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

 

New COSO Updated ERM Framework – Coming Soon – End of June, Perhaps – Could Be Very Important

Just a heads up, a source has suggested that the new long-anticipated COSO (Committee of Sponsoring Organizations of the Treadway Commission) ERM update might finally be out at the end of June. COSO is spending a very long time (since October 2014) preparing and vetting this “update” of the 2004 Enterprise Risk Management — Integrated Framework. COSO’s sponsoring organizations are the American Accounting Association (AAA), the American Institute of Certified Public Accountants (AICPA), Financial Executives International (FEI), The Institute of Internal Auditors (IIA), and the National Association of Accountants (now the Institute of Management Accountants [IMA]), and the Commission includes representatives from industry, public accounting, investment firms, and SROs (exchanges).

We’ll have to wait and see what we get with this “update,” which will either simply be a relatively unimpressive or vague tweak, or a useful, modernized, sufficiently detailed guide which might become the standard to achieve, or somewhere in between. I’m hopeful for the useful version – ERM needs a big boost – this “update” is important. I find that there really are only three ways to provide this type of boost: sponsorship and push by large or influential organizations and people, mandatory (i.e., by law, regulation or rule) adoption, or, sometimes, push and expectancy by the public.

Here is the link to the COSO website https://www.coso.org/Pages/default.aspx

Best to you, David Tate, Esq., Litigation, D&O, audit committees, etc., Royse Law Firm http://rroyselaw.com/

Evaluating Director Independence – Zynga Shareholder Derivative Suit

Thomas Sandys Derivatively on Behalf of Zynga, Inc. v. Pincus, et al., Delaware Supreme Court, Case No. 157,2016, December 5, 2016, highlights the sometimes difficulty, and the importance of evaluating director independence in the circumstance of a shareholder derivative suit.

In Zynga the plaintiff filed his shareholder derivative suit without first making a demand upon the board that the Company sue Company insiders that were alleged to have improperly sold Company stock. Instead of first making the demand upon the board, plaintiff argued that such a demand would have been futile because a majority of the nine person board members lacked independence.

In summary, the plaintiff alleged two derivative claims based on allegations that certain top managers and directors at Zynga were given an exemption to the Company’s standing rule preventing sales of stock by insiders until three days after an earnings announcement, and that the insiders who participated in the sale breached their fiduciary duties by misusing confidential information when they sold their shares while in possession of adverse, material non-public information. And plaintiff also asserted a duty of loyalty claim against the directors who approved the sale.

The holding in Zynga is that at the pleading stage there was sufficient evidence to suggest that a majority of the board did lack independence so as to excuse not making the demand upon the board. The holding is primarily interesting for the Court’s discussion about three particular board members, and the reasons why the Court determined that there was evidence to sufficiently suggest that those three directors did in fact lack independence to impartially consider a demand that the Company bring suit against the selling insiders, which resulted in a majority of the board also lacking independence, so as to excuse making the pre-suit demand upon the board.

To plead demand excusal the plaintiff must plead particularized factual allegations that create a reasonable doubt that, as of the time the complaint was filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand. At the pleading stage, a lack of independence turns on whether the plaintiff has pleaded facts from which the director‘s ability to act impartially on a matter important to the interested party can be doubted because that director may feel subject to the interested party‘s dominion or beholden to that interested party.
With respect to one of the directors in question, the Court found troubling for the purpose of independence or lack thereof that the particular board member and her husband co-owned an unusual asset, an airplane, with Zynga’s former CEO and controlling stockholder, which the Court found was suggestive of an “extremely intimate personal friendship between their families.”

And with respect to the other two directors, the Court found troubling for the purpose of independence or lack thereof that the directors are partners at a prominent venture capital firm and that they and their firm not only controlled 9.2% of Zynga‘s equity as a result of being early-stage investors, but have other interlocking relationships with the controller and another selling stockholder outside of Zynga. More specifically the Court stated “Although it is true that entrepreneurs like the controller need access to venture capital, it is also true that venture capitalists compete to fund the best entrepreneurs and that these relationships can generate ongoing economic opportunities. There is nothing wrong with that, as that is how commerce often proceeds, but these relationships can give rise to human motivations compromising the participants’ ability to act impartially toward each other on a matter of material importance. Perhaps for that reason, the Zynga board itself determined that these two directors did not qualify as independent under the NASDAQ rules, which have a bottom line standard that a director is not independent if she has ―a relationship which, in the opinion of the Company‘s board of directors, would interfere with the exercise of independent judgment . . . .[Footnote #1: NASDAQ Marketplace Rule 5605(a)(2)] Although the plaintiff’s lack of diligence made the determination as to these directors perhaps closer than necessary, in our view, the combination of these facts creates a pleading stage reasonable doubt as to the ability of these directors to act independently on a demand adverse to the controller‘s interests. When these three directors are considered incapable of impartially considering a demand, a majority of the nine member Zynga board is compromised for Rule 23.1 purposes and demand is excused. Thus, the dismissal of the complaint is reversed.”

As you might correctly assume, board member independence can arise as an issue in several different corporate and governance related circumstances.

* * * * *

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

david-tate-picture-large-cropped

Audit Committee 5 Lines of Defense 07182016

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

 

Why do so many practitioners misunderstand risk? Forwarding post by Norman Marks

The following is a link to a new post by Norman Marks, https://normanmarks.wordpress.com/2016/11/26/why-do-so-many-practitioners-misunderstand-risk/ , Why do so many practitioners misunderstand risk? See also the link to “A Revolution in Risk Management” which is provided in Norman’s post. This is a good, i.e., worthwhile, post and discussion – the point being, I believe, is to not be too singularly focused in your evaluation of risks and risk management. I also like Norman’s use of the tree to visually demonstrate the discussion.

Best to you, Dave Tate, Esq., San Francisco and California. Link for Tate’s Excellent Audit Committee Guide http://wp.me/p75iWX-6z