Compliance Bits and Pieces for March 26

Here are some interesting stories from the past week:

The Difference Between Wrong and Illegal by Charles H. Green

Do you know the difference between a wrong action and an illegal action? If you don’t, you are not alone. But neither are you to be trusted.

Ghostblogging will be the death of social media in the law by Kevin O’Keefe in Real Lawyers Have Blogs

We’re just scratching the surface of what social media can do for lawyers and law firms. But rather than learn how to harness this powerful relationship building tool, one with its roots in traditional client development, I’m finding some lawyers and law firms would rather pay to have someone else participate in social media for them.

Advisors Allowed to Get Social by Mark Astarita in onWall Street

As social media sites have become more popular with the general public, advisors have been drawn to them. But firms have generally banned their use because of advertising restrictions, and the lack of clear guidance from the regulators as to their use. That partially changed in January, with FINRA’s release of Regulatory Notice 10-06-Guidance on Blogs and Social Networking Web Sites. The notice dealt with five main areas.

Cahill taps firms tied to state pension investor By Aaron Lester, Michele Richinick, and Walter V. Robinson in the Boston Globe

Cahill, in an interview, expressed no qualms about receiving campaign contributions from companies that have or want business from the [Massachusetts] treasurer’s office and the five agencies he oversees, including the pension board. In fact, he acknowledged that he and his campaign aides routinely seek contributions from such companies.

Judge Uncorks True Feelings About Compliance Monitors by Matt Kelley in Compliance Week

Most events in federal court are terribly dull, the carefully scripted culmination of legal briefs fired back and forth among various parties for years. But once in a great while, a judge goes a little nuts—as happened last week with the new hero of compliance officers everywhere, District Court Judge Ellen Segal Huvelle.

Bribery in Britain

The British government is working on a new Bribery Bill “to reform the criminal law of bribery to provide for a new consolidated scheme of bribery offenses to cover bribery both in the United Kingdom (UK) and abroad.”

The Bribery Bill would replaces the offenses under the Public Bodies Corrupt Practices Act 1889, the Prevention of Corruption Act 1906 and the Prevention of Corruption Act 1916 with two crimes. The first makes it a crime to bribe another person. The second makes it a crime to accept a bribe.

The Bribery Bill also creates a discrete offense of bribery of a foreign public official and a new offense where a commercial organization fails to prevent bribery. This would create a British version of the US Foreign Corrupt Practices Act and and bring the United Kingdom compliant with its obligations under the OECD.

There is an affirmative defense for the failure of a commercial organization to prevent bribery: “adequate procedures.” The Bribery Bill requires the Secretary of State to publish guidance about procedures that a company can put in place to prevent bribery.

The Bribery Bill is widely expected to come into force later this year.

According to research from the Eversheds, many businesses are unaware of this new Bribery Bill, with 60% of businesses unaware that failing to prevent bribery will be a criminal offense.

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Should You Invest in Ethical Companies?

2010 World’s Most Ethical Companies

Yesterday, I was excited to see that the World’s Most Ethical Companies for 2010 had outperformed the S&P 500. Ethisphere went back five years and charted the performance. They found a 53% return for the 2010 class of companies, compared to a 4% return in the S&P.

The hindsight of looking back on the performance is great. It’s telling me that I should have bought stock in those companies five years ago. We all know that hindsight is 20/20. I was curious to see if inclusion on the list is an indicator of future performance.

Should I run out and buy the companies on the 2010 list?

I decided to go back and check the performance of the companies on the first edition of Ethisphere’s list: 2007 World’s Most Ethical Companies.

Great news for ethical investing

The group of public companies on Ethisphere’s 2007 World’s Most Ethical Companies dramatically outperformed the broader market.

If you bought one share in each of the 52 companies on June 1, 2007, you would have realized a -6.34% return. In comparison, the S&P 500 had a -19.57% return and the Dow Jones Industrial Average had  a -15.80% return.

