Author: Doug Cornelius

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

Boston University’s Code of Conduct

bu-logoFor a change of pace, I thought I would look at the codes of conduct for educational institutions for their take on the issues. Boston University has an easy to find page with the President’s Statement of Commitment to Ethical Conduct with a link to the BU’s Code of Ethical Conduct.

Boston University is committed to the highest standards of honesty and integrity in all its activities. This includes, among other concerns, the following:

  • Avoiding conflicts of interest and commitment;
  • Dealing with others honestly and in good faith;
  • Preserving confidentiality;
  • Compliance with applicable laws, rules, and regulations; and
  • Timely and accurate public disclosures.

I also tried finding the Code for Brandeis University (my other alma mater) but failed. Perhaps the International Center for Ethics, Justice and Public Life clogs up the search results. Or maybe the Code is not published externally.

President’s Working Group on Financial Markets Reports

globe200pxAsset Managers’ Committee and the Investors’ Committee of the President’s Working Group on Financial Markets Reports have released their best practices reports for hedge fund managers and investors, respectively: Asset Managers’ Committee Report (.pdf) and the Investors’ Committee Report (.pdf).

In the Asset Manager’s Committee Report:

A Manager should establish a comprehensive and integrated compliance and business practices framework that is supported by adequate resources. The goal of the framework is to provide guidance to the Manager and its personnel in respect of ethical, regulatory compliance and conflict of interest situations. Critical to the success of the framework is a strong culture of compliance.

Document Retention Policies and Spoliation of Evidence

In a recent case, a court found the implementation of a document retention policy to amount to the spoliation of evidence and imposed the “nuclear” sanction of declaring the suit unenforceable.

In the case of Micron Tech. v. Rambus in the U.S. District Court for Delware, Judge Sue Robinson was addressing the effect of Rambus’ document retention policy on the availability of evidence for the case. Rambus had brought suit against Micron Technology Inc. to enforce a patent held by Rambus on dynamic random access memory.

According to the opinion, Rambus took several months to ramp up for its litigation strategy to enforce its patent portfolio. At the same time, Rambus designed and implemented a document retention policy and began destroying company documents until a time just prior to when it filed the suit.

The case does not invalidate document retention policies. It seems from the facts in the case that Rambus purposefully destroyed records as part of its litigation strategy.

Judge Robinson points out:

“42.  A duty to preserve evidence arises when there is a knowledge of potential claim. Winters v. Textron, Inc. 187 FRD 518( M.D. Pa. 1999). A potential claim is generally deemed cognizable in this regard when litigation is pending or imminent, or when there is a reasonable belief that litigation is foreseeable. . . . As soon as a potential claim is thus identified, a party is under a duty to preserve evidence which it knows, or reasonably should know, is relevant to the future litigation. Nat’l Ass’n of Radiation Survivors v. Turnage, 115 FRD 543, 556-57 (N.D. Cal 1987)”

If a company has a records retention policy it is appropriate for a court to determine if it was instituted in bad faith.

In this case, the Judge found that destroyed documents were discoverable and could have played a role in Micron’s defenses of patent misuse, violation of antitrust and unfair competition laws and inequitable conduct. This evidence would only exist in internal Rambus documents.

The court concluded that “the showing of bad faith is so clear and convincing” and the “very integrity of the litigation process has been impugned.”

To me the key in this case is that Rambus initiated the suit and implemented the document retention policy. You can compare this with Arthur Andersen v. US, 544 U.S. 696 where Arthur Andersen thought it would be subpoenaed but continued shredding documents right up until the time the subpoena was served.  Rambus, as the initiator of the suit knew well ahead of time that litigation was foreseeable.

It is important to consider putting a litigation hold in place before litigation has actually commenced.

Data Breach at Heartland Payment Systems

Heartland Payment Systems (HPY) disclosed that intruders hacked into the computers it uses to process 100 million payment card transactions per month for 175,000 merchants.  The company said it couldn’t estimate how many customer records have been compromised, but said the data compromised include the information on a card’s magnetic strip  that could be used to duplicate a card.

No merchant data or cardholder Social Security numbers, unencrypted personal identification numbers (PIN), addresses or telephone numbers were involved in the breach. Nor were any of Heartland’s check management systems; Canadian, payroll, campus solutions or micropayments operations; Give Something Back Network; or the recently acquired Network Services and Chockstone processing platforms.

Avivah Litan, an analyst at research company Gartner, called it the largest card-data breach ever. before this breach, the largest known breach occurred when around 45 million card numbers were stolen from retail company TJX Cos.

See also:

Can Facebook Get You Into Legal Trouble?

Kim S. Nash writing for CIO.com: How Text Messaging and Facebook Can Get You in Legal Trouble. The article focusing on the electronic discovery pitfalls of the ever-changing and expanding ways we communicate.

One thing is clear, banning access to social networking platforms is not effective. Even if you ban access in the workplace, your employees have access to the sites outside the workplace. What they post can be found and impact your organization.

Instead of ignoring the existence of social networking, educate and monitor. Social networking is just another way to communicate. Existing, well drafted email policies can easily be adapted to include social networking. If you shouldn’t put in an email, you should put it on a blog, Facebook or Twitter.

Some of these social networking tools allow for easier monitoring than email. Many of the platforms are designed to send out updates when new information is published. With a free RSS feed reader you can subscribe to these updates, collect them and review them.

Facebook and Airlines

British Airways and Virgin Atlantic both ran into trouble when their employees posted nasty remarks about their customers on Facebook. This raises the question about whether the companies did enough to educate their employees about the proper use of social networking.

See:

Draft SEC Filings Can Be Protected From Discovery

In a January 9, 2009 order, Magistrate Judge Morton Denlow of the US District Court for the Northern District of Illinois ruled that Aon was not required to produce an email seeking comments on draft disclosure language for Aon’s Form 10-K because it was protected by the attorney-client privilege. Magistrate’s Opinion and Order in Roth v. Aon

The ruling is part of a securities class action suit against Aon. The plaintiffs were seeking an email with with a draft portion of Aon’s 10-K. In rejecting the plaintiff’s request, Judge Denlow recognized that the process of preparing SEC filings involves legal judgments throughout, even where the disclosure in question concerns operational rather than legal matters. Judge Denlow lays out the eight prong test for attorney-client privilege:

“(1) Where legal advice of any kind is sought (2) from a professional legal adviser in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence (5) by the client, (6) are at his instance permanently protected (7) from disclosure by himself or by the legal adviser, (8) except the protection be waived.”

Judge Denlow goes on to point out that the inclusion of non-lawyers as recipients of the email did not waive the attorney-client privilege so long as all other recipients were employees of Aon.

Judge Denlow also rejected the argument that because the final 10-k was a public document that drafts should not subject to the privilege.

A key take-away is that communications to be protected by the attorney-client privilege must only be exchanged among in-house or outside counsel and company employees. Including outsiders, such as the company’s auditors or other consultants, as recipients could waive the privilege. You should also label these drafts as preliminary drafts and as confidential attorney/client privilege.

Although this ruling is based on SEC filings, you should be able to apply the same analysis to private placement memorandum and other documents related to private investment fund-raising.

See also:

Risk IQ

ca_logoSumner Blount and CA have coined the term Risk IQ to address a company’s risk management environment:  Risk IQ – The Key to Effective Risk Management. The idea is deliver comprehensive, timely and accurate information to the decision makers to improve the decision-making process.

They break the Risk IQ into two parts: visibility and insight.

You need visibility into the right information at points in the business process to identify risks across the enterprise. You need easy access to it. You are all too likely to ignore or not ask for a report that is difficult to create.

You need insight into the information so it needs to be structured and presented in a way that allows the decision-maker to properly assess, quantify and manage the associated risks.

Improving your organization’s Risk IQ by establishing a common risk management framework can have significant financial benefits, in addition to controlling enterprise risks more effectively. Standard & Poor’s, for example, uses the level of risk management maturity as part of its overall corporate evaluation. So, poor risk management leads to a lower rating, which can increase the cost of borrowing, among other consequences.

The Anti-Corruption Principle in the U.S. Constitution

cornell-logoAre integrity or self-governance part of the constitutional framework of the United States? Do we need to give constitutional-like weight to the distortions to our democracy seen in campaign finance, redistricting, term limits and lobbying?

Zephyr Teachout published an article in the January 2009 edition of the Cornell Law Review: The Anti-Corruption Principle (pdf).

The Constitution carries within it an anti-corruption principle, much like the separation-of-powers principle, or federalism. It is a freestanding principle embedded in the Constitution’s structure, and should be given independent weight, like these other principles, in deciding difficult questions concerning how we govern ourselves. Corruption has been part of our constitutional dialogue since the beginning, but in the last 50 years—and particularly since Buckley v. Valeo gave corruption a relatively weak role in the constitutional scheme— the concept of corruption has been unbound from the text and history of the document itself.

The purpose of this Article is to prove this principle.

Professor Teachout argues that the Framers of the Constitution were obsessed with corruption and expunging it from the new government. She points out that Frameres thought the Senate was more prone to corruption since it was smaller than the House. That is why bills for raising revenue come from the House and not the Senate. [Article 1, Section 7]

The Framers resigned themselves to the fact that “man in his deepest natures was selfish and corrupt; that blind ambition most often overcomes even the most clear-eyed rationality; and that the lust for power was so overwhelming that no one should ever be entrusted with unqualified authority.” (citing Bernard Bailyn‘s The Ideological Origins of the American Revolution)

Professor Teachout groups political corruptioninto five clusters: criminal bribery, inequality, drowned voices, a dispirited public, and a lack of integrity.