You are either getting your kids back to school, enjoying a vacation, or enjoying everyone else being out of the office on vacation.

Me? I’m out of the office.

There was still some interesting compliance news this past week:

SEC employees win battle to dress casual By Zachary Goldfarb for Market Cop

Some of the Securities and Exchange Commission’s rank-and-file employees have won a quiet battle with top officials: They no longer have to wear formal business attire when out on the job.

Trust Me – I’m from HR/ IT/ Legal/ Finance ! by Charles H. Green in Trust Matters

These internal staff have exactly the same challenge that their outside brethren have—to successfully persuade and influence others, over whom they have exactly zero direct authority. But it’s worse for internals: first, because they eat in the same lunchroom as their clients and are known by their first names, they tend to not get the same respect that outside experts do.

The Impact of Dodd-Frank – And a Warning to Rating Agencies by Thomas O. Gorman in SEC Actions

The Moody’s Investors Services, Inc. Section 21(a) report released on August 31, 2010 gives an indication of the potential impact of Dodd-Frank. It is based on an existing limitation of the enforcement program, but reflects the removal of that impediment by the legislation. Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Moody’s Investors Services, Inc., Exchange Act Release No. 62802 (Aug. 31, 2010).

Image is Lone Tree. Footpath from Tealby Thorpe to Willingham Woods. The tree is a relic of a lost hedgerow.
By Kate Nicol

So how are your surveys working?

Do you get meaningful results?

Are the results skewed by those who responded (versus those who didn’t)?

The Department of Justice released its latest FCPA Opinion Release. The requesting company for this opinion release is stepping into a situation full of FCPA red flags. In the end, the DOJ opined that it would not bring an enforcement action based on the safeguards put in place by the company.

The company is involved in “natural resource infrastructure development” and trying to get a government contract. They want to hire a consultant who has previously and currently holds contracts to represent the foreign government
and act on its behalf and a registered agent of a foreign government pursuant to the Foreign Agents Registration Act, 22 U.S.C. § 611 et seq. Of course, the consultant is being paid on a contingency basis.

The DOJ points out that the FCPA does not “per se prohibit business relationships with, or payments to, foreign officials.” They look for these factors in the business relationship:

• indicia of corrupt intent
• transparency to the foreign government and the general public
• whether the arrangement is in conformity with local law
• whether there are safeguards to prevent the foreign official from improperly using his or her position

In this case, the company is putting extensive safeguards in place. The DOJ found the safeguards were good enough.

The consultant is an agent of the foreign government and there are situations in which the consultant will act on behalf of the foreign government, so the company should treat the consultant and its employees “foreign officials” for purposes of the FCPA.

The company is walling off the employees working on the various representations from each other and is disclosing  the relationships to the relevant parties. The business relationships are permitted under local law. The obligations limit representation of the foreign government by the consultant are sufficient to ensure that the consultant will not be acting on behalf of the foreign government in acting for the company.

The walling off and limitations are actually enough to pull the consultant out from under the label of being a “foreign official.”

Sources:

• FCPA Opinion Release 10-03
• Lobbyists Aren’t Always Foreign Officials by Richard L. Cassin in the FCPA blog

Each year, LexisNexis “honors a select group of blogs that set the online standard for a given industry.” This year, they expanded Top Blogs to include their Business Law Communities.

Compliance Building is one of the nominated candidates for the LexisNexis Top 25 Business Law Blogs of 2010, featured on the LexisNexis Corporate & Securities Law Community and the LexisNexis UCC, Commercial Contracts & Business Law Community.

Looking at the list of candidates, I see many blogs that I read regularly. If you are looking for a list of business law blogs to read, the list of nominees is a great place to start.

I think most of the nominated blogs are much better than mine. Whether its on quality, popularity, or some other factors, there is no way I will make it into the top 25. I will sit back and take the consolation prize: the honor of being nominated.

Lexis Nexis invites you to comment on the announcement post at either of the following links:

Top 25 Business Law Blogs 2010 – Corporate & Securities Law Community

Top 25 Business Law Blogs 2010 – UCC, Commercial Contracts & Business Law Community

To comment, you have to register. Registration is free and supposedly does not result in sales contacts. The comment period for nominations ends on October 8, 2010. They don’t say how they will end up selecting the top 25 out of the nominees other based on their review and your comments.

