Category: Compliance Programs

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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SEC Proposal on Short-Term Borrowing Disclosure by Public Companies

The Securities and Exchange Commission voted to propose measures that would require public companies to disclose additional information to investors about their short-term borrowing arrangements. The proposals would require “a registrant to provide, in a separately captioned subsection of Management’s Discussion and Analysis of Financial Condition and Results of Operations, a comprehensive explanation of its short-term borrowings, including both quantitative and qualitative information.”

The proposed rules are aimed to enable investors to better understand whether amounts of short-term borrowings reported at the end of reporting periods are consistent with amounts outstanding throughout the reporting periods. From the FAQs it sounds like the proposal is intended to attack repo transactions.

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Criminal Provisions under Dodd-Frank

handcuffs

When thinking designing compliance programs, I pay extra attention to the issues that can result in jail time. It’s one thing to pay a fine, it’s a much bigger problem when you take someone’s freedom away.

The Dodd-Frank Wall Street Reform & Consumer Protection Act has added several new federal criminal offenses. The National Association of Criminal Defense Lawyers has compiled the two dozen provisions in a handy guide: Criminal Provisions in HR 4173 (list of the criminal provisions in Dodd-Frank Wall Street Reform & Consumer Protection Act).

Most of these new opportunities to earn a shiny pair of bracelets are related to the new regulatory regime of swaps.

Compliance Bits and Pieces: Mark Hurd Special

Mark Hurd

Last Friday, the big news in compliance was the sudden resignation of Mark Hurd as the CEO and Chairman of the Board of Hewlett-Packard. I decided to put together a compilation of other stories I found interesting.

HP and me: Coincidence or not? by Michelle Leder in Footnoted

Of course, footnoted had done its own poking at HP over the years. But one piece that seems particularly prescient right now in light of the shared meals between Hurd and the recently named consultant, Jodie Fisher, is this post from nearly two years ago that talked about some hefty gross-ups for Hurd’s meal. As we noted at the time, we used some back-of-the-envelope math to come up with a total meal bill of $243K. Several days later, HP filed a revised proxy to say that $79,814 tax gross up that was originally reported was actually only $4,117, which we viewed with a healthy serving of skepticism.

(It’s good to see Michelle back after having a baby. Congratulations Michelle!)

Hurd and ethics? Nah, it’s the money by Dennis Howlett in ZDNet’s Irregular Enterprise

The old saying that money talks while BS walks is a good standby but it doesn’t always apply. Sometimes money blinds you. As it seems to have done over some of Hurd’s expenses and the board in bending over to make a messy settlement.

The FCPA – Tone at the Top and in the Middle by Tom Fox in the FCPA Complaince and Ethics Blog

We have previously noted that Hewlett-Packard is under investigation for allegations of paying bribes to obtain commercial sales contracts in Russia. (See here and here) Given the current situation with the former Chairman and Chief Executive and the ongoing bribery investigation by not only German and Russian governmental authorities but also the SEC and Department of Justice for possible FCPA violations, it might be a propitious time for Hewlett-Packard’s top management to implement some or all of Hanson suggestions regarding the communication of Hewlett-Packard’s commitment to FCPA compliance and ethics to its middle management and indeed throughout its organization.

HP, Hurd, Deloitte and Tone at the Top by Francine McKenna in re: The Auditors

What do HP, Boeing and Navistar have in common?  All three companies, over the years, have fought SEC investigations, internal investigations, and shareholder lawsuits. … There’s one more thing these three companies have in common:  Deloitte was their auditor during the worst of these troubles.

The Week in Ethics: Mark Hurd’s Leadership Failure by Gael O’ Brien in The Week in Ethics

Tone at the top only counts when leaders use words that they believe in enough to live.

HP’s letter to employees on Hurd resignation from cnet

On Friday afternoon [Chief Financial Officer Cathie] Lesjak sent a memo to company employees explaining the leadership change and going into some detail about the nature of the claim, and the results of the the HP board of directors’ investigation. CNET has obtained a copy of that e-mail, which we’ve posted below in its entirety.

Here’s The Real Reason HP CEO Mark Hurd Was Fired (As Best We Can Tell…) by Henry Blodgett in Business Insider

Now that everyone has gotten over the shock of HP CEO Mark Hurd getting ejected on an August Friday afternoon–with the timing of the announcement obviously chosen to minimize bad PR–people are looking more closely at the details. And the details leave big questions as to what really happened.

How HP General Counsel Michael Holston Handled CEO’s Sex Harassment Nightmare by Sue Reisinger in Corporate Counsel

For Hewlett-Packard Company general counsel Michael Holston the nightmare began when CEO Mark Hurd handed him a June 29 letter accusing Hurd of sexual harassment. Hurd took the letter to Holston, reportedly within a half hour of receiving it.

Mark Hurd’s Excesses Were in Plain Sight by Eric Jackson in The Street

There are lots of good CEOs who suddenly lose their touch. What alarmed me about Hurd last year was the piggish behavior he and his executive team were exhibiting at the expense of H-P shareholders. What was worse, they were gorging at the trough of lavish compensation and excess perks at the same time that they were hypocritically turning the screws on H-P employees (who remained after a series of layoffs) to accept pay cuts and reduced benefits.

I wrote about the mixed messages from H-P

Be the Mayor, not the Sheriff

Are you getting in the way or helping to move your organization forward?

Inevitably, compliance professional will need to step in and stop an activity or start a discipline process for someone who broke the rules. That does not have to be the primary focus of the your job, or the compliance profession.

Frank Sheeder, of the Healthcare Compliance Blog put together a story on How to Fail as a Compliance Officer. Number two on the list was “Acting like the sheriff instead of the mayor.”

That lead to a childhood flashback of the old McDonald Land populated by Mayor McCheese and Officer Big Mac, with the Hamburglar stealing burgers, the Fry Guys stealing fries, and Captain Crook trying to steal the Filet-o-Fish. I vaguely remember Grimace originally stealing shakes, before he became more law-abiding (and more cuddly with fewer arms).

Of course you need an enforcement function. You need to punish an offender, even if he is the CEO (well, sort of).

The primary function of compliance should be educating the employees about the rules. You should evaluate rules that are causing problems and see if there is a better way to deal with the issue. You should look for weaknesses in the company’s operations and policies so you can improve them.

Be the mayor. Wear a sash instead of a badge.

Images are property of McDonald’s, who apparently stole them from Sid and Marty Krofft, the creators of H.R. Pufnstuf, Sid & Marty Krofft Television Productions, Inc. v. McDonald’s Corp., 562 F.2d 1157 (1977)

That’s a $h!#ty Policy

On the front page of today’s Wall Street Journal is story about one of the fallouts from Goldman Sachs’ recent problems with the SEC: George Carlin Never Would’ve Cut It at the New Goldman Sachs.

One of the most sensational bits of Goldman Sachs fiasco was an email from a Goldman executive “[B]oy that, timberwolf was one $h!#ty deal.” Apparently, Goldman thinks the solution is to ban profanity in electronic messages.

Of course, everyone needs to pay closer attention to what is written down in email. They are often reviewed and taken out of context during litigation. Saying it was “$h!#ty deal” is more sensational than saying it was a “bad deal.”

Monitoring language in email has been part of financial service compliance for years. The SEC requires that compliance monitor for improper activity and advice. It will be easy enough to have the monitoring program also search for George Carlin’s “Seven Words You Can Never Say on Television” and their variants.

The big problem will be false positives once you start getting into the variants. That means frontline employees and deal flow will be get emails bounced back or blocked. Inevitably, compliance will get the blame for messing up a deal.

The other problem is enforcement. The first line of enforcement will probably be to block messages from being sent with profanity in them. That works as long as you can eliminate false positives. The alternative is to notify compliance when a message has profanity. Compliance can then keep track of the number of messages and report back to management for discipline.

“Employee A had 354 message with “$h!#ty”, 1,567 with F@(k, and 456 with this word which I don’t know but sounds dirty.”

Sounds like a $h!#ty policy and $h!#ty role for the compliance department.

Do Prosecutions Stop Insider Trading?

We generally assume that the prosecution of crime acts as a deterrence to others who may think about committing the crime. One of the key factors in fraud is opportunity. If the wrongdoer thinks they can not get away with the violation, they are less likely to commit the violation.

At least that is the theory. Social scientists have been looking at this strategy for a long time, with sometimes mixed results. My guess is that the deterrent effect will vary from crime to crime and deterrence strategy to deterrence strategy.

What about insider trading?

The UK’s Financial Services Authority has published a metric on insider trading. They look at the level of abnormal pre-announcement price movements (APPMs) in the share price of a company.

“The level of APPMs for the takeover data set has remained stable over the past few years including for 2009. The level of APPMs for the FTSE 350 data set remained at a low level in 2009.”

The data does not show any improvements. The data set is on the small side so it is hard to judge significance. The FSA program is also new. The program begin during a period of great turmoil in the financial markets.

On the other hand, the FSA’s new enforcement activity of criminal prosecutions and large fines did not affect the amount of abnormal pre-announcement price movements. If this robust enforcement activity is supposed to have a deterrent effect, it does not obviously appear in the data.

Perhaps robust enforcement activity catches more bad guys but does not reduce the bad activity.

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Compliance Bits and Pieces – July 2

Early this week, some people expected fireworks to come from the Free Enterprise v. PCAOB decision. Instead, we got cheap package of sparklers. Fun for a few minutes, but unlikely to leave much of a lasting impression.  Here are some interesting compliance-related stories from the past week.

SEC Statement on Supreme Court’s Decision in FEF v. PCAOB

I am pleased that the Court has determined that the Board’s operations may continue and the Sarbanes-Oxley Act, with the Board’s tenure restrictions excised, remains fully in effect. The PCAOB is a cornerstone of the Sarbanes-Oxley Act and serves a critical role in promoting investor protection and audit quality,” said SEC Chairman Mary L. Schapiro. “We look forward to continuing to work with the Board in connection with its mission to oversee auditors in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports.”

The PCAOB Anti-climax by Professor Bainbridge

The real problem here is the Supreme Court’s decades long acquiescence in the creation of a fourth branch of government comprised of independent agencies over which the President has power of removal only for cause. It is not so much the double level of tenure protection that offends the President’s constitutional prerogatives, as the existence of any level of protection.

The New Sheriffs in Town by Halah Touryalai in RegisteredRep.com

There will be plenty at stake when the 4,000 firms currently registered with the SEC are transferred to state regulators. Between 2008 and 2009 the number of firms with $100 million assets or more dropped. Meanwhile, the number of firms with $25 to $100 million in assets increased by 15 percent. Firms in that range make up 38 percent of all SEC registered investment advisors — larger than any other asset range.

Enforcement Report for Q2 ’10 in the FCPA Blog

The first quarter of 2010 was the busiest ever for FCPA-related enforcement. This past quarter was one of the quietest for new enforcement actions, with just one from the DOJ and three from the SEC.

Image is sparkle3 by placid casual

Cheap Sunglasses and Compliance

Can cheap sunglasses affect your ethical behavior?

An important part of a compliance program is monitoring and improving the ethical behavior of your workforce. I’m always intrigued by ethics experiments.

Francesca Gino of Chapel Hill, Michael Norton of Harvard Business School, and Dan Ariely of Duke tested the effect of wearing knock-off designer sunglasses. They wanted to see if knowing you were wearing knock-offs would affect your behavior.

It did. Those subjects told they were wearing knock-off designer sunglasses cheated more than those who were not told.

The scientists asked two groups of young women to wear sunglasses taken from a box labeled either “authentic” or “counterfeit.” (All the eyewear was authentic.) Then the researchers put the participants in situations in which it was both easy and tempting to cheat.

People still cheat when its easy and tempting. Of those in the “authentic” group, 30% inflated their scores. But in the “counterfeit” group 71% inflated their scores.

They ran a bunch of other tests using the same theory that knowingly wearing knock-off designer sunglasses leads to degraded ethical behavior. It seems to have a very significant impact.

A lesson for compliance professionals: Don’t use knock-off goods in your program.

Dan Ariely talks about the findings in this video:

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Image of Knockoff Shades is by sparktography.