Author: Doug Cornelius

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

Windex and Compliance

Katie Liljenquist

People are more fair and more generous when they are in clean-smelling environments, according to a soon-to-be published study: The Smell of Virtue.

The experiment had participants engage in several tasks, the only difference being that some worked in unscented rooms, while others worked in rooms freshly spritzed with citrus-scented Windex.

The first experiment was a test of whether clean scents would enhance reciprocity. Participants received $12 of real money. They had to decide how much of it to either keep or return to their partners who had trusted them to divide it fairly. Subjects in clean-scented rooms returned a significantly higher share of the money. The average amount of cash given back by the participants in the unscented room was $2.81. But the participants in the Windex room gave back an average of $5.33.

The second experiment evaluated whether scents would encourage charitable behavior. Test participants indicated their interest in volunteering with a campus organization for a Habitat for Humanity service project and their interest in donating funds to the cause. Participants surveyed in a Windex room were significantly more interested in volunteering (4.21 on a 7-point scale) than those in a normal room (3.29). In the Windex room, 22% participants said they’d like to donate money, compared to only 6% of those in a unscented room.

Follow-up questions confirmed that participants didn’t notice the scent in the room.

The results are consistent with the “broken windows” theory of crime that argues disrepair in the environment promotes lawless behavior.

Katie Liljenquist, assistant professor of organizational leadership at BYU’s Marriott School of Management, is the lead author on the piece in an upcoming issue of Psychological Science, with co-authors are Chen-Bo Zhong of the University of Toronto’s Rotman School of Management and Adam Galinsky of the Kellogg School of Management at Northwestern University.

References:

Thanks to Mary Abraham of Above and Beyond KM for pointing out this study.

Private Fund Investment Advisers Registration Act is Passed by House Committee

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The House Financial Services Committee passed H.R. 3818, the Private Fund Investment Advisers Registration Act, introduced by Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises. The Committee passed H.R. 3818 by a vote of 67-1.

The press release summarizes the bill as “Everyone Registers. Sunlight is the best disinfectant.” But the text of the bill appears to still have an exclusion from registration for venture capital firms.

References:

Accidental Securities Underwriter

sec-seal

So you made almost $1 million on selling penny stocks through the pink sheets on $75,000. Nice pay day. Then the SEC makes you give it all back.

This is the sad tale of Rodney Schoemann, a professional stock market trader.

Schoemann had previous purchased some restricted shares in Stinger Systems, Inc. that were marked “RESTRICTED” on their face. He apparently thought the company was worth investing in, so he asked to purchase 100,000 unrestricted shares from one of the company’s insiders. Schoemann paid the insider at the company $0.75 per share, which were not marked with a restriction. He later deposited the shares with his broker and sold them to the public.

Unfortunately, those 100,000 were not registered and that insider was in control of the issuer.

An administrative law judge found that Schoemann violated Sections 5(a) and 5(c) of the Securities Act of 1933 in November 2004 by offering and selling the securities of Stinger Systems, Inc.when no registration statement was filed or in effect for those securities and no exemption from registration was available.

Securities Act Section 5(a) prohibits any person, directly or indirectly, from selling a security in interstate commerce unless a registration statement is in effect as to the offer and sale of that security or there is an applicable exemption from the registration requirements. Securities Act Section 5(c) prohibits the offer or sale of a security unless a registration statement as to such security has been filed with the Commission, or an exemption is available.

Schoenmann argued that he was not an underwriter. But individual investors may be deemed “underwriters” within the statutory meaning of that term if they act as links in a chain of securities transactions from issuers or control persons to the public.

Section 2 of the Securities Act has this definition:

The term “underwriter” means any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking; but such term shall not include a person whose interest is limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors’ or sellers’ commission. As used in this paragraph the term “issuer” shall include, in addition to an issuer, any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer.

From the testimony, both Shoemann and the insider thought the shares were freely transferable. The insider did not think he was a control person and Shoemann never inquired the insider to see if he was control person.

Shoemann did see a legal opinion that shares in Stinger Systems, Inc. were freely tradeable. This opinion was submitted to the transfer agent and the Pink Sheets. Advice of counsel is not a defense, since it merely goes to the question of scienter.

A showing of scienter is not required to establish a violation of Section 5. There is strict liability.

The last test was whether Shoemann had purchased the shares for distribution. This test involves intent. Since Shoemann sold all 100,000 shares in the two weeks after he purchased them, he would have a hard arguing that he did not intend to distribute them. So Schoemann served as a link in a chain of transactions where securities moved from the issuer to the public, and in doing so, served as an underwriter.

The deal made financial for Shoemann, but he failed to realize the legal background on the shares. The SEC made him disgorge his $967,901 ($1,042,901 in gross proceeds, minus Schoemann’s initial $75,000 purchase price) from his “violative sales” of Stinger stock. In addition to the disgorgement of profits, he has to pay prejudgment interest of $335,370.98.

References:

How to Read a Privacy Policy

stacking up privacy policies
How Privacy Policies Stack Up (literally)

The Common Data Project surveyed the online privacy policies of the largest internet companies. Their conclusion:

We realize that most users of online services have not and never will read the privacy policies so carefully crafted by teams of lawyers at Google and Microsoft. And having read all of these documents (many times over), we’re not convinced that anyone should read them, other than to confirm what you probably already know: A lot of data is being collected about you, and it’s not really clear who gets to use that data, for what purpose, for how long, or whether any or all of it can eventually be connected back to you.

How does your company’s privacy policy stack up?

More than 100 Banks Have Failed in 2009

FDICBank closures are usually symptomatic of the economy. Last Thursday, the number of banks subject to FDIC closure stood at 99. Since FDIC take-overs are usually Friday afternoon, the question was “Would the FDIC would reach one hundred this weekend?”

They smashed through the century mark, closing seven banks over the weekend:

This rate of closure is bad, but not the worst.

The most failures occurred in 1989 when 534 banks and savings and loans were closed, which is an average of more than 10 per week. Although there were twice as many insured institutions in 1989: 16,574 in 1898 versus about 8,200 today.

The last time more than 100 FDIC-insured institutions were closed was in 1992, when 181 failed. The first time more than 100 FDIC-insured institutions failed in a year was 1982, when 119 were closed. From 1984 through 1992, more than 100 institutions were closed each year.

This is a lit more interesting when you look at it visually: (from Calculated Risk)

FDICFailures

References:

Who Knows What?

WSJ-who-knows-what

A nice piece in Monday’s Wall Street Journal on knowledge management: Who Knows What? Finding in-house experts isn’t easy. But most companies make it harder than it should be. The article, by  Dorit Nevo, Izak Benbasat and Yair Wand, explores the expertise location benefits of enterprise 2.0.

The authors describe the use of blogs, wikis, social networking and tagging as ways to collect and expose expertise with an enterprise”

“Every big company has in-house experts. So why don’t they use them more?

In-house experts, with their specialized knowledge and skills, could be invaluable to both colleagues and managers. But often workers who could use their help in other departments and locations don’t even know they exist.

Talk about a waste! Because of an inability to tap expertise, problems go unsolved, new ideas never get imagined, employees feel underutilized and underappreciated. These are things that no business can afford anytime—let alone in this tough economic climate. Which is why so-called expertise-locator systems have become a hot topic in corporate IT.

To date, most such systems are centrally managed efforts, and that’s a problem. The typical setup identifies and catalogs experts in a searchable directory or database that includes descriptions of the experts’ knowledge and experience, and sometimes links to samples of their work, such as research reports.

But there are gaping holes in this approach. For starters, big companies tend to be dynamic organizations, in a constant state of flux, and few commit the resources necessary to constantly review and update the credentials of often rapidly changing rolls of experts.

Second, users of these systems need more than a list of who knows what among employees. They also need to gauge the experts’ “softer” qualities, such as trustworthiness, communication skills and willingness to help. It isn’t easy for a centrally managed database to offer opinions in these areas without crossing delicate political and cultural boundaries.

The answer, we think, is to use social-computing tools.”

Missing from the online story link are some additional resources listed in the paper for further reading in the MIT Sloan Management Review (they sponsored the Business Insight section).

  • Six Myths About Informal Networks— and How to Overcome Them
    By Rob Cross, Nitin Nohria and Andrew Parker (Spring 2002)
    Informal groups of employees do much of the important work in companies today. To help those networks reach their potential, executives must understand how they function.
    http://sloanreview.mit.edu/x/4337
  • Improving Capabilities Through Industry Peer Networks
    By Stoyan V. Sgourev and Ezra W. Zuckerman (Winter 2006)
    By sharing insights and perspectives with a group of noncompeting peers from other regions, managers can stay abreast of industry trends and combat complacency.
    http://sloanreview.mit.edu/x/47210
  • Defining the Social Network of a Strategic Alliance
    By Michael D. Hutt, Edwin R. Stafford, Beth A. Walker and Peter H. Reingen (Winter 2000)
    Paying attention to personal relationships accelerates learning and increases the effectiveness of alliances.
    http://sloanreview.mit.edu/x/4124
  • Creating Sustainable Local Enterprise Networks
    By David Wheeler, Kevin McKague, Jane Thomson, Rachel Davies, Jacqueline Medalye and Marina Prada (Fall 2005)
    In developing countries, examples of successful sustainable enterprise often involve informal networks that include businesses, nonprofit organizations and communities.
    http://sloanreview.mit.edu/x/47109
  • Are You Networked for Successful Innovation?
    By Polly Rizova (Spring 2006)
    To manage research-and-development projects, companies need to ensure that informal social networks are reinforced—and not thwarted—by formal organizational structures.
    http://sloanreview.mit.edu/x/47310

(I’m not sure why they left out Enterprise 2.0: The Dawn of Emergent Collaboration by Andrew P. McAfee, Spring 2006)

Another resource is this video of Jennifer Merritt from the Wall street Journal interviewing Dorit Nevo from the Schulich School of Business at York University.

No Bribe, Just a Thanks

fly fishing

The Commonwealth of Massachusetts Ethics Commission fined Norfolk property developer Jack Scott for violating section 3 of M.G.L. c. 268A, the conflict of interest law, by offering an illegal gift to a municipal employee. Scott offered a free week’s stay at his fly-fishing cabin in Pennsylvania to the chairman of the Norfolk Conservation Commission at a time when Scott had matters pending before the Commission.

My favorite part is this statement from Scott to the Chairman in an email:

Lastly when you step down from the commission so no one in this dame [sic] town can say anything about anything my cabin is yours for a week with your family… the best trout fishing in the east and great for the kids. Jeff no bribe just a thanks for being on the up and up with us regardless of how this all plays out. [my emphasis]

Just saying something is not a bribe does not work. If you offer something of value to a public official when you have a matter in front of the public official, it’s going to be considered a bribe.

Press release: Norfolk Property Developer Jack Scott Fined $2,000

Decision and Order in Mass. Ethics Comm. In the Matter of John F. Scott – hosted on JD Supra

Image is by koliver

Compliance Bits and Pieces

Here are some interesting stories from the past week:

Compliance Surprises in Cuba’s Closed Economy by Alexandra Wrage on the WrageBlog

Companies enjoying any success in Cuba have partnered with savvy locals who guide them through the dense, opaque bureaucracy. Such companies must convince the government that they are there for the long haul. They cultivate relationships and, invariably, they sponsor charity cigar auctions or kids’ “go-kart” rallies. But, by all reports from many sources, they don’t pay bribes.

Five Common Mistakes in Internal Investigations by Tim Mohr and Nidhi Rao for Directorship

Warren Buffett put it best when he said, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” This statement could not be more relevant today. It takes only one person to tarnish an organization’s reputation. Not only is the current turbulent economy affecting the corporate bottom line, but if past history is any indicator, businesses can anticipate it to lead to an increase in incidents of fraud. As a result of the SEC, regulators, stakeholders and the public paying closer attention to the way an organization functions, organizations and corporate directors need to be diligent when conducting internal investigations.

Wall Street Meets the Wire by Gail Shifman on the White Collar Crime Prof Blog

In this case [against billionaire hedge-fund manager Raj Rajaratnam], however, the legal issue regarding the use of wiretaps that immediately jump to the surface is the question about whether The Federal Wiretap Act specifically authorizes the interception of electronic recordings for alleged security fraud violations (Title 15 U.S.C. §§ 78j(b) & 78ff and Title 17 C.F.R. §§ 240.10b-5 & 240.10b5-2) as charged in the criminal complaint. These statutes are not specifically enumerated in Title III, 18 U.S.C. § 2516, which provides the authorization for electronic interception. Wire and mail fraud (18 U.S.C. §§ 1341 & 1343) anti-trust violations, money laundering and numerous other offenses are listed, but not securities fraud. Chances are good that the government could have charged these defendants with wire fraud but were they scared away by the fact that the Skilling, Weyrauch, and Black cases are on review before the Supreme Court? One would think (hope?) that the government has preliminarily determined that section 2516 provides them with the authorization they need lest they find themselves licking self-inflicted wounds.

Facilitation Payments Still Leave Companies Vexed By Melissa Klein Aguilar for Compliance Week

A survey conducted by TRACE International shows some companies are prohibiting facilitation payments—colloquially known also known as “grease payments”—which are given to induce foreign officials to perform routine functions they’re already obligated to perform, such as issuing licenses or permits and installing telephone lines. In theory, such payments simply nudge foreign officials to do their jobs more promptly.

In practice, however, the line between a permissible facilitation payment and an illegal bribe can be very blurry. And to complicate matters, while the United States, Canada, Australia, New Zealand, and South Korea allow their citizens to make facilitation payments, they are illegal under local law in every country in which they are actually paid.

Personal Knowledge Management and Compliance

boston km forum

Today, I am presenting at the Boston KM Forum on Personal Knowledge Management. My presentation is part an all-day symposium on personal knowledge management.

My take on this subject is that knowledge management had been too focused on the benefits to the enterprise instead of the immediate benefits to the individual.

Firehose of Information

We are all on the receiving end of a firehose of information. We need tools to help filter, reduce and save that flow of information. In compliance, we are dealing with ever-changing rules and regulations. We need to find out which ones affect us, how they affect us and what we should do. Even better would be to see the rule changes coming so we can be ready for them.

What’s In It For Me

I’m sure it’s great for the enterprise that we save our stuff into a central place according to the rules imposed by that central system. But how does that help me manage my firehose of information? Give me a tool, a system or a technique that has an immediate, direct affect on me.

Many companies offered incentives, like gift cards, for contributing to the system. If you have to give away a prize to motivate people to contribute, then perhaps they do not seen enough value in contributing. What in it for me? Sure, you get the Starbucks giftcard. And you get some smug satisfaction for contributing into the central knowledge system vault.

Marketplace of One

Davenport and Prusak, in Working Knowledge, point out that “People rarely give away valuable possessions, including knowledge, without expecting something in return.” There is a knowledge marketplace. But I’m the biggest consumer of my knowledge. Help me organize and memorialize the things I know. Others can benefit form this, but the focus is on me.

Knowledge management solutions will work better if they are focused on improving the normal workflow and better capturing that information. The user is more likely to use a new tool if it is easy to use and provides more functionality than what they currently use.

Compliance Building is published for me. I am the biggest consumer of information on the site. I am happy that it allows me network and be a part of the compliance community. But I primarily put the posts together so I have a collection of the information I need for my personal use.

Lessons from Web 2.0

I spend a lot of time during the presentation showing how web 2.0 tools have helped me manage my flow of information. Compliance Building being one of them.

Slides

Here is my slidedeck:

Personal Knowledge Management

References:

Update:

Other views from the Knowledge Management Forum Symposium on Personal Knowledge Management:

New Mexico Regulates the Use of Placement Agents

Flag_of_New_Mexico

New Mexico, like New York and California is regulating the use of placement agents. The state has adopted the New York Model and banned any future investments with money managers who employ third-party placement agents. They have also instituted enhanced disclosure requirements.

The New Mexico State Investment Council policy will preclude any investments being made with money managers who use outside placement agents to market their fund. This is a complete ban of third-party marketers. Money managers who use internal marketing teams will have to disclose details of their relationships. Fees paid to attorneys, consultants, brokers, administrators and others related to investments will also require disclosure under the new rules.

The policy was enacted at the end of May, 2009. (I just realized that I forgot to write a post about it.)

References: