The SEC Shows Some Respect for the Working Woman

SEC Seal 2

The Securities and Exchange Commission decided to emphasize that working wives can be a source of material non-public information. The SEC press release highlighted insider trading cases brought against husbands who engaged in insider trading after learning confidential information from their wives.

The first case was against Tyrone Hawk. His wife worked at Oracle. Mr. Hawk overheard Mrs. Hawk talking about Oracle’s acquisition of Acme Packet. He decided to make a quick buck and bought shares in Acme Packet. His trade netted him $150,000 after the stock went up 23% on the takeover news.

The second case was against Ching Hwa Chen. His wife worked at Informatica. He overheard news from Mrs. Chen that the company was not going to make its quarterly earnings target. He decided to profit on the bad news by taking a short position on the stock. He made a quick $140,000 in profit.

To emphasize the point, the press release highlighted three older cases of husbands engaging in insider trading after misappropriating information from their spouses: James Balchan, M. Jason Hanold, and William A. Marovitz.

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Compliance Bricks and Mortar for March 28

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These are some of the compliance-related stories that recently caught my attention.

Encouraging Communication of Employee Concerns by Michael Volkov in Corruption, Crime & Compliance

One of the hardest issues for compliance professionals is encouraging employees to raise concerns about ethics and compliance issues.  It has become even more difficult when the government establishes whistleblower programs offering financial rewards for employees to tell the government about the problems. Employee surveys provide important and interesting information.  A recent survey by CEB (here) found that only five percent of employee concerns are reported on a company’s hotline system.

Insights From LRN’s 2013 Ethics & Compliance Leadership Survey Report

“Program effectiveness” is a term ethics and compliance (E&C) professionals frequently use as they strive to understand whether or not their companies’ investment and effort are paying off. Those who manage E&C programs generally collect and report whatever is immediately measurable, such as number of helpline calls or code violations, and while this information is helpful, it doesn’t tell us which programs are particularly effective or what those programs have in common. Every year, LRN conducts a survey of our client partners across the globe to get a pulse of which ethics and compliance tools work and which don’t work as well – and why.

If You Invested Less Than $925,000 With Bernard Madoff, You’re Now Even by Jordan D. Maglich in Ponzitracker

In an announcement from the court-appointed trustee overseeing recovery for victims of Bernard Madoff’s massive Ponzi scheme, a proposed fourth distribution of approximately $350 million will resolve all claims from victims with an allowed claim of $925,000 or less. The trustee, Irving Picard, sought court approval to make a total distribution of approximately $349 million, which will bring the total amount distributed to Madoff victims at nearly $6 billion to date. With an average payment of approximately $323,000, the proposed distribution will also fully satisfy nearly 52% of the 2,189 accounts for which a claim was submitted.

The Destruction of Arthur Andersen and the Use of DPAs in FCPA Enforcement by Tom Fox in the FCPA Compliance and Ethics Blog

The debate over the efficiencies of Deferred Prosecution Agreements (DPAs) continued this week with additional criticism of their use. I have argued that DPAs are in a corporation’s interest because they can bring certainty to the conclusion of an enforcement action and allow it to make remedial changes and move forward. However yesterday I came across an article by Larry Katzen, a former partner at Arthur Andersen and author of “And You Thought Accountants were Boring – My Life Inside Arthur Andersen.” Katzen’s piece is entitled “A Business World Massacre – What Can Happen 
When Government Needs a Scapegoat” and it details the destruction of the firm after it’s guilty verdict surrounding the Enron scandal.

Bank Fraud is Okay, But not Drugs or Terrorism

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I would like to think that many of the bankers involved in illegal money laundering are not actually aware of the full extent of their malfeasance. Maybe they should have done a better job looking at a client when they noticed a red flag. But sometimes you run across a case where the bankers are truly scumbags. The Department of Justice just brought charges in such a case.

A combined Department of Justice and Internal Revenue Service sting lead to the arrests of two Caribbean-based bankers and their lawyer for conspiracy to launder money and hide the identities and assets of U.S. taxpayers. According to the indictment, Joshua Vandyk and Eric St-Cyr lived in the Cayman Islands and worked for an investment firm based there. Patrick Poulin was the firm’s attorney, based in Turks and Caicos. According to the indictment, Vandyk, St-Cyr and Poulin solicited U.S. citizens to use their services to hide assets from the U.S. government.

The case starts off as bread and butter fraud, trying to shield assets and avoid tax. The feds sent in three undercover agents to use the services to catch them red-handed. Vandyk and St-Cyr told the agents to create offshore foundations, with help from Poulin, so the investment firm wouldn’t look like it dealt with U.S. clients. Vandyk and St-Cyr then invested the money outside the United States in the name of the offshore foundation. The investment firm said it wouldn’t disclose its clients or their gains to the U.S. government, or send the clients any investment statements. The firm’s clients could monitor their investments online through the use of anonymous, numeric passcodes and liquidate their accounts on request.

What caught my attention was the defendants knew the money coming in was illegal money. One of undercover agents told all three defendants that the cash was coming from a bank fraud that he committed. Vandyk “indicated that this was acceptable to the co-conspirators so long as the money was not linked to drugs or terrorism.”

Of course, the information in this article comes only from the indictment, so the defendants have not had a chance to tell their side of the story.

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Follow-Up Purchase of a Business from a Foreign Official

compliance and bribery

There are obstacles when trying to buy a business from a foreign official. The Foreign Corrupt Practices Act prohibits giving or offering anything of value to any foreign official with a corrupt intent to assist in obtaining or retaining business. It is not a flat prohibition on business relationships. But all of the recent FCPA enforcement has made businesses skittish when dealing with a foreign official in a business relationship.

The latest Department of Justice’s Foreign Corrupt Practices Act Opinion Procedure Release is evidence of the overly-cautionary approach.

A US investment banking/wealth management firm bought a majority interest in a foreign financial firm. The seller retained a minority interest in the foreign firm and was locked-out from selling for five years. The seller ends up getting appointed as a high-level government official, responsible for financial industry regulation. Suddenly, the firm’s minority shareholder is a government official.

The US firm wants to buy the remaining minority interest, but the red alarm of the FCPA is flashing. Even worse, the contractual formula for calculating the sales price for the minority interest no longer works. It results in a zero value when there is significant value. There would be litigation if the US firm tried to enforce that zero dollar purchase price.

The US firm and foreign official do the right thing for a conflict situation. They hire a third party to value the asset and base the sales price on that value. The parties even use a “leading, highly regarded, global accounting firm” to determine the value.

As for the official acts, the foreign official has recused himself from any actions that would involve the firm and has notified his agency of his relationship with the firm.

The firm received assurances from the foreign country that the sale of the minority interest would not violate local law.

Shouldn’t that have been enough? The parties documented the transaction price, walled the regulatory agency, and got a legal opinion that the transaction did not violate local law. That should have been enough to eliminate any signs of corrupt intent that would result in violation of the FCPA. Even more, buying the minority interest would remove the ongoing conflict that the foreign official had with owning an interest in a regulated entity.

But one or both sides decided they wanted more and used the Department of Justice’s FCPA opinion procedure. It’s one of the funky features of the FCPA that you can ask the government if it’s okay to do something. This is the DOJ’s first Opinion Procedure Release of 2014 and only the second release since October 2012.

The firm then went through an 8 month process with the Department of Justice to get this Opinion Procedure Release. It seems like overkill.

I would suspect the parties thought the transaction was high profile enough that it would attract the attention of the Department of Justice. Then the firm would need to sit through a Department of Justice investigation on the transaction and possibly print a press release about the investigation. It seems from the steps that the firm took, it could tell a good story and provide all the right documentation. You would think that the DOJ would quickly see that there was no story and go away quickly.

The Opinion Release acts a preventive measure. There are clearly red flags associated with the transaction. The firm and foreign official appeared to have done a great job addressing the concerns.

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New Lists to Check for Bad Guys

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If you conduct business overseas or have foreign investors in your funds, you are checking the various block persons lists to ensure you’re not working with bad guys. (You are checking, right.) The Office of Foreign Assets Control (“OFAC”), of the U.S. Department of the Treasury, has created two new lists: the Foreign Sanctions Evaders List and the Blocking Property of Additional Persons Contributing to the Situation in Ukraine.

Foreign Sanctions Evaders List

The FSE List implements Executive Order 13608 by identifying non-U.S. persons and entities that have engaged in conduct evading U.S. economic sanctions with respect to Iran or Syria.  The FSE-listed individuals or entities are not necessarily located in Iran or Syria.

You are generally prohibited from all transactions or dealings, direct or indirect, involving persons or entities identified on the FSE List related to any goods, services, or technology (i) in or intended for the United States, or (ii) provided by or to U.S. persons, wherever located.  However, unlike the OFAC Specially Designated Nationals List, the new FSE List does not require blocking of property and reporting of transactions with FSE-listed entities.

OFAC has elected to maintain a separate FSE List rather than include the FSE entries on the Specially Designated Nationals List.  That means you need to screen against both lists. Most likely, you are using software or a third-party service provider, so check to make sure the FSE List was added to the screening protocol.

Blocking Property of Additional Persons Contributing to the Situation in Ukraine

By Executive Order on March 20, 2014, President Obama put in place new restrictions on companies and individuals that operates in sectors of the Russian Economy that would support the Russian Federation’s annexation of Crimea. It’s an expansion of 13660 and 13661.

So far, the orders have brought sixteen Russian government officials, members of the Russian leadership’s inner circle, and a Russian bank into the sanctions regime. Bank Rossiya (ОАО АБ РОССИЯ) is the personal bank for senior officials of the Russian Federation.

OFAC has added the blocked persons to the Specially Designated Nationals List. I received a notice that my vendor has already included the names in its database.

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Image of villain is a caricature by J.J. McCullough
cc by sa

Compliance Bricks and Mortar for March 21

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Welcome to Spring.

These are some of the recent compliance-related stories that recently caught my attention.

Two Thoughts about Dewey LeBoeuf and Parallel Proceedings by David Smyth in Cady Bar the Door

In a devastating New York Times story over the weekend, James Stewart zeroed in on that last sentence.  Client relations manager?  Who? Apparently it wasn’t obvious to “longtime Dewey insiders”who Zachary Warren even is.

Warren graduated from Stanford in 2006, and applied to be a Dewey paralegal.  “Instead, he was offered a $40,000-a-year job helping partners collect client debts.

NEWSFLASH: Common sense prevails again! Prosecutors give credit for compliance programs in Norway too. in the Bribery Act .com

Today Barry spoke at the Oslo Compliance Forumorganized by Wiersholm, Norway’s largest law firm which itself has a history of advising and representing clients on anti-corruption compliance and investigations.  I spoke at length to Jan FougnerMarit Berger Rosland and Georg Engebretsen – they know what they’re talking about and have been involved in some big cases – so if you have a problem in Norway, call them.  I would in a heartbeat.

SEC Discourages Incentivizing Whistleblowers to Keep Complaints In-House by Christopher M. Varano in Fox Rothschild’s Securities Compliance Sentinel

What’s good for the goose is apparently not so good for the gander, as the SEC warns in-house attorneys against whistleblower contracts.

The Cost of Compliance by Michael Volkov in Corruption, Crime & Compliance

The title for this posting is a little ambiguous.  What is the “cost” of compliance?  Is it the cost of implementing an “effective” compliance program?  Or is the “cost” to the company of an “ineffective” compliance program.  Let’s just say it is both.

Do Law Firms Need Compliance Programs? Part 2

Earlier this month it was accounting fraud. This week it’s insider trading. Law firms seem to pose the same risks as any other firm.

Do as I say; Not as I do.

A clerk at a law firm trolled the document management system for information on mergers when the firm was representing one of the parties. The clerk passed the information onto an unnamed Middleman, who passed the information on to a stockbroker. Everyone made money. the behavior was repeated for a dozen other transactions involving the law firm.

The SEC put together a graphic to help understand the flow of money and information. The three went through some rather elaborate steps to hide their tracks. As you can see from the graphic, Metro, the law firm clerk, would meet the Middleman at coffee shops to pass along the information. The Middleman would meet with Eydelman, the stockbroker, at the clock at Grand Central station to pass along the information.

eydelman graphic

Initially it surprised me while reading the SEC’s complaint that Middleman was not identified and not charged. The description of the Middleman’s information exchanges including Metro pointing to data on a mobile device and Middleman making Eydelman eat the paper with the information on it. It seems clear that Middleman is cooperating with the SEC and federal prosecutors. In the criminal complaint, Middleman was wearing a wire and had begun cooperating with authorities.

The law firm was in charge of sensitive information about its clients. It sounds like the firm failed secure the information. Metro may have worked on some of the transactions, but should not have had access to key information like timing and pricing. He probably should not have had access to the parties names.

It sounds like the law firm failed to take reasonable steps to isolate information to those who need to know.

Until the charges were filed, the law firm did not know about the transgressions. Metro was fired the day the charges were brought. You also have to wonder how often the law firm employees were reminded of not engaging in insider trading.

The SEC has fired a warning shot and has stated that it is focused on law firms:

 “We are continuing to combat serial insider trading schemes, particularly by law firm employees and other professionals who are entrusted with extremely sensitive market-moving information.”

– Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit

Attorney Matthew Kluger was sentenced to 12 years in prison, the longest term ever imposed in an insider-trading case, for stealing corporate merger tips from four law firms over 17 years. Two Ropes & Gray LLP lawyers in New York went to prison for leaking tips to former Galleon Group LLC trader Zvi Goffer.

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Private Fund Compliance Forum 2014

private fund compliance forum

On May 6 and May 7, I’ll be in New York for PEI’s Private Fund Compliance Forum. Let me know if you’ll be there.

If you haven’t signed up yet, PEI was nice enough to offer a 15% discount to readers of Compliance Building. Use the promo code PFC14_CB.

Agenda

  • Update on the current trends impacting the private equity compliance community
  • View from the SEC
  • Testing your compliance program
  • Cybersecurity: data risk protection
  • The role of compliance in the valuation process
  • Understanding the international regulatory landscape
  • Maneuvering your way through an SEC exam (I’ll be speaking on this panel.)
  • Addressing the regulatory challenges that are on the horizon
  • Utilizing technology to increase efficiency in your compliance processes
  • Beyond compliance: effectively managing risk within your firm
  • Scaling your compliance program to meet the needs of your office

Document Request List for Never-Before-Examined Advisers

aca compliance

In January, the Securities and Exchange Commission announced in its annual exam priorities for 2014 that it wanted to emphasize exams on never-before examined firms that had been registered before 2012. Then in February, the SEC officially announced its never-before-examined initiative. It looks a lot like the presence exams.

ACA Compliance got its hands on an initial document request list used by OCIE in conducting a never-before-examined exam.

Unlike other exam letters, this one explicitly states that it is part of OCIE’s never-before-examined initiative. It sounds like an on-site visit is not part of the initial protocol. But this may vary from region to region.

I’ve added this example to Compliance Building‘s collection of 13 other SEC Exam Document Request Examples. If you have an example and are willing to share it, you can send it to [email protected]. I will always delete any information about the firm and I will only publish any additional information about the letter that you consent to.

Disclosure: I’ve used ACA Compliance as a provider.

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Evacuation Day and Compliance

evacuation-day

March 17 is more known for that other holiday where everything is green. You night not be celebrating today if it were not for the events of 1776.

In 1776, British forces had occupied Boston for years. The local militia and Continental army had been harassing the British soldiers, leaving them isolated on the small peninsula that was Boston at the time.

In May of 1775 American forces had captured Fort Ticonderoga on Lake Champlain and its artillery. Colonel Henry Knox, Washington’s chief of artillery, suggested to General Washington that they bring the captured artillery to Boston. Knox and his men hauled tons of artillery over the rugged Berkshires, through swamps and along crude roads, for 300 miles.

Washington first placed some of the heavy cannons in Cambridge and Roxbury. They were effective to harass the British, but were merely a diversion. The batteries opened fire on the night of March 2. The British returned fire, without significant casualties on either side. The action was repeated on March 3.

It was repeated again on March 4. But this night was the true diversion. Troops marched to the top of Dorchester Heights hauling tools and cannon placements. Throughout the night the troops built earthworks overlooking Boston and the harbor. The artillery was in place to controll access to the city.

On the morning of March 5, the British saw the fortifications. It was a key date because March 5 was the sixth anniversary of the Boston Massacre.

Washington controlled the harbor and access by land to the Boston peninsula. The British were vulnerable and had to either flee or try to take back Dorchester Heights. British General Howe decided to preserve his army for battle elsewhere rather than attempt to hold Boston. Howe informed Washington that Boston would not be burned if his troops were allowed to leave unmolested.

After several days of preparation and several days of delay caused by bad weather, the British forces departed Boston on March 17 and sailed to Halifax. Hundreds of 1,000 loyalist fled Boston with the troops, afraid of the rebel forces.

This was the first major victory of the Revolutionary War. The citizens of Boston were not willing to comply with the British mandates. A city full of British soldiers was causing trouble, even for those were not keen on the rebellion.

Evacuation Day was declared a city holiday in 1901. The state made it a holiday in Suffolk County in 1938. Perhaps the large Irish population of Boston played a role in the establishment of the holiday that coincided with St. Patrick’s Day.

As you hoist a green beer today, remember this victory.

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