Court holds that a whistleblower need only have a reasonable belief that the defendant’s conduct was unlawful

The United States District Court, S.D. New York, on a FRCP 56 motion for summary judgment, recently held in Murray v. UBS Securities, LLC that a whistleblower under section 806 need only show reasonable belief that the defendant’s conduct violated federal law. In relevant part see the summary snapshot below. This is important for potential defendants and their decision makers to know when evaluating potential whistleblower situations and how to proceed.

David Tate, Esq. (and CPA, California inactive), Royse Law Firm (Menlo Park office, California, San Francisco Bay Area and the Los Angeles Basin)

PCAOB Adopts New Audit Report-Should Be Interesting-Still Has To Be Adopted By The SEC

The following is a link to the PCAOB website page discussing the PCAOB’s June 2017 adoption of a new audit report which in part requires the disclosure of critical audit matters (CAM) for certain audits conducted under PCAOB standards. Here’s the link to the PCAOB page CLICK HERE

The new report standard still must be adopted by the SEC. If adopted, some of the new report standards will first apply to annual audits for years ending on or after December 15, 2017; however, the critical audit matter reporting would not apply until 2019 at the earliest for certain entities.

As the PCAOB notes, there is a need to make the audit report more relevant. In fact, there is a need to make both external and internal audit and auditors more relevant.

More will follow on this; however, I usually don’t spend signification time on new laws, statutes, regulations, rules and standards until (1) they are in fact enacted or adopted, and (2) it is near the time of actual use or requirement.

I do note, however, that this new report and the CAM provision is an interesting development, which perhaps should have occurred years ago. If you click on the above link, and then on the actual standard itself, you will also see that the standard contains worthwhile discussions about critical audit matters, materiality and other topics that are relevant to the standard.

Best, David Tate, Esq. (and CPA, California inactive). Royse Law Firm, Menlo Park Office, California.

Royse Law Firm – Practice Area Overview – San Francisco Bay Area and Los Angeles Basin

  • Corporate and Securities, Financing and Formation
  • Corporate Governance, D&O, Boards and Committees, Audit Committees, Etc.
  • Intellectual Property – Patents, Trademarks, Copyrights, Trade Secrets
  • International
  • Immigration
  • Mergers & Acquisitions
  • Labor and Employment
  • Litigation (I broke out the litigation because this is my primary area of practice)
  •             Business
  •             Intellectual Property – Patents, Trademarks, Copyrights, Trade Secrets
  •             Trade Secrets, NDA, Financial & Accounting Issues, Fraud, Lost Income, Royalties, Etc.
  •             Privacy, Internet, Hacking, Speech, Etc.
  •             Labor and Employment
  •             Mergers & Acquisitions
  •             Real Estate
  •             Owner, Founder, Investor, Board & Committee, Shareholder, D&O, Lender/Debtor, Etc.
  •             Insurance Coverage and Bad Faith
  •             Investigations
  •             Trust, Estate, Conservatorship, Elder Abuse, Etc., and Contentious Administrations
  • Real Estate
  • Tax (US and International) and Tax Litigation
  • Technology Companies and Transactions Including AgTech, HealthTech, etc.
  • Wealth and Estate Planning, Trust and Estate Administration, and Disputes and Litigation

 

May 15, 2017, Preliminary Injunction Order Against Uber – A Lot Of People Should Take Personal Note – Officers, Directors, Employees, Agents, Suppliers And Consultants

You may have heard, this week on May 15, 2017, Judge William Alsup in the Waymo LLC v. Uber Technologies, Inc. case (U.S. District Court, No. District of California) issued his Order Granting In Part and Denying In Part Plaintiff’s Motion For Provisional Relief, i.e., for a preliminary injunction. The Order is 26 pages. Plaintiff has brought multiple claims in the case including for trade secret misappropriation, patent infringement and unfair competition, but the Order is for preliminary injunction only on the trade secret misappropriation claim. The trade secret claim is brought under both the California Uniform Trade Secrets Act and the federal Defend Trade Secrets Act.

I’m not going to go through the evidence in this post – as indicated above, the Order is 26 pages in length. The Order states that it is narrowly-tailored to balance the interests of the parties and the public. In summary, the decision whether or not to grant a preliminary injunction is based on the evidence now available, the legal claims alleged, the now perceived likelihood of the plaintiff prevailing at trial on the relevant claim or claims, and the interests of the parties and the public. Preliminary injunction motions are significantly based on the strength of the evidence now available and presented and the Judge’s view of that evidence. In this instance, in my view based on the Court’s Order, there was strong evidence that trade secret information possibly was misappropriated, but either no evidence or not particularly strong evidence that Uber had involvement in that possible misappropriation or that Uber had access to or used that information.

