Terra Extraneus

The United States Securities and Exchange Commission just listed its laundry list of money laundering statutes. The list is designed to allow corporate compliance officers, especially in the securities industry, to be able to quickly run the check list on transactions. Hat tip to Investment News, in an article by Aaron Siegel. The list contains twelve specific statutes, a catch all category of links, and a “contacts” category. The list is embedded with links to statutes and other source materials.

While this list is very helpful to lawyers and researchers, I’m not so sure it is useful to compliance personnel trying to make decisions on the fly. Siegel reported that the SEC claims the list was developed for their examiners, but I suspect it was developed to help their examiners fill in the blanks on their examination reports. But, be that as it may, it is still a useful list.

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Investment News reported on the federal sentencing of a college student for 3 and ½ years to do and a restitutionary fine of $4.18 million for collecting investments for a non-existent hedge fund. His mother helped him and she was sentenced to two years for wire fraud. Her defense was that her son made her do it. The kid pulled it off posing as a wealthy Turkish heir.

This type of thing happens every day in America. The more typical scenario is that a fledgling and usually floundering company is obtained in a reverse merger with a shell public company. The public shell is usually owned or managed by an entrepreneurial sort and the fledgling start up company is usually desperately and unsuccessfully searching for venture capital. The fledgling start up company could be a company with a new technology it is trying to bring to market, or more likely, it is an idea in search of a metamorphosis from dream to reality. In either case, the company usually has no capital or is very thinly capitalized, cannot quite make a case to venture capitalists, but now has shareholders that either need an exit strategy or are unwilling to wait until the idea matures into product.

In these situations, it is difficult to separate the pump and dump schemes from the legitimate search for capital. This problem is not limited to penny stocks sold on the bulletin board, but happens all over the market. It is nothing to see, as it was at the beginning of the decade and is once again, an internet company with few hard assets valued at hundreds of dollars per share while a company with billions of dollars in assets, like a bank or insurance company, is valued at share prices in the tens of dollars. The “market” is often not rational.

When trying to determine whether the investment is bona fide, common sense is the first line of defense. If the proposed product sounds impossible, it probably is impossible under present technology. Does the company merely have a good idea in search of a way to reach this plane of reality, or is there a real plan to bring the idea to concreteness and then to market? While it is true many of today’s financial titans started in somebody’s garage just a few decades ago, the question is, what is keeping this company in the garage? If the company, or the person promoting the stock, cannot or will not disclose the reason mainline venture capitalists are not interested, then it is unlikely the company can or will disclose the truth about much else, especially to stock purchasing investors.

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The decision issued by the Supreme Court of Oklahoma on April 3 in Hagen v Watts Public Schools (Adair County), 2007 OK 19 at www.oscn.net, left me unsettled. I served as a member of the board of a public school district for four years and I have represented school districts as legal counsel in several instances. The Supreme Court should never have been involved in this and the opinion, especially the dissent, should never have been published. The statute that made it all happen, the Teacher Due Process Act, should never have been passed. The Teacher Due Process Act is going to make Oklahoma look bad and the courts that try to administer it are, in the long run will find themselves in a no win situation. This opinion is a perfect example of it all.

In this case, Hagen was a special education teacher. He slapped one of his special needs students. This slapping incident reminded me of the silliness during the Second World War that landed atop General George A. Patton. The school district fired Hagen. Hagen appealed the firing to the district court, although he admitted the facts of the incident, and the trial court ordered him reinstated. The school district appealed, why that was a priority in their budget will forever remain unknown, and the Oklahoma Supreme Court affirmed the trial court. The Supreme Court was not unified, however, and there was a written dissent.

The slapping of any student by a teacher or school official is not a good thing. But, in all likelihood, it does not rank as a heinous crime. It most likely can and should be dealt with in the confines of professional discipline, counseling, and training. What loss of perspective, what loss of emotional control, caused the school district to turn it into a firing and then into an appeal to the Supreme Court of Oklahoma? The dissent in the Supreme Court’s opinion suffered from the same loss of perspective and emotional control as the school board. It is rare to see such an emotional outburst from a Justice of any Supreme Court escape out into the public sector. The dissent defined the slapping incident as “assault and battery,” “ugly facts,” “mental and physical abuse” and “this teacher’s conduct was abusive.”

According to the dissent, the child’s brother and grandmother both testified they would have no trouble returning the child to the teacher’s classroom and admitted under oath that was sometimes the only to break up a tantrum. Apparently, somebody still had some perspective, even if it was not the Supreme Court dissenter or the school board. But, wait!! The Supreme Court dissenter did not like those folks either because he demanded to know why state child abuse authorities had not been called out to investigate their admitted willingness to use a slap now and then to control this child’s behavior. That such a comment was a bit of a foul ball should have seemed obvious to the Justice. For all the Justice knew, child abuse authorities had investigated and with a sense of perspective agreed a slap might be better than letting the kid run out into traffic in the middle of a tantrum.

Indeed, the dissent wanted to define “abuse,” even though it was not defined in the Teacher Due Process Act, in the same manner as in the “child abuse” statutes. The “child abuse” statutes of Oklahoma were endowed with a sense of perspective because “abuse” under those statutes must include, according to the footnotes of the dissent, an “injury.” The “injury” can be physical or mental. What is the “injury” that results from a slap? Either the word “injury” has no meaning, or it has to mean clinically observable and treatable damage. Clearly, a mere slap does not result in clinically observable and treatable damage. But, it does not matter to the dissent that there was no actual “injury,” because to the dissent, all harm no matter how slight is abuse and thereby damnable.

The trial court tried to re-inject perspective that had been lost by the school board and the majority of the Supreme Court did the same. But, neither will be thanked for that by those with no perspective, and ultimately, both will be asked to decide every personnel issue that arises in a school district under that silly statute.

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I noted Jim Calloway’s post of his pick for a weblog of the week and noted his comments about continuity of law bloggers, and their tendency to burn out quickly.

Having experienced this myself at www.terraextraneus.com, my solution was to bring on an “editor” and co-contributor. I am a solo practitioner in an office sharing arrangement with a former partner from our prior lives with another firm. However, I was fortunate enough to run across an old friend that was a former newspaper reporter and newspaper editor in several small newspapers in Oklahoma, Terry Hull. He has worked in a law office as a paralegal for four years, too. I engaged him to act as my editor in chief and co-contributor.

Serious law bloggers will either eventually form virtual law firms in which they blog together, some already have, even if they do not practice together, or they will engage web consultants like Mr. Hull to assist with editorial and content contribution. I have chosen the latter. Busy lawyers, especially trial lawyers like myself, will have no choice. I am often out of state in trial and simply do not have the time when I’m in trial to do anything with it.

Terraextraneus is being redesigned into a pure law blog, a process we hope to have finished shortly. It was a mixed bag before, reflecting varied interests, but I have decided to participate at least in one other blog to address those interests.

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Investment News reported that New York’s highest court granted absolute immunity to multi-billion dollar MetLife, Inc. for filing a U-5 termination statement. In the retail securities industry, broker dealers must file a form U-5 with the Central Registration Depository operated by the National Association of Securities Dealers, Inc. every time a registered representative (persons that can sell securities to the public) departs from their employment. The form U-5 must contain the employer’s version of the reason for the termination.

In Rosenberg v. MetLife, Inc., the United States Court of Appeals for the 2nd Circuit certified a question from one of its cases to the highest court of New York and inquired whether MetLife had absolute immunity from a defamation suit for its entry on the Form U-5. The New York high court held that MetLife was entitled to absolute immunity for its U-5 entry.

MetLife was immunized under the new doctrine even though MetLife stated for public consumption that its former employee was a “possible accessory to money laundering violations.” MetLife was not required to state whether its investigation established the accusation as fact or more than merely “possible.” Indeed, MetLife was not required to complete the investigation, no matter that its statement on Form U-5 might destroy its former employee, even if he was in fact innocent.

MetLife’s former employee was an Hasidic Jew and was hired by MetLife specifically for the purpose of reaching that community. The Hasidic Jews routinely relied on a free loan society to pay premiums, probably on variable insurance products that included securities investments in the variable accounts of the products, resulting in third party checks being used to pay premiums. MetLife, like most broker dealers, prohibits acceptance of third party checks for securities purchases. But, MetLife, knowing it was dealing with a cultural problem as much as anything else, did not set up monitoring procedures so that the loan society checks could be accepted. MetLife simply fired the employee.

Moreover, to conduct an actual investigation of the allegations in the Form U-5, MetLife could have retrieved copies of every check, inquired of some or even all of the policy owners and payors whether the check was part of a money laundering scheme. By so doing, MetLife could have avoided stating the former employee was a “possible accessory to money laundering violations.”

Of course, individual employees are fungible. Company profits, company costs, and company convenience are more important. MetLife’s policy owners and shareholders are probably well served by a management willing to destroy the life of an employee rather than spend the money to conduct and complete an investigation.

The New York high court noted that an employee still has a remedy. The employee can initiate legal proceedings to obtain expungement of the untruthful statements on Form U-5. Of course, because the out of work employee cannot collect any damages for defamation, the out of work employee has no way to pay for such a proceeding (the NASD filing fee would be hundreds of dollars and legal fees would likely be at least $7,500 for such a proceeding, and double or triple that amount on the coasts).

The CRD system was set up to protect the public from rogue brokers. In this instance, if the former MetLife employee was guilty of money laundering, MetLife apparently did not complete its investigation and amend the U-5 to remove the word “possibly,” and did not thereby inform the public of the risk. MetLife mostly likely did not refund any of the illegally accepted premiums. If the money was part of a money laundering scheme, should not MetLife be forced to disgorge the money or turn it over to the government? In the last analysis, all that happened was that MetLife was allowed to defame its former employee under a cloak of absolute immunity.

New York’s highest court has now issued a license to much of the industry to do the same. Does anyone think honestly they will refrain?

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