Scherzer Blog

Scraping to find your real name

PeekYou.com has applied for a patent for a way to, among other things, match people’s real names to pseudonyms they use on blogs, Twitter and online forums. A statement on its patent application describes the invention as “a method for aggregating over a network, personal information available from public sources.”

PeekYou’s people-watch Web site offers records of about 250 million people, primarily in the U.S. and Canada. PeekYou says it also is starting to work with listening services to help them learn more about the people whose conversations they are monitoring. It claims to provide only demographic information, not names or addresses.

December 22nd, 2010|Educational Series|

Social Security number (SSN) randomization to take effect in June 2011

The Social Security Administration (SSA) describes the SSN randomization as a forward-looking project to help protect the integrity of the Social Security number by establishing a new random assignment methodology. The SSA promises to still provide online services for direct SSN verifications, as follows:

SSA’s Social Security Number Verification Service – available to employers.
Department of Homeland Security’s eVerify Service – available to employers to determine employment eligibility.
SSA’s Consent-Based SSN Verification Service – available to enrolled private companies and government agencies for a fee.

Federal and state agencies will continue to maintain several SSN verification
systems, as outlined at http://www.ssa.gov/gix/eprojects.html.

December 21st, 2010|Educational Series|

FTC’s latest privacy initiatives

On December 1, 2010, the Federal Trade Commission (FTC) released its long-awaited preliminary report on the protection of consumer privacy titled “Protecting Consumer Privacy in an Era of Rapid Change: A Proposed Framework for Businesses and Policymakers.” The FTC is seeking input on this proposal and intends to issue a final report sometime in 2011.

The report, which covers both online and offline data collection and use, reiterates certain concrete steps that the FTC believes organizations should take related to choice and transparency and also provides broad guidance that applies to all commercial entities that collect or use consumer data, including companies that do not interact directly with consumers, such as information brokers. The framework is not limited to personally identifiable information (PII); it applies to all consumer data that can be linked to a specific individual or to a computer or other device.

Focusing on new and growing threats to consumer privacy driven by innovations that rely on consumer data, the proposal outlines a three-step framework for data protection:

1) Privacy by Design – Organizations should integrate privacy concepts into every stage of the life-cycle of their products and services, develop marketing initiatives and data-sharing activities based on privacy guidance from the inception of such projects, and develop and maintain comprehensive information programs to protect and manage consumer data within the organization itself. Data security, reasonable collection limits, sound retention practices, and data accuracy are critical program components.

2) Choice – Organizations should offer clear and easy-to-use choice mechanisms at the point when the consumer is making a decision about his/her data, such as at the point of collection, implement a “do not track” mechanism, such as a persistent web browser setting that allows consumers to block all tracking of their online activities, obtain consumer consent before sharing data for marketing purposes with third parties or even with its affiliates if the affiliate relationship is not clear to consumers, and require enhanced consent for sensitive information, such as data about children, financial and medical information, and precise geolocation data.

3) Transparency – While privacy policies remain a critical tool for notifying consumers (and regulators) of an organization’s privacy practices, in general, most privacy polices need to be streamlined and simplified, and organizations must obtain consumer consent before implementing a change in policy that affects previously collected data. Organizations also should explore mechanisms for providing consumers with access to their data.

December 10th, 2010|Educational Series, Legislation|

Historical investment fraud sweep compels numerous civil and criminal actions

On December 6, 2010, the Financial Fraud Enforcement Task Force announced the conclusion of Operation Broken Trust, the largest investment fraud sweep ever conducted in the United Stated. Started August 16, 2010, the operation captured 343 criminal defendants and 189 civil defendants who were involved in fraud schemes that harmed more than 120,000 victims throughout the country. The criminal cases involved more than $8.3 billion in estimated losses and the civil cases more than $2.1 billion. Eighty-seven defendants have been sentenced to prison, including several who will serve more than 20 years.

The sweep focused on fraudsters who offered “investment opportunities” that were either completely fictitious or not structured as advertised. An overwhelming number of these were high-yield investment frauds and Ponzi schemes. Others involved commodities fraud, foreign exchange fraud, market manipulation (pump-and-dump schemes), real estate investment fraud, business opportunity fraud, and affinity fraud. Some of the perpetrators filed for bankruptcy in an attempt to avoid claims by victimized investors. In many instances, the criminals were trusted people within their communities—neighbors, co-workers, fellow church members—who betrayed that trust in order to line their own pockets.

December 10th, 2010|Criminal Activity, Fraud|

Corporate misconduct can preclude directors from serving on other boards

Due diligence on current and prospective board directors should extend not only to the legal liability exposure but also to the possibility of losing valuable opportunities for board membership at other firms,” said Jason Schloetzer, assistant professor of accounting at Georgetown University’s McDonough School of Business and author of The Conference Board Report. “In the current litigation environment, it is particularly important for the board to demonstrate to shareholders and the judicial system that any failure to prevent or discover corporate misconduct took place in spite of the rigorous performance by the board of its oversight duties, including the establishment of a state-of-the-art compliance program.”

The Conference Board Report, released November 4, 2010, analyzed the changes in directorships held by outside board members of 113 public companies involved in shareholder class-action lawsuits that alleged misrepresentation of information to investors. The study, encompassing the period of 1996 to 2005, tracked directorship changes for three years after the start of litigation and used data from proxy statements to identify director turnover.

Within three years of litigation, 83.2% of outside directors remained on the board of the public company involved in the lawsuit, the study found. Related research showed that outside directors in firms involved in litigation did not appear to turn over any more frequently than the average among all outside directors. However, outside directors whose companies were involved in litigation experienced reduced opportunities to serve on other companies’ boards. The average number of board seats held by these individuals at other companies dropped from 0.95 in the year prior to the litigation to 0.47 three years after the suit was filed.

November 9th, 2010|Criminal Activity, Educational Series|

Supreme court ruling may ban consumer class-action lawsuits

A case that goes before the U.S. Supreme Court tomorrow, AT&T Mobility vs. Concepcion, may potentially ban consumers from filing class-action lawsuits. The basic question that will be decided is whether companies can bar class-actions in the fine print of their take-it-or-leave-it contracts with customers (and employees.)

The U.S. District Court for the Southern District of California ruled that a class-action ban violates state law and is not preempted by federal law; the U.S. 9th Circuit Court of Appeals upheld the lower-court ruling last year.

If a majority of the nine justices vote AT&T’s way, any business that issues a contract to customers — such as for credit cards, cell phones or cable TV — would be able to prevent them from joining class-action lawsuits. Class-actions allow plaintiffs to band together in seeking compensation or redress, thus giving more substance to their claims.

And the banning of class-actions may potentially apply to employment agreements such as union contracts…

November 8th, 2010|Judgment, Lawsuit|

Green-energy scams put portfolios in the red

The emerging green-energy market has created a horde of fraudsters. So many, in fact, that late last year, the Financial Industry Regulatory Authority (FINRA) warned about schemes that promise large gains from investments in companies that pitch alternative, renewable or waste-to-energy products. And in May of this year, the Securities & Exchange Commission (SEC) followed with its own alert about potential scams that exploit the Gulf oil spill and related cleanup efforts.

The green-energy get-rich-quick schemes are showing up in blog posts, e-mail, infomercials, Internet message boards, text messages, and Twitter. As with most investment scams, all promise unrealistic returns, such a 200 percent stock gain by a solar panel company, a one-in-a-million deal to get a “51 times” return on current stock value from a China wind-power enterprise, and a 500 percent one week stock gain by a hydrogen-based energy outfit.

Of course, the regulators are on the lookout for the scammers. In one recently filed case, the SEC charged that promoters of eco-friendly investment opportunities lured 300 investors into a $30 million Ponzi scheme, encouraging the participants to finance “green” initiatives of Mantria Corporation, including a purported “carbon negative” housing community in rural Tennessee and a “bio-char” charcoal substitute made from organic waste. Investors were promised returns ranging from 17 percent to “hundreds of percent” annually. But, according to the SEC’s complaint, Mantria did not generate any income from which such extraordinary returns could be paid.

As cautioned by the SEC, the oil spill in the Gulf of Mexico brought additional scam opportunities for cons promising financial gains from investments in companies that claim to be involved in the cleanup operations. In May and June 2010, the SEC suspended the trading in shares of ACT Clean Technologies Inc. of Huntington Beach, CA, and Green Energy Resources, Inc. of New York, NY, because, among other issues, questions arose about the accuracy and adequacy of the publicly disseminated information by the companies.

To dodge green-energy investment scams (and other frauds) investigate before investing! And:

Never rely solely on information contained in an unsolicited communication.
Find out who sent the investment recommendations; many companies and individuals that tout stocks are paid by the company being promoted.
Examine the fine print for any statements indicating payments in cash or in stock for issuing the report or message.
Find out where the stock trades. Most unsolicited recommendations involve stocks that do not meet the listing requirements of the major stock exchanges; they are usually quoted on the OTC Bulletin Board or in the Pink Sheets, which do not impose minimum qualitative standards. Many of the OTC or Pink Sheets stocks trade infrequently which can make shares difficult to sell. When these stocks do trade, they may fluctuate in price very rapidly.
Read the company’s SEC filings to verify information.
Exercise skepticism and be wary of any pitch that suggests immediate pay-offs, especially if the investment involves a start-up company or a product or service that is still in development.

October 19th, 2010|Educational Series, Green Technology|

SEC’s proposed rule requires issuers and underwriters of asset-backed securities to make due diligence findings available to the public

The Securities and Exchange Commission (SEC) issued on October 13, 2010 a proposal to enhance disclosure to investors in the asset-backed securities market. The proposed rule requires issuers of asset-backed securities (ABS) to perform a review of the assets underlying the securities, and publicly disclose information relating to the review. The proposal also requires an issuer or underwriter of ABS to make publicly available the findings and conclusions of any third-party due diligence report.

The SEC’s proposed rule would enhance ABS disclosure in three ways:
Issuers of ABS that are registered with the SEC would be required to perform a review of the bundled assets that underlie the ABS.
Proposed amendments to Regulation AB would require an ABS issuer to disclose the nature, findings and conclusions of this review of assets.
Issuer or underwriter of both registered and unregistered ABS offerings would be required to disclose the findings and conclusions of any review performed by a third-party that was hired to conduct such a review.

In addition to this rule, the Commission last week proposed regulations that require issuers of ABS — and credit rating agencies that rate ABS — to provide investors with new disclosures about representations, warranties, and enforcement mechanisms. And, in April 2010, the Commission proposed rules that would revise the disclosure, reporting and offering process for ABS to better protect investors in the securitization market.

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the Commission to adopt rules regarding the review of assets, such as loans, underlying the securities no later than 180 days after enactment.

October 15th, 2010|Educational Series, Legislation|

Spotlight on Foreign Corrupt Practices Act (FCPA) compliance

All U.S. firms seeking to do business in foreign markets must be familiar with the FCPA. Enacted in 1977 and amended several times since then, the FCPA generally states that if a foreign company has any footprint in the U.S., even simply wiring money through it, that company is subject to prosecution if involved in corrupt payments to foreign officials for the purpose of obtaining or keeping business.

The FCPA applies to any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm. U.S. parent corporations also may be held liable for the acts of foreign subsidiaries where they authorized, directed, or controlled the activity in question, as can U.S. citizens or residents, who were employed by or acting on behalf of such foreign subsidiaries. The same provisions essentially extend to intermediaries which include joint venture partners or agents.

Between 2006 and 2009, the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), both of which have jurisdiction over the FCPA, initiated more enforcement actions than in the first 28 years of the FCPA’s existence. And the financial penalties for violations have skyrocketed. In December 2008, Siemens AG, Europe’s largest engineering firm, pleaded guilty to violating U.S. anti-corruption laws and was ordered to pay $1.6 billion to settle bribery charges in U.S. and Germany.

To ensure FCPA compliance, the DOJ recommends that companies exercise risk-based due diligence to ensure that they are doing business with reputable and qualified entities and representatives. The due diligence process, at minimum, should include investigating potential foreign representatives and joint venture partners to determine their general reputation and qualifications, whether they have personal or professional ties to the government, the reputation of their clients, and their history with the U.S. Embassy or Consulate, local bankers and other business associates. Additionally, the U.S. firm should be aware of “red flags,” i.e., unusual payment patterns or financial arrangements, indicators of corruption in the country or the particular industry, or refusal by the foreign joint venture partner or representative to provide certification that it will not engage in actions to further an unlawful offer, promise, or payment to a foreign public official and not cause the firm to be in violation of the FCPA (such as paying unusually high commissions, lacking transparency in expenses and accounting records, or retaining a joint venture partner or representative that has been referred by a government official.)

Capturing recent headlines are the changes to the FCPA-related compliance and ethics provisions of the Federal Sentencing Guidelines for Organizations that will become effective in November 2010. The amendments provide that a meaningful compliance program requires, among other actions, that when criminal conduct is detected, the company implement “reasonable steps to respond appropriately … to prevent further similar conduct.” An annotation to that provision specifies that the actions include “assessing the compliance and ethics program and making modifications necessary to ensure that the program is effective … and possibly including the use of an outside professional advisor to ensure adequate assessment and implementation of any modifications.”

The Guidelines also state that a board must be knowledgeable about the content and operation of the company’s compliance program and must “exercise reasonable oversight with respect to the implementation and effectiveness of its compliance and ethics.” Likewise, the DOJ’s prosecution guidelines consider whether the board exercises independent reviews of the compliance program and whether it is provided with information sufficient to enable the exercise of independent judgment. Directors have similar “Caremark” oversight duties arising under case law and various other directives, such as stock exchange rules, Sarbanes-Oxley, and audit committee charters.

October 14th, 2010|Educational Series, Legislation|

One of many case studies from our files that stopped a deal in its tracks

Our client, a commercial lender, requested background investigations of a consumer products company and its two principals in connection with their application for working capital financing. The loan officer was familiar with the subjects, and was astonished by the information that SI quickly uncovered. Searches of federal court records revealed a 2008 action filed against the subjects under the Federal Trade Commission Act for falsely advertising that using their electronic exercise belt caused weight and inch loss without exercise. The action was resolved by stipulated orders as part of a global settlement of both the FTC’s lawsuit and related actions brought by county and city prosecutors. The subjects and certain retailers collectively were ordered to pay over $2 million. The FTC and state orders further barred the defendants from making false advertising claims for the product or any similar device, and provided other injunctive relief to prevent future deceptive practices. And the subjects’ nefarious acts did not stop here. Both principals had several unpaid tax liens and judgments ranging in amounts from $48,000 to $650,000, and both were convicted within the last two years of driving under the influence of alcohol.

October 1st, 2010|Criminal Activity, Judgment, Taxes|