Month: March 2009

The Inside Story on the Breakdown at the SEC

Time MagazineAdam Zagorin and Michael Weisskopf wrote a very critical article in Time Magazine about Christopher Cox’s tenure with the Securities and Exchange Commission: The Inside Story on the Breakdown at the SEC. The authors use Cox as a symbol of what went wrong with the US financial system, resulting it its current meltdown. They paint a picture of a leader who avoided dealing with investment banks and pushed for de-regulation at a time the markets needed more regulation.

Long an evangelist for deregulation, the affable 56-year-old conservative former California Congressman took a custodial approach to a job that called for muscular leadership. . . . . Indeed, longtime observers say, Cox allowed complacency and drift at an agency that was created to issue warnings and limit the potential for wider damage from financial malfeasance at publicly traded companies.

Bashing the SEC has gotten very popular lately. This article continues the trend, placing the blame at the top.

Ex-Employees Admit to Stealing Company Data

symantecYou ex-employees are probably stealing your company’s data on their way out the door.  In a study by Symantec Corp. and Ponemon Institute, they found that 59 percent of ex-employees admit to stealing confidential company information: More Than Half of Ex-Employees Admit to Stealing Company Data According to New Study.

That employees are taking data is not surprising. That the percentage is this large may be a surprise to some of you. (It also not a surprise that Symantec also has a product to help limit this kind of data loss.) But in these economic times with many company’s downsizing, it is important to think about possible data loss.

Additional Survey Findings:

  • 53 percent of respondents downloaded information onto a CD or DVD.
  • 42 percent downloaded information onto a USB drive.
  • 38 percent sent attachments to a personal e-mail account.
  • 82 percent of respondents said their employers did not perform an audit or review of paper or electronic documents before the respondent left his/her job.
  • 24 percent of respondents had access to their employer’s computer system or network after their departure from the company.

The Ponemon Institute conducted the web-based survey in January 2009, polling nearly 1,000 adult participants located in the United States who left an employer within the past 12 months.

See also:

SEC Warns Investors and Financial Firms of Government Impersonators

sec-sealThe Securities and Exchange Commission issued a warning  about con-artists who may use the names of actual SEC employees to mislead potential victims. The SEC is already beaten down by the Madoff scandal. Now it has to deal with scam artists further dragging mud across the reputation of the SEC.

Investors should be aware that the SEC never makes or endorses investment offers or participates in money transfers. Nor does the SEC send e-mails asking for detailed personal information, or financial information such as PIN numbers.

Take steps to protect your self:

If you have reason to suspect that a caller claiming to be an examiner or other member of the staff is not a member of the SEC’s staff, consider taking the following steps. You can ask for the caller’s name, office, and telephone number, and tell the caller that you will return his or her call. The telephone numbers of all SEC offices are available on the SEC’s web site at: http://www.sec.gov/contact/addresses.htm. Using the telephone number on the SEC’s website, call the main number of the particular office that the caller identified, and ask to speak to the SEC staff person.

See also:

More Guidance on Extended COBRA Coverage under ARRA

IRS_LogoAs part of the enormous stimulus package in the American Recovery and Reinvestment Act of 2009, the federal government included some relief for laid-off employees: COBRA Coverage Under ARRA. Some of the unanswered questions are starting to be answered.

The IRS has posted information: COBRA Health Insurance Continuation Premium Subsidy, with COBRA: Answers for Employers.

The COBRA subsidy amount is reimbursed as a tax credit. Employers should use the updated Form 941 (.pdf), Employer’s Quarterly Federal Tax Return, to report their COBRA premium assistance payments. So employers have to come out of pocket for the health insurance premiums for their “involuntarily terminated” employees, but get a reduction on their quarterly employment taxes. Line 12a on Form 941 (.pdf) is for the COBRA premium assistance payments.

The Department of Labor has put together a collection of information on COBRA Continuation Coverage Assistance Under The American Recovery And Reinvestment Act Of 2009. That site has more detailed information on employee eligibility.

See also:

SEC Charges Operators of Multi-Billion Dollar Real Estate Enterprise With Fraud

sec-sealThe SEC charged Oregon-based Sunwest Management Inc. with securities fraud and is seeking an emergency court order freezing its assets.

According to the SEC Complaint, the recent collapse of a real estate enterprise once valued at approximately $2 billion in assets, run by Sunwest Management Inc.and its CEO, Jon M. Harder, revealed a massive fraud that led to losses of hundreds of millions of dollars for investors. Sunwest, Harder and certain related entities operated several hundred retirement homes nationwide. From January 2006 through June 2008, they raised at least $300 million from more than 1300 investors, primarily through the sale of tenancy-in-common interests (“TICs”). The company represented that individuals were obtaining an interest in a specific property which would generate a steady income stream. Instead the defendants ran Sunwest as a single enterprise, commingling all investor funds and operational revenue into a single fund from which all operating expenses and investor returns were paid. Sunwest paid investors steady returns on their investments from cash generated in the operations of other facilities, from funds obtained in refinancings, and from funds raised through offerings to new investors. With the credit crisis, new funding sources began drying up. Despite the dire financial condition, defendants continued to raise additional money from investors. By June 2008, they operated Sunwest virtually as a Ponzi scheme. The money they raised in the final offerings (supposedly for new properties) was used to pay old investors their 10 percent return and fund operations at existing facilities. As of January 2009, over 100 retirement homes have been placed in foreclosure, receivership or bankruptcy, resulting in the effective elimination of the TIC investors’ interests in them. Approximately 32 facilities have filed for bankruptcy.

The Commission’s complaint charges all of the Defendants with violating the antifraud provisions of the federal securities laws, including Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

On December 31, 2008, Jon M. Harder filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”). The case was assigned case number 08-37225 (the “Bankruptcy Case”) and is currently pending before the Honorable Trish M. Brown in the United States Bankruptcy Court for the District of Oregon.

The SEC complaint include a pleading to freeze assets and appoint a receiver to oversee Sunwest and related entities. According to a press release from Sunwest, both requests were denied by the court. Sunwest welcomes serious discussions with the SEC about a form of cooperative receivership that would allow the current Sunwest restructuring to continue.

“The judge denied the temporary restraining order motion in its entirety including denial of the appointment of a receiver,” said Stephen English, special counsel for Jon Harder. “We see this as a big win for the restructuring work at Sunwest.”

See also:

Corporate Ethics in a Devilish System

kent greenfield of Boston College Law SchoolThere is a mismatch between the law and corporate ethics. According to Boston College Law School’s Kent Greenfield it can only be addressed by changing the law itself, and aligning it better with ethics. In his paper Corporate Ethics in a Devilish System, Journal of Business & Technology Law 3: issue 2 (2008): 427-435, Greenfield talks about companies behaving unethically but within the bounds of the law.

“In essence, a corporation should consider the cost of illegality as the penalty, fine or other costs discounted by the chance of the exposure of the corporation’s illegality. The law, in other words, merely imposes a price for illegal behavior. If the corporation is willing to pay, then no problem with illegality.”

The mismatch comes from the confusion that complying with the law is the same as behaving ethically.  Ethics means more than obeying the law.

Greenfield argues that the limited liability of corporate law is “inconsistent with the ethical norm of taking responsibility for one’s own actions since it shields people from liability that arises from their wrongful conduct.” I don’t agree. Actions of a corporation happens through the individuals in the corporation. Corporate law has evolved over the last few years, holding executives personally responsible for illegal actions. The limited liability of a corporation shields investors from losing more than their invested capital. It does not shield the actors within the corporation.

Greenfield proposes changing rules of governance where companies would be required to give stakeholders who don’t own stock – like for example employees and communities – to make their views  part of the firm’s governance.

“Bringing the views of non-shareholder stakeholders into the governance of the firm would not only make it more likely that the corporation will consider broadly the impacts of its decisions, it also will – because shareholders tend to have a very short time horizon – necessarily cause the firm to take a longer term view of its decisions and strategies. Such inclusion will also cause corporations to internalize more the costs of their decisions.”

I agree that the movements in price of a public companies stock can influence corporate decision-making. Many people have argued about setting the proper incentives for management to look to the long term and not pay attention to the short-term gyration of stock prices.

But Greenfield ignores private corporations. One of the arguments for private equity is that ownership and management can look to the long-term goals of the firm rather than focusing on short-term stock price gyrations. Everyone is focused on creating the long term value of the company.

Thanks to Leon Gettler of  SOX First for pointing out the article: Corporate Ethics and Law.

Madoff and Markopolos on 60 Minutes

markopolosOn Sunday night, 60 Minutes aired an interview with Harry Markopolos: The Man Who Figured Out Madoff’s Scheme. Last month, Markopolos supplied similar information to a Congressional panel.

By its vary nature, the SEC does not stop a financial crime until happens. As with all prosecutions, the bad act needs to happen before there is a crime. The failure with Madoff is that the fraud appears to be so big and appears to have been happening for over a decade. Usually, the SEC stops fraud before it gets so big.

If you think the SEC is ineffective, take a look at the SEC litigation releases. Quickly browsing through the list, you can see that the SEC is filing to stop a few securities fraud schemes every week.  Hardly ineffective.

The SEC can no sooner prevent securities fraud than the police can prevent a robbery. You hope your patrols and effective prosecutions will deter potential bad actors. But people will always be enticed to take short cuts.

Markopolos spotted the problem and the SEC blew it. Let’s move on and find out how Madoff did it so we can learn some lessons. The sound bites and preachings from Markopolos are not contributing to the prevention of future securities fraud.

Thanks to Bruce Carton and Securities Docket for pointing out the interview: Sunday Night: Harry Markopolos on 60 Minutes.