Month: October 2012

Cycling and Compliance

During the summer of 2001, Mrs. Doug was stuck on the couch recovering from knee surgery. She stumbled across the coverage of the Tour de France, and especially Lance Armstrong, on the Outdoor Life Network. We were hooked, and ever since have been glued to the television during July to watch the beauty and competition of the Tour de France.

The US Postal Service team was a well run dynamo helping to support Lance Armstrong during his dominance of the race for seven years. It was clear that Mr. Armstrong trained harder and was more focused on winning than any of his competitors. Unfortunately, the evidence has become almost overwhelming that the US Postal Service team was involved in doping, including Mr. Armstrong.

Any fan of professional cycling knows that there is long history of drug abuse in the peleton. Many Tour de France riders had been subject to disciplinary action for doping. Only three of the podium finishers in the Tour de France from 1996 through 2005 have not been directly tied to likely doping through admission, sanctions, public investigation or exceeding the UCI hematocrit threshold.  The sole exceptions were Bobby Julich – third place in 1998, Fernando Escartin – third place in 1999, and Mr. Armstrong.

I always thought Mr. Armstrong was above this. After all, he fought cancer. He looked death in the eye and said he was not ready yet. There were rumors that Mr. Armstrong was doping. Most of those came from other rides with a grudge against him or were otherwise relatively unreliable.

The US Anti-Doping Agency released its report implicating the riders of the US Postal Service Team in wide spread doping. My heart was broken when two of my favorite riders George Hincapie and Levi Leipheimer admitted to doping.

Because of my love for the sport, the contributions I feel I have made to it, and the amount the sport of cycling has given to me over the years, it is extremely difficult today to acknowledge that during a part of my career I used banned substances. Early in my professional career, it became clear to me that, given the widespread use of performance enhancing drugs by cyclists at the top of the profession, it was not possible to compete at the highest level without them. I deeply regret that choice and sincerely apologize to my family, teammates and fans.

George Hincapie

The cycling team had a culture of doping, set with tone from the top to push your body with medical treatment to improve performance. I’m still sorting through the extensive material to find direct evidence of Mr. Armstrong’s doping. So far the evidence is fairly light about his use. However, the evidence of the USPS team’s acceptance of doping is overwhelming.

It seems that doping was widespread, but has since decreased since 2008. Jonathan Vaughters, a former USPS rider and self-admitted doper, offers decreased riding times as evidence of doping.

  • L’Alpe D’Huez
    • Fastest: 22.43 kph, 1,900 vertical meters per hour by Marco Pantani in 1997
    • Fastest since 2008: 19.98 kph, 1,670 vertical meters per hour by Carlos Sastre in 2008
  • Plateau De Beille
    • Fastest: 22 kph, 1,812 vertical meters per hour by Marco Pantani in 1998
    • Fastest since 2008: 20.57 kph, 1,678 vertical meters per hour by Jelle Vandenert in 2011
  • Fastest Grand Tour Climbing Rate
    • Fastest: 1,769 vertical meters per hour by Roberto Heras in 2004’s Vuelta a Espana
    • Fastest since 2008: 1,682 vertical meters per hour by Bradley Wiggins in 2012’s Tour de France

The data shows a 10% drop in average fastest times. This correlates to the 10% drop in hemoglobin rates reported by UCI doctors from 2007 until 2010.

Perhaps that still leaves us with Mr. Armstrong as the greatest rider of his time. He was competing against dopers, while probably doping himself. The playing field was level for the elite riders. It was just a medically elevated playing field.

Sources:

The New SEC Presence Exams


The Securities and Exchange Commission has started it Presence Exams process. I have copies of letters from the New York Regional Office and the Boston Regional Office. The Presence Exams is part of an initiative to conduct “focused, risk-based examinations of investment advisers to private funds that recently registered with the commission.”

The SEC has broken the Presence Exams initiative into three phases: Engagement, Examination, and Reporting. This matches up with the preview offered by Carlo di Florio at PEI’s Private Fund Compliance Forum.

I assume the letters are part of the engagement phase. They include a long list of reference materials about the Investment Advisers Act and compliance.

The SEC has broken the examination phase into 5 higher risk areas for review:

  • marketing
  • portfolio management
  • conflicts of interest
  • safety of client assets
  • valuation

I assume the other regional offices have sent out the same letter. Please let me know if your firm has received one and if it’s different from the New York or Boston letters. You can leave a comment or email to [email protected].

Sources:

Royalty Is Not Always a Foreign Official

I’m not quite sure how royalty works in various parts of the world. From the latest FCPA Opinion release, the parties to a business deal also did not fully understand. The proposed business relationship has some serious red flags so I’m not surprised the parties requested the opinion. According to the release, submission for a release was part of the contract.

The requestor was going to make payments to a member of the country’s royal family. (Red flag – But a key issue is whether he is Foreign Official.) The Royal Family Member was going to lobby his home country’s embassy to engage the requestor as the country’s lobbyist in the United States. (Lobbying the government = another red flag) The Royal Family Member would be working on a commission for 20% of what requestor receives for business. (red flag) The Royal Family Member can also identify other opportunities for the Requestor in the foreign country subject to a separate engagement. (red flag)

The whole opinion hinges on the definition of “Foreign Official” under the FCPA and whether the Royal Member falls under that definition. The FCPA defines a “foreign official” as

any officer or employee of a foreign government or any department, agency, or instrumentality thereof, . . . or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality . . . .

15 U.S.C. § 78dd-2(h)(2)(A)

The Department of Justice looks to FCPA Opinion Release 10-03 and United States v. Carson, et al., No. 09-cr-00077 (C.D. Cal. 2011) and distills the factors in those sources to three factors to determine whether a member of a royal family is a “foreign official”:

(i) how much control or influence the individual has over the levers of governmental power, execution, administration, finances, and the like;

(ii) whether a foreign government characterizes an individual or entity as having governmental power; and

(iii) whether and under what circumstances an individual (or entity) may act on behalf of, or bind, a government.

This royal family member:

  1. has no official or unofficial title or role in the Foreign Country’s government
  2. has no official or unofficial power over any aspect of the Foreign Country’s governmental decision-making process, executive function, administration, finance
  3. has no direct or indirect power to award the business the Requestor seeks
  4. cannot, by virtue of his membership in the royal family, ascend to a governmental position
  5. has no benefits or privileges because of his status as a Royal Family Member
  6. has no relationship—personal, professional, or familial—with the decision-makers in the Foreign Country’s Embassy and the Foreign Country’s government who will decide whether to award the business

As the FCPA Professor Mike Koehler points out, this opinion procedure release creates more uncertainty in the definition of a foreign official. Past advice has focused on the purpose of the payments and not just the mere status of the official. The Carson decision looks to the entity to determine if it is a government organization.

The facts and circumstances about the royal family member sound unique to me. (Again, pointing out that I don’t understand how the various royal family members related to their home countries.) We don’t know the foreign country based on the opinion release. It would seem based on points 4 and 5 that the royal family is largely ceremonial in the country and not in a position of power in the government. Otherwise, the royal family itself would be foreign government instrumentality.

There is new guidance expected this month from the DOJ and SEC that is meant to consolidate the advice given on the FCPA. Perhaps that will help clear up some of the confusion over who is a foreign official.

Sources:

Image is the Crown of Rus-Ukrania by Alexandr Synytsa

Whistleblower Only Has to Believe There is Something Wrong

Whistleblower rights are growing stronger. The recent award of a reward in excess of $100 million to a whistleblower will certainly attract those looking for financial reward. Dodd-Frank not only increased the chances of getting a reward, it also provided broader rights to employees and the courts are starting to rule strongly in favor of employees. A recent ruling highlights the new legal world of whistleblowers.

An employee wrote a letter to the Securities and Exchange Commission and reported that the company had failed to submit its 2009 amendment to the pension plan to its board of directors for approval and had failed to file its amendment with the SEC. The employee, Richard Kramer, was a human resources officer and member of the pension plan committee. Kramer had also told the company that there needed to be three member of the committee, not just the two in place at that time.

Kramer argues that as a result of his complaints, the company disciplined him, reduced his responsibilities, and eventually fired him.

The Dodd-Frank Act provides this protection against whistleblower retaliation:

No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower —

(i) in providing information to the Commission in accordance with this section;
(ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or
(iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002, the Securities Exchange Act of 1934, including section 10A(m) of such Act, and any other law, rule, or regulation subject to the jurisdiction of the Commission.

A “whistleblower” is defined as “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” 15 U.S.C. § 78u-6(a)(6)

The company first argues that Kramer is not a whsitleblower because he did not us the SEC’s new method of reporting on Form TCR. Mailing a regular letter is insufficient. The court did not believe that it is unambiguously clear that the Dodd-Frank Act’s whistleblower retaliation provision is limited to those individuals who have provided information relating to a securities violation to the SEC, and have done so in a manner established by the SEC. In the court’s view, the company’s interpretation would dramatically narrow the available protections available to potential whistleblowers. I suspect that the use of Form TCR will be required for whistleblower payouts, but not required for retaliation claims.

The company that argued that it had filed the form with the SEC on the date of the 2009 amendment to the plan. There was no securities law violation.

The court noted that in order to qualify for whistleblower protection the employee need only demonstrate that he reasonably believed there had been a violation. There need not be an actual violation of securities laws. The court found that the employee may have reasonably believed the company to be committing violations of SEC rules or regulations.

The ruling was just on the motion to dismiss and amend claims, so it is not over. It does appear to be the first Dodd-Frank whistleblower claim to survive a motion to dismiss in federal court.  I expect it will not be the last.

Sources:

SEC Brings a Pay-to-Play Action

The Securities and Exchange Commission filed a “pay-to-play” case against Goldman Sachs and one of its former investment bankers, Neil M.M. Morrison. The SEC alleges that Goldman and Morrison made undisclosed campaign contributions to then-Massachusetts state treasurer Timothy P. Cahill while he was a candidate for governor.

The case was brought under the Municipal Securities Rule on pay-to-play: MSRB Rule G-37. The SEC’s investment adviser/private fund rule on pay to play, Rule 206(4)-5, is based closely on that MSRB rule.

The SEC’s order found that Goldman Sachs did not disclose any of the contributions on MSRB forms and did not  keep records of the contributions in violation of MSRB rules.

Goldman Sachs agreed to settle the charges by paying $7,558,942 in disgorgement, $670,033 in prejudgment interest, and a $3.75 million penalty. This is the largest fine ever imposed by the SEC for Municipal Securities Rulemaking Board pay-to-play violations. The SEC’s case against Morrison continues.

According to the SEC’s order against Goldman Sachs, Morrison worked in the firm’s Boston office and solicited underwriting business from the Massachusetts treasurer’s office beginning in July 2008. Morrison was substantially engaged in working on Cahill’s political campaigns. Before joining Goldman Sachs, between January 2003 and June 2007, Morrison was employed by the Massachusetts Treasurer’s Office, which included positions as the first deputy treasurer, chief of staff and assistant treasurer, reporting directly to Cahill.

Morrison participated extensively in Cahill’s gubernatorial campaign, often during working hours from his Goldman Sachs office, and used Goldman Sachs resources (such as phones, e-mail and office space). The SEC claims that Morrison’s use of Goldman Sachs work time and resources for campaign activities constituted valuable in-kind campaign contributions to Cahill that were attributable to Goldman Sachs and disqualified the firm from engaging in municipal underwriting business with certain Massachusetts municipal issuers for two years after the contributions.

While Morrison was an employee and working on the Cahill campaign, Goldman Sachs participated in 30 prohibited underwritings with Massachusetts issuers and earned more than $7.5 million in underwriting fees.

According to the complaint, this seems like an egregious violation of the pay-to-play rules. It does highlight that items beyond cash contributions could be considered a “contribution” under the pay-to-play rule.

We would not consider a donation of time by an individual to be a contribution, provided the adviser has not solicited the individual’s efforts and the adviser’s resources, such as office space and telephones, are not used….

A covered associate’s donation of his or her time generally would not be viewed as a contribution if such volunteering were to occur during non-work hours, if the covered associate were using vacation time, or if the adviser is not otherwise paying the employee’s salary

Sec Release IA-3403 page 46 and footnote 157 (.pdf)

From a compliance perspective, the question is how to value the use of time in the office, email, and phone usage. I suppose you can add up long distance charges. For employees you can use their hourly rate to determine time spent.  For Morrison, it appears that even using a very conservative measurement  of his time and the Goldman resources, the value would be many times in excess of the $250 limit under the MSRB rule. (The SEC limit is $350 if you can vote for the person.)

Sources: