Category: Corporate Security

10 Tips for Conducting an Internal Investigation

Recently posted in the National Law Review an article by Catherine Salmen Wright of  Dinsmore & Shohl LLP regarding conducting an internal investigation:

The recent news involving Penn State highlights how high the stakes can be when conducting an internal investigation. In fact, Penn State has hired former FBI director Louis Freeh to lead its internal investigation into alleged criminal conduct by a former employee. But while most employers do not face circumstances this challenging, the reality is that employers are presented with circumstances on a regular basis that must be investigated effectively to avoid significant legal liability.

Of course, this begs the question of when an employer needs to investigate. The simplest answer is when the employer has knowledge of misconduct. Misconduct can include a breach of an employer policy, violation of a drug or alcohol policy, theft or other criminal activity, or even misuse of company property. Employers should not, however, too narrowly construe what constitutes “knowledge,” which can include formal and informal complaints, information obtained during exit interviews, anonymous tips and third-party information.

Employers should also keep in mind that an internal investigation may become your defense in any subsequent litigation and therefore may be subject to significant scrutiny by the plaintiff, the plaintiff’s lawyer and possibly a jury. For example, in a sexual harassment lawsuit, the employer’s investigation is what typically shows that the employer exercised reasonable care to prevent and correct any harassing behavior. Another defense used by employers in wrongful termination lawsuits is the “honest belief” rule. Specifically, if the employer can show that it reasonably relied on the particularized facts that were before it at the time the decision was made, it can potentially avoid liability over a challenged decision. The investigation does not need to be perfect, but the employer must make a reasonably informed decision before taking an adverse employment action.

As a result, conducting an effective internal investigation is critically important. Every investigation comes with a unique set of facts and challenges, but the following 10 principles serve as a guide for conducting an effective investigation.

1. Determine the objectives and strategy for the investigation.

At the outset, employers must establish the objectives of the investigation. Questions that should be addressed include:

  • Are you trying to develop a complete record to justify a decision?
  • Are you attempting to avoid litigation?
  • What are your legal obligations?
  • Do you need an attorney involved?

Evaluating the answers to these questions will allow you to tailor your investigation.

2. Maintain confidentiality.

A guiding principle in any investigation is confidentiality, which employers should maintain to the extent possible. However, don’t promise what you can’t deliver. Absolute confidentiality when employees will be interviewed is virtually impossible. Also, employers need to be vigilant when it comes to thoroughness and promptness. For example, if you had to answer questions one year later in a deposition, can you give a reasonable explanation of why it took the amount of time it did to complete the investigation?

3. Determine if immediate actions need to take place to protect the workforce.

Based on what you know at the time the investigation begins, you may need to take immediate steps to protect the complaining party, alleged victim or the workforce in general. For example, an accused harasser may be put on a paid or unpaid leave, supervisory responsibilities could be changed or an employee could be temporarily transferred pending an investigation, but in no case should an employer penalize the alleged victim.

4. Review company policies.

Take an inventory of employer policies that may impact the investigation process. For example, a collective bargaining agreement may provide an employee the right to have a representative present at any interview.

5. Conduct a preliminary search of available records.

This includes reviewing personnel files and any documents relating to the misconduct. Act quickly to retrieve what electronic information is still available, including emails and text messages.

6. Select the appropriate personnel to conduct the investigation.

Investigators should be unbiased and unprejudiced — and perceived as such. Good investigators are skilled at setting people at ease and drawing out reticent witnesses in order to collect facts. They also need knowledge of company policies and procedures, the ability to maintain confidentiality and a level of authority consistent with the significance of the matter being investigated.

7. Control the interview process.

Obtaining detailed statements from interviews with the complaining party and the accused are a critical part of any investigation. Documentation should include the facts, not legal conclusions, or your interpretations and assumptions. Give witnesses ground rules: No conclusion has been reached, no reprisal will be taken, and no discussions about the interview are allowed with anyone.

8. Communicate throughout the process.

Many employers launch an investigation, only to fail to keep the complainant reasonably informed during the process. Unfortunately, this results in the complaining party believing their complaint was ignored, which may prompt them to involve an attorney.

9. Close the investigation properly.

Having invested the time and cost associated with the investigation, protect your investment by properly closing out the investigation. Make a decision, communicate the decision and document the process.

10. Ensure against retaliation.

Employees who make complaints may be legally protected from experiencing an adverse employment action. This includes complaints involving discrimination, harassment, safety violations, wage and hour violations and more. Do ensure against retaliation by continuing to monitor the situation.

As seen in the December 9th issue of Business Lexington.

© 2011 Dinsmore & Shohl LLP. All rights reserved.

White Collar Crime

The National Law Review would like to advise you of the upcoming White Collar Crime conference sponsored by the ABA Center for CLE and Criminal Justice Section, General Practice,  &   Solo and Small Firm Division:

Event Information

When

February 29 – March 02, 2012

Where

  • Eden Roc Renaissance Miami Beach
  • 4525 Collins Ave
  • Miami Beach, FL, 33140-3226
  • United States of America
Primary Sponsors

  • Highlight

The faculty includes some of the leading white collar lawyers in the United States.  The keynote panels for the 2012 program will continue to focus on the role of ethics and corporate compliance in today’s business environment.

  • Program Description

Each year the National Institute brings together judges, federal, state, and local prosecutors, law enforcement officials, defense attorneys, corporate in-house counsel, and members of the academic community.  The attendees include experienced litigators, as well as attorneys new to the white collar area.  Attendees have consistently given the Institute high ratings for the exceptional quality of the Institute’s publication, its valuable updates on new developments and strategies, as well as the rare opportunity it provides to meet colleagues in this field, renew acquaintances and exchange ideas.

The faculty includes some of the leading white collar lawyers in the United States.  The keynote panels for the 2012 program will continue to focus on the role of ethics and corporate compliance in today’s business environment.  Once again, we expect excellent representation from the corporate sector.

  • CLE Information

ABA programs ordinarily receive Continuing Legal Education (CLE) credit in AK, AL, AR, AZ, CA, CO, DE, FL, GA, GU, HI, IA, ID, IL, IN, KS, KY, LA, ME, MN, MS, MO, MT, NH, NM, NV, NY, NC, ND, OH, OK, OR, PA, RI, SC, TN, TX, UT, VT, VA, VI, WA, WI, WV, and WY. These states sometimes do not approve a program for credit before the program occurs. This course is expected to qualify for 11.0 CLE credit hours (including TBD ethics hours) in 60-minute-hour states, and 13.2 credit hours (including TBD ethics hours) in 50-minute-hour states. This transitional program is approved for both newly admitted and experienced attorneys in NY. Click here for more details on CLE credit for this program.

White Collar Crime

The National Law Review would like to advise you of the upcoming White Collar Crime conference sponsored by the ABA Center for CLE and Criminal Justice Section, General Practice,  &   Solo and Small Firm Division:

 

 

Event Information

When

February 29 – March 02, 2012

Where

  • Eden Roc Renaissance Miami Beach
  • 4525 Collins Ave
  • Miami Beach, FL, 33140-3226
  • United States of America
Primary Sponsors

  • Highlight

The faculty includes some of the leading white collar lawyers in the United States.  The keynote panels for the 2012 program will continue to focus on the role of ethics and corporate compliance in today’s business environment.

  • Program Description

Each year the National Institute brings together judges, federal, state, and local prosecutors, law enforcement officials, defense attorneys, corporate in-house counsel, and members of the academic community.  The attendees include experienced litigators, as well as attorneys new to the white collar area.  Attendees have consistently given the Institute high ratings for the exceptional quality of the Institute’s publication, its valuable updates on new developments and strategies, as well as the rare opportunity it provides to meet colleagues in this field, renew acquaintances and exchange ideas.

The faculty includes some of the leading white collar lawyers in the United States.  The keynote panels for the 2012 program will continue to focus on the role of ethics and corporate compliance in today’s business environment.  Once again, we expect excellent representation from the corporate sector.

  • CLE Information

ABA programs ordinarily receive Continuing Legal Education (CLE) credit in AK, AL, AR, AZ, CA, CO, DE, FL, GA, GU, HI, IA, ID, IL, IN, KS, KY, LA, ME, MN, MS, MO, MT, NH, NM, NV, NY, NC, ND, OH, OK, OR, PA, RI, SC, TN, TX, UT, VT, VA, VI, WA, WI, WV, and WY. These states sometimes do not approve a program for credit before the program occurs. This course is expected to qualify for 11.0 CLE credit hours (including TBD ethics hours) in 60-minute-hour states, and 13.2 credit hours (including TBD ethics hours) in 50-minute-hour states. This transitional program is approved for both newly admitted and experienced attorneys in NY. Click here for more details on CLE credit for this program.

Second Circuit's Citigroup Decision Endorses Presumption of Prudence, Upholds Dismissal of Disclosure Claims

Posted this week at the National Law Review by Morgan, Lewis & Bockius LLP regarding the decision that employer stock in a 401(k) plan is subject to a “presumption of prudence” that a plaintiff alleging fiduciary breach:

 

 

 

In a much-anticipated decision, the U.S. Court of Appeals for the Second Circuit joined five other circuits in ruling that employer stock in a 401(k) plan is subject to a “presumption of prudence” that a plaintiff alleging fiduciary breach can overcome only upon a showing that the employer was facing a “dire situation” that was objectively unforeseeable by the plan sponsor. In re Citigroup ERISA Litigation, No. 09-3804, 2011 WL 4950368 (2d Cir. Oct. 19, 2011). The appellate court found the plaintiffs had not rebutted the presumption of prudence and so upheld the dismissal of their “stock drop” claims.

BACKGROUND

The Citigroup plaintiffs were participants in two 401(k) plans that specifically required the offering of Citigroup stock as an investment option. The plaintiffs alleged that Citigroup’s large subprime mortgage exposure caused the share price of Citigroup stock to decline sharply between January 2007 and January 2008, and that plan fiduciaries breached their duties of prudence and loyalty by not divesting the plans of the stock in the face of the declines. The plaintiffs further alleged that the defendants breached their duty of disclosure by not providing complete and accurate information to plan participants regarding the risks associated with investing in Citigroup stock in light of the company’s exposure to the subprime market. On a motion to dismiss, the district court found no fiduciary breach because the defendants had “no discretion whatsoever” to eliminate Citigroup stock as an investment option (sometimes referred to as “hardwiring”). Alternatively, the lower court ruled that Citigroup stock was a presumptively prudent investment and the plaintiffs had not alleged sufficient facts to overcome the presumption.

SECOND CIRCUIT DECISION

Oral argument in the Citigroup case occurred nearly a year ago, and legal observers have been anxiously awaiting the court’s ruling. In a 2-1 decision, with Judge Chester J. Straub issuing a lengthy dissent, the Second Circuit rejected the “hardwiring” rationale but confirmed the application of the presumption of prudence, which was first articulated by the Third Circuit in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995). The court also rejected claims that the defendants violated ERISA’s disclosure obligations by failing to provide plan participants with information about the expected future performance of Citigroup stock.

Prudence

Joining the Third, Fifth, Sixth, Seventh, and Ninth Circuits,[1] the court adopted the presumption of prudence as the “best accommodation between the competing ERISA values of protecting retirement assets and encouraging investment in employer stock.” Under the presumption of prudence, a fiduciary’s decision to continue to offer participants the opportunity to invest in employer stock is reviewed under an abuse of discretion standard of review, which provides that a fiduciary’s conduct will not be second-guessed so long as it is reasonable. The court also ruled that the presumption of prudence applies at the earliest stages of the litigation and is relevant to all defined contribution plans that offer employer stock (not just ESOPs, which are designed to invest primarily in employer securities).

Having announced the relevant legal standard, the court of appeals dispatched the plaintiffs’ prudence claim in relatively short order. The plaintiffs alleged that Citigroup made ill-advised investments in the subprime market and hid the extent of its exposure from plan participants and the public; consequently, Citigroup’s stock price was artificially inflated. These facts alone, the court held, were not enough to plead a breach of fiduciary duty: “[T]hat Citigroup made a bad business decision is insufficient to show that the company was in a ‘dire situation,’ much less that the Investment Committee or the Administrative Committee knew or should have known that the situation was dire.” Nor could the plaintiffs carry their burden by alleging in conclusory fashion that individual fiduciaries “knew or should have known” about Citigroup’s subprime exposure but failed to act. Relying on the Supreme Court’s decision in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), the court of appeals held these bald assertions were insufficient at the pleadings stage to suggest knowledge of imprudence or to support the inference that the fiduciaries could have foreseen Citigroup’s subprime losses.

Disclosure

The court’s treatment of the disclosure claims was equally instructive. Plaintiffs’ allegations rested on two theories of liability under ERISA: (1) failing to provide complete and accurate information to participants (the “nondisclosure” theory), and (2) conveying materially inaccurate information about Citigroup stock to participants (the “misrepresentation” theory).

As to the nondisclosure theory, the court found that Citigroup adequately disclosed in plan documents made available to participants the risks of investing in Citigroup stock, including the undiversified nature of the investment, its volatility, and the importance of diversification. The court also emphasized that ERISA does not impose an obligation on employers to disclose nonpublic information to participants regarding a specific plan investment option.

Turning to the misrepresentation theory, the court found plaintiffs’ allegations that the fiduciaries “knew or should have known” about Citigroup’s subprime losses, or that they failed to investigate the prudence of the stock, were too threadbare to support a claim for relief. Though plaintiffs claimed that false statements in SEC filings were incorporated by reference into summary plan descriptions (SPDs), the court found no basis to infer that the individual defendants knew the statements were false. It also concluded there were no facts which, if proved, would show (without the benefit of hindsight) that an investigation of Citigroup’s financial condition would have revealed the stock was no longer a prudent investment.

IMPLICATIONS

Coming from the influential Second Circuit, the Citigroup decision represents something of a tipping point in stock-drop jurisprudence, especially with respect to the dozens of companies (including many financial services companies) that have been sued in stock-drop cases based on events surrounding the 2007-08 global financial crisis. The Second Circuit opinion gives the presumption of prudence critical mass among appellate courts and signals a potential shift in how stock-drop claims will be evaluated, including at the motion to dismiss stage.[2]

Under the Citigroup analysis, fiduciaries should not override the plan terms regarding employer stock unless maintaining the stock investment would frustrate the purpose of the plan, such as when the company is facing imminent collapse or some other “dire situation” that threatens its viability. Like other circuits that have adopted the prudence presumption, the Citigroup court emphasized the long-term nature of retirement investing and the need to refrain from acting in response to “mere stock fluctuations, even those that trend downhill significantly.” It also sided with other courts in holding that the presumption of prudence should be applied at the motion to dismiss stage (i.e., not allowing plaintiffs to gather evidence through discovery to show the imprudence of the stock). Taken together, these rulings may make it harder for plaintiffs to survive a motion to dismiss, especially where their allegations of imprudence are based on relatively short-lived declines in stock price.

Some had predicted the Second Circuit would endorse the “hardwiring” argument and allow employers to remove fiduciary discretion by designating stock as a mandatory investment in the plan document. The Citigroup court was unwilling to go that far, but it did adopt a “sliding scale” under which judicial scrutiny will increase with the degree of discretion a plan gives its fiduciaries to offer company stock as an investment. This is similar to the approach taken by the Ninth Circuit inQuan and consistent with the heightened deference that courts generally give to fiduciaries when employer stock is hardwired into the plan. Thus, through careful plan drafting, employers should be able to secure the desired standard of review. Language in the plan document and trust agreement (as well as other documents) confirming that employer stock is a required investment option should result in the most deferential standard and provide fiduciaries the greatest protection.

Also noteworthy was the court’s treatment of the disclosure claims. Many stock-drop complaints piggyback on allegations of securities fraud, creating an inevitable tension between disclosure obligations under the federal securities laws and disclosure obligations under ERISA. The Second Circuit did not resolve this tension, but it construed ERISA fiduciary disclosure requirements narrowly and rejected the notion that fiduciaries have a general duty to tell participants about adverse corporate developments. The court made this ruling in the context of SPD disclosures under the 401(k) plan that identified specific risks of investing in Citigroup stock. Plan sponsors should review their SPDs and other participant communications to make sure company stock descriptions are sufficiently explicit about issues such as the volatility of a single-stock investment and the importance of diversification. These disclosures may go beyond what is already required under Department of Labor regulations.

[1]. See Howell v. Motorola, Inc., 633 F.3d 552, 568 (7th Cir.), cert.denied, ­­­2011 WL 4530151 (2011); Quan v. Computer Sciences Corp., 623 F.3d 870, 881 (9th Cir. 2010); Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243, 254 (5th Cir. 2008); Kuper v. Iovenko, 66 F.3d 1447, 1459-60 (6th Cir. 1995).

[2]. That said, plan sponsors and fiduciaries should continue to monitor future developments in Citigroup in light of Judge Straub’s dissenting opinion and the likelihood of a petition for rehearing (or rehearing en banc), which the Citigroup plaintiffs have indicated they intend to seek. In his dissent, Judge Straub rejected the Moench presumption in favor of plenary review of fiduciary decisions regarding employer stock. He also disagreed with the majority’s interpretation of ERISA disclosure duties.

Copyright © 2011 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

Protecting Your Brand in the New .XXX Top-Level Domain

Recently posted in the National Law Review an article written by atttorneys  Lee J. Eulgen, Antony J. McShane and Katherine Dennis Nye of Neal, Gerber & Eisenberg LLP regarding  ICANN’s established procedures for the use of .XXX as a new top-level domain :

 

The Internet Corporation for Assigned Names and Numbers (ICANN) recently established procedures for the use of .XXX as a new top-level domain (TLD) like .COM, .NET, and .ORG. However, unlike those other TLDs, .XXX has been designed to clearly signal adult content on the Internet. Given the connection between .XXX and adult content, many brand owners outside the adult industry have reasonable concerns about protecting their name and brand from use with the .XXX TLD.

In part to allay some of these fears, the company behind .XXX, ICM Registry, has created a sunrise period, which has just opened, to help protect brand owners from the use of their trademarks with the .XXX TLD. Between Sept. 7 and Oct. 28, 2011, trademark owners that are not in the adult industry can “reserve” their trademark for a one-time fee of approximately $250. For example, if the fictional ABC Company owns a U.S. federal trademark registration covering the mark ABC, it could reserve www.abc.xxx so that no one else can register or use that domain name for at least the next 10 years.

One important exception to the reservation process is that if two trademark owners both own the same mark, the one that wants to actually register and use the .XXX domain will prevail over the one that simply wants to reserve the same domain. For example, assume the fictional Acme Adult Magazine and Acme Family Restaurant both own U.S. federal trademark registrations for the mark ACME. If the restaurant applies to reserve www.acme.xxx and the magazine applies to register the same domain, ICM Registry will permit the magazine to register and use the domain, and the restaurant will lose its reservation fee.

Failure to reserve important trademarks during this sunrise period could have serious consequences. Most fundamentally, failure to reserve .XXX domain names corresponding to your trademarks could of course lead to undesirable usage of your marks in connection with domain names corresponding to adult web sites. Although brand owners may be able to recover .XXX domain names from others who register and use those domains in bad faith – just as brand owners can in domain name disputes over .COM or .ORG domains – the damage to a brand may be greater from misuse of a trademark in connection with the .XXX TLD by an adult content site than from misuse with another TLD. Furthermore, regardless of what TLD is at issue, the process of forcibly obtaining a domain name through legal means can be expensive. Thus, trademark owners should consider carefully whether reserving their marks during the .XXX sunrise period makes sense for their brands. 

© 2011 Neal, Gerber & Eisenberg LLP.

The U.S. Has a New Patent Law

Posted in the National Law Review on October 27, 2011 an article regarding the Patent Reform Act of 2011 by Taylor P. Evans of Andrews Kurth LLP:

President Obama signed the Patent Reform Act of 2011 into law on September 16, 2011. Below is a summary of selected provisions of the Act.

First to File

Effective March 2013, the U.S. patent system will change from a first-to-invent to a first-to-file system. This means that if two people make the same invention and there has been no public disclosure of the invention, and both describe and claim that invention in separate patent applications, the inventor that filed his patent application first gets the patent. Thus, filing early will be more critical than ever before. Companies should consider filing a provisional application for an invention as early as possible, possibly followed by additional provisional applications as the technology of an invention develops, with a non-provisional application within a year of the first provisional application. The first-to-file provision will have no effect on existing patents or applications filed before March 2013.

Post-Grant Challenges

Effective September 2012, third parties will be able to challenge the validity of patents within nine months of issuance in the Patent Office in a Post-Grant Opposition Review proceeding. Any basis for a validity challenge will be entertained, including questions of novelty and obviousness, as well as challenges based on non-patentable subject matter or an improper written description or other formalities. After nine months, third parties may challenge patents through Inter Partes Review, which will replace existing Inter Partes Reexamination proceedings. In an Inter Partes Review, invalidity challenges must be based only on prior patents and printed publications.

In view of these changes, companies planning to initiate Inter Partes Reexamination proceedings should do so prior to September 2012. In addition, companies should arrange a monitoring program to identify patents that relate to the company’s product line for possible challenge in a Post-Grant Opposition Review proceeding upon issuance. Similarly, patentees should be aware that a significant challenge against their patents in the patent office may develop, and they should be prepared to defend against challenges from competitors when their own patents issue.

False Marking

The new Act severely limits false marking lawsuits. Only the federal government and direct competitors that have been damaged can sue for false marking. Furthermore, non-government litigants will no longer be able to collect five hundred dollars in damages per item. In addition, it is no longer actionable not to remove expired patent numbers from products. The new law also provides for “virtual marking,” by which a company marks its product with “Patent” or “Pat.,” followed by a web address. The corresponding website displays the patent marking information and must be available to the public at no charge. These changes apply retroactively to existing cases.

Disjoinder

The new law bars plaintiffs from suing multiple defendants in the same suit if the only thing that the defendants have in common is that they are alleged to infringe the same patent(s). Courts will also be barred from consolidating cases involving different defendants according to the same criteria, except that unrelated parties may still be joined for purposes of discovery. This provision applies to all suits filed on or after September 16, 2011.

Supplemental Examination

Supplemental examination is a new post-grant procedure that will allow a patentee to cure possible inequitable conduct by presenting previously withheld information to the Patent Office after issuance of a patent. After the previously withheld information is presented, and if the claims are allowed again, that information cannot be used in later court proceedings. Supplemental examination proceedings cannot be commenced or continue once an infringement action has been brought.

Assignee Filing

Under the new Act, a company can file a patent application on behalf of an inventor where the inventor is under obligation to assign its rights to the company and refuses to sign the oath or declaration. This provision will become effective in September 2012.

Fees

Effective September 26, 2011, all Patent Office fees will be subject to a 15% surcharge.

Other Changes

There are numerous other changes to the patent system under the Patent Reform Act of 2011, including, for example, elimination of the “best mode” requirement, and changes unique to specific types of inventions, such as business methods or computers. For additional information or to discuss all the new changes in more detail, please call us.

© 2011 Andrews Kurth LLP

OFAC Settles Alleged Sanctions Violations for $88.3 million

Posted in the National Law Review an article by Thaddeus Rogers McBride and Mark L. Jensen of Sheppard Mullin Richter & Hampton LLP regarding OFAC’s settlements with financial institutions:

 

On August 25, 2011, a major U.S. financial institution agreed to pay the U.S. Department of Treasury, Office of Foreign Assets Control (“OFAC”) $88.3 million to settle claims of violations of several U.S. economic sanctions programs. While OFAC settlements with financial institutions in recent years have involved larger penalty amounts, this August 2011 settlement is notable because of OFAC’s harsh—and subjective—view of the bank’s compliance program.

Background. OFAC has primary responsibility for implementing U.S. economic sanctions against specifically designated countries, governments, entities, and individuals. OFAC currently maintains approximately 20 different sanctions programs. Each of those programs bars varying types of conduct with the targeted parties including, in certain cases, transfers of funds through U.S. bank accounts.

As reported by OFAC, the alleged violations in this case involved, among other conduct, loans, transfers of gold bullion, and wire transfers that violated the Cuban Assets Control Regulations, 31 C.F.R. Part 515, the Iranian Transactions Regulations, 31 C.F.R. Part 560, the Sudanese Sanctions Regulations, 31 C.F.R. Part 538, the Former Liberian Regime of Charles Taylor Sanctions Regulations, 31 C.F.R. Part 593, the Weapons of Mass Destruction Proliferators Sanctions Regulations, 31 C.F.R. Part 544, the Global Terrorism Sanctions Regulations, 31 C.F.R. Part 594, and the Reporting, Procedures, and Penalties Regulations, 31 C.F.R. Part 501.

Key Points of Settlement. As summarized below, the settlement provides insight into OFAC’s compliance expectations in several ways:

1. “Egregious” conduct. In OFAC’s view, three categories of violations – involving Cuba, in support of a blocked Iranian vessel, and incomplete compliance with an administrative subpoena – were egregious under the agency’s Enforcement Guidelines. To quote the agency’s press release, these violations “were egregious because of reckless acts or omissions” by the bank. This, coupled with the large amount and value of purportedly impermissibly wire transfers involving Cuba, is likely a primary basis for the large $88.3 million penalty.

OFAC’s Enforcement Guidelines indicate that, when determining whether conduct is “egregious,” OFAC gives “substantial” weight to (i) whether the conduct is “willful or reckless,” and (ii) the party’s “awareness of the conduct at issue.” 31 C.F.R. Part 501, App. A. at V(B)(1). We suspect that OFAC viewed the conduct here as “egregious” and “reckless” because, according to OFAC, the bank apparently failed to address compliance issues fully: as an example, OFAC claims that the bank determined that transfers in which Cuba or a Cuban national had interest were made through a correspondent account, but did not take “adequate steps” to prevent further transfers. OFAC’s emphasis on reckless or willful conduct, and the agency’s assertion that the bank was aware of the underlying conduct, underscore the importance of a compliance program that both has the resources to act, and is able to act reasonably promptly when potential compliance issues are identified.

2. Ramifications of disclosure. In this matter, the bank voluntarily disclosed many potential violations. Yet the tone in OFAC’s press release is generally critical of the bank for violations that were not voluntarily disclosed. Moreover, OFAC specifically criticizes the bank for a tardy (though still voluntary) disclosure. According to OFAC, that disclosure was decided upon in December 2009 but not submitted until March 2010, just prior to the bank receiving repayment of the loan that was the subject of the disclosure. Although OFAC ultimately credited the bank for this voluntary disclosure, the timing of that disclosure may have contributed negatively to OFAC’s overall view of the bank’s conduct.

This serves as a reminder that there often is a benefit of making an initial notification to the agency in advance of the full disclosure. This also serves as reminder of OFAC’s very substantial discretion as to what is a timely filing of a disclosure: as noted in OFAC’s Enforcement Guidelines, a voluntary self-disclosure “must include, or be followed within a reasonable period of time by, a report of sufficient detail to afford a complete understanding of an apparent violation’s circumstances.” (emphasis added). In this regard, OFAC maintains specific discretion under the regulations to minimize credit for a voluntary disclosure made (at least in the agency’s view) in an inappropriate or untimely fashion.

3. Size of the penalty. The penalty amount—$88.3 million—is substantial. Yet the penalty is only a small percentage of the much larger penalties paid by Lloyds TSB ($350 million), Credit Suisse ($536 million), and Barclays ($298 million) over the past few years. In those cases, although the jurisdictional nexus between those banks and the United States was less clear than in the present case, the conduct was apparently more egregious because it involved what OFAC characterized as intentional misconduct in the form of stripping wire instructions. The difference in the size of the penalties is at least partly attributable to the amount of money involved in each matter. It also appears, however, that OFAC is distinguishing between “reckless” conduct and intentional misconduct.

4. Sources of information. As noted, many of the violations in this matter were voluntarily disclosed to OFAC. The press release also indicates that certain disclosures were based on information about the Cuba sanctions issues that was received from another U.S. financial institution (it is not clear whether OFAC received information from that other financial institution). The press release also states that, with respect to an administrative subpoena OFAC issued in this matter, the agency’s inquiries were at least in part “based on communications with a third-party financial institution.”

It may not be the case here that another financial institution (or institutions) blew the proverbial whistle, but it appears that at least one other financial institution did provide information that OFAC used to pursue this matter. Such information sharing is a reminder that, particularly given the interconnectivity of the financial system, even routine reporting by financial institutions may help OFAC identify other enforcement targets.

5. Compliance oversight. As part of the settlement agreement, the bank agreed to provide ongoing information about its internal compliance policies and procedures. In particular, the bank agreed to provide the following: “any and all updates” to internal compliance procedures and policies; results of internal and external audits of compliance with OFAC sanctions programs; and explanation of remedial measures taken in response to such audits.

Prior OFAC settlements, such as those with Barclays and Lloyds, have stipulated compliance program reporting obligations for the settling parties. While prior agreements, such as Barclay’s, required a periodic or annual review, the ongoing monitoring obligation in this settlement appears to be unusual, and could be a requirement that OFAC imposes more often in the future. (Although involving a different legal regime, requirements with similarly augmented government oversight have been imposed in recent Foreign Corrupt Practices Act settlements, most notably the April 2011 settlement between the Justice Department and Johnson & Johnson. See Getting Specific About FCPA Compliance, Law360, at:http://www.sheppardmullin.com/assets/attachments/973.pdf).

Conclusions. We think this settlement is particularly notable for the aggression with which OFAC pursued this matter. Based on the breadth of the settlement, OFAC seems to have engaged in a relatively comprehensive review of sanctions implications of the bank’s operations, going beyond those allegations that were voluntarily self-disclosed to use information from a third party. Moreover, as detailed above, OFAC adopted specific, negative views about the bank’s compliance program and approach and seems to have relied on those views to impose a very substantial penalty. The settlement is a valuable reminder that OFAC can and will enforce the U.S. sanctions laws aggressively, and all parties—especially financial institutions—need to be prepared.

Copyright © 2011, Sheppard Mullin Richter & Hampton LLP.

 

Troubled Loan Workouts: Qualified Professionals Can Help Maximize Recovery for All Parties

Posted in the National Law Review an article by Norman B. Newman of Much Shelist Denenberg Ament & Rubenstein P.C. regarding workout of a financially troubled loans:

The workout of a financially troubled loan requires the participants—typically the lender, the borrower and the guarantors—to be well versed in legal and business principals, coupled with an ability to understand the emotional aspects of the situation. The primary goal of a troubled loan workout is to maximize the recovery to all parties involved. That end result is best achieved when each party is represented by qualified professionals, including a loan officer who is familiar with the situation, as well as experienced attorneys and workout consultants. Collectively, these resources offer a vast network of appraisers, real estate and business brokers, buyers, prospective lenders and other contacts—all of whom are familiar with financially troubled business matters.

From the lender’s side, a loan workout officer will bring to the table a thorough understanding of the loan documents and know what collateral has been pledged, as well as the extent of the perfection of the security interests granted to the lender. The loan officer will be able to communicate with the borrower and the guarantors with respect to the existing defaults under the loan documents. This individual will also know the lender’s rights in light of the default and whether the lender is choosing to presently exercise its rights under the loan documents or reserve exercising them until a future date.

From a legal prospective, it is essential that all parties involved in a troubled loan workout be represented by attorneys experienced in handling financial distress matters. The lender’s attorney will review the loan documents, examine collateral perfection issues and assist in providing updated UCC, tax lien and judgment lien searches. This attorney will also be able to advise the lender as to the various remedies available in the exercise of its rights against the borrower and the guarantors, including in-court and out-of-court options.

The other parties should also turn to legal counsel for advice regarding their rights, remedies and obligations under the operative documents. Attorneys for the borrower and guarantors will advise their clients how best to cooperate with the lender in a consensual workout scenario or what defenses might be available in an adversarial situation. This advice will also cover in-court and out-of-court options, including the availability of bankruptcy relief as part of a consensual loan workout.

Assuming the lender does not need to take immediate action to get control over or liquidate its collateral, most troubled loan workouts involve some period of forbearance that affords the borrower additional time to resolve its financial problems. Under a limited forbearance arrangement, the lender gives up little, while both the borrower and the lender have an opportunity to pursue various benefits. At this stage, the parties should involve experienced workout consultants who, for example, will help analyze the borrower’s business and provide advice regarding the profitability and viability of the enterprise. They often help prepare short-term and long-term cash flow projections and budgets or test such projections and budgets when they are prepared by the borrower. Additionally, they typically play a role in determining the best way to maximize the recovery to all parties, whether it be a reorganization of the borrower, a sale or an orderly liquidation of the borrower’s assets. If a restructure or reorganization is the chosen solution, workout consultants will help determine what additional funds might be necessary to accomplish the desired result.

The workout of a financially troubled loan involves complex legal and business issues, as well as the emotions of the business owners or the guarantors of the borrower’s indebtedness. Partnering with experienced attorneys and other workout professionals is an essential step towards navigating these difficult waters and ensuring a successful outcome for all of the parties involved.

© 2011 Much Shelist Denenberg Ament & Rubenstein, P.C.

Federal Authorities Warn of Terrorism: Three Steps Toward Comprehensive Risk Management for the Hotel Industry

Recently posted at the National Law Review by Richard J. Fildes of Lowndes, Drosdick, Doster, Kantor & Reed, P.A. – news about a recent federal government terror alert involving hotels and resort properties: 

Quality service, prime amenities, ideal locations and excellent accommodations are the repertoire of successful hotels. In light of a recent warning issued by federal authorities to the U.S. hotel industry, that checklist may need to expand, according to the American Hotel & Lodging Educational Institute. Though Mumbai-style attacks have thankfully not come to fruition on American soil in recent years, the need for vigilance is ever-present. Based on intelligence reports gathered by the U.S. government, terror plots on the hotel industry are a looming threat;however, a panic-free plan for potentially devastating crises can easily be developed.

Attacks of terrorism and natural disasters can often share the same elements of surprise, chaos, structural destruction and health-related concerns. Just as hotels should plan for before, during, and after a storm (more details), there should be a similarly structured program for staff and guests when dealing with terrorist attacks. Combining the consideration of both events can streamline the process of training employees and increasing familiarity with risk management in the aftermath of such events. Some considerations are as follows:

• Lobbies tend to be the most dangerous part of hotels because they are typically unsecured open areas where guests congregate. If finances permit, have plain clothed security personnel in the lobby. The presence of uniformed security guards can create a perception of safety; however, non-uniformed guards can be more attuned as the eyes and ears of hotel security.

• Staff should be trained to spot potentially dangerous activities. All employees who may have contact with guests, including housekeeping, maintenance, front desk, guest services, food and beverage, transportation, and parking should be given detailed instructions on what types of activity should be reported to hotel security.

• Staff should also have equally detailed instructions on panic control and ways to manage the turmoil of natural disasters.

• Record keeping is also vital, especially with health related issues. Knowing which employees have medical ailments or potential concerns will help reduce health risks stemming from natural disasters and terrorist attacks. Though some guests may not want to disclose such information, consider asking guests whether they have any heart conditions, diabetes or other issues that would be necessary for the staff to know in case of an emergency. Such inquiries should be phrased “as non-intrusive” inquiries geared toward providing the best possible customer care and service in the rare chance that something may happen.

• Keeping both paper and electronic copies of records, including which guests are checked into the hotel at any given time, is also key to minimizing confusion and chaos when responding to an emergency.

• Develop specific evacuation plans. The standard “in-case-of-a-fire” evacuation route may not be helpful during a chemical weapon attack, bombing or hurricane.

• Have designated evacuation areas equipped (or readily able to be equipped) with vital supplies. Back up energy sources, medical supplies and non-perishable foods, and bottled waters are all necessary to keep guests safe and calm.

• Make the evacuation routes easy to follow, and ensure that the staff knows exactly where guests should be located during the different emergencies.

Being vigilant, heightening security efforts, and ensuring staff preparedness will help reduce the stress, commotion and devastating aftermath of natural disasters and terrorist related incidents.

* Tara L. Tedrow is co-author of this article. She is a rising third year law student and has not been admitted to the Florida Bar.

To read the press release issued by the American Hotel & Lodging Association, please click on the following : AHLEI PR_TerrorWarningReinforcesNeedVigilanceTraining.pdf

© Lowndes, Drosdick, Doster, Kantor & Reed, PA, 2011. All rights reserved.

An Ounce of Prevention – The Importance of Periodic Corporate Audits

Posted this week at the National Law Review by James M. O’Brien, III and David R. Krosner of  Poyner Spruill LLP – a good overview of the many reasons managed care organization should perform periodic corporate audits:  

Most, if not all, long term care providers operate their business in an entity form, such as a corporation or limited liability company.  Many use multiple entities – for example, one entity to own the real estate (or a separate entity to own each parcel of real estate) and another to operate the business.

Although the type of entity (or entities) used in your business was likely selected based on an evaluation of the benefits and drawbacks of each type of entity (including tax considerations and management structure), one of the principal benefits of both a corporation and a limited liability company (LLC) is limited liability, which is often referred to as the “corporate veil” or “corporate shield.” The corporate veil refers to the concept that the owners of the corporation or LLC are generally not liable for the debts and obligations of the entity. Rather, the “corporate veil” protects the owners from that personal liability and places responsibility for the entity’s debts and obligations on the entity.

As we all know, for every rule, there are exceptions, and that holds true with respect to the corporate shield. Some of these exceptions are created by statutes and others by case law. For example, under federal statutes, employees who are responsible for the entity’s payroll or financial affairs may be personally liable (and also subject to penalties) for willfully failing to collect and remit required federal withholding or employment taxes. Similarly, under certain federal environmental laws, corporate officers who have authority and control over the disposal of hazardous wastes can be held personally liable for the corporation’s failure to comply with certain environmental laws.

In the category of case law type exceptions, generally an individual will always be liable for his own wrongdoing. For example, if I get frustrated at work and punch my partner in the nose, the corporate shield will not protect me from liability to my partner! We all understand (and can’t legitimately complain about) those types of exceptions to the corporate shield. But there is also a broader set of case law that creates additional exceptions that allow plaintiffs to “pierce the corporate veil.” Under this concept, a judge may decide that the facts of a particular case warrant piercing the corporate veil and, thereby, holding the owners of the entity personally liable for the matter being litigated. Generally, the courts examine a laundry list of factors, including, most importantly whether the facts suggest that a refusal to pierce the corporate veil would result in fraud or similar injustice.

Generally, to succeed in a veil piercing case, the plaintiffs would have to prove, among other items, that the owners of the entity so dominated its finances, policy and business that the entity had no separate mind, will or existence of its own. In determining whether that level of control exists, a court looks to several factors (none of which are typically decisive in and of themselves). These factors include (i) inadequate capitalization of the entity, (ii) noncompliance with corporate formalities, (iii) excessive fragmentation of a single enterprise into multiple entities, (iv) absence of company records, and (v) siphoning of funds from the company by the dominant owner.

Although the case law rules for veil piercing vary somewhat from state to state, the good news is that courts are typically very reluctant to pierce the corporate veil. The perhaps better news is that there are steps you can take to make it less likely that the veil of your entity will be pierced. So what can you do to lessen the risk of a successful veil piercing claim? For one, be sure your entity complies with appropriate corporate formalities and maintains appropriate corporate records. For example, if your entity is a corporation, each year the corporation should hold a shareholders’ meeting to elect its Board of Directors and the directors should appoint the officers. All major corporate actions should be approved by the Board of Directors and records of those approvals should be maintained. If money is distributed to the owners or there are multiple entities and money flows between the entities, all of this should be approved in writing by the directors and properly documented. Generally, these types of records are kept in the entity’s minute book. If the last entry in your minute book dates from 1982, your entity is not keeping proper records!

As a service to our clients, we often conduct legal reviews of a client’s corporate/LLC records, including, as applicable, minute books, shareholders’ or operating agreements, articles of incorporation/articles of organization, bylaws, annual reports, stock transfer ledgers, foreign qualifications, good standing certificates, tax clearance certificates, etc., to ensure the records are up to date, reflect the current operations of the company, comply with current law, and generally reflect compliance with the governing documents and formalities applicable to the company. To the extent we find deficiencies, we propose a course of action and help our clients implement corrections. This is an easy and inexpensive way for you to eliminate one of the factors associated with piercing the corporate veil and help protect owners from personal liability.

© 2011 Poyner Spruill LLP. All rights reserved.