Audit, Compliance and Risk Blog

If bloggers and other social media posters need a reminder that they can be held accountable for their online musings, a $600,000 jury verdict against an online poster in Georgia is such an example.

Earlier this year, the US Department of Justice (DOJ) Fraud Section issued additional enforcement guidelines to US Attorneys, entitled “Evaluation of Corporate Compliance Programs.” DOJ’s US Attorneys perform these evaluations to weigh whether and how severely an organization might be charged for illegal conduct by directors, officers, or other employees. But individuals may be committing crimes to further the organization’s goals (remember Volkswagen’s recent use of fraudulent means to defeat emission requirements), or for their own purposes despite organizational efforts. For readers in organizations that aren’t encouraging criminal behavior, these guidelines provide important guidance to the design (and implementation) of effective compliance programs.

In Re Hornby Residences Ltd. (2017 BCSECCOM 17), the British Columbia Securities Commission had to determine whether a real estate development corporation and its principal had violated the BC Securities Act s. 57(b) prohibition against fraud in connection with the issuance of a security when the funds invested were used to pay the principal and other corporations controlled by the same principal, Brendan James Schouw. Schouw was a real estate developer and the sole director of Hornby, and of Grace Residences Ltd. and Homer Residences Ltd. Schouw was also connected with Drake Residences Ltd., although the Commission was not provided with information about its directors and officers.

The Federal Court of Appeal granted the Crown’s appeal from a Tax Court decision excusing two directors from liability for unremitted income tax deductions because there was evidence of their subjective intention to resign as directors (Gariepy v. Canada, 2016 FCA 236). Donna Elizabeth Gariepy and Sally Anne Chriss were directors of 1056922 Ontario Ltd. (“105”), a company whose affairs and business was managed by their respective spouses. The spouses had previously operated another company that had become insolvent and owed significant amounts to the Canada Revenue Agency. The spouses were aware that they could be liable as directors of the previous company for a two year period and prevailed on Gariepy and Chriss to become 105’s directors for those two years, despite their lack of involvement in the previous company and their reluctance to act as directors.

A recent appeal before the Manitoba Court of Appeal highlights the strictures placed on directors with respect to corporate opportunities. In Matic v. Waldner (2016 MBCA 60), the dispute concerned the opportunity to bid on a construction project for one of Manitoba’s First Nations. Ante Matic (Matic) and Paul Waldner (Waldner) agreed to purchase Springhill Lumber Wholesale Ltd. (Springhill) from its previous owners, with Waldner having a 70% interest, and Matic having a 30% interest and acting as Springhill’s general manager. Springhill’s main customers were First Nations, primarily in northern Manitoba. In addition to supplying construction material, Springhill would sometimes also act as general contractor for construction projects for the First Nations.

The Ontario Psychological Association is a not-for-profit voluntary association that aims to advance the practice and science of psychology through advocacy and education. Charlotte (Carla) Mardonet was hired by the Association in 1990 to manage its affairs and administer its finances and money. In Ontario Psychological Assn. v. Mardonet (2016 ONSC 4528 (Ont. S.C.J.)), the Court granted the Association’s motion to strike the part of Mardonet’s counterclaim alleging that the Association and its officers and directors owed Mardonet a “duty of care and a fiduciary duty which they breached as a result of their failure to provide her with the supervision, management, support and guidance that was part of their responsibility” and claiming full indemnity and contribution from the directors for any amounts that Mardonet might be liable to the plaintiff. The defendant’s counterclaim was issued in response to the plaintiffs’ lawsuit alleging the defendant had “misappropriated the funds [$1.6 million] and converted them to her own benefit and the benefit of her family members and friends,” with the assistance of her immediate family.

The Equal Employment Opportunity Commission (EEOC) administers and enforces most national anti-discrimination laws. As part of these responsibilities, EEOC issues formal regulations, and a host of less formal guidance documents – some directed to employers, some to employees, and/or some to the agency’s own personnel. In August 2016, EEOC reissued EEOC Enforcement Guidance on Retaliation and Related Issues (“the Guidance”), describing its approach to situations where employees claim they’ve suffered retaliation for asserting rights against discrimination under the laws EEOC administers, or even just for questioning workplace rules and situations.

In July 2014, President Obama issued Executive Order (EO) Number 13673, establishing a series of reporting and procedural requirements for federal contractors, inducing them to provide “Fair Pay and Safe Workplaces” to their employees. Some requirements are specific in the EO, while others were left for clarification by revisions to the Federal Acquisition Regulation (FAR), for contracts subject to these requirements. (I blogged about the EO here). None became effective in 2014, but instead they have awaited the FAR revisions. The revised FAR has been issued effective October 25, 2016, for appropriate contracts issued by the Department of Defense (DoD), General Services Administration (GSA) and National Aeronautics and Space Administration (NASA). The new requirements will be phased in, covering contracts and subcontracts for goods and services greater than $50 million immediately, and those greater than $500,000 effective April 25, 2017.

The Securities and Exchange Commission (SEC) has recently republished requirements for publicly listed “resource extraction issuers” to report payments they make to the U.S. federal government or foreign governments, related to commercial development of oil, natural gas, or minerals. These requirements fulfill one of many duties assigned SEC by the 2010 Dodd-Frank Act, this one codified in a new Section 13(q) of the Securities and Exchange Act of 1934 (1934 Act).

Managers who abuse employees and employers who tolerate such abuse may be subject to law suits and face significant financial penalties if their actions are found to constitute constructive dismissal.