Month: November 2014

Happy Thanksgiving

first thanksgiving

Washington, D.C.
October 3, 1863

By the President of the United States of America.

A Proclamation.

The year that is drawing towards its close, has been filled with the blessings of fruitful fields and healthful skies. To these bounties, which are so constantly enjoyed that we are prone to forget the source from which they come, others have been added, which are of so extraordinary a nature, that they cannot fail to penetrate and soften even the heart which is habitually insensible to the ever watchful providence of Almighty God. In the midst of a civil war of unequaled magnitude and severity, which has sometimes seemed to foreign States to invite and to provoke their aggression, peace has been preserved with all nations, order has been maintained, the laws have been respected and obeyed, and harmony has prevailed everywhere except in the theatre of military conflict; while that theatre has been greatly contracted by the advancing armies and navies of the Union. Needful diversions of wealth and of strength from the fields of peaceful industry to the national defence, have not arrested the plough, the shuttle or the ship; the axe has enlarged the borders of our settlements, and the mines, as well of iron and coal as of the precious metals, have yielded even more abundantly than heretofore. Population has steadily increased, notwithstanding the waste that has been made in the camp, the siege and the battle-field; and the country, rejoicing in the consiousness of augmented strength and vigor, is permitted to expect continuance of years with large increase of freedom. No human counsel hath devised nor hath any mortal hand worked out these great things. They are the gracious gifts of the Most High God, who, while dealing with us in anger for our sins, hath nevertheless remembered mercy. It has seemed to me fit and proper that they should be solemnly, reverently and gratefully acknowledged as with one heart and one voice by the whole American People. I do therefore invite my fellow citizens in every part of the United States, and also those who are at sea and those who are sojourning in foreign lands, to set apart and observe the last Thursday of November next, as a day of Thanksgiving and Praise to our beneficent Father who dwelleth in the Heavens. And I recommend to them that while offering up the ascriptions justly due to Him for such singular deliverances and blessings, they do also, with humble penitence for our national perverseness and disobedience, commend to His tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife in which we are unavoidably engaged, and fervently implore the interposition of the Almighty Hand to heal the wounds of the nation and to restore it as soon as may be consistent with the Divine purposes to the full enjoyment of peace, harmony, tranquillity and Union.

In testimony whereof, I have hereunto set my hand and caused the Seal of the United States to be affixed.

Done at the City of Washington, this Third day of October, in the year of our Lord one thousand eight hundred and sixty-three, and of the Independence of the Unites States the Eighty-eighth.

By the President: Abraham Lincoln

William H. Seward,
Secretary of State

 

The First Thanksgiving 1621 by Jean Leon Gerome Ferris.

SEC Issues Second Exemptive Relief from Pay-to-Play

compliance politics and money

It’s been about a year since the Securities and Exchange Commission granted its first exemptive order Rule 206(4)-5 when an adviser accidentally violated the pay-to-play rule. The SEC has now issued its second relief order. Ares Real Estate Management Holdings filed for exemptive relief after a senior partner wrote a $1,100 check to Colorado Governor John Hickenlooper’s campaign.

The Colorado governor appoints members to the Board of Trustees for Colorado’s pension system. That system was investor in one of Ares’ older funds.

Ares had compliance policies and procedures that require pre-approval of all political contributions. The employee thought the limitation didn’t apply in this situation because the adviser was not seeking new investments from the Colorado public pension fund.

The Colorado system had not made a new investment in an Ares fund since 2007. That’s six years before the contribution was made and three years before Hickenlooper was elected governor.

Since it’s a closed-end private fund, the investor has no right to redeem and is locked in for the fund’s duration.

After finding the problem, Ares put the fees into escrow pending an outcome of the exemptive order. Ares also walled that employee off from the Colorado investment to avoid tainting the relationship.

A big pile of cash was at stake for Ares. Over $1 million in fees could be generated over the two year ban.

It is great that the SEC granted the relief. But the case is an example of the problem with the Rule 206(4)-5. It is too broad. The contribution amounts were relatively small and had no connection to the investment.

Money in politics is a problem. It’s noble that the SEC has taken a stance. However, it’s contrary to the current law that political contributions are considered free speech. the SEC is taking a big club to the problem.

