Public Disclosure Defuses Scandal
Publish FOIA Response?
Technology motivates any publicly accountable organization (nonprofit, corporation, government) to adopt a radically open style of governance.
Owing to email, data logs, text messages and the like, the quantity of official business records ascends skyward, while the granularity of those records grows ever more fine. Detailed within these innumerable records are the secrets of the organization.
Stored this way, secrets are dangerous.
Keeping secrets –- or just withholding information -- is becoming harder and harder. Secrets and records can leak out by way of FOIA, spies, gossip, hackers, mistakes, e-discovery, whistleblowers, external surveillance, or just the natural course of events (sousveillance). In finance, a "trusted" banker will leak to a friend secrets about exotic instruments like credit default swaps, which are so new that the law has yet to establish "insider trading" rules applicable to them. Kara Scannell, "Trader's 'Nice Little Kiss' Tests Reach of Regulations," Wall Street Journal, March 31, 2010.
A leak is dangerous.
The leak is an invitation for an adversary to allege malfeasance. When a secret leaks, the adversary's storyline becomes (a) the organization possessed information that the public needed, (b) the organization wrongfully withheld the information and (c) the public now knows the information only because a righteous force external to the organization brought it to light.
For a smart organization, the best posture is to preempt the leaking. Before the leak happens, it should embrace transparency and publish (most all of) its records and activities onto the public Internet. It should expose its information to independent review and debate. Authors Tapscott and Ticoll admiringly call such an organization the naked corporation.
False Statement?
Take for example the story of the small, grassroots political action committee named “Take Back Your City,” which is promoting a vote by citizens against red light cameras in the municipality of College Station, Texas. Through freedom of information act, the PAC obtained extensive email records regarding the city government’s use of the cameras. In this trove of information, the PAC found what it believes is smoking gun evidence that the city is engaged in false, illegal political advertising about the effectiveness of the cameras. The city claims – in a flyer to be inserted in monthly utility bills -- that the cameras have reduced traffic accidents, but the PAC says an internal city email contradicts that claim. The PAC attached the email as evidence to a formal complaint it filed with the Texas Ethics Commission.
Whether this complaint will result in ethics sanctions against the city (or more particularly the city manager cited in the complaint), I don’t know. But the city’s defense would be easier had it been more open and transparent with its records. When it gave the email records to the PAC, it could have also posted them all on its web page as well. (Why not? The city had already gone to the trouble to compile them.) Then, when it prepared its flyer for the utility bills, it could have made its point about accident reductions while also saying, “Each citizen can draw his or her own conclusions. The city has posted on its web page exhaustive records regarding traffic cameras.”
Such openness takes the punch out of allegations that the city lied. Effectively, it enables the city to say, “We drew a conclusion from the data and told citizens our conclusion, but our statements to citizens were more than just that. We also made all the data available to the citizens and told them they could read it themselves and draw their own conclusions. We've opened the data to third party review.”
Investigating Leaks
Another lesson in transparency derives from the contrast in styles between the board of directors at Hewlett-Packard Company and the town council at Watertown, Massachusetts.
When HP saw that someone on its board was leaking company secrets, it assumed cloak-and-dagger
mode. It didn’t talk about the problem. It secretly hired private investigators to spy on members of its board as well as reporters in the media. The private eyes violated the privacy of the directors by hijacking their telephone calling records. AT&T discovered the hijacking and reported it to its customer, Tom Perkins, one of the directors targeted by the spying. The result was an embarrassing, debilitating scandal, with lawsuits, criminal complaints, an SEC investigation, a congressional investigation, and the end of career for two of the company’s top lawyers.
HP followed the old-fashioned, closed approach to resolving a crisis. But in this Internet age -- where clandestine activities are hard to keep clandestine -- that approach led to disaster.
Compare the youtube video below. It shows the town council dealing with the same problem as the HP board – insider leaks. The leaks pertained to closed-door deliberations about contracts. But rather than spying on its members in the dark of night, the Watertown council brought the issue into the open. It discussed the topic in public, video-broadcast session!
Notice that Watertown’s transparency immediately deters future leaks. The leaker has to be thinking, “My leaks are attracting negative attention. Now all the citizens are on alert, and some knowledgeable witness watching out there may come forward with embarrassing information that reveals me as the leaker. I’d best stop leaking.”
By being transparent, the council uses the Internet as its enforcer, and it avoids the risk of a HP-style scandal. Legal compliance meets modern public communications.
–Benjamin Wright
At the SANS Institute, Mr. Wright stresses that, in the wake of a data security incident, the delivery of a effective public message is as important as the technical and legal response.
illegal
October 09, 2009
September 14, 2009
Destroy Backup Tapes, Obstruct Justice?
Canada | Politician Emails Lost?
Which employee wants to be the target of a criminal investigation into whether public record e-mails were wrongfully destroyed? Observers of a political corruption lawsuit in British Columbia were shocked to learn that – while the well-known lawsuit was pending – IT employees destroyed backup tapes containing key e-mails by executives (i.e., government officials negotiating the sale of the then-government enterprise, BC Rail).
This kind of news sounds sensational in the press. The public naturally wonders what the justification was for erasing records. How much does it cost, citizens ask, just to retain some tapes a few more years? Did someone apply a record destruction policy as a convenient way to eliminate embarrassing evidence? Should the employees not have observed a "legal hold" (also known as "litigation hold") on the records?
Such destruction of records, during an on-going prosecution, could be grounds for a criminal investigation into obstruction of justice, said a local expert quoted in the BC news media.
Such destruction of records may also qualify as spoliation, worthy of sanctions by a court.
