Month: August 2017

Compliance Bricks and Mortar – Pan Mass Challenge Edition

When this story publishes on Friday morning, I’ll be on my bike riding from Boston to Sturbridge for Day Zero of the Pan Mass Challenge. (I’m adding an extra day of cycling before the First and Second Day of the PMC.) Thanks to so many of you who read Compliance Building for your generous donations and kind words. I have my donor list and those kind words printed and tucked into the back pocket of my jersey. I’ll keep them with me over the 250+miles of cycling I have to complete this weekend.

If you have not contributed, there is still plenty of time to make a donation to fight cancer. I love seeing donation messages pop up while I’m riding. Donate here: http://pmc.org/egifts/DC0176

As for compliance-related matters, here are some of the stories that recently caught my attention.

SEC Whistleblower Award Sends Message to Government Employees by Samuel Rubenfeld in the Wall Street Journal

A $2.5 million award announced by the SEC last week didn’t include the name of the agency where the person worked, the company involved in the misconduct or the nature of the conduct involved, but lawyers representing tipsters and companies in whistleblower cases drew lessons from a footnote attached to the order. The footnote delineated who, among government employees, is eligible: Anyone who works for a local, state or federal agency, other than those at regulatory agencies or a law-enforcement organization. [More…]

Main Street and Premium Listings by Matt Levine

I think we are up to the Seventh Law of Insider Trading. The first six are: (1) don’t do it, (2) don’t do it by buying short-dated out-of-the-money call options on undisclosed merger targets, (3) don’t text or email about it, (4) don’t do it in your mother’s account, (5) don’t do it by planting bombs at a company and shorting its stock, and (6) don’t do it while employed at the Securities and Exchange Commission. I hereby declare the Seventh Law: (7) If you are going to insider trade, don’t Google “how to insider trade without getting caught” before or after you trade. [More…]

Mentoring Compliance Professionals by Roy Snell in the SCCE Blog

Call someone you know who could use a little mentoring. Call today. Call again in a week or two. Don’t wait for someone to match you up. It doesn’t work that way. Pick someone you would enjoy working with. Pick someone who is a “personality match.” Pick someone you think has potential. Pick someone you would be proud to say you helped. Ask them how they are doing. Think about what they need help with and send them an article or a link to a website. Tell them where you received your best compliance and ethics training. Encourage them to be involved in and hang out with the profession. Go onto social media and answer a few questions or make a comment about something you recently discovered. Write an article or blog post. Speak at a conference.  Or better yet, invite your mentee to co-present or co-author a post or article. We don’t need much of your time. We just need a little bit of time from a lot of people. [More…]

More about Crime Coverage and Social Engineering Fraud by Kevin LaCroix in The D&O Diary

Just days after a Southern District of New York judge ruled in the Medidata Solutions decision that the Computer Fraud section of a commercial crime policy covered losses from social engineering fraud  (as I discussed in a post last week), a judge in the Eastern District of Michigan has held that a crime policy’s computer fraud section did not apply to social engineering fraud.  [More…

The Ethics of Opposition Research by Hana Callaghan in the Markkula Center for Applied Ethics blog

Opposition research per se isn’t unethical, but there are boundaries. Starting with the premise that the goal of our political process is to create an informed electorate that can make educated choices come election day, we can assess whether those boundaries have been crossed. An ethically informed electorate requires that all information researched and used by a political campaign be true, fair, and relevant.  [More…]

Was there a Housing Price Bubble? Revisited by Alex Tabarrok in Marginal Revolution

Let’s go back to the Shiller graph, now updated to 2017. Over the entire 20th century real home prices averaged an index value of about 110 (and were quite close to this value over the the entire 1950-1997 period). Over the entire 20th century, housing prices never once roce above 131, the 1989 peak. But beginning around 2000 house prices seemed to reach for an entirely new equilibrium. In fact, even given the financial crisis, prices since 2000 fell below the 20th century peak for only a few months in late 2011. Real prices today are now back to 2004 levels and rising. As I predicted in 2008, prices never returned to their long-run 20th century levels. [More…]

 

Stick The Landing

I saw this picture and it made think about compliance. At its most basic, the plane did land, the aviators did not die, and the aircraft carrier is still floating.

But it was a not a compliant landing.

The plane, the aircraft carrier, and the pilot are all damaged to some extent. That it was not fatal to any of them does mean it was good. Although, better than the alternative.

Compliance is not a success if merely sticks the landing. It needs to monitor the entire flight plan, to make sure things are on track for a good landing. You need reporting along the way and a judgment on the final result. Merely noting that something landed misses the point.

I don’t know what lead to this landing. Obviously, something went wrong. So perhaps this landing was a good result given the circumstances. Being able to walk away from a situation could be considered a success if things were really bad.

In the business world that more likely means that you ended up talking the lawyers instead of the compliance group. The lawyers figure out how to get you out of trouble. Compliance tries to keep you from getting into trouble. Both want you to stick the landing.

Sources:

I’m raising money for the Dana-Farber Cancer Institute by participating in the Pan-Mass Challenge. 100% of your donation is passed through to DFCI. I’m riding my bike for three days and 250+ miles. I appreciate the generous support I have received from so many of the readers of Compliance Building. You can donate through any of the links below.

Thank you,
Doug

Initial Coin Offerings and the Securities Laws

Regulators have been trying to figure out what to do with the new currencies coming to the marketplace. Bitcoin was the vanguard, bringing its blockchain technology into the public’s view. The Securities and Exchange Commission has issued a Report of Investigation that provides some insight into when these currencies and their rollouts are going to violate securities law.

