Ethisphere’s 100 Most Influential People in Business Ethics


The Ethisphere Institute unveiled its “100 Most Influential People in Business Ethics,” an annual list of individuals who have made a significant impact in the realm of corporate citizenship over the course of the previous year.

Some are world famous and some are little unknown. Here are some that caught my attention:

#48 Stephen Colbert – Satirist, The Colbert Report
Category: Media and Whistleblowers

#64 Jack Dorsey – Founder and Executive Chairman, Twitter
Category: Business Leadership

#77 Chris MacDonald – Author, Business Ethics Blog
Category: Media and Whistleblowers

#85 Dick Cassin – Author, FCPA Blog
Category: Media and Whistleblowers

#91 Matt Kelly – Editor-in-Chief, ComplianceWeek
Category: Media and Whistleblowers

Compliance Bits and Pieces for January 20

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

Bruce Carton’s “2011: The Year in Enforcement” in Securities Docket

2011 was another difficult year for the Securities and Exchange Commission, even though another Madoff or Stanford-like scandal didn’t emerge to bring new embarrassment. Indeed, the SEC seemed to be under attack from all sides throughout the year—by Congress, by the judiciary, by its own inspector general, by private litigation, and, of course, by the media. Here is my look back at 2011, including the good, the bad, and the ugly in the world of securities enforcement.

California Proposes Private Fund Adviser Exemption in Hedge Fund Law Blog

As a general proposition, managers who are located in California must register as an investment adviser if they are providing investment advice for compensation.  There are exemptions from the registration requirement which we have detailed previously.  Because of the changes in the statutes and regulations at the Federal level, the states are changing their laws with respect to adviser registration.  Some states, such as California (see post), have adopted interim orders for certain advisers to address gaps in the Federal and state laws until state laws or appropriate regulations can be adopted.  California is proposing to adopt laws which would exempt many hedge fund managers from registration with the California Securities Regulation Division.

TRACE Global Enforcement Report (.pdf)

International anti-bribery enforcement continues to increase worldwide, as more countries move slowly from
enacting anti-bribery laws to initiating actions to identify and prosecute the individuals and companies who break
them. The TRACE GER 2011 summarizes known international enforcement actions by countries to date. New
developments and ongoing trends are highlighted below…

Amending the Ban on General Solicitation and Advertising

There seems to be some momentum for changes to the  Regulation D’s prohibition on advertising a private fund offering. The Managed Funds Association has asked the SEC to start a rulemaking and one of the SEC’s new advisory committees has also recommended a change.

The SEC’s new Advisory Committee on Small and Emerging Companies approved its first recommendation on January 6. It urged the Commission to “relax or modify” the restrictions under Reg D to permit general solicitation and advertising of private fund offerings, but only to accredited investors.

3. The Advisory Committee is of the view that the restrictions on general solicitation and general advertising prevent many privately held small businesses and smaller public companies from gaining sufficient access to sources of capital and thereby materially limit their ability to raise capital through private offerings of securities; and

4. The Advisory Committee is of the view that the investor protections afforded by the existing restrictions on general solicitation and general advertising are not necessary in private offerings of securities whereby the securities are sold solely to accredited investors.

In a petition filed with the SEC last week, the Managed Funds Association states eliminating the general and advertising solicitation ban would “promote investment and enhance economic growth,” add new transparency to hedge funds and free up resources the agency could reallocate.

The House has passed a bill that would eliminate the advertising. It still needs support and action from the Senate.

Personally, I find the current ban hard to deal with because of uncertainty about what you can and cannot do. On the other hand, a broad allowance of advertising would likely perpetrate fraud. Currently, if you see an ad to invest in a private company or unique investment opportunity, it’s a red flag that the offer could be a fraud.

Sources:

Stop SOPA

Based on the White House statement about Stop Online Piracy Act (SOPA), the PROTECT IP Act and the Online Protection and Digital ENforcement Act (OPEN), those bills may be in serious trouble.

The Stop Online Piracy Act (SOPA), H.R. 3261, as originally proposed bill would allow the U.S. Department of Justice to take action against websites accused of enabling or facilitating copyright infringement. The court order could include barring online advertising networks and payment facilitators from doing business with the allegedly infringing website, barring search engines from linking to such sites, and requiring Internet service providers to block access to such sites. This creates a huge compliance headache for website publishers and the internet infrastructure.

Then there is the further erosion of civil liberties by allowing government intervention based on content. (Granted, the content is supposed to be illegal, but who determines it’s illegal?)

The bill would also make unauthorized streaming of copyrighted content a crime. We don’t need more criminal laws. Unfortunately, I think many members of Congress are taking positive positions on the legislation without understanding the implications.

Here are links about SOPA and the protest against it:

Compliance Building will shut down for most of the day, as will wikipedia, Boing Boing, the Cheezbuger network of sites and many other internet sites.