Easy to Write Policy | Hard to Follow
In the field of records management, it is easy to write a policy that says an enterprise will destroy records like email regularly, but will apply a "legal hold" when a lawsuit or investigation arises. However, in practice, to institute a legal hold is hard. It is hard for the responsible employees to understand when and where they need to apply a litigation hold.
Consider this issue from the perspective of employees in government agencies or other large enterprises. They don’t want to do anything illegal. But for an employee to stay fully informed of all pending lawsuits and investigations (even well-known ones) can be very difficult in practice. Many employees who have control over email records do not know all of the matters to which they many pertain.
Safer Course
From the perspective of employees, the safer course of action is to retain electronic records of executives generously, for a long time. Modern technology is causing the cost of email retention to drop. To retain a lot of e-mail is not as expensive as retaining a lot paper holding the same content.
–Benjamin Wright
Mr. Wright teaches e-records management and cyber investigations law at the SANS Institute.
June 22, 2009
Internet Terms, Contracts, Disclaimers
Financial Derivatives Yield Unexpected Incentives
Hedge Fund Public Disclaimer of Liability-Responsibility?
The World Wide Web is changing contract and commercial law practices. As a global medium for broadcasting terms, notices, conditions, and disclaimers, the web empowers business innovators preemptively to warn their trading partners of risk and to disclaim responsibility to prospective counterparties. Business innovators might therefore use the web to reduce their legal risk.
This blog post presents an advanced idea. To explain it will require space, so please hang with me as I lay out my argument. First I will explain how forward-thinking traders like hedge funds can be exposed to new legal liability. Then I will explain a method for containing that exposure, a method that could apply to more than just hedge funds and financial markets.
The legal desire to warn others and disclaim liability is acute in the cutthroat world of financial derivatives and structured finance. Derivatives (which are fueled by efficient digital
technology), especially credit default swaps (CDS), allow aggressive traders to assume unconventional, counterintuitive positions – positions that may surprise and even anger other parties. Three examples:
1. George Soros says some of the bondholders in the AbitibiBowater and General Motors bankruptcies perversely preferred to dissolve the companies rather than reorganize them on account of the bondholders’ positions in credit default swaps. “CDS are instruments of destruction that ought to be outlawed,” he proclaimed (emphasis added). Further, to hold both a bond and a corresponding CDS simultaneously “is like buying life insurance on someone else’s life and owning a license to kill him.” George Soros, “My three steps to financial reform,” Financial Times, June 17, 2009.
2. Some analysts complain about a Fidelity mutual fund that simultaneously held both bonds issued by the distressed Six Flags company and hedged CDS positions relative to those bonds. According to the analysts, the mutual fund turned down a reasonable restructuring offer for the Six Flags company. Strangely, the mutual fund preferred that Six Flags sink into bankruptcy where bondholders as bondholders would receive less. The Economist magazine goes on to observe, “By purchasing a material amount of a firm’s debt in conjunction with a disproportionately large number of CDS contracts, rapacious lenders (mostly hedge funds) can render bankruptcy more attractive than solvency.” “CDSs and bankruptcy: No empty threat,” The Economist, June 20, 2009, p. 79 (emphasis added to highlight that the Economist thinks the mutual fund's behavior was bad and presumably should be punished).
3. Amherst Holdings, a Texas investment firm, “ambushed” some big banks. The banks were counterparties to which Amherst had sold CDSs so that the banks could hedge their losses on bonds they owned representing defaulting mortgages. From the sale of the CDSs, Amherst and its associates earned multimillion dollar fees from the banks. Under the terms of the CDSs, team Amherst would have to pay handsomely as the losses from the defaulting mortgages were allocated under the bonds to the banks. But then Amherst executed a maneuver that prevented the banks from collecting under the CDSs. It used a little-known legal loophole to arrange (with the party that services the bonds) for the bonds to be paid in full! The banks were not prepared for this scenario. The result was that team Amherst did not have to pay as expected under the CDSs. On balance, Amherst made money, and the banks lost the substantial fees they had paid team Amherst for the CDSs. Some of the banks have complained to industry trade associations that Amherst acted improperly. Zuckerman, Ng & Rappaport, “A Daring Trade Has Wall Street Seething,” Wall Street Journal, June 12, 2009. Deutsche Bank averred that a maneuver like Amherst’s might be illegal.
In each of these three stories, counterparties or other investors felt the successful traders had acted unfairly, possibly deceptively and perhaps even illegally.
When large sums of money are lost unexpectedly, losers are prone to seek legal or political redress. They might try to claim, for example, that they were victims of fraud or that they were entitled to more disclosure of the other party’s intention, position, or strategy.
Web Notice to Pre-empt Complaints
But in anticipation of the possibility of such legal claims, unconventional traders might take steps long in advance. They might pre-empt such claims by issuing a general warning and disclaimer. They might conspicuously publish on their Web pages a notice like this:
“Notice. This is notice published by ABC Hedge Fund (the “Fund”) to the attention of any party that may have a direct or indirect relationship to the Fund’s investments, including but not limited to an investor, a counterparty or the issuer of debt, equity or other rights, interests or securities. Please be advised that the Fund may assume or take advantage of innovative, unconventional or surprising positions. While the Fund shall always stay in full compliance with all applicable laws, please be alert that the Fund may aggressively pursue trading or investment strategies that are novel or counterintuitive. Except to the extent the Fund otherwise explicitly agrees in writing, the Fund disclaims responsibility to (a) inform others of its intentions, trading positions or investment strategies, or (b) look out for the interests of others or divine their intentions, strategies or expectations.”
Publication of such a notice/disclaimer would create electronic records suggesting that prospective “victims” had been warned in advance.
How effective might such a notice be? Although the legal effect of any kind of disclaimer can rarely be certain for all circumstances, support is growing for the proposition that general-distribution legal notices can be delivered by way of publication on the web. Observe four angles on the topic: