the enforcement division. The cooperation message I was hearing from the SEC did not give me the warm fuzzies.

Nonetheless, the new tools should encourage cooperation and be beneficial to SEC Enforcement. For individuals, they have the prospect that they may not be prosecuted. Companies may also induced by being able to avoid the filing of the typical SEC complaint, with pages and pages of misconduct.

To publicize the new cooperation initiative, the SEC even assembled a new Enforcement Cooperation Initiative website. The best publicity will be an individual or company benefiting from cooperation.

Sources:

Social Networking is Serious Business – Presentation Materials

I  joined John Pepper, the CEO of Boloco and Russ Edelman the CEO of Corridor Consulting at meeting of the New England Chapter of AIIM on Friday. The topic was “Social Networking is Serious Business.”

Russ started us off with a great background on Web 2.0 and social networking tools.

Here is the slidedeck he used:

AIIM New England Social Networking Presentation

John showed how he uses web 2.0 tools as part of his business. It was an impressive display of how he listens to his customers. My favorite story was John seeing a tweet from a customer in one of the Boloco locations complaining the background music was too loud. John called up the store manager and told him to turn it down. The customer was happy in minutes. We were also happy that John handed out Boloco cards for some free burritos.

Being the lawyer and compliance guy on the panel, I focused on the regulatory, compliance and legal issues related to web 2.0 / social networking. I showed some of the downside and the ways to get yourself in trouble. In other words, I put the emphasis on the “serious” part in the presentation name.

Here is my slidedeck:

Social Networking is Serious Business – AIIM Presentation

Since my slides are mostly images instead of words, you may be wondering what I was saying. You can see my notes along with the slides: Social Networking is Serious Business. Hosted on JDsupra.

A big thanks to the New England Chapter of AIIM for inviting me.

Martin Luther King, Jr.

I Have a Dream – Address at March on Washington August 28, 1963.

“I have a dream that one day this nation will rise up and live out the true meaning of its creed: ‘We hold these truths to be self-evident, that all men are created equal.'”

“Let freedom ring. And when this happens, and when we allow freedom ring—when we let it ring from every village and every hamlet, from every state and every city, we will be able to speed up that day when all of God’s children—black men and white men, Jews and Gentiles, Protestants and Catholics—will be able to join hands and sing in the words of the old Negro spiritual: “Free at last! Free at last! Thank God Almighty, we are free at last!”

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