Year: 2009

Cost-effective Compliance Risk Assessment

rees morrisonRees Morrison, publisher of Law Department Management,  is hosting a series of articles on Cost-effective Compliance Risk Assessment. This series is written by Jeff Kaplan of Kaplan & Walker LLP.

The first article was on Three trends regarding the costs of ineffective compliance. Jeff first focused on the increasing occurrence of the “mega fine.” Then noted that desperate times tend to breed desperate deeds. Lastly he noted that the new attorney-general is the same official who set compliance and ethics standards as part of the DOJ’s enforcement decisions.

The second article was on non-costly ways to achieve C&E program successes. Jeff noted that it is more cost-efficient to build the compliance assessment into other functions.

The third article focused on how to embed risk assessment into the process of drafting “third-party” codes of conduct. Jeff points out that handing your employee to third parties will just lead to confusion. In drafting a code, make sure you elicit comments from the people in the company with direct third party dealings.

Lawyer’s Noisy Withdrawal from Stanford Case

sjoblomLawyers must protect their clients’ confidence, but they can’t aid in the commission of a potential crime. The Wall Street Journal covered some of the facts leading up to the “noisy withdrawal” of Thomas Sjoblom of Proskauer Rose LLP from their representation of the Stanford Financial Group: Top Lawyer’s Withdrawal From Stanford Case Waves a Flag.

There was much consternation over the idea of an attorney whistle-blowing on her client back when Sarbanes-Oxley was adopted. Legal ethics, business ethics and ethics were at odds. An attorney is divided between doing what is right for society at large, for her client and her own income.

Lawyers represent guilty people. They are there to help them through the legal system and ensure the government did not overstep its constitutional limitations. Stanford was in trouble and needed the help of lawyers. In this time of crisis Stanford’s lawyer ended his representation.

Charlie Green finds much fault with the approach and found the use of “disaffirm” to be a bit trivial for the magnitude of the underlying scandal.  Stephen Gillers in his comment points out that “the word ‘disaffirm’ is actually a term of art in New York legal ethics.”

I am giving Mr. Sjoblom the benefit of the doubt that he did not find out about the fraud at Stanford until sometime in late January or early February when they had to respond to the SEC subpoena. It certainly sounds like the February 10 testimony of Laura Pendergest-Holt, a Stanford executive, in front SEC investigators did not go well. She got arrested and Mr. Sjoblom made his noisy withdrawal.

There is a lot of work ahead for Stanford’s lawyers in sorting out the facts, defending the company and defending the executives. Sjoblom stepped away from this representation and turned down hundreds of thousands if not millions of dollars or revenue to be made from the representation.

There is a big difference between defending a criminal and being a witness to a crime. It sounds like Mr. Sjoblom realized that he had become a witness to a crime and incapable of defense.

Someday we may hear the true story of what happened. As with the Madoff scandal, I am very interested in finding out the underlying facts. Did they start out bad? If they originally had good intentions, what made these people go bad?

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The Law:

17 CFR 205.3(b) provides:

Duty to report evidence of a material violation. (1) If an attorney, appearing and practicing before the [Securites and Exchange] Commission in the representation of an issuer, becomes aware of evidence of a material violation by the issuer or by any officer, director, employee, or agent of the issuer, the attorney shall report such evidence to the issuer’s chief legal officer (or the equivalent thereof) or to both the issuer’s chief legal officer and its chief executive officer (or the equivalents thereof) forthwith. By communicating such information to the issuer’s officers or directors, an attorney does not reveal client confidences or secrets or privileged or otherwise protected information related to the attorney’s representation of an issuer.

This regulation was promulgated under Section 307 of Sarbanes Oxley Act of 2002.

Twitter Good or Bad?

Most people are up in the air about what to do with Twitter. I thought I would put together two contrasting views.

First up, Evan Williams on how Twitter’s spectacular growth is being driven by unexpected uses:

And then Jon Stewart on why the Twitter Frenzy is silly:


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I Twitter (@DougCornelius), do you?

Federal Knowledge Management Working Group

fed_km_initiative_words_logo
The Federal Knowledge Management Working Group consists of over 700 Federal employees, contractors, academicians and interested members of the public who have mounted a campaign to enhance collaboration, knowledge and learning in the Federal Government by implementing formal knowledge management.

Neil Olonoff, who is the leader for the initiative looking at the formation of a Chief Knowledge Officer for the federal government, sent me note about this impressive initiative.

Mission: Inform and support federal government departments, agencies, organizations, and their constituencies in the research, development, identification, and implementation of knowledge management (KM) activities, practices, lessons learned, and technologies. To accomplish this mission, the Federal KMWG will mobilize and leverage thought leaders and KM practitioners from government, quasi-government, academia, non-government, nonprofit, and the private sector around the globe.

They have already putting together a tremendous wiki full of information at KM.gov (which redirects to http://wiki.nasa.gov/cm/wiki/?id=1926).

I recommend taking a look at the PowerPoint presentation they posted on knowledge management is important to the federal government: Federal Knowledge Management Initiative (PPT). There are some great ideas that are can be reused for your organization.

UPDATE:

Jeanne Holm is the elected chair of the Federal Management Working Group. In the original post, I had identified Neil Olonoff as the holder of that position. Jeanne sent me a nice note with the clarification. You can reach Jeanne on Twitter @Jeanne_JPL.

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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