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)

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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

 

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.

* * * * *

Important – SEC v. United – Administrative Proceeding Relating to United’s Internal Accounting Controls to Prevent Violation of United’s Policies

On December 2, 2016, the SEC issued an Accounting and Auditing Enforcement, Administrative Proceeding Order against United Continental Holdings, Inc. Here is a link to the Order, CLICK HERE

Why is this Order important – because the SEC found that “United failed to design and maintain a system of internal accounting controls that was sufficient to prevent its officers from approving the use of United’s assets in connection with the South Carolina Route in violation of United’s Policies, which prohibited the use of assets for corrupt purposes.” This isn’t a Foreign Corrupt Practices Act case – the alleged corruption or impropriety occurred in the United States. The SEC alleged that United “instituted the South Carolina Route following pressure from David Samson (“Samson”), then the Chairman of he Board of Commissioners of the Port Authority of New York and New Jersey (“Port Authority”). The route provided Samson – who exercised authority and influence as a Port Authority official in matters affecting United’s business interests – with a more direct route to his house in South Carolina.”

The scenario in this case could occur at any time that a public company (1) allegedly acts improperly, and (2) it is alleged that the act was allowed or able to occur because of insufficient internal controls (resulting in a violation of the books and records and internal accounting controls provisions of the Securities Exchange Act, which is automatically alleged in a great number of cases because it is easy in most situations to allege that something unexpected occurred because of inadequate internal controls), and (3) the alleged improper act also allegedly violates some policy or procedure of the public company (i.e., in this case to not use corporate assets for an allegedly corrupt or improper purpose).

What can a company (and the audit committee) do about these possible situations? Review the company’s policies and procedures, and adopt and enact sufficient internal controls, monitored and updated regularly, to ensure that the policies and procedures are followed. But, of course, it is difficult and probably impossible to ensure 100% compliance. I have previously written that the books and records and internal accounting controls provision in the Securities Exchange Act should be amended to include a standard of conduct provision (such as negligence) because it is unreasonable to expect that internal controls, no matter how good, will stop all alleged wrongful conduct.

Below is a screenshot of some of the SEC v. United Order, providing a summary of some of the facts, and I have also included below a link to Tate’s Excellent Audit Committee Guide. Dave Tate, Esq., San Francisco and California

sec-v-united-continental-holdings

The following is a link to Tate’s Excellent Audit Committee Guide (updated October 20, 2016), Click Here

The following is a link to my trust, estate, conservatorship and elder abuse litigation blog, http://californiaestatetrust.com

Audit Committee 5 Lines of Defense 07182016

 

Gretchen Carlson – Harassment & Discrimination – Culture – A Task For The Board – And Internal Audit?

I have provided below a link to a short article about Gretchen Carlson, an interview that she is giving, possible legislative efforts, and sexual harassment and discrimination. We all know, or should know, that this is an important topic. Not only sexual harassment and discrimination, but harassment, discrimination, retaliation, bullying, and hostile environments, and not only male harassment and discrimination of females, but also female v. male, male v. male, female v. female, and including race, color, ancestry and national origin, religion and creed, age and elder, mental and physical disability, sex and gender, sexual orientation, gender identity, and more.

This is or should become an area of oversight for your board, and it also relates to the culture of the organization, and tone at the top, at the middle, and at the lower employee levels, including an environment that encourages people to report harassment and discrimination without fear of retribution, anonymously if the desired, with the knowledge that the reported conduct will be timely, fairly and fully investigated, and that appropriate action will be taken.

This really isn’t new stuff from legal and governance perspectives. Are your board, and the board’s committees, on top of this issue and the culture of the organization?

These can and often are difficult issues and situations.  Of course anyone accused is entitled to a defense, and to rebut the allegations. At law, in most situations, innocence is presumed. In recent past years there have also been stories involving allegations of harassment and discrimination reported in the news that turned out to be false or at least not sufficiently supported.

An investigation into situations involving these allegations often should be performed by outside legal counsel with a reputation for integrity and knowledge and experience in these practice areas.

But let me also suggest that the culture of the organization (but not an actual investigation of a specific situation) also could be an area for attention by internal audit, if the board or management puts it on internal audit’s agenda, and if internal audit is provided education and training about the critical elements, and investigation techniques, and help preparing an audit and reporting program. After all, internal audit also is looking to become more relevant in helping the organization to achieve its organizational objectives, goals and strategies.

The following is a link to one of the articles about Gretchen Carlson and what she is trying to do and accomplish: http://people.com/tv/gretchen-carlson-alleged-sexual-harassment-in-2020-interview/

 

EEOC sues for alleged unequal female – male pay for the same employment position

Below is a screenshot from the EEOC website for a recent press release, and the EEOC’s announcement about a new lawsuit over alleged unequal female v. male pay for the same employment position. As you might well imagine, the opportunities for this type of lawsuit truly could be very numerous. Is your board or audit committee, or a director member, overseeing, to any extent, HR, employer and employee matters, including, for example, liability exposure and asset protection (trade secrets, etc.)? It’s worth some consideration. And this holds true for public companies, private companies, and nonprofits.

eeoc-sues-for-alleged-unequal-female-male-pay-for-the-same-employment-position

Sustainability Disclosures – From PWC – Audit Committee Need to Know?

I’m forwarding this along – sustainability disclosure guidance from PWC – click on the following link for the materials and the discussion, CLICK HERE

And I am thinking that there could be a need for increasing audit committee member expertise in the sustainability disclosure area.

Below is a snapshot from the PWC website, followed by a link to Tate’s Excellent Audit Committee Guide (updated January 2016), followed by the Audit Committee 5 Lines of Diligence and Defense. Thank you. Dave Tate, Esq., San Francisco and California.

PWC Sustainability Disclosure Guidance

 

See also my Tate’s Excellent Audit Committee Guide, updated January 2016, Tate’s Excellent Audit Committee Guide 01032016 with Appendix A Final

Audit Committee 5 Lines of Defense 07182016

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