On August 10, 2020, I received what would become the greatest news of my life: my wife and I found out we were expecting our first child. As we began daydreaming about the new addition to our family, the realities of life also began setting in. Not only would we be contending with the unique challenges posed by the pandemic, but we also began to evaluate how two type-A professionals would deal with childcare.

My wife is a dentist, and the dental industry has historically struggled to provide meaningful “parental leave,” as the practice inherently requires the doctors to physically be present to treat patients. Leave in the dental field is typically unpaid, with a strong encouragement (whether driven by patient care, finances, or other motivators) to return as promptly as possible.

Historically, the legal field also does not lay claim as a pioneer in promoting parental leave. Fortunately, there is a slow but steady shift towards recognizing the value of paid childcare leave in general. However, those gains tend to focus primarily, if not exclusively, on maternity leave.

In 2019, my firm introduced a new leave policy offering 10 weeks leave for all parents, in addition to medical recovery time for birth parents. As a first-time parent, I had no idea what this truly entailed. Moreover, as a first-time father, I only had a conceptual idea of what my role would even be during our child’s early days. What was to ensue would change me not only as a lawyer but as a person altogether.

The Spring 2022 issue of the Shareholder Advocate includes:

Download the Spring 2022 edition of the Shareholder Advocate (PDF).

The persistent gender- and race-based pay gaps have many contributors. A recurring culprit is employers’ reliance on candidates’ prior inequitable pay, a phenomenon known as “start low, stay low.” Another is applicants’ lack of information about what the job should pay.

While some have placed the onus on underpaid employees to cure inequities through increased negotiation — which is itself a questionable proposition, given the evidence that women often experience penalties for such self-advocacy — negotiations are unlikely to have their desired leveling effect if candidates only know their past compensation, and not that of their potential colleagues.

To get closer to pay parity, the law should — and in some cases does — require employers to increase their provision of information while limiting their requests for financial figures from applicants.

Other jurisdictions should follow the lead of Colorado, New York City and Washington, which have recently required employers to advertise salary ranges with job postings.

Eliminate Reliance on Past Pay

Crafting employees’ salaries based on their prior pay essentially creates different starting lines for negotiation, disadvantaging women and people of color who are systemically underpaid

To avoid exacerbating past discrimination, 21 states and several localities have curbed employers’ ability to ask candidates about salary histories.

Some states, like California, go even further and prohibit considering prior pay even when applicants volunteer it.

Courts, as well as a state statute in Massachusetts, have trended toward the conclusion that reliance on previous compensation cannot insulate employers from claims of pay discrimination.

Despite this tremendous progress, two states — Wisconsin and Michigan — have taken the unfortunate step of prohibiting localities from enacting salary history bans.

Even worse, Mississippi is currently considering cementing this discriminatory practice, as the state’s equal pay law, which has been approved by the Legislature, has an explicit loophole permitting employers to justify differences in pay based on differences in prior pay.

Moreover, currently permissible questioning about applicants’ salary expectations may be serving as an end-run around bars on prior pay inquiries.

Predictably, there exists an expectation gap for women and people of color that strongly correlates with the wage gap.

Not only may certain candidates have depressed expectations because of a dearth of information, but, as Robin Bleiweis from the Center for American Progress has written, the “economic and other societal biases that devalue” certain individuals’ work — resulting in lower pay in their current positions — “likely inform [their] expectations and may effectively present the same structural barrier to equal pay as questions about prior salary.”

For these reasons, some courts have already recognized that applicants’ salary demands do not necessarily reflect nondiscriminatory reasons that could justify pay discrepancies.

To ensure that past discrimination does not sneak into negotiations, laws should prohibit reliance on past pay, whether the result of direct inquiries or indirect probing on salary expectations.

Increase Transparency Around Plausible Compensation

Studies have consistently shown that pay secrecy policies, which ban employees from discussing their compensation, worsen inequalities in compensation.Yet employers persist in explicitly prohibiting or strongly discouraging workers from sharing with each other information about what they are paid.

Without access to information about what others earn, employees are in the dark about how their pay compares to that of their peers.

As a result, more than a dozen states have explicitly protected workers’ ability to discuss their compensation with each other. Nonsupervisors also have some cover under federal law to discuss their wages.

Recently, some jurisdictions have taken a further step to level the playing field by passing pay transparency laws.

Under laws passed in Colorado, New York City and, recently, Washington state, employers must affirmatively post the anticipated salary range for a given position.

Other places, like California, Connecticut, Maryland, Nevada and Rhode Island, require employers to make this information available upon request or at certain stages in the interview process.

Such proactive measures are of crucial importance to new hires, who have yet to meet their future co-workers, and to individuals who are less plugged into networks, often for reasons stemming from a problematic lack of inclusivity.

And in this era of increased remote work, without the proverbial watercooler, side conversations that create a whisper network of information exchange are far less likely to occur.

These legislative developments make great strides in putting the ball in employers’ court to do the heavier lifting toward closing discriminatory pay gaps.

To ensure that the policies have their desired sea change, a few things must occur.

First, pay transparency cannot be limited to base salary, but must also include all forms of compensation, including bonus amounts and form, e.g., cash versus equity.

Second, when workplaces post huge ranges in job ads, they should also use and advertise objective factors that are considered in placing a candidate on the pay spectrum.

And finally, employers must foster a culture where openness around compensation — from the top down — is not only tolerated but encouraged.

After all, hiring managers should welcome pay transparency measures that allow them to invest time interviewing only those applicants for whom the possible paycheck is not deal breaker.

Conclusion

Legislators should continue shifting the burden of closing gender-based and other pay gaps to employers by providing employees with more information, while protecting employee salary history from discovery by the employer.

Such a one-way flow of information starts to balance the scales of employer-employee bargaining power, which are currently uneven due to employers’ outmatched information access about their internal operations, and likely also that of their competitors.

By keeping past pay out of consideration and telling applicants what they can expect to earn upfront, such compensation policies go a long way in giving women and people of color more balanced positions in negotiations, and hopefully helping to address the scourge of unequal pay.

By Christopher Lometti and Richard E. Lorant
Securities Litigation 101
Shareholder Advocate Spring 2022

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Over the past few years, companies including Alphabet, Boeing, Pinterest, Victoria’s Secret, and Wynn Resorts have agreed to sweeping corporate governance reforms to settle derivative lawsuits brought by their shareholders. Though mainstream news outlets have focused on the behavior that led to these lawsuits and the groundbreaking settlements themselves, we thought it would be helpful to discuss the nature of these “indirect” lawsuits and how they differ from other securities class actions.

Let’s start with some differences.

In a traditional securities class action, shareholder plaintiffs sue the company and certain of its officers and directors for violations of securities laws. In a derivative class action, shareholder plaintiffs sue corporate leaders on behalf of the company for breaching their fiduciary duty to the company and harming long-term shareholder value. In other words, shareholders “stand in the shoes” of the corporation to protect the present and future value of their stock holdings.

This leads to another important difference. While plaintiffs in a securities class action typically seek to recover monetary damages directly from the company and individual defendants, the goal of a derivative lawsuit is to address corporate governance and/or internal-control weaknesses that exposed the company to reputational and financial damage. While a settlement may include a financial contribution from defendants or their insurers, that money goes to the corporation—and is frequently tied to commitments to effectuate corporate governance changes to enhance the company’s long-term value.

Courts have made clear that before filing a derivative lawsuit it is advisable for a shareholder to first exercise her statutory shareholder rights to seek certain types of documents from the company. This “books and records demand,” which takes the form of a letter sent to the company’s Board of Directors, seeks internal non-public documents that enable a shareholder to better evaluate her concerns and, if warranted, file a derivative lawsuit with allegations supported by the documents the company produces.

It is also worth noting that derivative lawsuits must clear a high bar early in the proceeding. Plaintiffs must convince the court that it was necessary to file the lawsuit; merely demanding that the Board of Directors make the necessary governance changes would be “futile” because the directors are insufficiently independent to correct the wrongdoing. In some cases, the documents produced by the corporation in response to a books and records demand may provide support for why a pre-suit demand on the board would be futile.

Unlike federal securities litigation, derivative lawsuits are not subject to the Private Securities Litigation Reform Act of 1995 (PSLRA), which directs judges to select as lead plaintiff the movant or movants with the largest presumptive losses, if they are typical and adequate class representatives. In derivative litigation, the “relative economic stakes of the competing litigants in the outcome of the lawsuit” is just one of six factors judges use to select lead plaintiffs. So sophisticated institutional investors who may not have the largest position in the company may be appointed based on the quality of their legal pleadings, ability to represent the class, willingness to lead the case, and selection of counsel, among other factors, providing they pledge to remain shareholders throughout the litigation.

All these characteristics make derivative litigation an interesting option for pension funds of all sizes who are interested in enhancing the longterm value of their holdings by addressing shortcomings in a variety of areas, including corporate governance, workplace safety, environmental compliance, DEI (diversity, equity, and inclusion), and cybersecurity.

Fiduciary Focus

The Great Resignation. The Great Reassessment. The Great Refresh. There’s no shortage of monikers for the phenomenon that began in 2021 and continues today. Americans first quit work in record numbers in April 2021, according to the U.S. Bureau of Labor Statistics (BLS). They broke that record again in July and August of 2021 before hitting an all-time high of 4.5 million “quits” in November. Defined as voluntary separations initiated by employees, “quits” are an indicator of workers’ willingness or ability to leave jobs, the BLS says. The trend doesn’t appear to be fading: the BLS reported well over 4 million quits in both January and February of this year.

The Great Resignation has affected almost every industry and impacted employers across the country, including pension plans. What does the trend look like in the pension world and what lessons can we learn from peers? We asked colleagues from two different-sized state retirement systems to tell us how their systems have been affected by the Great Resignation, what challenges it has created for them, and how they’ve responded.

Recognize the New Reality

“We really are in a new world,” says Laura Gilson, Chief Legal Counsel at the Arkansas Public Employees Retirement System (APERS), a pension system with 64 employees. Gilson notes that a confluence of events with multifaceted causes has shaped this new reality. The COVID-19 pandemic was clearly a primary impetus, as it caused workers to reflect on their careers and their lives. While the pandemic may have triggered the Great Resignation, however, changes in demographics also play a role, Gilson says. Millennials and Generation Z, who now make up the largest portion of the workforce, are also more than twice as mobile as older employees, according to a late 2021 survey. More than three-quarters of Gen Z workers (ages 18-24) and nearly-two thirds of Millennials (ages 25-40) surveyed said they would soon be hunting for new jobs, compared to only one-third of baby boomers (ages 57-75). Just as there wasn’t a single cause of the Great Resignation, Gilson notes, no single answer can address all the challenges it has created.

Flexibility is Key

Janet Bray, Chief Organizational Excellence Officer at the Teacher Retirement System of Texas (TRS), says flexibility is key for employers. She notes: “It is important for employers to consider work-life balance,” observing that today the need to balance personal needs and business needs is critical. That statement is confirmed by recent studies, including research conducted by Oracle, which found that 88% of workers have changed their definition of “success”—with work-life balance (42%), mental wellness (37%), and workplace flexibility (33%) now top priorities.

In April, TRS was able to onboard the largest new hire class in its history, bringing the total number of TRS employees to 892. The new hires are comprised primarily of call center staff, who now work 100% remotely. The ability to offer remote work has proven key to successfully recruiting new employees.

Gilson reports that APERS has also successfully moved call center staff to remote work and that removing the distractions inherent to a crowded call center room has increased performance. Productivity is tracked in real time by supervisors, who are able to see metrics such as how much time staff spends on calls and how many calls they take, and APERS has found that technology has not impeded the successful transition to remote work.

Both pension plans are careful to note that while flexible work arrangements are becoming the norm, 100% remote working may not be appropriate or available for many positions. Bray says many TRS managers are offering a hybrid work arrangement with 2-3 days a week in the office. Gilson agrees that different positions may require different accommodations when it comes to remote work. For example, when she recruited last year for a part-time attorney position, all applicants expected—indeed, required—that the work would be performed remotely. She notes that the position probably would have been remote, at least temporarily, due to the pandemic, but that the pandemic had shifted power to the applicants. She is currently recruiting for a full-time attorney position and anticipates that the position may not be filled by someone who works 100% remotely.

Work Within the Confines—and Change Them When You Can

Gilson points out that government pension plans often have to work within the confines of the governmental system in which they operate. For example, in her case, remote work was allowed at that time under State of Arkansas government directives. Pension plans may have to be increasingly creative within those limits when recruiting new employees in today’s marketplace. Furthermore, according to Bray, if the opportunity exists to change those limitations, it may well be worth pursuing such efforts.

For example, TRS staff brought to its Board the results from a classification and compensation review that the system had undertaken. The review demonstrated the impact of the Great Reassessment on TRS, including direct costs (such as a 67% increase in costs to pay out annual and overtime leave at separation, difficulty in hiring key positions that require skills that are in high demand, and paying a premium for contract work that could be done at less expense by TRS employees) and indirect costs (increases in workload and burnout). Detailing the pressing need, staff recommended that TRS leave the state classification and compensation plan and adopt a TRS-specific classification structure, which was permitted by state law. At its February meeting, the TRS Board agreed and authorized implementation of a new classification structure.

Bray calls the new classification structure “a powerful tool for TRS” that will make it easier to conduct labor market comparisons, adjust classification system parameters as necessary to reflect the skills needed by the agency, and recruit talent using job titles that make sense in the market. A new salary structure will give TRS the flexibility it needs to respond to market shifts and the ability to vie against businesses who are often competitors for candidates to fill jobs.

Play Your Strong Suit—Mission and Culture

In the end, retirement systems’ most powerful tool may come down to the mission and culture of their organization. Bray notes that nearly every Texan knows someone who has made a significant impact in their lives and who is a member of the TRS system—a teacher, coach, counselor, or family member—and it is this support for the community and desire to be a part of the community that is crucial. Gilson agrees and adds that having a culture that values staff and prioritizes employee well-being in a collaborative environment is critical to today’s workforce and necessary to attract and retain the best and brightest.

That message resonates with Bray, who says that “executive management at TRS values the input of employees.” She notes that the executive director and the deputy executive director promote an open-door policy and regularly hold “employee huddles” that serve as pulse checks around the agency. Another aspect of the organizational culture within TRS is its serious commitment to diversity, equity, and inclusion in the workforce, which includes a high-level director of Diversity, Equity and Inclusion. “If I had known that work could be like this”, Bray says, “I would have been here a lot sooner.” And that’s a valuable lesson for all pension plans as we adapt to the changes wrought by the Great Resignation.

By Jan E. Messerschmidt

A federal judge last month granted preliminary approval to a settlement in which KPMG LLP, the global auditing firm, agreed to pay $35 million to shareholders of the now-defunct Miller Energy Resources, Inc. The substantial settlement, which culminated six years of litigation, is a significant victory for the class of investors, who needed to clear the high bar for auditor liability in securities fraud cases. On June 30, plaintiffs are scheduled to seek final approval of the settlement from Judge Thomas A. Varlan of the U.S. District Court for the Eastern District of Tennessee.

Cohen Milstein serves as court-appointed Co-Lead Counsel for the class of Miller Energy investors in the case, which was originally filed in March 2016. In their complaint, plaintiffs alleged that KPMG recklessly or intentionally failed to meet its obligations as the independent auditor of Miller Energy and perpetuated a massive fraud by signing off on the oil and gas firm’s $480 million valuation of its Alaskan oil reserve assets, which were later revealed to be largely worthless. KPMG’s role in Miller Energy’s fraud, plaintiffs alleged, led to millions of dollars in investor losses and Miller Energy’s eventual bankruptcy.

Miller Energy catapulted itself from an oil and gas penny stock to a behemoth company traded on the New York Stock Exchange following its 2009 acquisition of the Alaskan oil assets. Though Miller Energy purchased those oil reserve assets for only $2.25 million in a bankruptcy fire sale, the company spent the next five years telling investors that the assets were in fact worth $480 million. After Miller Energy replaced its small auditing firm with the global powerhouse KPMG in 2011, the company continued to file financial statements that represented the gargantuan valuation of the Alaska assets, all with KPMG’s blessing.

But as the Securities and Exchange Commission (SEC) would later find, KPMG’s tenure as Miller Energy’s auditor was replete with “repeated instances of [highly] unreasonable conduct.” By 2014, the truth finally began to emerge, with Miller Energy announcing a staggering $265.3 impairment charge to the Alaska assets, followed by a $149.1 million impairment the following year. Over the following months, the company announced it was suspending dividend payments, the SEC filed charges against the company, the New York Stock Exchange delisted Miller Energy stock, and, in October 2015, Miller Energy filed for Chapter 11 bankruptcy, later admitting that the Alaska assets were worthless all along—and that its years of financial statements to the contrary, all with KPMG’s blessing, were a sham.

In August 2017, the SEC confirmed what plaintiffs had alleged, announcing charges against KPMG and its lead partner on the Miller Energy engagement “for “improper professional conduct and securities law violations by KPMG” relating to its review and audit of Miller Energy’s financial statements. The SEC concluded that KPMG repeatedly turned a blind eye to evidence that the Alaskan assets were grossly overvalued, in violation of its legal and professional duties as an independent auditor. As a result of its misconduct, the SEC ordered KPMG to conduct a comprehensive review of its quality controls for audits and training materials with the oversight of an independent monitor, pay a civil money penalty of $1 million, and disgorge all of its Miller audit fees plus interest, a total of more than $5 million.

From the very start, however, plaintiffs faced tough odds in their attempt to hold KPMG liable. Courts typically require plaintiffs to meet a higher standard for finding auditors liable for securities fraud than defendant companies or their officers and directors, making it rare for auditor cases to even withstand motions to dismiss, let alone reach a favorable settlement or judgment. For the next five years, though, Cohen Milstein successfully fought against KPMG’s determined effort to defeat the lawsuit, surviving three motions to dismiss and multiple rounds of class certification and Daubert briefing in both the district court and the Sixth U.S. Circuit Court of Appeals.

Coming on the heels of the successful motion to dismiss decision obtained by Cohen Milstein in a separate case pending against Deloitte, another “Big Four” audit firm, the $35 million settlement agreement with KPMG shows that even under the high standards applicable to such cases, auditors can be held to account if they fail to adhere to their obligations to objectively and independently evaluate the accuracy of a public company’s financial statements.

Gary L. Azorsky, co-chair of Cohen Milstein’s Whistleblower/ False Claims Act practice group, along with co-chair Jeanne A. Markey, and Raymond M. Sarola, submitted a comment letter to the Securities and Exchange Commission (SEC) in response to the SEC’s proposed whistleblower program rules, 87 Fed. Reg. 9280 (Feb. 18, 2022) (the “Proposed Rules”).

Cohen Milstein represents individuals who submit claims under the SEC’s whistleblower Program. We are well aware of the valuable role that whistleblowers play in facilitating the enforcement of the federal securities laws. We believe that certain of the amendments to the whistleblower program contained in the Proposed Rules will benefit the SEC, whistleblowers, and ultimately all participants in the U.S. capital markets by providing clear incentives to individuals with information regarding securities law violations to provide that information to the SEC and to any other whistleblower program that is implicated by such violations.

Related Actions – Rule 21F-3(b)(3)

We support the SEC’s efforts to replace the current “Multiple-Recovery Rule” (Rule 21F3(b)(3)) with a new approach that strengthens the incentives that the SEC presents to whistleblowers. There is no policy reason why whistleblowers should be penalized merely because the information that they provided to the SEC and that led to a related action recovery may also qualify them for an award under a different whistleblower program. Such a penalty, which may arise under the Multiple-Recovery Rule when the SEC determines that another whistleblower program has a closer relationship to the related action but would provide a lower award than the SEC would provide, creates a disincentive to whistleblowers in precisely those situations in which the government has determined whistleblowers are of particular importance (i.e., situations in which multiple whistleblower programs are implicated). 

While each of the proposed alternatives represent improvements over the Multiple-Recovery Rule, we believe the SEC should select the Whistleblower’s Choice Option. This is the only “principal” alternative that fully ensures that whistleblowers are not penalized when their information leads to a related action recovery that implicates both the SEC’s and another agency’s whistleblower program.1 The Comparability Approach would result in such a penalty in situations in which the other whistleblower program was found to be “comparable” and has the “more direct or relevant connection” to the related action yet provides for a smaller award than the SEC would provide. And the Topping-Off Approach would retain the potential for this penalty in situations where the SEC’s covered action award was at or near the 30% statutory maximum. Under the Whistleblower’s Choice Option, the SEC would only consider the existence of the alternative award program at the payment stage.2 We therefore believe it would be appropriate and efficient to clarify in proposed Rule 21F-3(b)(3)(v) that the whistleblower’s obligation to inform the SEC that he or she has applied for an award from an alternative award program arises at the payment stage.3 We also suggest that the SEC specify the process by which a whistleblower should provide this notice, such as by creating a specific form or online mechanism. We are concerned that the language of proposed Rule 21F-3(b)(3)(v) may cause confusion among whistleblowers and their counsel as to when the obligation to inform the SEC is triggered4 and how notice should be provided. 

Consideration of the Dollar Amount of Awards – Rule 21F-6

We support the addition of proposed paragraph (d) to Rule 21F-6. Our experience representing whistleblowers is consistent with the experience of the SEC that large awards increase the awareness of, and incentives to participate in, the SEC’s whistleblower program. We can also confirm that the SEC is wise to be concerned that discretionary authority to consider the dollar amount to reduce the size of awards adds uncertainty and decreases confidence in the award process. Whistleblowers should believe that they will be rewarded, not penalized, for the time and personal risk inherent in presenting information to the SEC concerning those frauds that cause the greatest investor harm and most significantly undermine faith in the U.S. capital markets. The proposed paragraph (d) to Rule 21F-6 would appropriately communicate this important message to whistleblowers. Thank you in advance for your consideration of the comments expressed in this letter. Should you have any questions regarding these comments or any other issues related to the SEC’s whistleblower program, please contact our Whistleblower Practice Group through its cochairs, Gary L. Azorsky or Jeanne A. Markey, or attorney Raymond M. Sarola, at (267) 479- 5700. 

A copy of the letter can be found here.

Cohen Milstein’s Whistleblower and False Claims Act practice group has decades of combined experience successfully pursuing whistleblower cases under the federal and state false claims act statutes, and claims under the whistleblower programs of the SEC, IRS, and CFTC.

By Jeanne A. Markey and Raymond M. Sarola

In his State of the Union address, President Biden expressed concern with the growing — and troubling — trend of private equity ownership and operation of nursing homes and the inherent risk it presents to care of their residents. Between 2010 and 2019, such equity deals in health care nearly tripled in value, from $42 billion to $120 billion, totaling $750 billion over the last decade.

That staggering number represents thousands of hospitals, nursing homes, travel nurse companies, behavioral health programs, and other health care settings in every state. The profit-making goals of private equity are, in many ways, at odds with the needs of patients and the rules of government-financed health care programs. In fact, since 2013, private equity-owned health care companies have paid more than $500 million to settle claims of overcharging government health care programs.

