FCPA Compliance and Ethics Blog

January 16, 2015

As American as Duck Soup, the Marx Brothers and Stepping In It

Duck SoupI am at the end of my week of Marx Brothers themed posts. As you can tell, I am a huge fan and several of you have asked which is my favorite film. Before answering I must confess that I much prefer their Paramount films to their later MGM work. Their first two films were adaptations of the Broadway shows The Cocoanuts (1929) and Animal Crackers (1930), George S. Kaufman and Morrie Ryskind wrote both. Their third Paramount film, Monkey Business (1931), was their first movie not based on a stage production, and the only one in which Harpo’s voice is heard (singing tenor from inside a barrel in the opening scene). Number four was Horse Feathers (1932), where they brothers satirized the American college system and Prohibition, the amateur status of college football players, and placed them the cover of Time.

But for me it is their final Paramount film, Duck Soup (1933), which was their greatest and my personal favorite. It was directed by the highly regarded Leo McCarey, is the highest rated of the five Marx Brothers films on the American Film Institute’s top 100 years … 100 Movies list. It had slapstick, singing and dancing, atrocious puns and just about every other form of top-notch comedy one can ask for in a movie. The absurdity of the film and the nature of the Marx Brothers comedy seems to me to be summed up in a dispute the film sparked between the Brothers and the village of Fredonia, New York. “Freedonia” was the name of a fictional country of which Groucho was the President and the city fathers wrote to Paramount and asked the studio to remove all references to Freedonia because “it is hurting our town’s image”. Groucho fired back a sarcastic retort asking them to change the name of their town, because “it’s hurting our picture.”

I thought about this comedic phenomenon when I read several articles about JP Morgan Chief Executive Officer (CEO) Jamie Dimon and his whining about how tough regulators have been on him and his poor little bank. An article in the Financial Times (FT) Lex Column, entitled “JPMorgan: comic relief”, said, “A rule of thumb for JPMorgan earnings: the more entertaining chief executive Jamie Dimon is on the conference call, the limper the results. Yesterday, he riffed on [among other things]: what is un-American (the bank being chased by many regulatory bodies rather than just one)”. This was in the face of a report in another FT article by Tom Braithwaite, entitled “High quality global journalism requires investment”, that the bank “said its earnings have been hit by $1.1bn in new legal charges, as it prepares to settle over allegations of foreign exchange manipulation with the Department of Justice. This latest sum takes the total legal charges disclosed by the US’s largest bank since 2010 to more than $25bn, or more than a year’s profits. “Banks are under assault,” said Jamie Dimon, chief executive, as he reported fourth-quarter results on Wednesday.”

Dimon’s seeming insistence that banks following laws is un-American and the attendant cost of doing business in compliance with relevant anti-money laundering (AML) laws still seems to bedevil a fellow mega-bank, HSBC Holdings PLC, which paid a paltry fine of $1.9 billion (paltry that is next to JPMorgan) for its transgressions and violations of that un-American prohibition against money-laundering. In an article in the Wall Street Journal (WSJ) Rachel Louise Ensign and Max Colchester reported that after a two-year monitorship, the independent monitor will issue a report that “will criticize the bank and lay out ways it needs to improve.” This is in the face of the 2014 monitor’s report that HSBC “information-technology systems still lacked ‘integration, coordination and standardization’ and recommending that senior executives have their bonuses docked absent progress.” The monitor also said that “Throwing bodies at it and putting your finger in the dike-that’s not a sustainable system.”

What has been HSBC’s response to this news? Apparently with the same whining as Dimon but rather than focus on the fact they have to follow laws, HSBC focused on the actual doing of compliance. The article said that the new Chief Compliance Officer (CCO) Joe Evan, a former Drug Enforcement Administration official, “surprised some colleagues by spitting tobacco juice into a cup while in the office”; perhaps they are just anti-tobacco. However even such simple messaging techniques as screen savers with the AML reminders to “Ask The Right Question” have been derided at HSBC. Even the head of the bank’s AML compliance was quoted as having said “But money laundering happens in financial institutions. How do you reconcile appetite with reality?”

