Special Report on Sovereign Wealth Funds

Pensions and Investments

Pensions & Investments published a Special Report on Sovereign Wealth Funds. The report is based on a survey conducted in April by the Oxford University Center for Employment, Work and Finance: Oxford SWF Project.

Sovereign wealth funds are perceived to be shrouded in mystery because, like many private investment funds, they do not publicly report their investment activity. One item that attracts attention is the size of these funds. They are collectively a pool of capital estimated to be somewhere between about three trillion to nearly seven trillion dollars. The largest individual fund is believed to have assets of over $600 billion.

The special report was based on interviews of investment managers who routinely work with sovereign investment funds, not directly with officers of the funds themselves. So, the information is second hand.

The report predicts a movement away from U.S. Treasuries and towards equities and real estate.

References:

Ethics and the Sales Relationship in World-Class Bull

hbr-may-2009

The May issue of the Harvard Business Review offers up an ethics problem in its monthly case study: World-Class Bull (subscription required for full article). The three commentaries offer very different reactions to the facts presented in the case study’s fact pattern. John Humphreys, Zafar U. Ahmed, and Mildred Pryor penned the fact pattern.

The case study revolves around the acquisition of a new customer. The existing sales agent was having no luck. A hot shot salesman took on the challenge by using the customer’s love of livestock to generate the relationship and close the sale.

On one hand, you need to applaud the salesman for learning more about the customer and how to engage the customer in a relationship. The ethical issue arises because of the apparent subterfuge of the salesman in engaging the customer and developing the relationship. The ethical issue is raised to a higher level when the sales manager sends an email to the entire sales team applauding the salesman and describing all of the subterfuge in detail.

James Borg, author of Persuasion: The Art Of Influencing People, lauds the salesman for taking the steps to engage the customer on a personal basis. However, he thinks the sales manager should “be hauled in front of the company’s Idiocy Review Board for sending an ill-advised, potentially damaging e-mail.”

Don Peppers and Martha Rogers, the coauthors of Rules to Break and Laws to Follow: How Your Business Can Beat the Crisis of Short-Termism, flat out declare the saleman’s tactics as unethical. They think the company should immediately fire the sales manager, discipline the salesman, send a message to all employees firmly asserting that deceiving customers or prospects is not the Company’s way of doing business, and rewrite the ethics code.

Kirk O. Hanson, the University Professor of Organizations and Society and the executive director of the Markkula Center for Applied Ethics at Santa Clara University in California, thinks the company should publicly reprimand the salesman and doubts that the sales manager is salvageable.

I see a problem with the salesman’s tactics, but I would not be so harsh as to pass judgment without an investigation and without reviewing the company’s code of ethics. There is flat statement in the case study by the salesman that he didn’t violate a single item in the ethics code. To me it seems hard to punish the salesman if he didn’t violate the company’s policies or ethics code. Since the conduct seems questionable, perhaps there is a flaw in the ethics code. I agree with Peppers and Rogers that you may need to rewrite the ethics code. Of course, it could also be that the salesman did know the content of the code of ethics.

Like the other commentators I have a bigger problem with the sales manager for not recognizing the ethical problem and sending out the laudatory email without a review or investigation. That is the bigger failure. For a company to maintain high ethical standards, front-line managers like the sales manager are key. They must understand how the actions by the people they manage affect the long term success of the company. The sales manager failed this test.

Obama Plan for Financial Regulatory Reform and Private Investment Funds

obama plan

Along with the Hedge Fund Adviser Registration Act of 2009, the Hedge Fund Transparency Act of 2009 and the Private Fund Transparency Act of 2009, we also have the Obama plan for financial reform: Financial Regulatory Reform – A New Foundation: Rebuilding Financial Supervision and Regulation.

Under the Obama plan, all advisers to private pools of capital, including hedge funds, private equity funds and venture capital funds, would be required to register with the SEC under the Investment Advisers Act of 1940. There would be an exception for advisers whose assets under management did not exceed “some modest threshold.” All registered private investment funds would be subject to

  1. Reporting information on the funds they manage that is sufficient to assess whether any fund poses a threat to financial stability
  2. Recordkeeping requirements,
  3. Requirements regarding disclosures to investors, creditors and counterparties and
  4. Regulatory reporting requirements
  5. Regular, periodic examinations by the SEC to monitor compliance with these requirements
  6. Confidential reporting on assets under management, borrowings, off-balance sheet exposures, and other information deemed necessary to assess whether a fund or group of related funds is so large, highly leveraged, or interconnected that it poses a threat to financial stability.

As with the Hedge Fund Adviser Registration Act of 2009, the Hedge Fund Transparency Act of 2009 and the Private Fund Transparency Act of 2009, it is too early to tell what will come of this. Although, it seems clear that many private investment funds are going to be subject to greater regulation.

References:

California IOUs

California

California started issuing IOUs instead of checks. I know some people that got an IOU instead of their tax refund. They are not alone. In the last week, State Controller John Chiang’s office issued 91,000 IOUs worth $354 million to people expecting tax refunds, to state vendors and to local governments.

Banks have been willing to accept the IOUs and redeem them for cash. However, some major banks are getting ready to stop cashing them, although credit unions appear to be willing to continue redeeming the IOUs.

Since an IOU doesn’t work for anyone who needs cash, markets have opened for buying and selling these IOUs. There have been some sitings on eBay and Craigslist. It looks like eBay has been vigilant about pulling down listings. Craigslist has dozens of listings.

It should be so surprise that the IOUs are securities and subject to securities laws. The SEC has issued an Investor Alert on State of California IOUs.

While the IOUs are “securities” for purposes of the federal securities laws, as obligations of the State of California they are “municipal securities.” This means that sales of the IOUs are not required to be registered with the Commission. Also, as municipal securities, the IOUs are subject to the rules issued by the Municipal Securities Rulemaking Board, which include a requirement that the securities sold are suitable for the purchaser.

In addition, persons engaged in the business of buying and selling the IOUs may need to be registered as market intermediaries, such as brokers, dealers, or municipal securities dealers, alternative trading systems, or national securities exchanges.

Meanwhile, California’s bind debt rating has been lower to BBB from A minus, with another downgrade to junk status possible next week.

References:

Enterprise 2.0 by Andrew McAfee

mcafee

I just read an early preview chapter from Andrew McAfee’s forthcoming book Enterprise 2.0: New Collaborative Tools for Your Organization’s Toughest Challenges. The book is scheduled for release later this year from Harvard Business Press. You can also download and read the preview chapter: Introduction of Enterprise 2.0.

Much like Professor McAfee, I too was a skeptic of how web 2.0 tools could be used inside a business. I started exploring these tools when my old law firm started to consider an upgrade of their intranet platform to SharePoint 2007. That software package has some basic enterprise 2.0 tools. If we upgraded, we would have blogs, wikis and RSS feeds as part of intranet platform. But I didn’t really know what they were or how they could help a law firm. At the time, the terms sounded like something out of a Dr. Seuss book. But I looked a little closer and saw that they had some potential.

I quickly discovered that two people I knew had blogs: Ron Friedmann’s Strategic Legal Technology and Joy London’s Excited Utterances. Originally, I thought they were just websites. (Does it really matter anymore?) I did a little more research and decided to try setting my own blog. I set aside an afternoon to set up a blog. Google claimed their Blogger platform was easy to set up and it was free. Instead of an afternoon, it took me ten minutes to set up the blog. Five minutes was spent figuring out a name and four minutes was spent choosing colors. That left a lot of time that afternoon to think about the implications of what I had done. This was the birth of my first blog, KM Space, in February of 2007.

I first encountered Professor McAfee at the Enterprise 2.0 Conference 2007.  Since then, we have had a few opportunities to talk about the implication of these tools inside a business.

I see transformational change in the availability of information. For decades it was business that had the powerful internal network that allowed them to share information across the enterprise. Now with the increasing ubiquity of internet access, the internal business network and tools that run on it are becoming inferior to the tools available through the internet for finding and dealing with information. There are many lessons for a business to learn from the consumer tools for handling information. This is big change.

The other aspect is email. Most businesses rely on email and attachments as their collaboration platform. If you look back 20 years, email was barely a factor in the way business teams collaborated. So there is no reason to think that email is either the endpoint or the zenith of the way business team collaborate.

Like Professor McAfee, I see a transformation change. I am looking forward to reading the Enterprise 2.0 when it is finally published.

Discretion and Compliance

Martin Lomasney
Martin Lomasney

Martin Lomasney created a famous saying on the importance of discretion:

“Never write if you can speak; never speak if you can nod; never nod if you can wink.”

At the time of Lomasney, it was not email but telegrams that were the principal method of electronic communication. But those telegrams just ended up on pieces of paper.

This was also the time before e-discovery. Now every email is subject to ending up in a lawyer’s hand during a law suit.

Think before you hit that send button. Maybe a phone conversation will be better. Or a nod.

Corporate Compliance Scam Comes to North Carolina

corporate compliance services

A vigilant reader in North Carolina received an “Annual Minutes Requirement Statement” from Corporate Compliance Services. We have seen a similar scam in California, Colorado, Florida, Georgia, Indiana, Illinois, Massachusetts, Montana, New York, Ohio, and Texas.

The very official document cites North Carolina General Statute §55-16-01(a) with the requirement that a corporation must keep a permanent record of all meetings of its incorporators, shareholders and board of directors, and all actions taken.

This form does not act as a record of the meetings, but is merely a list of the directors, officers, and shareholders. It does not even meet the requirement of the statute it cites.

North Carolina General Statute §55-16-01(c) requires a corporation to maintain a record of its shareholders in a form that permits preparation of a list of the names and addresses of all shareholders, in alphabetical order by class of shares showing the number and class of shares held by each.

The form provides a list of shareholders and the number of shares, but does not record the class of shares. That appears to make the form defective and would not meet the requirements of the statute.

In fairness to the Compliance Services,  the form and the company’s website both state that they not connected with any government agency.  Throw their form in the garbage and check with your attorney to make sure the proper corporate procedures and record-keeping are in place.

According to a source at the North Carolina Department of Justice, anyone who has lost money to this Raleigh, NC version of the scam is invited to contact Jennifer Pulley of the NC Attorney General’s Consumer Protection Division, tel. 919-716-6000.

See a larger image of the form.

Associational Retaliation Claims

retaliation

Most companies have some form of non-retaliation policy for employees who make a good faith report of a problem. But what if the company retaliates against someone else instead? That was the situation presented in a recent court case: Thompson v. North American Stainless. A woman and her fiancee worked at the same company. She complained and they fired him.

Factual Background:

The plaintiff, Eric Thompson, claimed he was fired in retaliation for his fiancee’s discrimination charge. Thompson met the woman, Miriam Regalado, at work. In 2002, Regalado filed a charge with the EEOC alleging that she was discriminated against because of her gender. At the time of Thompson’s termination, he and Regalado were engaged to be married, and their relationship was common knowledge at North American Stainless.

The Problem

Title VII of the Civil Rights Act says an employer may not fire, demote, harass or otherwise “retaliate” against an individual for filing a charge of discrimination. Most companies have a policy that takes the same position for reporting other violations of company policy or illegal acts.

Clearly if the company had fired Regalado, the fiancee, they would have broken the law. But is it still “retaliation” if you fire a close friend or relative? (That’s associational retaliation.)

The Result

No, at least under Title VII of the Civil Rights Act. The Court relied on the plain language of the statute limiting the class of persons authorized to sue for retaliation to those who opposed an unlawful employment practice; made a charge; or testified, assisted, or participated in any manner in an investigation, proceeding, or hearing. The statute does not authorize a retaliation claim by a plaintiff who did not himself engage in protected activity.

But . . .

The Court did note that Thompson’s fiancee, who filed the original discrimination charge, could have filed a retaliation complaint herself alleging that the termination of Thompson in response to her protected activity was an adverse employment action against her. There is no background on why she didn’t do that.

Companies should be careful of these potential associational retaliation claims when dealing with its complaint process

Resources:

What Went Wrong at Lehman?

DeMuro

Complinet interviewed David DeMuro, head of compliance at Lehman Brothers during its last days in 2008. It should come as no surprise that the warning signs were there for everyone to see but in the midst of a bubble, employees were too scared to raise their hand because there was still money to be made.

DeMuro did not blame the regulators, saying they were looking closely at the working of the investment bank. He did lay some blame on the Federal Reserve Bank: “The role of the Fed is to take away the punch bowl just as the party gets going. However, in recent times the Fed has chosen to add just a few more shots of vodka to the punch bowl to keep the party going.”

He did peg lots of blame on an over-reliance on financial risk models. There was also an “almost religious belief” in the veracity of the models.

See the webcast yourself (13 minutes): Complinet Interviews David Demuro

References:

Workplace Computer Policy and the Attorney Client Privilege

email_icon

Back in April, I mentioned a New Jersey case that found e-mail, sent during work hours on a company computer, was not protected by the attorney-client privilege: Compliance Policies and Email (Stengart v. Loving Care [.pdf]) That case has now been overturned. It seems that a company’s policy on computer use may be more limited that I originally posted.

Factual Background:

The company provided Stengart with a laptop computer and a work email address. Prior to her resignation, plaintiff communicated with her attorneys, Budd Larner, P.C., by email about an anticipated suit against the company, and using the work-issued laptop but through her personal, web-based, password-protected Yahoo email account. After Stengart filed suit, the company extracted a forensic image of the hard drive from plaintiff’s computer. In reviewing plaintiff’s Internet browsing history, an attorney discovered numerous communications between Stengart and her attorney from the time period prior to her resignation from employment with Stengart.

I found it strange that the email from a web-based email account would be stored on the local computer. I am going to guess that it was attachments to the email that ended up stored on the computer in a temporary file and not the email itself.

Company Position:

According to the decision, the company’s policy may not have been clearly distributed and applied. There was some factual disputes about whether the company had ever adopted or distributed such a policy. There was a further dispute that even if the policy was put in place as to whether it applied to executives like Stengart.

Decision:

In the end the company’s position didn’t matter and the court assumed the policy was in place. Instead, the court took a harsh position:

A policy imposed by an employer, purporting to transform all private communications into company property — merely because the company owned the computer used to make private communications or used to access such private information during work hours — furthers no legitimate business interest. See Western Dairymen Coop., 684 P.2d 647, 649 (Utah 1984). When an employee, at work, engages in personal communications via a company computer, the company’s interest — absent circumstances the same or similar to those that occurred in State v. M.A., 402 N.J. Super. 353 (App. Div. 2008); Doe v. XYC Corp., 382 N.J. Super. 122, 126 (App. Div. 2005) — is not in the content of those communications; the company’s legitimate interest is in the fact that the employee is engaging in business other than the company’s business. Certainly, an employer may monitor whether an employee is distracted from the employer’s business and may take disciplinary action if an employee engages in personal matters during work hours; that right to discipline or terminate, however, does not extend to the confiscation of the employee’s personal communications.

Those were some broad statements, but the decision was ultimately limited to the attorney-client privilege.

There is no question — absent the impact of the company’s policy — that the attorney-client privilege applies to the emails and would protect them from the view of others. In weighing the attorney-client privilege, which attaches to the emails exchanged by plaintiff and her attorney, against the company’s claimed interest in ownership of or access to those communications based on its electronic communications policy, we conclude that the latter must give way. Even when we assume an employer may trespass to some degree into an employee’s privacy when buttressed by a legitimate business interest, we find little force in such a company policy when offered as the basis for an intrusion into communications otherwise shielded by the attorney-client privilege.

It seems that New Jersey courts are now taking the position that a company cannot read an employee’s personal e-mail, even when the employer has a policy stating that the employee has no reasonable expectation of privacy. The exception to this rule would be when the company needs to know the content of the e-mail to determine whether the employee broke the law or violated company policy.

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