SEC fines Zenefits and former CEO Parker Conrad

By Rujie Zhou, LL.M. Candidate 2018 | Posted on

On October 26, 2017, the Securities and Exchange Commission (the “SEC”) fined a Silicon Valley unicorn startup, Zenefits, and its former CEO Parker Conrad for “materially false and misleading statements and omissions” to the company’s investors regarding non-compliance with state insurance laws. This is a first for a Silicon Valley startup.

Zenefits and Conrad agreed to pay a combined nearly $1 million in fines to settle accusations. The company agreed to pay $450,000 and Conrad agreed to pay nearly $534,000, of which $350,000 represents disgorgement of ill-gotten gains and a penalty of $160,000. But Zenefits did not confirm or deny the SEC’s findings that they violated federal securities laws.

San Francisco-based Zenefits makes software for business to automate their human resources activities, but also acts as a health insurance broker. 90 percent of the company’s revenue comes from brokerage fees from their health insurance business.

The SEC claimed that Zenefits used inadequate compliance procedures under Conrad’s control, allowing employees to sell health insurance without the necessary state licenses. Conrad created and shared a program allowing employees to complete California licensing education requirements in fewer hours than the law required. Separately, in 2016, in a concession to investors, Zenefits slashed its valuation by more than half to $2 billion from $4.5 billion and investors agreed not to sue Zenefits. The SEC asserted that when Zenefits and Conrad raised funds in 2014 and 2015, they failed to adequately disclose their knowledge of these compliance lapses.

In contrast to the SEC’s broad authority to police behavior in public traded companies, it has relatively limited authority in the world of private companies; by law, it can only police misrepresentations and fraud in the sale of private company stock. Zenefits is the first case in which the SEC took action against a privately held Silicon Valley startup for misleading its investors. In the future, the SEC will keep a watchful eye on Zenefits.

SEC fines Zenefits and former CEO Parker Conrad

Dodd-Frank Liquidation Rules Should Not be Scrapped

By Sean Kiernan, J.D. Candidate 2020 | Posted on

The debate regarding how to effectively handle a failure of major financial institutions has reignited under the Trump Administration, prompting critical reaction from overseas regulators.  In April, President Trump ordered the Treasury Department to review current Dodd-Frank rules and determine if an improved bankruptcy process could be a better option. Some Congressional republicans agree that it is.

Under Dodd-Frank regulations, when a big bank fails, the FDIC will step in, unwind nonbank and other financials firms integral to it, and set up a fund, the Orderly Liquidation Authority, to pay for the cost. It would initially borrow from the Treasury Department and recover the funds by charging the bank.

Foreign regulators have threatened to impose higher capital requirements on overseas subsidiaries of American banks if the Dodd-Frank rules are scrapped.

Potential legislation should prevent panic and lack of liquidity throughout the entire American and overseas financial system. Given the FDIC’s ability to coordinate responses to multiple failing banks, Dodd Frank is the superior option. Replacing Dodd Frank bankruptcy rules with a revised bankruptcy process could mean bankruptcy judges would be assigned to one specific case and could not cross coordinate with each other.

Bankruptcy judges do not have the legal mandate, prior experience, nor the incentive necessary to maintain the stability of the financial system as a whole. Their legal responsibility is to adjudicate creditor’s claims against the bank, rather than minimize debilitating effects on the entire economy.

While the bankruptcy process can serve as a useful additional channel for resolving failing financial institutions, wide scale crisis demands regulatory authority to manage it. An outright replacement of the Orderly Liquidation Authority, as administered by the F.D.I.C., could severely undermine our financial system’s stability.

Fortunately, Wall Street’s support for maintaining the liquidation authority, Secretary Steve Mnuchin’s pragmatic policy approach, and threats from overseas regulators make the odds of major deregulation bleak.

Dodd-Frank Liquidation Rules Should Not be Scrapped (PDF)

Uber: Two Stock Prices but Not One Deal

By Brianna Tsutsui, J.D. Candidate 2019 | Posted on

The potential billion-dollar transaction between Uber and the Japanese investment company, SoftBank, was announced several months ago, though the deal has yet to close.

SoftBank’s Chief Executive Officer, Masayoshi Son, plans to invest $10 billion in the ride-sharing giant to become a significant shareholder in the company. The investment is comprised of a $1 to $1.25 billion investment, and the purchase of 14 to 17 percent of Uber’s shares.

There are two different sets of shares under this deal. Uber will issue new shares to sell to SoftBank for the first set, and SoftBank will acquire the second set from current investors through a tender offer.  However, not all current investors will be authorized to accept SoftBank’s tender. Eligible shareholders include (but are not solely limited to) current Uber employees and board members with at least 10,000 shares, who may sell no more than half of their total shares.

Although Son intends to buy the newly issued shares based on Uber’s most recent $68 billion company valuation, he is only willing to make an offer for the second set of shares based on a $50 billion company valuation. Because Uber is a private company, investors like SoftBank can in fact determine the company’s valuation on its own. This of course may have harmful effects on those Uber shareholders who desperately want to exit the scandal-labeled company and may be forced to sell their shares at this lower valuation in order do so.

The SoftBank deal, coupled with Uber’s recent change in its governance structure, may offer hope to those dissatisfied shareholders and investors unable to sell their stocks. In addition to SoftBank appointing two directors to Uber’s new 17-member board if the deal is completed, Uber’s board hopes to carry out an initial public offering by 2019. Investors in public markets have greater freedom to transfer their shares and valuations are much more transparent than in private companies.

Despite the delay and obvious drawbacks, Uber board member Arianna Huffington said she remains “optimistic” that SoftBank and Uber’s massive deal will soon close.

Uber Two Stock Prices but Not One Deal (PDF)

Recap: “BCLBE Leadership Lunch Talk – Funding Innovation”

By Hannah Rawdin, J.D. Candidate 2020 | Posted on

On October 23, 2017, the Berkeley Center for Law, Business and the Economy (BCLBE) welcomed Chris Young ‘05, Head of Legal at GoFundMe, for a Q&A discussion about his career, his position as a company counsel at a venture-backed startup, and the crucial role attorneys play in the startup world.

A graduate of SDSU and Berkeley Law, Young began his career as a litigator at Morrison Foerster. After litigating a high-profile class action suit addressing education inequality, Young was asked to join the 2008 Obama presidential campaign as the Deputy Finance Director of Northern California. Faced with a difficult decision between staying at his firm, clerking, or joining the campaign, Young’s mentors encouraged him to take advantage of the opportunity to work for President Obama. He took their advice and served on the campaign until the election, at which point he returned to his hometown of Sacramento to work as Mayor Johnson’s Senior Advisor. Young moved to Washington D.C. shortly thereafter to work in the White House and the Department of Justice. He then returned to the Bay Area in 2010 to work as a Senior Associate trial attorney at Keker, Van Nest & Peters. In 2014, he left to join OpenGov as its head of business development and counsel, until finally starting his current position in November 2015.

Young attributes part of his success to the encouragement and understanding of his mentors. When presented with the opportunity to work for President Obama, he was initially hesitant to leave his firm and defer his clerkship. However, a senior partner pushed him to take it, stressing that Young could always return to big law. The judge also told him to risk it and enjoy the journey. At the end of the day, Young would encourage any law student to “take chances and bet on yourself” when making career decisions.

Those chances eventually brought Young to GoFundMe, where he has served as Head of Legal for two years. GoFundMe, which Young refers to as “America’s company,” is a rapidly expanding crowd-funding platform, experiencing 300% annual growth with 50 million users worldwide since its launch eight years ago. Young said the best part of his job is that every day there is something new on his desk. Whether he is dealing with corporate governance, litigation, contract negotiations, or equity issues, Young said, “you have to have a sense of confidence and a little bit of insanity to think that you can handle everything that comes your way.” He shared that as counsel to a startup, it is important to balance the company’s want for growth with keeping it out of harm’s way, which presents new challenges every day.

Young also loves the public service aspect of his job. He emphasized that GoFundMe is an open platform that helps people from all walks of life, regardless of their location or political beliefs. Young recently started a charity through GoFundMe to directly assist those in need, and was able to raise $6 million to help hurricane, California fire, and Las Vegas shooting victims. Young said that seeing how those funds impacted people’s lives was inspiring, and reinforced the importance of GoFundMe’s role in the world.  “When I wake up in the morning, I know that I’m going to work at a company that’s allowing people to help each other out,” Young shared.

Recap BCLBE Leadership Lunch Talk – Funding Innovation (PDF)

Aramco Still Plans to Go Public in 2018 in Largest IPO in History

By Jarrah K. Al-Buainain, J.D. Candidate 2019 | Posted on

Early last year, Saudi Arabia’s Crown Prince, Mohammed bin Salman, announced that talks of an Aramco initial public offering (IPO) were in progress. Aramco is by far the largest oil company in the world, with the Crown Prince and other Saudi officials valuing the company above $2 trillion. The public sale of just 5% of the company would mark it as the largest IPO in history (Alibaba’s $25 billion IPO in 2014 is currently the largest).

Aramco’s CEO, Amin Nasser, told the New York Times that the IPO is planned for the latter half of 2018. Where to go public, specifically, is the question that has been causing a stir. According to the Saudi Finance Minister, a listing on Tadawul, the Kingdom’s local exchange, is set in stone. So the burning question is where else will Aramco be listed?

Expectedly, major international exchanges such as the New York and London exchanges are competing as potential venues for the IPO, which will surely bolster trade activity. Rumors have also circulated the past few months of a possible private sale to China – which Aramco’s CEO has denied. Because many believe that an overseas listing occurring before 2019 is not feasible, there has been speculation that Tadawul could be the only exchange where Aramco will be listing.

However, it is important to view the IPO in the context of its timing and purpose. The Aramco IPO is the crux of Saudi Vision 2030, a plan headed by the Crown Prince to diversify the Kingdom’s traditionally oil-based economy and reduce its reliance on oil. Saudi Arabia owns Aramco, and therefore any significant move on Aramco’s part would affect the Saudi economy.

The Saudi Government has made it clear, economic growth beyond current levels is an important and viable long-term goal for the Kingdom. Whatever measures taken by the Kingdom’s prized possession will be carefully designed to accelerate that prosperity. With hundreds of billions of dollars in reserves, Saudi Arabia is not likely going public solely for the payout.

The Aramco IPO has the potential to produce a myriad of fruitful effects for the Saudi financial landscape. The IPO will encourage market transparency within the kingdom and undoubtedly  attract foreign investment, both of which seem it be in line with the Crown Prince’s vision. Given what is at stake for the Kingdom and the potential for adverse legal implications of listing in foreign exchanges, Aramco’s caution in choosing where to list should come as no surprise.

Aramco Still Plans to Go Public in 2018 in Largest IPO in History (PDF)

Uber Discrimination Lawsuits in Tech

By Angela Lyons, J.D. Candidate 2019 | Posted on

Three Latina female engineers have filed suit against Uber for gender and race discrimination. The suit, filed in San Francisco on October 24, 2017, alleges that Uber violated the Equal Pay Act by using a “stack ranking” system. The promotion vehicle is alleged to be an unreliable qualitative method that systematically undervalues female employees and employees of color. The three plaintiffs are represented by Outten & Golden, which has also represented employees in suits against Goldman Sachs and Microsoft.

The suit comes after Uber attempted to amend some of its culture issues. In August, the company instituted a new policy that bumped up the salaries of employees who were not paid the median amount for their jobs. The policy change also included a 2.5% salary increase for each year an employee had worked at Uber.

These changes come after Uber acknowledged its pervasive sexism following a viral blog post detailing an engineer’s experience with rampant sexism and sexual harassment. In response, Uber’s CEO Travis Kalanick ultimately resigned. Eric Holder was then hired to review the company’s policies, and Frances Frei of Harvard Business School was brought on board to improve company culture.

Uber is not the only company facing similar charges. Google, Tesla, and Microsoft have been the subject of discrimination lawsuits in recent months. Given the pervasiveness of these suits, it is possible that more employees will come forward in the future. With more employees beginning to speak out, these suits may mark a watershed moment in the technology industry.

Uber Discrimination Lawsuits in Tech (PDF)

Supreme Court to Decide Microsoft Data Privacy Case

By Patrick Blake, J.D. Candidate 2019 | Posted on

This month, the Supreme Court has decided to hear a case that will resolve whether a United States company, Microsoft, must provide data stored on servers outside the United States.  The decision will impact what data is available to the United States Government and will have reactions in countries where the data is stored.

In 2016, a Second Circuit decision overturned a district court ruling and held that the Government cannot compel an internet service provider to produce information overseas that would constitute an extra-territorial application of the statute not in accordance with congressional intent.  The court focused on user privacy and increased global freedom of expression.

This decision has been criticized for not addressing the complexities of data in the technological age. One of the difficulties in all of this is interpreting anachronistic legal terms and cases to a world that where technological progress and entrepreneurship is moving at an incredible pace.  Applying the Fourth Amendment in a digital world means a breakdown of traditional distinctions protecting privacy.

Additionally, there may be impacts in foreign relations.  The European Union (EU) has updated their policies in what they call the General Data Protection Regulation.   It is worth considering whether this policy, which has yet to go into effect, would have implications for EU companies with data stored in the United States.  One of the key changes in their law is the extra-territorial application.

What will the Supreme Court have to say?  Will they draw clear lines?  Will they acknowledge the complexities of this space?  Will they issue a ruling that impacts entrepreneurship or your individual data privacy?  Or will they send a message the Fourth Amendment needs to be squared immediately with our individual constitutional rights?

Supreme Court to Decide Microsoft Data Privacy Case (PDF)

Nursing Home Giant Owes Landlord Over $300 Million In Rent

By Michael Soon Fah, J.D. Candidate 2019 | Posted on

Significant changes could be coming for thousands of elderly residents living at HCR ManorCare’s 292 nursing home and assisted care facilities. On August 17, 2017, HCR’s landlord and real estate company, Quality Care Properties, Inc., filed a complaint seeking to recover over $300 million in rent owed. The complaint asks the Court to appoint a receiver to facilitate transfer of the homes to a new operator. On October 19, QCP announced it had agreed to extend the deadline for HCR to respond to the receivership complaint. HCR now has until November 1 to respond.

A receivership is an alternative remedy to traditional bankruptcy and eviction. In a receivership proceeding, the court orders transfer of the insolvent’s assets to an appointed receiver. The receiver will facilitate transition of ownership to a new entity who will hopefully be able to run the operation profitably and meet its obligations. During the interim, the court empowers the receiver with the power to manage the business and protect its assets. Receiverships enable continuity and stability, but are only granted in certain circumstances that vary depending on jurisdiction.

Receiverships have been used to transfer ownership of smaller nursing home companies in the past. Recently in July 2017, a court approved the transfer of Fortis Management Group’s 65 nursing homes and assisted living facilities to a receiver. However, a court has yet to apply receivership to a nursing home giant like HCR ManorCare.

QCP’s lawsuit hits HCR amidst Department of Justice accusations of Medicare fraud. On April 21, 2015, the DOJ announced it had intervened in a consolidated False Claims Act lawsuit against HCR. The government alleged that HCR pressured staff to push unnecessary services on residents and kept discharge-worthy patients in its facilities to increase Medicare billables. The case is still pending in District Court. If the Court finds HCR engaged in intentional fraud, liability under the False Claims Act may not be dischargeable in bankruptcy.

HCR and QCP expect to use the deadline extension to discuss the possibility of selling and releasing properties, governance and protocol changes, and asset stewardship. It is unclear whether these talks are aimed at completely avoiding the receivership or preliminarily restructuring HCR’s assets in advance of the proceeding. Either way, for thousands of HCR ManorCare residents, home could be completely different in the not so distant future.

Nursing Home Giant Owes Landlord Over $300 Million In Rent (PDF)

$150 Billion Spark Bipartisanship and Changes the Definition of “Worthy”

By Cremeithius Riggins, J.D. Candidate 2020 | Posted on

Congress and White House personnel are attempting to raise the financial threshold for a banking institution to be considered a “Systematically Important Financial Institution” (SIFI). On its face, this may seem to bring about banking reform; however, this would lead to a dramatic decrease in federal oversight and transparency. Considering the 2008 financial crisis, it is difficult to understand why any banking institution would not be considered systematically important. Nevertheless, the arguably arbitrary $50 billion threshold is taking center stage for what has already been a controversial Trump agenda.

At a time when there has been very little to celebrate about our government’s ability to work in a bipartisan manner, it appears that economics has forced the hand of some, including top White House economic advisor, Gary Cohen. Cohen was considered the “most important person” in Washington and on Wall Street. Cohen has been working with Democrats and Republicans to create significant changes in U.S. banking. On October 16, 2017, Cohen told the American Banking Association that the SIFI threshold needs to be raised from $50 billion to $200 billion. Is the U.S. banking system ready for a $150 million-dollar threshold increase only seven years after the $50 billion threshold was implemented?

Let’s put this into perspective. The 2008 financial crisis was the most stifling financial dilemma since the Great Depression. Several economic markets were crashing. The financial sector, credit industry, real estate market, and auto industry required federal funding to prevent economic turmoil. Many companies failed and many people lost their assets in the aftermath. It is also important to consider that the United States was not the only country that experienced the shock. The economic shock was so profound that it traveled across the Atlantic Ocean and devastated many European markets.

As a result of the financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). The Dodd-Frank Act was the culmination of studies conducted by the Commodity Futures Trading Commission (CFTC) and implemented an increase in regulation of swap market dealers. The current listing of swap dealers features more than 100 banking institutions considered SIFIs because they possess more than $50 billion dollars in assets. These banking institutions face greater federal oversight to increase transparency and lower risk to Americans. The $50 billion threshold was implemented to protect Americans; however, some economists attribute a negative impact to the threshold because it limits banks from lending to “worthy” customers. Does a $150 billion increase in the threshold change the definition of a worthy customer?

The worthy customer is as ambiguous and arbitrary as the slogan, “let banks be banks again,” used by President Trump to support the proposed $150 billion threshold increase. It is unclear exactly how many of the approximately one-hundred SIFIs would be free from governmental oversight. However, if letting banks be banks again means allowing institutions to engage in risky transactions to the detriment of Americans, it is as undesirable as waking up to the loss of all your fantasy stock.

$150 Billion Spark Bipartisanship and Changes the Definition of Worthy (PDF)

Recap: “Leadership Lunch Talk: Ricardo Cortes-Monroy, Nestlé – Sustenance and Sustainability”

By Hayley Dardick, J.D. Candidate 2019 | Posted on

On October 24th, 2017, the Berkeley Center for Law, Business and the Economy (BCLBE) hosted Ricardo Cortes-Monroy, Chief Legal Officer and General Counsel of Nestlé.

Nestlé is the world’s largest food company, manufacturing more than 10,000 different products, employing around 330,000 people, and maintaining a presence in over 150 countries. Mr. Cortes-Monroy not only manages the company’s giant legal department, but is recognized as a leader in the legal community for advancing corporate citizenship.

He explained that sustainability and corporate responsibility should be understood as legal issues, and urged this needs to be embraced by other inside counsel. In the past, these concepts were only acknowledged as public relations concerns—indeed many lawyers today view corporate responsibility as nothing more than a marketing fad. Mr. Cortes-Monroy, however, explains these concepts are relevant business considerations. In the food industry, you must maintain trust and a positive reputation to be successful with consumers. But for Mr. Cortes-Monroy, the bottom line is, “It’s not about what is legal, but what is right.”

The paramount example of Mr. Cortes-Monroy’s commitment to this ideal is the Thai fisheries case. In 2014, media outlets and NGOs began reporting on ties between horrific labor conditions on fishing boats in Thailand and Purina cat food, a brand owned by Nestlé. In response to these reports, Nestlé’s legal department commissioned global NGO Verité  to investigate its production sites in Thailand. Using supply chain mapping, Verité confirmed a link. In an incredibly dangerous move and despite significant legal risks, Nestlé published the report online, basically admitting wrongdoing. Mr. Cortes-Monroy recognizes, “from a defense lawyer perspective, what we did was crazy.”

Yet, the company was publically praised for disclosing the report and announcing an action plan to combat slave labor in its supply chain. Measures outlined in the plan include commissioning an emergency response team, launching an awareness campaign, training boat owners and captains, and utilizing a traceability system and audits. Nestlé’s disclosure ultimately shielded the company from liability under the safe harbor doctrine in one California class action.

Nestlé’s commitment to corporate responsibility may be having an influence on other companies, as well. Pulling straight from the Nestlé playbook, Patagonia engaged Verité to investigate forced labor in their clothing supply chain and to assist the company with a strategy moving forward.

Nestlé continues to strive for improvement in sustainability. For example, the company has committed to purchase only cage-free eggs by 2020. As Mr. Cortes-Monroy concluded, “Challenges are still there, but there has been remarkable progress in the last few years.”

The presentation also discussed Nestlé’s Summer Internship Program for 1L students. Second year Berkeley Law student Lauren Kelly-Jones was on-hand to share her experience interning in Nestlé’s Legal Sustainability & Creating Shared Value group this past summer in Vevey, Switzerland. Interested first year students may apply for next summer’s program when the application becomes available on December 1st.

Recap Leadership Lunch Talk Ricardo Cortes-Monroy, Nestlé – Sustenance and Sustainability (PDF)