Privacy — Enter the FTC

June 29, 2005 | Filed Under Regulation, Governance 

Another alphabet-agency jumps into the pool regarding lapses in customer data security.

Just when a GC may think this issue mostly involves financial institutions, in comes the Federal Trade Commission. In a case involving BJ’s Wholesale Club, the FTC has reached a settlement that, among other things will require:

… BJ’s to implement a comprehensive information security program and obtain audits by an independent third party security professional every other year for 20 years.

Twenty years! The Economist noted this development, and wondered whether “Boards should pay as much attention to these IT operational risks as they do to other operational risks in the firm…”

The FTC press release goes on to say:

The FTC alleges that BJ’s failure to secure customers’ sensitive information was an unfair practice because it caused substantial injury that was not reasonably avoidable by consumers and not outweighed by offsetting benefits to consumers or competition.

More on the the FTC action is available here, in a recent BJ’s 10-Q filing (at item #8), and in Information Week.

If customer information “dataspills” go beyond violations of specific privacy statutes and become characterized as unfair competition, the universe of potential plaintiffs facing a company–formerly just the customers involved–may now include its competitors.

The GC and the SEC

February 21, 2005 | Filed Under Regulation 

The weblog Deal Attorney notes that the SEC is increasingly targeting general counsel in certain enforcement proceedings. It points to a detailed report from the Fried Frank law firm that highlights a recent matter involving Google and its general counsel. A consent order has settled this dispute, without any admission of liability.

Legal Director also covers this story (30 day link). The article quotes SEC head of enforcement Stephen Cutler, who has noted that lawyers have been named in more than 30 of the SEC’s enforcement actions in the previous two years. This resulted from the SEC’s policy of focusing its limited resources on policing ‘gatekeepers’ to the capital markets, defined as:

“the auditors who sign off on companies’ financial data; the lawyers who advise companies on disclosure standards and other securities law requirements; the analysts who warn investors away from unsound companies; and the boards of directors responsible for oversight of company management”.

The Fried Frank report concludes somewhat ominously:

the Commission’s recent efforts confirm that securities lawyers, like accountants, will be held rigorously to high standards of conduct. Securities lawyers occupy a sensitive point in the regulatory process. By increasing its pressure on them, the Commission continues to reinforce the messages of its regulatory agenda and to leverage its enforcement capabilities.

Check your D&O policy and bylaws on indemnification…

Fairness Opinions

December 29, 2004 | Filed Under Regulation, Governance 

Today’s Wall Street Journal has an interesting article (reg req’d $) about whether certain fairness opinions rendered in M&A transactions are really independent or fair. The J.P. Morgan/Bank One deal was among those profiled:

In the biggest U.S. merger this year, J.P. Morgan Chase & Co. announced last January it would acquire Bank One Corp. To assure investors it was paying a fair price, J.P. Morgan told them in a proxy filing it had obtained an opinion from one of “the top five financial advisors in the world.”

Itself.

The in-house bankers at J.P. Morgan endorsed the $56.9 billion price — negotiated by their boss — as “fair.”

It also looks like the NASD will weigh in; it has reportedly launched an enforcement inquiry:

into conflicts that can arise with fairness opinions. The NASD is also seeking comment on potential new rules requiring more disclosure of the financial incentives that bankers and their clients have for endorsing deals.

J.P. Morgan undoubtedly had the best legal minds review and approve these arrangements. One reality of corporate governance today, however, is that certain things look different later when described on page one of the Wall Street Journal.

Professor Ribstein also covers this.

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