Year: 2010

Compliance Bits and Pieces: Ground Zero Mosque Edition

One part of compliance is investigation. Find the facts. Don’t rely on opinion or self-interest statements. With all the hullabaloo about the Ground Zero Mosque I thought I would gather some factual information.

First off. It’s not at Ground Zero.

Just How Far Is the “Ground Zero Mosque” From Ground Zero? by Matt Sledge in the Huffington Post

From 45 Park Place, the former Burlington Coat Factory building that will make way for the Cordoba House, it’s two blocks, around a corner, to get to the WTC site. Park Place doesn’t lie between the construction site and any mass transit stations, so you would need to go out of your way to have it offend you.

Mosques And A City Block (Update) by Scott Greenfield in Simple Justice

If someone was trying to build a Mosque on the Site, there would be one debate. But building a Mosque where the old Burlington Coat Factory used to be isn’t the Site. Not even close. It’s the equivalent of building it ten miles away in Houston. It’s a different neighborhood, climate, time zone. There are a couple of nudie bars, even another tiny Mosque, that far away, not to mention dozens of stores selling cheap junk. It’s not a pretty neighborhood. It’s not what people who don’t know Manhattan think it is. Not even close.

There’s a reason all the elected officials of both stripes in Manhattan think this whole debate is nonsense. They’ve been there and know what they’re talking about. This is being used by politicians to manufacture a debate that doesn’t exist. They are selling a fantasy to people who don’t know any better. This Mosque has absolutely nothing to do with the Site. It doesn’t besmirch anyone’s memory. It might as well be in another country for it’s impact on anything.

The Wikipedia page for Park 51 is full of links to great primary source material and (at least when I read it) mostly avoids opinions on the controversial project.

Park51, originally named Cordoba House and sometimes referred to in the media as the “Ground Zero mosque”, is a planned $100 million, 13-story, glass and steel Islamic community center and mosque. Plans are for the facility to include a 500-seat auditorium, theater, performing arts center, fitness center, swimming pool, basketball court, childcare area, bookstore, culinary school, food court serving halal dishes, and Islamic prayer space for 1,000–2,000 Muslims. It would replace an existing 1850s Italianate building that was damaged in the September 11 attacks, and is located two blocks (about 600 feet, or 180 meters) from the World Trade Center site in Manhattan, New York City.

Muslim Prayers and Renewal Near Ground Zero by Ralph Blumenthal in the New York Times

The location was precisely a key selling point for the group of Muslims who bought the building in July. A presence so close to the World Trade Center, “where a piece of the wreckage fell,” said Imam Feisal Abdul Rauf, the cleric leading the project, “sends the opposite statement to what happened on 9/11.” “We want to push back against the extremists,” added Imam Feisal, 61.

Mosque-erade from The Daily Show with Jon Stewart

The Daily Show With Jon Stewart Mon – Thurs 11p / 10c
Mosque-Erade
www.thedailyshow.com
Daily Show Full Episodes Political Humor Tea Party

SEC versus New Jersey

Fuggedaboutit!

New Jersey became the first state ever charged by the SEC for violations of the federal securities laws. They gave up without a fight and agreed to settle the case, without admitting or denying the SEC’s findings.

This matter involves the sale of over $26 billion in municipal bonds from August 2001 through April 2007. In 79 municipal bond offerings, the State misrepresented and failed to disclose material information regarding its under funding of New Jersey’s two largest pension plans, the Teachers’ Pension and Annuity Fund and the Public Employees’ Retirement System. Among New Jersey’s material misrepresentations and omissions:

  • Failed to disclose and misrepresented information about 2001 legislation that increased retirement benefits for employees and retirees those pension plans.
  • Failed to disclose and misrepresented information about special Benefit Enhancement Funds initially intended to fund the benefits, but then abandoned.
  • Failed to disclose and misrepresented that New jersey would be unable to fund the increased benefits without raising taxes or cutting services.

This case is a clear warning sign for states and cities that are running into retirement funding problems. You need to disclose those problems in the bond offering.

An interesting note is that the State Treasurer signed a 10b-5 certification that the official statement did not contain any material misrepresentations or omissions. The Treasurer was not charged.

The SEC only brings civil charges, so we don’t get to see Robert Khuzami driving up the New Jersey Turnpike trying to slap handcuffs on the state.

Sources:

Criminal Provisions under Dodd-Frank

handcuffs

When thinking designing compliance programs, I pay extra attention to the issues that can result in jail time. It’s one thing to pay a fine, it’s a much bigger problem when you take someone’s freedom away.

The Dodd-Frank Wall Street Reform & Consumer Protection Act has added several new federal criminal offenses. The National Association of Criminal Defense Lawyers has compiled the two dozen provisions in a handy guide: Criminal Provisions in HR 4173 (list of the criminal provisions in Dodd-Frank Wall Street Reform & Consumer Protection Act).

Most of these new opportunities to earn a shiny pair of bracelets are related to the new regulatory regime of swaps.

EWWW! The Connections Between Disgust and Morality

What if our moral judgments are simply that a situation makes us feel like throwing up?

Drake Bennett explores some of the new research and thinking in how our moral ideas may have evolved from our more visceral feelings of disgust in Ewwwwwwwww! The surprising moral force of disgust.

The moral emotions model has another radical implication as well. It means morality is not, as the Buddha and St. Augustine said, a way to curb our animal desires: It’s simply an outgrowth of that same animal nature.

The origins of disgust are mysterious. But so are the origins of morality. Both are partly through biological selection and partly as a taught behavior.

The facial expression triggered by disgust is also a social cue: “a visible signal of disgust at both bodily and behavioral transgressions, and an unmistakable warning to the transgressors themselves.”

I think there were lots of “that smells bad” looks last week after the Mark Hurd/H-P brouhaha.

Image of mushroom 6 smells bad! is by Amy.

The Ascent of Money: A Financial History of the World

Niall Ferguson had the unfortunate luck of writing The Ascent of Money just before the unveiling of the 2008’s Great Panic. At the time he finished writing the book in May 2008, only $318 billion of write-downs had been acknowledged.

I was interested in the book because of its focus on the development of our financial institutions. If we want to understand the present and hope to have some insight to the future, then we need to understand the past.

Ferguson starts with the origin of money, “the crystallized relationship between debtor and creditor.” Effectively turning counting into wealth. Once you had money, then you needed banks and clearing houses to aggregate borrowing and lending.

Then the government got involved and introduced government bonds (largely to wage war and pay for the extravagant spending of the monarchies.) This lead to the securitization of streams of payments and highlighted the need for the regulation of securities markets.

Then the sixteenth century brought the rise of the joint stock companies and the market for the trading of these equity interests.

The rise of insurance funds and pension funds in the eighteenth century used the economies of scale and the laws of averages to provide financial protection.

The nineteenth century saw the start of option and future contracts. These eventually morphed into the more sophisticated derivatives seen as a central player the Great Panic.

The last piece was the emphasis on real estate ownership that became a central policy for the twentieth century. This policy, combined with more sophisticated derivatives, became the maelstrom of the 2008’s Great Panic. At the time, the creators and sellers of these products boasted of allocating risk to those “best able to bear it,” when the reality was more that it was being allocated to “those least able to understand it.”

He ends the book with a lengthy afterward called “The Descent of Money.” Those with the pitchforks and torches chasing the bankers will not like where Ferguson ends up. “[F]inancial markets are like the mirror of mankind, revealing every hour of every working day the way we value ourselves and the resources of the world around us. It is not the fault of the mirror if it reflects our blemishes as clearly as our beauty.”

We need to remember that the ascent is not a straight line. It is full of rapid drops, rising bubbles and death-defying falls. “If stock market movements followed the ‘normal distribution’ …, an annual drop of 10% would happen only once every 500 years, whereas on the Dow Jones it has happened about once every five years.”

He spends some time looking at Long Term Capital Management and their collapse in the late 1990s. These quant traders used sophisticated models to identify correlations and uneven pricing. Ferguson focuses on a flaw in their data for their downfall. Their models worked on just five years of data. If they had gone back 11 years, they would have captured the 1987 stock market crash and seen the volatility and unseen correlations.

This fatal flaw sounds much like the flaw in the Gaussian copula function that failed in assessing the risks for mortgage backed securities. They used ten years worth of data in that formula. Unfortunately, the last real estate crash predated that data.

A failure to understand history lead to yet another fatal flaw.

Ferguson does a great job of shedding light on the origins of finance. If you have an interest in finance, then you need to understand the history of finance. The Ascent of Money is worth the time spent reading it.

Sources:

Compliance Bits and Pieces: Mark Hurd Special

Mark Hurd

Last Friday, the big news in compliance was the sudden resignation of Mark Hurd as the CEO and Chairman of the Board of Hewlett-Packard. I decided to put together a compilation of other stories I found interesting.

HP and me: Coincidence or not? by Michelle Leder in Footnoted

Of course, footnoted had done its own poking at HP over the years. But one piece that seems particularly prescient right now in light of the shared meals between Hurd and the recently named consultant, Jodie Fisher, is this post from nearly two years ago that talked about some hefty gross-ups for Hurd’s meal. As we noted at the time, we used some back-of-the-envelope math to come up with a total meal bill of $243K. Several days later, HP filed a revised proxy to say that $79,814 tax gross up that was originally reported was actually only $4,117, which we viewed with a healthy serving of skepticism.

(It’s good to see Michelle back after having a baby. Congratulations Michelle!)

Hurd and ethics? Nah, it’s the money by Dennis Howlett in ZDNet’s Irregular Enterprise

The old saying that money talks while BS walks is a good standby but it doesn’t always apply. Sometimes money blinds you. As it seems to have done over some of Hurd’s expenses and the board in bending over to make a messy settlement.

The FCPA – Tone at the Top and in the Middle by Tom Fox in the FCPA Complaince and Ethics Blog

We have previously noted that Hewlett-Packard is under investigation for allegations of paying bribes to obtain commercial sales contracts in Russia. (See here and here) Given the current situation with the former Chairman and Chief Executive and the ongoing bribery investigation by not only German and Russian governmental authorities but also the SEC and Department of Justice for possible FCPA violations, it might be a propitious time for Hewlett-Packard’s top management to implement some or all of Hanson suggestions regarding the communication of Hewlett-Packard’s commitment to FCPA compliance and ethics to its middle management and indeed throughout its organization.

HP, Hurd, Deloitte and Tone at the Top by Francine McKenna in re: The Auditors

What do HP, Boeing and Navistar have in common?  All three companies, over the years, have fought SEC investigations, internal investigations, and shareholder lawsuits. … There’s one more thing these three companies have in common:  Deloitte was their auditor during the worst of these troubles.

The Week in Ethics: Mark Hurd’s Leadership Failure by Gael O’ Brien in The Week in Ethics

Tone at the top only counts when leaders use words that they believe in enough to live.

HP’s letter to employees on Hurd resignation from cnet

On Friday afternoon [Chief Financial Officer Cathie] Lesjak sent a memo to company employees explaining the leadership change and going into some detail about the nature of the claim, and the results of the the HP board of directors’ investigation. CNET has obtained a copy of that e-mail, which we’ve posted below in its entirety.

Here’s The Real Reason HP CEO Mark Hurd Was Fired (As Best We Can Tell…) by Henry Blodgett in Business Insider

Now that everyone has gotten over the shock of HP CEO Mark Hurd getting ejected on an August Friday afternoon–with the timing of the announcement obviously chosen to minimize bad PR–people are looking more closely at the details. And the details leave big questions as to what really happened.

How HP General Counsel Michael Holston Handled CEO’s Sex Harassment Nightmare by Sue Reisinger in Corporate Counsel

For Hewlett-Packard Company general counsel Michael Holston the nightmare began when CEO Mark Hurd handed him a June 29 letter accusing Hurd of sexual harassment. Hurd took the letter to Holston, reportedly within a half hour of receiving it.

Mark Hurd’s Excesses Were in Plain Sight by Eric Jackson in The Street

There are lots of good CEOs who suddenly lose their touch. What alarmed me about Hurd last year was the piggish behavior he and his executive team were exhibiting at the expense of H-P shareholders. What was worse, they were gorging at the trough of lavish compensation and excess perks at the same time that they were hypocritically turning the screws on H-P employees (who remained after a series of layoffs) to accept pay cuts and reduced benefits.

I wrote about the mixed messages from H-P

Changes to the Qualified Client Standard

In addition to the changing standard for an accredited investor, the standard for a “qualified client” under the Investment Advisers Act is also changing. Section 418 of the requires the SEC to increase the standard.

SEC. 418. QUALIFIED CLIENT STANDARD.
Section 205(e) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–5(e)) is amended by adding at the end the following: ‘‘With respect to any factor used in any rule or regulation by the Commission in making a determination under this subsection, if the Commission uses a dollar amount test in connection with such factor, such as a net asset threshold, the Commission shall, by order, not later than 1 year after the date of enactment of the Private Fund Investment Advisers Registration Act of 2010, and every 5 years thereafter, adjust for the effects of inflation on such test. Any such adjustment that is not a multiple of $100,000 shall be rounded to the nearest multiple of $100,000.’’.

Unlike some of the arguments over whether the accredited investor standard should be adjusted based on inflation, this standard is explicitly tied to inflation.

The definition of a qualified client is set out in Rule 205-3.

Currently, the investor has to have at least $750,000 under management with the adviser/fund.  That standard was adopted in July 1998. Using the CPI-U of 163.2 in  July 1998 and 217.965 in June 2010, the minimum investment amount should increase to $1,000,000.

The net worth amount of $1.5 million was also adopted in July 1998. Using the same ratio, I would expect the minimum net worth to rise to $2 million.

As for private  funds, Rule 205-3 requires a look -through from the fund to the investors in the fund. If the fund is relying on the 3(c)(7) exemption from the Investment Company Act then the fund’s investors should all be qualified purchasers or knowledgeable employees and you won’t need to look much further.

If the fund is using the 3(c)(1) exemption, then it will need to take a closer look at its investors to make sure that each is a qualified client.

Sources:

That fancy SEC logo appeared briefly on the SEC’s website on Monday. (Thanks for pointing this out Bruce.) It was odd enough that I thought it should be re-used.

Be the Mayor, not the Sheriff

Are you getting in the way or helping to move your organization forward?

Inevitably, compliance professional will need to step in and stop an activity or start a discipline process for someone who broke the rules. That does not have to be the primary focus of the your job, or the compliance profession.

Frank Sheeder, of the Healthcare Compliance Blog put together a story on How to Fail as a Compliance Officer. Number two on the list was “Acting like the sheriff instead of the mayor.”

That lead to a childhood flashback of the old McDonald Land populated by Mayor McCheese and Officer Big Mac, with the Hamburglar stealing burgers, the Fry Guys stealing fries, and Captain Crook trying to steal the Filet-o-Fish. I vaguely remember Grimace originally stealing shakes, before he became more law-abiding (and more cuddly with fewer arms).

Of course you need an enforcement function. You need to punish an offender, even if he is the CEO (well, sort of).

The primary function of compliance should be educating the employees about the rules. You should evaluate rules that are causing problems and see if there is a better way to deal with the issue. You should look for weaknesses in the company’s operations and policies so you can improve them.

Be the mayor. Wear a sash instead of a badge.

Images are property of McDonald’s, who apparently stole them from Sid and Marty Krofft, the creators of H.R. Pufnstuf, Sid & Marty Krofft Television Productions, Inc. v. McDonald’s Corp., 562 F.2d 1157 (1977)

How Does Your Hotline Compare?

Does your hotline ring off the hook with complaints? Is it silent? Are the complaints mostly that the employee thinks his boss is a jerk?

The Network and BDO Consulting published their 2010 Corporate Governance and Compliance Hotline Benchmarking Report. The 2010 report provides an analysis of compilation of more than 500,000 reports from over 4,000 organizations throughout the five-year period covering 2005 to 2009.

Most of the report deal with a per 1,000 employee standard so you can do the math to figure out where your organization sits compared to other companies. They break the employee size into 5 groups: (0-5,000;5,001-10,000;10,0001-20,000; 20,001-50,000; and 50,000+). One interesting item is that report frequency is greater for the smallest organizations than it is for the largest organizations.

Retail has lost its crown as having the most reports to transportation, communication & utilities.

Industry 2005 2009
Construction 2.66 6.96
Finance, Insurance & Real Estate 5.61 8.28
Manufacturing 3.40 4.10
Mining 2.32 3.81
Public Administration N/A 8.66
Retail Trade 18.00 11.09
Service Industries 7.33 10.52
Transportation, Communication & Utilities 9.67 12.80
Wholesale Trade 11.67 7.67
Overall 9.44 8.58

One item that has remained steady is that in 71% of the reports, the participant did not notify management before making the report. Personnel management still takes up about half of the reports. Posters are still the top source for creating awareness about the hotline.

Sources:

Mixed Messages from H-P

On Friday, Hewlett-Packard fired its CEO because he violated the company’s code of conduct. Mark Hurd had submitted inaccurate expense reports.

That sounds like a good message from the Board. Anyone can be fired for violating the code.

However, Mr. Hurd was given a severance package that may be worth more than $35 million, including a cash payment of $12.2 million. He violated the code, but was not fired “for cause” so he gets to keep his severance package.

That sounds like a bad message from the board. If it is company policy to fire someone for violating policy, then you should fire him and deny him severance.

However, as a top executive, Hurd had an employment agreement that better defined “cause for termination.” Cause involves “material neglect” of an individual’s duties or conduct “that is not in the best interest of, or is injurious to, H-P.” Mr. Hurd’s $20,000 of inaccurate expenses probably did not meet that standard.

Mr. Hurd stepped into the role of CEO after the poorly handled corporate espionage investigations by the prior CEO Carly Fiorina. He talked about improving the ethics of H-P.

Hewlett-Packard’s Standards of Business Conduct starts off with the headline test: “Before I make a decision, I consider how it would look in a news story.”

Mr. Hurd should have taken his own test.

Sources: