Insider Trading: “The Circle of Friends”


The FBI continues to escalate their crackdown on Wall Street with their latest bust on hedge fund portfolio managers and analysts. This week seven friends have been charged with running a $62million insider trading scheme (see here).

The seven charged worked for five different hedge funds and investment firms and reaped nearly $62million in illegal profits on trades in Dell Inc, the prosecutors said.

This is eerily similar to the Galleon case and should not come as a surprise. There are numerous white collar crime cases where friends have been working in cahoots with one another. The Russian trader at UBS using “potato code” also springs to mind.
The fact is (and Catelas has been saying this for over 3 years now) that criminals cannot work in complete isolation. They need to work with trusted accomplices. Trust is gained through the building of relationships. And, it is unlikely that you will commit a crime with someone you do not trust, someone with which you have a tight bond, or strong relationship.
That is why at Catelas our fundamental premise is uncovering relationships. Our assumption is that a “circle of friends” committing a crime will not necessarily provide incriminating evidence in a email exchange. Sometimes people do make mistakes, but the thing that links these individuals is the communication exchanges they had (email, cell phone, SMS, IM, etc) lomg before the crime was committed. During the time these relationships were getting stronger. In fact, often we find that communications go “radio silent” leading up to the crime.
So our approach is rooted in Behavioral Science – we uncover communication patterns that mimic what behavioral science calls “shared experiences”. Its similar to going on a weekend camping outing with friends. Here a group of people participate in a shared experience (ie camping). After the weekend, this group will by definition have a stronger bond, having participated in a shared experience. Catelas has been able to apply this same approach to everyday business (and personal) communications. I cannot share the details of how we do it, but the results are astounding.
Our Relationship Analytics approach is used to first identify the people involved in or close to a particular investigation or case. These relationships leads us to critical conversations (topic or timeline related), which enables us to point the investigation, with laser focus, to the relevant people and the relevant documents.
The next time you are working a case and your question is: “Who else might be involved?”, think trusted relationships. For more information take a look at our website or contact me.
Rob.
(robert.levey@catelas.com)
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Pharma’s in the cross-hairs – turning up the heat!


There seems to be a lot of heat in the Pharma compliance kitchens right now with a series of federal investigations and settlements. Stephanie Rabiner’s blog post summarizes the recent activity –  “Glaxo pays $3B fine, Pfizer paid $2.3 billion in 2009, while Eli paid $1.4 billion the same year. And Abbott Laboratories agreed to a $1.3 billion settlement in recent weeks.”

These cases center around fraud, off-label promotions and/or kickbacks and many go back over the last 10 years. Viewed holistically and considering the consumer suits that accompany these federal one’s, it is a very big deal. The Pharma Industry is certainly in the cross-hairs right now. And the heat is being turned up.

Another blogger, Richard Cassin, last month wrote about “a flock of Pharmas”, asking the question, was the Pharma industry simply prone to these types of investigations, given the business they are in?

The allegations being investigated are certainly broad – the illegal marketing of a number of drugs, de-frauding the Medicaid program, FCPA violations, to name a few. Is this the culmination of the big investigations or is this the tip of the ice-berg?

I also looked a little closer into the Pfizer case, started by a whistle-blower lawsuit. Turns out that the list of 10 whistle-blowers includes two former employees who had spent 24 years and 16 years respectively with Pfizer.  Long careers certainly, long memories, perhaps? This is not to say that the industry is inherently corrupt, but like the financial services industry, which was placed under massive scrutiny following Madoff, these types of investigations force every company in the industry to look in the mirror.

Given the revelations coming out of Penn State University this week, I would say that every Compliance Officer should be looking a little harder into their company’s Ethics programs to be sure that their company is not the next big Wall Street head-line.

How well do you know your Partners and 3rd Parties?


Reading through the Mike Volkov and Tom Fox blogs certainly provides food-for-thought around FCPA violations and infringements. Mike is holding a webinar next week to talk about FCPA with respect to Private Equity and Hedge Funds, in particular when such companies are considering international mergers or acquisitions; Tom talks about whether FCPA scrutiny revolves around the oil and gas company because of the places where they operate or the ‘cowboy tradition’ of the industry.

These articles got me thinking about the partners and 3rd parties that such companies contract with to conduct business in countries like Russia, China and Mexico. My question for companies with significant international operations is simply “How well do you really know your Partners and 3rd Parties?” I posed a similar question in my blog last month, but the point is worth repeating.

Most companies it seems, who are expanding their international businesses or looking at potential M&A activity, do a pretty good job at the front end – ie the due diligence stage. Vetting partners, 3rd party relationships, etc. The problem is that business relationships are not static – they change and evolve. Personnel changes, from sales to research and development teams to supply chain partners. With these changes, so does ‘who we do business with’ and more importantly ‘how business is conducted’.

At Catelas we are not advocating that companies need to monitor every business relationship every minute of the day, but we certainly recommend regular check-ups (or assessments). For example, a company might be have expanded its business operations into South America. Well it would not hurt to conduct a business partner / 3rd party assessment after 1 year to examine what those business relationships look like. Or a major pharma company conducting clinical trials in Indonesia may find it makes sound business sense to identify the key relationships that exist between the company, partners, 3rd parties and hospitals, six month into those trials.

As this picture shows, these 360 degree assessment need not be a massive, expensive investigation in-country. Nor is it a major audit of the company’s financials and partnership contracts. Rather they are designed to be a non-obtrusive examination of how  business is really being done on a day-to-day basis – ‘who is talking to who’, and ‘what are the key business relationships in place’. It provides first and foremost ‘peace of mind’ that the company is conducting business ethically. But if red flags are raised as a result of the assessment, then it provides a process for undertaking a more detailed examination.

And hence the MRI analogy we have used before – the Catelas 360 degree assessment provides an MRI into your foreign business operations – answering the question “How well do you know your 3rd parties?”. To learn more take a look here or give us a call. I would love to hear your views.

Internal Investigations continue to rise


The latest Fulbright & Jaworski Litigation Trends Survey is out – slightly less litigation in 2011 compared to 2010, yet the cost of litigation per company rose. However, regulatory actions and internal investigations are climbing.

The report also reveals that whistle-blowers remain a concern in the coming year stating that one-quarter of respondents anticipate an increase in the number of claims or lawsuits brought by whistle-blowers next year. This year, 22% of respondents said their organizations were subjected to whistle-blower allegations. I suspect that this percentage has been increasing steadily over the last few years, but 25% !!! That certainly registers on the “take-notice” meter.

I also listened to a TechLaw10 podcast #42 this week, where Jonathan Armstrong was talking about the many challenges of internal investigations… more regulations, businesses being more global, more value on corporate data, more employee turnover. This last one certainly resonated – the work force of today statistically averages 2.2 years per company, a far cry from our Dads’ generation when jobs were for life. Whether people today are stealing corporate secrets more than they were before is not the issue; but the chance of this happening is significantly higher simply because people move around more and it is much easier to ‘take’ secret data with you.

All put together, I sense the perfect storm brewing to corroborate this trend of increasing investigations.

So to the people who actually have to do the work and respond to this trend, my question is how are you coping? In this economy it is not simply a case of asking General Counsel for a bigger budget – more people and more technology. It’s more complicated than that. It requires putting together a well thought out “mini-business plan” – what are the key areas of focus, how do you prioritize investigations, when and how do you deploy resources (locally and internationally), what policies and processes do you have to train and educate employees, etc. And of course if additional resources are required they need to be justified via an ROI calculation. This last piece is absolutely key – coming from the sales side, believe me, sales commission are directly proportional to a customer’s ROI.

Faced with an increase in internal investigations, the key is to use technology to your advantage – at Catelas, we are all about upfront intelligence – arming you with the facts about a case as early as possible, so that you can prioritize your investigations, spending time on the important, not the trivial, one’s, collecting only the relevant data specific to that investigation and thereby saving time and cost per investigation.

If you are interested in learning more, look here.

Voluntary Disclosure of FCPA violations


To disclose or not to disclose… that is the question. Definitely a thorny issue which Compliance Officers have to deal with. From my standpoint, I am seeing more voluntary disclosures hitting the press – here Maxwell and here Analogic, which is a good thing. Right?

Personal Disclosure – I have never been inside a Compliance Officer’s shoes when he or she is being chewed out by the CEO, so my opinion may not count for much. But what I have observed over the last few years being around corporate FCPA investigations is the following:-

1. We will investigate, prioritize and disclose potential violations that are brought to the Compliance Team’s attention:  what this means is that most companies have an investigation process in place and when they find something wrong and potentially serious, for the most part they will voluntarily disclose. Clearly, this begs the question what is “serious”, but most companies I would hope will not deliberately try to hide blatant stuff.

2. I don’t want to know what I don’t need to know: this is really about proactive monitoring or going out and finding potential violations. We work with a few companies in highly regulated industries where this is a must, but for most companies it is a step too far – ie I don’t want to uncover stuff that I don’t need to know about. This does not mean that these companies have blinders on, simply that they are doing what is necessary from a compliance and enterprise risk perspective. They feel they no not need to go the extra 9 yards.

3. Cover my backside principle:  this is about policies, processes, employee training, ‘walking the walk’, ‘top down approach’, etc. It’s what all good Compliance Teams do: they enforce and remind employees, partners, etc about good business practices. Often this is driven by past experiences – has the company been investigated by the authorities before, have they had whistle-blower incidents, etc?

4. Who is the target?  The company or the Executive: this is probably the one dynamic that has changed the most in the last 2 years. The charges are becoming personal, in that CEO’s (SEC charges CEO $20M in fraud case) or Compliance Officers are being charged for violations, resulting in possible jail time. No longer is it simply the company that stands to be charged.

Of course each company is different, but the underlying theme is reputation risk – enterprise and personal. Voluntary disclosure provides an avenue for ‘coming clean’, for putting some level of  ‘positive spin’ out of a bad situation and hopefully ultimately saving the company money in fines, etc. To all Compliance Officers – are you feeling the disclosure heat? Or is it still business as usual? I would love to hear your views.