I’m also not sure how the Lexis-Nexis Communities fits in with the Martindale Hubbell Connected platform. There seems to be whole lot so substantive information in Communities that is missing in Connected. They should get these two sites together.

Vote for the business law blogs you feel are the best. Include Compliance Building if you think it’s worthy.

Is the CEO or CFO lying during the quarterly earnings call? How can you tell?

David F. Larcker and Anastasia A. Zakolyukina of the Stanford Graduate School of Business turned to the rich data set of quarterly calls and subsequent financial restatements. After studying Q&A sections of transcripts of hundreds of calls with CEOs and CFOs, the researchers then looked to see whether financial statements being discussed were substantially restated at some point after the call. If they were restated, Professor Larcker and Zakolyukina (a PhD student at the school)  reasoned that the executive had been “less than candid.”

They found that answers from deceptive executives:

• have more references to general knowledge
• fewer non-extreme positive emotions
• fewer references to shareholders value and value creation
• use signisignificantly fewer self-references, more third person plural and impersonal pronouns
• more extreme positive emotions
• fewer extreme negative emotions
• fewer certainty and hesitation words

Their performance is only 4% to 6% better than a random guess. So it’s statistically significant, but not determinative.

Sources:

• Larcker, David F. and Zakolyukina, Anastasia A., Detecting Deceptive Discussions in Conference Calls (July 29, 2010). Rock Center for Corporate Governance at Stanford University Working Paper No. 83. Available at SSRN: http://ssrn.com/abstract=1572705
• How to tell when your boss is lying in The Economist

Back in December, the Federal Trade Commission released new guidelines that specifically required bloggers to disclose any material connections to a product or company they are writing about. In May, they brought their first action under those guidelines against Ann Taylor. The FTC declined to bring an enforcement action.

Last week, they brought their second action. A public relations agency hired by video game developers had employees pose as ordinary consumers posting game reviews at the online iTunes store, and did not disclose that the reviews came from paid employees working on behalf of the developers.

This time they decided to enforce. Reverb Communications, Inc. and its sole owner, Tracie Snitker, are required to remove any posted endorsements that misrepresent the authors and fail to disclose the connection between Reverb and Snitker and the seller of a product or service. Reverb would get paid to promote the games and would often get paid a percentage of sales.

The posted reviews were published between November 2008 and May 2009. The endorsed products by giving them 4 and 5 star ratings in iTunes. They also submitted positive written comments like these:

• “Amazing new game”
• “ONE of the BEST”
• “One of the best apps just got better”

I’m sure you noticed that the publication dates of the reviews predate the new guidelines were finally adopted. That means the FTC is willing to go back retroactively and enforce these guidelines.

Sources:

• FTC Press Release: Public Relations Firm to Settle FTC Charges that It Advertised Clients’ Gaming Apps Through Misleading Online Endorsements
• Agreement Containing Consent Order In the Matter of Reverb Communications, Inc. and Tracie Snitker
• Complaint In the Matter of Reverb Communications, Inc. and Tracie Snitke
• Analysis of Agreement Containing Consent Order To Aid Public Comment
• FTC and Bloggers – prior post on Compliance Building
• Charges Settled Over Fake Reviews on iTunes By Miguel Helft in the New York Times

I think a big part of compliance is education. It is great to get compliance imposed through internal systems, but you generally need to get the message out to your company about the policies, why they exist, and what they need to do.

There is lots of talk about the generation and age group starting to make their way into the workforce. They have group up with the internet, access to lots of information, and access to lots of communication tools. In Rewired, Dr. Larry Rosen tries to off insight into “understanding the igeneration and the way they learn.”

The publisher was nice enough to send me a free review copy. I was interested because the book was based on really studies and empirical data. I see too many rants about the changing learning habits of younger generations based on anecdotes and conjecture.

Dr. Rosen focuses on the what he calls the “igeneration” of children and teens in elementary school through high school. I also have young kids so I had a personal interest in the subject.

He emphasized that this generation is one that multitasks and has ample access to mobile communications. I grew up at the dawn of able television and video games. This generation is growing up with an amazing amount of connectivity and information access.

He has found that they are used to a “fast, shallow pace of information presentation” and get bored easily.

Some of points that Dr. Rosen makes seem off to me. He includes MySpace and Twitter as platforms that hold the attention of the igeneration. He talks about them gathering in Second Life.

Huh?!? I have not seen that to be true. Sure, they love to communicate. Just not these platforms. They text, and text, and text.

In looking at footnote 7 for the first chapter he discloses some of his methodology. In each study he used anonymous online surveys to interview their subjects. That the research was gathered online would seem to skew the data. You are automatically excluding those with no or limited access to the internet.

The igeneration hates school. Most kids hate school. We all hated school growing up. Students didn’t read the books. They read the Cliff Notes or online summaries. Again, that doesn’t sound like new behavior to me.

I think some of his conclusions are a bit off or obvious. Other hand, he does offer some insight and useful suggestions.

In dealing with multitasking, he attributes some of this as an attempt to make tedious work more fun. They are also trying to fill in the gaps and downtime.

I think he puts too much emphasis on 3D social networks. Personally, I think this may have more utility in distant learning than in school. One of the great things about school is that you have a large gathering of your peers in one place. Why communicate virtually when you are in close approximation.

He does have a few great examples of using virtual tours of other places like an art museum or Mayan cultural exhibit to create a more immersive learning environment. There are some great ideas in there. I’m not sure how that translates to other subjects.

It is clear that my kids are growing up in different learning environment with access to vast amounts of information. It is clear that new adults coming into the workforce have grown up in a very different information and communications environment. Dr. Rosen offers some insight and help in thinking about their learning needs. I think it’s just sometimes flawed.

Here are some recent stories I found interesting:

A Red Flag on G.M. Internal Controls by Peter J. Henning in the New York Times’ DealBook

General Motors filed its S-1 on Wednesday, and its list of potential risks to the company contains the usual array of obvious market threats and uncontrollable events that might be harmful to prospects, like the admonition that “our business is highly dependent on sales volume” – what a surprise.

After listing 30 different risk factors for its business, G.M. then drops this on investors: “We have determined that our disclosure controls and procedures and our internal control over financial reporting are currently not effective. The lack of effective internal controls could materially adversely affect our financial condition and ability to carry out our business plan.” That is quite a risk to put at the end of the list.

4,000 Investment Advisers Bound for State Regulation from Investor’s Watchdog

Among the myriad changes wrought by the Dodd-Frank Act, approximately 4,000 registered investment advisers (RIAs) will soon be examined by state securities regulators, rather than the SEC. With a few narrow exceptions, by this time next year state regulators will handle RIAs managing less than $100 million (the cut-off point under the old law was $25 million). This will help the SEC focus on the biggest funds, but it throws state securities regulators a Herculean challenge. As it is, state-regulated RIAs see examiners, on average, only once every five years.

Financial Reform Leaves New York Investment Advisers Unsure Where to Register by Compliance Avenue

The Dodd-Frank financial reform bill, signed into law by President Obama on July 21, 2010, has left behind an odd but important ambiguity for investment advisers located in New York state. The law requires most investment advisers with less than $100 million in assets under management to register with the securities commissioner of the state where the adviser maintains its principal office and place of business, provided that the adviser “would be subject to examination as an investment adviser” by such commissioner. Unlike most other states, however, New York has never conducted examinations of investment advisers and currently its General Business Laws provide no specific authority for such examinations.

Six Keys to Being Excellent at Anything by Tony Schwartz in the Harvard Business Review‘s Conversation

If you want to be really good at something, it’s going to involve relentlessly pushing past your comfort zone, along with frustration, struggle, setbacks and failures. That’s true as long as you want to continue to improve, or even maintain a high level of excellence. The reward is that being really good at something you’ve earned through your own hard work can be immensely satisfying. Here, then, are the six keys to achieving excellence we’ve found are most effective for our clients: …

Promotional Expenses Defense under the FCPA by Tom Fox

So what is the problem with a US company paying for travel, room and board for foreign governmental officials to travel to the United States? The problem is that payment for such travel, lodging and expenses may run afoul of the prohibition against corrupt payments (or promises of them) made to obtain or retain business. The Foreign Corrupt Practices Act (FCPA) allows payments to foreign officials for expenses related directly to “the promotion, demonstration, or explanation of products or services” that are “reasonable and bona fide” 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A). This affirmative defense, however, is notoriously hard to use (and easy to abuse), mainly because no one is quite sure what reasonable and bona fide really mean.

Purchase out of the money call options set to expire in two weeks, be an employee of the company acting as an adviser in the merger, not have any activity on that stock before, use an account in your name, exclusively use option when you have barely traded options in the account before, and quickly try to move the money off-shore.

The SEC alleges that Juan Jose Fernandez Garcia and Luis Martin Caro Sanchez had material, non-public information and purchased hundreds of “out-of-the-money” call option contracts for stock in Potash Corp. in the days leading up to the public announcement of BHP Billiton’s bid on August 17.

Juan Garcia is (was?) the head of equity derivatives research at Banco Santander which was advising BHP on its bid. It’s not clear how Luis Sanchez is related to Santander or Garcia. The daring duo made nearly $1.1 million in illegal profits based on $61,000 in option contracts.

How did they get caught?

The warning signs are obvious, but who saw them. Daniel M. Hawke, Market Abuse Unit Chief SEC Enforcement Division, gets his face on the press release. That’s some good publicity for the new structure of the enforcement division.

The complaint mentions the daring duo’s attempt to transmit the funds from that brokerage account back to Spain. It sounds to me like the compliance folks at Interactive Brokers are likely the ones who spotted the red flags and froze the accounts. Otherwise that money would be sitting in Spain and harder for the SEC to grab and demand disgorgement.

Let’s hand a glass of champagne to SEC’s Market Abuse Unit and the compliance department at Interactive Brokers

I agree with Felix Salmon that there is probably a much juicier story behind this incident.

Sources:

• Insider trading datapoint of the day by Feliz Salmon in Reuters
• SEC charges 2 with insider trading in Potash Corp
• SEC Press Release: SEC Freezes Assets of Two Traders in Spain for Insider Trading Around Public Announcement of BHP Acquisition Bid
• SEC Complaint

It’s official. Social media is a risk factor. At least according to Estee Lauder and lululemon athletica.

Over at Footnoted, Michelle Leder and her team dig through SEC filings digging up the dirt on bad corporate behavior. They were digging through the 10-K for Estee Lauder when Theo Francis came across a new risk factor.

Our inability to anticipate and respond to market trends and changes in consumer preferences could adversely affect our financial results.

Our continued success depends on our ability to anticipate, gauge and react in a timely and cost-effective manner to changes in consumer tastes for skin care, makeup, fragrance and hair care products, their attitudes toward our industry and brands, as well as to where and how consumers shop for those products. We must continually work to develop, produce and market new products, maintain and enhance the recognition of our brands, achieve a favorable mix of products, and refine our approach as to how and where we market and sell our products. While we devote considerable effort and resources to shape, analyze and respond to consumer preferences, we recognize that consumer tastes cannot be predicted with certainty and can change rapidly. The issue is compounded by the increasing use of social and digital media by consumers and the speed by which information and opinions are shared. If we are unable to anticipate and respond to sudden challenges that we may face in the marketplace, trends in the market for our products and changing consumer demands and sentiment, our financial results will suffer.

It’s not exactly: “We could lose millions if the Twitteratti turn on us.”

Public companies disclose risk factors in their SEC filings trying to inform its stockholders and potential purchasers of its stock about potential losses. Failure to disclose a risk could result in a shareholder suit that the company was hiding its risks.

It looks like Estee Lauder is covering itself in case its customers get ugly in social media, start attacking the company, and stop buying its products.

Ever vigilant, Theo Francis poured back through the SEC database to see if any other companies had disclosed social media as a risk factor in its SEC filings. The only other consumer-product company they  found that lists social media as a risk factor in its 10-K was lululemon athletica, a Vancouver-based maker of “yoga-inspired apparel.”

Social media is not a new disclosure in SEC filings, but it was mostly discussed in marketing strategies and business strategies for tech and media companies. For example, Estee Lauder’s competitor Elizabeth Arden talks about the use of social media as part of its marketing strategy, but does not disclose it as a risk factor.

I wonder if we will see other companies start adding social media as a risk factor. Have you seen any other companies list it as a risk factor?

Sources:

• Warning: Social media at Estee Lauder… by Theo Francis in Footnoted
• Estee Lauder 10-K June 30, 2010
• Lululemon Athletica 10-K January 31, 2010
• Search the SEC’s EDGAR database for “social media”