In episode Matt Kelly and I take a deep dive into a recent SEC enforcement action involving Susan Diamond, a CCO at a financial advisory firm. She made representations on forms submitted to the SEC regarding the firm’s status, audits and reporting that were material miss-statements. She was severely sanctioned with a $15,000 penalty and a nine-month suspension from working with any investment adviser or financial firm. And after that, she will be barred permanently from working as a compliance officer at broker-dealers and investment advisory firms.

Matt and I explore the question of whether this portends potential more or greater liability and we conclude that it does not for a variety of factors including: (1) the egregiousness of the facts, (2) the prior liability of Diamond and her company, (3) the high regulatory scrutiny afforded to financial advisors, and (4) her outright material miss-statements. We also discuss the recent arrest of a VW compliance officer and detail how the criminal charges against him do not portend additional CCO liability. Finally we conclude with a discussion about the departure of the CCO from VW and what it says about the company’s commitment to an ethical culture.

For more on the Diamond enforcement action, see Matt’s post Ack! CCO Liability is Back Again on Radical Compliance.

2016 was more than simply the most robust year in Foreign Corrupt Practices Act (FCPA) enforcement. It was also a record year in Securities and Exchange Commission (SEC) whistleblower awards and additionally the year the SEC literally crashed through the $100 million mark for whistleblower awards under Dodd-Frank. It would therefore seem like a very propitious time for a well-rounded conference focusing solely on this issue. Fortunately for us in the compliance space, Financial Research Associates and Compliance Week have answered the call with the Whistleblowers & Compliance conference to be held in NYC on February 27, 2016. In this episode I visit with Conference Chair, Gregory Keating, on the upcoming event.

Best of all listeners to this podcast will receive a discount to the event. You can receive a 15% discount off the regular price by entering the Code CMP 161. For more information on the event, check out the website by clicking here.

2016 was more than simply the most robust year in Foreign Corrupt Practices Act (FCPA) enforcement. It was also a record year in Securities and Exchange Commission (SEC) whistleblower awards and additionally the year the SEC literally crashed through the $100 million mark for whistleblower awards under Dodd-Frank. It would therefore seem like a very propitious time for a well-rounded conference focusing solely on this issue. Fortunately for us in the compliance space, Financial Research Associates and Compliance Week have answered the call with the Whistleblowers & Compliance conference to be held in NYC on February 27, 2016. Recently I was able to visit with Conference Chair, Gregory Keating, on the event.

Greg is the Chair of Choate Hall & Stewart LLP’s Labor Employment & Benefits and Whistleblower Defense Groups. In his practice has he three general areas. The first is compliance related and is everything from conducting training for organizations to auditing their existing practices, policies and procedures to assist employers to make sure that everything is setup correctly to insure a transparent environment. Second is in the area of investigations; including those focusing on  alleged wide-spread retaliation or wrongful conduct which whistleblowers bring to light. Third is litigation in the arena of whistleblower retaliation suits that are brought under a growing array of statutes, predominately Sarbanes–Oxley (SOX), Dodd-Frank, the False Claims Act, and others which prohibit against retaliation.

Keating is very excited about the conference. He noted there will be a marquee group of speakers who come from a number of different arenas. There will be government officials from some of the most prominent agencies who have agreed to speak. A group with an in-house perspective from some very prominent multi-national organizations who are wrestling with and analyzing how best to respond to this changing climate, who are going to weigh in and give their perspective. There will be some of the most prominent members of the defense bar, nationally and internationally, in this space. Last, but not least, there will be a number of extremely high profile plaintiff lawyers who practice either in Dodd-Frank or the plaintiff side of retaliation against whistleblowers.

The conference will kick-off with a deep dive into the whistleblower landscape, discussing its importance and why there is such deep water right now. It will canvas the expansion of whistleblower rights and remedies, focusing on recent court decisions that have come out and new legislation that continues to evolve. It will also look at what companies are doing specifically in response in this area.

I asked Keating if he might provide an example and he related that there has been a real proven attack on corporate agreements and policies which have the purpose or effect of muzzling whistleblowers. There have been, in the last year at least, almost half a dozen six figure civil money penalties imposed by  the SEC. The conference will provide some concrete guidance and advise from both the in-house and defense bar perspective on how to avoid that mine field. Additionally, there will be some concrete advice flowing from some very, very recent Department of Labor (DOL) recommended best practices around how to have an effective compliance program, where they focus on the importance in this day and age of training.

A hot topic to be discussed is the current whistleblower retaliation trial of former Bio-Rad General Counsel (GC) Sanford Wadley. The conference will use this trial to consider the rising tide of in-house counsel and compliance professionals as the whistleblower. Keating said that other hot topics that will likely be addressed include whether whistleblowers can take confidential information in direct violation of a confidentiality agreement and, nonetheless, proceed as a whistleblower and whether would-be whistleblowers could engage in other opposition which arguably is unreasonable and whether those whistleblower rights will trump otherwise legitimate company policies. Keating ended by stating “there is a lot in this space that is really sizzling now” and the conference agenda will reflect these very current topics.

The conference will feature government representatives from the SEC, the US Commodity Future Trading and the DOL. This is whistleblowing across the government spectrum and will allow the attendees to identify some of the issues which corporations across America are grappling with and provide some unique insights into how best to protect oneself in this rapidly changing climate.

No doubt to warm my heart as the nuts and bolts guy, there will be several panels dedicated to subjects such as how do you do compliance, including training; drafting and creating effective employment separation, settlement and confidentiality agreements, and in-house audits. Of course there will also be coverage of hotline triage and response, together with presentations on how set up a robust investigation protocol.

In short, if there is only one whistleblower conference you can attend, you should strongly consider this event. It will showcase regulators, the whistleblower defense bar, top corporate in-house compliance practitioner and GC types, and the plaintiff’s bar for whistleblower and retaliation cases. For any compliance practitioner, GC or lawyer, I think this will be a fabulous conference. I hope you will be able to attend.

Best of all readers of this blog will receive a discount to the event. You can receive a 15% discount off the regular price by entering the Code CMP 161. For more information on the event, check out the website by clicking here.

A recent Securities and Exchange Commission (SEC) internal controls enforcement action drew my attention. It was not a Foreign Corrupt Practices Act (FCPA) enforcement action but it certainly does have implications for a Chief Compliance Officer (CCO), compliance practitioner and corporate compliance function. It involves General Motors (GM). In the SEC Press Release it noted the company agreed, in a Cease and Desist Order (Order),  “to pay a $1 million penalty to settle charges that deficient internal accounting controls prevented the company from properly assessing the potential impact on its financial statements of a defective ignition switch found in some vehicles.”

In the Press Release, Andrew M. Calamari, Director of the SEC’s New York Regional Office, stated, “Internal accounting controls at General Motors failed to consider relevant accounting guidance when it came to considering disclosure of potential vehicle recalls. Proper consideration of loss contingencies and assessment of the need for disclosure are vital to the preparation of financial statements that conform with Generally Accepted Accounting Principles [GAAP].” All of this revolved around the manner in which the company handled loss contingencies such as a potential vehicle those when a vehicle recall might arise.

GAAP, whose principal source is the Accounting Standards Codification (“ASC”), requires automobile manufacturers to assess the likelihood of whether a potential vehicle recall will occur, then “provide an estimate of the associated loss or range of loss or otherwise provide a statement that such an estimate cannot be made.”

ASC 450 provides guidance for the recognition and disclosure of a loss contingency. The ASC defines a loss contingency as an existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that will ultimately be resolved when one or more future events occur or fail to occur. The term loss, as used in ASC 450, includes many charges against income that are commonly referred to as expenses and others that are commonly referred to as losses.” The standard goes on to require companies to “assess the likelihood that the future event or events will confirm the loss or impairment of an asset or the incurrence of a liability is remote, reasonably possible or probable. “Probable” means the future event or events is likely to occur. A loss is considered “reasonably possible” when the chance of the future event or events occurring is more than remote but less than likely. A loss is considered “remote” when the chance of the future event or events occurring is slight.”

The Order found “the company’s internal investigation involving the defective ignition switch was not brought to the attention of its accountants until November 2013 even though other General Motors personnel understood as early as the spring of 2012 that there was a safety issue involving the ignition switches in certain car models. This meant that during at least an 18-month period, GM accountants did not properly evaluate the likelihood of a recall occurring or the potential losses resulting from a recall of cars with the defective ignition switch.”

GM had what can only be charitably termed as a Byzantine procedure for making such an assessment. There was a “Field Performance Evaluation, or “FPE,” process. The FPE process included an investigation and, when merited, a recall decision-making process that relied on three committees.” The first committee was the investigative team which gathered information and passed their gathered information up to the “Field Performance Review Committee (“FPERC”), which made a preliminary determination about whether an issue qualified as a safety defect and made a recommendation regarding recall decisions” up to the next level; which was the “Executive Field Action Decision Committee (“EFADC”), which made a final recall decision.”

Unfortunately, this process did not end with the EFADC. If the issue was accepted as a recall by this committee it was placed on something called the “Emerging Issues List” and under ASC 450, the issue was “probable and estimable” for accounting purposes and it was reported to another group called the “Warranty Group”, which was “responsible for the accounting treatment of possible losses related to potential” issues. But it only made it to this financial reporting group if and when the EFACD made a final determination. If the investigation determined much earlier that a recall was warranted this earlier information never made it to the Warranty Group.

When it came to the ignition switch issue, GM was aware of the issue some two years before it began to accrue for the recall. It was made aware of the issue when a GM engineer discovered the existence in a deposition from an unrelated civil action. Not reporting it was a violation of ASC 450. The Order stated, “by not devising and maintaining a system of internal accounting controls sufficient to provide reasonable assurances that transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles.”

The implications from this case in FCPA enforcement actions involving the SEC are clear cut. Recall the standard requires a company to “assess the likelihood that the future event or events will confirm the loss or impairment of an asset or the incurrence of a liability is remote, reasonably possible or probable. “Probable” means the future event or events is likely to occur. A loss is considered “reasonably possible” when the chance of the future event or events occurring is more than remote but less than likely. A loss is considered “remote” when the chance of the future event or events occurring is slight.”

If the SEC looked at the filings of issuers around their FCPA disclosures how many would meet this standard? My suspicion is not many. This SEC enforcement puts additional pressure on an organization in several different areas. Obviously the first around the decision to self-disclose (or not) which is already fraught with many different trap-doors. Now overlay this accounting requirement to accurately record and then forecast.

Looking at it from the opposite perspective what if the accounting side of the house makes a disclosure under this requirement without consulting compliance or legal. How do you think the SEC might feel about a company if they read such a disclosure in a K or Q filing? Finally, what about the internal controls that GM set by way of its investigative committee structure? What if information is turned up clearly showing a FCPA violation yet the investigator cannot make that determination and is even hamstrung in getting up the line to the proper committee for further review and reporting?

This case emphasizes not only the need for robust, functioning and effective internal controls but also demonstrates how an aggressive posture by the SEC can bring a routine corporate action into an enforcement action.

 

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, 2017

 Show Notes for Episode 36, week ending January 20, the Jeff Bagwell in the Hall of Fame edition

  1. Jeff Bagwell admitted into the Hall of Fame. See article in Houston Chronicle.
  2. Rolls Royce-stunning $800MM global settlement, including resolutions with the UK SFO, DOJ and Brazilian authorities. See Tom’s blog posts on the FCPA Compliance and Ethics Report, Part I and Part II.
  3. Orthofix-another recidivist FCPA enforcement action-see the FCPA Blog
  4. Las Vegas Sands concludes its FCPA enforcement action. On the FCPA Blog.
  5. Jay’s question answered. See Tom’s blog post on the FCPA Blog.
  6. NFL Conference Championship Predictions