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Weekend Reading: War of the Whales

war of the whales

Dozens of beaked whales beach themselves in the Bahamas. This leads to a legal battle against the U.S. Navy. Joshua Horwitz details the story, scientists, the legal battle, and the science in  War of the Whales.

It’s an uphill battle when the other side is the most powerful fighting machine on the seas. It’s an even steeper hill when you realize nearly all of the experts are on the navy’s payroll.

For decades the navy has been studying marine mammals for their speed through the water and especially their echolocation. A beaked whale’s ability to locate object underwater far surpasses anything the navy can do with sonar.

But the navy does have power. If it can’t fine tune its reception, it can turn the volume up. Way up. 200+ decibels of power that appears to drive marine mammals right out of the ocean.

The book also shows the malignant problems of regulatory capture. The National Marine Fisheries Service is supposed to oversee the environmental impact of the navy. But fails to do much bur rubber stamp cursory navy reports.

Some of the key reports end up getting dumped during dead spots, just like corporate bad news filings with the Securities and Exchange Commission. One key report in the book that actually points some blame at the navy was filed at 5:30 on a Friday December 21, 2001, the last day of the federal work year and start of the Christmas weekend. There is no need to impose a media blackout, when all of the media are gone.

Compliance Bricks and Mortar for November 21

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Commissioner: ‘Millionaires can fend for themselves’ by Mark Schoeff Jr. in Investment News

“This obsession with ‘protecting’ millionaires — potentially at the cost of hindering the wildly successful and critically important private markets — strains logic and reason,” said SEC member Daniel Gallagher Jr. “Millionaires can fend for themselves.”

S.E.C.’s Delay on Crowdfunding May Just Save It by Steven Davidoff Solomon in the NY Times.com’s DealBook

But the crowdfunding industry is eager for guidelines. And so it has started to go to the states to work around the S.E.C.’s inertia. Under the securities laws, an offering made in a state by company from that state is exempt from the S.E.C. rules on securities offerings. This was intentional when the Securities Act of 1933 was passed. The idea was that individual states should maintain jurisdiction of offerings limited to their borders because only their residents would be affected.

SEC Whistleblower program has historic year by Mary Jane Wilmoth in the Whistleblower Protection Blog

On November 17, 2014, the U.S. Securities and Exchange Commission’s Office of the Whistleblower released its 2014 Annual Report to Congress. According to the report, 2014 was a historic year for the SEC Whistleblower program in terms of both the number and dollar amount of whistleblower awards. The SEC issued whistleblower awards to more individuals in 2014 than in all previous years combined.

Opinion Release 14-02: Dis-Linking The Illegal Conduct Going Forward by Tom Fox

One of my favorite words in the context of Foreign Corrupt Practices Act (FCPA) enforcement is dis-link. I find it a useful adjective in explaining how certain conduct by a company must be separated from the winning of business. But it works on so many different levels when discussing the FCPA. Last week I thought about this concept of dis-linking when I read the second Opinion Release of 2014, that being 14-02. One of the clearest ways that the Department of Justice (DOJ) communicates is through the Opinion Release procedure. This procedure provides to the compliance practitioner solid and specific information about what steps a company needs to take in the pre-acquisition phase of due diligence. However, 14-02 directly answers many FCPA naysayers long incorrect claim about how companies step into FCPA liability through mergers and acquisitions (M&A) activity.

SEC: Sending Saudi Officials on ‘World Tour’ Was FCPA Violation by Bruce Carton in Compliance Week

In case there was any ambiguity that companies may not send foreign government officials on a “world tour” in order to secure business, the SEC made that clear yesterday. In an administrative proceeding filed yesterday, the SEC sanctioned two former employees in the Dubai office of U.S.-based FLIR Systems Inc. for violating the FCPA via such conduct.

Image of Kingston Brick Wall is by Nicholas Laughlin

Anti-Money Laundering Regulations are Coming for Private Funds

Money Laundering: Hiding ownership and profits in offshore jurisdictions using myriad mechanisms in Switzeland, money laundering capital of the world, & other islands and nations. Favorite tool of mega-rich arch-criminal banking & corporate investors

Investment advisers and private funds have largely not been under the strict regulatory requirements under Bank Secrecy Act. The rationale is that the custody requirements impose a custody account and the custodian is subject to those rules.

It looks like things are going to change. U.S. Treasury Undersecretary for Terrorism and Financial Intelligence David Cohen gave  speech to to the ABA/ABA Money Laundering Enforcement Conference and said changes are underway.

FinCEN, in consultation with the SEC, is working to define SEC-registered investment advisers as financial institutions and, because of their unique insight into customer and transaction information, to extend AML program and suspicious activity reporting requirements to them.

In 2012, the Federal Reserve, FDIC, OCC, NCUA, SEC, CFTC, IRS, and DOJ, formed an AML Task Force to review the AML regime.  The Task Force’s mandate was to take a close look at what was working well and what areas might need some improvement, leveraging input from the private sector through the Bank Secrecy Act Advisory Group.

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Pay to Pour

800px-Michelle_Obama_pours_a_pint_of_stout

Massachusetts regulators have launched an investigation into whether providers are paying for access. In this case, it’s about beer, not political donations. Pay-to-play is illegal under Massachusetts and federal liquor control laws.

The restrictions date back to the end of Prohibition, to keep large breweries from dominating the market. Small breweries have to compete for limited space at the bar. This is not true for the grocery store where non-alcohol manufacturers routinely pay a slotting fee for access to the supermarket shelves.

A local craft brewing company executive aired his grievances on Twitter, and complained that two restaurants would not serve his beer because he would not buy a beer line. The response, in part, was

“I personally don’t even know you, never asked you for a damn thing, never intend to ask you for a damn thing and will not serve your inferior product. ” 

From compliance perspective it looks like the Massachusetts law must hinge on the word “substantial”

No licensee shall give or permit to be given money or any other thing of substantial value in any effort to induce any person to persuade or influence any other person to purchase, or contract for the purchase of any particular brand or kind of alcoholic beverages, or to persuade or influence any person to refrain from purchasing, or contracting for the purchase of any particular brand or kind of alcoholic beverages.

Whenever I go into a bar or liquor store, I see plenty of signs and other items that have clearly been given to the retailer. I guess the glowing Budweiser sign is not “substantial.” The accusations are for payments or merchandise on a grander scale.

Does it matter? Is this a regulation that helps the economics for a consumer?

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Cheating Your Way Into the Olympics

Vanessa_Mae_holding_olympic_torch

Vanessa Mae really wanted to compete in the Olympics, but she is better violinist than a skier. She has sold 10 million records so that is a very high bar. The International Ski Federation decided that she cheated her way into the Olympics.

When Eddie the Eagle competed in the 1988 Olympics, some thought it was a great underdog story and some thought it was degrading the biggest sports event. In response, the International Olympic Committee instituted a new rule in 1990 which requires Olympic hopefuls to compete and place well.

In Sochi the musician raced for Thailand and finished last of 67 competitors in the two-run giant slalom. Her quote after the race:

“You’ve got the elite skiers of the world and then you’ve got some mad old woman like me trying to make it down.”

To qualify, Ms. Mae raced four times in Slovenia in January in a last-ditch bid to meet the Olympic qualifying standard. Under current Olympic qualification rules, countries with no skier ranked in the world’s top 500 may send one man and one woman to to compete in slalom and giant slalom if those athletes meet racing criteria.

Thailand has no skiers ranked in the world’s top 500.  To meet the racing criteria, Mae had to produce an average of 140 points or fewer over five recognized races. She slid under the wire and made the score.

But it turns out those races in Slovenia were a fraud, staged to get Mae the points she needed. According to the FIS report:

  • The results of two giant slalom races on 19th January included a competitor who was not present at, and did not participate.
  • At least one competitor started away from the starting gate outside the automatic timing wand that was manually opened by the starter when she was already on the course.
  • A previously retired competitor with the best FIS points in the competition took part for the sole purpose of lowering the penalty to the benefit the participants in the races.
  • The races courses were not changed for the second runs as is required by the FIS rules.
  • One of the races was a junior championship, with Mae being 15 years older than all of the other racers.

The FIS banned five officials from Slovenia and Italy for between one and two years for their role in the scandal. Ms. Mae is banned from skiing for four years. But she still achieved her dream of competing in the Olympics.

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“Vanessa Mae holding olympic torch” by Yemisi Blake from London, United Kingdom. Licensed under CC BY 2.0 via Wikimedia Commons.