If you bought $100 worth of shares in each of the companies instead of 1 share each, your return drops to -9.83%. The difference is due almost entirely to the presence of Google and its lofty share price. (I used the Berkshire Hathaway B shares because the astronomical price of the Berkshire Hathaway A shares would have dwarfed the one share results.)

Methodology

I used SPY SPDRs, an index fund that tracks the S&P 500, and the SPDR DIAs, an index fund that tracks the Dow Jones Industrial Average.

There are 52 stocks on Ethisphere’s 2007 list that were public companies then and now. Two other companies on the list were public, but went private: Sun Microsystems and Bright Horizons. I omitted those two. There were another 38 companies that were private or whose shares were only available on foreign exchanges. I also omitted those 38 from my calculations.

I used the adjusted close price from Yahoo’s historical prices for the 52 companies, SPY and DIA shares, which adjusts the close price for dividends and splits.

Here is the spreadsheet with the underlying values: http://spreadsheets.google.com/pub?key=t5Tg37_FEqFq71zqApUq0Pw&output=html. Feel free to double-check my math or challenge my methodology.

What does it mean?

I own some of the shares on the list, so I’m well aware that almost as many companies underperformed. (After all, it is an average return.) Eighteen of the 52 companies performed worse than the SPY shares. There does not seem to be a clustering of returns or any one big or gain in the group of 52. It seems to me that these ethical companies, as a group, just outperform the broader market.

If I had more time, I might go back to the 2008 list and the 2009 list to see how those companies have done over a shorter term.

Daimler Charged with FCPA Violations

Daimler AG, the parent company of Mercedes-Benz, has been charged with violations of the Foreign Corrupt Practices Act.

The Department of Justice accuses the company of engaging in a long-standing practice of paying bribes worth tens of millions of dollars to foreign officials in over 22 countries.

There is an April 1 hearing in U.S. District Court in Washington D.C.

Daimler is accused of making “hundreds of payments” between 1998 and January 2008 to officials in 22 countries, including China, Croatia, Egypt, Greece, Hungary, Indonesia, Iraq, Ivory Coast, Latvia, Nigeria, Russia, Serbia and Montenegro, Thailand, Turkey, Turkmenistan, Uzbekistan and Vietnam.

Daimler is accused of having “interne Fremdkonten” or third party accounts with over 2000 in place at the time of the Chrysler merger in 1998. There is also mention of cash desk in Stuttgart that sounds a lot like the suitcase room at Siemens, where executives could fill up suitcases of cash to pay bribes.

In China the “819 account” was used to pay special commissions. The account number’s last three digits were “819.”

In addition to the payment of bribes, Daimler is also accused of improperly accounting for the funds in violation of the books and records provisions of the FCPA.

It looks ugly for the company.

Here is a copy of the Information Filing in US v. Daimler AG – hosted on JD Supra:

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Financial Overhaul Moves Forward

Senator Dodd

With the health care reform now out of the hands of Congress, there is now movement with financial overhaul. Senator Dodd introduced the Restoring American Financial Stability Act of 2010 last week  without a Republican co-sponsor [Dodd Goes Solo].

Instead plugging in amendments, the Senate Banking Committee voted on straight party lines to advance the bill as introduced by Senator Dodd. The bill is moving so fast that it has not even made into the Thomas system for tracking legislative activity. The vote on Monday night lasted less than 25 minutes.

According to reports, Republicans filed more than 200 amendments on Friday, but withdrew all of them and let the bill pass quickly through committee. I assume the strategy will be to attack the bill in the full Senate instead of in the Banking Committee.

UPDATE: There were 114 pages of amendments made to the bill. Most look like clean-ups and small changes that do not have a big impact on the bill.

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World’s Most Ethical Companies 2010 Edition

2010 World’s Most Ethical Companies

Ethisphere Institute just announced its list of the World’s Most Ethical Companies for 2010.

Of the 100 companies on their list, 26 are new to the list. The sole winner for the real estate industry is Jones Lang LaSalle. For the financial services industry there were three companies: American Express, The Hartford and The Principal Financial Group.

A tidbit that caught my eye was the comparative performance of the companies. Ethisphere claims that the “2010 World’s Most Ethical Companies have outperformed the S&P 500 by delivering a 53 percent return to shareholders since 2005—compared to the S&P’s four percent shareholder loss over the same period.”

It’s interesting to see that these companies consistently outperformed the broader in good times and bad. I’m tempted to go back through all of the past winners to see how it would have worked out by investing in these companies over the years. (If I could just find the time to do so.)

Ethisphere’s looks at 7 categories under their “Ethics Quotient”:

  1. Corporate citizenship and responsibility (20%)
  2. Corporate governance (10%)
  3. Innovation that contributes to public well being (15%)
  4. Industry leadership (5%)
  5. Executive leadership and tone from the top (15%)
  6. Integrity track record and reputation (20%)
  7. Internal systems and ethics/compliance program (15%)

SEC Warns Firms on Muni Pay-to-Play Rules

While sources are wallowing in the exposure of a political figure in a “pay to play” scandal, I thought there might be some lessons for other investment managers as states and perhaps the SEC roll out limitations on political contributions.

The original story seemed mildly interesting.  The SEC warned firms that municipal securities rules prohibiting pay-to-play apply to affiliated financial professionals, not just a firm’s employees. The story caught my eye because MSRB Rule G-37 was identified as a model for the SEC’s proposal on pay to play.

The SEC wanted to make it clear that an “executive who supervises the activities of a broker, dealer, or municipal securities dealer is not exempt from the MSRB’s pay-to-play rule just because he or she may be outside the firm’s corporate governance structure.”

The SEC report identified JP Morgan and the Treasurer of the State of California, but did not name names. It did not take much research to find out that Phil Angelides was treasurer at the time of the incident. The Wall Street Journal identified the JP Morgan executive as David Coulter who was the vice chairman who oversaw the bank’s investment-banking business.

“On September 10, 2002, the Vice Chairman forwarded an invitation for the California Treasurer’s New York fundraising event to JP Morgan Chase’s executive committee and to its Vice President for Government Relations with a handwritten note stating that the California Treasurer is an important client and soliciting their help in raising $10,000 for the event.”

That is exactly the sort of behavior that the SEC wants to prohibit with MSRB Rule G-37 and its proposed pay to play rule.

A key takeaway from the report is that the SEC will look “to the activities, not merely the title, of an associated person in determining whether the person is” subject to the pay to play restrictions.

The story gets juicy because Mr. Angelides is currently the Chairman of the Financial Crisis Inquiry Commission. The Financial Crisis Inquiry Commission was established under the Fraud Enforcement and Recovery Act of 2009 to “examine the causes, domestic and global, of the current financial and economic crisis in the United States.” Perhaps his own situation will be an example in the FCIC’s report due on December 15.

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Compliance Bits and Pieces for March 19

Here are some compliance related stories from the past week:

Securities Docket Radio: Available Free on iTunes

Securities Docket Radio is now available as a free download on iTunes! To listen to or download the debut program featuring Bruce Carton’s interview with Sanjay Wadhwa, Deputy Chief of the SEC’s new Market Abuse Unit, please click on the iTunes link below.

Schapiro Details How The SEC Would Spend 2011 Budget by Melissa Klein Aguilar in Compliance Week’s The Filing Cabinet

SEC Chairman Mary Schapiro took to the Hill this week to provide lawmakers with details on how the agency would use the President’s budget request of $1.258 billion for fiscal 2011. If enacted, the 12 percent increase over the agency’s FY 2010 funding level would allow the SEC to hire an additional 374 professionals, bringing its total staff to just over 4,200.

Dear Moody’s Corp: Type this fast 3 times by Dominic Jones in IR Web Report

Moody’s Corporation (NYSE:MCO) is one company that is in the process of sending such a notice to its registered shareholders … Now remember that people are getting this on paper and they have to manually key in that long URL –http://www.amstock.com/ProxyServices/ViewMaterial.asp?CoNumber=26180

Compliance Book of the Month: Money for Nothing by Matt Kelly in Compliance Week

The book Money for Nothing can be summed up in one sentence: The boards running corporations in America today are ineffective. But while that sentence may be accurate, it is not news to corporate compliance and governance officers, so those of you looking for a more substantive analysis or solutions to the governance problems you face might want to read elsewhere.

