Educational Series Archives

Some call the new U.K. Bribery Act “The FCPA on Steroids”

The new law, called the Bribery Act, takes effect in April 2011. It resembles the U.S. Foreign Corrupt Practices Act (FCPA) which bars companies that trade on U.S. exchanges from bribing foreign government officials to gain a business advantage, but the Bribery Act goes beyond the FCPA by not just prohibiting illicit payments to foreign officials, but also bribes between private business people. It holds even if the individual who makes the payment does not realize that the transaction was a bribe.

And the Act’s impact extends beyond U.K.-based companies. It applies to entities with any “business presence” in the U.K., regardless of where the act of briberyoccurs. It also covers bribery by any person with “close connections” to the U.K., including both British citizens and citizens of others countries “ordinarily residing” in the U.K.

According to the Ministry of Justice, the law basically creates three criminal offenses: 1) giving or accepting a bribe designed to induce someone to perform a function improperly; 2) bribing a foreign public official with the intention of obtaining a business advantage, and 3) failing to prevent bribery.

Legal experts say that the most significant development in the law is a company’s strict liability for failing to prevent bribery (by an employee, a joint-venture partner or a subsidiary.) Under the Act, the company can be penalized with an unlimited fine for such actions, and further can be held liable for the acts of bribery by a person “associated” with the company who is trying to obtain a business advantage for the company. And unlike the FCPA, the Act does not exempt from prosecution what are commonly known as “facilitation payments.” (In some parts of the world, it is common practice to pay a small amount of money to ensure that an otherwise legitimate permit is approved in a timely manner.)

While the British government released some draft guidance on the Act in late 2010 and more definitive text is expected in 2011, it is unclear how vigorously the law will be enforced or what resources will be committed to investigating and prosecuting the suspected violations. Ultimately, it will be up to the courts to determine the true impact of the new law.

|Educational Series, Legislation|

Turning to lie detectors for investment confidence

Media reports say that amid the still unsettled regulations in the wake of the financial crisis, affluent investors are turning to behavioral specialists, looking to find things in the faces and phrases of their fund managers that may not be revealed in financial statements.

Eccentric screening techniques are nothing new to Wall Street. Seigmund Warburg, founder of the investment bank S. G. Warburg & Co., was known for subjecting customers and employees to psychological tests, and evaluating hand-writing samples of job applicants. And these days, requests for deception detection are on the uptick, as acknowledged by lie detector professionals who are turning down repeated orders to analyze subjects for Wall Street firms.

Earlier this year, intelligence sources disclosed to the publication Politico that the CIA, within tight guidelines of its employment policies, allows agents to moonlight in the private sector, and that some of them work as “human lie detectors.” Calling deception detection an “arcane field,” Politico reported that such experts recognize the verbal and nonverbal cues that indicate someone may be lying, and the people under scrutiny never know they’re being evaluated. Politico recounted an incident from 2005 where a large hedge fund, through a third-party, retained CIA-trained analysts to remotely listen in on a quarterly earnings status call from executives at UTStarcom. During the call, the agents noted some suspicious responses by the interim CFO, and specifically about revenue recognition. They subsequently cautioned that the company most likely would post poor results in the third-quarter. And sure enough, the prediction came true: a day after the below-expectations results were released, the stock closed at $5.64. It had been trading at $8.54 when the CIA listened in on the call in August.

So exactly what verbal clues tipped off the agents? In this case, it was a “detour statement” when the interim CFO qualified his response to a revenue recognition question by referring back to an announcement from a previous quarter, and avoided further comments on any related issues. The executives on the call also projected low confidence, had an underlying concern and did not readily come forth with information.

According to corporate lie detection experts, there is a myriad of verbal clues that may be indicators of dishonesty. Shifts in language patterns, such as switching from the first person to the third person, i.e., suddenly speaking on behalf of “the firm” or “the team,” and quick “rehearsed” responses may be red flags. Statements that contain the words “honestly,” “frankly” or “basically” and phrases such as “as I said before” and “I swear to God” also have been linked to deception. Attacking the questioner with “How dare you ask me something like that?” too may point to someone who is uncomfortable with the untruth, as well as having a selective memory as indicated by the phrase “to the best of my knowledge.” Additionally, complaints – “How long is this going to take?” – and overly courteous responses – “yes, sir” – have been found common in liars.

And of course there are physical indicators of lying, with the main ones being facial twitches, changes in breathing tempo, and dilated pupils. Professional human lie detectors say that people who are uneasy with deception will show that in motions such as micro-expressions—brief flashes of fear or other changes in a face—or concealing positions like crossing legs, or sitting motionless. Shifting anchor points, grooming gestures such as adjusting clothes, hair or eyeglasses, picking at fingernails, and cleaning the surroundings by straightening paper clips on the table or lining up pens are also possible indicators of honesty transgressions.

Skeptics, however, abound. In a May 2010 report, even the Government Accountability Office called into question the effectiveness and the scientific foundation of deception detection techniques. And many experts agree that even the most common dishonesty signs are not universal and detection is most effective when the analyst can establish an “honesty” pattern and then look for deviations.

When screening a fund manager, investors still like to see experience, a consistent record and good returns. And a comprehensive background investigation that provides such information may be more predicting of future behavior and honesty than a Pinocchio’s nose. But human lie detectors can identify “hot spots” for extra probing, and combined with a traditional due diligence, buy investors a reasonable peace of mind.

|Educational Series, Fraud|

Scraped information for sale to employers

Employers legally can’t discriminate based on gender, race and other factors which they may get from social-media profiles, but some indeed are using such data in their employment decisions. Media sources reported that scraping for employment purposes is growing, and that an employment screening company in Florida began offering limited social-networking data, including some that is scraped, about a year ago. Scrapers operate in a legal gray area. Internationally, anti-scraping laws vary, and in the U.S., court rulings have been contradictory. Media reports quoted Eric Goldman, a law professor at Santa Clara University saying: “Scraping is ubiquitous, but questionable. Everyone does it, but it’s not totally clear that anyone is allowed to do it without permission.”

|Educational Series, Employment Decisions|

Scraping to find your real name

PeekYou.com has applied for a patent for a way to, among other things, match people’s real names to pseudonyms they use on blogs, Twitter and online forums. A statement on its patent application describes the invention as “a method for aggregating over a network, personal information available from public sources.”

PeekYou’s people-watch Web site offers records of about 250 million people, primarily in the U.S. and Canada. PeekYou says it also is starting to work with listening services to help them learn more about the people whose conversations they are monitoring. It claims to provide only demographic information, not names or addresses.

|Educational Series|

Social Security number (SSN) randomization to take effect in June 2011

The Social Security Administration (SSA) describes the SSN randomization as a forward-looking project to help protect the integrity of the Social Security number by establishing a new random assignment methodology. The SSA promises to still provide online services for direct SSN verifications, as follows:

SSA’s Social Security Number Verification Service – available to employers.
Department of Homeland Security’s eVerify Service – available to employers to determine employment eligibility.
SSA’s Consent-Based SSN Verification Service – available to enrolled private companies and government agencies for a fee.

Federal and state agencies will continue to maintain several SSN verification
systems, as outlined at http://www.ssa.gov/gix/eprojects.html.

|Educational Series|

FTC’s latest privacy initiatives

On December 1, 2010, the Federal Trade Commission (FTC) released its long-awaited preliminary report on the protection of consumer privacy titled “Protecting Consumer Privacy in an Era of Rapid Change: A Proposed Framework for Businesses and Policymakers.” The FTC is seeking input on this proposal and intends to issue a final report sometime in 2011.

The report, which covers both online and offline data collection and use, reiterates certain concrete steps that the FTC believes organizations should take related to choice and transparency and also provides broad guidance that applies to all commercial entities that collect or use consumer data, including companies that do not interact directly with consumers, such as information brokers. The framework is not limited to personally identifiable information (PII); it applies to all consumer data that can be linked to a specific individual or to a computer or other device.

Focusing on new and growing threats to consumer privacy driven by innovations that rely on consumer data, the proposal outlines a three-step framework for data protection:

1) Privacy by Design – Organizations should integrate privacy concepts into every stage of the life-cycle of their products and services, develop marketing initiatives and data-sharing activities based on privacy guidance from the inception of such projects, and develop and maintain comprehensive information programs to protect and manage consumer data within the organization itself. Data security, reasonable collection limits, sound retention practices, and data accuracy are critical program components.

2) Choice – Organizations should offer clear and easy-to-use choice mechanisms at the point when the consumer is making a decision about his/her data, such as at the point of collection, implement a “do not track” mechanism, such as a persistent web browser setting that allows consumers to block all tracking of their online activities, obtain consumer consent before sharing data for marketing purposes with third parties or even with its affiliates if the affiliate relationship is not clear to consumers, and require enhanced consent for sensitive information, such as data about children, financial and medical information, and precise geolocation data.

3) Transparency – While privacy policies remain a critical tool for notifying consumers (and regulators) of an organization’s privacy practices, in general, most privacy polices need to be streamlined and simplified, and organizations must obtain consumer consent before implementing a change in policy that affects previously collected data. Organizations also should explore mechanisms for providing consumers with access to their data.

|Educational Series, Legislation|

No background check was done on Michael Jackson’s doctor

Media sources reported that among several wrongful death lawsuits filed by the Jackson family, is a September 2010 action against event production company AEG Live and others alleging that they are responsible for the singer’s death because his “This Is It” tour contract with AEG created a legal duty to keep him healthy.

In its complaint, among other causes, the Jackson family accuses AEG of “negligent hiring” and retention of Dr. Conrad Murray to care for Jackson instead of his usual doctor. Earlier this year, prosecutors charged Murray with involuntary manslaughter, to which he pleaded not guilty. The doctor is accused of administering the drug Propofol to Jackson without the necessary resuscitation equipment or nursing support, and subsequently causing his death. The ‘Negligent Hiring’ cause of action in the complaint filed in Los Angeles County states:

“In undertaking to hire Murray, AEG performed absolutely no diligence in investigating or checking into Murray’s background, specialties, ability, or even whether he was insured, which it had a duty to do. In choosing to hire and employ a physician to treat Jackson, AEG undertook to act, and it needed to do so reasonably. AEG did not act reasonably and breached its duty.”

“During the course of Murray’s treatment, it became clear to AEG that Jackson was not doing well at all. AEG did nothing to terminate Murray and instead negligently retained him as an employee, and in so doing violated its duty of care. AEG insisted that Jackson continue treatment with Murray and receive no treatment from other physicians, a further breach of its duty of supervision.”

Along with negligent hiring, training and supervision, the complaint calls for unspecified damages for breach of contract, fraud, and negligent infliction of emotional distress. And in the most recent case filed November 30, 2010 in the Los Angeles County Superior Court, Joe Jackson is also claiming negligent hiring, training and supervision and negligence by the Murray-affiliated clinics and negligence against the pharmacy (and Murray.) A similar suit filed this past June did not include the pharmacy, and was dismissed.

Shortly after Michael Jackson’s death, ABC News reported that Murray was arrested on domestic violence charges in 1994 after an incident with his then-girlfriend. The doctor was tried and acquitted. When a company fails to conduct a background check, the employer can be held legally liable for a worker, independent contractor or volunteer who causes injury to a customer, co-worker or the general public. Whether the individual was acting within the capacity of the job for which he/she was hired does not matter. The legal theory is that even if an employer did not possess direct knowledge of the liability posed by an employee, the company is legally responsible because the employer should have known about the threat presented by the individual. Currently, fewer than 50% of the states uphold the doctrine of negligent hiring, and the criteria for determining negligent hiring differ from state to state.

|Criminal Activity, Educational Series, Employment Decisions, Lawsuit|

Massachusetts employers cannot ask about criminal history on initial job applications

As of November 4, 2010, Massachusetts employers are prohibited from asking about criminal records on the initial job application, except for positions for which a federal or state law, regulation or accreditation disqualifies an applicant based on a conviction, or if the employer is mandated by a federal or state law or regulation not to employ
individuals who have been convicted of a crime.

The new law also has two provisions that will become effective February 6, 2012. Under the first provision, an employer in possession of criminal record information must disclose that information to the applicant, prior to asking about it. And similar to the requirements of the Fair Credit Reporting Act, if an employer decides not to hire an
applicant in whole or in part because of the criminal record, the employer must provide the applicant with a copy of the record.

The second provision requires employers who conduct five or more criminal background investigations annually to implement and maintain a written criminal record information policy. The policy, at minimum, must specify procedures for (1) notifying applicants of the potential for an adverse decision based on the criminal record, (2) providing
a copy of the criminal record and the written policy to applicants, and (3) dispensing information to applicants about the process for correcting errors on their criminal record.

The law imposes penalties (including imprisonment for up to one year or a fine of up to $5,000 for an individual and $50,000 for a company) for those who request or require an applicant to provide a copy of his/her criminal record except under conditions authorized by law, and prohibits harassment of the subject of the criminal record (punishable by imprisonment of up to one year, or a fine of not more than $5,000.)

|Criminal Activity, Educational Series, Employment Decisions, Legislation|

Corporate misconduct can preclude directors from serving on other boards

Due diligence on current and prospective board directors should extend not only to the legal liability exposure but also to the possibility of losing valuable opportunities for board membership at other firms,” said Jason Schloetzer, assistant professor of accounting at Georgetown University’s McDonough School of Business and author of The Conference Board Report. “In the current litigation environment, it is particularly important for the board to demonstrate to shareholders and the judicial system that any failure to prevent or discover corporate misconduct took place in spite of the rigorous performance by the board of its oversight duties, including the establishment of a state-of-the-art compliance program.”

The Conference Board Report, released November 4, 2010, analyzed the changes in directorships held by outside board members of 113 public companies involved in shareholder class-action lawsuits that alleged misrepresentation of information to investors. The study, encompassing the period of 1996 to 2005, tracked directorship changes for three years after the start of litigation and used data from proxy statements to identify director turnover.

Within three years of litigation, 83.2% of outside directors remained on the board of the public company involved in the lawsuit, the study found. Related research showed that outside directors in firms involved in litigation did not appear to turn over any more frequently than the average among all outside directors. However, outside directors whose companies were involved in litigation experienced reduced opportunities to serve on other companies’ boards. The average number of board seats held by these individuals at other companies dropped from 0.95 in the year prior to the litigation to 0.47 three years after the suit was filed.

|Criminal Activity, Educational Series|

Green-energy scams put portfolios in the red

The emerging green-energy market has created a horde of fraudsters. So many, in fact, that late last year, the Financial Industry Regulatory Authority (FINRA) warned about schemes that promise large gains from investments in companies that pitch alternative, renewable or waste-to-energy products. And in May of this year, the Securities & Exchange Commission (SEC) followed with its own alert about potential scams that exploit the Gulf oil spill and related cleanup efforts.

The green-energy get-rich-quick schemes are showing up in blog posts, e-mail, infomercials, Internet message boards, text messages, and Twitter. As with most investment scams, all promise unrealistic returns, such a 200 percent stock gain by a solar panel company, a one-in-a-million deal to get a “51 times” return on current stock value from a China wind-power enterprise, and a 500 percent one week stock gain by a hydrogen-based energy outfit.

Of course, the regulators are on the lookout for the scammers. In one recently filed case, the SEC charged that promoters of eco-friendly investment opportunities lured 300 investors into a $30 million Ponzi scheme, encouraging the participants to finance “green” initiatives of Mantria Corporation, including a purported “carbon negative” housing community in rural Tennessee and a “bio-char” charcoal substitute made from organic waste. Investors were promised returns ranging from 17 percent to “hundreds of percent” annually. But, according to the SEC’s complaint, Mantria did not generate any income from which such extraordinary returns could be paid.

As cautioned by the SEC, the oil spill in the Gulf of Mexico brought additional scam opportunities for cons promising financial gains from investments in companies that claim to be involved in the cleanup operations. In May and June 2010, the SEC suspended the trading in shares of ACT Clean Technologies Inc. of Huntington Beach, CA, and Green Energy Resources, Inc. of New York, NY, because, among other issues, questions arose about the accuracy and adequacy of the publicly disseminated information by the companies.

To dodge green-energy investment scams (and other frauds) investigate before investing! And:

Never rely solely on information contained in an unsolicited communication.
Find out who sent the investment recommendations; many companies and individuals that tout stocks are paid by the company being promoted.
Examine the fine print for any statements indicating payments in cash or in stock for issuing the report or message.
Find out where the stock trades. Most unsolicited recommendations involve stocks that do not meet the listing requirements of the major stock exchanges; they are usually quoted on the OTC Bulletin Board or in the Pink Sheets, which do not impose minimum qualitative standards. Many of the OTC or Pink Sheets stocks trade infrequently which can make shares difficult to sell. When these stocks do trade, they may fluctuate in price very rapidly.
Read the company’s SEC filings to verify information.
Exercise skepticism and be wary of any pitch that suggests immediate pay-offs, especially if the investment involves a start-up company or a product or service that is still in development.

|Educational Series, Green Technology|