GOING TOE TO TOE
WITH THE SEC
Dentons' Executive Webinar
Stephen L. Hill, Jr.
March 12, 2014
The Kovzan Investigation and Trial Speak to 2
Overlapping/Connected Communities
March 12, 2014 2
De
LegalAccounting
What We Will Try And Cover Today For
Both Audiences
March 12, 2014
 The process and pitfalls of SEC investigations and in...
The Lawyers that took on the SEC for
Steve Kovzan
March 12, 2014 4
Max Carr-Howard Stephen L. Hill, Jr. Angela Harse
Nicol...
Our Client - Steve Kovzan
March 12, 2014 5
"Operation Boy Scout"
The SEC Investigation: Two Versions
March 14, 2014 6
Their Version:
"It Begins With a Whistleblower Complaint"
The NIC V...
SEC Investigation Begins with . . .
March 12, 2014 7
If you are lucky, with a phone call to general
counsel or the CFO.
...
Interview Takeways
March 12, 2014 8
 The SEC is not going to show the "full" picture to interviewees.
 This approach wil...
Trial
March 12, 2014 9
…After 3 plus years and several settlements with other NIC officers, we go
to trial in United State...
The SEC Claims Presented to the Jury
March 12, 2014 10
Claims A & D* Alleged failure to disclose Fraser's
compensation in ...
A Major Factual and Legal Issue
March 12, 2014 11
Was Steve the leader for all
accounting activity or was he part
of a tea...
12
Kovzan
Ellis Gill
Gadd /Wiesensee
(Internal
Controls, Development and
Testing)
Sales & Portal
Operations
Administration...
The Story Behind the Compensation
Allegations
March 12, 2014 13
 NIC had gone from a very successful IPO to a company in ...
14
NIC Stock Price: Pre-Fraser Return
10
20
30
40
50
60
70
80
0
Aug
1999
Sep
1999
Oct
1999
Nov
1999
Dec
1999
Jan
2000
Feb
...
How the Company is Organized was/is
Important Factor in Telling the "NIC Story"
March 12, 2014 15
Here is why it was important…
March 12, 2014 16
Responding to Discovery of the
Whistleblower
March 12, 2014 17
 The SEC could not make this matter about whistleblower re...
The SEC Trial Structure
March 12, 2014 18
 They will tell the story by showing the jury some, but not all of the e-mails
...
The SEC Trial Structure con't.
March 12, 2014 19
They will not completely describe all of the relevant events
("you got t...
Their Playbook in These Cases Will be to Try And
Have Employees Testify Against the Defendant…
March 12, 2014 20
 They wi...
Here is an Example of What The SEC
Did Not Present
March 12, 2014 21
Consideration For Structuring Your Trial
Presentation
March 12, 2014
22
 Kovzan Practice Pointer #1:Federal trial juries ...
March 12, 2014 23
 Almost every significant legal problem at a business organization
leads to an internal investigation.
...
Evers: The Auditors Knew About the CEO
Expenses
March 12, 2014 24
Tinkers: The Expert Testifies That Auditor
Work Papers Evidenced a Review With no
Exceptions
March 12, 2014 25
Chance: At trial, the Auditors "testify" Without Taking the
Stand That NIC had Effective Internal Control
March 12, 2014 26
Some of The Things We Learned
Including Lessons For Public
Companies Outside of The Courtroom
March 12, 2014 27
 The SEC'...
Variables You Can Control in Your E-mails
and Written Communications
March 12, 2014 28
Establish a threshold of significa...
March 12, 2014 29
At trial, its critical that investors relations personnel play a
positive role in the look back at mate...
Win the War of Experts on What Matters to
Investors
March 12, 2014 30
The Importance of Insurance In Creating
a Level Playing Field
March 12, 2014
31
 Steve Kovzan 's pretrial effort, includi...
Thank you
Stephen L. Hill, Jr.
stephen.hill@dentons.com
@slhilljr (Twitter)
Dentons US LLP
816-460-2494
4520 Main Street
S...
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Going toe to toe with the sec

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Trial lawyer Stephen L. Hill, Jr., former United States Attorney for the Western District of Missouri and partner in the firm's White Collar practice, led the winning team who beat back the SEC on all 12 counts against Stephen M. Kovzan, Chief Financial Officer for NIC, Inc. The three-week trial before Judge John W. Lungstrum of the District of Kansas capped an investigation spanning more than six years, and was one of the two significant SEC jury losses of 2013 (the Mark Cuban insider trading matter being the other).

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  • The four guys on the bottom report to Reynolds and Ellis, not Gill. So fix that vertical line to ELLIS.TWO lines should go out of the Sales map: 1. Solid, just to Harry. 2. Dotted straight to Jeff.
  • Transcript of "Going toe to toe with the sec"

    1. 1. GOING TOE TO TOE WITH THE SEC Dentons' Executive Webinar Stephen L. Hill, Jr. March 12, 2014
    2. 2. The Kovzan Investigation and Trial Speak to 2 Overlapping/Connected Communities March 12, 2014 2 De LegalAccounting
    3. 3. What We Will Try And Cover Today For Both Audiences March 12, 2014  The process and pitfalls of SEC investigations and interviews (Interview Takeaways)  Steps you may consider taking following the discovery of a whistleblower (Responding to the Whistleblower).  Review of how the SEC will structure its trial and corresponding practice pointers (Trial Takeaways and Practice Pointers).  Some of The Things We Learned Including Lessons For Public Companies Outside of The Courtroom  The Importance of Insurance In Creating a Level Playing Field  Considerations on how to lower future risk with the Kovzan issues  The "Evers to Tinker to Chance" Audit Trail  Variables You Can Control in Your E-mails and Written Communications  How You Run Your Investor Relations Can Be A Huge "Risk +" 3
    4. 4. The Lawyers that took on the SEC for Steve Kovzan March 12, 2014 4 Max Carr-Howard Stephen L. Hill, Jr. Angela Harse Nicole Rabner Andrew Weissman John Valentine
    5. 5. Our Client - Steve Kovzan March 12, 2014 5 "Operation Boy Scout"
    6. 6. The SEC Investigation: Two Versions March 14, 2014 6 Their Version: "It Begins With a Whistleblower Complaint" The NIC Version: "We Found The Problem With CEO Fraser Poorly Documenting Expenses and Were Working On The "Fix" When You Knocked on Our Door"
    7. 7. SEC Investigation Begins with . . . March 12, 2014 7 If you are lucky, with a phone call to general counsel or the CFO. Information request (formal and informal). Informal-the phone call ("we were just wondering"). Formal-"who should we send the subpoena to?" Interviews (formal and informal). Formal is under oath testimony and your counsel may be present.
    8. 8. Interview Takeways March 12, 2014 8  The SEC is not going to show the "full" picture to interviewees.  This approach will paint an incomplete picture for the interviewee of what actually occurred ("They did not show me that document").  If you are the individual employee, you and your counsel want that "full picture" especially if you are no longer with the company.  If you are the company, you want a full, complete and accurate investigative record.  The company can paint a complete picture by collecting and sharing information with current and former employees through pool/individual counsel.  Practice Pointer: How do I avoid the internal "disconnect" between SEC enforcement personnel and SEC Trial counsel?
    9. 9. Trial March 12, 2014 9 …After 3 plus years and several settlements with other NIC officers, we go to trial in United States District Court with Judge John Lungstrum in Kansas City, Kansas.
    10. 10. The SEC Claims Presented to the Jury March 12, 2014 10 Claims A & D* Alleged failure to disclose Fraser's compensation in filings Claims B, C& E Alleged scheme to defraud investors with respect to disclosure of compensation Claims F& G** Aided and abetted NIC's alleged failure to make disclosures of compensation Claims H, I & J Alleged falsification of NIC books and records Claims K & L Alleged circumvention or failure to implement a system of internal controls or aided and abetted such a violation by NIC *Claims A, B, C, D, E, F &G have common materiality requirement **There is no successful aiding and abetting without primary violation.
    11. 11. A Major Factual and Legal Issue March 12, 2014 11 Was Steve the leader for all accounting activity or was he part of a team and able to rely on others?
    12. 12. 12 Kovzan Ellis Gill Gadd /Wiesensee (Internal Controls, Development and Testing) Sales & Portal Operations Administration Executive Management Brad Bradley GC and CLO Eric Bur CFO Sam Somerhalder CAO NIC Board of Directors Gov. Pete Wilson Gov. Daniel Evans Ross C. Hartley Art N. Burtscher Jeffery Fraser Chairman John L. Bunce CEO Jeffery S. Fraser Accounts Payable (Miller) Payroll (Everly) Portal Accountant (Reichert) Accounting Clerk (Torres) Reynolds Neff Sales and Portal Operations COO Harry H. Herington
    13. 13. The Story Behind the Compensation Allegations March 12, 2014 13  NIC had gone from a very successful IPO to a company in an economic free-fall.
    14. 14. 14 NIC Stock Price: Pre-Fraser Return 10 20 30 40 50 60 70 80 0 Aug 1999 Sep 1999 Oct 1999 Nov 1999 Dec 1999 Jan 2000 Feb 2000 Mar 2000 Apr 2000 May 2000 Jun 2000 Jul 2000 Aug 2000 Sep 2000 Oct 2000 Nov 2000 Dec 2000
    15. 15. How the Company is Organized was/is Important Factor in Telling the "NIC Story" March 12, 2014 15
    16. 16. Here is why it was important… March 12, 2014 16
    17. 17. Responding to Discovery of the Whistleblower March 12, 2014 17  The SEC could not make this matter about whistleblower retaliation because of the process NIC used to review her complaints (brought outside independent counsel to review) and the manner in which they terminated her employment (3 independent personnel unrelated to her position or claim reviewed the investigation and her file and then recommended her severance from the company).  Ultimately the whistleblower was not called as a witness.  Have you administered the process for dealing with the whistleblower, including their firing, if that is appropriate, with an eye toward less than neutral observers down the road?  NIC could demonstrate that its internal investigation of the same subject matter was already underway when she made her complaint.
    18. 18. The SEC Trial Structure March 12, 2014 18  They will tell the story by showing the jury some, but not all of the e-mails ("here are four emails that were red flags and nothing was done"), when in fact there is context, back story, face to face discussions and other communications which will cast the "bad" email in a different light for the jury.
    19. 19. The SEC Trial Structure con't. March 12, 2014 19 They will not completely describe all of the relevant events ("you got this e-mail and did nothing, correct?")
    20. 20. Their Playbook in These Cases Will be to Try And Have Employees Testify Against the Defendant… March 12, 2014 20  They will call the defendant as their own witness which emphasizes the need for the company and the individual to be ready to tell your side of the story when responding to the SEC questions.
    21. 21. Here is an Example of What The SEC Did Not Present March 12, 2014 21
    22. 22. Consideration For Structuring Your Trial Presentation March 12, 2014 22  Kovzan Practice Pointer #1:Federal trial juries are smart (ours was really smart), broadly experienced with corporate structure and very familiar with presentations that use charts, timelines and graphics to tell a story.  Kovzan Practice Pointer #2: Jurors prefer timelines that tell the complete story.  Kovzan Practice Pointer #3: Short to the point witnesses score more points than long ones who cover every single issue.  Kovzan Practice Pointer #4: Instructions matter.  Kovzan Practice Pointer #5: They are going to call the defendant as a witness so spend as much time as possible on preparation including their live testimony during mock trial.
    23. 23. March 12, 2014 23  Almost every significant legal problem at a business organization leads to an internal investigation.  Does the "record" created by the internal investigation anticipate its use by outside auditor in reviewing the conduct and the outside counsel defending the company.  The "completeness" of the company and auditor's contemporaneous comments on material accounting issues is critical. Here is an example of all the three components playing out at trial The "Evers to Tinker to Chance" Investigation and Audit Trail
    24. 24. Evers: The Auditors Knew About the CEO Expenses March 12, 2014 24
    25. 25. Tinkers: The Expert Testifies That Auditor Work Papers Evidenced a Review With no Exceptions March 12, 2014 25
    26. 26. Chance: At trial, the Auditors "testify" Without Taking the Stand That NIC had Effective Internal Control March 12, 2014 26
    27. 27. Some of The Things We Learned Including Lessons For Public Companies Outside of The Courtroom March 12, 2014 27  The SEC's decision to take a matter is not necessarily because they have good evidence of fraudulent conduct.  CFOs need to explain what they do, what others in the accounting department do and why you rely on them for critical functions (juries and regulators will turn against you if you don't do all three).  Track legal counsel's role in public company filings' preparation and be clear about the information you provide and the instructions you receive.
    28. 28. Variables You Can Control in Your E-mails and Written Communications March 12, 2014 28 Establish a threshold of significant subject matter for all communications and a goal of zero unanswered e-mails including the end of "naked just keeping you in the loop" e- mails. The goal of ending "come one, come all" e-mails by replacing it with a culture that provides context and why people are included on e-mails. End the silent internal record on duties and responsibilities particularly matching risk, compliance and fraud prevention duties with your internal control policies and procedures.
    29. 29. March 12, 2014 29 At trial, its critical that investors relations personnel play a positive role in the look back at materiality. How You Run Your Investor Relations Can Be A Huge "Risk +"
    30. 30. Win the War of Experts on What Matters to Investors March 12, 2014 30
    31. 31. The Importance of Insurance In Creating a Level Playing Field March 12, 2014 31  Steve Kovzan 's pretrial effort, including extensive discovery of the SEC's investigation determining what they did not investigate, identification and retention of expert witnesses and extensive successful legal challenges to the SEC charges was expensive.  If Steve had not had directors and officers insurance he could not have taken on the SEC.
    32. 32. Thank you Stephen L. Hill, Jr. stephen.hill@dentons.com @slhilljr (Twitter) Dentons US LLP 816-460-2494 4520 Main Street Suite 1100 Kansas City, Missouri 64111 USA © 2013 Dentons Dentons is an international legal practice providing client services worldwide through its member firms and affiliates. This publication is not designed to provide legal or other advice and you should not take, or refrain from taking, action based on its content. Please see dentons.com for Legal Notices.

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