Author: Doug Cornelius

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

Corporate Governance of Public Web Sites

Jane K. Storero and Yelena Barychev of The Legal Intelligencer and Law.com authored an article that the system of reviewing and monitoring information posted on a company Web site should be part of the disclosure controls included in the enterprise-wide risk management system established by the company: Corporate Governance of Public Web Sites.

This article describes methods of effectively complying with the SEC guidance related to company websites: Commission Guidance on the Use of Company Websites (Release 34-58288, August 7, 2008).

That release gave some guidance as to whether a company’s website is a means of public dissemination of information under Regulation FD.

It also addresses how the anti-fraud provisions of the federal securities laws can be applied to a statements made on the internet.  One issue is whether historical information is considered “republished” each time the material is accessed on the company’s website. If they are considered republished, then the company would have a duty to update the materials.

As a general matter, we believe that the fact that investors can access previously posted materials or statements on a company’s web site does not in itself mean that such previously posted materials or statements have been reissued or republished for purposes of the antifraud provisions of the federal securities laws, that the company has made a new statement, or that the company has created a duty to update the materials or statements.

The release also notes that hyperlinks to third party information could be implicated as part of the anti-fraud provisions. The key is the context of the hyperlink. If explicit approval or endorsement is plainly evident, then the hyperlink to a third party statement can be found to be a implicit approval of the statement in the hyperlinked web page.

The release also endorses the use of blogs:

We acknowledge the utility these interactive web site features afford companies and shareholders alike, and want to promote their growth as important means for companies to maintain a dialogue with their various constituencies. As we noted in the Shareholder Forum Release, companies may find these forums “of use in better gauging shareholder interest with respect to a variety of topics,” and the forums “could be used to provide a means for management to communicate with shareholders by posting press releases, notifying shareholders of record dates, and expressing the views of the company’s management and board of directors.”

Statements made on a blog or forum will not be treated any differently than any other statements made by the company for purposes of anti-fraud provisions.

Deloitte sues vice chairman for client stock trades

Accounting firm Deloitte & Touche LLP has sued its former vice chairman for trading in securities of the firm’s audit clients. In a lawsuit filed Oct. 29 in Delaware Chancery Court, Deloitte said Thomas Flanagan “repeatedly lied to Deloitte about his clandestine trading activities in annual written certifications, going so far as to conceal the existence of a number of his brokerage accounts to avoid detection.” Complaint of Deloitte LLP v. Thomas P. Flanagan. (.pdf)

The complaint states:

  • In 2007 Flanagan purchased stock a client’s acquisition target one week before the client publicly announce the acquisition.
  • Between January 2005 and June 2008, Flanagan engaged in put and call trades for at least 12 audit clients.

These actions were violations of Deloitte’s insider trading policies. See the story in  Crain’s Chicago Business: Deloitte partner accused of improper trading in client stocks.

Imposing Caremark Fiduciary Duty on Corporate Officers

I previously posted on the Midland Grange case [Delaware Imposing Same Fiduciary Duty on Officers as Directors] where the Delaware Chancery Court imposed the same obligations on officers as directors, including the duty of loyalty and the duty of care.

In Miller v. McDonald, et al., ( D. Del., Bankr., April 9, 2008), the Bankruptcy Court for the District of Delaware ruled on corporate governance issues related to the fiduciary duties of officers and directors. The Bankruptcy Court denied a motion to dismiss in the course of ruling that Caremark duties would be imposed on an officer (who was not a director), that was on the management team when the President of the company committed fraud and other actions and omissions that ultimately led to the bankruptcy filing of the company.

It is correct that Delaware law does not impose fiduciary duty on “employees” generally, but it is incorrect that it does not impose failure of oversight (fiduciary duty) as to officers. . . . While it is true that all of the cases relied upon by the Trustee involved directors’ conduct, not officers’, I believe the Caremark decision itself suggests that the same test would be applicable to officers.

The corporate entity in Miller v. McDonald is a Florida corporation, so the court is exporting this concept of similar duties between officers and directors from Delaware to Florida.

Thus, it is clear that under both Delaware and Florida law both officers and directors owe fiduciary duties to the corporation.

Thanks to the Harvard Law School Corporate Governance Blog and Francis G.X. Pileggi of Fox Rothschild LLP and the Delaware Corporate and Commercial Litigation Blog for pointing out this case: Court Imposes Caremark Fiduciary Duty on Corporate Officer.

Delaware Imposing Same Fiduciary Duty on Officers as Directors

In Stone v. Ritter, we saw the Delaware courts imposing a duty on corporate directors to attempt to assure that a corporate information and reporting system exists, and that failure to do so may, under some circumstances, render a director liable for losses caused by the illegal conduct of employees. See The Implications of Stone v. Ritter.

In Midland Grange No. 27 Patrons of Husbandry v. Walls, 2008 WL 616239 (Del. Ch., Feb. 28, 2008) the Delaware Chancery Court was reviewing a potential breach of fiduciary by a fraternal non-profit organization. The key statement in the decision is that regardless of whether the defendants were considered officers or directors, their fiduciary duties would be the same:

Thus, regardless of whether the Officer Respondents are properly characterized as “officers” of the Grange or “directors” of the Grange, “[t]he fiduciary duties an officer owes to the corporation ‘have been assumed to be identical to those of directors.’ “ Ryan v. Giford, 935 A.2d 258, 269 (Del. Ch.2007) (quoting In re Walt Disney Co., 2004 WL 2050138, at *3 (Del. Ch. Sept. 10, 2004))

Thanks to the Delaware Corporate and Commercial Litigation Blog for pointing out the Midland Grange case: Chancery Imposes Same Fiduciary Duty on Officers as Directors

Ruder Calls for Regulation of Hedge Funds

Former SEC Chair David Ruder testified to the House Oversight and Government Reform Committee that the SEC should be given the power to register hedge funds advisers and force them to disclose their risks. This testimony was part of the testimony of Congress Examining Hedge Funds. You can read the Testimony of David Ruder (.pdf).

Mr. Ruder states that:

New regulations are needed in order to protect hedge fund investors and in order to monitor hedge fund contributions to systemic risk. These regulatory needs can be accomplished by giving the Securities and Exchange Commission power to register and inspect hedge fund advisers, including the power to require disclosure of activities that might injure investors, power to require hedge fund advisers to disclose hedge fund risk activities, and power to monitor and assess the effectiveness of hedge fund risk management systems.

I disagree with the statement that regulation is needed to protect investors in hedge funds.  The exemptions from registration of hedge funds is for those funds and advisers with significant assets and understanding of risks.

As for the systemic risk posed by hedge funds, I remain unconvinced. Mr. Ruder refers back to the Long Term Capital Management in the late 90s.  We have not been hearing about hedge funds causing the current crisis. It appears that the investment banks and rating agencies were the parties most at fault. It also seems the lack of regulation in the derivatives markets, especially Credit Default Swaps, and poorly underwritten residential mortgages and mortgage securities were the tools that caused the most damage.

Congress Examining Hedge Funds

On Thursday November 13, 2008, The House Commitee on Oversight and Government Reform held a hearing on hedge funds and the financial market.

The following witnesses testified:

  • Professor David Ruder, Northwestern University School of Law, Former Chairman, U.S. Securities and Exchange Commission
  • Professor Andrew Lo, Director, MIT Laboratory for Financial Engineering, Massachusetts Institute of Technology, Sloan School of Management
  • Professor Joseph Bankman, Stanford University Law School
  • Houman Shadab, Senior Research Fellow, Mercatus Center, George Mason University
  • John Alfred Paulson, President, Paulson & Co., Inc.
  • George Soros, Chairman, Soros Fund Management, LLC
  • James Simons, President, Renaissance Technologies, LLC
  • Philip A. Falcone, Senior Managing Partner, Harbinger Capital Partners
  • Kenneth C. Griffin, Chief Executive Officer and President, Citadel Investment Group, LLC

The Implications of Stone v. Ritter

In 1996, Delaware’s Court of Chancery stated in the Caremark case that a director’s duty of good faith includes a duty to attempt to assure that a corporate information and reporting system exists, and that failure to do so may, under some circumstances, render a director liable for losses caused by the illegal conduct of employees. In 2006 the Delaware Supreme Court applied and clarified the Caremark language in the case of Stone v. Ritter.

Rebecca Walker of Walkercompliance.com wrote a summary of the Implications of Stone v. Ritter on Board Oversight of a Compliance Program.

The Stone decision formalizes the discussion that appeared in Caremark regarding potential liability of directors into a holding that directors may be liable for the damages resulting from legal violations committed by employees of a corporation, if directors fail to implement a reporting or information system or controls or fail to monitor such systems. The court places this duty of directors squarely within the duty of loyalty. The decision also provides a view of those factors that the court will use in deciding whether the board oversight of the company’s compliance program was adequate to prevent liability to the directors.

Metcalf & Eddy Settlement

This is a FCPA civil settlement between the United States of America and Metcalf & Eddy (.pdf). Metcalf & Eddy’s agreement in this settlement was to institute their FCPA Compliance Program. You can use the settlement as resource guide to what the government expects in compliance programs pertaining to FCPA. Click here to download the PDF.

Courtesy of the Society of Corporate Compliance and Ethics.

Inflated Credentials

The Wall Street Journal had a story on inflated academic credentials: Inflated Credentials Surface in Executive Suite by Keith J. Winstein.

Kroll issues an annual report of its “hit ratio” that says about 20% of job seekers and rank-and-file employees undergoing background checks by their companies are found to have inflated their educational credentials.

Referring to this story, Chris MacDonald of The Business Ethics Blog, writes in Executives & Inflated Academic Credentials:

The details are not exactly eye-popping. A few execs said they completed degrees they only started, one said he got a Bachelor’s degree when all he really got is an Associate’s degree. But still. Their information was inaccurate, and that’s bad. It’s dishonest (though the WSJ acknowledges that some cases might best be chalked up to misunderstandings) and it sets a lousy example for people lower down the corporate ladder.