New Year’s Resolutions

Speaking of compliance, here are two businesses that ended the year resolving charges they violated U.S. trade sanctions by dealing with blocked countries, people, or entities.

Both cases show how the government enforces its sanctions regime, and they illustrate how an ounce of prevention can beat a pound of cure. Both cases were brought by the Office of Foreign Assets Control, or OFAC, which is an agency within the Department of Treasury.

The first case concerns a dental-supply company that agreed to pay $1.2 million to settle charges that it violated the Iranian Transactions and Sanctions Regulations. The government alleged that, from the end of 2009 through the middle of 2012, the company exported 37 shipments of dental equipment to distributors in other countries knowing, or having reason to know, they would end up in Iran.

According to the government, it wasn’t an egregious case because the exports were likely eligible for a license if the company had only applied for one. But it didn’t, and that ended up costing it a lot more on the back end.

The second case concerns a luxury-goods company that agreed to pay $300,000-plus to settle charges that it violated the Foreign Narcotics Kingpin Sanctions Regulations. The government alleged that, from October 2010 to April 2011, the company exported four shipments of jewelry to a Hong Kong entity that was on OFAC’s list of blocked persons and interests. The blocked entity’s name and address squarely matched those of the ship-to party, but the company didn’t flag the transaction before shipping the goods.

According to the government, this wasn’t an egregious case either, but if you add up the settlement costs and legal fees, it sure does eat into the margin.

Happy 2018, California

Let’s celebrate because the new year marks the dawn of the state’s licensing program for commercial, recreational cannabis. It follows the voters’ approval of Proposition 64, the Adult Use of Marijuana Act, which we wrote about last year.

But hold your horses, too, because it’s just the beginning. Earlier this month, the state launched its online application system, and two weeks ago, it issued its first batch of temporary licenses to retailers, distributors, microbusinesses, and testing laboratories. These licenses go effective January 1 and allow previously accredited businesses to do business while they complete the application process.

So far, only a few cities and counties are ready to go on January 1. Others, like Los Angeles, have been getting ready and will start taking applications within days or weeks. Some have opted out entirely. And most haven’t decided one way or another.

It’s a work in progress, then, and the best advice for now is to cover your backside. Run your business by the book, and invest in high-quality legal research, analysis, and representation. Invest in compliance, in other words, because it’s the only sustainable way in the end.

In the meantime, seven more states are poised to join the growing majority that has chosen to legalize, regulate, and tax medical or recreational pot.

So it may just be the beginning, but the new year looks bright.

SEC Chair Offers Advice on Bitcoin and Its Ilk

This week, the chair of the U.S. Securities and Exchange Commission weighed in on crypto-currencies as well as ICOs or initial coin offerings. With the price of bitcoin nearing $20,000, it probably comes at the right time. You may have been wondering yourself: What are the rules for this stuff? Are they being followed? And what are the risks in these markets?

Here is a summary of his advice for both Main Street and Wall Street.

For Main Street

These are the folks at home who may be tempted to jump on the bandwagon.

  1. Understand that, for now, it’s the Wild West out there. The SEC hasn’t approved any crypto-currency-related funds or products for listing and trading, and no one has registered an ICO with the Commission. Don’t let anyone today tell you otherwise.
  2. Do your homework. If you choose to invest in these things, ask plenty of questions and demand clear answers. The Chair’s statement includes a list of sample questions to consider. Be especially careful if a pitch sounds too good to be true or you’re pressured to act quickly.
  3. Understand that these markets cross borders, so your money may travel overseas even without your knowledge. Once there, you may not ever be able to get it back.

For Wall Street

These are market professionals like brokers, dealers, lawyers, advisers, accountants, and exchanges.

  1. Although ICOs can be effective ways to raise money, you have to follow the securities laws if it constitutes an offering of securities. So ask yourself: Is this offering a security? Is it an investment contract? Is it, in other words, an investment of money in a pooled venture that expects to derive profit from the efforts of others? If you’re not clear on this then you need a lawyer because the Commission will look past the form of a transaction to its substance. So just calling it a currency doesn’t settle the question. We blogged recently about this fact-intensive inquiry here.
  2. If you handle transactions in crypto-currency, you should treat them as if cash were being handed from one party to the other. You should know your customer and mind anti-money-laundering laws whenever you allow payments in crypto-currencies, allow their purchase on margin, or otherwise use them to facilitate securities transactions.

New DOJ Policy on Foreign Business Bribery

On the eve of the fortieth anniversary of the Foreign Corrupt Practices Act, the Justice Department has unveiled a policy that strongly encourages businesses to self-report any violations to the government on their own.

