Month: August 2016

Compliance Bricks and Mortar for August 12

These are some of the compliance-related stories that recently caught my attention. They caught my attention after completion of my Pan-Mass Challenge ride last weekend. (Even though the ride is over, there is still time to donate: http://profile.pmc.org/DC0176.) This is the team photo taken on Saturday afternoon.

Team Kinetic Karma PMC

Compliance Careers Looking Good, Mostly by Matt Kelly in Radical Compliance

In the wake of last Friday’s stellar jobs report, let’s take a look this morning at the career trends working away on compliance officers—which, as often happens with this profession, is both good and bad news at the same time.[More…]

The Morning Risk Report: Court Ruling on Password Sharing Not the Last Word by Ben Dipietro in the Wall Street Journal

A U.S. appeals court ruling in a case involving the sharing of a work-related password will make it easier for companies to prosecute employees and former employees for accessing networks to which they no longer have permission to enter, but the issue remains unsettled and more action is needed to clarify the scope of the ruling, said one executive at a compliance services firm. French Caldwell, chief evangelist at compliance services firm MetricStream, said either more court rulings are needed to clarify the decision or Congress will have to act to specify what types of password sharing would be violations of U.S. law. [more…]

Exxon Mobil Climate Change Inquiry in New York Gains Allies by John Schwartz in the New York Times

Mr. Schneiderman began his investigation in November. His staff is looking at whether statements the company made to investors about climate risks — some as recently as last year — conflicted with the company’s own scientific research. [More…]

A Gold Medal in Integrity by Adam Turtletaub in SCCE’s Compliance & Ethics Blog

The Dutch team has very strict rules about alcohol consumption and leaving the team’s base of operations.  Yuri van Gelder, a gymnast, broke them.  After qualifying for the finals on the rings he went out drinking and stayed out into the small hours of the morning, Reuters reported.

So what did the team do?  They expelled him. [More…]

A Trip to the Dentist for Some Compliance Insight by Tom Fox in FCPA Compliance & Ethics

It struck me that the diverse problem solving requirements are very close to what the compliance professional must do and it pointed to the differences between the compliance discipline and the legal discipline in corporate America. Lawyers are there to protect the company. Such a role can include problem solving but it does not move to the types of solutions that a compliance professional must develop in a best practices compliance program. [More…]

FCPA Compliance: Does “Anything of Value” Really Mean “Anything of Value”? by Michael Volkov in Corruption Corime & Compliance

If I hire a relative to a foreign official with the intent to influence the foreign official, my liability should not depend on whether we can provide a precise calculation of the “intangible benefit” to the foreign official. Instead, a prosecutor will have to prove beyond a reasonable doubt that I acted with corrupt intent to influence the government official by hiring his or her relative. That seems sufficient in my mind without having to resolve the existential question of what constitutes an intangible benefit. [More…]

Last Lap for U.S. Bike Idol Evelyn Stevens by Jason Gay in the Wall Street Journal

Evelyn Stevens has lived the dream of every weekend warrior cyclist who’s ever wondered: What would happen if I quit my day job and rode my bike full time?

Most of us mortals would wind up pedaling straight back into the office. But Stevens, 33, climbed straight to the top of her sport. [More…]

Whistleblowers Power Up

Two whistleblower stories caught my attention. Both are follow-ups to previous stories.

Close-up Of Metal Sport Whistle On American Flag

The Securities and Exchange Commission previously announced that it thought poorly of severance agreements that restricted the former employees from being whistleblowers. Last year, the SEC brought an action against KBR for restrictive employee agreements that stifled whistleblowing. That was in the context of confidentiality statements used as part of internal investigations. The SEC’s expressed distaste left few practitioners thinking that the distaste was limited to this kind of application.

BlueLinx didn’t get the law firm memos on this issue and continued to use severance agreements that stifled whistleblowers. When Rule 21F-17 was passed by the SEC, BlueLinx revised its severance agreements to allow terminated employees to be whistleblowers, but waive any right to monetary recovery in connection with it.

Further, by requiring its departing employees to forgo any monetary recovery in connection with providing information to the Commission, BlueLinx removed the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations.

The SEC wants whistleblowers. That has given rise to the professional whistleblower. It took six years since the passage of Dodd-Frank, but in January 2016, the SEC announced the first-ever whistleblower award to an outsider.  I think that was the first professional whistleblower. (Other than those whistleblowers who profited indirectly through books and speaking engagements.)

The Wall Street Journal reported that the rumor that Harry Markopolis’s firm was behind the State Street Bank and BNY Melon FX whistleblowers seems to be true. According to the story Mr. Markopolos became intrigued about the possibility that trust banks were overcharging clients in currency markets after reading a book by Yale University’s chief investment officer that pointed to unpredictable “foreign exchange translations.” Mr. Markopolos searched for bank employees to prove his case. He found a trio. The group organized Delaware partnerships to keep their identities out of public view. Mr. Markopolos served as a litigation consultant to the lawyers.

The resulting awards could exceed a combined $100 million. That will attract a lot of attention for those who think professional whistleblowing might be lucrative. It has taken years to get to the settlement and it’s not clear how much the whistleblower award will be or how much of a cut Markopolis will take from the award. It certainly seems like it could be millions or even tens of millions.

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SEC’s In-House Courts Are Upheld

There have been several challenges to the constitutionality of the in-house judges at the Securities and Exchange Commission. The problem is that the judges are appointed by an internal panel instead of by the President or the SEC Commissioners. That will not make a difference for Raymond Lucia and his “Buckets of Money.”

SEC Seal 2

Radio personality Raymond J. Lucia, Sr. got in trouble with the SEC by claiming that his “Buckets of Money” strategy had been successfully backtested when in fact it had not been. Lucia was a registered investment advisor, but the SEC barred him for his transgressions. He appealed.

In addition to appealing the substance of the charges against him, he argued that the SEC in-house court was unconstitutional. The appeal looked at the Appointments Clause of the Constitution. It’s an important part of the constitution to make sure that those who wield power are subject to “political force and the will of the people.” The President appoints “Officers” who are those who exercise “significant authority pursuant to the laws of the United States.”

The court went out to point out a three prong test to determine if an official is an “Officer” under the Appointments Clause:

  1. significance of the matters resolved by the government official
  2. discretion the official exercises in reaching the decision
  3. the finality of the decision

So far it sounds good for Mr. Lucia and the other parties arguing this point in their disciplinary matters.

But then there is the procedural matter of what happens after an SEC in-house judge issued his or her order. Under the SEC rules, there is not final decision until the Commission determines not to review the order. That initial order from the SEC judge only becomes final when the Commission issues the finality order. “The Commission’s final action is either in the form of a new decision after de novo review or, by declining to grant or order review, its embrace of the ALJ’s initial decision as its own.”

That leaves the full decision-making powers in the hands of the SEC commissioners who are appointed by the President in accordance with the Appointments Clause.

That seems to settle the argument that the SEC in-house administrative proceedings are unconstitutional.

Of course, Mr. Lucia could appeal this decision further. The Supreme Court may want to take a different view of who is an “officer” under the Appointments Clause.

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How To Pay A Bribe

A thick envelope arrived in the mail from Trace International, the firm of anti-bribery compliance experts. The title caught me off guard: How to Pay a Bribe.  I would have thought Trace would be focused on how to stop bribes.

bhow to pay a bribe

Then, of course, I read the subtitle: Thinking Like a Criminal to Thwart Bribery Schemes. It’s a learning tool to help compliance practitioners identify the signs of a bribery scheme.

This is the third version of this book, collecting stories about the inner workings of bribery schemes.

The first chapter is prophetic look at banking in Panama and the law firm Mossack Fonesca. This seems obvious with the release of the Panama Papers. But if you look at the publication date, the book was sent to the printers and released before the Panama Paper were released. The chapter’s author Ken Silverstein pulls no punches. “Panama has been run by assholes for more than a century.”

Richard Bistrong tells his story as convicted bribe payer. He tells his missteps as he sunk into a pit of corruption.

The chapter authors describe various methods used to pay bribes and different mechanisms to move corrupt money. The goal is teach the reader how to avoid the pitfalls and identify potential problems. In the end it is full of practical advice on how to discover, deter and defend against corruption.

On the Road, On My Bike

I’m not thinking about compliance today. When this story gets posted I’ll be somewhere on the road between Hillsdale, New York and Sturbridge, Massachusetts. I’m with a dozen members of my Pan-Mass Challenge team and a few dozen other hearty souls who have added on a pre-ride we call Day Zero. The first official day of the my Pan-Mass Challenge ride starts Saturday morning in Sturbridge and the second day starts in Bourne, just beside the Cape Cod Canal, as we head toward Provincetown at the tip of Cape Cod.

In all, it will be about 300 miles over those three days. Those are days remembering those we have lost to cancer, cheering those who are fighting cancer and celebrating those who have beaten cancer. I’m sure you or someone you love has been affected by cancer.

The Pan-Mass Challenge is the biggest fund raiser for the Dana-Farber Cancer Institute. 100% of the rider generated donations go to Dana Farber.

I’m so grateful at the outpouring of Compliance Building readers who have supported me. I’ve got your names tucked into my jersey pocket and I’m bringing you all the way across Massachusetts.

If you are interested in supporting my ride there is still time donate, just follow this link: http://profile.pmc.org/DC0176

pmc composite

 

Compliance Bricks and Mortar for August 4

It’s early round up this week. I’m taking Friday off to ride additional day before the Pan-Mass Challenge.http://profile.pmc.org/DC0176

In the meantime, these are some of the compliance-related stories that recently caught my attention.

pmc bricks

People, please stop making these two insider trading-related mistakes! by Bruce Carton in Compliance Week

There are two insider trading-related “mistakes” that I have repeatedly warned against in this blog through the years.

Mistake 1. People whose firms are directly involved in merger transactions (e.g., public company employees, investor relations executives, lawyers, accountants, etc.) foolishly believe that they can engage in insider trading without being caught. Seriously, just don’t do it!

[More. . . ]

Drinker Biddle analyzes the First 50 Crowdfunding Offerings by Marc A. Leaf, Robert T. Esposito and Abigail Luhn in the CLS Blue Sky Blog

As of June 30, 2016, 50 companies have filed a Form C with the SEC to offer securities under the Regulation Crowdfunding exemption. Minimum target offering amounts range from $20,000 to $500,000 per offering, with a median of $55,000. All but one of these issuers, however, have disclosed that they will accept offers in excess of the target amount, including 27 issuers that say they will accept investments at or near the maximum permitted offering amount of $1,000,000. In contrast, 18 of the first 50 issuers elected to cap their offering at just $100,000, with the remainder setting an offering cap of between $200,000 and $500,000. In the aggregate, if this first wave of retail crowdfundings is successful, 50 small companies will raise an aggregate of $6 to $30 million in new capital to fund their businesses. [More…]

John Hancock and Cultural Transformation by Tom Fox in the FCPA Compliance & Ethics Report

As a CCO or compliance practitioner, you need to be seen as leading this type of behavior. Heffernan ended with these propitious comments from Van der Bel, “It starts with you. You must always show up energised and open. Annual surveys are a thing of the past; you have to get a sense of pulse on a weekly basis. I’m much more thoughtful about which meetings I attend, how I add value. You have to get out more and listen more.” [More…]

China Clamps Down on Fund-Management Firms by Shen Hong in the Wall Street Journal

The move, which has eliminated close to 40% of the country’s privately-offered funds, is the latest signal of a policy shift by the Chinese leadership toward boosting regulatory oversight and away from financial liberalization and reform, especially after thedramatic stock market meltdown over a year ago. [More…]

 

More Targeting of Real Estate Transactions by FinCEN

The US Financial Crimes Enforcement Network has started to look closely at cash purchases of expensive real estate as a possible source of money laundering. In January, FinCEN issued two Geographic Targeting Orders, one for New York and one for Miami. Now more metropolitan areas are in FinCEN’s sights.

Alamo

According to the press release, FinCEN has been gathering some good data from the small step it took earlier this year. Apparently it thinks there are other jurisdictions that are likely places for money laundering.

The new order targets all of New York City, more of the greater metropolitan Miami area, and adds in metropolitan areas in California and the area around San Antonio.

The covered transactions must meet the following criteria:

  1. An entity is the purchaser .
  2. It’s purchasing residential real estate.
  3. It’s for a large purchase price (see below).
  4. There is no bank loan or similar external financing.
  5. The purchased in made in part with cash or check or or certified check or cashier’s check.

One problem is the inclusion of a certified check or cashier’s check in the included transactions. If you’ve ever bought a home, you usually come to the closing with a certified check or cashier’s check. The closing needs cash equivalents at the closing to make sure it can send the money back out to the seller. In Massachusetts, its mandated by law.

I would guess that the FinCEN targeting order is generating mostly reports of ordinary, legal transactions.

That’s not to say that the efforts should not be applauded. Legitimate parties in real estate transactions do not want to be engaged in money laundering.

I would guess that most people engaged in this type of residential real estate money laundering have stopped using title companies in the transaction. That moves it out of the reporting requirements of the order. Title companies provide a great service, but not a required part of the transaction. It seems easy to structure around.

The purchase price guidelines in the targeted areas:

New York:

  • The Borough of Manhattan $3,000,000
  • The Borough of Brooklyn $1,500,000
  • The Borough of Queens $1,500,000
  • The Borough of Bronx $1,500,000
  • The Borough of Staten Island $1,500,000

Florida:

  • Miami-Dade County $1,000,000
  • Broward County $1,000,000
  • Palm Beach County $1,000,000

California:

  • San Diego County $2,000,000
  • Los Angeles County $2,000,000
  • San Francisco County $2,000,000
  • San Mateo County $2,000,000
  • Santa Clara County $2,000,000

Texas:

  • Bexar County $500,000

FinCEN is using title insurance companies as the gatekeeper because title insurance is a common feature in real estate transactions. FinCEN is quick to note that the title insurance companies themselves are not being implicated in the money laundering. “To the contrary, FinCEN appreciates the continued assistance and cooperation of the title insurance companies and the American Land Title Association in protecting the real estate markets from abuse by illicit actors.”

