Month: March 2009

Corporate Compliance Fraud in Georgia, Florida and Massachusetts

Just like the Corporate Compliance Fraud in Ohio, Compliance Services is also targeting companies in Georgia, Florida and Massachusetts.

The Daily Citizen is reporting Georgia corporations warned about solicitations. The Georgia Secretary of State issued a warning:

“Several corporations registered with the Corporations Division of the Office of the Secretary of State received a letter from Georgia Corporate Compliance, a private company offering to complete corporation meeting minutes on behalf of registered corporations.”

The Attorney General of Florida also issued a warning:

Over the past several months, the Attorney General’s Office has received numerous complaints against several of these companies. Last week the Attorney General settled a lawsuit against one such company, Corporate Compliance Center, over allegations that the company misled Florida businesses relating to the sale of corporate minutes reports. Two other companies, Corporate Minutes Compliance Service and Corporate Minute Services, were prevented from operating in Florida when the Attorney General’s Office threatened litigation.

Bill Galvin, the Secretary of the Commonwealth of Massachusetts issued his warning:

Recently, an entity calling itself “Compliance Services” mailed solicitations entitled “Annual Minutes Requirement Statement Directors and Shareholders” to numerous Massachusetts corporations. This solicitation offers to complete corporate meeting minutes on behalf of the corporation for a fee. Despite the implications contained in the solicitation, Massachusetts corporations are not required by law to file corporate minutes with the Secretary of State.

Thanks to Corporate Compliance Insights: Compliance Scam Alert in Georgia: Corporate Minutes Hoax Not Limited to Ohio.

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Twitter in the Workplace

twitter_buttonShould you allow your employees to use Twitter?

Are they already using Twitter?

The answer to both questions is probably YES.

Your employees are probably already using Twitter and they do not need your computer network for access. They can access Twitter by text messages, an iPhone, a blackberry or any other smartphone.

Personally, I have been using Twitter for a while and find it a great way to stay connected with the news, compliance issues and the other compliance related people using Twitter. ( See @DougCornelius on Twitter)

Daniel Schwartz lays out the thinking very nicely in Twitter in the Workplace: Why Employers Need to Be Cautious, Not Afraid:

“Next, I should clarify that I don’t disagree with the underlying premise that is advanced by some that posts on Twitter can get an employer into trouble. Of course that’s true.  But so can a letter to an editor in your local newspaper, or a notable call to a radio talk show or causing a scene at a presentation.

You don’t see advice that we ought to cut off mail service, or remove phones from employees’ offices, or stop allowing employees to attend seminars and presentations.  Rather, we outline a set of expectations as to what is proper business behavior and what is expected by the employer.”

You can also find Daniel on Twitter @DanielSchwartz. He, like me, finds Twitter to “be a great marketing device and novel communications tool.”

Some caution. If you are a registered representative or otherwise subject to FINRA rules, you will need to take a look at the FINRA’s Guide to the Internet. They do address Twitter directly. Unfortunately, the feature set of Twitter can fall into several of the different buckets of regulation.

Hedge Fund Adviser Registration Act of 2009

capuanoCongressmen Mike Capuano of Massachusetts and Mike Castle of Delaware introduced the Hedge Fund Adviser Registration Act of 2009 (H.R. 711). The Act, if passed, would delete Section 203(b)(3) from the Investment Advisers Act of 1940.

This section of the Investment Advisers Act exempts from registration an investment adviser who has fewer than 15 clients and does not hold themselves out to the public as an investment adviser. The general partner of a private investment fund is generally considered an investment adviser to that fund. Many private investment funds use this exemption if they have less than 15 funds.

Since the bill was just proposed on January 27, 2009 it is too early to speculate as to whether it will be passed.

This act falls into the bucket with the Hedge Fund Transparency Act of 2009 as one of several prospective changes to the private investment fund industry.

Electronic Filing of Form D and Amendments Becomes Mandatory on March 16

Beginning March 16, 2009, Form D filings are required to be made electronically on EDGAR. See SEC Release No. 33-8891 (February 6, 2008).  Form D is commonly used for offerings made under the Rule 506 safe harbor to accredited investors. While the filing of a Form D is not a condition to the exemption, it is a requirement pursuant to SEC Rule 503.

To prepare for the transition, issuers need to obtain access codes for the SEC’s EDGAR system.