Those that do can presume that the government won’t prosecute them criminally as long as they fix the problem timely and cooperate fully. That’s probably good for shareholders and boards of directors, among others, but less so for managers, executives, or foot soldiers who get thrown under the bus.

The new policy was announced last week at a conference on the FCPA. It’s been added to the official policy manual for federal prosecutors. It takes most parts of the government’s recent pilot program and makes them permanent.

What does it mean to self-report voluntarily, cooperate fully, and remediate timely? It means a company must report a violation promptly and before the government gets wind of it. Also, it must share everything it knows about anything and anyone involved. Then it must create a sound compliance program based on its size and resources. And it must return all the money or property that’s subject to restitution, forfeiture, or disgorgement.

The government may still prosecute if aggravating factors make the business more culpable. That may happen, for example, if executive management was involved, or the conduct was widespread, or the company made a lot of money from it, or it’s happened before.

But even then, if the business has voluntarily self-reported, fully cooperated, and timely remediated, the government will recommend a criminal fine that’s at least 50% lower than it otherwise might be (unless the business is a repeat offender). Also, if the business has created an effective compliance program, the government likely won’t require the appointment of an outside monitor.

Finally, if a business doesn’t self-report but later cooperates and remediates fully, the government will recommend a fine that’s at least 25% lower than it otherwise might be.

DOJ Will Clear Out Weak Qui Tam Cases

In a surprise announcement, the U.S. Justice Department says it will start moving to dismiss weak whistleblower cases brought under the False Claims Act rather than let them run their course. The announcement was made at a recent conference by the Director of Commercial Litigation for the Fraud Section of the Department’s Civil Division. I wasn’t at the conference, but this gentleman was, and he sheds light on the new policy.

Up to this point, the government has let whistleblowers litigate cases on their own even when it didn’t think they were any good. As we’ve explained before, the government always gets a first look at these cases. If it likes what it sees, it will take over the case and throw its weight behind it. If it doesn’t, it will decline to intervene but allow the case to proceed if the whistleblower (and his or her lawyers) is willing to do the work. Often, the government’s decision not to intervene will prompt whistleblowers to dismiss the case themselves. But now, it seems, the government will sometimes make that decision for them.

Don’t Keep The Change, Doc

Meaning, don’t just pocket the difference when the government overpays you for healthcare goods or services.

Recently, a medical group agreed to pay $450,000 to settle allegations that it refused to return $175,000 in overpayments that it received from federal healthcare programs like Medicare and Medicaid. Here’s the government’s press release.

The overpayments at issue tend to happen in medical practices when two insurers share responsibility for a payment, and one pays too much.

But the thing is, you have to return the surplus, whether it’s big or small; you can’t keep it, and you can’t dawdle, either. If you do, you may incur significant liability under the False Claims Act, as we’ve explained before.

The rule is that you have sixty days to return the money once you know (or should know) about the overpayment. For more on the 60-day rule, see here.

In this case, the government alleged that the medical group failed to return the money despite repeated warnings, until it learned the Justice Department was investigating. Apparently, it didn’t know that one of its employees had filed a whistleblower lawsuit, which the government joined and took over. (For more on that process, see here.) The former employee will receive $90,000 of the settlement proceeds, or twenty percent.

This isn’t the first time the feds have moved to enforce the 60-day rule, and it sure won’t be the last. They’re just getting started.

California’s New Law of Fair Shakes

Whether you’re an employer or an employee, take note.

Earlier this month, California enacted the Fair Chance Act.

This means that, beginning next year, many employers can no longer ask about or look into criminal convictions until they’ve decided a person is right for the job. That means they can’t ask about convictions anymore on a job application. It also means they can’t run a background check until they’ve made a conditional offer of employment.

Also, once employers make a conditional offer and run someone’s record, they can’t deny the job based on a conviction unless they first analyze the relationship between the job and conviction. What kind of job is it, after all? Does it have anything to do with the conviction? How long ago was that, anyway? There must be a “direct and adverse” relationship between the two to justify the decision.

Employers don’t have to share their analysis with applicants, but they must advise of their decision in writing. When they do, they must identify the relevant conviction, attach a copy of the report they ran on the person, and explain that he or she has at least five business days to show why the report isn’t accurate or why they should still get the job based on rehabilitation or mitigating circumstances. Employers must consider any evidence they submit. If they still decide to deny the job, they must let the person know in writing, refer him or her to any existing procedure they have for challenging it, and give them notice of the right to file a complaint with the Department of Fair Employment and Housing.

