Month: February 2010

Compliance Bits and Pieces for February 5

Here are some interesting stories from the past week:

Can your Broker be your Facebook Friend? by Gil Yehuda on Gil Yehuda’s Enterprise 2.0 Blog

Can brokers set up blogs? What about the comments that people post to their blogs? Can brokers give financial advice on discussion forums? What if a broker sets up a forum where all their misleading advertising gets magically erased whenever a regulator visits the site? Sure, when you think of all the bad things that could happen, you may be glad this industry is regulated (of course those who got swindled wish the enforcement would be more effective).

FINRA Guidance on Social Media podcast (mp3) from Compliance Week

Compliance Week editor Matt Kelly talks with Eden Rohrer of the law firm Haynes Boone about new guidance from FINRA on social media usage among financial-sector workers. (Time: 9 min.; file size: 4.2 Mb)

The DOJ: Bringing Bribe-Takers to Justice? in the Wrage Blog

Anne Richardson of TRACE was present at ACI’s FCPA Bootcamp in Houston last week and provides this report on a possible new development in anti-bribery enforcement: “In the conference’s opening panel on January 26, 2010, Stacey Luck, Senior Trial Attorney in the Fraud Section, explained how the recent DOJ/FBI sting operation involving 22 executives from military and law enforcement equipment companies demonstrates several recent FCPA enforcement trends: (i) the focus on individuals, (ii) the use of traditional law enforcement tactics, (iii) the emphasis on industry-wide investigations, and (iv) greater international cooperation among enforcement authorities.

SEC Enforcement in 2009: A Year of Changes, with More This Year by Eduardo Gallardo, Gibson, Dunn & Crutcher LLP in The Harvard Law School Forum on Corporate Governance and Financial Regulation

In this review of enforcement in 2009, we focus on the significant enforcement developments of the second half of the year, as well as notable cases and important trends revealed by annual enforcement statistics, both those disclosed by the SEC, as well as those that result from our own analysis. We also look ahead to the significant developments to anticipate this year.

CFTC: Billy Ray and Winthrop Were Not Insider Traders by Bruce Carton in Compliance Week‘s Enforcement Action.

Earlier this week, Commodity Futures Trading Commission Chairman Gary Gensler clarified that no matter what you might have assumed back in 1983, Billy Ray Valentine (Eddie Murphy) and Louis Winthorpe III (Dan Aykroyd) did not commit insider trading when they made millions trading on orange juice futures in the movie Trading Places.

Under Proposed Budget, SEC Could Get $1.258B, Add Staff by Melissa Klein Aguilar in Compliance Week‘s The Filing Cabinet

The President’s budget request of $1.258 billion for the Securities and Exchange Commission for fiscal 2011 would increase the commission’s coffers by roughly $139 million, or 12 percent over its fiscal 2010 funding level, and would enable the agency to add about 380 staff positions.

Social Media and the Workplace: What Every Employer Should Know by Nixon Peabody

Employers must fully consider the use and misuse of social media at each stage of employment, craft appropriate policies and procedures consistent with their industry and firm culture, and apply such policies in a consistent and non-discriminatory way.

Fraud Charges Against Ken Lewis and Joseph Price

Bloomberg News

New York Attorney General Andrew Cuomo filed securities fraud charges against former Bank of America CEO Kenneth Lewis and former Chief Financial Officer Joseph Price. The Attorney General claims that the two decided not to disclose the enormous losses at Merrill Lynch & Co. before getting shareholder approval to acquire the Wall Street firm.

The Complaint is full of newsbites:

“Ultimately, this was an enormous fraud on taxpayers who ended up paying billions for Bank of America’s misdeeds. Throughout this episode, the conduct of Bank of America, through its top management, was motivated by self-interest, greed, hubris, and a palpable sense that the normal rules of fair play did not apply to them. Bank of America’s management thought of itself as too big to play by the rules and, just as disturbingly, too big to tell the truth.” (#1)

From the Frontline Report, Breaking the Bank, it sounded like Bank of America was strong-armed into completing the merger with Merrill Lynch. Ken Lewis had the choice of going ahead with the merger or losing the bank. The complaint addresses this point

“The evidence further demonstrates that almost immediately upon reviewing the December 12 loss analysis, the Bank planned to seek taxpayer aid to save the merger, and to use the empty threat of a MAC claim as leverage with the government in negotiations.” (#21.)

Politicians have been looking for heads to roll. That bloodlust has gotten even frothier with year-end bankers’ bonuses getting readied for distribution. Lewis and Price have their heads in the civil lawsuit guillotine.

Sources:

Zubulake Revisited: Six years Later

A new treatise has been written on field of electronic stored information and sanctions for spoliation. In the Amended Opinion and Order for The Pension Committee of the University of Montreal Pension Plan et al., v. Banc of America Securities, LLC, et al. Judge Shira A. Scheindlin of the Southern District of New York, addressed the issues of parties’ preservation obligations and spoliation in great detail.

The order identified several actions (or failures to act) which would result in a finding of gross negligence in upholding discovery obligations:

“After a discovery duty is well established, the failure to adhere to contemporary standards can be consi-dered gross negligence. Thus, after the final relevant Zubulake opinion in July, 2004, the following failures support a finding of gross negligence, when the duty to preserve has attached:

  • to issue a written litigation hold;
  • to identify all of the key players and to ensure that their electronic and paper records are preserved;
  • to cease the deletion of email or to preserve the records of former employees that are in a party’s possession, custody, or control; and
  • to preserve backup tapes when they are the sole source of relevant information or when they relate to key players, if the relevant information maintained by those players is not obtainable from readily accessible sources.”

The order establishes that sanctions for evidence spoliation require proof that: (i) the party had control over the evidence and an obligation to preserve it at the time it was lost or destroyed; (ii) acted with a culpable state of mind; and (iii) the lost or destroyed evidence was not only relevant to the innocent party’s claims or defenses, but also that party suffered real prejudice as a result.

Sources:

Adriana Linares of LawTech Partners supplied the image: http://www.flickr.com/photos/lawtechpartners/438634521/. Used with permission.

SEC Guidance Regarding Disclosure Related to Climate Change

Last week, the Securities and Exchange Commission voted to provide public companies with interpretive guidance on existing disclosure requirements as they apply to business or legal developments relating to the issue of climate change. The SEC has now released the text of the guidance:
Guidance Regarding Disclosure Related to Climate Change

Those who are fired up about global warming will be quickly underwhelmed by the guidance. At its most basic it merely reminds public companies that they need “to consider climate change and its consequences as they prepare disclosure documents to be filed with us and provided to investors.”

The guidance claims that it will does not create any new disclosure requirements. Given the increased regulation of emissions, cap and trade, and insurance company adjustments, companies need to disclose the potential impact of these changes on the future prospects of the company.

I expect we will see a new section in the annual filings this spring, some interesting reading and some inflammatory news reports.

The globe image is by Jackl under the Creative Commons Attribution ShareAlike 3.0 in Wikimedia: http://commons.wikimedia.org/wiki/File:Global_warming_ubx.svg.png

Paying a Bribe with Zero

In India, petty corruption is pervasive. Its citizens often face situations where they are asked to pay bribes for public services that should be provided free. The 5th Pillar is advocating for paying the bribe with a zero-rupee note.

According Vijay Anand, president of the 5th Pillar, the idea is credited to an expatriate Indian physics professor from the University of Maryland who was traveling back home. He found himself harassed by endless extortion demands and thought of the notes as a polite way of saying “no.” The 5th Pillar took the idea to the next level and has distributed one million of the zero-rupee notes since 2007.

They have been collecting success stories of how the notes have battled bribery: 5th Pillar Success Stories.

5th Pillar is a non profit, non governmental organization aimed at fighting corruption. The name of the group is based on the premise that India already has four pillars of democracy – the legislature, executive, judiciary and the media. “So, any socially conscious, patriotic and well-meaning citizen who abides by laws and puts the nation in front of his personal gains, is a 5th Pillar.”

Sources:

Boston Bar Association Presentation on Web 2.0

Martha Sperry of Advocate’s Studio asked me to join her in a presentation to the Boston Bar Association’s Computer & Internet Law Committee titled: Beyond LinkedIn: Advanced Social Media for Lawyers.

Martha Sperry, OneBeacon Insurance Group Ltd., and Doug Cornelius will lead a brown-bag lunch discussion for lawyers who are familiar with the various forms of social media but want to take their use to the next level. Would you like to make better use of social media in your practice? Are you interested in starting a blog or Twittering about legal issues but concerned about ethical restrictions or other pitfalls? Martha will discuss the latest technologies and how to use them most effectively and efficiently in marketing and online brand development. Doug will discuss security and ethical issues and online best practices.

Presentation Slides:

You can also find the slides on Slideshare: Beyond Linked In Advanced Social Media For Lawyers.

We also provided a handout full of information on useful sites and tools:
http://docs.google.com/View?id=dcnnt5b4_28jhgwr9gk

The SEC and Climate Change

Last week, the Securities and Exchange Commission voted to provide public companies with interpretive guidance on existing disclosure requirements as they apply to business or legal developments relating to the issue of climate change.

Chairman Mary Schapiro pointed out in her speech that the SEC is not commenting or opining on the issue of climate change; rather the guidance is intend to “provide clarity and enhance consistency” to help companies decide what does and does not need to be disclosed.

There has been a fair amount of discussion, mostly because climate change is such a lightning rod issue. I think most people, even Republicans, have agreed that the planet is going through some fairly rapid climate change. The debate has shifted to how much of it is caused by man and what we can do to slow climate change. But not the SEC: “We are not opining on whether the world’s climate is changing, at what pace it might be changing, or due to what causes.” If they are going to regulate, they should at least admit that there is climate change.

Maybe they should take a trip to McCarty Glacier in Alaska.

Image from Global Warming Art under CC-BY-SA

As with most SEC rules, the press release was short on details and we are still waiting for the actual interpretive notice to see what will be required.

Sources:

The globe image is by Jackl under the Creative Commons Attribution ShareAlike 3.0 in Wikimedia: http://commons.wikimedia.org/wiki/File:Global_warming_ubx.svg.png

Futures Trading and Social Networking

With this week’s release of FINRA’s guidance on social media sites for securities traders, I thought it would be interesting to look at how the futures trading regulatory body is dealing with the issues. It turns out that the National Futures Association recently amended its rules to address social media and released new interpretive notices (.pdf).

As with FINRA, the NFA took a platform neutral position. On-line communications are subject to the same standards as other types of communications.

All audio or video advertisement, regardless of whether its on the radio, television, the internet or any media accessible by the public is subject to the rule. That means it must be reviewed by the NFA before it is published if it contains a specific trading recommendation or claims of past profits.

Any electronic content that can be viewed by the general public, or even by a more closed community that includes current and potential customers, can be promotional material. That makes it subject to the requirements of NFA Compliance Rules 2-29, 2-36, or 2-39.

Members should have policies regarding employee conduct. These policies could require employees to notify the employer if they participate in any on-line trading or financial communities and provide screen names so that the employer can monitor employees’ posts periodically. Alternatively, the policy could simply prohibit participation in such communities. The Member must, of course, take reasonable steps to enforce whatever policies it adopts.

The notice also points out that you need to be careful about your hyperlinks. You could be held accountable for linking to third party content that is misleading.

Sources: