Tag: New Jersey

SEC versus New Jersey

Fuggedaboutit!

New Jersey became the first state ever charged by the SEC for violations of the federal securities laws. They gave up without a fight and agreed to settle the case, without admitting or denying the SEC’s findings.

This matter involves the sale of over $26 billion in municipal bonds from August 2001 through April 2007. In 79 municipal bond offerings, the State misrepresented and failed to disclose material information regarding its under funding of New Jersey’s two largest pension plans, the Teachers’ Pension and Annuity Fund and the Public Employees’ Retirement System. Among New Jersey’s material misrepresentations and omissions:

  • Failed to disclose and misrepresented information about 2001 legislation that increased retirement benefits for employees and retirees those pension plans.
  • Failed to disclose and misrepresented information about special Benefit Enhancement Funds initially intended to fund the benefits, but then abandoned.
  • Failed to disclose and misrepresented that New jersey would be unable to fund the increased benefits without raising taxes or cutting services.

This case is a clear warning sign for states and cities that are running into retirement funding problems. You need to disclose those problems in the bond offering.

An interesting note is that the State Treasurer signed a 10b-5 certification that the official statement did not contain any material misrepresentations or omissions. The Treasurer was not charged.

The SEC only brings civil charges, so we don’t get to see Robert Khuzami driving up the New Jersey Turnpike trying to slap handcuffs on the state.

Sources:

N.J. Supreme Court upholds privacy of personal e-mails accessed at work

The New Jersey courts have been handling a case that squarely addressed a company’s ability to monitor employee email.

Back in April of 2009, I mentioned a New Jersey case that found e-mail, sent during work hours on a company computer, was not protected by the attorney-client privilege: Compliance Policies and Email. That later was overturned: Workplace Computer Policy and the Attorney Client Privilege.

The New Jersey Supreme Court has ruled on the appeal and found that the employee

“could reasonably expect that e-mail communications with her lawyer through her personal, password-protected, web-based e-mail account would remain private, and that sending and receiving them using a company laptop did not eliminate the attorney-client privilege that protected them.”

The court went a step further and chastised the company’s lawyers for reading and using privileged documents.

The court’s decision focused on two areas: the adequacy of the company’s notice in its computer use policy and the importance of attorney-client privilege.

Computer use policy

The court was not swayed by the company’s arguments about its computer use policy. The company took the position that its employees have no expectation of privacy in their use of company computers based on its Policy. The court found that the policy did not address personal email accounts at all and therefore had no express notice that the accounts would be subject to monitoring. Also, the policy did not warn employees that the contents of the emails could be stored on a hard drive and retrieved by the company.

Attorney Client Communication

The bigger problem was that the communications between attorneys and their client are held to a higher standard. They were not “illegal or inappropriate material” stored on the company’s equipment that could harm the company. The e-mails warned the reader directly that the e-mails are personal, confidential, and may be attorney-client communications.

In my opinion, the nature and content of these emails made this an easy decision for the court.

Key Considerations

The decision does not mean that a company cannot monitor or regulate the use of workplace computers.

  • A policy should be clear that employees have no expectation of privacy in their use of company computers.
  • A policy needs to explicitly not address the use of personal, web-based e-mail accounts accessed through company equipment.
  • A policy should warn employees that the contents of e-mails sent via personal accounts can be forensically retrieved and read by the company.

Sources:

Hiring Lawyers for Employees Under Investigation

Your company comes under investigation and specific employees are implicated. What is the right way to get lawyers for those employees? Assuming the company is picking up the cost of the lawyers, the company usually wants to have some input on the selection.

A recent New Jersey case highlighted some of the issues involved for the company and the lawyers involved. In the Matter of the State Grand Jury Investigation (A-80-08) highlighted the ethical issues.

The court laid  it out simply that the Rules of Professional Conduct forbid a lawyer from accepting compensation for representing a client from one other than the client unless six conditions are satisfied:

  1. The client gives informed consent.
  2. There is no interference with the lawyer’s independence of professional judgment or with the lawyer-client relationship.
  3. There is no current attorney-client relationship between the lawyer and the third-party payer.
  4. Information relating to the representation of the client is protected.
  5. The third-party payer must pay the invoices in its regular course of business.
  6. Once the third-party payer commits to pay, they need to get court approval to stop.

In this case Laidlaw International, Inc. was under investigation, with a focus on three employees.  The company hired four lawyers, one for each named employee involved and a fourth for all non-target current and former employees. The retainer agreements provided that the company would be responsible for the lawyer fees, but the lawyers’ professional obligation was to the individual employees only. The lawyers were not required to make disclosures to the company, and payment of the legal fees was not conditioned on the lawyers’ cooperation with the company.

That arrangement is fairly standard. But the state attorney objected and want to disqualify the company-paid lawyers for the employees. “The attorney maintains a sense of loyalty to the party paying him,” said Deputy Attorney General Frank Muroski told the Court at oral arguments. “The lawyer must suspect that the fee payer expects to have its interests protected.”

The court denied that there is an per se conflict. But there should be safeguards in place as outlined in the six conditions.

One key practice tip for the lawyers is that there must be a careful and conscientious redaction of all detail from any billings submitted to the third-party payer.

Sources:

Workplace Computer Policy and the Attorney Client Privilege

email_icon

Back in April, I mentioned a New Jersey case that found e-mail, sent during work hours on a company computer, was not protected by the attorney-client privilege: Compliance Policies and Email (Stengart v. Loving Care [.pdf]) That case has now been overturned. It seems that a company’s policy on computer use may be more limited that I originally posted.

Factual Background:

The company provided Stengart with a laptop computer and a work email address. Prior to her resignation, plaintiff communicated with her attorneys, Budd Larner, P.C., by email about an anticipated suit against the company, and using the work-issued laptop but through her personal, web-based, password-protected Yahoo email account. After Stengart filed suit, the company extracted a forensic image of the hard drive from plaintiff’s computer. In reviewing plaintiff’s Internet browsing history, an attorney discovered numerous communications between Stengart and her attorney from the time period prior to her resignation from employment with Stengart.

I found it strange that the email from a web-based email account would be stored on the local computer. I am going to guess that it was attachments to the email that ended up stored on the computer in a temporary file and not the email itself.

Company Position:

According to the decision, the company’s policy may not have been clearly distributed and applied. There was some factual disputes about whether the company had ever adopted or distributed such a policy. There was a further dispute that even if the policy was put in place as to whether it applied to executives like Stengart.

Decision:

In the end the company’s position didn’t matter and the court assumed the policy was in place. Instead, the court took a harsh position:

A policy imposed by an employer, purporting to transform all private communications into company property — merely because the company owned the computer used to make private communications or used to access such private information during work hours — furthers no legitimate business interest. See Western Dairymen Coop., 684 P.2d 647, 649 (Utah 1984). When an employee, at work, engages in personal communications via a company computer, the company’s interest — absent circumstances the same or similar to those that occurred in State v. M.A., 402 N.J. Super. 353 (App. Div. 2008); Doe v. XYC Corp., 382 N.J. Super. 122, 126 (App. Div. 2005) — is not in the content of those communications; the company’s legitimate interest is in the fact that the employee is engaging in business other than the company’s business. Certainly, an employer may monitor whether an employee is distracted from the employer’s business and may take disciplinary action if an employee engages in personal matters during work hours; that right to discipline or terminate, however, does not extend to the confiscation of the employee’s personal communications.

Those were some broad statements, but the decision was ultimately limited to the attorney-client privilege.

There is no question — absent the impact of the company’s policy — that the attorney-client privilege applies to the emails and would protect them from the view of others. In weighing the attorney-client privilege, which attaches to the emails exchanged by plaintiff and her attorney, against the company’s claimed interest in ownership of or access to those communications based on its electronic communications policy, we conclude that the latter must give way. Even when we assume an employer may trespass to some degree into an employee’s privacy when buttressed by a legitimate business interest, we find little force in such a company policy when offered as the basis for an intrusion into communications otherwise shielded by the attorney-client privilege.

It seems that New Jersey courts are now taking the position that a company cannot read an employee’s personal e-mail, even when the employer has a policy stating that the employee has no reasonable expectation of privacy. The exception to this rule would be when the company needs to know the content of the e-mail to determine whether the employee broke the law or violated company policy.

References:

You’re a Victim of a Ponzi Scheme, But What About Your State Taxes?

IRS_Logo

You missed the warning signs and got suckered into a Ponzi scheme. The IRS offered some tax relief for long-term Ponzi scheme investors (like some of the Madoff victims) who have paid taxes on gains from the investment. The IRS clarified the federal tax law governing the treatment of losses in Ponzi schemes. They also set out a safe harbor method for computing and reporting the losses.