What hasn’t changed? Employers still can’t consider arrests that didn’t lead to conviction, unless charges are still pending or the arrest was for certain drug or sex offenses and the job is in a healthcare facility that requires access to drugs or patients. Nor can employers consider convictions that have been sealed, dismissed, or otherwise expunged.

The law will apply to employers with five or more employees. It exempts those who must conduct background checks by law. For more on the new law and its passage, see here and here. For the text itself, see here.

When It Sounds Too Good To Be True

Last week, it was the SEC; this week, it’s the FTC or Federal Trade Commission. That’s the agency that, among other things, enforces federal laws against unfair or deceptive business acts or practices, including false advertising.

So what happened?

The FTC settled a lawsuit against a chiropractor who sold a “breakthrough” weight-loss system for $1,895 a pop. He also licensed and franchised the system to other chiropractors and professionals to sell.

Although the defendant didn’t admit or deny the allegations, he agreed to stop making the following claims about his system:

  1. That you could lose twenty to forty pounds, or more, in forty days.
  2. That you could do that safely and without cutting calories or exercising.
  3. That you could burn between 2,000 and 7,000 calories per day.
  4. That you could treat diabetes, psoriasis, and other conditions.

I’m no doctor, but as far as I know, it’s not possible to lose that much weight or burn that many calories without starving yourself or exercising like you’re on meth. According to the complaint, the people who bought the system were told—only after the fact—to eat about 500 calories per day. To put that in perspective, the bowl of cereal you had this morning was at least 200 calories. Good luck getting through the rest of the day.

The defendant also agreed to pay $2 million in refunds; to pay $30 million more if he violates the settlement agreement; to stop presenting friends, relatives, or business partners as satisfied customers who endorsed his system; and to stop using a non-disparagement clause in his contract that punished people for criticizing the system.

Buyer, beware: All that glitters ain’t gold, and there’s no substitute for good nutrition, exercise, and sleep.

SEC Lights Up Another Cannabis Company

In what may be a sign of maturity for the industry, the Securities and Exchange Commission has sued another marijuana-related business for violating federal securities laws.

Last month, the SEC charged a California-based company and two former executives with a classic pump-and-dump scheme. First, the Commission says, the defendants touted phony revenue to drive up the price of the company’s stock. Then they unloaded their own shares for millions of dollars. According to the complaint, much of the revenue came from a series of sham transactions with a shell company that the executives controlled. So the SEC charged them with fraud as well as offering and selling unregistered securities.

The company and one of the executives have settled the case without admitting or denying liability. The executive agreed to pay more than $12 million, among other penalties.

Meanwhile, the company has turned over a new leaf, so to speak, overhauling its management, business model, and board of directors.

The SEC will continue to scrutinize the market, however, which highlights something cannabis companies should already know: get your ducks in a row, and run your business the right way.

Puff and pass if you want, but don’t pump and dump.

Securities Fraud: But Was It Even A Security?

What is a security, anyway? The California Court of Appeal tackled that question recently in a case about a loan between friends.

A good starting point is that the law considers a security to be an investment contract, but there’s more to it than that. You may be familiar with common examples like publicly-traded stocks and bonds, but sometimes it’s a tougher call.

California law recognizes two tests to determine whether a deal or transaction is a security. One is the state’s risk-capital test, and the other is the federal Howey test (from a U.S. Supreme Court case). California courts may apply either one to your case, their goal being to protect the public from shady investment schemes.

The narrower risk-capital test asks whether you indiscriminately solicited passive investments from the public at large. A passive investment is one whose success depends mainly or exclusively on the efforts of people other than the investors.

The broader federal test simply asks whether you solicited people to invest passively.

In this case, the defendant had persuaded a guy he knew to invest in his land-development deal. The investment was a $280,000 promissory note that promised to pay out as follows:

  1. If the land were sold, the guy would share in the net profits from the sale.
  2. If the land were developed, he would receive one residential acre of his choosing.
  3. If neither event took place within one year, he could call the note and get interest on top of principal at a rate of ten percent.

But things didn’t exactly pan out, and some years later, the local district attorney’s office charged the defendant with securities fraud.

The trial court partly dismissed the case because it ruled that the promissory note wasn’t a security but a simple loan.

The government appealed that ruling, but the appeals court agreed. Even under the federal test, the note wasn’t a security because it was carefully negotiated between the parties, and it called for repayment whether the venture succeeded or not. The defendant had even personally guaranteed it.

So the case could’ve been a breach of contract, or it could’ve been a fraud.

But it wasn’t a securities fraud because the note wasn’t a security.

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