Month: October 2009

Compliance Bits and Pieces

Here are some interesting compliance stories that have not made their into their own posts:

Canada’s Commitment to Combating the Corruption of Foreign Public Officials: Watching Bill C-31 from the Wrageblog

Bill C-31, An Act to amend the Criminal Code, the Corruption of Foreign Public Officials Act and the Identification of Criminals Act, was introduced to Parliament on May 15, 2009. The timing of the bill’s first reading was clearly tied to the June 2009 release of Transparency International’s Progress Report on the Enforcement of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The TI Report criticized Canada, calling Canada a laggard, and listing it as one of 21 countries making little or no effort to enforce its anti-corruption laws.

The FCPA’s Murky Knowledge Element by Mike Koehler for the FCPA Professor

In a superb new piece titled, “The ‘Knowledge’ Requirement of the FCPA Anti-Bribery Provisions: Effectuating Or Frustrating Congressional Intent?,” – Kenneth Winer and Gregory Husisian of Foley & Lardner (the “Authors”) conclude that “[t]he DOJ and SEC … now interpret the knowledge requirement so broadly that they have effectively eviscerated the 1988 statutory changes thereby raising an important question: Are the DOJ and SEC frustrating the intent of Congress by ignoring the reason that Congress amended the FCPA?” (see here).

Changes to Cayman AML Guidance Notes from Compliance Avenue

According to recent changes to the Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands (the “Guidance Notes”), offshore funds registered in the Cayman Islands and regulated by the Cayman Islands Monetary Authority (“CIMA”) should designate and appoint a compliance officer (“Compliance Officer”) at the management level, who: . . .

How BAE Got Caught by Richard Cassin for the FCPA Blog

Investigative reporters may be disappearing from newsrooms everywhere, but they still have an important role to play in holding institutions and people accountable for overseas bribery. Rob Evans of the U.K. Guardian contributed an essay to TI’s Global Corruption Report 2009 here. It’s about how he and David Leigh broke the BAE story.

ERISA Bonding Requirements for Hedge Fund Managers by The Hedge Fund Lawyer

Hedge fund managers who manages hedge funds which exceed the 25% ERISA threshold will need to purchase a fidelity bond.  The questions and answers below on the ERISA fidelity bonding requirements were prepared by the Department of Labor which is the governmental agency which is in charge of enforcing the ERISA laws and regulations.

The Time I was Written Up for Blogging by New CommBiz

About a year and a half ago I was written up for blogging. It was kind of a weird moment and I’ve never really talked about it much. It wasn’t that big of a deal but I thought I’d share how it happened and what I learned from it.

Here’s what I did wrong:

  • Technically I responded to a “press inquiry” (nothing freaks out PR people more than employees talking to the press)
  • I talked about the layoffs and certain financial aspects of the company during the “quiet period”

Insider Trading Debates

Raj Rajaratnam

Insider trading is back in the news. The SEC has shown heightened interest in prosecuting these cases, evidenced by the high-profile arrest of Galleon hedge fund manager, Raj Rajaratnam, on civil and criminal charges.

One thing to keep in mind is that insider trading is not defined in the federal securities laws. The SEC has developed insider trading through an interpretation of Section 10(b) of the Securities Exchange Act of 1934 that insider trading is a “deceptive device” under that section and and the anti-fraud provisions of Rule 10b-5.

Given that, there has always been some academic discussion about whether insider trading should be illegal. That discussion moved to the front burner after an opinion piece by Donald J. Boudreaux in the Wall Street Journal: Learning to Love Insider Trading. Donald J. Boudreaux is Professor of Economics at George Mason University and a Senior Fellow at the Mercatus Center.

Mr. Boudreaux latches on to the argument that insider trading allows better information into the markets, allowing for greater economic efficiency. “When insiders trade on their nonpublic, nonproprietary information, they cause asset prices to reflect that information sooner than otherwise and therefore prompt other market participants to make better decisions.” He thinks the capital markets will reward companies that self-impose restrictions on insider trading and punish those that don’t. So, market discipline is better than government regulation and prosecution.

I see some interesting things in this argument. Obviously, we would need prompt and transparent information on when insiders make trades. Delayed reporting undercuts this efficient market argument.

The bigger problem is the shifting of rewards to individuals. It seems inherently unfair that an insider could get a windfall profit from information that is not available to a wider audience. The insider is always going to have better information and should always be ahead of the market.

I could see the perverse effect of insiders purposefully delaying the public release of information to increase their own personal reward. Even worse, they could give false signals to the public in order to sell their shares at a higher level or buy at a cheaper price.

In the end you prosecute companies for poor disclosure, while individuals inside the company profit. You still end up with the government looking over the corporate shoulder at the information they disclose and who benefits from it. Then the government decided whether or not to prosecute.

Regardless, the arguments are purely academic. Insider trading is illegal and compliance officers need to be vigilant to make sure it does not occur. The downfall of Galleon and Raj Rajaratnam should be a stark examples. The indictment on insider trading charges sent them plummeting into the abyss. Galleon has gone from managing billions to possibly going out of business in the course of a week.

References:

Amendments to the Private Fund Investment Advisers Registration Act

Capitol_dome

Enacting legislation is often compared to making sausage. I don’t think that the Private Fund Investment Advisers Registration Act is exception. I spent some time watching the House Financial Services Committee hearing on passing the Private Fund Investment Advisers Registration Act.

There were 13 proposed amendments, 8 of which were agreed to by the Committee. I tried incorporating these amendments into the text to see what happened earlier this week.

You can see my attempt hosted on JD Supra

Here are some quick thoughts:

  • The exemption for venture capital funds was retained.
  • There is a new exemption for investment advisers of private funds with less than $150 million. (There was a rejected amendment trying to have this level at $500 million.)
  • There is a one year transition rule, postponing the registration requirement until one year after the Act is passed.

References:

jdsupra-logo

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

Capitol_dome

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.