Author: Doug Cornelius

You can find out more about Doug on the About Doug page

Happy Evacuation Day!

March 17th may mean Saint Patrick’s Day to most of you. Here in Boston it’s Evacuation Day.

The holiday commemorates the evacuation of British forces from the city of Boston following the Siege of Boston, early in the American Revolutionary War. (It’s just a coincidence that it coincides with Saint Patrick’s Day.)

George Washington fortified Dorchester Heights in early March 1776 with cannons. Major General Henry Knox had captured the cannons from Fort Ticonderoga. The garrison and navy under the command of British General William Howe were threatened by these cannon positions. Howe had to decide between attack and retreat. Howe chose to retreat and withdrew from Boston and sailed off to Nova Scotia on March 17.

George Washington had his first victory of the Revolutionary war.

Dodd’s Solo View on Private Investment Funds

Senator Dodd

Senator Dodd did not forget about private investment funds. Tucked into page 366 of his 1366 page Restoring American Financial Stability Act of 2010 is the Private Fund Investment Advisers Registration Act.

This is largely the same language in the Private Fund Investment Advisers Registration Act of 2009 contained in Dodd’s draft Restoring American Financial Stability Act of 2009. He circulated that draft back in November to start negotiations with Republicans.

Venture Capital Fund Advisers

There is an exemption from registration for the “provision of investment advice relating to a venture capital fund.” The bill gives the SEC the responsibility for defining a “venture capital fund.”

Private Equity Fund Advisers

Unlike the bill passed by the House, Dodd proposes an exemption from registration or reporting requirements with respect to advice given to private equity funds. The SEC is tasked with defining the term “private equity fund.”  Unlike venture capital funds, private equity funds will be subject to SEC record-keeping requirements to the extent the SEC determines it is “necessary and appropriate in the public interest and for the protection of investors.”

State versus Federal Registration of Investment Advisers

Section 410 of the bill raises the federal registration level to $100 million from $25 million. So investment advisers and funds of less than $100 million will be subject to state regulators instead of federal regulators. David Tittsworth, executive director of the Investment Adviser Association, said the change would shift about 4,200 of the 11,000 money managers now registered at the SEC to state regulation.

Accredited Investors

The Dodd bill would change the threshold for “accredited investor.” Currently, the threshold is $200,000 income for a natural person (or $300,000 for a couple) or $1,000,000 in assets. The SEC would have the power to increase those levels  as “appropriate and in the public interest, in light of price inflation since those figures were determined.”

The Comptroller General is also directed to study the financial thresholds for investor eligibility in private funds.

Regulation D Offerings

Separately in the bill, Senator Dodd is proposing to tinker with exemption from registration under Rule 506. Section 926 of his bill, gives the SEC the power to designate certain Rule 506 offerings to not be “covered securities.”  That would get the states more involved in the review and regulation of private offerings, including private fund offerings.

Now What?

This bill still has a long way to go in the Senate. Most reports indicate that private funds are not one of the hotly contested issues in the bill. Assuming the Senate passes the bill, they will need to negotiate the differences between the House and Senate. Assuming it passes, it looks like a big chunk of work would be dropped onto the SEC to define the fund types.

Sources:

Dodd Goes Solo

Senator Dodd

After months of negotiation, Senator Dodd gave up on his negotiations with Republicans and decided to introduce a financial industry reform bill all by himself.

To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘‘too big to fail’’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

Now what?

Well, there’s a lot of reading. The Restoring American Financial Stability Act of 2010 is a whopping 1,336 pages. That’s a hundred or so pages longer the House’s Wall Street Reform and Consumer Protection Act passed in December.

Apparently none of the 10 Republicans on the Senate Banking Committee endorse Dodd’s Restoring American Financial Stability Act of 2010. I assume he can muster the Democrats on the committee to pass the bill. Then he has to get the votes lined up in the full Senate. That will likely mean having to make some changes to the bill. Assuming he can gather that many votes, then they need to negotiate a compromise law with the House so that the bill is in a final form that both legislative bodies will approve (or vote down).

I wouldn’t get too attached to anything in the Restoring American Financial Stability Act of 2010. One thing that’s certain: the bill will look different.

How will it be different? I’m not even going to guess.

Sources:

Toyota, Ethics and Compliance

Toyota Logo

With Toyota’s problems all over the news, I started to think about whether compliance and ethics professionals could learn anything from these problems.

To begin, I don’t think there is a systemic problem with their vehicles or with the company. I think the sudden acceleration problem is bunk.

Yes, I own a Toyota, but my Tundra has not been implicated.

Numbers

It is unfortunate that people have died in Toyotas. About 56 people have died in accidents involving Toyotas that allegedly accelerated out of control. That anyone has died or been hurt is difficult to face.

But lets put that number in perspective.  Over 34,000 people died in car crashes in 2008 and over 2 million people were injured.

Over 10,000 of those deadly crashes in 2008 involved alcohol impaired driving. That means you were at least 100 times more likely to be killed by a drunk driver than sudden acceleration.

From an ethics perspective, you obviously don’t want to sell a product that is defective or even a little more likely to injure your customers. Of course, that assumes there is a defect in the product and it’s not just a big pile of media hype.

Look back at Audi

We have seen this situation before. Twenty years ago it was Audi. The reports on Audi suffering from sudden acceleration nearly destroyed the automaker in the late 80s.

They never did find a problem with the Audi cars. Audi was never able to counter the outcry against their cars.

Is there really a problem with the cars?

Surely, the throttle of a car could get stuck open and cause the car to accelerate. Cars are increasingly run through electronics that control the fuel levels and throttle of the car. Floor mats can get stuck on the gas pedals. Cruise controls can malfunction. For any number of reasons, a car could accelerate without the driver’s input. (With Audi, the assumption is that the driver stepped on the gas pedal instead of  the brake pedal.)

But what about the brakes?

Car and Driver ran some tests for unintended acceleration. Even with the throttle held wide open, if you stepped on the brakes your car would stop in roughly the same distance.  In a normal situation, they stopped a Toyota Camry from 70 mph to 0 in 174 feet. With the throttle held open it took 190 feet to stop from 70 mph.

The brakes were not as successful for the hugely powerful Roush Stage 3 Mustang with 540 horsepower. It required an extra 80 feet to stop with all extra horsepower was fighting the brakes.

Even if the engine in most cars suddenly accelerates, the brakes should stop in it roughly the same distance.

However, if you pump the brakes, you may lose the vacuum boost needed for the power assist and have a hard time stopping the car. Prior to anti-lock braking systems, we were taught to pump the brakes in slippery conditions.

Another possibility is that the car could have suffered a brake failure at the same time the throttle failed.

Driver error

One way to deal with sudden acceleration is to disconnect the engine. With a manual transmission you step on the clutch and with an automatic you shift into neutral. (I’m not sure that I would have thought to do that if my throttle got stuck.  I would now.)

With Audi, they main theory was that people were stepping on the gas when they thought they were stepping on the brake.

As for the runaway Prius a few days ago, he could have pumped the brakes and lost the power assist needed to stop the car, or had a simultaneous failure of the brakes and the throttle. (Or he could have faked it.)

Systemic failure

What Toyota needs is a way to avoid systemic failure. It’s really bad to have the throttle and the brakes fail at the same time.

What Toyota needs is a throttle kill switch. When you step on the brakes, the electronic throttle control will cut the throttle and cut the power. In the Car and Driver test, they tried an Infiniti G37 that had the throttle kill and its braking distance barely changed. Many cars have this throttle kill mechanism, but not all.

Having a safeguard for a systemic failure is good thing from a compliance and risk management perspective. By having a throttle kill, it’s easier to point to operator error. (“If you had stepped on the brakes, the engine throttle would have released.”)

What about the conflict of interest?

One problem with a government investigation of Toyota is the inherent conflict of interest the United States government and the taxpayers have in the automobile industry. We own a competitor to Toyota. It would be good for the U.S. ownership in General Motors for Toyota vehicles to be less popular.

I was very disappointed to see Mr. Toyoda flogged in front of a Congressional panel. To some extent, he was being yelled at by the board of directors of GM.

Lessons

In the end, I believe the Toyota story is one of a failure of crisis management and not one of ethics or compliance. It seems like Toyota was not able to quickly gather the facts and act on the facts. They keep announcing recalls, without explaining the problem or the fix.

Every company action made in error is magnified under the white hot lights of the media looking for stories. We the taxpayers and our government has a big conflict of interest in attacking the company without a good set of facts.

The failure of crisis management is going to cost them. There will be shareholder class action lawsuits, driver lawsuits, owner class action lawsuits, the cost of recalls and the long term damage to the company’s image.

Sources:

MoFo2Go

Do I care if my law firm has an iPhone App? As client, I care about my law firms delivering useful information to me.

Kevin O’Keefe says your law firm should forget about building an iPhone App. Morrison & Foerster didn’t heed his advice and created MoFo2Go, an iPhone app.

iPhone App versus Mobile View

Kevin’s post was in response to a iPhone app built around a law firm’s blog. I looked at Arnold & Porter’s iPhone app for their Consumer Advertising Law Blog. It required a separate application and was very clunky. All it had was blog content. They would have been better off just having their site enabled for mobile viewing. Kevin was right.

(By the way, Compliance Building uses MobilePress to make a really nice looking mobile view of the site on the iPhone. It looks mediocre on the Blackberry.)

Rather than reading on the commute home, I decided to download MoFo2Go to my iPhone and see if Kevin was right.

Disclaimer

MoFo2Go is the first app I’ve seen that has a disclaimer wrapper that I had to “accept” before installing. Clearly this app had some lawyer input on the design.

Splash Screen

The four functional buttons take up 20% of the screen space, with the new firm motto taking up the majority of the space. Is this an ad or a tool? I think they got that wrong.

Lawyer Directory

This is a nice feature. I can look up lawyers. With one step I can call the lawyer. It also allows me to add the lawyer to my contacts, send an email to the person and view their full bio. I wish the phone number and email were clickable to take these actions instead of menu items at the bottom.

Locations

So assuming I’m trying to get to a MoFo office, I could use this to get directions. It kicks you over to the Google Maps feature in the iPhone.

News

It’s nice enough of MoFo to publish all of these updates. But MoFo is an international law firm with dozens of practice area. Only a small fraction of their publications are of any use to me.

They have four filters: Alerts, Releases, Newsletters and MoFoTech. Please explain why dividing the publications into Alerts and Newsletters helps me to find information. It’s a useless distinction from a client’s perspective.

The Releases are MoFo press releases, so I can just ignore those.

MoFo Tech is a publication focused on tech-based companies. It has all all 7 articles from the single edition of the publication. MoFo Tech Fall/Winter 2009. That seems to be a lot of screen devoted to a small publication.

Play

Yes, MoFo2Go has a game. It’s a classic marble maze. You tilt the iPhone to move a marble through a maze. When you succeed, in addition to a score, you get a MoFo Factoid (“In 2009, Chambers & Partners ranked MoFo Band 1 in Intellectual Property.” I guess I didn’t do very well if that is reward I got at the end of the maze).

So What?

The only useful feature in MoFo2Go is the lawyer directory. The rest is useless or a waste of time.

They should have just made MoFo.com mobile-friendly for the iPhone.  MoFo.com is unusable on the iPhone.

Surprisingly, there is a mobile version of MoFo.com for the blackberry. It’s stripped to the lawyer directory and the office locations. Unfortunately, they stripped the email from the directory. But you can just click on the phone number to call the lawyer. Nice.

Should Law Firms Have iPhone Apps?

From my perspective as a client, No. Don’t bother with an iPhone app.

