Year: 2010

Weekend Book Review: In Fed We Trust

It is only fitting that I am writing this book review on a Sunday. In Fed We Trust: Ben Bernanke’s War on the Great Panic starts off by telling about the importance of a few Sundays in 2008. In March, there was the Sunday when the Federal Reserve announced an unprecedented action to lend $30 billion to JPMorgan Chase to buy Bear Stearns. There was the Sunday in August when the Federal Reserve and the Treasury Department decided to seize Fannie Mae and Freddie Mac. Of course, there was the Sunday in September when they allowed Lehman Brothers to fail. There was the Sunday when Bank of America agreed to take over Merrill Lynch.

David Wessel tells a story about Ben Bernanke’s rule of the Federal Reserve deciding to do “whatever it takes” to protect the U.S. economy from the incredible economic threat of those Sundays. The story takes us through what it missed, what it did, what it didn’t do, what it got right and what it got wrong during the “Great Panic.”

During Alan Greenspan’s term as chairman of the Federal Reserve we mostly watched as he and the Board decided whether to raise interest rates or not. Most of the country thought that was the extent of what the Federal Reserve did. During Bernanke’s term we saw the incredible power of the Federal Reserve to create vast sums of money out of thin air.

One of the key takeaways from the book is that is very difficult “to get the politics, the policy and market reaction all right at the any one point in time.” That was a quote from former Secretary of the Treasury Henry Paulson shortly after leaving office.

The book is sometimes short on its depiction of events. The one that stuck out the most was the short description of the Merrill Lynch discussion by Bank of America’s Ken Lewis and Joe Price. The New York Attorney General tells a more interesting tale in his indictment of the Bank of America executives.

But of the book provides terrific insight into the events of the Great Panic. (That’s the term the Wessel uses.) During the full-court press of forcing the largest banks to take TARP money, it’s Merrill Lunch’s Thain that asks how taking the TARP money would affect government controls on executive compensation. As we later find out, Thain became one of the poster boys for the banks’ failures with executive compensation.

In the end, as we all know, mistakes were made. The Federal Reserve did not always get the politics, policy and market reaction right.

But what if Bernanke had not been a student of the Great Depression? What if he had not taken bold steps? I think the economy and the country would be much worse off.

Blogoversary!

anniversary present

Instead of substantive information, today’s post focuses on me and this website.

Compliance Building went public on February 12, 2009.  Since then, it looks like I have managed to get out a blog post every business day.  Sometimes, more than one.

Thanks for reading. If you haven’t done so already, you can subscribe and have my posts sent to you. It’s free, except on the Kindle. (I can’t convince Amazon to change the price.)

I started my first blog, KM Space, on this day in 2007. I set up Real Estate Space a few months later. Now I’m moving into my fourth year blogging.

Here are some statistics from the past three years:

Posts
Compliance Building 873
KM Space 614
Real Estate Space 144
Total: 1631

I hope at least some of those posts were useful to you, whether you are a subscriber or one of the other 90,000 or so visitors to Compliance Building.

Why do I do this? I publish because the information is useful to me, but I’m happy to have you along for the ride. (I put down my thoughts in more detail in the Why I Blog page.) This blog is a personal knowledge management tool.

For those of you who know me from KM Space, I will continue to publish a subset of my posts to the KMspace feed. No need to say goodbye. Unless I’m boring you.

Image is from Petr Kratochvil at publicdomainpictures.net.

California Proposes Having Placement Agents Register

Placement agents would have to register as lobbyists under legislation proposed by Assemblyman Ed Hernandez (D-West Covina). The legislation would define placement agents as lobbyists in accordance with the state’s Political Reform Act. Placement agents would have to register as lobbyists before pitching investment ideas to public pension plans in California.

It seems like the big California pension funds want access for pitches from small investment firms without their own marketing staff. So they are not following the lead of New York with its outright ban on placement agents.

The bill is sponsored by State Controller John Chiang, the California Public Employees’ Retirement System (CalPERS), and Treasurer Bill Lockyer.

The bill is straightforward, defining a placement agent as:

“any person or entity hired, engaged, or retained by, or acting on behalf of, an external manager, or on behalf of another placement agent, as a finder, solicitor, marketer, consultant, broker, or other intermediary to raise money or investment from, or to obtain access to, a public retirement system in California, directly or indirectly, including, without limitation, through an investment vehicle.”

There is an exemption for employees of external managers who spends at least one-third of their time managing the assets of their employer.

As a “placement agent” you are required to report quarterly on fees, compensation and gifts under the Political Reform Act (Government Code §81000-81016).

Sources:

Another Reason to Secure Your Wireless Network

Linksys WRT54GL

If you care about network security, you are probably well aware of the Massachusetts Data Privacy Law and its requirement to secure wireless networks.

But password-protecting a wireless router also has constitutional significance.

A child pornography suspect had no constitutionally protected privacy right in the files found on his personal computer, accessible by a neighbor who was piggybacking on his unsecured wireless network.

A neighbor stumbled across the shared files and alerted the local sheriff. After coming by to see the files, the sheriff ran license plates on cars on the street and found one nearby that was registered to a convicted sex offender. The sheriff then obtained warrants to determine the subscribers IP address and eventually to seize the computers.

Even though the defendant confessed on the spot, his lawyer tried to get all of the evidence thrown out claiming the sheriff violated the defendant’s reasonable expectation of privacy. The government disagreed and said the “defendant’s conduct in operating his home computer eliminated his right to privacy.”

The case ended up with Judge King in the Oregon’s United States District Court in the case of U.S. v. Ahrndt.

The case even quotes one of my favorite columns: The Ethicist by Randy Cohen in The New York Times: Wi-Fi Fairness Feb 8, 2004. Cohen came to the conclusion that “you may use but not overuse Wi-Fi hot spots you encounter.”

The judge steps over the issue of whether it is legal or not to access an open wi-fi hotspot, but is happy to point out that the accidental unauthorized use of other people’s wireless networks is a fairly common occurrence in densely populated urban environments.

“As a result of the ease and frequency with which people use others’ wireless networks, I conclude that society recognizes a lower expectation ofprivacy in information broadcast via an unsecured wireless network router than in information transmitted through a hardwired network or password-protected network.”

The judge also found “when a person shares files on iTunes over an unsecured wireless network, it is like leaving one’s documents in a box marked ‘take a look’ at the end of a cul-de-sac.” In the end, the defendant’s conduct in operating his software and maintaining his router diminished his reasonable expectation of privacy.

So not only, will improperly maintaining your wireless network open you to data loss and liability under privacy laws, but you diminish your constitutional protections.

Sources:

Proposed Amendments to Sentencing Guidelines

The United States Sentencing Commission has proposed some changes to the Federal Sentencing Guidelines. Of the eight changes, one should catch the eye of compliance professionals.

There is a proposed amendment to Chapter Eight of the Guidelines Manual regarding the sentencing of organizations, including proposed changes to §8B2.1 (Effective Compliance and Ethics Program) and §8D1.4 (Recommended Conditions of Probation — Organizations).

§8B2.1

In §8B2.1 (Effective Compliance and Ethics Program) they are inserting a new Note 6 that would add a new requirement for an effective compliance and ethics program. The note focuses on the steps to take after the detection of criminal conduct.

First, the organization must respond appropriately to the criminal conduct, including restitution to the victims, self-reporting and cooperation with authorities.

Second, the organization must assess its program and modify it to make the program more effective. They seem to encourage the use of an independent monitor to ensure implementation of the changes.

§8D1.4

The proposed amendment amends §8D1.4 (Recommended Conditions of Probation – Organizations) (Policy Statement) to simplify the recommended conditions of probation for organizations. The new section consolidates the list of conditions that are appropriate conditions for probation.

Request for Comments

In addition to the proposed amendment the Sentencing Commission has is considering an issue and are asking for comment:

Should the Commission amend §8C2.5(f)(3) (Culpability Score) to allow an organization to receive the three level mitigation for an effective compliance program even when high-level personnel are involved in the offense if

(A) the individual(s) with operational responsibility for compliance in the organization have direct reporting authority to the board level (e.g. an audit committee of the board);
(B) the compliance program was successful in detecting the offense prior to discovery or reasonable likelihood of discovery outside of the organization; and
(C) the organization promptly reported the violation to the appropriate authorities?

Written comments are due by March 22, 2010.

Sources:

Dan Pink on the Surprising Science of Motivation

Dan Pink, at TED Global in July 2009, broke tasks, performance and rewards for performance into two groups. With complex problems, financial rewards do not impact performance and seem to dull creativity. Actually, they seem to deter performance. With a simple problem and a simple set of rules, then contingent motivations for performance (like financial rewards) are very effective.

He comes to three conclusions:

  1. The twentieth century rewards that we think are part of business do work, but only in a surprisingly narrow band of circumstances.
  2. “If, then” rewards often destroy creativity.
  3. The secret to high performance is not rewards and punishments, but that a drive to do things because they matter.

There are some great lessons for compliance and corporate governance in the presentation. He explains it much better than I can. Take the 19 minutes to watch the video.

I have his book Drive: The Surprising Truth About What Motivates Us on my reading list. After watching this video, I have moved it higher up in the queue.

Thanks to Jack Vinson of Knowledge Jolt with Jack for pointing out this video: What is the right culture for your organization?

Compliance Bits and Pieces for February 5

Here are some interesting stories from the past week:

Can your Broker be your Facebook Friend? by Gil Yehuda on Gil Yehuda’s Enterprise 2.0 Blog

Can brokers set up blogs? What about the comments that people post to their blogs? Can brokers give financial advice on discussion forums? What if a broker sets up a forum where all their misleading advertising gets magically erased whenever a regulator visits the site? Sure, when you think of all the bad things that could happen, you may be glad this industry is regulated (of course those who got swindled wish the enforcement would be more effective).

FINRA Guidance on Social Media podcast (mp3) from Compliance Week

Compliance Week editor Matt Kelly talks with Eden Rohrer of the law firm Haynes Boone about new guidance from FINRA on social media usage among financial-sector workers. (Time: 9 min.; file size: 4.2 Mb)

The DOJ: Bringing Bribe-Takers to Justice? in the Wrage Blog

Anne Richardson of TRACE was present at ACI’s FCPA Bootcamp in Houston last week and provides this report on a possible new development in anti-bribery enforcement: “In the conference’s opening panel on January 26, 2010, Stacey Luck, Senior Trial Attorney in the Fraud Section, explained how the recent DOJ/FBI sting operation involving 22 executives from military and law enforcement equipment companies demonstrates several recent FCPA enforcement trends: (i) the focus on individuals, (ii) the use of traditional law enforcement tactics, (iii) the emphasis on industry-wide investigations, and (iv) greater international cooperation among enforcement authorities.

SEC Enforcement in 2009: A Year of Changes, with More This Year by Eduardo Gallardo, Gibson, Dunn & Crutcher LLP in The Harvard Law School Forum on Corporate Governance and Financial Regulation

In this review of enforcement in 2009, we focus on the significant enforcement developments of the second half of the year, as well as notable cases and important trends revealed by annual enforcement statistics, both those disclosed by the SEC, as well as those that result from our own analysis. We also look ahead to the significant developments to anticipate this year.

CFTC: Billy Ray and Winthrop Were Not Insider Traders by Bruce Carton in Compliance Week‘s Enforcement Action.

Earlier this week, Commodity Futures Trading Commission Chairman Gary Gensler clarified that no matter what you might have assumed back in 1983, Billy Ray Valentine (Eddie Murphy) and Louis Winthorpe III (Dan Aykroyd) did not commit insider trading when they made millions trading on orange juice futures in the movie Trading Places.

Under Proposed Budget, SEC Could Get $1.258B, Add Staff by Melissa Klein Aguilar in Compliance Week‘s The Filing Cabinet

The President’s budget request of $1.258 billion for the Securities and Exchange Commission for fiscal 2011 would increase the commission’s coffers by roughly $139 million, or 12 percent over its fiscal 2010 funding level, and would enable the agency to add about 380 staff positions.

Social Media and the Workplace: What Every Employer Should Know by Nixon Peabody

Employers must fully consider the use and misuse of social media at each stage of employment, craft appropriate policies and procedures consistent with their industry and firm culture, and apply such policies in a consistent and non-discriminatory way.

Fraud Charges Against Ken Lewis and Joseph Price

Bloomberg News

New York Attorney General Andrew Cuomo filed securities fraud charges against former Bank of America CEO Kenneth Lewis and former Chief Financial Officer Joseph Price. The Attorney General claims that the two decided not to disclose the enormous losses at Merrill Lynch & Co. before getting shareholder approval to acquire the Wall Street firm.

The Complaint is full of newsbites:

“Ultimately, this was an enormous fraud on taxpayers who ended up paying billions for Bank of America’s misdeeds. Throughout this episode, the conduct of Bank of America, through its top management, was motivated by self-interest, greed, hubris, and a palpable sense that the normal rules of fair play did not apply to them. Bank of America’s management thought of itself as too big to play by the rules and, just as disturbingly, too big to tell the truth.” (#1)

From the Frontline Report, Breaking the Bank, it sounded like Bank of America was strong-armed into completing the merger with Merrill Lynch. Ken Lewis had the choice of going ahead with the merger or losing the bank. The complaint addresses this point

“The evidence further demonstrates that almost immediately upon reviewing the December 12 loss analysis, the Bank planned to seek taxpayer aid to save the merger, and to use the empty threat of a MAC claim as leverage with the government in negotiations.” (#21.)

Politicians have been looking for heads to roll. That bloodlust has gotten even frothier with year-end bankers’ bonuses getting readied for distribution. Lewis and Price have their heads in the civil lawsuit guillotine.

Sources:

Zubulake Revisited: Six years Later

A new treatise has been written on field of electronic stored information and sanctions for spoliation. In the Amended Opinion and Order for The Pension Committee of the University of Montreal Pension Plan et al., v. Banc of America Securities, LLC, et al. Judge Shira A. Scheindlin of the Southern District of New York, addressed the issues of parties’ preservation obligations and spoliation in great detail.

The order identified several actions (or failures to act) which would result in a finding of gross negligence in upholding discovery obligations:

“After a discovery duty is well established, the failure to adhere to contemporary standards can be consi-dered gross negligence. Thus, after the final relevant Zubulake opinion in July, 2004, the following failures support a finding of gross negligence, when the duty to preserve has attached:

  • to issue a written litigation hold;
  • to identify all of the key players and to ensure that their electronic and paper records are preserved;
  • to cease the deletion of email or to preserve the records of former employees that are in a party’s possession, custody, or control; and
  • to preserve backup tapes when they are the sole source of relevant information or when they relate to key players, if the relevant information maintained by those players is not obtainable from readily accessible sources.”

The order establishes that sanctions for evidence spoliation require proof that: (i) the party had control over the evidence and an obligation to preserve it at the time it was lost or destroyed; (ii) acted with a culpable state of mind; and (iii) the lost or destroyed evidence was not only relevant to the innocent party’s claims or defenses, but also that party suffered real prejudice as a result.

Sources:

Adriana Linares of LawTech Partners supplied the image: http://www.flickr.com/photos/lawtechpartners/438634521/. Used with permission.

SEC Guidance Regarding Disclosure Related to Climate Change

Last week, the Securities and Exchange Commission voted to provide public companies with interpretive guidance on existing disclosure requirements as they apply to business or legal developments relating to the issue of climate change. The SEC has now released the text of the guidance:
Guidance Regarding Disclosure Related to Climate Change

Those who are fired up about global warming will be quickly underwhelmed by the guidance. At its most basic it merely reminds public companies that they need “to consider climate change and its consequences as they prepare disclosure documents to be filed with us and provided to investors.”

The guidance claims that it will does not create any new disclosure requirements. Given the increased regulation of emissions, cap and trade, and insurance company adjustments, companies need to disclose the potential impact of these changes on the future prospects of the company.

I expect we will see a new section in the annual filings this spring, some interesting reading and some inflammatory news reports.

The globe image is by Jackl under the Creative Commons Attribution ShareAlike 3.0 in Wikimedia: http://commons.wikimedia.org/wiki/File:Global_warming_ubx.svg.png