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If you enjoy Compliance Building, please join many of my other readers and support my Pan-Mass Challenge ride to fight cancer this upcoming weekend. (Thank you to those who have already donated.) I’m pedaling from the New York border to Provincetown on August 5-7. 100% of your donation goes to the fight against cancer. You can read more and donate here: http://profile.pmc.org/DC0176

 

DLA Piper Takes a Look at Compliance

DLA Piper conducted its first compliance survey. I assume they reached out to some subset of the law firm’s clients seeking responses to the 34 questions. The answers came from not just the biggest companies. Although 38% of the companies had more than 5,000 employees, 20% had 100 or fewer. The companies were split 60/40 public private.

There is a bunch of stuff packed into the responses. I’m not sure I found anything new or surprising about the answers.

I did look at the four biggest compliance risks according to the survey:

  • Increased regulatory risk
  • Cybersecurity
  • Data breaches, data privacy
  • Regulatory risk

compliance risks

Okay, so maybe those are really just the two risks worded in two different ways.

Compliance is worried about cybersecurity which means avoiding date breaches and keeping data private. Regulators and hackers have made them worried about not taking the right approach. The survey does not say which worries compliance more.

Regulatory risk is the other big concern. Government regulators continue to pile on regulations. Compliance professionals and their firms are having a hard time figuring out how the new regulations apply and how to best attempt compliance.

You can read the entire compliance survey: CCOs Under Scrutiny (.pdf)

If you enjoy Compliance Building, please join many of my other readers and support my Pan-Mass Challenge ride to fight cancer this upcoming weekend. (Thank you to those who have already donated.) I’m pedaling from the New York border to Provincetown on August 5-7. 100% of your donation goes to the fight against cancer. You can read more and donate here: http://profile.pmc.org/DC0176

Turning a Slimy Internet Scheme Into Securities Fraud

Charles Scoville wants to help you get better traffic to your website. He does it through the slimy method of paying people to click on an ad for your website. But he added in a revenue sharing system. The SEC decided that the slimy method had turned securities fraud.

traffic monsoon

There are many, many, many platforms for falsely generating traffic to your site. HBO’s Silicon Valley used a click farm to generate user activity increases for its fictional product.

The Scoville platform, Traffic Monsoon, is mostly a traffic exchange. Users/members agree to click on other members’ websites and they agree to click on your website through AdPacks. Business owners buy ad packs and get visitors and banner clicks in return. Members get paid to click. There are a few levels of AdPacks and services for sale.

Traffic Monsoon took things a step further to get members clicking more and paying more for the AdPacks. The platform offered “revenue sharing.”

When you purchase an AdPack combo advertising campaign for $50, you’ll receive 20 clicks to your banner, 1,000 traffic exchange credits, and a revenue sharing position.

When you click a minimum of 50 ads in our traffic exchange and remain on the websites for 5 seconds each, you’ll qualify yourself for 24 hours to share in site profits.

By paying for the more expensive AdPack, you get to share revenue or share in site profits. The problem is how you define revenue and profits.

Traffic Monsoon treated the purchase of the AdPack as revenue. The sale of these accounted for 99% of the company’s revenue. There were very few third parties enticed to the site looking for pay to click activity.

According to the SEC Complaint, as of May 16, 2016, Traffic Monsoon had sold 15,225,689 AdPacks. For each such AdPack, however, it must deliver 1,000 visitors, amounting to 15 billion visitors total. As of July 24, 2016, however, the Traffic Monsoon website states that the company had “delivered 1,618,996,340 visitors.

In February, PayPal froze the company’s accounts because it had the earmarks of a Ponzi scheme. According to the SEC’s complaint it is a Ponzi scheme.

The SEC’s jurisdiction is limited. It will need to prove that the scheme involves securities. It does a better job pleading the case that this involves securities than other past complaints involving matters that may not be securities.

  • Members pay a premium price for the revenue sharing AdPacks.
  • Member funds are aggregated into a common pool.
  • The payment of returns is almost entirely dependent on Scoville’s ability to sell AdPacks.
  • Members have no role in managing Traffic Monsoon enterprise.
  • The interests are not registered.
  • The members are not required to be accredited investors.

The SEC needs to prove that the AdPack arrangement was essentially an investment contract. That leads back to some derivation of the Howey case to determine if there is an investment contract, and look at whether there is:

  1. an investment of money,
  2. a common enterprise,
  3. a reasonable expectation of profits, and
  4. a reliance on the entrepreneurial or managerial efforts of others.

Whether Traffic Monsoon calls it “revenue sharing” or “site profits” it looks like its revenue sharing system could be considered a security.

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