Make your law firm website mobile-friendly so that your clients can easily to get to the information they need. That means make it easy to get to the lawyer directory and office locations. Just like MoFo did with the blackberry version of their website.

Sources:

Compliance Bits and Pieces for March 12

Harry Markopolos high school photo

Here are some compliance stories from the past week that I found interesting:

Shadowing a Swindler by Richard Tofel

His review of the Harry Markopolos book: No One Would Listen

[N]early all the whistleblowers she had met shared two qualities. First, they were onto something—that is, there was at least some truth to what they were saying. Second, they were “a little bit nuts.” … None of this behavior makes Mr. Markopolos’s case against Mr. Madoff any less convincing. Nor does it excuse the SEC. But it does provide a fuller picture of the author than the cardboard cut-out of the lonely hero we’ve been hearing about for the past 15 months. With his book, Mr. Markopolos sheds more light than he intends on just why no one would listen.

OECD Guidance On Internal Controls, Ethics and Compliance by Melissa Klein Aguilar in Compliance Week‘s The Filing Cabinet

The OECD Working Group on Bribery has issued “Good Practice Guidance on Internal Controls, Ethics and Compliance,” which calls for companies in the 38 countries that are party to the OECD Anti-Bribery Convention to put in place strict internal controls and establish ethics and compliance programs as part of a strategy to combat bribery in international business deals.

Blagojevich Speaks on Ethics (And I Would Listen) by Chris MacDonald on The Business Ethics Blog

Of course, when you’re listening to someone who is accused of, or who has admitted to, significant wrongdoing, there’s no guarantee you’re hearing the truth. Some of them may be inveterate liars; others may be lying to polish their own image. So, naturally, you should take what they say with a grain of salt. But to think that there’s nothing to learn from them is a mistake.

To Improve Performance, Audit Your Employees’ Emails by Michael Schrage

Because the rhythm and rhetoric of effective email exchange is a critical success factor in business performance, mismanagement of email may in fact be a symptom of other weaknesses in your organization.

The Rise of  Client Collaboration by Jordan Furlong

Welcome to the world of client collaboration, where buyers of legal services share information with each other and where lawyers are often not needed on the voyage. The internet has enabled people with legal questions and problems to speak with and learn from each other on a massive scale, far beyond what was possible in the days before email and social networks. As a result, they are turning less frequently to their lawyers and more frequently to each other to acquire the legal information they need.

SIGTARP Quarterly Report to Congress

As important as assessing the effectiveness of TARP programs is, in the final analysis, TARP can truly only be a success if TARP is both managed well and its positive effects are enduring. The substantial costs of TARP — in money, moral hazard effects on the market, and Government credibility — will have been for naught if we do nothing to correct the fundamental problems in our financial system and end up in a similar or even greater crisis in two, or five, or ten years’ time. It is hard to see how any of the fundamental problems in the system have been addressed to date.

FCPA Enforcement in 2010: Prepare for Blastoff by Bruce Carton in Securities Docket

When Assistant Attorney General Lanny Breuer was recently asked to comment on enforcement of the Foreign Corrupt Practices Act in 2009, he minced no words: “One can say without exaggeration that this past year was probably the most dynamic single year in the more than 30 years since the FCPA was enacted.”

Upcoming Appearances and Conferences

For those of you stalking me or trying to find out when my house is empty, here are some places I will be this spring:

Mark Fryenburg asked back to his speak to his class: CS 299 Web 2.0: Technology, Strategy, Community. I’m going to tackle personal knowledge management. After all, that is the reason that Compliance Building exists. I’ll be there on the afternoon of March 17. I did a similar presentation to this class last spring.

Rather than the marketing aspects of blogs and web 2.0 tools, I’ll focus on how they can help you as individual in accumulating the knowledge you need to do your job and develop yourself professionally.

Hopefully, I can open the eyes of these college students. Don’t assume that the digital generation knows how to use web 2.0 tools any better than you.
In April will be heading down to San Antonio to an ICI Mutual Conference to speak about social media and compliance.

My presentation will focus on the issues that investment companies and investment advisers will have in dealing with social media. This will be my first time in San Antonio.
On May 6,  I will be speaking at the Annual Conference for the Association of Legal Administrators.

My topic will be The Social Networking / Web 2.0 Revolution. I’m going to bring my experience as a lawyer, law firm client, legal administrator and user of web 2.0 to give a better understanding of the web can firms and ways that firms can manage the use of web 2.0.
On May 17, I will be down in Miami at Interact 2010: The Legal and Compliance Technology Forum.

I will be on a panel with Kathleen Edmond, Chief Ethics Officer of Best Buy and Janice Innis-Thompson, SVP & Chief Compliance Officer of TIAA-CREF. We will talking about governing social media. The focus will be on ways to monitor, manage and make the most of employee use of web 2.0 tools.
compliance-week_2010 From May 24 to 26, I will be hanging out at the Compliance Week 2010 Conference. I’ll be able to sit back and enjoy the great agenda and leading speakers from the industry and government. I had a great time at this conference last year and met some great people. So I’m going back for more.

There should be some great compliance bloggers there: Francine McKenna of re: The Auditors, Bruce Carton of Securities Docket, Tom Fox of Tfoxlaw’s Blog (he needs a better name for his blog), Alex Howard of SearchCompliance.com, and Compliance Week Editor In Chief Matt Kelly
For a change of pace, I’m speaking at Pax East on March 26 on Bringing up the Next Generation of Geeks.

In my spare time, I’m a contributor to Wired’s Geekdad. The Pax East panel will be composed of a bunch of the GeekDad writers.

You can see my upcoming and past speaking engagement on my speaking engagements page.

Consumer Complaints and Fraud

Visit the Better Business Bureau

I occasionally like to look at consumer fraud complaints to see if I can learn any lessons for corporate compliance.On the consumer side there is tremendous volume of complaints and many parties trying to help.

It caught my eye when four different organizations got together to identify the top consumer complaints for 2009. Here are their lists:

Massachusetts Office of Consumer Affairs

1. Home Improvement Contractors
2. Auto Insurance
3. Health Insurance
4. Lemon Law
5. Foreclosure assistance

Massachusetts Attorney General’s Office

1. Time Share Resellers
2. Loan Modification Fee Schemes
3. Deceptive Advertising and Solicitations
4. Deceptive Lending Schemes
5. Fake Check Scams

Better Business Bureau of Eastern Massachusetts

1. New Car Dealers
2. Retail Furniture Dealers
3. Collection Agencies
4. Used Car Dealers
5. Movers

Federal Trade Commission

1. Identity Theft
2. Third Party/Creditor Debt Collection
3. Foreign Money Orders/Check Scams
4. Internet Services
5. Shop-at-Home and Catalogue Sales

Differences in the Lists of Complaints

I’m sure each agency has a different taxonomy for categorizing complaints so it’s not fair to compare across agencies. I will anyhow.

It seems really strange that the lists are so different. You would think that there would be some common themes.

I see “Lemon Law” on the Office of Consumer Affairs, with “New Car Dealers” and “Used Car Dealers” on the Better Business Bureau list. So they both have cars, but no sense of the consumer complaint from the BBB list.

The Office of Consumer Affairs has “foreclosure assistance” and the Attorney General has “Loan Modification Fee Schemes” on its list. I sense those entries are a sign of the times and each agency is trying to focus on those related issues.

How you intake complaints will affect how you classify complaints and how you report on complaints. So I thought it would be a useful exercise to see how these agencies intake complaints to see if you can see a relationship to their top complaints.

Federal Trade Commission

Why does the FTC have a category for “Internet Services”? That seems way too broad. I guess it is just the “internet is scary” category. So I tried out the FTC Complaint Assistant.

Its no surprise that “Identify theft” is the top category. That the first question asked. So with the FTC complaint everything is either an identify theft complaint or something else.