The electronic format is intended to make it easier for the SEC and state regulators  to spot compliance problems in private offerings.  As Katten points out in its client advisory:

Form D filers should also be aware of the federal and state regulatory enforcement implications of the Form D data being readily available to the regulators. For example, whenever placement commissions are contemplated, an issuer should obtain the proposed recipient’s CRD number in advance to confirm that the placement agent is properly registered with the SEC and with any state in which it intends to make solicitations. There is little doubt that the states (and possibly also the SEC) will be screening this aspect of the filing for persons acting in a placement capacity without appropriate licensure.

In a client alert from Goodwin Procter, they summarize three choices for filing in the near future, depending on your business plan:

Electronic Form D Amendments. Electronic amendments may – and starting March 16, 2009 must – be made using the new Form D adopted by the SEC. Electronically filed Form Ds will be publicly searchable through the EDGAR system, and involve new disclosure requirements, including: (i) the date of first sale of Fund securities; (ii) a CRD registration number for every person who receives compensation for sales of Fund securities, including brokers, dealers and finders; and (iii) the specific exclusion from registration under the Investment Company Act of 1940 upon which the Fund may be relying (e.g., Section 3(c)(7)). Electronic amendments will be most appropriate for Funds that expect to continue an ongoing offering after March 16, 2009, particularly open-end Funds.

Paper Amendments Using New Form D. The SEC has provided a transition period during which issuers can make filings using a paper version of the new electronic Form D. After the transition period ends on March 15, 2009, all Form D filings must be made electronically. This method may be appropriate for Funds that wish to manage the time schedule of their transition to the new electronic Form D and defer obtaining EDGAR access codes until a later date.

Paper Amendments Using Temporary Form D. Issuers also have the option to file a paper amendment using a Temporary Form D that is essentially the same as the previous paper Form D. This method may be appropriate for Funds that wish to defer disclosures on the new Form D because they expect their securities offering to cease in the near future.

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Recent Trends and Patterns in FCPA Enforcement

shearmanPhilip Urofsky and Danforth Newcomb of Shearman & Sterling LLP have released their latest update on the Recent Trends and Patterns in FCPA Enforcement (.pdf).

The Foreign Corrupt Practices Act has been front page news quite a bit lately with the enormous settlement of Siemens. The first to break through $1 billion. The Hallibuton/KBR settlement followed up with enormous numbers, just not quite as big as Siemens. There has been rumors floating around that there are several other cases out there with substantial fines as a result of FCPA prosecutions. Of course these numbers have been swallowed up by Madoff, Stanford and al of the gyrations in the market.

What do Mr. Urofsky and Mr. Newcomb have to say?:

The past year has seen the announcement of a number of FCPA enforcement actions with unprecedented fines and penalties. However, while such major cases as Siemens and Halliburton/KBR have obviously dominated the news, it is hard to say whether they represent a trend toward large-scale high-penalty FCPA prosecutions although there are likely several cases with similarly substantial fines to come. More important than the size of the penalty are the multi-year trends of increasing numbers of enforcement investigations and enforcement actions against both corporations and individuals, which have been accompanied by expansive assertions of jurisdiction by the U.S. enforcement authorities and a rapidly growing body of interpretative guidance, both from the courts and the enforcement agencies themselves. The increased risk of investigation or enforcement action has resulted in increased sensitivity to FCPA concerns in M&A transactions, as well as in common commercial transactions and business relationships. Further, as demonstrated by the Siemens matter, non-U.S. enforcement agencies have begun to initiate investigations of their own, suggesting that, in the future, there is a greater likelihood that multinational corporations will have to respond to, defend, and possibly settle investigations and enforcement actions in multiple jurisdictions.

The Ben Bernanke Interchange

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The rural South Carolina town of Dillon has decided to dedicate Exit 190 on Interstate 95 as the Ben Bernanke interchange.

[Insert your own joke about crashes.]

Bernanke grew up in Dillon and graduated from Dillon High School. The dedication ceremony is scheduled for Saturday.

So not confuse the Ben Bernanke Interchange at Exit 190 with Exit 193, Dillon’s second and more-used I-95 exit, named after the Honorable William James “Bill” McLeod, Sr., a WWII veteran, former state representative, and retired family court judge.

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Proposal to Tax Carried Interests as Ordinary Income

2010budgetThe Obama Administration has labeled their 2010 budget as A New Era of Responsibility. Part of that responsibility appears to be taxing carried interest as ordinary income.