Weekend Reading: Trapped Under the Sea

trapped under the sea

If you’ve ever flown into Boston’s Logan Airport or stared out over the harbor, you likely noticed the dozen egg-shaped structures sitting out on Deer Island. Those are key components of the second largest sewage treatment facility in the United States. The construction of the outflow pipes from that facility is the key point in Trapped Under the Sea: One Engineering Marvel, Five Men, and a Disaster Ten Miles Into the Darkness by Neil Swidey.

The communities of Greater Boston had been dumping barely-treated and raw sewage into Boston Harbor since it was founded. Boston earned the unwanted honor of having the nation’s filthiest harbor. I Love that Dirty Water, but it was time to clean up. By federal and judicial mandate Massachusetts constructed the sewage treatment plant at Deer Island.

In addition to the treatment, the outflow need to be sent somewhere. The design was to send it out to sea through a 9.5-mile-long tunnel, hundreds of feet below the harbor and into the deep water of Massachusetts Bay.

The final step in the construction was to remove the caps at the end of that tunnel. The construction issue was how to do that. The eventual plan was to send a team out to the end of the tunnel to pull the plugs.

At that point in the construction, the ventilation and lighting systems had been removed from the tunnel. The oxygen level had dropped below a level where a human could live. Near the end of the tunnel, its diameter grew smaller and smaller, until it was less than five feet at the end. Then the worker would have to crawl through a three foot side tunnel to reach the sixty-five pound plug. Then repeat that 54 times. No thanks, I’d rather sit at my desk.

The construction company hired a dive team that would use an experimental breathing system to pull those plugs. As you can tell from the title of the book, things go wrong.

On the first day in the tunnel air hoses tangled, the oxygen supply malfunctioned before they could pull any plugs, and the truck wouldn’t start when they tried to drive back to the tunnel entrance.  On the second day, the men worked out some of the problems and managed to remove two plugs. On the third day, everything went wrong.

Mr. Swidey keeps the action moving and the tension mounting as he retells the events leading up to the tragedy and what ensues. He is very detailed.

For a compliance angle, you can see the conflict between the pressure to get the tunnel done and the safety of the workers. There is also a great view of the ensuing investigation.

Mr. Swidey points out that injuries and deaths tend to happen at the end of projects, when tolerance for delays is low and confidence is high. It’s normalization. When someone does something without suffering a bad outcome, the harder it becomes for them to remain aware of the risks and bad behavior. You see this with fraud and ponzi schmes.

There was a great piece in the Boston Globe written by Parker Pettus:

These men were not rich or famous or privileged. Certainly they would have preferred not to have been in a dangerous tunnel hundreds of feet below the surface and miles from any help.

They died while doing a hazardous, unheralded job, and their contribution to a clean, revived Boston Harbor will last for generations. They will not be immortalized in the media, they will not be buried at sea from the decks of a warship.

These workers are the kind of heroes who are so often taken for granted. We would do well to think of Boston’s clear, blue, living harbor as a monument to the courage and sacrifice of the ordinary heroes who made it a reality.

Trapped Under the Sea should be a great addition for your “to-read list.”

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Compliance Bricks and Mortar for November 14

Decay: Aged brick & mortar in Puerto Rico by Rusty Long

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

The SEC and the DMV by Thomas O. Gorman in SEC Actions

“The SEC Should Copy the DMV” is the title of an article published in the New York Times by Joseph S. Fichera recently. The article focuses on the use of corporate fines, questioning whether they are effective: “The SEC and other federal regulators have levied over $125 billion in penalties on Wall Street since the global financial crisis of 2008. Yet few believe that these fines are enough to change behavior. For the largest financial institutions, a multibillion-dollar penalty can amount to a speeding ticket – another cost of doing business,” Mr. Fischera notes. He goes on to argue that the point system of the DMV might be adopted. Under that system drivers collect points for each infraction. When the driver accumulates enough points their driving privileges are revoked for a period of time. If the SEC adopted a similar system, then the market place might force firms into effective compliance as points pile up.

Trial Lawyering and FCPA Compliance by Tom Fox in the FCPA Compliance and Ethics Blog

It is that type of trial lawyer mentality which also seems to seep into the debate about a compliance defense under the FCPA. Leaving aside the Arthur Andersen effect of 63,000 people losing there livelihoods because one corporation made an idiotic decision to go to trial; the trial lawyer mentality that wants to tee it up with the DOJ does not serve the counseling function which corporations require. What does a trial lawyer tell a client about its chances at trial? You have a 10% chance; 20% chance; 50% chance; 75% chance of winning? What is that based on? Knowing what 12 (or perhaps 6) citizens will say? If there is a potential $500MM fine for a guilty verdict and there is a 10% chance of losing, is settling for $50MM reasonable? What if your illegal conduct was over five years ago, are you really going to trial on statute of limitations defense, where your own conduct hid the FCPA violations? Want to try and use that fact issue to persuade a jury that the government waited too long to indict?

SEC’s Increased Use of Administrative Proceedings Draws Criticism and Legal Challenges by Chip Phinney in Mintz Levin’s Securities Litigation & Compliance Matters

The SEC’s plan to bring more enforcement actions as administrative proceedings before its own administrative law judges rather than in the federal district courts — even in insider trading cases — has been drawing increasing criticism and legal challenges.  Most recently, Judge Jed Rakoff of the U.S. District Court for the Southern District of New York questioned  the SEC’s use of administrative proceedings in a speech last Wednesday before the Practising Law Institute’s Annual Institute on Securities Regulation.  Judge Rakoff observed that the SEC’s administrative powers, which were originally quite limited, have been expanded considerably by the Sarbanes-Oxley Act of 2002 and especially by Section 929P(a) of the Dodd-Frank Act of 2010, which respectively enabled the SEC to obtain administrative orders barring defendants from serving as officers and directors of registered companies and assessing monetary penalties.

AIFMD Reporting by non-EEA AIFMs by Winston Penhall and Paul Moran in ReedSmith’s Private Funds Law Update

AIFM that are authorised by the UK Financial Conduct Authority (or “FCA”) are already subject to compulsory reporting, while non-EEA AIFM become subject to FCA reporting when they register with the FCA under the UK national private placement regime (the “UK NPPR”).

Digging into the Data by Matt Kelly in Compliance Week

There are two truths about corporate compliance: no universal solution exists for all businesses, and everyone wants to know what everyone else is doing. As part of Compliance Week’s effort to better serve the compliance community, we now have a way to address both those points of pressure.

Decay – Aged brick & mortar in Puerto Rico is by Rusty Long
cc-by-nc-sa

 

Cheating Your Way to Marathon Victory

rosie ruiz

Tabitha Manning ran the Chickamauga Battlefield Marathon setting a personal best record time of 2:54:21. But it looks like she pulled a Rosie Ruiz.

For those of you not familiar with the history of the Boston Marathon, Rosie Ruiz was declared the winner of the 1980 Boston Marathon with a time of 2:31:56. At that time, it was one of the fastest female marathon runs. Currently, the female elite runners leave before the men. In 1980, women were back in the pack and harder to track.

Ms. Ruiz raised some red flags during her post-win interviews. She didn’t seem as fatigued or covered in sweat as the other competitors. A few people came forward and stated that they saw Ms. Ruiz burst from the crowd on Commonwealth Avenue in the last mile of the marathon. Race officials took away her olive wreath crown and title.

As a result of Ms. Ruiz’s hijinks marathons began using RFID chips to track a runner’s progress on the course. That makes it easier to see if a competitor has jumped on the train to reach the finish instead of running.

That chip marks when you cross the start line and the finish line. For most races it will mark your time at other places along the course.

Going back to Ms. Manning, she seems to have exploited the Chickamauga Battlefield Marathon’s use of only a mid-race split in addition to the start and finish. In looking at the course, it runs two laps around the battlefield park. But there is a road right down the middle.

The chip show Ms. Manning running a 2:54 marathon, but 2:06:51 for the first half and 47:30 for the second half.

That’s a big burst of speed.

Or a quick car ride.

Race officials could also check Ms. Manning’s previous running times and see that the first half time was closer to her previous races.

Ms. Manning was disqualified and Lillian Gilmer was crowned the winner.

When people wonder how design a control, that marathon chip is an excellent example. It marks your progress around the course to make sure that you are not taking shortcuts. The Chickamauga Battlefield Marathon organizers went cheap on the controls. As a result there was only one place (maybe two places) where the chip was scanned. That allowed Ms. Manning to use a shortcut.

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