Author: Doug Cornelius

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

What Is Insider Trading?

sec-sealThe SEC.gov website has a blurb on Insider Trading.  They start off with legal insider trading, when officers, directors and employees buy and sell stock in their own companies. Corporate insiders are required to report their trades.

Illegal insider trading “refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information.”

The SEC adopted new Rules 10b5-1 and 10b5-2 to resolve two insider trading issues where the courts have disagreed.

Under Rule 10b5-1, a person is trading on the basis of material nonpublic information if a trader is “aware” of the material nonpublic information when making the purchase or sale. The rule also sets forth several affirmative defenses or exceptions to liability. The rule permits persons to trade in certain specified circumstances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract, or instruction that was made in good faith.

Rule 10b5-2 focuses on the misappropriation theory of insider trading and how it applies to certain non-business relationships. This rule provides that a person receiving confidential information under circumstances specified in the rule would owe a duty of trust or confidence and thus could be liable under the misappropriation theory.

Chakrapani Insider Trading

"Blue horseshoe loves Anacot Steel"
"Blue horseshoe loves Anacot Steel"

The Securities and Exchange Commission charged Ramesh Chakrapani with insider trading. Chakrapani was an employee of the Blackstone Group.

The SEC alleges that Chakrapani tipped off a friend about the pending acquisition of the supermarket company Albertson’s Inc. before the public announcement of the deal in January 2006.

See coverage of the story:

Business Risk Intelligence

These are my notes from the OCEG webinar: Business Risk Intelligence.

  • Carole Stern Switzer, President of OCEG
  • Paul Shultz, Managing Director of Protiviti
  • Dave Anderson, Senior Director of SAP Business Objects

Paul frames the problem: Risk is often just an afterthought of strategy, resulting in strategic objectives that may be unrealistic and risk management being an appendage to performance management.

Paul breaks the solution down into components: enable, measure, plan, aim, aspire and protect to enable technology to build enterprise risk intelligence.

Dave views risk intelligence as a peice of performance. Risks can prevent you from reaching your goals. Strategy needs context to make decisions and needs to be connected to operations. Then there maybe a gap between the strategy and the execution.

Dave (and SAP’s) approach is to have an integrated approach to strategy and risk management, by addressing financial risk, compliance risks,market risks,process risks, and people risks.

Dave points out that S&P’s now requires enterprise risk management into their evaluation criteria as part of their credit rating calculations.

Carole pointed out that you want transparency so that risk is not hidden (whether intentionally or not).

it was interesting to hear the use of KRIs in connection with KPIs. (That is Key Risk Indicators and Key Performance Indicators.

The New Massachusetts Data Security Regulations

goodwinprocter_logoGoodwin Procter sponsored a webinar on the new Massachusetts date security rules

Deb pointed out that you may now need to collect the state of residence of the client to figure out if they are in Massachusetts. That may have the perverse effect of collecting additional information about the person.

Deb points out that “financial account” is not well defined. She looks back to the statute and sees that it is focused on identity theft. If the “financial account” can lead to identity theft or the loss of money from that account then it would probably be a financial account.

In evaluating compliance you can include these factors:

  • size, scope and type of business,
  • entity’s resources,
  • amount of stored data, and
  • seed for security and confidentiality of both consumer and employee information.

Deb points out that the Massachusetts regulators think the rules align with the federal data breach notification requirements. The regulators also think the rules are merely applying more detailed requirements to the broad principles under the federal rules.

The regulators are deferring to the Attorney General for enforcement. The new rules do not provide a private right of action.

The Written Information Security Program has four main groups.

Implementation

  • identify all records use to store information. The rules do not require an inventory. The regulators want you to know the answer. They suggest an information flow to see where information is gathered, where it goes and where it gets stored.
  • Identify and assess risk.
  • Evaluate and improve safeguards. This includes the security system and compliance training.
  • Limit collection and use. Personal information should only be available to those who need it and then only the information they need. Don’t gather it if you do not need it and don’t keep it if you do not need it.

Administrative

  • designate a responsible employee
  • develop security policies
  • verify the capacity of service providers to protect personal information
  • The certification must specifically address the Massachusetts rules and must state that the signatory was authorized to sign it.

Technical and Physical

  • establish a security system
  • restrict physical access
  • prevent access by former employees
  • document responsive actions in event of data breach

Maintain and Monitor

  • post-incident review
  • disciplinary measures for violations
  • regular monitoring
  • annual review (if not more often)

Jacqueline Klosek focused on the computer system requirements. She put together specific requirements:

  • encryption – of stored information on portable devices and information in transit. Portable memory sticks are a big problem.
  • secure user authentication protocols
  • reasonable monitoring of systems
  • firewall
  • malware and virus protection
  • education and training

Agnes laid out 3 things to get done by May 1, 2009:

  • Implement internal policies and practices
  • encrypt company laptops
  • amend contracts with service providers to incorporate data security requirements

By January 1, 2010:

  • obtain written certifications form service providers
  • encrypt other portable devices (non-laptops)

New FMLA Poster

Under the Family and Medical Leave Act of 1993, covered employers must post a notice approved by the Secretary of Labor explaining rights and responsibilities under FMLA.  The poster at WH Publication 1420 is sufficient.

Under 29 CFR 825.300:

(a) Every employer covered by the FMLA is required to post and keep posted on its premises, in conspicuous places where employees are employed, whether or not it has any “eligible” employees, a notice explaining the Act’s provisions and providing information concerning the procedures for filing complaints of violations of the Act with the Wage and Hour Division. The notice must be posted prominently where it can be readily seen by employees and applicants for employment. Employers may duplicate the text of the notice contained in Appendix C of this part (WH Publication 1420), or copies of the required notice may be obtained from local offices of the Wage and Hour Division. The poster and the text must be large enough to be easily read and contain fully legible text.

(b) An employer that willfully violates the posting requirement may be assessed a civil money penalty by the Wage and Hour Division not to exceed $100 for each separate offense. Furthermore, an employer that fails to post the required notice cannot take any adverse action against an employee, including denying FMLA leave, for failing to furnish the employer with advance notice of a need to take FMLA leave.

(c) Where an employer’s workforce is comprised of a significant portion of workers who are not literate in English, the employer shall be responsible for providing the notice in a language in which the employees are literate.

Top Ten Individuals We Won’t Miss from 2008

In addition to its list of the 100 Most Influential People in Business Ethics for 2008, Ethisphere also published a list of the Top Ten Individual We Won’t Miss from 2008.

  1. Bernard Madoff
  2. David Colby – Colby was the former CFO of Wellpoint who was caught carrying on multiple affairs on the side, even once texting “ABORT!!” to one of his many girlfriend’s after discovering she was pregnant. He carried on relationships with over 30 women and proposed to at least 12 of them.
  3. Rod Blagojevich
  4. Heinz-Joachim Neubürger, Karl-Hermann Baumann, and Johannes Feldmayer – The two former CFOs and former Chairman of Siemens, respectively.
  5. Ted Stevens – the Senator from Alaska who was found guilty of failing to report gifts given to him by various contractors.
  6. Bruno A. Kaelin – a former senior vice president and head of corporate compliance at Alstom, arrested in Switzerland in August 2008 for a joint Franco-Swiss-Italian investigation for his alleged role in running a bribery slush fund and laundering hundreds of millions of euros.
  7. Adam Vitale – Vitale was sentenced to 30 months in prison and $180,000 restitution to be paid to AOL after he found a way to spam 1.2 million AOL users in a way that avoided being caught by AOL’s spam filter.
  8. Robert Rubin – Rubin, like it or not, became one of the faces tied to the 2008 financial crisis. His position of deregulation when he was Treasury Secretary is now faulted by some for many of the problems of today. He also became the fall guy for Citigroup’s business strategy of leveraging more risk.
  9. Marco Benatti – Benatti was a former Italian director of advertising for WPP. Benatti, who was accused of libel last year for calling WPP chief executive Sir Martin Sorrell a “mad dwarf,” was alleged to have secretly pocketed millions of pounds from a deal he helped to broker. WPP’s lawyers, claiming up to ₤12.5 million for breach of “fiduciary duty,” alleged at a court hearing in London that Benatti was the “secret beneficiary” of most of the proceeds from a ₤17 million takeover of Media Club, an Italian advertising company.
  10. James M. DiBlasio – DeBlasio makes the list for going on a three day bender and hacking into the computers of his company, Ski.com, while drunk.

100 Most Influential People in Business Ethics 2008

Ethisphere has published its list of the 100 Most Influential People in Business Ethics for 2008.

The winners are broken down into the following nine core categories:

  • Government and Regulatory
  • Business Leadership
  • Non-Government Organization
  • Design and Sustainability
  • Media and Whistleblowers
  • Thought Leadership
  • Corporate Culture
  • Investment and Research
  • Legal and Governance

Here is the list:

1. Liu Qi
2. Neelie Kroes
3. Heinrich Kieber
4. Kim Yong-chul
5. Mark F. Mendelsohn
6. Lee Scott
7. Shan Ramburuth
8. Bobby Jindal
9. Myron Steele
10. Philip Collins
11. David Steiner
12. Angel Gurría
13. Ronald Luri
14. Barack Obama
15. Christoph Frei
16. Jeff Immelt
17. Nguyen Van Hai & Nguyen Viet Chen
18. David L. Stub
19. David Parker
20. Thomas Friedman
21. Davor Harasic
22. Anne M. Mulcahy
23. Dawn Primarolo
24. Ben W. Heineman, Jr.
25. Nicolas Sarkozy		 26. Dong Zhengqing
27. Leslie Gaines-Ross
28. R. Alexander Acosta
29. Cui Fan
30. Masamitsu Sakurai
31. Paul Krugman
32. Alexandra Wrage
33. Michael Hershman
34. Jed Rakoff
35. Dr. Anwar Nasution
36. Michael Johnston
37. Jim Senegal
38. Mike Barry
39. Marc Gunther
40. Neville Isdell
41. Eric Schmidt
42. Danny Wegman
43. Larry Thompson
44. H. Dean Steinke
45. James Jurwa
46. Sven Holmes
47. Lucas Benitez
48. Anonymous Chinese apartment owner
49. Earl E. Devaney
50. Nancy Boswell		 51. Haruka Nishimatsu
52. Henry Waxman
53. Sudhanshu Pokhriyal
54. Virginia D. Klein
55. James A. Mitchell
56. Tim Costello
57. Jim Koch
58. Jim Tyree
59. Ken Livingstone
60. Kathleen M Hamann
61. Victor Marrero
62. Ben Popken
63. Howard Schultz
64. Klaus Töpfer
65. Harry Halloran
66. Le Hien Duc
67. Peter Kinder
68. Bernard Listiza
69. Joseph Keefe
70. Magnus Berglund
71. Manny A. Alas
72. Max Bazerman
73. Bob Langert
74. Patrick Fitzgerald
75. Thomas Boone Pickens		 76. Dave Welch
77. Edward J. Zore
78. R. Edward Freeman
79. Mr. Frédéric Wehrlé
80. Greg Valerio
81. Chris MacDonald
82. James Goodnight
83. Brenda C. Barnes
84. Simon Ho
85. Gavin Newsom
86. Nobutaka Machimura
87. Anders Dalhvig
88. Odell Guyton
89. David Crawford
90. Patricia Werhane
91. Paul Newman
92. Barbara Krumsiek
93. Amy Domini
94. Richard McClellan
95. Rob Cameron
96. Harry Woolf
97. Tensie Whelan
98. Jack Grynberg
99. Alexander Solzhenitsyn
100. Kim Hun-sung and Park Jin-shik

Madoff Litigation: Can the Lost Billions be Recovered? How?

This post contains my notes from the webinar: Madoff Litigation: Can the Lost Billions be Recovered? How? The Webinar was sponsored by NERA Economic Consulting and produced by The Securities Docket. The slides are available on Securities Docket.com: Materials from Madoff Litigation Webcast.

Brad divides the world into those invested direftly through a Madoff account and those that invested through a feed fund or a fund of funds. The two groups of investors have different causes of actions and different approachs. Brad is representing both but focused his piece on direct investors.

The direct investors are in the worst position. Their biggest hope of recovery is from the SIPC. The limit is $500,000 for securities. The SIPC may also take the position that the limit is $100,000 (the cash limit) since Madoff apparently never invested in securities. Recovery is also limited to the dollars put in less the cash returned over time. Of course the direct investors will also have claims against the Madoff bankruptcy estate and should file a claim.

In an audience vote, 70% though Madoff should not be free on bail.

Gerald focuses on the issues arising from indirect Madoff investors.  The feeder funds offer a deep pocket for recovery. In the case of a limited partnership structure, they will need to prove gross negligence or willful misconduct. Recovery will be governed by the partnership agreement and related documents. The other problem is that the general partner may be able to use the assets of the limited partnership to defend and indemnify themselves.  You end up suing yourself.

Fred pointed out that there are lots of “losses”, but also lots of  “damages” and probably very little “recovery.” Among the factors are (1) choice of law, (2) allocation among the parties based on conduct and causation and (3) time at which damages are estimated. The starting point for damages is going to be the differences between the reported value on the account statement and the actual value of the securities in the account.

Losses Due to Fraudulent Reported Value = Loss on Subscriptions – Gain on Redemptions (similar to 10b-5 damage valuations)

Fred cites the case of Goldstein v. SEC (DC Cir. 2006):

If the investors are owed a fiduciary duty and the entityis also owed a fiduciary duty, then the adviser will inevitablyface conflicts of interest. Consider an investment adviser to ahedge fund that is about to go bankrupt. His advice to the fundwill likely include any and all measures to remain solvent. Hisadvice to an investor in the fund, however, would likely be tosell. …It simply cannot be the case that investment advisers are theservants of two masters in this way.

It was a great panel. Thanks to the panelists, sponsors and publishers of the webcast.

New York State Bar Position on Carried Interest

Besides the position of Professor Bankman on carried interest, the New York State bar submitted a very detailed report and recommendations to the House Committee on Oversight and Government Reform: New York State Bar Tax Section Report on Carried Interest and Fee Deferral Legislation (.pdf) September, 2008