Sam SpenceSam Spence died last week. His was not a name that many folks were aware of generally and even in the sports world where he made his greatest mark. Yet he was a prime mover in the explosion of growth by the National Football League (NFL) from the 1960s up to today. What was his role in this? Spence was the composer for the soundtracks to NFL Films. Together with the pioneer and founder of NFL Films, Ed Sabol, his 35-time Emmy decorated son, Steve Sabol, and narrator John Facenda, a/k/a “the Voice of God”, they formed the core of the NFL Films team who worked to put together the story of professional football in America.

As Bruce Weber wrote in his New York Times (NYT) obituary, “Spence and his music helped fashion an identity for the game that made it seem more dramatic and inspiring.” Why was Spence so important to me? It was not the driving beats of today that he selected for his soundtracks but the wide variety of symphonic tunes that were both dramatic and inspiring. I watched NFL Films mostly in the 1970s and years later when I became a symphony aficionado I recognized music I had first heard in the NFL Films presentations. The one that struck me the most was Dvorak’s New World Symphony, which I first heard courtesy of Sam Spence.

The original quartet who started NFL Films is now in the great beyond. I am sure they are all creating some great films and videos for us all.

While Spence’s contributions to NFL Films were not as well known as the others mentioned above, they were a part of the fabric, DNA and what made the presentations so powerful. Indeed his music was so intertwined with the Films it became seamless with the visual presentations. I found this an interesting way to consider the difference in management and leadership.

In the NYT Corner Office section, Adam Bryant interviewed Walt Bettinger, Chief Executive Officer (CEO) of Charles Schwab Corporation, for an article entitled “You’ve Got to Open Up to Move Up”. In this article Bettinger talked about an idea rarely considered by a Chief Compliance Officer (CCO), which is the difference in leadership from management. Most CCOs are technically competent in the Foreign Corrupt Practices Act (FCPA) or other anti-corruption law. Put another way, they are technically competent at the management of a best practices compliance program. Yet they struggle not only to be seen as leaders but also to engage in leadership rather than simply managing.

Bettinger draws a sharp distinction between the two roles. He states the following: “There’s a contractual relationship with your manager. And you can do your job and fulfill the terms of that contract and never really have your heart in it.” He contrasted this with leadership, which he view as “something completely different.” He went on to note, “With leadership, you make a decision every day about whether you choose to follow someone. And you make it in your heart, not your head. The ability to inspire followership is so different than management, and it requires transparency, authenticity, vulnerability and all things that are completely unnatural to you when you are trying to build and achieve and accomplish.” Which does your employee base see you as, in your role as CCO?

As a perquisite for leadership, as opposed management, Bettinger had some interesting thoughts. He said that to be a leader, you have to open up. Moreover, you have to be vulnerable and be ready to share with people. Finally he indicated, “it was more important than anything to share with people the great failures in my life as opposed to the successes.” In other words, you have to get people to trust you.

Channeling his inner Dale Carnegie, Bettinger also spoke about the importance of learning about everyone. He gave a great example of a final exam he took in his final year of college, in a business strategies class. He was trying to maintain a 4.0 grade average and dutifully prepare for the final exam. When he got the test paper, it had one question, “What was the name of the lady who cleans this building?” Of course, Bettinger had no idea and failed the exam. It may seem harsh but it taught him a life-long lesson to know the name of that person in every position he has held since that time. Yet another difference between management and leadership.

As a final note about the difference between management and leadership, Bettinger has what can only be called an unorthodox approach regarding his approach to hiring. He said that one of the things to do is meet a candidate over breakfast. However, he gets there early and will “pull the manager of the restaurant aside, and say, “I want you to mess up the order of the person who’s going to be joining me. It’ll be O.K., and I’ll give a good tip, but mess up their order.”

He does this because he wants to see how the candidate will respond to that simple adversity. He wants to know if they will become upset, frustrated or simply deal with it in the course of the breakfast. Bettinger believes, “It’s just another way to get a look inside their heart rather than their head” because “We’re all going to make mistakes. The question is how are we going to recover when we make them, and are we going to be respectful to others when they make them?”

As a CCO you will be called on for several different roles in an organization. Certainly technical competence as a subject matter expert (SME) in your compliance program is a minimum. Yet never forget that the consumers of compliance are the company employees. The more leadership you show them, using some of the technics subscribed to by Bettinger, can be very useful to help foster that position for you going forward.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2016

Blood on the TracksOn this week in 1975, Bob Dylan’s 15th studio album, Blood on the Tracks, reached the Number 1 album slot on the Billboard charts. This was in spite of no song rising above the 31st slot on the single charts. It came out in the final semester of my senior year in high school so its personal nature was very poignant to me. Two interesting facts were that Phil Ramone was an engineer on the recording sessions and Buddy Cage played steel guitar (shout out to Chris Bauer). While I probably enjoyed it because I found it to be the most accessible Dylan album to that point, the critics most generally praised it as well, finding it to be his most reflective. Indeed his son Jakob has been quoted as saying, “When I’m listening to Blood On The Tracks, that’s about my parents.”

Last week we had a second Foreign Corrupt Practices Enforcement Action (FCPA) from the Securities and Exchange Commission (SEC). This one involved the California based entity SciClone Pharmaceuticals, Inc. (SCLN) which was assessed a penalty of $2.5MM, profit disgorgement of $9.42MM and prejudgment interest of $900K for a total penalty of $12.8MM to settle SEC charges that it violated the FCPA when employees in China pumped up sales for five years by making improper payments to professionals employed at state health institutions. The penalty was for the conduct of its Chinese subsidiary, SciClone Pharmaceuticals International Ltd.

Many of the allegations reached back over 10 years, to 2005, when the Chinese subsidiary created a special VIP program for high volume customers called health care professionals (HCPs). According to the SEC Cease and Desist Order, this special program provided “weekend trips, vacations, gifts, expensive meals, foreign language classes and entertainment” to selected VIPs. It was described internally as “luring them with the promise of profit.” Clearly not the tone a Chief Compliance Officer (CCO) would want to see from his or her top salespersons. Oops, SCLN did not have a Chinese compliance officer at the time of the incidents in question because it did not have a compliance function at the company, so I guess that tone issue never came up.

Clearly the VIP program went beyond the pale as it provided for vacations for both the VIPs and their family members. But this program also had less egregious activities such as golf tournaments followed by beer drinking. However, the subsidiary’s conduct became more nefarious in 2007 when it hired “well-connected regulatory affairs specialist (Specialist) to facilitate” the application of certain licenses the company needed to distribute a new product in China.

This Specialist originally intended to send two foreign officials who were responsible for approving this license to Greece for an academic conference related to this new medical product. However visas could not be obtained in time so “the Specialist instead provided them at least $8,600 in lavish gifts.” In addition to the foregoing, the company sent many other Chinese government officials to in the US, Japan and the Chinese resort island of Hainan where “significant sightseeing was involved” in addition to an educational component.

The company even managed to fall prey to the well known Chinese bribery conduit of travel agencies by failing to conduct any due diligence on a number of travel vendors who were used to funnel bribes and improper gifts and trips involving improper sightseeing and tourist expenditures. Then again this may have been intentional given the overall posture of the subsidiary and its parent. Nevertheless it was another compliance program failure.

Finally, as part of SCLN’s internal investigation, after the discovery of all of the above, an “internal review of promotion expenses of employees from 2011 to early 2013. This review found high exception rates indicating violations of corporate policy that ranged from fake fapiao, inconsistent amounts or dates with fapiao, excessive gift or meal amounts, unverified events, doctored honoraria agreements, and duplicative meetings. A portion of the funds generated through the reimbursements were used as part of the sales practices described above that continued through at least 2012.”

Noting the foregoing conduct, the SEC Order held that SCLN did not have the appropriate internal controls in place for any type of FCPA compliance program. Both the subsidiary and parent engaged in false accounting entries by “recording the payments to health care providers as sales, marketing, and promotional expenses.” So SCLN violated both prongs of the Accounting Provisions of the FCPA , those being the accounting and internal controls provisions.

However, SCLN did make a come back which led to the relatively low fine and penalty. As noted in the Order, the company took steps, “to improve its internal accounting controls and to create a dedicated compliance function. These include the following: (1) hiring a compliance officer for its China operations; (2) undertaking an extensive review of the policies and procedures surrounding employee travel and entertainment reimbursements; (3) substantially reducing the number of suppliers providing third-party travel and event planning services; (4) improving its policies and procedures around third-party due diligence and payments; (5) incorporating anti-corruption provisions in its third-party contracts; (6) providing anti-corruption training to its third-party travel and event planning vendors; (7) disciplining employees (and their managers) who violate SciClone’s policies; and (8) creating an internal audit department and compliance department.”

Lessons Learned

Mike Volkov has called the SCLN enforcement action, “A Textbook Case of FCPA Violations for Gifts, Meals, Entertainment and Travel”. I would add that it is the textbook case for CCOs and compliance practitioners to study for lessons learned. The first thing is to review your own compliance program to see if any of these anomalies that SCLN engaged in appear in your Chinese operations or any other high risk areas. Beyond these general reviews, I would suggest a more detailed transaction monitoring and data analytics approach, which would involve:

  • Tracking not only the expenses paid for gifts, travel and entertainment by employees but tying this information back to the foreign government officials who received these benefits;
  • Look to any third parties who may have been involved in any of the foregoing, such as the ubiquitous Chinese travel agencies or the more iniquitous ‘Specialist’ who might be involved in facilitating license approvals;
  • Consider the positions which were lavished with such gifts, entertainment or travel. Did any of these persons make any approvals or decisions which allowed your company to obtain or retain business immediately before or after such treatment?

Finally, consider the thoughts of Scott Lane, Executive Chairman of the Red Flag Group, where he described the line of sight a compliance practitioner needed. Lane described the data points that a CCO or compliance practitioner should have visibility into going forward. By looking down a straight line at all of this information derived from the SCLN enforcement matter, the compliance function can identify measures to improve any high risk issues before they move to FCPA violations. While gifts, travel and entertainment expenses might be on your company’s radar for compliance department pre-approval, if they are spent on one or two government officials who may influence deal making authority regarding your company’s business it may well merit a more detailed analysis.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2016

Spud WebbOn this day 30 years ago, history was made when Spud Webb won the 3rd NBA Slam Dunk contest. Webb joined future Hall-of-Famers Michael Jordan, who won the inaugural contest in 1984, and Dominic Wilkins, who won the second event in 1985, as the Slam Dunk champ. What made Webb’s win so noteworthy? It was his size. He was 5 feet, 9 inches tall and the shortest player in the league at that time. Webb played for 12 seasons in the NBA, mostly with the Atlanta Hawks, but for anyone who tuned in that day, we will never forget when Spud Webb stood the tallest of the all the players.

I thought about Webb, his biggest moment of personal glory and individual responsibility when I read Sunday’s Fair Game column in the New York Times (NYT) by Gretchen Morgenson, entitled “Fixing Banks by Fining the Bankers. Morgenson has written several pieces about the banking scandals coming out of the 2008 financial crisis and beyond, coupled with the lack of personal accountability in all of the settlements with US regulators.

She began her piece with the certain truism, “Ho-hum, another week, another multimillion-dollar settlement between regulators and a behemoth bank acting badly.” The settlement she referenced referred to two financial institutions, Barclay’s and Credit Suisse, who agreed to pay $154.3MM, regarding their misrepresentations to investors around high-frequency trading. But what concerned Morgenson was the following, “As has become all too common in these cases, not one individual was identified as being responsible for the activities. Once again, shareholders are shouldering the costs of unethical behavior they had nothing to do with.”

Morgenson identified the reason behind the continued failings of banks “could not be clearer: Years of tighter rules from legislators and bank regulators have done nothing to fix the toxic, me-first cultures that afflict big financial firms.” She believes it is a failure of banks to change their culture. In her piece she quoted the Chairman of FINRA, Richard Ketchum, who said firms that continue to have violations are because of “poor cultures of compliance”. He finds the opposite to be true stating, “Firms with a strong ethical culture and senior leaders who set the right tone, lead by example and impose consequences on anyone who violates the firm’s cultural norms are essential to restoring investor confidence and trust in the securities industry.”

The rules and regulations of compliance can set down the written standards for employees to follow. Yet for a compliance program to be effective, it is much more than the paper part of the program. Morgenson believes that banks must change their culture to help stop these systemic breakdowns. Yet she did not end her piece there as she explored what regulators can do, more than simply talk, to facilitate this change in culture.

She considered two separate approaches regulators might consider. The first was suggested by Andreas Dombret, a member of the executive board of Deutsche Bundesbank, who noted, “Most companies have codes of ethics, but they often exist only on paper.” To help make the message of doing business ethically and in compliance, he also suggested banking regulators could help encourage a more ethical approach by routinely monitoring how a bank cooperates with the regulatory authorities particularly in an oversight rule. Finally he asked, “How often is the bank the whistle-blower?” He felt this question was important because “Not only to get a lesser penalty but also to show that it won’t accept that kind of behavior. We are seeing more of that.”

These suggestions would seem to be more aligned with an industry with significant oversight, such as banking. So I found the second area she explored more directly applicable to the Foreign Corrupt Practices Act (FCPA. It met her criticisms that it was either the shareholders or perhaps the company D&O insurance carrier who foot the bill for any FCPA violation.

She explored an idea posited by Claire A. Hill and Richard W. Painter, professors at the University of Minnesota Law School, in a new book they published, entitled “Better Bankers, Better Banks”. In this book the law professors urged “making financial executives personally liable for a portion of any fines and fraud-based judgments a bank enters into, including legal settlements. The professors called this “covenant banking.”

This covenant banking plan had some very interesting elements that spoke to the issue of individual v. corporate liability, similar to the discussion compliance professionals have engaged in since the release of the Yates Memo. Morgenson said the covenant banking plan “contains a crucial element, requiring the best-paid bankers in the company to be liable for a fine whether or not they were directly involved in the activities that generated it. Such a no-fault program, the professors argued, would motivate bankers not only to curb their own problematic tendencies but to be on the alert for colleagues’ misbehavior as well.” She quoted the book’s authors stating that this plan would help to change corporate culture as it “discourages bad behavior and its underlying ethos, the competitive pursuit of narrow material gain.”

Moreover, the professors believe, “If bankers aren’t willing to institute a system involving personal liability, regulators and judges could require it as part of their settlements or rulings. Something like covenant banking could be included in nonprosecution agreements. Or a judge overseeing a case in which a company is paying $50 million could require individuals to pay $10 million of that personally.” Finally, “A regulator could give a company the choice of a far lower fine if it were to be paid by managers, not shareholders. A company choosing to pay the higher fine and billing it to the shareholders would have some explaining to do”.

While most banks or non-financial institutions subject to the FCPA might well be reluctant to put such corporate strictures in place, it certainly could be a part of a civil penalty which comes before a court for review and consideration, such as when the Securities and Exchange Commission (SEC) goes to court when filing a Cease and Desist order in a FCPA enforcement action.

The Yates Memo recognized that individual accountability will help to drive compliance with the FCPA. The problem in going after individuals is that it is often difficult to pinpoint any single or series of actions by a senior manager that may have lead to the violation. It can be as nefarious as the General Motors (GM) nod or simply the diffusion of liability was the basis for the original creation of the corporate structure long ago.

Yet, by focusing on corporate culture Morgenson, the banking industry and banking regulators are hitting on a key theme. Paper programs are only that if there is not the culture of compliance set by senior management that the company will follow the rules. I was also intrigued that both FINRA Chairman Ketchum and banker Dombret recognized the business problem which poor cultures of compliance led to, lack of faith in capital markets and the securities industry. If companies will work to enhance culture, they move to addressing this most serious and long-term business issue.

Spud Webb was the first ‘Little Big Man’ in the modern era of the NBA. His 12-year run of success led to players such as the five-foot, five-inch Earl Boykins and five-foot, three-inch Muggsy Bogues. In 2006, 5’9” Nate Robinson of the New York Knicks became the second-shortest player to emerge victorious in the NBA slam-dunk contest. Webb changed NBA culture just as corporate culture can be changed as well.

For a YouTube video clip of Spud Webb at the 1986 Slam Dunk contest, click here.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2016

CyclocrossOn this day in 1934, Hammerin’ Hank Aaron was born; who for my money is the greatest home run hitter ever. He began his professional baseball career in 1952 in the Negro League but soon joined the Milwaukee Braves of the National League in 1954, eight years after Jackie Robinson had integrated baseball. He quickly established himself as an important player for the Braves and won the National League batting title in 1956. The following season, he took home the league’s Most Valuable Player (MVP) award and helped the Braves beat Mickey Mantle and the heavily favored New York Yankees in the World Series. The Braves returned to the World Series in 1958 but lost to the Yankees in seven games.

In 1959, Aaron won his second league batting title. He hit .300 or higher for 14 seasons and slugged out at least 40 homers in eight separate seasons. In May 1970, he became the first player in baseball to record 500 homers and 3,000 hits. I will never forget Milo Hamilton’s call of Aaron’s shot to break Babe Ruth’s record of 714 career home runs, on April 8, 1974, against the Los Angeles Dodgers. Aaron retired in 1976 with 755 total homers, 2297 career runs batted in, 6856 career total bases and 1477 career extra base hits; the final three records still standing.

Aaron’s career home run records stand in stark contrast to the man who broke his record, Barry Bonds, who is believed to have used performance enhancing drugs to break the record. While Bonds’ cheating may not have been proven that of Lance Armstrong in cycling is well known and well documented. One of the most interesting (or perhaps saddest) things which occurred when Armstrong finally admitted he had doped was that cheating was so wide-spread in the sport there was no one left to award the vacated first place awards to after Armstrong was stripped of his.

Yet as bad as cheating in cycling was, it actually may have been taken to a new level with the introduction of what the Wall Street Journal (WSJ) called “technological fraud”. In an article entitled “Cycling’s New Scandal is a Motor” Jason Gay detailed that the latest scandal to hit international cycling events is the motorization of the bike. He wrote, “I’m talking about an elite-level cyclist getting busted this weekend for a motor in a bicycle. That’s right, a motor inside a leg-powered bicycle. Just when you think you’ve heard it all about illegal performance enhancement in sports, here comes … vroooooooooom … perhaps the goofiest scandal ever.”

The motor appeared in the bike of Femke Van dem Driessche in the sport of cyclocross, which combines cycling, some running with the bike on your shoulder and clearing obstacles such as barriers and steps. Gay reported that Union Cycliste Internationale President Brian Cook confirmed that there was “a concealed motor” at a news conference. You do have to admire cyclist Van dem Driessche who mounted the best big dog ate my homework since at least the Pink Panther movies when she said denied that it was her bike, adding, “I would never cheat.”

Even Gay admitted the entire episode sounded so preposterous as to be absurd, yet he noted, “It sounds absurd, but such technology exists. Small, battery-powered motors have been made that can fit inside the bottom bracket of a bicycle, near the pedals, which can be turned on and off with the push of a hidden button. It isn’t as if the bike suddenly turns into a Harley-Davidson – instead, the motor gives the rider an artificial push as he or she continues to pedal the bike.”

Sadly, Gay cited to Katie Compton, a US cyclocross racer, who was quoted as saying, “I didn’t think that it would actually ever happen.” Even worse she said, “this has probably been happening on the road more than anyone realizes”. Gay also quoted former men’s US cyclocross champion Tim Johnson who said he was “ashamed to have this happen in our sport.”

Obviously this is a problem. But it also speaks to why the myth of the rogue employee is simply that, a myth. How many people do you think it took to develop and sell the motor unit, custom made for cyclocross? Then who do you think installed it? Too bad Van den Driessche is not German, as perhaps she could advise Volkswagen going forward on how to claim its 10-year program to defraud emissions testing was the result of ‘rogue engineers’.

How about the most recent Foreign Corrupt Practices Act (FCPA) enforcement action involving SAP? There have been rumblings that the former head of Latin America Sales, Vicente Garcia, was that pesky lone wolf, the rogue employee. He somehow managed to create a slush fund for the payment of bribes all on his own by intentionally deceiving his employer, the worldwide software giant SAP. Does anyone realistically think he did this all on his own?

But perhaps the more important question is the following: if Garcia defrauded a $85bn company, according to the site NetWorth.com; what does it say about the internal controls of a company that allowed a senior level employee to do this and indeed one who admitted that he believed paying such bribes was necessary to secure both the initial contract and additional Panamanian government contracts.

The tale of the rogue employee likens to the explanation that it was really just human error. The problem with this is there is no exploration of the compliance system failures that allowed the employee to engage in the bribery and corruption. Even if an employee can evade the controls in a system at one level there should be another level of oversight. In Garcia’s case, it appears he could set the discount rate for the corrupt distributor through which the bribe was paid in addition to the sales price with no meaningful oversight.

What about cheating by putting a motor on a leg powered bicycle? Gay said it was probably “a punch line too far”, and quoted Johnson for the following, “I laugh and you laugh, but it’s really not funny. It sucks.”

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2016