Category: Compliance Bricks and Mortar

Compliance Bits and Pieces

Here are some interesting stories from the past week:

Compliance Surprises in Cuba’s Closed Economy by Alexandra Wrage on the WrageBlog

Companies enjoying any success in Cuba have partnered with savvy locals who guide them through the dense, opaque bureaucracy. Such companies must convince the government that they are there for the long haul. They cultivate relationships and, invariably, they sponsor charity cigar auctions or kids’ “go-kart” rallies. But, by all reports from many sources, they don’t pay bribes.

Five Common Mistakes in Internal Investigations by Tim Mohr and Nidhi Rao for Directorship

Warren Buffett put it best when he said, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” This statement could not be more relevant today. It takes only one person to tarnish an organization’s reputation. Not only is the current turbulent economy affecting the corporate bottom line, but if past history is any indicator, businesses can anticipate it to lead to an increase in incidents of fraud. As a result of the SEC, regulators, stakeholders and the public paying closer attention to the way an organization functions, organizations and corporate directors need to be diligent when conducting internal investigations.

Wall Street Meets the Wire by Gail Shifman on the White Collar Crime Prof Blog

In this case [against billionaire hedge-fund manager Raj Rajaratnam], however, the legal issue regarding the use of wiretaps that immediately jump to the surface is the question about whether The Federal Wiretap Act specifically authorizes the interception of electronic recordings for alleged security fraud violations (Title 15 U.S.C. §§ 78j(b) & 78ff and Title 17 C.F.R. §§ 240.10b-5 & 240.10b5-2) as charged in the criminal complaint. These statutes are not specifically enumerated in Title III, 18 U.S.C. § 2516, which provides the authorization for electronic interception. Wire and mail fraud (18 U.S.C. §§ 1341 & 1343) anti-trust violations, money laundering and numerous other offenses are listed, but not securities fraud. Chances are good that the government could have charged these defendants with wire fraud but were they scared away by the fact that the Skilling, Weyrauch, and Black cases are on review before the Supreme Court? One would think (hope?) that the government has preliminarily determined that section 2516 provides them with the authorization they need lest they find themselves licking self-inflicted wounds.

Facilitation Payments Still Leave Companies Vexed By Melissa Klein Aguilar for Compliance Week

A survey conducted by TRACE International shows some companies are prohibiting facilitation payments—colloquially known also known as “grease payments”—which are given to induce foreign officials to perform routine functions they’re already obligated to perform, such as issuing licenses or permits and installing telephone lines. In theory, such payments simply nudge foreign officials to do their jobs more promptly.

In practice, however, the line between a permissible facilitation payment and an illegal bribe can be very blurry. And to complicate matters, while the United States, Canada, Australia, New Zealand, and South Korea allow their citizens to make facilitation payments, they are illegal under local law in every country in which they are actually paid.

Calendars and Household Compliance

household calendar small
View of our household calendar

It is hard to keep track of who is doing what with a busy family. You can’t show up on time and do what you are supposed to do if you don’t where you are supposed be.

My work calendar runs on an Exchange / Outlook platform, as does The Wife’s calendar. Now that The Son and The Daughter are getting their own activities, it is getting harder and harder to figure out who is supposed to be where.

The Wife and I could just copy each other for all of the events. But then our calendars would be mucked up with events that one of us is going to, but not the other. It’s also easy to lose track of the kids’ events.

We decided to use the Google Calendar application. It allows us to have separate calendars for me, The Wife, The Son and The Daughter. We even set up a separate calendar for family and friend birthdays.

The Google Calendar allows us to use a different color for each person so we can easily distinguish who belongs to a particular event. That’s a great visual clue and makes the mess of events easier to sort through.

On the settings for the calendar, you can assign different permissions: (1) make changes to events, (2) see all event details or (3) see only fee/busy. Even an unruly teenager should be able to be convinced into sharing their calendar if their parents couldn’t see the details.

When an event intrudes into the work day, we invite the work email to the event. Google Calendar plays nice with the Exchange/Outlook platform so the invitations from Google Calendar appear as calendar events at work and vice-versa. I try to keep the non-working hours events out of my office calendar.

By using separate Google calendars, each person can control their own calendar, while at the same time sharing the events with the whole family. It’s little or no extra effort and makes household management much easier.

Since the Google Calendar is web-based, I can use it at work and view the calendars on my blackberry or iPhone.

This post was based on a previous post from my old blog, KM Space: Calendars and Household Knowledge Management.

Compliance Bits and Pieces

Here is this weeks collection of stuff I found interesting, but didn’t blog about:

To Combat Overseas Bribery, Authorities Make It Personal
Dionne Searcy for The Wall Street Journal

“To really achieve the kind of deterrent effect we’re shooting for, you have to prosecute individuals,” Mark Mendelsohn, deputy chief of the Justice Department’s criminal division, says in an interview.

