Tuesday, August 20, 2013


The Pension Fund of the Cement and Concrete Workers District Council filed suit against Hewlett-Packard (HP) and its former Chairman, President, and CEO Mark Hurd alleging securities fraud, on multiple occasions, because Hurd and HP issued and updated the corporation’s Standards of Business Conduct Brochure (SBC) in 2006, May 2008, and June 2010, and also approved and issued SEC Forms 10-K and 10-Q, including statements in the “Risk Factors” section that did not properly reveal the securities risks Hurd was undertaking with his relationship with Jodie Fisher. Not only did Hurd admittedly not inform his Board of the pornographic background of Ms. Foster, he also falsified expense statements relating to their relationship, allowed her to receive compensation for non-business purposes, and inappropriately used his position as CEO to attempt to pursue a romantic relationship with her.

The class action suit alleged that Hurd’s actions, ultimately, had an adverse impact on the value of the company stock which in turn reduced the value of the fund’s holdings. At issue was the question of the significance of the Standards of Business Conduct relative to security prices and/or shareholder value.

Judge Jon Tigar held, August 9, 2013, in a decision of the US District Court, Northern California, that HP’s Statements of Business Conduct (SBC) were inactionable corporate “puffery,” and that Hurd’s behavior, which might have contravened the mandates of those presumed ethical standards, did not rise to the level of a violation of securities law.  See the order dismissing at http://amlawdaily.typepad.com/hphurd.pdf (1)

Justice Tigar also cited problems with the Pension Fund’s filing relating to materiality, causation, and scienter. Were the SBC or “Risk Sections” material contributors to the rise in share value before Hurd’s behavior caused them to fall?  Did Hurd specifically make false or misleading statements that arguably inflated share prices? Did Hurd act with criminal intent? Did the Pension Fund show that Hurd’s falsification of expenses or compensation records actually caused share values to rise or fall?  In several respects, the Pension Fund had major legal challenges to meet and, failing to have done so successfully, their class action suit was dismissed.

The “puffery doctrine” is an interesting and new argument applied to Codes of Conduct.  Usually “puffery” in securities litigation is associated with “forward-looking statements” or advertising.  Corporations have been allowed some leeway in their use of “puffery” (i.e., held not accountable for them as factual statements) where it was obvious that the company was hyping itself rather than its share prices, specifically.  For a clear and full treatment of the “puffery doctrine,” see: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=887720 (2)

It appears to be OK for a Chairman, CEO, and President of a major US corporation to be playing fast and loose with a female contractor, fudge the expense and compensation statements, and yet also state that he and the company are “committed to being open, honest, and direct in all of our dealings.” According to Justice Tigar, this is OK because a Statement or Code of Business Conduct, first, applies dominantly to employees (not the chief executive officer) and, second, because securities law doesn’t know how to apply standards of fraud or criminal behavior based on actions contrary to a company’s Statement or Code of Business Conduct.  Apparently, actions contrary to a company’s Statement of Business Conduct are simply that – “actions not consistent with” company culture, values, or ideals.

Justice Tigar may have held that Codes of Conduct were empty puffs of air because if shareholders actually expected those ethical standards to describe the moral or behavioral foundation of corporate America, then maintaining that dual concept of reality (what they say and what they do) would drive shareholders stark raving mad.

Justice Tigar has pounded some pretty rusty nails into the coffin of corporate accountability by his extension of the “puffery doctrine” to codes of corporate business conduct, calling them essentially “aspirational statements.”  If his decision stands, perhaps other corporate statements might equally amount to “mere wishful future thinking,” including whistle-blower provisions, diversity statements or other ethical mandates.Shall we call all of these "Dream-Speak?"

Sarbanes-Oxley (SOX) Section 302 is securities law which states that corporate officers must sign and affirm the validity of financial statements which presumably should have included Hurd’s bogus expense statements. Corporations are "obligated" under SOX Section 406 to publish their Codes of Conduct and inform shareholder if ethics waivers have been granted. See: http://www.cooley.com/57376 for one legal interpretation. (3)

Perhaps the bottom line here is that the Cement Workers simply chose the wrong legal foundation for their case in a desire to elevate Corporate Codes of Conduct to a higher level of accountability than simple moral suasion.

The real tragedy is that we show so little regard for the fact that Codes of Corporate Conduct, those mandates for ethical behavior in Corporate America, have now been lumped together with the likes of Twitter and other marketing and social media as simple business hype.  Shareholders, management, leadership and the public all seem to ignore the implications and consequences of this trend.  Even the NACD might want to reconsider what this decision means for their goal of "restoring trust in corporate governance."



(2)  “The Best Puffery Article Ever” by David A. Hoffman, Temple University - James E. Beasley School of Law; Cultural Cognition Project at Yale Law School; Iowa Law Review, Vol. 91, p. 1395, 2006; Temple University Legal Studies Research Paper No. 2006-11.

(3) Cooley Law Client Alert: "The Sarbanes-Oxley Act of 2002: Final SEC Rules Regarding Codes of Ethics," 2/14/2004.

Friday, August 16, 2013

An Honor and A Pleasure

Recently, I had the pleasure (and the honor) of serving as a coach and “mock judge” for 15 entrepreneurs preparing for the 4th Annual Port Tech Los Angeles Entrepreneur Pitch Competition.  This was my 3rd year in this capacity, and I was joined by a stellar team of colleagues:

Rick Plumley – BrandZing (Marketing)
John Wentworth - The Wentworth Company (Recruiting)
Blair Schlecter – Law Offices of Blair Schlecter
Tom Taulli – Contributor at Financial Corner, Forbes; serial entrepreneur and author of several books on startups

The Port Tech LA Pitch Competition is exciting on several levels. First, the caliber of coaches – including Port Tech LA executives in residence, Stan Tomsic and John Dmohowski – is unmatched.  The opportunity of working with these gentlemen was a tremendous learning experience. The entrepreneurs were fortunate to be bombarded by the questions and insight of these very talented guys.

At the same time, the quality of talent in the candidate pool has never been better (and prior years’ talent was awesome, as well).  It is so exciting to hear presentations about creative, innovative business ideas that address substantive problems and to do so effectively.  Again, the charter of coaches is to advise and critique, so candidates often leave the room wondering where they stand.  The answer is that they stand on a solid foundation, and the business structure they are building will be beautiful.

But, don’t take my word for it.  The pitch-off of the finalists will be held September 10th from 2:00 to 9:00 PM at the Port of LA Administrative Building, 425 S. Palos Verdes Street, San Pedro, CA 90731.  The Port Tech LA Expo will be held September 11th (registration at 8:00 AM) where a host of exhibitors will display their “global technology solutions for ports and beyond.”  Keynote speakers will include Chairman Mario Cordero of the Federal Maritime Commission and City of Los Angeles Mayor, Eric Garcetti.

For further information, see www.PortTechLA.org – be prepared to be impressed!

Thursday, August 8, 2013

Ghaffari Speaks to Businesswomen(and men) at Duke Global Entrepreneursh Network

Elizabeth Ghaffari was guest speaker Wednesday August 7 at The City Club on Bunker Hill, Los Angeles, CA at an event titled, The Reluctant Entrepreneur, presented by a collaboration of the Duke Global Entrepreneurship Network (http://dukegen.com/) and the Duke Women's Forum. The evening provided an engaging discussion with a capacity-filled room of women and men who have started their own businesses and those who aspire to be entrepreneurs.

The event was coordinated by DukeGEN LA chair Jennifer Beall (Duke Trinity 2005 and founder of CleanBeeBaby LLC) and the Duke Women's Forum chair.

Whether looking to leave your corporate job to gain flexibility, or hoping to re-enter the workforce after starting a family, women tend to be slightly more risk-averse when it comes to taking the plunge of entrepreneurship. Ms. Ghaffari's stories of entrepreneurship from her own experience and that of the women she interviewed for her two books provided a wealth of information for current entrepreneurs to learn what it takes to get a new company off the ground. She also provided a wealth of women-specific resources for technical advice, mentoring, improving presentation skills, and building confidence to pursue opportunities and funding for high-growth start-ups and small businesses alike.