Though there is always a profit motive when private investors acquire a company, private equity firms in the realm of health care should be viewed with skepticism. In this industry, the “product” at issue is a person’s health, not a computer or a bicycle pump. The business model of these companies — its goals, structure, and the operation of portfolio companies — combine to incentivize short-term profits at the expense of all other considerations. The result is that patients, communities, and even entire health care systems can suffer.

Fortunately, the government, aided by whistleblowers, has an invaluable tool in the False Claims Act, which allows it to prosecute fraud and protect the interests of patients and taxpayers.

Private equity firms are asset managers that raise capital from institutional and accredited investors and use that capital to obtain significant, often controlling, equity interests in private operating companies. Using the influence granted by their equity interest to direct the major business decisions of these companies, these firms seek to improve their financial condition and business prospects with the ultimate goal of selling the companies to the public through an IPO or to a strategic buyer at a profit that generates above-market returns to the firm and its investors.

A fundamental aspect of private equity is that, unlike traditional asset managers, they play active roles in the governance of their portfolio companies, a feature reflected in the considerable fees that private equity firms obtain from their investors. While equity-focused mutual funds have management fees that generally hover around 1% of assets under management, private equity funds commonly charge “2 and 20,” referring to a 2% management fee and 20% of profits above an agreed-upon threshold. Investors pay these high fees because these firms do not merely identify companies in which to invest, but also manage the operations of those companies for their own financial benefit.

At least four additional attributes of the private equity business model are relevant to understanding the incentives that tilt these firms toward emphasizing short term profits:

Private equity firms do not acquire portfolio companies for the long haul. The funds formed by private equity firms generally have a life span of five to seven years, meaning that from the time a private equity firm makes a new investment it is “on the clock” to improve the financial results of that company to make it attractive to a new buyer.

Individuals employed by private equity firms are typically appointed to sit on the boards of portfolio companies and to fill in as, or hand pick, the CEO and other senior executives, giving the equity firm multiple means of directing key business strategies.

Private equity investments often involve raising substantial amounts of debt financing to obtain a controlling interest in a company, secured by that company’s assets, which can leave the operating company with a significant debt burden on its cash flow that increases the risk of a future bankruptcy.

The combination of leveraged investments in companies with the one-sided performance fee that rewards private equity firms for profitable investments but does not penalize them for unprofitable ones creates a distorted structure that incentivizes these firms to select risky investments and to operate them in a risky fashion.

When private equity buys a health care company, patients often pay the price. A 2021 study concluded that private equity ownership increases the short-term mortality of nursing home residents by 10%, which represents more than 20,000 lives lost during a 12-year period, likely due to lowered nursing-staff-to-resident ratios and the diversion of patient care funding to private equity owners. An investigation by USA Today and Newsy found that when private equity firms acquire an interest in dental practices treating Medicaid patients, often children, those practices tend to incentivize dentists to increase the volume of procedures, regardless of medical necessity.

Just last month the Private Equity Stakeholder Project issued a report concluding that expansion of these companies into behavioral health services for vulnerable and at-risk youth has led to safety issues, quality of care issues, and even “horrific conditions” when short-term profits trump other considerations.

The Department of Justice and attorneys general in many states have begun to police the actions of private equity firms that cause portfolio companies to submit false claims to the government health care programs, and the False Claims Act has been their chosen enforcement tool. For example, in October 2021, the Massachusetts attorney general used the state’s False Claims Act to obtain a $25 million settlement from the private equity owners of a health care company following an earlier 2018 settlement with the company itself for $4 million. The government claimed that South Bay Mental Health Center submitted claims to Medicaid for mental health care services that were provided to patients by unlicensed, unqualified, and improperly supervised staff. The allegations directed at its private equity owners were that they knew of the company’s fraudulent scheme, held a majority of the seats on the company’s board, and yet failed to take the necessary steps to correct it.

Several effective strategies exist for deterring private equity from putting profits ahead of patients. First, the Securities and Exchange Commission can impose enhanced disclosure requirements on the investments and activities of private equity funds, a concept in which it has recently expressed interest. As Supreme Court Justice Louis Brandeis observed more than 100 years ago, “Sunlight is said to be the best of disinfectants.” Stronger disclosure requirements would increase transparency and bring more wrongdoing to light.

Second, the False Claims Act can be an effective tool in policing the actions of private equity firms that cause portfolio companies to submit false claims for payment to Medicare and Medicaid. It is increasingly being successfully used by the government and whistleblowers, who are often company insiders. This trend reflects the reality that private equity can both control and be complicit in fraudulent conduct.

Third, during the investigation phase of a false claims matter in which the health care company being targeted is owned by private equity, discovery directed at the private equity firm — and not just the health care company — should be encouraged. Due diligence memos and files, monthly portfolio updates disseminated to investors, and business plans revealing the firm’s strategies and timeline for enhancing the value of the portfolio company, for example, could all be immensely useful to understanding the nature and scope of the fraud alleged and the private equity firm’s role in perpetuating and profiting from that fraud.

As private equity firms further encroach upon the health care industry, it is essential that their activity is closely monitored for fraud and patients’ best interests are protected and prioritized.

Jeanne A. Markey is partner at Cohen Milstein Sellers & Toll PLLC and co-chair of the firm’s Whistleblower/False Claims Act practice group. Raymond M. Sarola is of counsel at Cohen Milstein and a member of the same practice group.

Access Private Equity, Health Care, and Profits: It’s Time to Protect Patients in full.

Cohen Milstein Has a Filed Lawsuit Against The Salvation Army ARC for
Unpaid Wages. CLICK HERE to Learn Who is Eligible to Join.

December 9, 2020

By not paying recovering addicts for their work, residential programs don’t provide the most effective approach to healing patients. Plus, it’s illegal.

By D. Michael Hancock, former assistant administrator for the U.S. Department of Labor’s Wage and Hour Division, and Joseph M. Sellers, partner at Cohen Milstein Sellers & Toll.

Addiction and substance abuse are destroying lives, communities and families all across America. The skyrocketing levels of addiction to opiates, alcohol and other substances make it critically important that effective treatment programs are available for those in need. Respect and dignity for those struggling to fight a nasty disease will be essential to save lives and reduce the number of families torn apart.

Substance abuse programs help in a variety of ways. Some residential programs facilitate the healing process by requiring patients to work full-time jobs as the central feature of the therapy. According to a report published in July by Shoshana Walter, an investigative journalist who has reported extensively on rehab programs that rely on unpaid work, at least 300 work rehab programs in 44 states are attended by over 60,000 recovering substance abusers every year.

Evidence-based studies of therapeutic communities demonstrate that work can be an important part of a holistic treatment program when tailored to a person’s skills and aptitude. Such work tends to build on existing strengths and reinforce the value of the individual. However, some research argues that it is not the work itself that provides effective treatment but rather accountability in the form of drug and alcohol testing and paid work. One prominent researcher is quoted as saying: “I’m not sure that it’s right to say that work is a powerful incentive. Paid work is a powerful incentive. It’s probably the money that’s the most important thing.”

But many of the workers in these rehab programs are not receiving pay. By not paying recovering drug and alcohol abusers, these programs do not provide the most effective approach to healing patients. Moreover, such arrangements are wrong — and illegal.

Most rehab programs that require work act essentially as temp agencies, farming the rehab residents out to commercial enterprises. The work is often for third parties, such as tree trimming services, dairies, poultry processing plants or oil refineries. The wages are remitted not to the workers but to the rehab centers. In many cases, these workers are not receiving the benefits of a hard day’s work, working for no pay, no Social Security credits, no unemployment insurance payment, with all of the fruits of their labor accruing to the treatment centers.

Other rehab-affiliated programs, notably the Salvation Army, have their patients perform grossly underpaid work for their commercial enterprises — if they did not have this captive workforce, they would have to seek labor from the open market.

Work programs that require residents to work jobs that produce goods or services for enterprises operating in the broader economy are obligated to ensure that those working are protected by employment laws. Minimum wage and overtime laws apply even if the employers claim they are not covered by these requirements because of their charitable status, as determined by a unanimous 1985 Supreme Court ruling. The decision stated that even if workers did not consider themselves to be employees, “minimum wage, overtime, and record-keeping requirements of the Fair Labor Standards Act” applied to all workers “engaged in the commercial activities of a religious foundation.” The same rules apply to nonreligious charities that engage in commercial activities.

The purposes of these protections are to guarantee a floor under which wages cannot fall to safeguard workers from having to compete based on substandard conditions, as well as to protect businesses that compete with them from unfair competition. These goals are not in any way incompatible with the goals of substance abuse treatment programs. Furthermore, there is no evidence that third-party employers are paying less to the rehab centers than they would to workers secured through temp agencies.

One of the fundamental principles underlying wage and hour law is that neither workers nor businesses should be forced to compete based on substandard wages. In fact, the Fair Labor Standards Act was put in place largely in recognition that the most vulnerable workers need protection because they are largely without power to demand fair treatment on their own.

Addiction treatment programs that require work must abide by the law and protect recovering abusers as members of the workforce. Otherwise, these workers, and the other workers and businesses competing with them, suffer the very harm Congress set out to prevent.

We owe these workers the protection of the law, but more than that, we owe them the respect and the dignity that are signified by paying someone an honest day’s pay for an honest day’s work.

The article is availabe at NBC Think.

By Julie Goldsmith Reiser, co-chair of Cohen Milstein’s Securities Litigation & Investor Protection practice, and Lori Nishiura Mackenzie, co-founder of the Stanford VMware Women’s Leadership Innovation Lab.

The NFL’s Rooney Rule, requiring that at least one person of color be interviewed for head coaching vacancies, has lost its effectiveness in the NFL but should still be used by corporate boards to improve diversity, say Julie Goldsmith Reiser, partner at Cohen Milstein, and Lori Nishiura Mackenzie, co-founder of the Stanford VMware Women’s Leadership Innovation Lab. They offer guidance on using it purposefully and authentically.

With the NFL plagued by years of scandal and backlash for its treatment of Black players, it comes as no surprise to see owners back in the spotlight battling a discrimination lawsuit. Former Miami Dolphins head coach Brian Flores sued the NFL and three teams for racial discrimination, sparking much larger conversations about diversity in hiring and the NFL’s “Rooney Rule.”

The NFL implemented the Rooney Rule in 2003, requiring that at least one person of color be interviewed as part of the hiring process for vacancies in head coaching positions. It appeared to work. From 2001 to 2005, the number of Black head coaches in the NFL, while still small, tripled from two to six. After more than a decade of success resulting in nearly 25% representation of Black coaches in the NFL, the rule undeniably faltered from 2017 to 2019, with the percentage of Black head coaches dropping from 21.9% to 9.4%, where it remains today.

As an attorney who works with shareholders to hold companies accountable promoting diversity, equity, and inclusion in the workplace and a strategist who helps companies thrive through building communities with strong cultures, we recommended that companies adopt an evolved version of the Rooney Rule for their own efforts to diversity corporate boards.

There are a number of lessons that corporate boards should draw from the NFL’s experience with the Rooney Rule to avoid similar backsliding.

A True Commitment Is Essential

We continue to believe the Rooney Rule can work if it evolves and is part of a broader, authentic commitment to diversity.

First, how did the rule lose effectiveness? The interview process now appears to reflect tokenism where White team owners interview Black candidates only to avoid a fine from the NFL, not because the Black coaches have a legitimate chance to secure a head coach position. Research shows that when there is only one minority candidate in a pool of four finalists, their odds of being hired are statistically zero.

While interviewing just one candidate from an underrepresented group does not change the status quo, interviewing at least two has a greater likelihood of leading to change. Interviewers are less likely to see any particular candidate as “the Rooney Rule” applicant and instead, consider their qualifications. And since the candidates are indeed qualified, just overlooked due to biases, their skills can now shine. A truly diverse slate can also help the candidate’s performance and help interviewers be fair.

The revised Rooney Rule of at least two candidates (or even better, 50%) from underrepresented groups is a crucial step in the right direction. But for boards to succeed in their efforts to diversify, they must shift from a compliance mindset to one of truly valuing diversity. Then they must create the processes to prevent biases from creeping into their decision making, focusing on continual improvement rather than a one-time, quick fix.

How to Support Diversity Efforts

Here are some ways to support diversity efforts in the boardroom.

Focus on Skills, Not Titles

An anonymized skills matrix, such as the NYC Boardroom Accountability matrix, allows the search committee to assess important skills across all existing, and then prospective, board members.

This can be effective for two reasons. First, it allows boards to assess candidates based on their unique skills, not broad-based experience such as prior board experience or titles, such as having been a CEO or board member for another company. With women and people of color in low numbers on boards and in the CEO seat, this can open the door to more candidates.

Second, it can help boards more effectively identify what they need, which can lead to a more productive interview process. Boards should also retain a neutral party to populate the skills matrix of prospective board members in an anonymized way, to minimize implicit gender and racial bias.

Curate a Diverse Interview Committee

Not only will diversity on the committee lead to better decision making; it can also reduce biases. Being from an underrepresented group does not automatically make a person less biased, but because women and people of color have often experienced bias, they are more likely to practice techniques to block it.

And having a diverse committee can support the candidates in moving past stereotype threat to imagining that they could truly belong on the board and contribute in a meaningful way.

Move From a ‘Quick Fix’ to Inclusion

These proposals can lead to a stronger hiring process, but the work does not end here. Once a candidate is chosen, companies should commit to ongoing efforts to support the new member with a thoughtful onboarding process that aims to fully integrate the new board member.

The board should also engage in designing inclusive norms and educate incumbent members about the value of hearing from different viewpoints in order to truly benefit from the increased diversity.

Research and experience show that diversity efforts must be intentionally incorporated and customized into the recruitment process to make lasting, meaningful change.

A six-year study by Credit Suisse reflected that companies with women directors on their boards outperformed shares of their peers with all-male boards by 26%. Likewise, a Morgan Stanley study found that U.S. companies with three or more female directors outperformed the earnings of companies without female directors by 45% per share.

These outcomes show that representation yields stronger performance—a metric that surely the NFL owners care about too.