On page 122 of the budget there is a single line item: “Tax carried interest as ordinary income,” with projections of $2,742 million in 2011, $4,347 million in 2012 and an overall $23,894 million for the ten year period.

There is no corresponding text about how the tax would be implemented, so it is premature to be thinking about how this might affect the business plan of a private investment fund.

Unlike a fixed fee, a carried interest aligns the interests of sponsors and investors with the success of the fund. Under current law, the grant of a carried interest generally is not taxable. Instead, the sponsor recognizes income and gain when allocations of partnership income and gain are made. For a partnership that generates long-term capital gains, the carried interest share of the gains would be taxed at the long-term capital gains rates (currently 15%) instead of ordinary income.

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Time to Make the Donuts – Krispy Kreme Executives Charged With Securities Law Violations

krispykreme

The Securities and Exchange Commission announced that on March 4, 2009, it filed a Complaint in the United States District Court for the Middle District of North Carolina against three former executives of Krispy Kreme Doughnuts, Inc.: Scott A. Livengood,Chairman, President, and Chief Executive Officer, John W. Tate, Chief Operating Officer, and Randy S. Casstevens, Chief Financial Officer.

The SEC Complaint alleges that between February 2003 and May 2004, Krispy Kreme inflated its quarterly and annual earnings and omitted to disclose the impact of certain adjustments to report quarterly earnings per share that exceeded its previously announced EPS guidance by one cent. The Company under-accrued or reversed previously accrued incentive compensation expense pursuant to Krispy Kreme’s Senior Executive Incentive Compensation Plan. The under-accruals and reversals were inconsistent with the formal incentive plan and were performed to inflate the Company’s earnings to exceed the Company’s guidance by one cent. The Complaint alleges that the defendants understood the existence and significance of the under accrual and the reversals to the Company’s earnings, yet failed to disclose either to the public. Livengood and Casstevens also signed and certified Krispy Kreme filings that misstated the Company’s financial performance.

The Complaint also alleges that each of the defendants sold stock following the Company’s earnings announcement for the second quarter of fiscal 2004.

The Complaint charges:

  • Livengood with violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Rule 13a-14, promulgated under the Securities Exchange Act of 1934, and aiding and abetting violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder.
  • Tate with violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Section 13(b)(5) of the Exchange Act and Rule 13b2-1, promulgated under the Exchange Act, and aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13.
  • Casstevens with violations of Section 17(a)(3) of the Securities Act and Section 13(b)(5) of the Exchange Act and Rules 13a-14 and 13b2-1, promulgated under the Exchange Act, and aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13.

On the same day the Complaint was filed, the defendants consented to orders permanently enjoining the defendants from future violations, disgorgement of ill-gotten gains with prejudgment interest, and the imposition of civil penalties against defendants. The three former executives agreed to pay a total of $150,000 in fines and $632,919 in ill-gotten gains and interest.

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In the interest of full disclosure, I used to own some Krispy Kreme stock, lost a chunk of the investment and received a paltry settlement as part of the securities class action.

Corporate Compliance Fraud in Ohio

logo_clevelandThe Cleveland Plain Dealer is reporting a fraud that uses the cover of corporate compliance: ‘Corporate Compliance’ form not from any government agency. According to columnist Sheryl Harris, businesses are receiving official-looking mailings with a form requesting a $150 fee to comply with the annual meetings under state law.

As the story points out, not all companies need to have an annual meeting and even if they did, filling out a form is not a sufficient replacement for an annual meeting.

The Ohio Secretary of State has posted an alert on her website: Alert: Annual Minutes Disclosure Solicitation. She has also published an example of the fraudulent mailing (.pdf).

As with the fraudulent SEC Examiners stories we are hearing about, it is sad to see fraudsters using compliance to dupe their marks.

Thanks to Corporate Compliance Insights for pointing out this story:Attention: Beware of Corporate Compliance Form Hoax Circulating in Ohio.

Stop Tax Haven Abuse Act

senator_levin_michigan

Senator Levin of Michigan has introduced the Stop Tax Haven Abuse Act (S.506). It is a wide ranging bill that would require disclosure of beneficial ownership of foreign entities, implementation of anti-money laundering by formation agents, limit patents on tax planning inventions, change the tax opinion standard for penalties, and many other changes. There is a lot wrapped up into this bill. It was just sent into committee so it is hard to tell what may come of it at this point.

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