Year: 2010

Real Estate, China and the FCPA

China is hotbed for violations of the Foreign Corrupt Practices Act. The real estate industry is not immune from the dangers. In February of 2009 Morgan Stanley’s real estate group reported an employee based in China in an overseas real estate subsidiary that appeared to have violated the Foreign Corrupt Practices Act.

My company has significant business relationships with CB Richard Ellis so it saddens me that they are the latest to report a problem under the FCPA.

As a result of an internal investigation that began in the first quarter of 2010, the Company determined that some of its employees in certain of its offices in China made payments in violation of Company policy to local governmental officials, including payments for non-business entertainment and in the form of gifts. The payments the Company discovered are minor in amount and the Company believes relate to only a few discrete transactions involving immaterial revenues. Nonetheless, the Company believes that the payments may have been in violation of the U.S. Foreign Corrupt Practices Act or other applicable laws. Consequently, the Company voluntarily disclosed these events to the U.S. Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”) on February 27, 2010 and has continued to cooperate with both the DOJ and the SEC in connection with this investigation. The Company engaged outside counsel to investigate these events and has implemented thorough remedial measures.

In addition, in the third quarter of 2010, the Company began another internal investigation, with the assistance of outside counsel, involving the use of a third party agent in connection with a purchase in 2008 of an investment property in China for one of the funds the Company manages through its Global Investment Management business. This investigation is ongoing and at this point the Company is unable to predict the duration, scope or results thereof. In light of the Company’s cooperation with the DOJ and the SEC as described above, the Company voluntarily notified both agencies of this separate internal investigation and will report back to them when the Company has more information.

The real estate industry should be just as concerned about bribery of foreign officials as any other industry. Perhaps even more so. Real estate is inherently local and you undoubtedly need to deal with government officials to get building permits, occupancy permits, zoning approvals and a myriad of other interactions.

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Revoking a Subscription Agreement

Private equity funds investors sign a subscription agreement, promising to deliver cash when the fund makes a capital call. In a recent Delaware case, investors sought to revoke their subscription agreements and recover their capital contribution. They were investors in a Lehman Brothers sponsored investment fund.

In 2007 the three plaintiffs became limited partners in Lehman Brothers Merchant Banking Partners IV L.P. After Lehman declared bankruptcy, the the Fund’s management team bought out Lehman, took over the Fund’s general partner and investment advisor, and changed the Fund’s name to Trilantic Capital Partners IV, L.P.

Among the other investors in the fund was Lehman Brothers itself. The company had made a $250 million capital commitment. The fund itself was not part of the Lehman bankruptcy estate, but the general partner’s interest, the investment advisor and the $250 capital commitment were involved.

The plaintiffs told the fund they would not make any capital calls after they heard of the Lehman bankruptcy. That was probably a sensible position to take initially.

But the fund emerged from the Lehman bankruptcy proceedings. The existing fund management team would stay in place. A third party capital source funded their purchase of Lehman’s general partner interest and investment adviser. The investor also agreed to assume the unfunded and uncommitted portion of the Lehman’s capital commitment. The management team offered all the limited partners a chance to reduce their capital commitments. Ultimately, the fund reduced in size from $3.3 billion to $2.6 billion.

These three plaintiffs sought a rescission based on three counts: supervening frustration, mutual mistake and violations of the Texas Securities Act.

Supervening frustration

“The doctrine of supervening frustration can be invoked ‘[w]here, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made.’ … The doctrine does not apply if the supervening events were “reasonably foreseeable, and could (and should) have been anticipated by the parties” at the time of contracting.”

The limited partnership agreement contemplated that Lehman might transfer its general partnership interest and the fund would continue to operate. The LP Agreement also contemplated the potential bankruptcy of Lehman.

This claim did not even come close to working.

Mutual mistake

“Under this doctrine, a party can rescind an agreement if (i) both parties were mistaken as to a basic assumption underlying the agreement; (ii) the mistake materially affects the agreed-upon exchange of performances; and (iii) the party adversely affected did not assume the risk of the mistake.”

The plaintiffs claimed they were mistaken about Lehman’s financial condition and the continued presence of Lehman was one of their basic assumptions. The LP agreement contemplated the removal of Lehman. The private placement memorandum made not representations about Lehman’s financial health. The subscription agreement stated that the investors were not relying on any other representations.

This claim did not even come close to working.

Texas Securities Act

“This statute prohibits the soliciting of an investment ‘by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they are made, not misleading.’”

The plaintiffs claimed that Lehman failed to disclose its financial instability. Given this instability, its unlikely Lehman could continue its sponsorship of the fund.

But the false statements were in Lehman’s public filings, not the fund documents. They failed to show that the subscription agreement, the limited partnership agreement or the PPM contained any representation about Lehman’s financial health. They merely pointed to general statements in the PPM about how the fund would benefit in the future from its affiliation with Lehman.

The plaintiffs also failed to allege that the fund knew its representations about Lehman were “false when made.” It failed the scienter requirement under the Texas Securities Act.

It’s tough for a fund to get in a fight with its investors. Here, it was the investors who filed suit. it was probably sensible to resist making capital calls when Lehman filed bankruptcy. Once the fund survived and was spun out with the existing management team, the investors should have re-thought their position.

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Embarrassment from the American Bar Association

As the head of compliance, I frequently call on a team of lawyers for advice on how to interpret the law and move that interpretation into implementation. As a consumer of legal services, I have an interest in innovation and improvements in the delivery of those services. As an former practicing lawyer, I understand the challenges.

The American Bar Association ran a  Legal Rebels contest on the theme of “What innovation will be most valuable to you in your future practice as a solo practitioner?”

I don’t deal with solo practitioners very often for legal advice, even though they represent a big portion of legal practice. Having left a big law for compliance, I’m now more like a solo practitioner (without having to look for clients.)

I was interested to hear what innovations the ABA found interesting. The crop of runners-up was a mixed bag. With some interesting thoughts and some mere statements that technology alone will be innovative.

I was hoping the winner would offer something new and interesting about improving the delivery of legal services, legal skills or the delivery of client service.

The winner thinks a fancy answer machine will be the most valuable innovation: Solo Dreams of Full-Functioning Digital Messaging Assistant.

Kevin O’Keefe and Scott Greenfield already expressed their dismay. I think this one of the worst things to come out of American Bar Association. I don’t see how this would help the lawyer. I don’t see how this helps you be a better lawyer or deliver better client service.

For the most part, lawyers are dealing with their clients at a critical time in their lives: divorce, imprisonment, merger, bankruptcy, internal investigation, etc. A personalized greeting from a robot on the phone is not going to make me think any better of the lawyer.

For me, simple questions can be answered by email. More complicated issues and more problematic issues require a real person. Do you feel better about a service provider because you can handle transactions through voicemail?

Parts of the lawyers day can be handled by technology, but personal interaction between the lawyer and the client cannot.

Maybe the ABA should just stick with selling skateboards.

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Compliance Bits and Pieces for October 1

Here are some recent compliance-related stories that I found interesting:

The face of the financial crisis by Larry Ribstein in the Creative Destroyer

We need somebody we can send off to jail. Jail apparently provides the moral clarity necessary to wrap up a financial crisis. Bernie Madoff’s just an old-fashioned fraud from another era. The Justice Department has sent almost 3,000 people to jail for financial fraud between October, 2009 and June 2010, but no faces.

House Passes Impotent Debarment Bill by Mike Koehler in FCPA Professor

On September 15th, the House, by a unanimous 409-0 vote, passed H.R. 5366 (“Overseas Contractor Reform Act”) (see here). The Act generally provides that a corporation “found to be in violation of the [FCPA’s anti-bribery provisions] shall be proposed for debarment from any contract or grant awarded by the Federal Government within 30 days after a final judgment of such a violation.” The Act’s key trigger term for debarment – “found to be in violation” of the FCPA’s anti-bribery provisions – is a trigger that is not reached in nearly every FCPA enforcement action because of the façade of FCPA enforcement. Thus, the Act represents impotent legislation.

Small Change – Why the revolution will not be tweeted by Malcolm Gladwell in the New Yorker

Innovators tend to be solipsists. They often want to cram every stray fact and experience into their new model. As the historian Robert Darnton has written, “The marvels of communication technology in the present have produced a false consciousness about the past—even a sense that communication has no history, or had nothing of importance to consider before the days of television and the Internet.” But there is something else at work here, in the outsized enthusiasm for social media. Fifty years after one of the most extraordinary episodes of social upheaval in American history, we seem to have forgotten what activism is.

After Dodd-Frank, SEC Getting At Least One FCPA Tip A Day in WSJ.com’s Corruption Currents

The Securities and Exchange Commission has been receiving at least one tip a day about potential foreign bribery violations since a whistleblower bounty program became law in July, according to a person familiar with the matter.

A Tale of Two Strategies for SOX Compliance by Matt Kelly in Compliance Week‘s the Big Picture

Only that elite group can manage the responsibility of working with public investors—people so far removed from the corporation itself, that they have no choice but to trust in the accuracy of financial statements. SOX is one measure this country uses to determine which corporations belong in that group, and which don’t. Alloy Steel and Facebook both said today that they don’t, and they deserve praise for it. This is how the system is supposed to work.

Image of Bits & Pieces is By Thunderchild7.

Materials from Social Media Policies

Virtual Corporate Counsel Forum

As a follow-up to my presentation on social media polices at the Virtual Corporate Counsel Forum, I’m publishing the slide deck and links to some of the items I discussed.

Social Media Policies

Download the Slidedeck: ALM social media policy

FTC Action against Ann Taylor

FTC Action Against Reverb

SEC Guidance on the Use of Company Websites

Organized Labor and Social Media Policies

Advice Memorandum from the National Labor Relations Board in Sears Holdings (Roebucks) Case 18-CA-19081

Basic policy:
Be professional, kind, discreet, authentic. Represent us well. Remember that you can’t control it once you hit “update.” by Jay Shepherd on his Gruntled Employees blog

In the slide deck, I mention PBworks. I serve on a board of advisers for them and have a financial interest in the company.

Organized Labor and Social Media Policies

While preparing for my presentation today on social media policies, I came a cross this great article by Seth Borden: Labor Disputes Arising out of Social Media.

Having organized labor in your workforce will complicate the creation and enforcement of a social media policy. Potential unionizing activities offer similar problems. Employers must consider traditional labor law principles when creating and enforcing workplace social media policies.

The National Labor Relations Board has issued advice on social media policies. Sears had a policy that prohibited “disparagement of company’s or competitors’ products, services, executive leadership, employees, strategy, and business prospects.” The NLRB’s Division of Advice concluded that the charge against Sears should be dismissed. However, Mr. Borden concludes that the current make-up of the NLRB is more labor friendly and could rule the other way if again presented with a similar policy.

The challenges of drafting a social media policy will be to carry the existing law involving email and surveillance limitations to the current age of web publishing. This is not a unique challenge. You can see the same challenge with FINRA in the financial services industry.

If you have organized labor in your workforce and are concerned about social media use by your employees you should spend a few minutes and read Borden’s article.

Seth Borden is a partner in the New York office of McKenna Long & Aldridge and a member of the firm’s labor and employment practice. He co-writes the firm’s blog, Labor Relations Today, covering developments in labor law.

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Image of Unfair to Organized Labor sign is by Thomas Hawk

Virtual Corporate Counsel Forum: Social Media Policies

Virtual Corporate Counsel Forum

The folks at ALM are producing an online version of their Corporate Counsel’s annual General Counsel Conferences. I’m stepping in to fill a lat minute vacancy for one session: Social Media Policies: Crafting a Uniform Policy Across your Organization and Enforcing It. I’ll be joining Valerie L. Boccadoro, Director and Senior Intellectual Property Counsel at Toys R Us. I will be sharing my social media policies database and some thoughts on the regulatory issues that affect web publishing.

Registration is free, but is only open to general counsel/in-house corporate counsel.

Here is the full agenda for the day:

9:15 – 10:15 am

Social Media: Privacy & Security (CLE Eligible)

  • Ensuring your organization’s intellectual property is safe and protected
  • Protecting your clients and your employees
  • Twitter, Linked-in and Facebook: Exposure, liability and consequences
  • Watching the web: what do you have out there and how did it get there?

Bill McComas, Esq.
Partner
Shapiro Sher Guinot & Sandler
Michele Gibbons
Partner
Mayer Brown

10:15 – 11:15 am

Selecting the Right Fee Arrangement (CLE Eligible)

In view of the high cost of litigation in the face of shrinking corporate budgets, the need to select the right fee arrangement for an organization’s disputes is becoming more and more important. Our speaker, an experienced patent litigator, will review the options available to in-house counsel and outside counsel in setting up the right kind of fee arrangement, including identifying:

  • factors involved in determining what kinds fee arrangement makes sense in the context of the particular dispute;
  • different kinds of fee arrangements which are potentially available and discussing the best circumstances for considering each kind of arrangement;
  • cost saving techniques to reduce unnecessary expenditures; and
  • best practices for matching litigation activities to client goals and resources


Charles R. Macedo, Partner, Amster, Rothstein & Ebenstein;
Author, The Corporate Insider’s Guide to US Patent Practice, published by Oxford University Press

11:30 am – 12:30 pm

Effective Information Management Improves Corporate Litigation Readiness (CLE Eligible)

Information Management means different things to different people. For corporate legal departments with increasing eDiscovery demands and decreasing legal budgets, Information Management is a way to meet eDiscovery requirements, lower their legal risk and operate within budget. Many organizations do not have a tested process and therefore expend resources and dollars beyond what is necessary. This presentation will:

  • Review current Discovery responsibilities
  • Discuss how an organization’s data infrastructure won’t lend itself to effective and efficient eDiscovery
  • Review Information Management best practices to better proactively prepare for eDiscovery

William Tolson
Director of Product Marketing/Evangelism
Iron Mountain
William F. Savarino
Partner
Cohen Mohr LLP

12:30 – 1:30 pm

The Real Rate Report: Understanding the True Drivers of Legal Costs (CLE Eligible)

CT TyMetrix, in collaboration with The Corporate Executive Board’s Legal and Compliance practice/General Counsel Roundtable, brings you the industry’s first (and only) quantitative analysis of over $4 Billion in legal spend from more than 4,000 law firms and 50,000+ individual billers. The 2010 Real Rate Report will provide corporate legal departments, claims organizations and law firms with the first reliable benchmark data on law firm pricing, staffing practices, and realized rates across geographies, practice areas, matter types and timekeeper types.

The session will discuss how putting data to work can provide perspectives on trends and practices. The session will highlight reliable benchmarks that can be used to evaluate and negotiate rates across geographies, practice areas, professional levels, and other segments, as well as other insights.


Craig Raeburn
Vice President of Product Management
CT TyMetrix
Keith Brown, Esquire
Lead Business Consultant
CT TyMetrix

1:45 – 2:45 pm

Management, Measurement and More – Best Practices for Maximizing Your Legal Spend

As many law departments continue to face budget cuts, in-house counsel are challenged to find new ways to maximize their legal spend and control costs. Join LexisNexis® CounselLink™ representatives and in-house counsel from leading law departments as they share their perspectives on:

  • The impact of the dynamic economic climate on their law departments and the reporting tools used to optimize and justify spending decisions – comparing the decline in 2009 to the predicted upward trend in 2010
  • Alternative fee arrangements and how the right data and reporting can help identify outside counsel that are underperforming
  • In-sourcing versus outsourcing legal work, and the considerations and methods to make smarter decisions
  • Managing relationships with outside counsel and how using metrics and reporting can help ease difficult dialogues and garner greater productivity

Don’t miss this opportunity to the hear best practices and first-hand experiences of our GC panelists who have found the right balance between their budget and their business needs and improved the management and efficacy of their law departments.


Mary Clark
Vice President of Law
LexisNexis
Patrick Ryan
Director of Administration
City of Chicago Department of Law
Robin Sangston
Vice President, Legal Affairs and Chief Compliance Officer
Cox Communications, Inc.

2:45 pm – 3:45 pm

Social Media Policies: Crafting a Uniform Policy Across your Organization and Enforcing It (CLE Eligible)

  • Social Media and the struggle to keep IT, compliance & legal up to date
  • Policies and protocols to monitor and manage the burgeoning communications
  • Understanding the risks involved with the technology before you dive in
  • Creating a policy beyond banning social media all together
  • Using the tools to create realistic and enforceable social networking policies

Valerie L. Boccadoro
Director and Senior Intellectual Property Counsel
Toys R Us
Doug Cornelius
Chief Compliance Officer
Beacon Capital Partners, LLC.

4:00 pm – 5:00 pm

Driving Risk Out of the eDiscovery Process (CLE Eligible)

From the obligation to identify and preserve, through to the critical processes of analysis and review, the entire eDiscovery process can be complicated and cumbersome.  Developing and executing an eDiscovery preparedness plan that is repeatable, defensible, and cost effective often presents a challenge, considering the legal risks and enormous amount of time and resources it can consume if done without the proper people, processes and tools.

This presentation will help attendees understand how their organizations can:

  • Create a foundation for an organized, systematic, and defensible approach to eDiscovery – resulting in predictable legal costs and reduced risk
  • Analyze data in the wild, and in real-time – making more informed strategic legal decisions earlier in the eDiscovery process and reducing downstream review fees
  • Create a symbiotic relationship between legal and IT – ensuring legally defensible audit trails throughout the eDiscovery process

Keith Zoellner
Chief Technology Officer
StoredIQ
Ursala Talley
Vice President, Marketing
StoredIQ
Jake Frazier
Managing Director
Huron Consulting Group

New York Stock Exchange and Corporate Governance

Last week, the NYSE Euronext released the final report of the NYSE–sponsored Commission on Corporate Governance. The report identified 10 core governance principles. They cover the scope of the board’s authority, management’s responsibility for governance and the relationship between shareholders’ trading activities, voting decisions and governance.

The Commission on Corporate Governance was established in the fall of 2009 to examine core governance principles that could be widely supported by issuers, investors, directors, experts, and other market participants. These stakeholders have different viewpoints on governance issues, but the NYSE hoped they could find a consensus.

They started with the 10 core principles:

  1. The Board’s fundamental objective should be to build long-term sustainable growth in shareholder value for the corporation;
  2. Successful corporate governance depends upon successful management of the company, as management has the primary responsibility for creating a culture of performance with integrity and ethical behavior;
  3. Good corporate governance should be integrated with the company’s business strategy and not viewed as simply a compliance obligation;
  4. Shareholders have a responsibility and long-term economic interest to vote their shares in a reasoned and responsible manner, and should engage in a dialogue with companies thoughtful manner;
  5. While legislation and agency rule-making are important to establish the basic tenets of corporate governance, corporate governance issues are generally best solved through collaboration and market-based reforms;
  6. A critical component of good governance is transparency, as well governed companies should ensure that they have appropriate disclosure policies and practices and investors should also be held to appropriate levels of transparency, including disclosure of derivative or other security ownership on a timely basis;
  7. The Commission supports the NYSE’s listing requirements generally providing for a majority of independent directors, but also believes that companies can have additional non-independent directors so that there is an appropriate range and mix of expertise, diversity and knowledge on the board;
  8. The Commission recognizes the influence that proxy advisory firms have on the markets, and believes that it is important that such firms be held to appropriate standards of transparency and accountability;
  9. The SEC should work with exchanges to ease the burden of proxy voting while encouraging greater participation by individual investors in the proxy voting process;
  10. The SEC and/or the NYSE should periodically assess the impact of major governance reforms to determine if these reforms are achieving their goals, and in light of the many reforms adopted over the last decade the SEC should consider the expanded use of “pilot” programs, including the use of “sunset provisions” to help identify any implementation problems before a program is fully rolled out.

In Section IV of the report, they dive deeper into the roles of the board of directors, company management, and shareholders, recognizing the interdependence and inter-relatedness of the three groups. I found this to be the most interesting section. They lay out rights, responsibilities and expectations.

In the end, they do not end up advocating for change:

“Finally, it is important to note that as the Commission reviewed these issues, it did so in the context of the reality that, notwithstanding certain governance failures over the last decade, the current governance system generally works well. The Commission believes that failures of corporate governance were not the sole reason for the financial crisis of 2008, and more broadly believes that most of the thousands of public companies in this country are well governed, with hard-working and ethical boards and shareholders who are involved in the companies. This does not mean that the system is perfect, but it does mean that before further fundamental change is sought, all parties considering such change should recognize the strengths of the current system and the benefits it provides to investors and the economy.”

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Katy Perry and Compliance

Katy Perry just wanted to play dress-up. Elmo ran away. Just like Elmo, Sesame Street decided they wanted to get away from Ms. Perry. Her outfit showed too much cleavage.

It’s not the first time Sesame Street has pulled a video. They pulled a video with Chris Brown when he was accused of domestic violence.

The Katy Perry video inspired reactions ranging from “Her outfit seems a bit risqué” to “Jesus, lady, put some clothes on! Kids are watching.” Based on the outcry, Sesame Street pulled the clip. Katy Perry did not.

You need to conduct some due diligence on your business partners. Given that all organizations have limited resources, you generally take a risk-based approach and spend more time and money on those business partners that pose more of a risk.

For a young kid focused company like Sesame Street, Ms. Perry should have been high on their risk ranking. All they would have to do is watch her first hit song video: “I Kissed Girl.” Or watch her most recent video for “California Gurls“, featured breast-mounted frosting cannons. A little basic due diligence should have indicated that they should keep a close eye on Ms. Perry.

I’m not sure what Sesame Street didn’t like about the video with Ms. Perry and Elmo. I didn’t find anything wrong with it. Sure, it’s more cleavage than I’m used to seeing on Sesame Street. That’s not more than we see in many Disney cartoons. Ms. Perry was playing dress-up and wearing a princess outfit.

If Sesame Street had a policy against cleavage, they must have failed in letting Ms. Perry and the video director know about or failed to enforce it on the front lines. Education is a key component of compliance programs.

The front line employees should have been told that Ms. Perry would be under higher scrutiny and should have asked up about the wardrobe choice. Perhaps the front line employees did not feel that upper management was open to questions and concerns.

Based on an interview from the executive producer it sounds like they thought the video and the outfit was acceptable and met their standards. However, viewer comments on the video alerted them to the problem some parents had. Maybe the social media outcry was from only a segment of their viewers, but they needed to react.

Post-crisis, I thought Sesame Street handled it well. They let Ms. Perry publish the video through her channels and didn’t try to suppress the video. (Such an attempt would successful anyway.) They had Elmo ask her to come back for another play date.

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100 Best Legal Blogs

The ABA Journal is compiling its annual list of 100 best legal blogs (They use “blawgs.” I hate that term.) They would like your advice on which legal blogs you think they should include.

Use the Blawg 100 Amici form to tell the ABA Journal about a legal blog that you read regularly and think other lawyers should know about. If there is more than one legal blog you want to support, make multiple submissions.

They allow comments in the submission and will be including some of the best comments in their “Blawg 100” coverage. Friend-of-the-blawg briefs are due no later than Friday, Oct. 1.

They don’t have a compliance category and the other blogs in the practice specific category from 2009 are better choices. Feel free to include Compliance Building.

Broc Romanek’s TheCorporateCounsel.net Blog deservedly won that category last year. It was great to see a compliance-related blog win.