Cuomo announced two guilty pleas in the ongoing Pay to Play investigation
New York State Attorney General

Raymond Harding, the former chair of the Liberal Party, and Saul Meyer, a founding partner of a Dallas-based firm that advises public pension systems across the nation, both pled guilty to felony securities fraud charges for their involvement in pay-to-play kickback schemes at the New York State Office of the Comptroller and the CRF. “These guilty pleas vividly depict the depth and breadth of corruption involving the New York State pension fund,” said Attorney General Cuomo. “In one case, we see New York’s state pension fund looted to reward a political boss with hundreds of thousands of dollars in improper payments. In the other, we see a pension fund adviser – the outside “gatekeeper” who is supposed to safeguard the integrity of the pension fund process – recommending deals based on pressure from pension officials and politically-connected people.

Cuomo announces legislation to reform state pension fund
New York State Attorney General

Bipartisan Legislation Will Establish Board of Trustees to Manage State Pension Fund, Ban Placement Agents and Create Enforcement Mechanisms to Ensure Compliance

Private Equity LPs Seek to Impose “Best Practices” on Sponsor Community
Geoffrey Parnass for Private Equity Law Review

The Institutional Limited Partners Association, a trade association that represents 220 institutional investors in private equity funds, recently published a set of Private Equity Principles, designed to guide future dealings between its members and the private equity sponsor community. The Association’s members include public and corporate pension funds, endowments, foundations, family offices and insurance companies with more than $1 trillion in private equity funds under management. The publication of the Principles is the first time that a group of influential limited partners has collectively published a set of core requirements for private equity fund documents.

Social Networking Policies – What Does Your Law Firm Have To Say?
Greg Lambert for 3 Geeks and a Law Blog

According to the Society of Corporate Compliance and Ethics survey on what companies are doing with social networking compliance, there are over 50% of companies that either do not have a social networking policy for their employees to follow, or do not know if they do. After running across a couple of law firm client alerts on this very topic, I thought I’d take a quick look and build an ad hoc bibliography on what attorneys at major law firms are saying lately on this topic.

Draft SEC Strategic Plan for 2010-2015

sec-seal

The Securities and Exchange Commission is seeking comment on its draft Strategic Plan. The document includes drafts of the SEC’s mission, vision, values, strategic goals, major initiatives, and performance metrics for fiscal years 2010 through 2015.

Draft SEC Strategic Plan for 2010-2015

Here is the new vision: The SEC strives to promote a market environment that is worthy of the public’s trust and characterized by transparency and integrity.

Here are the Strategic Goals and Outcomes:

Strategic Goal 1: Foster and enforce compliance with the federal securities laws

Outcome 1.1: The SEC fosters compliance with the federal securities laws.

Outcome 1.2: The SEC promptly detects violations of the federal securities laws.

Outcome 1.3: The SEC prosecutes violations of federal securities laws and holds violators accountable.

Strategic Goal 2: Establish an effective regulatory environment

Outcome 2.1: The SEC establishes and maintains a regulatory environment that promotes high quality disclosure, financial reporting, and governance, and that prevents abusive practices by registrants, financial intermediaries, and other market participants.

Outcome 2.2: The U.S. capital markets operate in a fair, efficient, transparent, and competitive manner, fostering capital formation and useful innovation.

Outcome 2.3: The SEC adopts and administers rules and regulations that enable market participants to understand clearly their obligations under the securities laws.

Strategic Goal 3: Facilitate access to the information investors need to make
informed investment decisions

Outcome 3.1: Investors have access to high-quality disclosure materials that are useful to investment decision making.

Outcome 3.2: Agency rulemaking and investor education programs are informed by an understanding of the wide range of investor needs.

Strategic Goal 4: Enhance the Commission’s performance through effective alignment and management of human, information, and financial capital

Outcome 4.1: The SEC maintains a work environment that attracts, engages, and retains a technically proficient and diverse workforce that can excel and meet the dynamic challenges of market oversight.

Outcome 4.2: The SEC retains a diverse team of world-class leaders who provide motivation and strategic direction to the SEC workforce.

Outcome 4.3: Information within and available to the SEC becomes a Commission-wide shared resource, appropriately protected, that enables a collaborative and knowledge-based working environment.

Outcome 4.4: Resource decisions and operations reflect sound financial and risk management principles.

National Breast Cancer Awareness Month

national breast cancer awarenes month

October is National Breast Cancer Awareness Month. Compliance Building, like many others, has gone pink to promote and support the world’s fight against breast cancer.

After watching the NFL players sporting pink accents on Sunday, I figured I could do the same thing. So I updated the website and changed many of the colors to pink.

Since the National Breast Cancer Awareness Month began in 1985, mammography rates have more than doubled for women age 50 and older and breast cancer deaths have declined. As a result, breast cancer deaths are on the decline. Encourage the women in your life to get mammograms on a regular basis.

You can also offer financial support. I encourage you to donate to the Susan G. Komen for the Cure.

Breast cancer is the most common cancer in women in the United States, aside from skin cancer. According to the American Cancer Society, an estimated 192,370 new cases of invasive breast cancer are expected to be diagnosed among women in the United States this year. An estimated 40,170 women are expected to die from the disease in 2009 alone. Today, there are about 2.5 million breast cancer survivors living in the United States.

Thanks to the folks at Corporate Compliance Insights for giving me the idea: CCI “Goes Pink” To Support Breast Cancer Awareness Month.

Bits and Pieces on Compliance

Here are a few stories and items that caught my eye recently, but I have not had time to build-out to a full post:

Role of Federal Sentencing Guidelines in FCPA Cases from the WrageBlog

Given the tremendous fines imposed upon Siemens AG and Kellogg Brown & Root LLC (“KBR”) in the past 10 months, many have asked how the DOJ calculates criminal fines in FCPA cases and how statutory penalties and the United States Sentencing Guidelines (“U.S.S.G.”) interact in that calculation.

Behind the Numbers: The Anatomy of a Ponzi Scheme from The Fraud Guy

Many articles have been out in the press since Ponzi schemes have begun unraveling over the course of the last year which either describe Ponzi schemes inaccurately or really don’t help the public understand how the schemes actually work and what happens with the money.  This article (publication pending), “The Anatomy of a Ponzi Scheme” may help people understand how Ponzi schemes and their orchestrators work.

Complying With Mass. Data Security Regs Proves Costly from Melissa Klein Aguilar for Compliance Week

For those organizations already tackling the task of complying with a new Massachusetts data security regulations that are currently slated to take effect March 1, compliance is proving costly, a recent survey shows. . .  A joint survey of more than 200 members of the International Association of Privacy Professionals conducted by the IAPP and the law firm Goodwin Procter found that 33 percent of the organizations polled have already spent more than $50,000 on complying with the rules.

Massachusetts Holds Public Hearing on Information Security Regulations — Regulators Contemplating Additional Revisions in Final Rulemaking from Security, Privacy and The Law

The Massachusetts Office of Consumer Affairs and Business Regulations (OCABR) held a public hearing in connection with its promulgation of revisions to the Commonwealth’s information privacy regulations, 201 CMR 17.00. The standing-room-only crowd endured a modest, unventilated conference room in the Transportation Building to make comments on the stringent regulations. OCABR Undersecretary Barbara Anthony led the meeting with OCABR Deputy General Counsel Jason Egan and Assistant Attorney General Diane Lawton. The principal author of the original regulations, OCABR General Counsel David A. Murray, could also be seen in the audience.

Due Diligence Failure Leads to SEC Enforcement Action? from Mark J. Astarita of SECLaw.com

The SEC has charged Detroit-area stock broker Frank Bluestein with fraud, alleging that he lured elderly investors into a $250 million Ponzi scheme.

Lehman Bankruptcy Court Declares “Bankruptcy Default” Under Swap Agreement To Be Unenforceable from Goodwin Procter

On September 17, in one such closely watched matter, U.S. Bankruptcy Judge James Peck ordered Metavante Corporation (“Metavante”), a counterparty to Lehman Brothers Special Financing (“LBSF”) in an interest rate swap transaction in which Lehman Brothers Holdings, Inc. (“LBHI”) is the credit support provider, to perform its obligations to pay quarterly fixed amounts owing under the transaction, notwithstanding the bankruptcies of LBSF and its parent. Judge Peck concluded that Metavante could not rely solely on the filing of the Lehman bankruptcy cases to refuse to make payment to Lehman while also not terminating the agreement.

Some of these have been in my personal Twitter feed (@dougcornelius) or my Posterous (Compliance Building’s Posterous).

SEC Announces New Division of Risk, Strategy, and Financial Innovation

sec-seal

The Securities and Exchange Commission announced the creation of its new Division of Risk, Strategy, and Financial Innovation. University of Texas School of Law Professor Henry T. C. Hu will be its first Director. Professor Hu authored several articles that brought attention to potentially manipulative market practices using borrowed stock and derivatives.

“The new division combines the Office of Economic Analysis, the Office of Risk Assessment, and other functions to provide the Commission with sophisticated analysis that integrates economic, financial, and legal disciplines. The division’s responsibilities cover three broad areas: risk and economic analysis; strategic research; and financial innovation.”

But what is this new division going to be doing?

The new division will perform all of the functions previously performed by Office of Economic Analysis and Office of Risk Assessment, along with the following:

  1. strategic and long-term analysis
  2. identifying new developments and trends in financial markets and systemic risk
  3. making recommendations as to how these new developments and trends affect the Commission’s regulatory activities
  4. conducting research and analysis in furtherance and support of the functions of the Commission and its divisions and offices
  5. providing training on new developments and trends and other matters.

The SEC now has five divisions:

  • Division of Corporation Finance
  • Division of Enforcement
  • Division of Investment Management
  • Division of Trading and Markets
  • Division of Risk, Strategy, and Financial Innovation

According to Broc Romaneck, this is the first new division at the SEC since 1971. They divided Trading and Markets into Division of Enforcement and a Division of Market Regulation, and created a new Division of Investment Company Regulation, spun off from the Division of Corporate Regulation.

References:

The Collapse of AIG

AIG

There have been many stories about the collapse of AIG. There have also been many stories about the internal flaws at AIG. The pitchforks were out when bonuses were announced in March. One of those executives was Jake DeSantis who wrote a New York Times OP-ED about his bonus. (AIG Bonus – My Thoughts) It turns out that Mr. DeSantis also contacted Michael Lewis.

The end result is a story in the August issue of Vanity Fair: The Man Who Crashed the World. As you can guess from the title, Lewis pins much of the blame on one man: Joe Cassano, the former president of AIG Financial Products.

After reading the article, I am not sure it’s fair to pin so much blame on Mr. Cassona. The article does provide a great deal of insight and clarity into the interconnections between AIG, sub-prime lending, credit default swaps, and the collapse of US house prices.

“There was a natural role for a blue-chip corporation with the highest credit rating to stand in the middle of swaps and long-term options and the other risk-spawning innovations. The traits required of this corporation were that it not be a bank—and thus subject to bank regulation and the need to reserve capital against the risky assets—and that it be willing and able to bury exotic risks on its balance sheet. There was no real reason that company had to be A.I.G.; it could have been any AAA-rated entity with a huge balance sheet. Berkshire Hathaway, for instance, or General Electric. A.I.G. just got there first.”

At first, credit default swaps were mostly for commercial credit risk. Then, they started to expanding to consumer credit risk. The thought inside AIG Financial Products was that it was sufficiently diverse that it was unlikely to all bad at once.  At first, the consumer products did not include sub-prime loans. Then, in 2004, the less credit-worthy sub-prime loans started becoming part of the credit pools.  They eventually pulled the plug, feeling confident that their 2005 risks would not suffer any credit losses. (They were wrong.)

The bigger problem came when AIG lost its AAA rating, the day after Hank Greenberg was forced to resign. With its AAA rating, AIG has resisted being required to post collateral to back up its outstanding obligations under the derivative products it was selling. With a downgrade in its credit rating, it had agreed to post collateral. When the debt AIG insured started going bad, AIG had to put up cash collateral to back up its obligations. There was the equivalent of a run on a bank.

Lewis alludes to AIG’s risk-taking for residential loans may have been one of the factors that contributed to the dramatic run up in house prices, that eventually lead to more sub-prime borrowing, to a further increase in home prices and to more bad debt. That liquidity and poor underwriting lead to loans being made that, in retrospect, should not have been made.

Lastly, since AIG turned off its supply of risk-taking for residential mortgage loans, banks kept more of that risk on their books. That may have lead to the collapse of Bear Stearns, Merrill Lynch, and Lehman Brothers.

Lewis pins the blame on Cassano for not realizing that AIG was increasing taking on more sub-prime risk than they realized. At one point, when pools were up to 95% sub-prime, many internal risk analysts guessed that there was no more than 20%. Even when confronted with this Cassano dismissed the problem, conluding that house prices could never fall everywhere in the United States at once. (He was wrong.)

You can read the article and determine for yourself if Cassano should really be the fall guy.

In the end, the lesson to be learned for compliance and risk professionals is the importance of listening to your front line employees. They see many problems coming long before you do.

If you like that article, Michael Lewis also did a great story in the April issue of Vanity Fair on the financial collapse in Iceland: Iceland’s Meltdown.

UPDATE: The Wall Street Journal published an article indicating that Mr. Cassano is the subject of a grand jury inquiry. Prosecutors Are Poised to Impanel AIG Grand Jury. The possible case against Mr. Cassano (and others) could rely partly on tape recordings of 2007 phone calls involving AIG Financial Products employees who discussed the value of their derivatives trades.