Pay to Pour

800px-Michelle_Obama_pours_a_pint_of_stout

Massachusetts regulators have launched an investigation into whether providers are paying for access. In this case, it’s about beer, not political donations. Pay-to-play is illegal under Massachusetts and federal liquor control laws.

The restrictions date back to the end of Prohibition, to keep large breweries from dominating the market. Small breweries have to compete for limited space at the bar. This is not true for the grocery store where non-alcohol manufacturers routinely pay a slotting fee for access to the supermarket shelves.

A local craft brewing company executive aired his grievances on Twitter, and complained that two restaurants would not serve his beer because he would not buy a beer line. The response, in part, was

“I personally don’t even know you, never asked you for a damn thing, never intend to ask you for a damn thing and will not serve your inferior product. ” 

From compliance perspective it looks like the Massachusetts law must hinge on the word “substantial”

No licensee shall give or permit to be given money or any other thing of substantial value in any effort to induce any person to persuade or influence any other person to purchase, or contract for the purchase of any particular brand or kind of alcoholic beverages, or to persuade or influence any person to refrain from purchasing, or contracting for the purchase of any particular brand or kind of alcoholic beverages.

Whenever I go into a bar or liquor store, I see plenty of signs and other items that have clearly been given to the retailer. I guess the glowing Budweiser sign is not “substantial.” The accusations are for payments or merchandise on a grander scale.

Does it matter? Is this a regulation that helps the economics for a consumer?

Resources:

Cheating Your Way Into the Olympics

Vanessa_Mae_holding_olympic_torch

Vanessa Mae really wanted to compete in the Olympics, but she is better violinist than a skier. She has sold 10 million records so that is a very high bar. The International Ski Federation decided that she cheated her way into the Olympics.

When Eddie the Eagle competed in the 1988 Olympics, some thought it was a great underdog story and some thought it was degrading the biggest sports event. In response, the International Olympic Committee instituted a new rule in 1990 which requires Olympic hopefuls to compete and place well.

In Sochi the musician raced for Thailand and finished last of 67 competitors in the two-run giant slalom. Her quote after the race:

“You’ve got the elite skiers of the world and then you’ve got some mad old woman like me trying to make it down.”

To qualify, Ms. Mae raced four times in Slovenia in January in a last-ditch bid to meet the Olympic qualifying standard. Under current Olympic qualification rules, countries with no skier ranked in the world’s top 500 may send one man and one woman to to compete in slalom and giant slalom if those athletes meet racing criteria.

Thailand has no skiers ranked in the world’s top 500.  To meet the racing criteria, Mae had to produce an average of 140 points or fewer over five recognized races. She slid under the wire and made the score.

But it turns out those races in Slovenia were a fraud, staged to get Mae the points she needed. According to the FIS report:

  • The results of two giant slalom races on 19th January included a competitor who was not present at, and did not participate.
  • At least one competitor started away from the starting gate outside the automatic timing wand that was manually opened by the starter when she was already on the course.
  • A previously retired competitor with the best FIS points in the competition took part for the sole purpose of lowering the penalty to the benefit the participants in the races.
  • The races courses were not changed for the second runs as is required by the FIS rules.
  • One of the races was a junior championship, with Mae being 15 years older than all of the other racers.

The FIS banned five officials from Slovenia and Italy for between one and two years for their role in the scandal. Ms. Mae is banned from skiing for four years. But she still achieved her dream of competing in the Olympics.

Sources:

“Vanessa Mae holding olympic torch” by Yemisi Blake from London, United Kingdom. Licensed under CC BY 2.0 via Wikimedia Commons.

Weekend Reading: Trapped Under the Sea

trapped under the sea

If you’ve ever flown into Boston’s Logan Airport or stared out over the harbor, you likely noticed the dozen egg-shaped structures sitting out on Deer Island. Those are key components of the second largest sewage treatment facility in the United States. The construction of the outflow pipes from that facility is the key point in Trapped Under the Sea: One Engineering Marvel, Five Men, and a Disaster Ten Miles Into the Darkness by Neil Swidey.

The communities of Greater Boston had been dumping barely-treated and raw sewage into Boston Harbor since it was founded. Boston earned the unwanted honor of having the nation’s filthiest harbor. I Love that Dirty Water, but it was time to clean up. By federal and judicial mandate Massachusetts constructed the sewage treatment plant at Deer Island.

In addition to the treatment, the outflow need to be sent somewhere. The design was to send it out to sea through a 9.5-mile-long tunnel, hundreds of feet below the harbor and into the deep water of Massachusetts Bay.

The final step in the construction was to remove the caps at the end of that tunnel. The construction issue was how to do that. The eventual plan was to send a team out to the end of the tunnel to pull the plugs.

At that point in the construction, the ventilation and lighting systems had been removed from the tunnel. The oxygen level had dropped below a level where a human could live. Near the end of the tunnel, its diameter grew smaller and smaller, until it was less than five feet at the end. Then the worker would have to crawl through a three foot side tunnel to reach the sixty-five pound plug. Then repeat that 54 times. No thanks, I’d rather sit at my desk.

The construction company hired a dive team that would use an experimental breathing system to pull those plugs. As you can tell from the title of the book, things go wrong.

On the first day in the tunnel air hoses tangled, the oxygen supply malfunctioned before they could pull any plugs, and the truck wouldn’t start when they tried to drive back to the tunnel entrance.  On the second day, the men worked out some of the problems and managed to remove two plugs. On the third day, everything went wrong.

Mr. Swidey keeps the action moving and the tension mounting as he retells the events leading up to the tragedy and what ensues. He is very detailed.

For a compliance angle, you can see the conflict between the pressure to get the tunnel done and the safety of the workers. There is also a great view of the ensuing investigation.

Mr. Swidey points out that injuries and deaths tend to happen at the end of projects, when tolerance for delays is low and confidence is high. It’s normalization. When someone does something without suffering a bad outcome, the harder it becomes for them to remain aware of the risks and bad behavior. You see this with fraud and ponzi schmes.

There was a great piece in the Boston Globe written by Parker Pettus:

These men were not rich or famous or privileged. Certainly they would have preferred not to have been in a dangerous tunnel hundreds of feet below the surface and miles from any help.

They died while doing a hazardous, unheralded job, and their contribution to a clean, revived Boston Harbor will last for generations. They will not be immortalized in the media, they will not be buried at sea from the decks of a warship.

These workers are the kind of heroes who are so often taken for granted. We would do well to think of Boston’s clear, blue, living harbor as a monument to the courage and sacrifice of the ordinary heroes who made it a reality.

Trapped Under the Sea should be a great addition for your “to-read list.”

Sources:

Compliance Bricks and Mortar for November 14

Decay: Aged brick & mortar in Puerto Rico by Rusty Long

These are some of the recent compliance-related stories that caught my attention.

The SEC and the DMV by Thomas O. Gorman in SEC Actions

“The SEC Should Copy the DMV” is the title of an article published in the New York Times by Joseph S. Fichera recently. The article focuses on the use of corporate fines, questioning whether they are effective: “The SEC and other federal regulators have levied over $125 billion in penalties on Wall Street since the global financial crisis of 2008. Yet few believe that these fines are enough to change behavior. For the largest financial institutions, a multibillion-dollar penalty can amount to a speeding ticket – another cost of doing business,” Mr. Fischera notes. He goes on to argue that the point system of the DMV might be adopted. Under that system drivers collect points for each infraction. When the driver accumulates enough points their driving privileges are revoked for a period of time. If the SEC adopted a similar system, then the market place might force firms into effective compliance as points pile up.

Trial Lawyering and FCPA Compliance by Tom Fox in the FCPA Compliance and Ethics Blog

It is that type of trial lawyer mentality which also seems to seep into the debate about a compliance defense under the FCPA. Leaving aside the Arthur Andersen effect of 63,000 people losing there livelihoods because one corporation made an idiotic decision to go to trial; the trial lawyer mentality that wants to tee it up with the DOJ does not serve the counseling function which corporations require. What does a trial lawyer tell a client about its chances at trial? You have a 10% chance; 20% chance; 50% chance; 75% chance of winning? What is that based on? Knowing what 12 (or perhaps 6) citizens will say? If there is a potential $500MM fine for a guilty verdict and there is a 10% chance of losing, is settling for $50MM reasonable? What if your illegal conduct was over five years ago, are you really going to trial on statute of limitations defense, where your own conduct hid the FCPA violations? Want to try and use that fact issue to persuade a jury that the government waited too long to indict?

SEC’s Increased Use of Administrative Proceedings Draws Criticism and Legal Challenges by Chip Phinney in Mintz Levin’s Securities Litigation & Compliance Matters

The SEC’s plan to bring more enforcement actions as administrative proceedings before its own administrative law judges rather than in the federal district courts — even in insider trading cases — has been drawing increasing criticism and legal challenges.  Most recently, Judge Jed Rakoff of the U.S. District Court for the Southern District of New York questioned  the SEC’s use of administrative proceedings in a speech last Wednesday before the Practising Law Institute’s Annual Institute on Securities Regulation.  Judge Rakoff observed that the SEC’s administrative powers, which were originally quite limited, have been expanded considerably by the Sarbanes-Oxley Act of 2002 and especially by Section 929P(a) of the Dodd-Frank Act of 2010, which respectively enabled the SEC to obtain administrative orders barring defendants from serving as officers and directors of registered companies and assessing monetary penalties.

AIFMD Reporting by non-EEA AIFMs by Winston Penhall and Paul Moran in ReedSmith’s Private Funds Law Update

AIFM that are authorised by the UK Financial Conduct Authority (or “FCA”) are already subject to compulsory reporting, while non-EEA AIFM become subject to FCA reporting when they register with the FCA under the UK national private placement regime (the “UK NPPR”).

Digging into the Data by Matt Kelly in Compliance Week

There are two truths about corporate compliance: no universal solution exists for all businesses, and everyone wants to know what everyone else is doing. As part of Compliance Week’s effort to better serve the compliance community, we now have a way to address both those points of pressure.

Decay – Aged brick & mortar in Puerto Rico is by Rusty Long
cc-by-nc-sa

 

Cheating Your Way to Marathon Victory

rosie ruiz

Tabitha Manning ran the Chickamauga Battlefield Marathon setting a personal best record time of 2:54:21. But it looks like she pulled a Rosie Ruiz.

For those of you not familiar with the history of the Boston Marathon, Rosie Ruiz was declared the winner of the 1980 Boston Marathon with a time of 2:31:56. At that time, it was one of the fastest female marathon runs. Currently, the female elite runners leave before the men. In 1980, women were back in the pack and harder to track.

Ms. Ruiz raised some red flags during her post-win interviews. She didn’t seem as fatigued or covered in sweat as the other competitors. A few people came forward and stated that they saw Ms. Ruiz burst from the crowd on Commonwealth Avenue in the last mile of the marathon. Race officials took away her olive wreath crown and title.

As a result of Ms. Ruiz’s hijinks marathons began using RFID chips to track a runner’s progress on the course. That makes it easier to see if a competitor has jumped on the train to reach the finish instead of running.

That chip marks when you cross the start line and the finish line. For most races it will mark your time at other places along the course.

Going back to Ms. Manning, she seems to have exploited the Chickamauga Battlefield Marathon’s use of only a mid-race split in addition to the start and finish. In looking at the course, it runs two laps around the battlefield park. But there is a road right down the middle.

The chip show Ms. Manning running a 2:54 marathon, but 2:06:51 for the first half and 47:30 for the second half.

That’s a big burst of speed.

Or a quick car ride.

Race officials could also check Ms. Manning’s previous running times and see that the first half time was closer to her previous races.

Ms. Manning was disqualified and Lillian Gilmer was crowned the winner.

When people wonder how design a control, that marathon chip is an excellent example. It marks your progress around the course to make sure that you are not taking shortcuts. The Chickamauga Battlefield Marathon organizers went cheap on the controls. As a result there was only one place (maybe two places) where the chip was scanned. That allowed Ms. Manning to use a shortcut.

Sources:

The SEC Shuts Down Another Illegal Crowdfunding Site

eureeca-logo

Kickstarter has shown the world that crowdfunding is a viable option for funding great ideas. Because of US securities laws, the funding arrangement on that platform cannot be for an equity interest. That’s selling securities and that practice is subject to decades of protections built to protect consumers.  The JOBS Act opened the possibility of equity crowdfunding sites for the masses, but the implementation is still hung up in SEC rulemaking.

That has not stopped internet entrepreneurs from firing up crowdfunding sites. There are ways to do so legally, but there are lots of regulatory and operational landmines that need to be navigated.

Of course, it’s very easy to set up an illegal crowdfunding site. Eureeca.com did that and subjected itself to the wrath of the SEC.

Eureeca.com’s approach was to make international investments available for crowdfunding. From looking at the funding proposals on the site, most seem to be coming out of the Middle East and North Africa. Since I see the proposals and can seemingly participate, Eureeca.com subjected itself to the jurisdiction of the SEC.

The website is a general solicitation for securities purchases. None of the securities are registered. Eureeca.com is not making any attempt to limit participants to accredited investors and is not taking steps to verify that investors are accredited investors. That would allow it to use the new Rule 506(c) exemption for public private placements.

The SEC wrath was a charge of failing to register as a broker-dealer.

According to the SEC order, three US investors put $20,000 into four offerings. That resulted in a $25,000 fine and new big disclaimer on the site:

The securities and services on the Eureeca platform are not being offered in the USA or to U.S. persons. For further information please read our FAQs.

If the offerings were in the US, the SEC would also be able to interfere with the private placements as violations, but the issuers are outside the reach of the SEC. I’m not familiar with the securities laws in the foreign jurisdictions, but I would guess that Eureeca.com is violating the securities laws in many other countries.

The SEC will continue to bring the hammer down on crowdfunding sites. The SEC worried about consumer protection and fraud in this area. I think they are right to concerned.

Sources:

Veterans Day – Remember Those Who Serve

veterans day 2014

Raymond Weeks of Birmingham, Alabama, organized a Veterans Day parade for that city on November 11, 1947, to honor all of America’s Veterans for their loyal service. Later, U.S. Representative Edward H. Rees of Kansas proposed legislation changing the name of Armistice Day to Veterans Day to honor all who have served in America’s Armed Forces.

In 1954, President Dwight D. Eisenhower signed a bill proclaiming November 11th as Veterans Day and called upon Americans everywhere to rededicate themselves to the cause of peace. He issued a Presidential Order directing the head of the Veterans Administration, now the Department of Veterans Affairs, to form a Veterans Day National Committee to organize and oversee the national observance of Veterans Day.

Take a few minutes today to remember those who served.

Weekend Reading: The Map Thief

map thief

The classic business edict is to buy low and sell high. E. Forbes Smiley took that edict to heart in his business as an antique map dealer. Unfortunately, he discovered he could get his cost close to $0 if he stole his inventory. Michael Blanding captures the story of Mr. Smiley and the world of antique maps in The Map Thief: The Gripping Story of an Esteemed Rare-Map Dealer Who Made Millions Stealing Priceless Maps.

It turns out that valuable maps are much easier to steal than art. Works of art are generally one-of-a-kind pieces that hang in museums where everyone knows where they are. It’s hard for thieves to break and in and steal one. It’s even harder to try and sell the unique, identifiable, and now-known as stolen item.

In contrast, rare maps may be printed in thousands of copies, of which some unknown quantity may have survived over the centuries. They are rare, but not necessarily unique.

It also turns out that libraries are chock full of old map collections and atlases that are poorly cataloged, poorly tracked, and poorly monitored.  Mr. Smiley discovered that he could greatly increase his profits by attacking one of these libraries. He would pocket a map from a messy collection or tear maps from their bindings in atlases.

One of Mr. Smiley’s client was Norman Leventhal, the patriarch of the firm that employees me. The walls of my offices are adorned with part of his collection.

You can see the lack of controls at the libraries. One result of Mr. Smiley’s capture was an increased emphasis on libraries tracking their map collections. Mr. Smiley was not the only thief among map dealers.

The one weakness in the book is what made Mr. Smiley turn from respectable map dealer to thief. There is some discussion of his finances and a possible need to for more cash. There is also an implication that felt left out when one of clients made a large donation to a library. Mr. Smiley thought he was entitled to more. But it seems like the thievery started before then.

In the end we just don’t know what caused him to step over the line.

 

Compliance Bricks and Mortar for November 7

rainbow bricks

These are some of the compliance-related stories that recently caught my attention.

Fordham Law offers LL.M in Corporate Compliance, expands JD training by Sean J. Griffith in the FCPA Blog

The new compliance programs are good news for law students. According to The Wall Street Journal, starting salaries for compliance officers have been rising 3.5% each year since 2011. Moreover, those officers with a law degree are generally in a better position to advance to the higher end of the pay scale. In some large companies this salary may figure at more than $200,000.

Compliance Professionals Getting Grief by Roy Snell in SCCE’s Compliance & Ethics Blog

On occasion I get a little grief for being in the compliance profession. Sometimes it’s misguided because they think compliance professionals make up all the rules and they don’t like rules. But it’s still tiresome.

On Fifth Anniversary Of Rothstein’s $1.2 Billion Ponzi Scheme, Questions Remain by Jordan D. Maglich in Ponzitracker

Five years ago on a late October night, prominent lawyer Scott Rothstein hurried down an empty tarmac towards a waiting Gulfstream plane bound for Morocco – a country that lacked an extradition agreement with the United States. Rothstein’s once-extravagant lifestyle was collapsing before his eyes, with hundreds of investors soon to learn that Rothstein had masterminded a massive $1.2 billion Ponzi scheme. Carrying a duffel bag stuffed with over $500,000 and with $16 million sitting in a Moroccan bank account, Rothstein had little intention of returning to the U.S. to face the music.

Gallagher: Dodd-Frank Has SEC ‘Shoveling Manure’ for ‘No Discernible Purpose’ by Bruce Carton in Compliance Week

In his latest attack on the law he recently called “Dodd-Frankenstein,” SEC Commissioner Daniel S. Gallagher stated that the Dodd-Frank Act has left the Commission spending “much, if not most, of its time and resources for nearly half a decade shoveling manure, in some cases for no discernible purpose whatsoever.”

 

 

Rainbow Bricks by fusion-of-horizons

LinkedIn and Compliance for Private Funds

LinkedIn-Logo

At the recent  I was talking with another attendee about LinkedIn and the SEC rules on advertising. The basic question was can her employees use it. That became a more nuanced discussion of the various features.

One topic was the messaging feature of LinkedIn. You can send massages to people on LinkedIn. It’s not a great tool, but some people like it. Her interest was because some of her employees wanted to use it to communicate with clients and potential clients. That was the first red flag.

As a registered investment adviser, her firm was subject to the record-keeping rules. Rule 204-2(a) (7) requires an investment adviser to keep records of certain communications between the adviser and its clients. If the communication is happening on a third-party platform, it’s outside of the investment adviser’s reach. That means getting a third-party application to capture that communication. There are several vendors who claim to be able to do so. ( Smarsh is one. Global Relay is another. )

The other question that I, and those nearby, latched onto was the “testimonials” implication of LinkedIn.

The advertising limits under Rule 206(4)-1 limit the use of any communications “which refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser or concerning any advice, anaylsis, report or other service rendered by such investment adviser.” LinkedIn has several features that could be considered a testimonial.

The first is the recommendation feature. If a client writes a recommendation of the investment adviser, you’ve violated the rule. A recommendation would be considered a testimonial. The SEC’s view is that a testimonial may not represent the experience of a typical client. You can agree or disagree with the rule, but the rule is still in effect. My opinion was to have her employees shut off the recommendations feature and not allow them to use it.

The other feature that raises concern is the skills and expertise feature. That allows your connections to endorse particular skills. I personally find this feature to be wonky. The list of skills and expertise that I see in my profile seem a bit random and off base. Although some are right on target.

If a connection endorses a skill and expertise, I think that is a testimonial. Given that the endorsement could be from a client, then publishing that endorsement would violate the advertising rule’s ban on testimonials. My recommendation was to ban use of that feature.

What are your thoughts on the use of LinkedIn?