I find Bitcoin’s distributed ledger technology called the blockchain to be intriguing. Bitcoin as a currency has its problems. The wild swings in its conversion rate make it look more like a commodity than the steady values expected of a currency. In the US we have distinct regulatory structures between commodities and securities.

(Speaking of currency, if you have some extra currency then use it to fight cancer. Support my Pan-Mass Challenge Ride.)

The SEC took a close look at the initial coin offering of DAO Tokens to see if it violated securities laws. The first test was whether the DAO Tokens were securities. The short answer is yes.

The hurdle with rolling out new virtual currencies is getting enough into circulation at launch to make them useful of enough to act like a currency. Bitcoin has been out long enough and is widely used enough that it has passed this hurdle. But the first person with a Bitcoin couldn’t do much with it.

I think it’s important to note that the DAO Tokens that are the subject of the report are not the virtual currency. The DAO Tokess were used to fund the enterprise that was intended to fund projects involving the Ether currency and the Etherium blockchain.

The DAO was essential a venture capital organization and the DAO tokens were the capital commitments. Fund managers will tell you right off the bat that the partnership interests in a venture capital fund are securities.

In looking at the DAO tokens, the SEC went right to the Howey test.

Participants invested money. Of course, cash is not the only way to invest. For the DAO tokens, the investors used Ether which has value and easily meets this prong of the test.

Participants had a reasonable expectation of profits. The DAO organization was set up as a venture capital endeavor and explicitly stated that DAO token holders would share in profits from any of the projects that generated revenue.

The difficult part of the prong was the “managerial efforts of others.” DAO token holders had voting rights but the promoter, Slock.it, was key to moving the enterprise forward according to the SEC. DAO would have “Curators” instead of managers who would chose the projects for voting by the DAO token holders.

Slock.it chose the initial batch of Curators.  Token Holders could vote to replace a Curator. But the decision to send the proposal to a vote is subject to approval of the Curators.  Curators had the responsibility and power to “(1) vet Contractors; (2) determine whether and when to submit proposals for votes; (3) determine the order and frequency of proposals that were submitted for a vote; and (4) determine whether to halve the default quorum necessary for a successful vote on certain proposals. Thus, the Curators exercised significant control over the order and frequency of proposals, and could impose their own subjective criteria for whether the proposal should be whitelisted for a vote by DAO Token holders.”

The SEC went on further to conclude that the DAO Token voting rights are closer to those of corporate shareholder, than an active participant in the management.

If the DAO Tokens are securities then the whole securities law regulatory regime applies unless there is an exemption for the offering of the DAO Tokens. The sponsors took no steps to limit the offering in a manner consistent with a offering exemption.

In the end, it was not the initial coin offering that was a problem, it was the offering of interests in the organization behind the coins that was a problem.

Sources:

The Pan Mass Challenge has many choices for those looking to participate and raise money to fight cancer. I have a friend who is a virtual rider. Due to injuries she is not ready to spend hours on a bike. I’m not a virtual rider. Not only am I riding the two days of the Pan Mass Challenge, I’m adding an extra Day Zero and riding 75+ miles just to get to the start of the Pan Mass Challenge.

Help me fight cancer by donating your real currency through one of the links below.

Thank you,
Doug

The One With The Fake Cancer Detection

The product sounds great: “The Gold Standard to monitor metastic breast cancer. Our Serum-2 test provides a more accurate representation of HER-2 status, facilitating more appropriate treatment strategies.” NanoMolecularDX is “executing a commercialization strategy” for this test and others.  In July is closed on $1 million of seed funding.

I’m an advocate for cancer research and raising money to fight cancer, so this sounds like a good thing. It also has an affiliated entity, MetaboRX that is a “preclinical stage biopharmaceuticals enterprise based on pioneering research in fatty acid metabolism.”

So why did NanoMolecularDX list as its general character of business “serving food; restaurant” on its filing with the Massachusetts Secretary of the Commonwealth? And why did MetaboRX list as its general character of business “serving food; restaurant” on its filing with the Massachusetts Secretary of the Commonwealth

The Securities and Exchange Commission also wants to know. The SEC filed a complaint against NanoMolecularDX  and its manager, Patrick Muraca.

“According to the SEC’s complaint, Patrick Muraca established two pharmaceutical development companies and raised nearly $1.2 million by representing to investors that their money would be used to develop products to detect cancer and other diseases. The SEC has traced the flow of investor funds into Muraca’s personal bank account and alleges that at least $400,000 has been used to pay rent for the restaurants and fund other purchases by Muraca, including payments to a casino, automotive shop, and cigar shop.”

According the SEC complaint Mr. Muraca used the money he raised for personal expenses: mortgage, groceries, and gas. He also used $45,000 of the investors’ money to pay the rent and expenses for his fiancee’s restaurant business. Once that went out of business he spent another $30,000+ to start a new restaurant.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Muraca.

“As alleged in our complaint, we’re intervening to protect investors because Muraca has veered from his stated intentions and has been using their money for purposes other than the fight against cancer and other diseases.” – Paul Levenson, Director of the SEC’s Boston Regional Office

Great job by the SEC’s Boston Office to identify the fraud and shut it down before Muraca was able to scam any more investors.

What compliance lessons can we learn from the case?

Corporate filings do matter. Any investor could have pulled up the filing Massachusetts filing and noticed that strange purpose. I generally don’t find the filings with the secretary of state to be incredibly useful. But sometimes you do find a red flag like this to stop you in your tracks.

Sources:

As I mentioned above, I’m raising money for the Dan-Farber Cancer Institute for the Pan-Mass Challenge. 100% of your donation is passed through to DFCI. I’m riding my bike for three days and 250+ miles. I appreciate the generous support I have received from so many of the readers of Compliance Building. You can donate through any of the links below.

Thank you,
Doug