Author: Doug Cornelius

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

Blink and Compliance

blink

I am a little late to the game when it comes to reading some of Malcolm Gladwell’s books. Last week, while on vacation with the family, I managed to read Blink: The Power of Thinking Without Thinking.

The book is about rapid cognition, the kind of thinking that happens in a blink of an eye. What is going on inside our heads when during rapid cognition? When are these quick judgments good and when are they not? What kinds of things can we do to make our powers of rapid cognition better?

The book left me with a bunch of little tidbits of information. Gladwell illustrates each of his points with interesting narratives. In the process he makes several insightful points about the nature of rapid human decision-making. Sometimes, over-thinking a problem results in bad decisions. Our first instincts are often correct, if we have a clear picture of what is happening and our perception.

But often that clarity is missing. One example is the difference in selecting elite musicians when the audition is conducted behind a screen, rather than in full view. In the past thirty years since screened auditions have become commonplace, the number of females in the top U.S. orchestras has increased five-fold. Even though the judges were not overtly discriminatory, their first impressions from seeing a woman, the color of her instrument and the way she played had an unconscious negative effect on the judges.

There are lessons in this book for compliance professionals.

Snap judgments are often correct when they come from clarity and experience. But they can also easily be corrupted. Be aware of the situation, the person you are dealing with and the environment around you.

Sometimes too much information can cloud your decision-making. Gladwell finds an example in how an emergency room should handle potential heart attack victims. Typically, doctors try to gather as much information as possible and then make an estimate of whether the chest pain is a heart attack. Instead, they found that three factors were key to determining if chest pain is a heart attack. By focusing on these three factors, the correct diagnosis rate rose from 75%-89% correct rate of diagnosis to 95%.

Experience is clearly the most important factor in developing a strong snap judgment and practice is key in developing that expertise.

When Work Papers are not Subject to the Attorney-Client Privilege

textron

The recent Textron decision is causing quite a kerfuffle. The court permitted Internal Revenue Service to gain access to documents created by the defense-contracting firm to determine whether the company’s calculation of its tax liabilities would pass muster during a possible IRS audit. Textron was trying to shield the documents under the Work-Product Doctrine.

Work-Product Doctrine

The Work-Product Doctrine shields an individual or business from having to turn over documents created in anticipation of litigation. The Doctrine traces its roots to a 1947 Supreme Court decision, Hickman v. Taylor, 329 U.S. 495. It protects material prepared in anticipation of litigation from being revealed to opposing lawyers in a court case. Seeing those materials gives an opponent the edge by sharing the other side’s legal strategy.

Tax Work Papers

Tax accrual work papers for public companies may never deserve work product immunity. Corporate taxpayers create work papers to comply with federal securities law. They exist exclusively because of financial accounting and disclosure requirements. Their creation occurs regardless of any prospect for future litigation.

Attorney-Client Privilege

One of the concerns of this case is that this may be an attack by the IRS on the Attorney-Client Privilege.  That privilege is broader and protects communications between clients and their lawyers. That privilege is not solely for communications that deals with anticipated litigation.

However, Textron, like most other public companies, showed the tax accrual papers to outside accountants. Once you send documents to someone other than the lawyers you have effectively removed attorney-client privilege over these documents.

Dangers of Email

One of the points to take away from this case is the danger of sending out blast emails to your lawyers, copying third parties who are not lawyers. If you do so, you have probably waived the attorney-client privilege for the contents of that email. It is all too easy to add others to the email distribution. Independent auditors do not enjoy confidential relationships with their clients for purposes of the attorney-client privilege.

References:

In-House Counsel as Whistleblowers under SOX

whistleblower

Section 806 of the Sarbanes-Oxley Act (18 USC §1514A) expressly authorizes any “person” alleging discrimination based on protected conduct to file a complaint with the Secretary of Labor and, thereafter, to bring suit in an appropriate district court. There is no exception for lawyers or in-house counsel.

Recently, the Ninth Circuit tackled this issue in the case of Van Asdale v. International Game Technology.

Shawn and Lena Van Asdale were in-house counsel for IGT. As part of the merger of IGT with another company, the Van Asdales raised some issues regarding the validity of a valuable patent owned by IGT. They thought the patent issue should be disclosed in connection with the merger. Their bosses thought otherwise and fired them instead.The Van Asdales sued, asserting a whistleblower claim under the SOX because they were terminated for reporting possible shareholder fraud in connection with that merger.

What About Legal Ethics Restrictions?

IGT argued that the Van Asdales were prohibited from filing suit because of  their ethical obligations as Illinois-licensed attorneys. There is some Illinois law that “in-house counsel do not have a claim under the tort of retaliatory discharge.” Balla v. Gambro, Inc., 584 N.E. 2d 104 (Ill. 1991). However, this case is based on federal law, not Illinois law. So the court rejected that argument.

What About Attorney-Client Privilege?

The Van Asdale’s case is based on a conversation the two had with their boss regarding a pending litigation matter involving the company. To bring the case, they have to disclose information subject to the attorney-client privilege.

The Court looked at Section 806 of the Sarbanes-Oxley Act (18 USC §1514A) which expressly authorizes any “person” alleging discrimination based on protected conduct to file a complaint. Since there is no exception, in-house counsel should not be prevented from bringing a claim. There are ways to protect information. The trial court should “use the many ‘equitable measures at its disposal’ to minimize the possibility of harmful disclosures, not to dismiss the suit altogether.”

What About the Substance of the SOX Claim?

Beyond the attorney-client privilege in the case, there was also a disagreement of the standards for the claim under the whistleblower protections of SOX.

The plaintiffs only needed to show that they reasonably believed that there might have been fraud and were fired for suggesting further inquiry. Section 1514A prohibits discriminating  against an employee for “provid[ing] information . . . regarding any conduct which the employee reasonably believes constitutes a violation of” a listed law. So an employee “must have (1) a subjective belief that the conduct being reported violated a listed law, and (2) this belief must be objectively reasonable.”

References:

Image is by HughElectronic: Whistleblower. http://www.flickr.com/photos/hughelectronic/ / CC BY 2.0

Social Networking for the Legal Profession

Social-networking-for-the-legal-profession

I just finished reading Social Networking for the Legal Profession by Penny Edwards and Lee Bryant. They were nice enough to send me a copy.

Penny and Lee used a few quotes from me, referred to some of my writings and used some of my social networking activity as examples. That poor judgment aside, the book is otherwise a great report on how legal professionals can take advantage of online networking tools.

The book contains practical examples and strategies. They explore the use of the tools externally as part of your marketing and business development efforts. They also explore the use of them internally for operations, communication, and knowledge management 2.0. They present a good road map with lots of options for an organization to chose among.

They start with the basics and run through a survey of the social networking sites most useful to lawyers: LinkedIn, Avvo, blogs, Facebook, Twitter, Legal OnRamp, Martindale-Hubbell Connected, JD Supra and many others.

It is not all kumbaya. The report takes into account the risks and challenges you must overcome to make implementation a success. They spend significant time talking about the culture challenges. They also explore the security, privacy and compliance issues.

Penny and Lee point out the paradigm shift with these tools. Unlike previous generations of collaboration tools, these 2.0 tools target individual benefits rather than the benefits to the organization as a whole. They focus on what’s in it for the individual. The benefits to the larger organization are a by-product. There is less emphasis on standardization and centralization.

The focus on standardization and the collective benefits was what knowledge management got wrong. The big central databases of knowledge management were useful to the organization as a whole, but provided little benefit to the individual contributor. They did not want awards or financial compensation (not that more money wouldn’t hurt), but wanted a way to help organize their own stuff in a way that was useful to them.

Unlike past generations of software, most of the innovation is coming from the consumer space. Free tools on the web are far ahead of enterprise systems. IT departments are constantly being asked why its so easy to search on Google or publish on the web, but so much harder to do so inside the law firm. If you want to know how these tools can help you inside your organization, you need to try them outside your organization.

There is a great chapter on the benefits of networking tools used inside the organization and how to achieve great benefits.

The book is expensive. The Ark Group gave it a cover price of £245. It is a great book and worth the price. If you are interested, I was given the details of a discount offer, taking $115 off the price, making it $285 plus $10 shipping. The details are on the US publicity flyer for Social Networking for the Legal Profession (.pdf).

You can read more from Penny, Lee and others at Headshift on the Headshift blog.

I thought I would also share links to some of my material that Penny and Lee cite in the book:

Green Initiatives and Compliance Risks

Perkins-coie

Organizations or all types and sizes are adopting policies to provide standards for environmental responsibility and sustainability initiatives.  But adopting green policies may impose risks on your organization if the policies are not properly followed.

Perkins Coie published a piece on these risks and issues: Green Policies – Understanding and Addressing Compliance Risks.

False Advertising.

Your company can be held liable for making a false statement about your sustainability efforts. Just ask Nike. There is also the Lanham Act and the ability of competitors to sue your company for false or misleading representations in advertising of goods, services or commercial activities.

FTC Regulations.

The FTC has published its Guide for the Use of Environmental Marketing Claims. These have teeth. The FTC sued Kmart, claiming that Kmart had made false and unsubstantiated claims that its private-label paper products were biodegradable.

Investor Risk.

Corporate  environmental practices have attracted increased attention from shareholders of public companies. Just ask Exxon-Mobil. I have not yet seen a meaningful shareholder suit for failing to follow a sustainability policy. But it may happen.

Contract Misrepresentation.

You need to know what you are. If you make a contractual obligation that a property is LEED certified or meet some other environmental standard, that obviously needs to be true. Otherwise you are exposing yourself for breach of contract.

References:

Disclosure: Perkins Coie just signed a big lease renewal in one of my company’s properties. Perkins Coie renews huge downtown Seattle lease.

How Are the Fortune 100 Using Web 2.0 for Investor Relations?

retheauditors

Francine McKenna, of re: The Auditors, put together a great study on how the Fortune 100 are using Web 2.0 for investor relations. There are some. But for the most part, they are not using web 2.0.

The Downside:

  • Only 3 use blogs
  • Only 2 use Facebook
  • Only 2 use Twitter. (Although 4 others do, they just left that information from the IR page.)

The Upside:

  • 49 use RSS feeds

New Liability Under the FCPA: Control Person Liability

natures-sunshine

The SEC charged Nature’s Sunshine Products Inc. with violating the Foreign Corrupt Practices Act after its Brazilian subsidiary made cash payments to customs officials to get their products imported into the country. The SEC also included two officers of the company in those charges. That part of the case was fairly standard.

What was new was that that the officers were not accused of being directly involved in creating the false books and records or authorizing the payment of the bribes. Instead, the SEC used Section 20(a) of the Exchange Act, which provides for control person liability.

Every person who, directly or indirectly, controls any person liable under any provision of this title or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.

It sounds like the SEC really wanted to get these two officers but did not have enough evidence to show their direct involvement in the bad acts. It really shows the SEC’s willingness to use all the tools at its disposal to hold individuals liable for acts within a company. They want corporate officers to know that there is personal liability associated with their bad acts.

This case may foreshadow broader SEC enforcement against corporate officers who fail to adequately supervise employees.

References:

Self-Reporting Corruption in the UK

serious-fraud-office

As part of its renewed efforts to combat overseas corruption, the United Kingdom’s Serious Fraud Office published its new Approach of the Serious Fraud Office to Dealing with Overseas Corruption PDF Document .

Previously, the Serious Fraud Office saw its role as an after-the-event investigator and prosecutor, difficult for a company to engage except in the context of a formal investigation. The new policy statement shows a very different approach in which the Serious Fraud Office is offering to work with a company to avoid criminal prosecution.

What does this mean?

The Serious Fraud Office wants to encourage self-reporting. The benefit is that the Serious Fraud Office will more likely consider a civil, rather than criminal, outcome and the opportunity to manage publicity proactively. A negotiated settlement rather than a criminal prosecution means that the mandatory debarment provisions under Article 45 of the EU Public Sector Procurement Directive in 2004 will not apply.

What about the US Department of Justice?

If the case is within the jurisdiction of the DOJ and the Serious Fraud Office, they expect to be notified at the same time.

What do you need to do to avoid criminal prosecution?

Very soon after they receive the self-report and the acknowledgment of a problem, they want to establish the following:

  • Is the Board of the corporate genuinely committed to resolving the issue and moving to a better corporate culture?
  • Is the corporate prepared to work with the SFO on the scope and handling of any additional investigation the SFO considers to be necessary?
  • At the end of the investigation (and assuming acknowledgment of a problem) will the corporate be prepared to discuss resolution of the issue on the basis, for example, of restitution through civil recovery, a program of training and culture change, appropriate action where necessary against individuals and at least in some cases external monitoring in a proportionate manner?
  • Does the corporate understand that any resolution must satisfy the public interest and must be transparent? This will almost invariably involve a public statement although the terms of this will be discussed and agreed by the corporate and the SFO.
  • Will the corporate want the SFO, where possible, to work with regulators and criminal enforcement authorities, both in the UK and abroad, in order to reach a global settlement?

They are not offering an “unconditional guarantee” that there will not be a prosecution.

What about corporate officers?

There are no guarantees. There are a few questions that will influence their course of action:

  • how involved were the individuals in the corruption (whether actively or through failure of oversight)?
  • what action has the company taken?
  • did the individuals benefit financially and, if so, do they still enjoy the benefit?
  • if they are professionals should the SFO be working with the appropriate Disciplinary Bodies?
  • should the SFO be looking for Directors’ Disqualification Orders?
  • should the SFO think about a Serious Crime Prevention Order?

Conclusion

The Serious Fraud Office is trying to take the same approach that the Department of Justice is taking. Companies should self-investigate, self-report and negotiate to avoid the harshest sanctions.

References:

Pension Security Act of 2009 and its Effect on Private Investment Funds

department-of-labor

I missed the introduction of the Pension Security Act. Rep Michael Castle introduced the bills in January and it was referred to the Committee on Education and Labor. It’s a short bill, but would have a big effect on the disclosure of investments in private investment funds.

The bill revises a section of the Employee Retirement Income Security Act (ERISA) and require of disclosure of which hedge funds the defined benefit pension plan has invested and the dollar amount of the investment.

The bill had a broad definition of “hedge fund”:

means an unregistered investment pool permitted under sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)(1), (7)) and section 4(2) of the Securities Act of 1933 (15 U.S.C. 77d(2)) and Rule 506 of Regulation D of the Securities and Exchange Commission (17 CFR 230.506).

The bill would require defined benefit pension plans on their annual financial statement to identify on a separate schedule, each “hedge fund in which amounts held for investment under the plan are invested as of the end of the plan year covered by the annual report and the amount so invested in such hedge fund.”

The Secretary of Labor,  in consultation with the Securities and Exchange Commission, would be charged with issuing initial regulations within one year.

References:

42

42

In Douglas Adams’ The Hitchhiker’s Guide to the Galaxy, 42 is the number from which all meaning  could be derived.

A group of hyper-intelligent pan-dimensional beings demand to learn the answer to the Ultimate Question of Life, the Universe, and Everything from the supercomputer, Deep Thought. It takes Deep Thought 7.5 million years to compute and check the answer. The answer turns out to be 42. Unfortunately, The Ultimate Question itself is unknown.

Wolfram Alpha gives you that answer. Google gives you that answer. Bing does not give you that answer.

Are you asking the right questions? Do you know what to do with the answer?