Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
On March 12, the U.S. District Court for the Southern District of New York ruled that Dow Jones & Company Inc. did not engage in unfair business practices or breach its contract with customers when it spun off Barron’s and added an additional fee for continued access to the publication. Lebowitz v. Dow Jones & Co. Inc., No. 06-2198, 2012 WL 795525 (S.D.N.Y. Mar. 12, 2012). The Wall Street Journal Online subscriber agreement stated that Dow Jones could change or add charges by giving its customers advance notice. Dow Jones notified customers in December 2005 that as of January 2006 it would charge separately for online access to the Wall Street Journal and Barron’s, thereby requiring existing customers to pay an additional fee for access to both. Dow Jones announced the change using pop-ups on its Wall Street Journal and Barron’s sites, which the court held was sufficient notice under the contract. The court also held that Dow Jones’s right change the price did not make the contract illusory.
On November 3, Bio-Rad Laboratories Inc. agreed to pay a total of $55 million to settle DOJ and SEC allegations that the company violated the FCPA in Russia, Thailand, and Vietnam. According the SEC’s cease-and-desist order, subsidiaries of the bio-medical instrument manufacturer paid $7.5 million in bribes in Russia, Thailand, and Vietnam from 2005 to 2010 in order to win business in violation of Section 30A of the FCPA, which resulted in $35 million in improper profits for the company. Some of the payments were disguised as commissions to foreign agents, in situations where the “agents had no employees and no capacity to perform the purported services for Bio-Rad.” The company also allegedly had an “atmosphere of secrecy.” Bio-Rad self-disclosed the violations to the government in 2010.
As part of the resolution, the company reached a Non-Prosecution Agreement with the DOJ regarding activities in Russia and agreed to a $14.35 million criminal penalty related to books and records and internal controls violations. The resolution with the SEC involved the payment of $40.7 million in disgorgement and pre-judgment interest regarding anti-bribery, books and records, and internal controls violations related to Russia, Thailand, and Vietnam.
Of note, and continuing the trend of cross-border cooperation, the SEC in its press release disclosed that numerous international entities had assisted its investigation, including the “Bank of Lithuania, Financial and Capital Market Commission of Latvia, and British Virgin Islands Financial Services Commission.” Underscoring the issue, following public disclosure of Bio-Rad’s settlement with the SEC regarding alleged payments in Vietnam, news reports indicate that Vietnam’s Ministry of Health has ordered a review of hospital purchases from Bio-Rad, and asked for information and assistance from US authorities.
On March 12, the FTC released the results of a survey conducted to gauge consumer experiences in dealing with consumer reporting agencies (CRAs) following an identity theft. While the survey indicates that the majority of consumers were satisfied with their experiences, many consumers were unaware of their rights under the Fair and Accurate Credit Transactions Act (FACTA) before contacting a CRA. In response to concerns raised by consumers in the survey, the report recommends that (i) CRAs make it easier for consumers to reach a live person and (ii) the CFPB use its examination and rulemaking authority, and the FTC employ its enforcement authority, to address CRAs’ practice of attempting to sell identity theft products to consumers reporting identify thefts.
Just a month after announcing its internal investigation of possible FCPA violations, news reports indicate that General Cable Corporation’s review will be completed or substantially completed by the first quarter of 2015. The company also announced that it “plans to exit all of its Asia Pacific and African manufacturing operations,” although it did not link the exit – which affects nine plants in Asia and five plants in Africa, and approximately 17% of its total sales – to its FCPA investigation.
In September, the Kentucky-based cable manufacturer announced that it was investigating its payment practices with respect to employees of public utility companies in Angola, Thailand, India and Portugal due to possible FCPA concerns. News reports indicate that, to date, the company has spent millions on the review, which has included a review of over 450,000 documents and interviews of over 20 individuals. The company also disclosed that it was cooperating with investigations by the DOJ and SEC.
On March 8, the U.S. District Court for the Southern District of Illinois ruled that minors who used Facebook are bound by the forum-selection clause contained in the website’s terms of service, to which they agreed when they signed up for Facebook. E.K.D. v. Facebook Inc., No. 11-461 (S.D. Ill. Mar. 8, 2012). The plaintiffs, a group of minors suing Facebook for improperly using their images in advertising, argued that because they were minors when they signed up, the forum selection clause could not be enforced. The court rejected this argument, holding that under California contract law the minor plaintiffs could not void the forum selection because they continued to use and benefit from Facebook after agreeing to the terms of service. The court further held that transferring the case to the Northern District of California would not unduly burden the plaintiffs and was permitted by 28 U.S.C § 1404.
On March 15, Freddie Mac published Single-Family Seller/Servicer Guide Bulletin 2012-8, which (i) updates mortgage eligibility and credit underwriting requirements Borrower Funds and Mortgage Credit Certificates for Borrower qualification, (ii) revises Forms 16SF and 1107SF regarding warehouse lender agreements and facilities, (iii) eliminates certain requirements for document custodians on Form 1034A, and (iv) updates certain delivery requirements under the Uniform Loan Delivery Dataset and clarifies delivery requirements for certain refinances under HARP.
On March 7, Washington Governor Christine Gregoire signed Senate Bill 5627 which expands protection for members of the state National Guard. The law expands the definition of “military service” to include servicemembers called to service by the governor for more than thirty consecutive days. This change is designed to provide National Guard members activated by the governor the same protections already provided under state law to servicemembers called to federal service by the President or the Secretary of Defense. This law becomes effective June 7, 2012.
On March 19, the FDIC issued Financial Institution Letter FIL-14-2012, which warns bank directors and officers that financial institution records belong exclusively to the institution, and supervisory records are the property of the FDIC. As such, directors and officers of failing institutions who make and remove copies of institution and supervisory records for “personal use” in preparing for anticipated litigation or enforcement activity (i) are breaching their fiduciary duty, (ii) are engaging in an unsafe and unsound banking practice, and (iii) may be violating the institution’s information security program. Personal use includes use by directors or officers to defend themselves against administrative, civil, and criminal proceedings or lawsuits based on actions taken in their official capacity. The Financial Institution Letter also reminds outside counsel to financial institutions that their legal and ethical obligations are only to the institution, and not to an institution’s directors or officers. The FDIC threatens bank directors and officers, and outside counsel with legal action for knowing or reckless violations of law or breach of fiduciary duty. In 2011, in a case in which the FDIC sued a law firm for having accepted copies of bank records from a bank prior to its closing to preserve for the defense of bank directors, BuckleySandler prepared an amicus brief for the American Association of Bank Directors asserting the right of bank directors to have free access to bank records that they need to defend themselves against administrative, civil, and criminal proceedings or suits.
In response to President Obama's initiatives to identify and reduce unnecessary governmental burdens on the private sector, the American Association of Bank Directors ("AABD") today released its "Bank Director Regulatory Burden Report," which includes a review of laws, regulations and federal banking agency regulatory guidance that direct bank boards of directors to take certain action. The Report identifies over 800 legislative and regulatory provisions that impact bank directors. AABD is requesting that the federal banking agencies take immediate action to develop a regulatory review process to address not only laws and regulations, but also the numerous regulatory guidance provisions affecting bank directors.
"The overburdening of bank directors with responsibilities that are insignificant or that are better delegated to management is a serious public policy issue," noted AABD Executive Director, David H. Baris, the co-author of the Report. "Bank directors need to focus on the important issues facing their banks to meet their fundamental duties of care and loyalty."
Baris further explains, "It is evident that no one -- not Congress and not the federal banking agencies -- is evaluating the aggregate effect that legislative and regulatory actions are having on the duties and responsibilities of bank directors. Bank directors are entitled to exercise their business judgment in good faith, delegate duties to management, and reasonably rely on such management. One would never know that by reading the voluminous admonishments and directives in the documents we have compiled."
AABD recognized the need for a central repository of all of the obligations imposed on bank directors. The Report provides a compilation, accomplished through months of searching and evaluating numerous disparate documents. For ease of reference, the regulatory guidance material and regulations have been grouped under each federal banking agency.
"This ever-increasing regulatory burden is a significant distraction from board time necessary for risk oversight and other essential board responsibilities," explained Charles J Thayer, AABD Chairman. "The increasing threat of personal liability is forcing bank boards to become 'compliance' boards where attention must be focused on satisfying laws, regulations, and regulatory guidance that often pertain to duties that are properly the function of day-to-day management."
On July 28, the SEC announced that Smith & Wesson Holding Corporation agreed to pay $2 million to settle charges that the United States-based firearms manufacturer had violated the FCPA by making or authorizing improper payments to foreign officials in Pakistan and other countries in an effort to win contracts to sell weapons to overseas military and police forces. The settlement comes just weeks after Smith & Wesson announced in a June 19 securities filing with the SEC that the DOJ had abandoned its own related investigation without pursuing FCPA criminal charges.
The claims against Smith & Wesson were filed in the SEC’s administrative court. In the order instituting the settled administrative proceeding, the SEC alleged that Smith & Wesson from 2007 to 2010 engaged in a “pervasive effort” of making the improper payments in order to generate new overseas business. According to the SEC the only contract that was successfully consummated under the scheme arose after Smith & Wesson officials in 2008 authorized a third party agent to make cash payments and provide firearms to Pakistani police officials as gifts. The resulting agreement to sell more than 500 pistols yielded a profit to Smith & Wesson of more than $100,000, the SEC found. Similar improper payments and gifts that did not ultimately result in contracts for Smith & Wesson were allegedly made to foreign officials in Indonesia, Turkey, Nepal, and Bangladesh. As described in the SEC’s order, Smith & Wesson failed to account for the improper payments and instead characterized them as legitimate commissions and business expenses. The order also found the illegal conduct was allowed to continue undetected for years because Smith & Wesson failed to establish an appropriate compliance program or adequate internal accounting controls in connection with its expanding business in “new and high risk” overseas markets.
In addition to the $2 million settlement, which consists of disgorgement, prejudgment interest, and a civil penalty of more than $1.9 million, Smith & Wesson also agreed for the next two years to report to the SEC on its FCPA compliance efforts. In its press release, the SEC praised Smith & Wesson’s cooperation with the investigation and its other remedial efforts following discovery of the bribery scheme, including the termination of the company’s entire international sales staff and the implementation of “a series of significant measures to improve its internal controls and compliance process.” Smith & Wesson consented to the settlement without admitting or denying the SEC’s findings.