Now contrast this incessant whining with the recent change in tactics by one of the few remaining financial meltdown enforcement actions left, that being the Department of Justice’s (DOJ) case against Standard & Poor (S&P). In an article in the New York Times (NYT), entitled, “S.&P. Nears Settlement With Justice Over Crisis”, Ben Protess reported that S&P has been accused by the DOJ “of awarding inflated credit rating to mortgage investments that spurred the financial crisis”. S&P initially had aggressively fought the lawsuit, Protess noted, and attacked the government case in the press. S&P had hired noted First Amendment lawyer Floyd Abrams to go on television to claim to link “the federal investigation to S.&P.’s decision in 2011 to cut the United States credit rating below the top grade of triple A.” Unfortunately for S&P they could not prove that defense, even after extensive discovery on the issue. But their tune has recently changed, “After S.&P. mounted a two-year campaign to defeat civil fraud charges — portraying them as retaliation for cutting the credit rating of the United States — the ratings agency is now negotiating with the Justice Department to settle the case, according to people briefed on the matter.”

But the real problem for S&P is that they could have settled two years ago, before suit was filed. Protess said, “The government offered S.&P. roughly the same settlement size, $1 billion plus, before filing suit two years ago. If S.&P. had embraced that offer, instead of fighting accusations that it abused its role as a rating agency, it could have walked away without accumulating tens of millions of dollars in legal fees.” Moreover, by not settling pre-suit, S&P has subjected itself to the new reality of settling suits with an admission of liability, never good for those pesky follow-on shareholder actions. Further, “more than a dozen state attorneys general are demanding that S.&P. pay more than $1 billion to settle the case, the people briefed on the matter said, a penalty large enough to wipe out the rating agency’s entire operating profit for a year.”

Are banks and rating entities inherently arrogant or do they simply face that age-old foe that many people face today, dog excrement? As Dimon said in his earnings call, and was quoted in the FT’s Lex Column, sometimes “even JP Morgan will step into it on occasion”.

If you want to avoid stepping in it this weekend, I suggest you settle in and watch some old Marx Brothers movies.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2015

January 15, 2015

The Marx Brothers Mirror Scene: Absurdity and Comments by a SEC Commissioner

Mirror SceneI continue my Marx Brothers’ themed week by today looking at what I and many others believe to be their most cherished routine: the Mirror Scene. Danny Leigh, in his article in the Financial Times (FT), entitled “Souped-up comedy”, wrote, “The set-up is deathlessly simple. Fredonia’s President, Groucho in nightgown and cap finds Harpo, a spy from neighboring Sylvania, in his bedroom. They chase each other down some stairs and face off in front of each other, dressed identically. Harpo, the spy and intruder pretends to be Groucho’s reflection, and the two brothers spend the next three minutes locked in a mad dance of mimicry. The result is flawless, the kind of ecstatic comedy in which the world outside the cinema simply falls away. Variations on the skit had been performed by others before but the brothers raised it to undreamt absurdist heights, claiming it for ever as their own.” So you have Pinky (Harpo), dressed as Firefly (Groucho), pretending to be Firefly’s reflection in a missing mirror, matching his every move—including absurd ones that begin out of sight—to near perfection. In one particularly surreal moment, the two men swap positions, and thus the idea of which is a reflection of the other. The scene is absolutely silent until Chicolini (Chico), also disguised as Firefly, enters the scene and collides with both of them and sound resumes.

Although its appearance in Duck Soup is the best-known instance, the concept of the mirror scene did not originate in this film. Max Linder included it in Seven Years Bad Luck (1921), where a man’s servants have accidentally broken a mirror and attempt to hide the fact by imitating his actions in the mirror’s frame. Charlie Chaplin used a similar joke in The Floorwalker (1916), though it didn’t involve a mirror. This scene has been recreated many times from entertainment as diverse as Bugs Bunny cartoons, to the televisions series Gilligan’s Island and even in a The X-Files episode. Harpo himself did a reprise of this scene, dressed in his usual costume, with Lucille Ball also donning the fright wig and trench coat, in the I Love Lucy episode “Lucy and Harpo Marx”.

I find it to be absurdist comedy at its ultimate height. To this day, I almost cry I laugh so hard when I see that scene. While you may not find it quite as funny as I did, most probably one thing you will also not find funny is an ongoing debate in both academia and in legal circles involving a question on corporate governance as reported in the New York Times (NYT) in the Dealbook column by Andrew Ross Sorkin, in an article entitled “An Unusual Boardroom Battle, in Academia”. The question staggered elections of corporate board members or whether the entire slate of Board members be elected, up or down, each year.

On the side of full Board, up or down voting is Professor Lucian A. Bebchuk, a Harvard Law School professor who has long researched corporate governance issues and has been an outspoken advocate for increased democracy in corporate America’s boardrooms and his group, the Harvard’s Shareholder Rights Project. Professor Bebchuk believes staggered election of Board members “silences shareholders, entrenches management and makes it less likely that suitors or activists will emerge, depressing valuations.”

On the other side of the dispute are Daniel M. Gallagher, a member of the Securities and Exchange Commission (SEC), and Joseph A. Grundfest, a professor at Stanford Law School and a former SEC commissioner, who co-authored a paper entitled “Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors.” The paper is in opposition to Bebchuk’s position. Sorkin observed that “Mr. Gallagher and Mr. Grundfest suggest that companies are dropping their staggered board structures — and shareholders are voting to eliminate them — based, in part, on faulty research by Harvard’s Shareholder Rights Project. Worse.” But here is the kicker and what moves this rather arcane academic debate into the realm of the absurd. “They suggest, Mr. Bebchuk’s project committed fraud by not fully disclosing the extent of contradictory research, which they say is a “material omission” by S.E.C. standards.” Yes sports fans, a sitting SEC commissioner suggested in writing that Harvard had engaged in a securities law violation.

As Sorkin noted, “there’s the fundamental issue of whether a sitting member of the S.E.C. should be writing such an incendiary paper in the first place.” Sorkin quoted an email comment made by Professor Robert J. Jackson Jr., from Columbia Law School. Jackson wrote to Sorkin in an email “All should agree that it is wildly inappropriate for a sitting S.E.C. commissioner to issue a law review paper accusing a private party of violating federal securities law without any investigation or due process of any kind. This is a striking, and as far as I know unprecedented, departure from longstanding S.E.C. practice.” Jackson went on to say “Imagine if a sitting S.E.C. commissioner wrote a law review article accusing Goldman Sachs of violating federal law without any S.E.C. investigation of the matter — Goldman and their counsel would quite rightly be outraged.”

Near the end of his article, Sorkin stated, “There are many opposing views on the paper. But here’s one way to think about it: It was a bad precedent for Mr. Gallagher to involve himself in a paper that raises the possibility of fraud in the field he regulates without the due process of a legal complaint. Mr. Grundfest could have written this provocative paper on his own, though it might not have attracted the same amount of attention within the industry.”

I would ask you to imagine if any of the Department of Justice (DOJ) attorneys who work in the Foreign Corrupt Practices Act (FCPA) area were to write an article, law review or other, that said not only is an entity’s position on interpretation of the FCPA wrong, its interpretation in practice is a FCPA violation. Do you think such corporation or entity would feel like they would get a fair shake from such prosecutors? Think any bias might exist going forward? While I have been one of the loudest advocates for the DOJ making more information on its FCPA declinations more public, SEC Commissioner Gallagher’s paper, demonstrates a very good reason for the DOJ not making any such information public: i.e. due process and fairness. Just as bad facts can certainly lead to bad law, this action by a sitting SEC Commissioner to even imply that an entity violated US Securities Laws in an article is not a road that we want to begin to go down.

For a clip of the famous Mirror Scene, click here.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2015

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