Tag: Corporate Compliance

The 16th Annual National Institute on Negotiating Business Acquisitions

The National Law Review wants to remind you to mark your calendars for the 16th Annual National Institute on Negotiating Business Acquisitions presented by the ABA’s  Business Law Section Mergers and Acquisitions Committee, General Practice, Solo & Small Firm Division, and the Center for Continuing Legal Education:

Negotiating Business Acquisitions

Event Information

When:  November 10 – 11, 2011

Where:  The Ritz-Carlton Miami Beach | South Beach Miami
                 1 Lincoln Rd, Miami Beach, FL, 33139-2000

 

Primary Sponsors

 

 

  • Highlights

This National Institute includes an extensive mock negotiation that will give you valuable insights on negotiating key representations, warranties, closing conditions and indemnification provisions in an acquisition agreement. Advance preparation is not needed for this program.

  • Program Description

This two-day National Institute will provide you with an expert perspective on negotiating business acquisitions.

Panelists include nationally known mergers & acquisitions attorneys who will discuss all facets of the acquisition process, including techniques used in structuring and negotiating M&A deals; the tax and securities law aspects of business acquisitions; and the impact of recent legal and regulatory developments on M&A transactions.

The program will examine both fundamental and cutting-edge issues, with sessions addressing
the following:

  • The key business, financial, and legal terms of the acquisition agreement
  • Special issues in asset acquisitions
  • Tax considerations in M&A transactions
  • Acquisitions of public companies and related Delaware and securities law considerations
  • An investment banker’s perspective on M&A trends
  • Recent developments, including the role of private equity buyers
  • Ethical issues in M&A transactions

 

Protesting at ODRA?: Learning the Lay of the Land

Recently posted in the National Law Review an article by Marko W. Kipa and Ryan E. Roberts of Sheppard Mullin Richter & Hampton LLP regarding filing with the Office of Dispute Resolution for Acquisition when the FAA makes an award.

 

Your company submitted a proposal to the Federal Aviation Administration (“FAA”) to provide widgets and related services. The opportunity had corporate visibility and was critical to your sector’s bottom line. After several agonizing months of waiting for an award decision, you learn that the FAA made an award to your competitor. You immediately accept the first debriefing date offered by the Agency. As that date approaches, you begin to strategize and weigh your options – should you file the bid protest at the Government Accountability Office (“GAO”) or the Court of Federal Claims? The answer – neither. When the FAA makes an award, any protest must be filed with the Office of Dispute Resolution for Acquisition – otherwise known as ODRA. There are several similarities and differences between, on the one hand, the GAO and the Court of Federal Claims, and, on the other hand, ODRA.

First, you are entitled to an automatic stay of performance if you timely file your protest at the GAO (unless the stay is overridden by the Agency).  To obtain a stay of performance at the Court of Federal Claims, you will most likely need to prevail on a motion for a temporary restraining order or a preliminary injunction. It is very difficult, however, to obtain a stay of performance at the ODRA. ODRA presumes that performance will continue pending resolution of the protest, and a protestor must separately brief the issue of whether a stay should be granted.  Unless the protester can demonstrate “a compelling reason to suspend or delay all or part of the procurement activities,” ODRA will allow performance to continue. 14 C.F.R. § 17.13(g); 14 C.F.R. § 17.15(d).  A review of ODRA’s suspension decisions shows that stays of performance are rarely granted. In other words, you should expect that ODRA will not grant a stay of performance.

Second, FAA procurements are not governed by the Federal Acquisition Regulation (“FAR”). Rather, the FAA is subject to the Acquisition Management System (“AMS”), which “establishes the policies, guiding principles, and internal procedures for the FAA’s acquisition system.” 14 C.F.R. § 17.3(c). While the FAR and the AMS share some overlapping concepts, there are notable differences between the two. For example, the AMS does not recognize the FAR’s distinction between “discussions” and “clarifications,” and instead categorizes all exchanges as “communications.” Furthermore, the AMS encourages communications with potential offerors, including one-on-one communications, stating that they “should take place throughout the source selection process” to “ensure that there are mutual understandings between the FAA and the offerors about all aspects of the procurement, including the offerors’ submittals/proposals.”   AMS § 3.2.2.3.1.2.2. ODRA has routinely denied protests where a disappointed offeror has claimed to have been the subject of unfair treatment when the FAA only communicated with one offeror. See, e.g., Consolidated Protests of Consecutive Weather, Eye Weather Windsor Enterprises, and IBEX Group, Inc., 02-ODRA-00254.

Third, ODRA has a robust alternative dispute resolution (“ADR”) program that is central to its resolution of bid protests. ODRA makes a variety of ADR techniques available to the parties, including mediation, neutral evaluation and mini-trials. 14 C.F.R. § 17.31(b). Additionally, ODRA’s rules were amended recently to place an even greater emphasis on ADR. The new rule officially instructs parties to use ADR as the primary means for settling protests and disputes, and allows parties to file “predisputes” so that they may engage in nonbinding, confidential discussions. 76 Fed. Reg. 55217 (Sept. 7, 2011) (to be codified at 14 C.F.R. Part 17). Although you can decline to participate in ODRA’s ADR program, it is well-worth your time and resources to consider pursuing this option.

Fourth, you should be aware of the various procedural rules at ODRA, as they differ from those of the GAO. Most notably, ODRA spurns the GAO standard of calendar days for business days (thereby excluding weekends and federal holidays). In this regard, a party must file its post-award protest within (i) 7 business days of when it knew or should have known of the basis for its protest, or (ii) not later than 5 business days from the date of the debriefing. 14 C.F.R. § 17.15(a)(3). Once filed, a contractor should be prepared to act – the FAA’s response to the protest is due 10 business days after the initial status conference, and the contractor’s comments on the FAA’s response are due five business days later. 14 C.F.R. § 17.17(e); 14 C.F.R. § 17.37(c). Contractors can also expect ODRA to issue a decision relatively quickly, as the ODRA Dispute Resolution Officer assigned to the case must issue a decision within 30 business days of the FAA’s response to the protest. 14 C.F.R. § 17.37(a),(i).

In conclusion, ODRA differs markedly from the GAO and COFC as a bid protest forum. An understanding of those differences is critical to the preservation and pursuit of your bid protest rights. Since ADR at ODRA has resulted in some form of agency corrective action in roughly 40% of the cases filed at the ODRA from 1997-2007, a failure to appreciate the differences in the rules and the consequent forfeiture of your protest rights can be highly prejudicial. See here.

Copyright © 2011, Sheppard Mullin Richter & Hampton 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.

 

Guilty Plea for Altering HSR Documents

Recently  posted in the National Law Review an article by Jonathan M. Rich and Sean P. Duffy of Morgan, Lewis & Bockius LLP about penalties for dishonesty in Hart-Scott-Rodino (HSR) filings:

The U.S. Department of Justice (DOJ) has provided a jarring reminder of the penalties for dishonesty in Hart-Scott-Rodino (HSR) filings. On August 15, the DOJ announced that Nautilus Hyosung Holdings Inc. (NHI) agreed to plead guilty to criminal obstruction of justice for altering documents submitted with an HSR filing. NHI agreed to pay a $200,000 fine, but the DOJ can still pursue criminal prosecution—and potential incarceration—of an NHI executive.

Companies must make HSR filings with the DOJ and Federal Trade Commission (FTC) and observe a waiting period before closing to enable the agencies to evaluate the likely impact of the transaction on competition. Item 4(c) of the HSR notification form requires parties to provide copies of “all studies, surveys, analyses and reports which were prepared by or for any officer or director . . . for the purpose of evaluating or analyzing the acquisition with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets.” Such “4(c) documents” provide the agencies with their first insight into the potential impact of a transaction on competition.

NHI, a manufacturer of automated teller machines (ATMs), made a filing in August 2008 in connection with its proposed acquisition of Trident Systems of Delaware (Trident), a rival ATM manufacturer. According to the plea agreement filed in the U.S. District Court for the District of Columbia, an unnamed NHI executive altered 4(c) documents to “misrepresent and minimize the competitive impact of the proposed acquisition on markets in the United States and other statements relevant and material to analyses . . . by the FTC and DOJ.”

Despite the altered documents, the DOJ initiated a merger investigation and requested additional documents from NHI, including copies of preexisting business plans and strategic plans relating to the sale of ATMs for the years 2006-2008. The company submitted the requested materials in early September 2008. According to the plea agreement, an NHI executive altered the business and strategic plans to misrepresent statements concerning NHI’s business and competition among vendors of ATMs.

In early 2009, NHI told the DOJ that an executive had altered 4(c) and other documents produced to the government. NHI and Trident abandoned the proposed transaction shortly thereafter. According to the plea agreement, NHI provided substantial cooperation with the DOJ’s obstruction of justice investigation.

According to the DOJ, the recommended fine of $200,000-$100,000 for each count-takes into account the nature and extent of the company’s disclosure and cooperation. NHI could have faced a maximum fine of up to $500,000 per count of obstruction of justice under 18 U.S.C. § 1512(c). The plea agreement reserves the DOJ’s right to pursue criminal prosecution of the executive involved in the alterations.

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

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.

Wisconsin Supreme Court Addresses Issues Concerning the Default Judgment Statute, the Direct Action Statute, and Personal Liability for Corporate Officers

Recently posted  posted in the National Law Review an article by Heidi L. Vogt and Jessica M. Swietlik of von Briesen & Roper, S.C. regarding the Wisconsin Supreme Court issued a decision in Casper, et al. v. American International South Ins. Co.

 Casper, et al. v. American International South Ins. Co., et al., 2011 WL 81

On July 19, 2011, the Wisconsin Supreme Court issued a decision in Casper, et al. v. American International South Ins. Co., et al., 2011 WI 81 (“Casper”) in which it addressed three issues: 1) the excusable neglect standard relative to default judgments; 2) whether an insurance policy must be delivered or issued in the State of Wisconsin in order to subject the insurer to a direct action under Wis. Stat. §§ 632.24 and 803.04(2); and 3) whether a corporate officer may be held personally liable for non-intentional torts that occur within the scope of employment.

The Casper case arises from a motor vehicle accident. Mark Wearing, a co-employee of Bestway Systems, Inc. (“Bestway”) and Transport Leasing/Contract Inc. (“TLC”), struck the Caspers’ minivan from behind, seriously injuring all five passengers in the Caspers’ vehicle.

Investigators learned that Wearing was under the influence of oxycodone, diazepam, and nordiazepam when the collision occurred. At the time of the accident, Wearing was en route to make a delivery for a Bestway customer. Jeffrey Wenham, the CEO of Bestway, had allegedly approved a driving route for Wearing on this particular delivery that required him to drive 536 miles through several states overnight. Wearing claimed he was told he would be fired if he did not complete the route as planned. However, Wenham had never met Wearing and the route that Wenham apparently approved was designed a year and a half prior to the accident. An expert hired by the Caspers opined that the route violated the hours of service requirements of the Federal Motor Carrier Safety Regulations (“FMCSR”) and was unsafe.

The Caspers brought suit against fourteen named defendants, including: Mark Wearing, his co-employers Bestway and TLC, Bestway’s CEO Jeffrey Wenham, and TLC’s excess insurer, National Union Fire Insurance Company of Pittsburgh PA (“National Union”). The appeals in this case stem from three orders issued by the trial court, all of which were affirmed by the court of appeals: 1) its order granting National Union’s request for a 7-day extension to file its answer and denying the Caspers’ motion for default judgment against National Union on the grounds that National Union had demonstrated excusable neglect; 2) its order granting summary judgment to National Union on the grounds that under Kenison v. Wellington Ins. Co., 218 Wis. 2d 700, 582 N.W.2d 69 (Ct. App. 1998) the Caspers could not maintain a direct action against National Union because its insurance policy was not issued or delivered in Wisconsin; and 3) its order denying Wenham’s motion for summary judgment on the Caspers’ claims for negligent training and supervision. The Wisconsin Supreme Court considered each of these issues separately, and affirmed in part, reversed in part, and remanded with instructions consistent with its decision.

The court affirmed on the first issue, holding that the trial court did not erroneously abuse its discretion by finding that National Union’s “lost in the mail” excuse amounted to excusable neglect such that granting an extension and denying the motion for default judgment was appropriate. The court noted that “although courts should be skeptical of glib claims that attribute fault to the United States Postal Service,” it was satisfied that a reasonably prudent person could neglect a deadline when correspondence gets lost, as was the case with National Union here.

Second, the court reversed on the direct action issue and thereby explicitly overruled Kenison. In doing so, the court acknowledged that the court of appeals properly applied Kenison as it lacked authority to ignore it. In Kenison, the court of appeals concluded that Wis. Stat. § 631.01 limited the application of the direct action statute, § 632.24, to insurance policies issued or delivered in Wisconsin. The Casper court disagreed. After carefully examining the plain language and the legislative history of Wis. Stat. §§ 631.01, 632.24, and 803.04(2), the court concluded that “Section 803.04(2) explicitly and § 632.24 by necessary implication are intended to apply to liability insurance policies delivered or issued for delivery outside Wisconsin, so long as the ‘accident, injury or negligence occurred in this state.’” Accordingly, the Caspers should have been allowed to maintain a direct action against National Union even though its policy was neither issued nor delivered in Wisconsin because the accident occurred in Wisconsin.

With regard to the third issue, the Wisconsin Supreme Court agreed with the lower courts that there are some instances where corporate officers like Wenham can be held personally liable for non-intentional torts committed in the course of employment. Both the trial court and the court of appeals had ended their inquiries there, finding that issues of fact existed regarding Wenham’s alleged negligent supervision and training of Wearing such that summary judgment was not appropriate on those claims. However, the Wisconsin Supreme Court considered and ultimately reversed on public policy grounds, holding that even if Wenham’s approval of the route that allegedly violated the FMCSR was a cause of the accident, “the results are so unusual, remote, or unexpected that, in justice, liability ought not be imposed.”

Justice Bradley issued an opinion concurring in part and dissenting in part, and Chief Justice Abrahamson joined in Justice Bradley’s concurrence/dissent.

©2011 von Briesen & Roper, s.c

Unclaimed Property Audits: No Laughing Matter

Posted on August 8, 2011 in the  National Law Review an article about several  states’ increased focus on unclaimed property and companies needing to be proactive in monitoring and improving their unclaimed property compliance practices.   This article was written by Marc J. Musyl, Micah Schwalb and Sarah Niemiec Seedig of Greenberg Traurig, LLP

Failure to Comply with Unclaimed Property Laws Can Cost a Company Millions in Interest and Penalties Alone

Many states continue to turn to unclaimed property as a source of revenue in the face of budget shortfalls. During the last two years, some state regulators have pursued non-traditional types of unclaimed property and state legislatures have revised their unclaimed property statutes to reduce dormancy periods, effectively causing companies to remit more unclaimed property in a shorter time frame. In New York, for example, the legislature lowered dormancy periods from five to three years for a number of different asset classes typically held by financial institutions.

Acting upon provisions in the Dodd-Frank Act, the SEC recently proposed to expand rules that would require brokers and dealers to escheat sums payable to security holders. Failure to comply with these laws can mean millions of dollars in interest and penalties for a company, which can negatively impact a company’s bottom line. For example, a growing number of life insurers are being audited by multiple states to assess their compliance with unclaimed property laws. One state regulator estimated that these life insurer audits could transfer “north of $1 billion” from the audited life insurers into the pockets of consumers, in the form of benefit payments, and revenue to the states, in the form of unclaimed property, interest and fines.

Unclaimed Property and State Audits

Unclaimed property laws require the remittance of certain types of property to the state for safekeeping if a business is unable to contact the owner of that property after a specified period, known as the dormancy period. Each state has its own set of laws that set forth the types of property subject to escheat, the dormancy period for each category of property, and reporting rules. Examples of items that can constitute unclaimed property include unused gift cards, uncashed payroll checks, uncashed stock dividend checks, abandoned corporate stock, and abandoned trust funds.

States have the ability to audit companies to determine their compliance with the unclaimed property laws. If an audit reveals improperly held or abandoned assets, states can seize the property, hold it in trust for a rightful owner, and impose costs, fines, and interest against the offending entity. In severe cases, the interest and fines can exceed the amount of unclaimed property at issue. These audits are often conducted by third-party auditors paid on a contingency basis, thus creating an incentive for them to maximize the unclaimed property uncovered. What’s more, the lack of a statute of limitations on escheat in most jurisdictions can lead to decades of accumulated unclaimed property liabilities.

35 States: How Does an Audit Get So Large?

Typically, an audit begins when a state engages a third-party auditor and provides a company with notice that it is under audit. The third-party auditor, being paid on a contingency basis, can expand its compensation by adding additional states to the audit. If only one state has authorized an unclaimed property audit, the thirdparty auditor only receives a percentage of the unclaimed property that was required to be reported to that state. However, if 20 states have authorized the audit, the third-party auditor now receives a percentage of the unclaimed property that should have been reported to 20 states, significantly increasing the auditor’s overall compensation.

This snowball effect is exactly what happened to some life insurers, and what could happen to any company. For example, the State of California initiated anaudit of John Hancock in 2008. This audit was undertaken by Verus Financial L.L.C. Fast forward three years to 2011, and Verus has now been authorized by 35 states and the District of Columbia to investigate and audit numerous insurance companies. These audits center around life insurers’ claims handling processes. The Social Security Administration publishes a Death Master File, updated weekly, which can be used to verify deaths. Insurers have been using the Death Master File to find dead annuity holders in order to stop payments. On the flip side, the insurers have not been using the Death Master File to find deceased policy insureds in order to pay the policy beneficiaries. The states and Verus have seized upon this disparate use of the Death Master File in their investigation of whether the funds should have been paid out to beneficiaries, in the form of benefit payments, or the states, in the form of unclaimed property.

Why Should I Be Concerned?: John Hancock as an Example

As a result of the Verus audit discussed above, John Hancock reportedly negotiated a global resolution agreement with 29 states which took effect June 1. As part of John Hancock’s settlement with the State of Florida, John Hancock will pay over $2.4 million in investigative costs and legal fees to Florida, and will establish a $10 million fund to pay death benefits and interest owed to beneficiaries. The amounts owed to beneficiaries that cannot be located will be turned over to Florida’s unclaimed property division. In addition, John Hancock has agreed to change its claims-handling procedures. Throughout the process, John Hancock has maintained that it has not violated the law. Given the number of insurance companies currently under audit, news of further settlements should be expected in the future.

In light of success with life insurers, recent legislative changes and continued state budget crunches, it is reasonable to expect an expansion of audits to other industries. It is widely estimated that a significant percentage of companies are not in full compliance with unclaimed property laws. There is no statute of limitations in most jurisdictions, as mentioned above, so the look-back period can be fairly lengthy and cover periods for which the company no longer has adequate records. The auditor may estimate the unclaimed property liability for such periods, which can lead to a company paying more than it would have otherwise owed. Further, interest and penalties can be severe. For example, in California interest is calculated by state statute at 12% per annum from the date the property should have been reported.

Taking Control of Unclaimed Property Compliance

As a result of the states’ increased focus on unclaimed property, companies need to be proactive in monitoring and, if necessary, improving their unclaimed property compliance practices. As a preliminary step, companies should determine whether or not they are currently in compliance with the unclaimed property laws. Many states have voluntary compliance programs for companies that are out of compliance. Oftentimes, by entering into a voluntary disclosure agreement with the appropriate authorities, a company can retain control of the process, limit the look-back period (remember, there is often no statute of limitations!), and limit the penalties and/or interest that may be owed for non-compliance. Typically, these voluntary programs are not available to companies once they have been selected for audit. Analyzing a target’s unclaimed property liability exposure should also be part of the due diligence process in a potential acquisition. Attention to unclaimed property compliance now can save valuable company resources later.

 

It's Not Easy Being Green: Understanding and Avoiding the Pitfalls of Green Marketing

Recently posted in the National Law Review an article by Anne E. Viner of Much Shelist Denenberg Ament & Rubenstein P.C. regarding the idenfication of “green” products and services:

A current trend among businesses is to identify their products and services as “green,” “environmentally safe,” “ozone friendly” or otherwise good for the environment. Companies do this to show that they are good stewards of the Earth and to attract customers who are interested in purchasing products that are “environmentally friendly.” But what does that phrase—or similar terminology—really mean? What sort of information must a business have in order to support these kinds of claims? Not surprisingly, there are a number of federal and state regulations, rules and guidelines that govern green marketing.

The Federal Trade Commission (FTC) Act prohibits deceptive representations in advertising, labeling, product inserts, catalogs and sales presentations. If statements concerning the environmental benefits of a product or service cannot be substantiated, they may be found to be deceptive by the FTC. Customers, competitors and environmental citizen groups often monitor green marketing and can file administrative complaints with the FTC if a company’s claims are misleading. Such complaints not only hurt businesses monetarily (legal expenses, administrative penalties, etc.), but can also damage the goodwill that the environmental claim was attempting to establish.

Federal Guidance

To help businesses determine when green marketing claims are acceptable and when they have gone too far, the FTC and the United States Environmental Protection Agency (EPA) have developed guidelines to ensure that environmental marketing claims do not mislead consumers. Advertising, labeling, promotional materials, presentations and other forms of marketing that run afoul of the guidelines created by the FTC and EPA can result in such conduct being declared unlawful under the FTC Act.

The following guidelines apply broadly to all environmental marketing efforts—whether they are consumer-focused claims or business-to-business claims directed at suppliers, affiliated companies, distributors or other customers:

  • Clearly identify whether the advertised environmental benefit is with the product itself, the packaging, a service, or some other portion or component of the product, service or packaging. For example, if a box of aluminum foil is labeled “recyclable” without further elaboration, this claim would be considered deceptive if any part of either the box or the foil cannot be recycled.
  • Avoid overstatements of environmental benefits. For example, a package might be labeled “50% more recycled content than before” after the manufacturer upped the amount of recycled material from 2% to 3%. Although the claim is technically true, it gives a false impression that the amount of recycled material was significantly increased.
  • Be ready to substantiate any comparisons between products. For example, if an ad claims that a package creates “less waste than the leading national brand,” the advertiser must be able to substantiate the comparison with calculations comparing the relative solid waste contributions of the two packages. If it cannot, the ad runs afoul of the FTC Act and may create liability.

The guidelines created by the FTC and EPA also address the following specific environmental claims:

  • Avoid general, unqualified terms (such as “environmentally friendly” and “green”) that cannot be quantified and may convey a wide range of meanings to customers. The broader the term (a brand name like Eco-Safe, for example), the more likely it will be found deceptive by the FTC.
  • Reliable, scientific evidence must support claims that a product or package is degradable, biodegradable or photodegradable, as well as compostable or made with recycled, pre-consumer or post-consumer products. For example, if a shampoo is advertised as “biodegradable” with no qualifications, the manufacturer must have reliable scientific evidence that the product, which is customarily disposed of in sewer systems, will break down and decompose into elements found in nature in a short period of time. These specific terms have precise environmental meanings, and the guidelines give numerous examples of acceptable and deceptive uses of them.

The Guidelines in Action

Assume that a manufacturer wants to identify its entire product line of plastic buckets as being “made of recyclable material.” However, only one type of bucket in the line is made of post-consumer plastic and the post-consumer content averages just 20% annually. How can the manufacturer properly advertise the recycled content of its bucket line? According to the FTC and EPA guidelines, it is deceptive to identify the entire line as “green” or as being “made of recycled materials.” These broad, unquantifiable terms should also be avoided when advertising the one type of bucket that actually is made from post-consumer plastic. However, it is acceptable to use the 20% annual average of recycled material in marketing that particular bucket type. Such averaging is permissible, provided the company’s claims can be substantiated with scientific evidence.

The FTC Act and related guidance is just one example of regulations that are potentially applicable to green marketing claims. The EPA has established additional regulations and guidance under its Consumer Labeling Initiative and EPA Environmentally Preferable Procurement Program. The International Organization for Standardization also has developed environmental labeling criteria for products sold worldwide. Many states have their own environmental disclosure and marketing requirements as well.

Given the numerous requirements associated with environmental marketing, along with the potential risks of being found deceptive, it really isn’t easy being green. So, before your business makes any environmental claims about its products or services, carefully consider how you will state the environmental benefits, whether they can be supported with scientific evidence and what regulations may govern your claims.

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

Entrepreneur’s Guide to Litigation – Blog Series: Discovery

Recently posted in the National Law Review an article by  Joseph D. Brydges of Michael Best & Friedrich LLP regarding the Discovery is a pre-trial phase of litigation.

 

Discovery is a pre-trial phase of litigation during which a party to a lawsuit seeks to “discover” information from the opposing party. Discovery is meant to facilitate the truth-finding function of the courts and, as such, parties to a lawsuit have an automatic right to discovery. From a strategic standpoint, discovery is used to gather and preserve evidence in support or defense of the claims made in the complaint. Further, discovery often helps parties narrow the focus of the litigation in preparation for trial and, in some cases, may lead to a pre-trial settlement. Discovery is an extremely important phase of litigation because the evidence gathered during discovery will serve as the foundation of a motion for summary judgment and/or strategy at trial.

Discovery proceedings are typically governed by state statutes in state court and by the federal rules of civil procedure in federal court. Generally, the scope of discovery permitted under these rules is very broad. Discoverable information may include any material which is reasonably calculated to produce evidence that may later be admitted at trial. However, certain information, including information protected by the attorney-client privilege and the work product of an opposing party, is generally protected from discovery. During the discovery period, parties may serve discovery requests upon one another. These discovery requests are made through one of several available discovery mechanisms including interrogatories, requests for admission, document requests and depositions.

Interrogatories are written discovery requests often utilized to obtain basic information such as names and dates. Any party served with written interrogatories must answer the questions contained therein in writing and under oath. Similarly, requests for admission consist of written statements directed towards an opposing party for the purpose of having the opposing party “admit” or “deny” the statements. Often, these statements seek to establish undisputed facts, authenticate documents and pin an opposing party to a particular position. Document requests are an important component of discovery in which a party may be required to make any relevant and nonprivileged documents available for inspection by the opposing party. Document production will be covered in greater detail in the following section entitled “Document Production.”

The lynchpin of discovery proceedings is the deposition. Depositions are used to obtain the out-of-court testimony of a witness with knowledge relevant to the litigation. They allow a party to discover any relevant information known to a witness and are often the only method of discovery available with regard to obtaining information from witnesses that are not a party to the litigation. During a deposition, the witness is questioned under oath and must answer the questions asked truthfully to the extent that the answer would not lead to the disclosure of privileged information. The rules governing depositions also allow for the deposition of an organization or corporation where a party is unable to identify the particular witness within the organization that may have knowledge of the information sought. In that instance, a party may identify the information sought and the organization will be required to designate a representative to testify on its behalf.

A party served with a discovery request must respond to the request within the specified time period or object to the requested discovery and state reasons for its objection. If, for some reason, a party refuses to respond to a discovery request, the party serving the request may move the court to compel a response. It is within the court’s power to compel a response to a discovery request and impose penalties on a party refusing to comply with a discovery request.

Click Below for previous posts from the Entrepreneur’s Guide to Litigation Blog Series:

© MICHAEL BEST & FRIEDRICH LLP

ALJ Upholds OIG’s Eight-Year Exclusion of Company Owner

Posted recently in the National Law Review an article by Meghan C. O’Connor of von Briesen & Roper, S.C. regarding OIG’s use of its exclusionary authority against individuals:

 

In yet another example of the OIG’s use of its exclusionary authority against individuals, an Administrative Law Judge (ALJ) upheld the OIG’s exclusion ofMichael D. Dinkel, the owner and President of a diagnostic imaging company. Dinkel has been excluded from participation in all Federal health care programs for a period of eight years.

The OIG has the authority to exclude individuals and entities from Federal health care programs for presenting or causing to be presented claims for items or services that the individual or entity knows or should know where not provided as claimed, or are otherwise false or fraudulent.

According to the OIG’s press release, Dinkel and his company, Drew Medical, Inc., submitted approximately 9,500 false claims worth $1.6 million to theMedicare and Medicaid programs for services related to venography, a radiology procedure. The OIG found that no venography services had actually been performed. Instead, claims were submitted to Medicare and Medicaid for a corresponding procedural code for MRI and CT procedures with contrast. Prior to Dinkel’s exclusion, a $1,147,564 civil False Claims Act settlement had been entered into with Dinkel and his company.

The ALJ found that Dinkel had a duty “to understand Medicare and Medicaid billing requirements and apply them scrupulously to the claims that he caused to be presented.” Furthermore, Dinkel’s failure to ensure his company properly claimed reimbursement “constituted reckless indifference to the propriety of the claims he cause to be presented.”

The ALJ’s full decision is available by request from the OIG.

©2011 von Briesen & Roper, s.c