Informants and Insider Trading

The cooperation of a single Wall Street trader has led directly led to the prosecution of 10 individuals. That makes David Slaine one of the most productive informants in the history of US financial crimes.

In a sentencing memorandum (.pdf), the US Attorney’s office states that “Slaine’s cooperation has been nothing short of extraordinary” and “truly exceptional”. It lays out the series of of prominent insider trading cases that came from his information: Rajaratnam, Goffer, Kimelman, Drimal and others.

This all came from Slaine’s actions back in 2002. According to the information filed by the prosecutors, Slaine starting getting tips from a UBS analyst. The analyst was leaking information in whether UBS was going to change its securities recommendations. Slaine was then trading ahead of the upgrades and downgrades.

To reduce his sentence, Slaine agreed to help prosecutors and helped unravel a huge ring of traders using inside information. One of the startling aspects of the cases was the widespread use of wiretaps. This was a technique not often seen in insider trading cases.

1:09-cr-01222-RJS USA v. Slaine in the Southern District of NY

Sources:

Compliance Bits and Pieces for January 13th

Here are some compliance-related stories for Friday the 13th:

Regulatory Risk Factors in the Carlyle Group S-1 by Seattle lawyer William Carleton.

The Carlyle Group is preparing to go public. There are some interesting risk factors in the S-1 registration statement relating to use of leverage in investments, continued control of prior owners following the offering, and other topics. But I was drawn to the risk factors having to do with the regulatory environment. It’s a different angle from which to think about the financial crisis, financial regualtory reform, and the scourge of lobbying and campaign contributions.

Lawyers v. Businessmen: Where Are the Bad Men?

In the glamorous/murky/elite/financially rewarding world of commercial law is it clients or lawyers who are the bad guys?  Put another way, does business corrupt law or do lawyers corrupt business?  This is the question that lies at the heart of Parker, Rosen and Nielsen’s paper.   Since the Savings and Loan scandals via WorldCom, Enron and latterly UK’s ownHackgate, corporate wrongdoing is often accompanied by the question, Where were the lawyers?  And as Big Law turns increasingly, well, ‘big’, the “is law a business or a profession” question is posed increasingly nostalgically, usually with deliberate exaggeration and answered only with speculation rather than evidence.  It is refreshing, therefore, to report on a study which is deals with the relationship between law and business empirically and with imagination which also deals with conceptually important questions.

Manufacturing Jobs, Robots, and the Economy

We still make lots of stuff in the United States. China is our closest competitor. The two countries are very close at the number 1 and number 2 positions of manufacturing output.  In the past decade, manufacturing output in the US has risen by a third. What hasn’t risen is the number of jobs in manufacturing. In the last ten years, those have decreased by a third. About 6 million jobs disappeared.

Adam Davidson of NPR traveled to South Carolina to get a better picture of what has happened. In Greenville, he found shuttered textile plants but found lots of hi-tech factories.

The double shock we’re experiencing now—globalization and computer-aided industrial productivity—happens to have the opposite impact: income inequality is growing, as the rewards for being skilled grow and the opportunities for unskilled Americans diminish.

Its going to get worse for unskilled workers. A factory owner puts it bluntly. He is willing to invest in a machine that will earn back its cost in two years. If a robot can do your job, hope that it costs at least twice your salary.

This all leads back to thinking about the Great Recession that come from the 2008 financial crisis and comparing it to the Great Depression. One theory is that the Great Depression stemmed from the movement from agricultural jobs to manufacturing jobs. It’s starting to look like the Great Recession stemmed from the movement away from manufacturing jobs. We were using residential real estate as a piggy bank to help through the transition, but we eventually broke the piggy bank.

The latest numbers from the end of 2011 show some solid signs of job growth and consumer borrowing is on the rise. it seems clear from Davidson’s story that some of the jobs will never come back. It’s more important than ever to invest in education and training.

Sources:

Image of a closed factory is by Rubbertoe

The Rise and Fall of Jon Corzine

Bryan Burrough, William D. Cohan and Bethany McLean have a piece in this month’s Vanity Fair on Jon Corzine, the man behind the spectacular crash of MF Global. It doesn’t provide much insight into what happened at MF Global or where the missing money went. But is does paint an interesting picture of the captain of the ship.

Unlike a nautical captain who drowns when his ship sinks, Corzine may escape. According the article, he had only a small percentage of his wealth in the firm. His wealth did not vaporize. The lawyers and class action suits against Corzine will likely take a big chunk of his remaining wealth. His career as a trader and money manager are likely over.

In piecing together earlier episodes in his career, one stuck out at me from a compliance and risk perspective. While a young trader at Goldman Sachs, Corzine was involved in a screwed up trade that was mishandled and exceeded the firm’s risk limits. In the end, the trade ended up making money, but that won no accolades. The trade violated compliance and risk policies and was non grata. We generally only hear about rogue traders when they lose money. At the time, at least according to the article, Goldman took a dim view on rogue traders who made money.

The other item that emerged is the Corzine was self-made. He is certainly part of the 1% now, but didn’t start out that way. One thing that has bothered me about the Occupy Wall Street movement is a somewhat misguided rage against the 1%. When looking at the income discrepancies over the last twenty years, I think people miss the fact that the people in the 1% are not all the same people that were int he 1% twenty years ago.

Unlike aristocracy, you do not need to be born into the 1% to become part of the 1%. (Sure, it usually helps to start off well-to-do.) It seems to me that combining lots of hard work, lots of education, and little bit of good luck can get you an entrance ticket to the 1%.

Sources:

Is a Mitt Romney Candidacy Good for Private Equity?

Mitt Romney puts his business background at the front of his campaign message. As the current front-runner for the Republican nomination, his background is going under increased scrutiny. Since his business background is in private equity, the industry should stop and wonder whether all of this publicity will be good or bad for private equity.

Hopefully people will not be as confused by private equity as they are with whether “Mitt” is short for Mittens. In listening to hearings on private equity and venture capital, many congressmen seem to think that private equity is only about leveraging healthy companies with lots of debt, firing lots of the employees, then quickly ripping them apart, and selling the pieces. If successful. Otherwise, they fire most of the employees and merely plunge their portfolio companies them into bankruptcy.

There is the obvious problem in how you define success. The Wall Street Journal looked at the Bain portfolio and found that 22% of its portfolio companies either filed for bankruptcy or shut down. The story failed to add any context about whether that is better or worse than average. Lots of companies run into trouble. There were over 13,000 Chapter 11 bankruptcy filings in fiscal year 2010. Add in some percentage of the 1.5 million chapter 7 bankruptcies that were businesses, not individuals.

Certainly, Bain Capital made money for its investors. The Wall Street Journal found that Bain produced about $2.5 billion in gains for its investors who had put in $1.1 billion in capital.

Even in the Walk Street Journal story, there is a disagreement about the right measuring stick and which failures should be attributed to Bain. In some cases, the failure came after a partial Bain exit.

Of course, the statistics can’t cover what would have happened to the business if Bain failed to step in or private equity failed to take an interest. They may have failed anyway.

I suspect the answer to whether private equity is good or bad will be twisted around Mitt Romney. His supporters will laud his business success and his detractors will attack his job cuts and business failures. (I lived with Mitt Romney as governor and don’t have a position on candidacy. He was mostly limited by the state legislature in what he could do, a similar position that Congress limits Presidential action. )

In the end, private equity will likely come out of the election cycle bruised and battered.

Sources:

US Private Equity Fund Compliance Companion

If you are looking for a good guide to help your private equity compliance program, PEI Media’s US Private Equity Fund Compliance Guide is a good place to start. There have been a few changes since its publication in 2010. PEI Media has just published the US Private Equity Fund Compliance Companion to provide an update on the new and amended regulations, hoping to deliver some timely information before the March 30, 2012 registration deadline.

Charles Lerner of Fiduciary Compliance Associates was the lead editor and asked me to contribute a chapter. (That means I can offer you a discount of 20%. use the code: COMP_20)

Other contributors include:

  • Daniel Bender
  • Erik A. Bergman
  • Timothy M. Clark
  • Winston Chan
  • Peter Cogan
  • Doug Cornelius
  • Karl Ehsam
  • Kimberly Everitt
  • Daniel Faigus
  • Craig Friedman
  • Thomas S. Harman
  • David Harpest
  • Ebonie D. Hazle
  • Jeanette Lewis
  • Matthew Maulbeck
  • Leslie Meredith
  • Edward D. Nelson
  • John J. O’Brien
  • James T. Parkinson
  • Scott Pomfret
  • Michael Quilatan
  • Jay Regan
  • John Schneider
  • Justin J. Shigemi
  • Kate Simpson
  • Mark Trousdale
  • Joel A. Wattenbarger

PEI’s description.

 Featuring expert advice from over 30 compliance and legal professionals, this guide for chief compliance officers (CCOs) provides practical guidance on the legal and operational issues that registered investment advisers are required to comply with, and what the CCO role entails with useful checklists and practical tips.

The companion also features an exclusive roundtable discussion among a chief compliance officer, a head of investor relations and three attorneys. In this candid and informative session, these compliance experts discuss reporting net as well as gross performance results, limitation on general or public solicitations of investors, fundraising in new markets, limited partner due diligence and social media policy – it’s a discussion that will reveal the realities of the brave new world for registered investment advisers.

You can see the table of contents and read two chapters in the US PE Compliance Companion. (.pdf)