The revenue ruling (2009-9) addresses the difficulty in determining the amount and timing of losses from Ponzi schemes and the prospect of recovering the lost money. The revenue procedure (2009-20) simplifies compliance for taxpayers by providing a safe-harbor for determining the year in which the loss is deemed to occur and a simplified means of calculating the amount of the loss.

But what about state taxes?

California: On March 25, 2009, the California Franchise Tax Board announced that the federal guidance (Revenue Ruling 2009-9 and Revenue Procedure 2009-20) regarding the treatment of Madoff-related or other Ponzi scheme losses would be generally applicable for California purposes.

Connecticut: On April 9, 2009, the Connecticut Department of Revenue Services released Connecticut Announcement No. 2009(7), which describes the effect for Connecticut income tax purposes of the reporting of Madoff-related or other Ponzi scheme losses under the Revenue Procedure 2009-20 safe harbor and under Revenue Ruling 2009-9. In general, Connecticut does not allow federal itemized deductions for Connecticut income tax purposes. Thus, any theft loss deduction claimed by a taxpayer under the Revenue Procedure 2009-20 safe harbor will not affect a taxpayer’s 2008 Connecticut income tax liability. However, if the amount of a taxpayer’s theft loss deduction allowed under Revenue Ruling 2009-9 or Revenue Procedure 2009-20 creates an NOL, then the taxpayer must file amended Connecticut income tax return(s) for the year(s) to which such NOL may be carried back for federal income tax purposes.

Massachusetts: On March 20, 2009, Massachusetts issued: “Notice—Individual Investors; Investments in Criminally Fraudulent Ponzi-type Schemes and Reporting of Fictitious Investment Income.” Massachusetts did not adopt the Revenue Procedure 2009-20 safe harbor in the case of individual investors since Massachusetts tax law does not recognize the theft loss deduction provided under federal tax law.

New Jersey: On April 2, 2009, the New Jersey Division of Taxation had issued guidance on the treatment of Madoff-related
or other Ponzi scheme losses for New Jersey gross income tax purposes. Under this guidance, taxpayers are allowed a theft
loss deduction for New Jersey gross income tax purposes in an amount equal to the original investment plus the income
reported in prior years minus distributions received in prior years. New Jersey does not allow NOL carrybacks or carry
forwards.

New York: On May 29, 2009, the New York State Department of Taxation and Finance issued guidance TSB-M-09(7)I (.pdf) on the
reporting of Madoff-related or other Ponzi scheme losses. In general, New York State will recognize the Revenue Procedure
2009-20 safe harbor.

For more information, Seyfarth Shaw put together some information: Some States Have “Weighed In” on Tax Treatment of Madoff-Related and Other Ponzi Scheme Losses (.pdf)

New Jersey’s Pay-to-Play Law

New Jersey enacted the Campaign Contributions and Expenditure Reporting Act, N.J.S.A. 19:44A-20.13 et seq. (“Chapter 51”) to limit abuses of pay-to-play.

Among other things, Chapter 51 prohibits a State agency from awarding a State contract whose value exceeds $17,500 to a business entity that contributed more than $300 to the Governor, a candidate for Governor, or any State or county political party committee in the preceding 18 months.

On January 15, 2009, the New Jersey Supreme Court issued a unanimous opinion upholding the constitutionality of Chapter 51 and rejecting arguments that it violated free speech and free association constitutional rights. In the Matter of the Appeal by Earle Asphalt Company, ____ N.J. ____ (2009).

Chapter 51 also provides that a company that makes a contribution that would otherwise render it ineligible to receive State contracts will retain its eligibility so long as it receives reimbursement of the contribution within 30 days of making it. In the Earle Asphalt case, the president of a company made a $1,500 contribution to a county political party committee. Upon realizing that the contribution would render the company ineligible for State contracts, the president requested that the contribution be returned. Although he made that request 20 days after the contribution, he did not receive the reimbursement until 41 days after the contribution. The Supreme Court rejected the company’s argument that it should not be disqualified from receiving State contracts because it had attempted to obtain return of the contribution within the 30-day window. Instead, the Court, employing a strict and literal interpretation of the provision, concluded that the company was not entitled to the exemption because it did not receive the reimbursement within 30 days of making the contribution.

The lesson from the Earle Asphalt decision is that failure to comply with the provisions of a pay-to-play law could result in crippling financial consequences to a company that depends on public contracts if the company’s breach results in it being disqualified from receiving those contracts.