The something else is then divided into “Debt collectors or debt collection practices”, “Credit Reports” or something else. So its no surprise what the second item is on the FTC list. It does leave me surprised that “Credit Reports” did not make their top five. The “internet” is one of the categories in other, but the other two on the top five are no obvious from the input taxonomy.

Better Business Bureau

Next I went to the Better Business Bureau’s online complaint form.  Their form’s taxonomy is

  • my vehicle
  • My cell phone or wireless carrier
  • a product or service (other than a vehicle or a cell phone)
  • a charity
  • children’s advertising

So its no surprise that New Car Dealers and Used Car Dealers are in their top five list.

Massachusetts Office of Consumer Affairs

I thought it was strange to see this agency in the mix because it has a limited mandate when it comes to consumer complaints. If you go to their How to Resolve a Consumer Problem webpage they make it hard to even find how to file a complaint with this agency.

They really just have jursdiction on Lemon Law disputes and home improvement arbitration. So what’s odd is that lemon law was only in the number four position in their top five.

(In the interest of disclosure, I worked as a intern at this agency working on consumer complaints.)

Massachusetts Attorney General

This consumer complaint form has the broadest taxonomy, with two dozen categories to choose among.  I would put the most faith its listing of the top consumer complaints because you are not forcing them into a box.

But that leaves me wondering how “time share resellers” are above “loan modification fee schemes”? Maybe there are just lots of people trying to unload their time shares in this bad economy so they can avoid having to modify their loan.

Sources:

  • Press Release: Top 5 Consumer Issues and Complaints Outlined by Patrick-Murray Administration’s Office of Consumer Affairs and Business Regulation, Attorney General’s Office, Better Business Bureau, and Federal Trade Commission

The Problem with Selective Disclosure

If you want to see a classic case of the problems with selective disclosure take a look at the recent SEC case against Presstek, Inc. and its former CFO.

Presstek was having a bad quarter in 2006. The CFO knew that the company would be reporting bad financial performance for the quarter. The CFO told an investor that the results would be bad. The investor immediately sold its shares in Presstek. The next day Presstek publicly released its poor financial performance for the quarter.

Slam dunk.

It’s that kind of selective disclosure that the SEC was trying to prevent when it enacted Regulation FD. It is bad that some investors could preferential treatment to material information and be able to act on that information before the general public.

“This investigation related to matters that occurred prior to the changes in executive leadership which took place in 2007,” said Jeff Jacobson, Presstek’s Chairman, President and Chief Executive Officer. “We feel very strongly about corporate governance and we are pleased to put this legacy issue behind us.”

In addition to the $400,000 settlement with the SEC, Presstek also had to pay a $1.25 million to settle a securities class action case related to the matter.

Even though it was a straightforward violation, the question I have is: How did the SEC find out? Perhaps they noticed the spike in the selling of shares and the purchasing of puts by the investor. Perhaps somebody blew the whistle? Perhaps the company self-reported?

Sources:

New Codes of Conduct for Real Estate Companies

It’s always useful to look at what your competition is doing. The same is true in drafting your code of conduct (or code of ethics or whatever name you chose). It is useful to look at you what your competitors’ codes of conduct look like.

Since Sarbanes-Oxley requires a public company to have a code of conduct, its fairly easy to dig around the investor relations portion of their website or SEC filings to get your hands on examples.

Since my company is a real estate company, I put together a database of Codes of Conduct for Real Estate Companies.

My original goal was to find codes for other real estate private equity companies. I struck out.

So I expanded to public REITs and real estate investment advisers. All of the companies in the database are public.

So far I have not found a private real estate company that has published its Code of Conduct. This is what I expected and not a criticism. In fairness, I haven’t publicly published my Code of Conduct.

With compliance, it’s better to think of competitors as peers instead of the competition. You might get some market gain with a competitor lost to a compliance or ethical failure. You’re more likely to get more government oversight and regulation, less of investor confidence and many more headaches.

Database of Codes of Conduct for Real Estate Companies

Image of Columbia Center is by simonsonjh from Wikimedia Commons

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