Here’s where the Court’s Order gets interesting – in the scope of relief granted. I have pasted below the wording from the Scope of Relief Granted part of the Order. In short aside from the provisions pertaining to Mr. Levandowski, and certain expedited discovery granted, the Order essentially requires Uber to conduct an extensive investigation and to file and disclose a detailed report and account by June 23, 2017, which is a very, very short time to conduct the investigation. In my view it is questionable whether the extent of the investigation can be completed and written-up to be filed in that short of time. And, as you will note, the investigation also includes, or example, all communications with any officer, director, employee, agent, supplier, or consultant of defendants on the relevant topics. Thus, Uber is required to conduct discovery upon itself in the form of the report and account to be filed, and depending on the documents and information obtained the report and account could well bring individual officers, directors, employees, agents, suppliers and consultants personally into focus in the case – if they haven’t done so already, all of those people should be expansively reviewing their possible involvement, if any, in the issues that are involved in the case and consulting with legal counsel about their possible exposure to legal action and personal liability, and how they should proceed.

For your further reading, below is the Scope of Relief Granted provision from the Order.

Best to you. David Tate, Esq.

  1. SCOPE OF RELIEF GRANTED.

Having considered the foregoing, the Court ORDERS as follows:

  1. The term “downloaded materials,” as used in this provisional order, means any and all materials that Anthony Levandowski downloaded from Waymo and kept upon leaving Waymo’s employment, regardless of how long he kept them for and whether or not any such materials qualify as trade secrets or proprietary or confidential information.
  2. Defendants must immediately and in writing exercise the full extent of their corporate, employment, contractual, and other authority to (a) prevent Anthony Levandowski and all other officers, directors, employees, and agents of defendants from consulting, copying, or otherwise using the downloaded materials; and (b) cause them to return the downloaded materials and all copies, excerpts, and summaries thereof to Waymo (or the Court) by MAY 31 AT NOON. Copies essential for counsel of record and their litigation experts to use in defending this civil action are exempted from the foregoing requirement.9
  3. With respect to Anthony Levandowski, defendants shall immediately (a) remove him from any role or responsibility pertaining to LiDAR; (b) take all steps in their power to prevent him from having any communication on the subject of LiDAR with any officer, director, employee, agent, supplier, consultant, or customer of defendants; and (c) prohibit him from consulting, copying, or otherwise using the downloaded materials in any way. Defendants shall instruct all their officers, directors, employees, agents, suppliers, consultants, and customers in writing of this prohibition, and further instruct them in writing to immediately report any suspected breaches thereof to the special master (or to the Court).
  4. With respect to all other persons, including those with Stroz Friedberg, defendants shall conduct a thorough investigation and provide a detailed accounting under oath setting forth every person who has seen or heard any part of any downloaded materials, what they saw or heard, when they saw or heard it, and for what purpose. In their investigation, defendants must do more than query servers with term searches. For example, they must interview personnel with particular focus on anyone who has communicated with Anthony Levandowski on the subject of LiDAR. Defendants’ accounting shall not be limited to Uber but shall include all persons who fit the foregoing description, including Levandowski and his separate counsel. The accounting may exclude, for only the time period after the commencement of this civil action, the attorneys of record and their staff and experts employed for this litigation. The accounting shall not be limited to downloaded materials that happened to make their way into some due diligence report but shall cover any and all downloaded materials. The accounting shall also identify the complete chains of custodians for every copy of any downloaded materials or due diligence report referencing downloaded materials. Defendants must also use the full extent of their authority and influence to obtain cooperation with the foregoing procedure from all involved. For example, if a potential custodian refuses to cooperate, then defendants’ accounting shall set forth the particulars, including all efforts made to obtain cooperation. The accounting must be filed and served by JUNE 23 AT NOON. The accounting may be filed under seal only to the extent that it quotes or appends downloaded materials.
  5. Also by JUNE 23 AT NOON, defendants shall provide Waymo’s counsel and the Court with a complete and chronologically organized log of all oral and written communications — including, without limitation, conferences, meetings, phone calls, one-on-one conversations, texts, emails, letters, memos, and voicemails — wherein Anthony Levandowski mentioned LiDAR to any officer, director, employee, agent, supplier, or consultant of defendants. The log shall identify for each such communication the time, place (if applicable), mode, all persons involved, and subjects discussed, as well as any and all notes or records referencing the communication.
  6. Waymo is hereby granted further expedited discovery in aid of possible further provisional relief. Subject to the protective order, and upon reasonable notice, Waymo’s counsel and one expert may inspect any and all aspects of defendants’ ongoing work involving LiDAR — including, without limitation, schematics, work orders, source code, notes, and emails — whether or not said work resulted in any prototype or device. With respect to its trade secret misappropriation claims only, Waymo may take seven further depositions on seven calendar days notice, may propound 28 reasonably narrow document requests for which the response time is reduced to 14 calendar days, and may propound 28 reasonably narrow interrogatories for which the response time is also reduced to 14 calendar days. If Waymo moves for further provisional relief before trial, then all its declarants in support of such motion must sit for depositions on an expedited basis. Otherwise, defendants may take only normal, unexpedited discovery. After Waymo has exhausted its expedited discovery, it may continue with normal discovery.
  7. Defendants shall keep complete and accurate records of their compliance with all of the foregoing requirements, including directives given to Anthony Levandowski and others. The special master shall monitor and verify said compliance. To that end, the special master shall promptly develop proposed monitoring and verification protocols with the parties’ input and then submit the proposed protocols to the Court for approval. The protocols shall provide for the special master to visit defendants’ facilities and monitor communications as necessary to ensure that Anthony Levandowski remains sealed off from LiDAR activities.

The foregoing provisional relief shall become effective upon the posting by Waymo of a bond or other security in the amount of FIVE MILLION DOLLARS.

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NEW NINTH CIRCUIT CASE – PLAINTIFF CANNOT BRING A SECURITIES CASE FOR BREACH OF THE CORPORATE CODE OF ETHICS . . . WELL, NOT SO FAST . . . .

On January 19, 2017, the Ninth Circuit dismissed a securities fraud case holding that the claim could not legally be brought where shareholders of Hewlett-Packard Company (“HP”) alleged that the Company CEO and Chairman violated Hewlett-Packard’s Corporate Code of Ethics after publicly touting the Company’s high standards for ethics and compliance while at the same time himself violating the provisions in the Code of Ethics. The case is Retail Wholesale & Department Store Union Local 338 Retirement Fund v. Hewlett-Packard Co. and Mark A. Hurd, Ninth Circuit Case No. 14-16433 and District Court Case No. 3:12-cv-04115-JST (Northern District of California) and you can view the case at http://cdn.ca9.uscourts.gov/datastore/opinions/2017/01/19/14-16433.pdf.

Plaintiffs’ claim was brought under §10 and Rule 10–b of the Securities Exchange Act of 1934. The Court’s decision is helpful from a defense viewpoint, but the decision shouldn’t be viewed too broadly. In summary, the Court held as follows (note: the below quotes from the case are not necessarily in the exact order in which they appeared in the Court’s decision):

“Retail Wholesale argues that the SBC [HP’s Standards of Business Conduct], bolstered by Defendants’ express promotion of corporate ethics, gives rise to a finding of material misrepresentation. Its claim is based in three factual allegations: (1) HP and Hurd actively promoted the SBC and stated that HP had zero tolerance for SBC violations; (2) Hurd’s SBC violations led to his resignation; and (3) Hurd’s resignation caused HP’s stock price to drop. The Court cannot agree that, under the facts alleged in the complaint, Defendants’ representations about ethics were materially misleading.”

“Defendants made no objectively verifiable statements during the Class Period. As one court has aptly written, a code of conduct is “inherently aspirational.” Andropolis, 505 F. Supp. 2d at 686. Such a code expresses opinions as to what actions are preferable, as opposed to implying that all staff, directors, and officers always adhere to its aspirations. See id.”

“Similarly, Hurd’s comments prefacing the SBC are not objectively verifiable. In the 2008 preface to the SBC, Hurd stated, in part,

We want to be a company known for its ethical leadership . . . .

We know actions speak louder than words. We must make decisions and behave in ways that we can be proud of, that reflect our commitment to doing the right thing . . . .

. . . . Let us commit together, as individuals and as a company, to build trust in everything we do by living our values and conducting business consistent with the high ethical standards within our SBC.”

“The aspirational nature of these statements is evident. They emphasize a desire to commit to certain “shared values” outlined in the SBC and provide a “vague statement[] of optimism,” not capable of objective verification. See Or. Pub. Emps., 774 F.3d at 606. A contrary interpretation—that statements such as, for example, the SBC’s “we make ethical decisions,” or Hurd’s prefatory statements, can be measured for compliance—is simply untenable, as it could turn all corporate wrongdoing into securities fraud.”

However, and equally important, the Court also stated:

“We note that the case may have been closer had Hurd’s sexual harassment and false expenses scandal involved facts remotely similar to those presented by the 2006 scandal [i.e., an earlier unrelated ethics problem at HP in which “A few years earlier, in 2006, a major scandal erupted when a whistleblower informed several government agencies that HP had hired detectives to monitor the phone records and email accounts of HP directors, HP employees, and journalists to find the sources of leaks of company information to the press”], as the ethical code could then have been understood as at least promising specifically not to do what had been done in 2006. Here, however, the context does not make HP’s promotion of business ethics any less subjective or vague. Further, Retail Wholesale cites to no case law suggesting that context may operate to allow a plaintiff to import an out-of-Class-Period statement into the Class Period. The strongest statement alleged in the complaint—the suggestion of a zero tolerance policy for SBC violations—was made outside of the Class Period.”

“In sum, we conclude that as there was no statement during the Class Period that was capable of being objectively false, there was no affirmative misrepresentation.”

It could be easy to read the case too broadly, and to conclude that a securities fraud claim cannot be brought for violation of the company’s code of ethics. Whether such a claim can be brought really depends on the facts and circumstances of the case. Further, and depending on the facts of each case, it might be possible that such a claim could be brought under a different legal theory such as, for example, the Foreign Corrupt Practices Act.

Thus, companies, and their officers, managing agents and directors still must be advised to know the company’s Code of Ethics, to follow the Code, and to be careful about making specific representations about following, satisfying or complying with the Code.

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Royse Law Firm/David Tate – Legal Updates in Litigation, Liability, Governance & Risk Management (March 10)

Below I have provided a link to the Royse Law Firm Legal Updates in Litigation, Liability, Governance & Risk Management, of which I am the Editor. The Update is litigation and dispute targeted, primarily covering business, IP, employer and employee, D&O, founder/owner/shareholder/investor, M&A, and trust and estate litigation and disputes, and also including governance, administrations, and risk management. The Updates include the Firm’s attorney written articles and updates, videos and presentations, and also from time to time select resources by other outside third parties with comments added.

My practice continues in civil and trust and estate litigation and disputes and administrations, and other related areas. The Royse Law Firm offers very experienced, appropriately priced corporate, IP, employment, D&O, M&A, founder/owner/shareholder/investor, estate planning and litigation legal services and representation for established and new businesses, and people, in Northern and Southern California. Please contact me if you or other people who you know have legal needs. You can contact me at (650) 813-9700, extension 233. The Firm’s website is http://rroyselaw.com/

Click on the following link to Legal Updates in Litigation: Royse Legal Updates in Litigation, Liability, Governance & Risk Management (March 10, 2017)

Updated Tate’s Excellent Audit Committee Guide (02172017) – Please Use, And Pass To Others

Below I have provided a link to my updated (02172017) Tate’s Excellent Audit Committee Guide. Please use it, and tell other people who would be interested. Best to you, David Tate, Esq., Royse Law Firm, Northern and Southern California, 149 Commonwealth Drive, Ste. 1001, Menlo Park, CA 94025, (650) 813-9700, Extension 233, http://www.rroyselaw.com

Here’s the link to the updated guide tates-excellent-audit-committee-guide-02172017-with-appendix-a

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Audit Committee 5 Lines of Defense 07182016

When should you take your internal accounting error/mistake or irregularity/fraud investigation outside?

Most every audit committee member, in-house counsel, other board member, CEO, CFO, risk officer, and chief internal auditor will at some time consider whether an accounting related investigation that is being done internally should be taken outside. The decision to stay inside or to go outside isn’t necessarily clear, and there certainly could be differing opinions depending on the facts and circumstances of the situation. The following isn’t a formal or legal discussion, but below are at least some of the factors that I would consider and that you might consider. Every situation is different at least to some extent.

  1. Is there really the expertise in-house to do the investigation? This is an important consideration that I will have more to say about in other posts – however, consider whether it is important for the primary investigator to not only have a legal background in the subject matter, but also accounting or auditing backgrounds. Whereas an accounting or auditing firm might also be retained to assist with the investigation, you might well also find that it would be helpful for the primary investigator to be able to understand the accounting, internal control and auditing or auditor issues, and that the primary investigator might need those backgrounds to better lead the investigation and make decisions or evaluations.
  2. Is there really the time availability to handle the investigation in-house?
  3. Is the dollar amount involved sufficiently large to warrant going outside for the investigation?
  4. Are the qualitative natures of the issues sufficiently important to warrant going outside, such as because of possible public relations, ethics, fraud, or other considerations?
  5. Does it warrant going outside because of the possible people who might be interviewed, questioned or involved including their office or stature in the organization, and their relationships with the people who are investigating, the board, the audit committee, the executive officers and other people?
  6. For whatever reasons, is it warranted or required that the investigation be independent, or more independent in nature.
  7. If the initial investigation began in-house (which is entirely possible), has it for whatever reason now become more prudent to go outside?

That’s it for now. Just some thoughts. I’m sure that you can come up with additional thoughts – the above discussion isn’t all encompassing.

Dave Tate, Esq. (San Francisco and California)

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Audit Committee 5 Lines of Defense 07182016

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