No, We Don’t Need to Suspend the FCPA In Haiti or Any Other Country! by the FCPA Professor

A topic in the blogosphere this week has been whether the FCPA needs to be suspended so that more U.S. companies will invest in Haiti. The spark igniting this discussion was an opinion piece on Monday by Wall Street Journal editorial board member Mary Anastasia O’Grady titled “Democrats and Haiti Telecom” (see here).

Turning Down The Information Firehose–ABA Article in Law Practice by David Hobbie in Caselines

Much of my work focuses on how attorneys can do a better job handling information….Research for the article was itself an interesting experiment in personal knowledge management. The most valuable resources were probably KM Lawyer Mary Abraham’s post “Managing the Firehose“, “PKM Professional” Harold Jarche’s posts on Sense-Making with Personal Knowledge Management, Patty Anklam on PKM as the “Third KM,” and the collection of resources compiled by a number of people on delicious at http://delicious.com/popular/pkm.

Did you “Make” an Untrue Statement under 10b-5?

The First Circuit threw out the SEC’s 10b-5(b) claim in SEC v. Tambone. This time it was the entire court after an earlier decision of a three judge panel reached the opposite decision.

The SEC alleged that James Tambone and Robert Hussey engaged in fraud in connection with the sale of mutual fund shares tied to market timing claims. The two were senior executives of a registered broker dealer, Columbia Funds Distributor, Inc. The prospectuses for the funds told investors that market timing was not permitted. Unfortunately, Tambone and Hussey permitted a number of customers to engage in market timing transactions. The SEC took the position that Tambone and Hussey were responsible for the false statements in the prospectuses since they commented on the market timing passages prior to their inclusion in the documents.

This case presents the two-part question of whether a securities professional can be said to “make” a statement, such that liability under Rule 10b-5(b) may attach, either by (i) using statements to sell securities, regardless of whether those statements were crafted entirely by others, or (ii) directing the offering and sale of securities on behalf of an underwriter, thus making an implied statement that he has a reasonable basis to believe that the key representations in the relevant prospectus are truthful and complete. The answer to each part of this two-part question is “no.”

Rule 10b-5(b), promulgated by the Securities and Exchange Commission under of section 10(b) of the Securities Exchange Act of 1934, renders it unlawful “[t]o make any untrue statement of a material fact . . . in connection with the purchase or sale of any security.” 17 C.F.R. § 240.10b-5(b).

The Tambone case turns on the meaning of the word “make” as used in Rule 10b-5(b). The SEC advocated “an expansive definition, contending that one may “make” a statement within the purview of the rule by merely using or disseminating a statement without regard to the authorship of that statement or, in the alternative, that securities professionals who direct the offering and sale of shares on behalf of an underwriter impliedly “make” a statement, covered by the rule, to the effect that the disclosures in a prospectus are truthful and complete.”

The court rejected the SEC’s position.

In 1994 the US Supreme Court held that private civil liability does not an aiding and abetting suit under Rule 10b-5 in the case of Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164. So private parties can only bring a suit against primary violators of Rule 10b-5. As a result of that decision, Congress amended the Exchange Act to make it clear that the SEC can bring a suit againstanyone who provides substantial assistance to a primary violator of securities laws. That is, the SEC can impose secondary liability.

The First Circuit decided that the SEC was trying to impose primary liability on Tambone and Hussey for conduct that would be a secondary violation (at most). The Court acknowledged that there is a split in the courts over the right test, but held that the facts of this case would fail both tests.

“If Central Bank is to have any real meaning, a defendant must actually make a false or misleading statement in order to be held liable [as a primary violator] under section 10(b). Anything short of such conduct is merely aiding and abetting.” Shapiro v. Cantor, 123 F.3d 717, 720 (2d Cir. 1997).

The next step is up to the SEC. They need to decide if they will appeal to the Supreme Court and use this case to try to reconcile the law in this area.

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