Takach is clearly perturbed by the court’s reasoning that the evidence in this case (a photo and text message that essentially confirms the crime) is acceptable because the police officer’s search was merely “cursory.”

One online dictionary defines “cursory” as “going rapidly over something, without noting details … hasty, superficial.” In light of this meaning, it is difficult to understand how anyone can perform a cursory search of a cellphone device to reveal specific files or pages. Surely any search that results in specific photos, documents and text being found is anything but cursory. It would appear that, in Fearon, the officer would have had to navigate through specific screens, photographs and text messages, and the court admits that the officer had to operate the keyboard or the phone — hardly cursory behaviour.

Neither is Takach much convinced by the court’s conclusion that, because the cellphone in question was not password-protected, the accused could not have had a high expectation of privacy.

Does this accord with reality today? What if we were dealing with a home? The owner of the house lives in a small town, and small-town values still resonate with this person, such that the owner never locks her front door when she leaves the house. Could a policeman, upon seeing the door unlocked, simply walk into and ramble around the premises without a warrant? The answer is obviously no.

Read George Takach’s column, via Lexpert‘s digital edition, right here.

–David Dias

Conrad Black leaves the Derksen Federal Courthouse after his sentencing hearing in Chicago December 10, 2007. REUTERS

The panel went beyond academic scenarios, though, and cited real cases like Hollinger, Niko Resources and Griffiths Energy to demonstrate what to do — and what not — when malfeasance is uncovered at your company.

The panel included:

• Draper, who is the VP of Valuations, Forensics & Litigation Support for MNP (and a former RCMP officer)
• Rob Kuling, Director, Internal Audit at energy services provider Tervita Corp.
• John Pozios, Director of the  University of Manitoba’s Desautels Centre for Private Enterprise and the Law

Draper got the session started by citing some key stats from the Association of Certified Fraud Examiners. According to the ACFE’s 2012 global report, employee fraud is estimated to cost the global economy about 5%  a year in revenue.

The average fraud for a low-level employee costs the company about $60,000, according to the ACFE. Frauds perpetrated by mid-level managers run around $180,000. Meanwhile, frauds at the executive or owner level average $573,000.

That’s a nice little pay day, to be sure, but Draper points out these are not material costs for the average public corporation. “You probably spend more on board lunches in a given year than some of the amounts involved. But it is something that you don’t want to see on the front page of the paper.”

Reputational risks, regulatory penalties, criminal convictions, and the consequent plunge in shareholder value — all these can destroy a company. Consider that, in the Hollinger case, after years of appeals and overturned convictions, only one fraud conviction stuck at the end of the day, relating to a $600,000 transaction attributed to Black.

While the conviction hinged on a financially immaterial transaction, the trial itself destroyed hundreds of millions of dollars in shareholder value, embroiling advisors like KPMG and Torys LLP, which paid millions in settlement.

“These events,” said Draper, “particularly at the executive level, are really an atomic bomb in the boardroom. These are circumstances that shape the foundations of trust.”

The irony, Draper noted, is that the immateriality of these fraud costs is precisely what makes them invisible to external auditors. “I think it’s very common for executives and board to say, ‘You know what, if the auditors are here once a year, and they haven’t found a problem, we’re good.’”

Tervita’s Kuling then went into more of the ACFE’s findings about employee fraud. … Apparently, 17% are committed by the owner or someone at an executive level; moreover, frauds at this level are usually detected 18 to 24 months after they’ve begun. “So if something’s going on,” said Kuling, “it’s probably been going on for about two years before the time that you’re going to detect it.”

The ACFE found that the most common way for detecting fraud was a tip: 43% of corporate fraud was discovered this way. Management reviews or internal audits also were a major factor in detecting fraud: 29% of frauds were discovered this way.

Among the least common mechanisms for detecting fraud were external audits (3%) and IT controls (1%). So, if you think your external audit combined with a great enterprise-management system is all you need, think again.

Kuling noted that, while boards are reluctant to implement a whistleblower hotline because they don’t like the idea of employees anonymously airing dirty laundry, these hotlines are highly effective–and also easily affordable, at about $1 per employee per year.

“It’s like a laser. It goes right into your organization and strikes right to the ethics of someone who might be up to something, and you find out quicker.”

Kuling also pointed out that, while a whistleblower program may seem like it’s more trouble than it’s worth, dealing with the occasional frivolous complaint is a lot better than having a whistleblower go directly to the Securities Commission or Department of Justice.

Moreover, Draper noted that it’s important to use an external service provider, rather than creating an internal hotline, so that employees feel assured that their confidentiality will be protected.

“It’s much better that people feel comfortable using an internal response or hotline … than to suggest that they have to go to the securities commission or to the police or to the media with an issue. It’s always much better to come to those stakeholders with answers, not questions.”

University of Manitoba’s Pozios was next, broaching the inherent conflict of interest between a general counsel’s duty to the company and their interest in supporting management. “Knowing, in your dual role … that perhaps management may not be giving the complete picture to the board, I think there are some inherent tensions in those roles.”

Pozios suggested that — just as the roles of chair and CEO have been split at many Canadian corporations — the board should consider going further and splitting the roles of general counsel and corporate secretary to the board.

The panel then listed some of the telltale signs that may point to instances of fraud. These “personal indicators” include:

• living beyond means
• financial difficulties
• “wheeler-dealer” attitude
• control issues
• divorce/family matters
• refusal to take vacations
• close vendor relationships

“People forget that [not taking vacations] is actually a very proven fraud indicator,” said Kuling, “because generally if somebody is doing something they can’t leave the job because the cycle of whatever they’re doing could be broken. … So, just some professional skepticism at your senior level might nip these things early.”

Kuling cited the case of Nick Lysyk, a BMO banker in Edmonton who seemed to be a diligent employee who was perceived as somewhat “nerdy” by co-workers. Outside the office, though, as Draper pointed out, his lifestyle was “hookers and muscle cars.”

The fraud (involving fake loans) was only uncovered when Lysyk was forced to take a vacation and a co-worker took over his loan portfolio.  … By the time the investigation was complete, $15 million had been stolen.

Pozios then looked into the Hollinger case as an example of what not to do when stakeholders accuse the company of malfeasance. The dispute — as we all know by now — centred on “non-competition” payments made to Black and a a couple of the co-accused.

These payments, while objectionable to institutional investors like hedge fund Tweedie Brown,were not hidden. Tweedie Brown tried to convince the board that these particular payments — worth around $100 million — should have gone to shareholders, not to Black himself and a few of his cronies.

“This was a shareholder dispute that really had gone awry,” said Pozios. “This is probably something that could have been resolved if the CEO hadn’t been so obstinate. … Conrad Blake took the position: so sue me.”

Tweedie Brown, however, went one better: they went to the prosecution in the U.S. and suggested that what was happening was criminal — eventually leading to a 17-count indictment.

Pozios called Mark Kipnis — general counsel for Hollinger in the U.S. — a “tragic figure” in the case. Kipnis took no payments, aside from a $150,000 bonus, but was eventually convicted, put on probation and disbarred.

“The practical reality for Mr. Kipnis is that he was wiped out financially,” said Pozios. “As far as my research could tell, he continues to be unable to practice law in the state of Illinois, even though the conviction was overturned, and he currently holds a licence as a real estate broker. … So he’s gone from top-flight general counsel to selling real estate.”

“The question I always ask when I do this presentation is, ‘What would you have done differently? … It’s a very, very difficult question to answer, and the best I can come up with is, when things were starting to unravel, perhaps you couldn’t change history, but maybe as general counsel, as a senior member of the executive team, you had an opportunity to mitigate the damage to the corporation.”

“You have to ask yourself, is the CEO acting in the best interests of the corporation, and is there something we could be doing differently. Perhaps that means putting something in place, calling that person on to the carpet and doing something about it, and I realize it’s easy for me to say that. I’m not working for Conrad Black, who is a pretty big personality.”

Pozios then offered the case of Griffiths Energy as a diametric opposite, and an example of what could have been done differently in the Hollinger dispute.

The Griffiths case was the first voluntary disclosure litigated in Canada under the Corruption of Foreign Public Officials Act. It was discovered by executives that $2 million bribe was paid to the ambassador to Chad.

“This is an instance where the executives and the board decided that they knew about their conduct in Africa. They knew that the conduct could get them into some significant hot water under the CFPOA.”

Ultimately a penalty was levied was $10.35 million, but no probation was required. “They presented a complete investigation to the RCMP. They mitigated any further damage to the corporation and their reputation. They basically came clean.”

So what lessons can general counsel take from the session?

• Set up a whistleblower hotline: they’re cheap and your best line of defence against executive misconduct.
• Ensure the company has an internal audit in place: these are your second line of defence.
• Don’t rely on external auditors: the low costs of executive fraud make it invisible to auditors, who are looking for more than rounding errors.
• Separate the GC and corporate counsel positions: easier said than done for small companies, but worth considering.
• Watch out for “personal indicators”: these are telltale signs of fraud, like refusing to take vacations.
• When stakeholders come calling with legitimate complaints, don’t suggest they sue you: they just might.

–David Dias

We’re long past the age when a law firm could be kept in business solely on the basis of a personal client-counsel relationship. With RFPs becoming increasingly common and companies devising “preferred firm” short lists, the focus has shifted away from maintaining relationships, and towards maintaining preferential status.

This is not news, but it does raise the basic question: if relationships are no longer sacrosanct, then what are the factors that most influence decision-making around which firms are “preferred” firms? They’re not well documented, but in April’s Legal Departments column, Richard Stock of Catalyst Consulting explores a survey by Altman Weil that targets that critical issue.

The survey canvassed more than 200 legal departments, asking chief legal officers to rank the factors that most influenced their selection of a law firm.

The top six “influencers” and their median ratings (out of 10) were: demonstrated understanding of the business (9); referrals/recommendations (8); personal contact (6); written materials demonstrating the expertise of the lawyer (6); free seminars, CLE, etc. (4); and branding as a full-service firm (4).

Note that referrals and recommendations and personal contact (i.e., the relationship stuff that isn’t supposed to matter so much anymore) still ranks highly, but CLOs are no longer placing it at the top of the heap.

The survey also asked respondents to list other influential factors that may not have been listed in the survey. “In order of importance,” writes Stock, “these were: subject-matter expertise, track record of success, prior relationships, and low cost.”

Read Richard Stock’s Legal Departments column in its entirety right here on Lexpert‘s digital edition.

–David Dias

An employee of European Gas Limited shows a coal sample at British company’s offices in Freyming-Merlebach, eastern France, February 4, 2013. Picture taken February 4, 2013. REUTERS/Christian Hartmann

First, there’s the bounty. Next month, the British Geological Survey will unveil reserve estimates that, according to The Times of London, could peg shale gas reserves at 1,500 trillion cubic feet. That’s more than 200 times (!) greater than the current mark of 5.3 trillion cubic feet.

Then, there’s the price gap. In the U.K., natural gas sells for US$12 per thousand cubic feet. In the U.S., the same amount sells for US$3. That’s a sizeable incentive for the British government to do something to develop the industry — and they’ve already taken the first steps, lifting a moratorium on hydraulic fracturing, aka “fracking,” late last year.

Already, the junior U.K. exploration outfit Cuadrilla claims to have drilled into a large shale deposit, prompting speculation that a bid from Centrica PLC — a British energy major — is forthcoming. This is a domestic deal landscape at the moment, but if the industry really gets underway, American and Canadian energy concerns — which have the financial wherewithal and the expertise — are bound to turn their attention to the opportunities.

Robert Desbarats, a partner in the business law department of Osler, Hoskin & Harcourt who has a long history of dealmaking the oil patch, says the U.K. has been on his radar for a while. In fact, he already has a client who’s interested.

“I do have this one client who has always been interested in the U.K.,” says Desbarats. “You know, all that production in the North Sea? Well, the geology doesn’t change just because you go from the North Sea to the land mass. So there’s speculation that, if there’s production in the North Sea, why couldn’t you find some of it on shore?”

Shale development so far, however, has been a difficult sell in Europe. Jean-Pierre Pham, a partner in the oil and gas group at Bennett Jones, points out that Europe has a higher population density and heightened environmental concerns, which have led to fracking moratoriums in France and Germany. While the U.K. has lifted their own moratorium, the political obstacles are still daunting. Daunting, but not impossible, says Pham.

“The UK is in an economic slump and they desperately need an engine of growth, and perhaps even export,” he says. “And their energy costs are quite high at the moment, hurting competitiveness.”

“If they do decide to proceed, I expect that many North American oil companies and service companies will want a piece of the action based on their experience in North America. Shale development is very expensive and typically requires a large land base as well as technical expertise, so it would not be surprising to see the bigger companies buying the assets of smaller ones or entering into joint ventures to provide financial and technical support.”

Kent Kufeldt, a partner at Borden Ladner Gervais, agrees. He says that, if the U.K. government does give the industry a green light, North American energy concerns are likely to come out of the woodwork:

“Any time there’s a resource opportunity in a first-world country, where there’s rule of law and resources are open to development by private enterprise, companies sit up and take notice, because the regimes there tend to be stable and predictable, and that’s what you need. … So I think it will attract people.”

And that’s great news for Canadian and American law firms, which are bound to ride on the coattails of any large movement towards shale development in Europe, says Pham.

“There is no question that North American oil and gas lawyers have acquired deep expertise in drafting and negotiating joint ventures and joint operating agreements involving shale projects. Shale projects are often quite different from conventional projects. It is also possible that North American firms might be involved in advising the UK regulators on shale development, on the basis of the regulations being developed here in Canada and in the US.”

Kufeldt, however, warns us not to get ahead of ourselves. He points out that large natural gas reserves — even mega reserves — do not necessarily lead to development. It’s all a question of cost and economics:

“Just because they’ve found this shale, it doesn’t mean its economic to produce. If you look into China, they have significant shale resources as well but are having trouble unlocking the way to do it. I think it’s still a bit of a science experiment. … Something that works in the Canadian shale market may not work in the U.K. or China or France.”

–David Dias

With the recent mysterious cyber attacks on South Korea, and an executive order in the U.S. that will bring about regulatory framework for cyber security, the media have been buzzing about this topic for months now.

For a real look behind the curtains, though, Takach’s column is a must-read. In it, he goes into detail about the various players within Canada’s cyber-security infrastructure: Public Safety Canada; the Canadian Cyber Incident Response Centre (CCIRC); the Canadian Security Intelligence Service (CSIS); the Department of National Defence Information Management Group; even the cryptological agency known as the Communications Security Establishment.

Particularly eye-opening is the fact that (as Canada’s Auditor General reported a few months ago) the CCIRC currently operates only on a Monday-to-Friday, nine-to-five schedule.

“This would be laughable,” writes Takach, “if it weren’t so dangerous. It’s as though the government is counting on our foreign adversaries, and cyber terrorists, to show us the courtesy of not attacking our computer systems in the evening or on weekends.”

Takach also explores the murky area around international cyber law:

“Is there a bright line, for international law purposes, between cyber espionage, cyber terrorism, cyber theft, cyber disruption, cyber infiltration?

Read George Takach’s enlightening column via Lexpert‘s digital edition right here.

–David Dias

The new J.D., Paton writes, “will allow new graduates to immediately seek licensure in Canada and the US” — a turn of events that will undoubtedly bring more Canucks to the Arizona Desert.

With all these Canadians set to relocate, Paton couldn’t help but suggest a few potentially relevant courses, such as:

• Cross-Border Franchising: Getting Tim Horton’s in Phoenix.
• “But Officer, I’m Canadian”: a primer on SB 1070, the part of Arizona’s immigration law, upheld by the US Supreme Court, requiring police officers make a reasonable attempt to determine the immigration status of a person stopped, detained or arrested if there is reasonable suspicion the person is in the country illegally.
• Studies in Logic: Understanding the Second Amendment, eh? (The NRA once hosted its annual meeting in Phoenix, boasting “acres of guns, gear and outfitters” and a “safe and fun atmosphere the whole family can enjoy.” Really, I couldn’t make this stuff up.).

Senior partner Jim Rose — a Lexpert-ranked lawyer with decades of experience in corporate/commercial, oil & gas and environmental disputes — explains that recent changes to conflict-of-interest rules at the Law Society of Alberta have created opportunities for a firm focusing on litigation and mediation. Former FMC litigation partner Matthew Lindsay also joins the team, which includes five Queen’s Counsel.

Read the Herald piece, by David Parker, here.

- David Dias

The committee’s mandate — which the OSC has outlined in detail on its site — will be to provide comments and advice on policy and procedural initiatives relating to the Commission’s administrative tribunal proceedings.

Commission Secretary John Stevenson will chair the committee, which also includes a list of heavyweights among the securities litigation bar. Here’s the list of appointees from law firms:

- Wendy Berman – Cassels Brock & Blackwell LLP
- Nigel Campbell – Blake, Cassels & Graydon LLP
- Alexander Cobb – Osler, Hoskin & Harcourt LLP
- Emily Cole – Miller Thomson LLP
- James Doris – Davies Ward Phillips & Vineberg LLP
- James Douglas – Borden Ladner Gervais LLP
- Linda Fuerst – Lenczner Slaght Royce Smith Griffin LLP
- James Grout – Thornton Grout Finnigan LLP
- Paul Le Vay – Stockwoods LLP

In an email to Lexpert, Commission Secretary John Stevenson explains the rationale behind the creation of the committee:

“The number of proceedings before the Ontario Securities Commission’s administrative tribunal has increased in recent years, and the new Securities Proceedings Advisory Committee is expected to assist by providing timely advice on policy and procedural initiatives. The Committee will be exploring opportunities for increased transparency and accessibility, specifically with the parties that appear before the Commission. The Commission has been forward-looking in establishing the Committee in order to consider areas for greater efficiency, for example those brought on by the move toward electronic hearings.”

In addition, Lexpert asked Stevenson to explain what criteria were considered when selecting committee members:

“The Commission sought members who are representative of respondents counsel and enforcement counsel. These individuals bring a wealth of experience and will work jointly with staff of the Commission’s Enforcement Branch, the Secretary and the Deputy Secretary.”

- David Dias

Our Top Deals feature, “The Year of the Regulator,” ranks the 10 most important deals of the year, while our Top Cases feature, “The Business of the Courts,” takes a look at the most influential and complex litigation of 2012. The features provide an exclusive, in-depth look at all the M&A twists and turns, the groundbreaking precedents — and, of course, the key players, law firms and lawyers involved.

The January issue also includes all your favourite Lexpert departments: “Big Deals” (like the acquisition of Q9 Networks), “People on the Move” (like Richard Jones and Peter Wilcox), news coverage (on Dentons, P3s and proxy guidelines), and a new “Last Word” columnist. This month, Paul Paton takes over the back page with a reflection on mid-career doldrums and law school reunions.

To subscribers and non-subscribers alike, please enjoy.

- Lexpert staff

Eric Fink, associate professor of law at Elon University in Greensboro, North Carolina, has just released a paper outlining reasons behind his assertion that such placements are not only unseemly or ineffective or unethical — they are actually prohibited under U.S. law.

In the abstract to Fink’s paper, “No Money, Mo’ Problems: Why Unpaid Law Firm Internships Are Illegal & What To Do About It,” he writes:

“Unpaid internships for law students appear to be on the rise in law firms, as in other sectors of the economy. I argue that such unpaid internships are illegal under the Fair Labor Standards Act, and raise ethical questions under the Model Rules of Professional Conduct. Moreover, the practice of law firms offering unpaid interships in lieu of paid employment substantially harms law students and law school graduates, who face an increasingly tight market for paid legal employment.”

Lexpert contributor Sandra Rubin recently spoke to Law Society of Upper Canada Treasurer Thomas Conway on its decision to allow such co-ops.

While Conway admits that the program may do little to correct the underlying problem — namely, a lack of demand for new lawyers — he suggests that such issues are outside the Society’s mandate.

“The pilot project allows them to become licensed. The Law Society doesn’t have an obligation to find people jobs. What we have, we think, is an obligation to provide fair access to the licensing process and, if there’s a way of providing good-quality experiential training that doesn’t involve the traditional articling pathway then, in order to make a fairer process, we’ve developed this alternative.”

-David Dias