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Top Tips to Resurface After a Bankruptcy

R. Scott Williams, Partner, Rumberger, Kirk & Caldwell

Despite a strong first quarter for the American economy in 2019, there have been many troubling signs. The recent inversion of the yield curve, newly announced layoffs and tariffs in the automotive and agriculture sectors, and modest increases in GDP growth indicate that troubled financial times may be around the corner for Alabama. Companies facing financial difficulties are often concerned with how to identify financial stress, when to ask for help, and how to navigate through troubled financial waters.

Identifying the problem

One of the keys to getting ahead of potential financial issues is identifying when you have a problem. Companies should be paying close attention to monthly and quarterly performance metrics. Important questions to consider include: Are you in compliance with your loan covenants? Are you having to stretch payables? Are you having to finance receivables or manipulate them beyond normal limits? Each of these indicators can predict impending problems. Early warning signs also often come from a friendly call from your banker/lender, or maybe a concerned visit from the company CPA.

Take the early warning signs seriously. Companies may be able to avoid a bankruptcy or a substantial restructuring by proactively identifying potential areas of concern and addressing them in a timely fashion. Moreover, sometimes even bad financial news can be an opportunity for growth and retrenching. For example, recognizing that a product line is not profitable and discontinuing it can allow for expanding core activities that generate profit.

Successful companies can face bankruptcy or substantial financial challenges and come out stronger on the back side. Many people in Alabama remember the stories of HealthSouth (now Encompass Health) and its financial struggles. That company has now rebranded, is extremely profitable and is an established leader in the healthcare industry. This is just one example illustrating that a bankruptcy or substantial financial restructuring may not be the end of the line.

Taking the plunge

If a company gets to a point of financial uncertainty, assembling the right team of professionals is important for successful reorganization. As with many aspects of the legal profession, the restructuring world is highly skilled and specialized. Identifying the right professional to assist and guide your company is an important step. In addition to legal advice, financial advisors/accountants and potential investment bankers can help companies resurface in troubled waters of a bankruptcy.

In considering when to file bankruptcy, there is an important legal principle to remember. A once profitable company begins to show that it is insolvent (in other words, that it’s not making its regular payments to creditors or is upside down on its balance sheet) when it enters what is known as the “zone of insolvency.” When companies enter this zone, legal fiduciary obligations shift. Normally companies are beholden to their shareholders and are driven by profit and earnings. When a company enters the zone of insolvency, that legal obligation changes, and company leadership’s priority responsibilities are redirected to creditors. As a result, the interests of creditors have to be placed above that of equity interest holders.

How to Chart a Course

A bankruptcy is a difficult and expensive process, but one that can streamline and modernize a company. An important adage I always tell clients is, “When you have dug a hole the first rule is to stop digging!” Companies that have been losing money can’t continue to simply lose money and think a bankruptcy will solve their problems. Rather, a bankruptcy is an opportunity to put a pause on creditor concerns and focus on the bottom line to realign priorities. Companies should take a bankruptcy filing as an opportunity to reject and abandon practices and product lines that have been losing money and focus on core assets and profitable ventures.

Restructuring professionals, both legal and accounting, can help guide companies through this process. For example, tools exist that allow a company to reject unnecessary leases or burdensome contracts. Bankruptcy professionals can help companies identify those leases and contracts and take steps to mitigate future loss.

The reality of a bankruptcy is that there is simply not enough money to go around, and cash to pay creditors and establishing the ground work for future operations is critical. Spending precious dollars on activities that are not fruitful or assist in the long run success of the company have to be curtailed and eliminated.

In addition to short-term concerns about cash, long-term issues also need to be addressed. Can potential profits be sustained in the long run? Are product lines and business opportunities going to continue to present themselves in the future? Will a company’s reputation be sustainable? Will the marketplace accept products in the future? Every decision a bankrupt company makes must be made with an eye toward the future.

What is a successful bankruptcy? 

In a bankruptcy, success is measured in the eye of the beholder. Creditors always want to be paid in full, but often that is impossible. Alternative routes to success include companies who can maintain their workforce and provide vendors an opportunity to continue to sell product to a new entity, or those that sell or restructure themselves so that a hiccup in financial performance can be overcome with a fresh start.

In a bankruptcy, recovery is different for every party and in every circumstance. A bankruptcy, however, should always be entered into knowingly and with a clear path forward charted. This path helps the company navigate its way through a bankruptcy as quickly and efficiently as possible to ensure and maximize creditor recoveries, and to enhance the long-term prospects of the company.

Scott Williams is a partner in Rumberger, Kirk & Caldwell’s Birmingham office, where he represents parties in complex commercial bankruptcy and litigation matters. He can be reached at swilliams@rumberger.com.

How Small Businesses Can Enter the Sea of Federal Procurement

Todd Overman and Taylor Hillman, of Bass, Berry & Sims PLC

The All Small Mentor-Protégé Program (ASMPP) was established by the Small Business Administration (SBA) to extend business development assistance to all small businesses and help them achieve success in competing for federal government contracts.

According to the SBA, only 20 of the 511 approved Mentor-Protégé Agreements had Alabama addresses listed as of May 5, 2018, even though one of the ASMPP’s top 10 district offices is located in Alabama.1 While there may be more Alabama-based businesses involved in the ASMPP, these numbers suggest a real opportunity to expand ASMPP relationships in the Alabama federal contracting market. The ability to offer tangible benefits for small business growth as well as meaningful participation by large businesses in previously unavailable set-aside opportunities creates a real “win-win” scenario that more contractors should take notice of. 

The SBA created an all-inclusive program, rather than individual programs for each small business constituency (Service Disabled Veteran Owned Small Businesses, Women Owned Small Businesses, HUBZones, etc.), to simplify and enhance access to the program. Protégés can acquire valuable business guidance and opportunities from their relationship with a mentor, including financial support; assistance in navigating the federal procurement bidding, acquisition, and performance processes; business development advice including strategic planning and opportunity identification; and guidance on internal business management systems. Mentors in turn can provide various forms of assistance to small businesses without the fear of affiliation risk and can create joint ventures with their protégé to pursue small business set-aside prime contracts and subcontracts.

ASMPP Eligibility

To be eligible for the ASMPP, a protégé must be small for the NAICS code in which it is requesting a Mentor-Protégé relationship and have industry experience in the NAICS code in which assistance is sought.2 Additionally, all protégés must be organized for-profit or as an agricultural cooperative. Protégés must have a mentor and business plan before submitting their ASMPP application, as well as register in the System for Award Management (SAM). Protégés are limited to no more than two mentors in their business lifetime.

Mentors can be a large (or small) business and must be organized for-profit. Mentors cannot have more than three protégés at any given time. To qualify as a mentor, a business concern must:

  1. Demonstrate that it is capable of carrying out its responsibilities to assist the protégé firm under the proposed mentor-protégé agreement;
  2. Exhibit good character;
  3. Not appear on the federal list of debarred or suspended contractors; and,
  4. Prove it can impart value to a protégé firm due to lessons learned and practical experience gained or through its knowledge of general business operations and government contracting.3

After being approved as an ASMPP mentor, the business is required to annually certify that it continues to possess good character and verify its favorable financial position to each protégé in order to continue serving as a mentor to a small business concern in the ASMPP.4

ASMPP Agreements

Applicants must create and submit a mutually negotiated and agreed upon Mentor-Protégé Agreement. A Mentor-Protégé Agreement must set forth an assessment of the protégé’s needs and provide a detailed description and timeline for the delivery of the assistance the mentor has committed to provide in order to address those needs.5 Specifically, the Mentor-Protégé Agreement must:

  1. Address how the assistance to be provided through the agreement will help the protégé firm meet its goals as defined in its business plan;
  2. Establish a single point of contact in the mentor concern who is responsible for managing and implementing the mentor-protégé agreement; and,
  3. Provide that the mentor will commit such assistance to the protégé firm for at least one year.6

In order to be approved, the SBA must determine that (1) the mentor will be able to provide assistance that will create a real opportunity for developmental growth for the protégé and (2) the mentor does not intend to use the ASMPP to simply access federal small business set-aside contracts that it would not be eligible to compete for otherwise. The SBA will deny a Mentor-Protégé Agreement if it has ever made an affiliation determination between a proposed mentor and protégé.

As of December 31, 2018, the SBA had approved 629 ASMPP Agreements. Once approved, the agreement is good for an initial three-year term and can be renewed by the SBA for an additional three-year period. Importantly, while an agreement is effective, all benefits provided by the mentor to the protégé cannot be used for affiliation determination purposes – but those benefits must be specifically identified in the agreement.7 This can provide a real advantage to a small business looking to receive business development or contractual/technical assistance as it pursues new federal opportunities.

ASMPP Joint Ventures

Protégés in the ASMPP are eligible to form a joint venture (JV) with their SBA-approved mentor and compete for federal contracts and subcontracts based on the protégé’s size and status, regardless of the mentor’s size.8 Once a protégé no longer qualifies as a small business under its primary NAICS code, it will no longer be eligible for the ASMPP, but will be able to complete contracts previously awarded.9 The ASMPP requires that the JV perform the appropriate percentage of work based on the subcontracting requirements, and the protégé must perform at least 40% of that work which must go beyond administrative or ministerial functions.10 In addition, the JV must submit annual reports to the SBA and the contracting agencies explaining how the work is performed under each contract.

To form a JV, the protégé and mentor must have a written JV agreement that meets very stringent regulatory requirements.11 The SBA will not review or approve a JV agreement before a JV competes for a contract, except in the case of an 8(a) contract. If a JV is awarded a contract and a size or status protest is filed against it, the SBA will then review the JV agreement to determine the JV’s eligibility. Thus, it is imperative that a JV agreement between mentor and protégé meet the following requirements:

  1. State the purpose of the JV;
  2. Designate the protégé as the managing venturer of the JV (dependent on the type of set-aside competing for) and identify an employee of the managing venturer as the project manager responsible for performance of the contract;
  3. State that the protégé owns at least 51% of the JV entity, if it is a separate legal entity, and that the protégé will receive profits from the JV that are commensurate with the work the protégé will perform;
  4. Provide for the establishment and operation of a special bank account in the name of the JV that requires signatures by all parties for withdrawals;
  5. Itemize all major equipment, facilities and resources to be furnished by each party;
  6. Specify each party’s responsibilities with regard to contract negotiations, labor sourcing, and contract performance;
  7. Obligate all parties to ensure that the contract is performed regardless of whether one party withdraws from the agreement;
  8. Designate that accounting and administrative records be kept in the managing venturer’s office and require that the managing venturer will retain final original records of the JV after contract completion;
  9. State that all quarterly financial statements showing cumulative contract receipts and expenditures will be submitted to the SBA within 45 days of the end of each operating quarter of the JV; and,
  10. State that a project-end profit and loss statement, including a statement of final profit distribution, will be submitted to SBA no later than 90 days after completion of the contract.12

While this list provides general guidance on how to structure an ASMPP JV agreement, it is not inclusive. Every type of set-aside is governed by its own regulations, which should be reviewed when forming any JV and drafting the accompanying JV agreement.

Todd R. Overman is a member at Bass, Berry & Sims PLC in Washington, D.C. He represents businesses as they move through the contracting process with federal, state and local governments. He can reached at toverman@bassberry.com.

Taylor A. Hillman is an attorney at Bass, Berry & Sims PLC in Washington, D.C. She assists clients throughout the contracting process with federal, state and local governments. She can be reached at taylor.hillman@bassberry.com.

Footnotes 1 through 9 and 11 refer to the electronic code of federal regulation, cited at: https://www.law.cornell.edu/cfr/text/13/125.9

Footnotes 10 and 12, are cited at: https://www.law.cornell.edu/cfr/text/13/part-125

Who Owns Alabama’s Forests?

Stephen Burdette

What types of owners are there in Alabama, owners of forestland?
Burdette: There are varied forest landowners of Alabama’s 23 million acres of timberland, 94 percent of which is privately owned, according to the Alabama Forestry Commission. These owners range from industrial owners (6 percent) to private owners (88 percent) and includes individuals, families, Timber Investment Management Organizations (TIMO), Real Estate Investment Trusts (REIT), and forest industry companies.

Are there still people who buy land directly as an investment, rather than investing in an REIT or in an ETF (exchange-traded fund) that is forest-based?
Burdette: Yes, individual investors still by land directly as an investment. REITs and TIMOs own about one quarter of the privately-owned timberland in the Southeast, according USDA Forest Service information. The rest is owned by other entities, such as individuals, families, businesses, and forest industry companies. Forestland is bought and sold all the time. There are currently thousands of listings for forestland on the open market being marketed to the public for private ownership.

What percentage of Alabama timber owners are owners of relatively small holdings?
Burdette: About 75 percent of forestland owners possess 40 acres or less, according to USDA Forest Service Southern Research Station Resource Bulletin SRS-146 – Alabama’s Forests, 2005.

What are the biggest holdings in the state? Who owns them?
Burdette: Information on ownership of land is kept in each county’s records and many owners own property in multiple counties. Therefore, it requires much research to find who is the largest forest owner in Alabama and that information is not readily available. Some of the larger landowner’s in Alabama are Weyerhaeuser, Hancock, Resource Management Services, Westervelt, Dudley. These are primarily industry owners, REITs and TIMOs.

What are the interests/motivations of a small acreage owner of forest land?
Burdette: From my perspective, the typical small acreage owner is interested in two things: recreational use (hunting, fishing, ATV, hiking, etc.) and income from the sale of products produced from their forest. Both are important to most owners of timberland, but all have their own unique goals for owning land.

At what size of acreage is it compelling to have a professional forest manager or management plan?
Burdette: Stewardship plans have been written for holdings as small as 10 acres. From a practical standpoint of timber management, 20 acres is about small an area as can be managed for timber production by a professional forester. The key factor is timber volume. The questions buyers ask is whether there is enough volume on the tract to allow an operator to work for a week or more without moving again. This is due to the cost of moving the required equipment to and from the site.

American Forest Management, a land management and forestry consulting company, has two offices in Alabama — Prattville and Russellville.

Benchmark Changes in This Year’s Fed Income Taxes

Dr. Kerry Inger

What are the main new tax laws this year?
The Tax Cuts and Jobs Act of 2017 was the most significant tax reform since 1986, so there are many new tax laws! At the individual level the repeal of personal and dependent exemptions and doubling of standard deduction is a significant change that will impact many taxpayers. Changes to the child tax credit, lowering of tax rates and specific changes to certain itemized deductions will also impact many individual taxpayers. One of the most significant changes was the reduction in the corporate tax rate from a top rate of 35 percent to a flat rate of 21 percent. There is also a new deduction for flow-through entities (partnerships, s-corporations, etc.) to alleviate the difference between the corporate and individual rates.

What is the expected impact on individuals and businesses?
Many individuals will no longer claim itemized deductions, simplifying the tax return preparation process. Due to changes in withholding schedules to reflect decreased tax rates, some taxpayers who traditionally received a refund will receive a smaller refund or perhaps owe tax. Going forward, taxpayers can adjust their withholding if they prefer a refund. There is some added complexity on the business side, but most businesses should experience a reduction in taxes paid. The new international tax rules are quite complicated, so companies operating overseas will need to pay particular attention.

How will the higher standard deduction affect taxpayers?
Many individual taxpayers will no longer claim itemized deductions because the standard deduction was doubled and the sum of their itemized deductions will not exceed the standard deduction. In addition, certain itemized deductions are limited or no longer available. For example, the deduction for state and local tax is now capped at $10,000 and employees can no longer deduct unreimbursed job expenses. Taxpayers may want to use a bundling strategy to take advantage of itemized deductions in one year and the standard deduction in another. For example, taxpayers may make charitable contributions every other year to take advantage of the tax benefits that are not available if the standard deduction exceeds itemized deductions in total.

What advice would you give to those who receive a refund (i.e., put it in a savings account, spend it, invest, etc.)?
It depends on the individual’s personal circumstances. Paying off debt, investing and saving for retirement are always good options when you have extra cash!

About Dr. Kerry Inger
Dr. Inger is an assistant professor who specializes in taxation in the School of Accountancy, Harbert College of Business, Auburn University. Her research focuses on the intersection of financial accounting and corporate taxation. Her work has been published in The Journal of the American Taxation Association, The Journal of Managerial Accounting Research, Tax Notes and Issues in Accounting Education.

Animals, Celebrities, Old Movie Trailers…What Works in Super Bowl Advertising

Dr. Linda Ferrell

With so many new communications platforms for marketers to use these days, does the Super Bowl ad still hold the same weight as it once did in terms of effectiveness and considering the large cost involved?

Ferrell: The Super Bowl is a massive cultural celebration. Whether you’re into sports or football, we love to get together with friends and enjoy the Super Bowl. Its effectiveness…it brings together colleagues, families and friends. Its viewership last year was over 103 million people in the U.S. The rate per 30-second ad is also a proxy for efficacy with this year’s Super Bowl charging a record $5.25 million ($1 million more than the 2014 Super Bowl).

The beauty is in the strategy for the ad. The very best ads get talked about, tweeted and discussed on morning shows and talk shows for days after the Super Bowl. Media outlets have “Ad Meters” where viewers can share their thoughts on best and worst ads. In addition, the very worst ads get traction and visibility. Your worst nightmare as a Super Bowl advertiser is to be in the middle and not be noticed or talked about. Your $5.25 million is well spent if you end up getting a lot of “free residual press.”

Often, it seems Super Bowl ads are focused on making the viewer laugh—hoping to provide a memorable “water cooler” moment. Does this method of marketing still work best, or should Super Bowl advertisers consider a different, more conscientious approach in such a day and age of political and societal turmoil?

Ferrell: The Super Bowl is a celebration with friends, family, food and frosty beverages. Social issue ads have to be handled very carefully to be successful. They must be very optimistic in their perspective and they are indeed, challenging for this broadcast. Nationwide ran an ad, “The Boy Who Didn’t Grow Up” in the Super Bowl a few years ago. The ad was highly controversial as it had a young boy stating that he “couldn’t grow up because he died in an accident.” The response was an “outrage” from the audience. Tweets started immediately: “Nationwide just ruined the Super Bowl.”; “Not cool, Nationwide. Not cool.”; “Nationwide Monday morning staff meeting is going to be a humdinger.”; and “Worst play in Super Bowl history #Nationwide #WhatWereYouThinking.”

This year we will see more ads featuring successful female celebrities and athletes including Serena Williams.

What trends are you seeing in advertising that we might look out for while watching this year’s Super Bowl?

Ferrell: Continuation of what marketing research knows that works in Super Bowl ads: Use animals, humor, celebrities, food (snack, frosty beverages, restaurant) and early movie trailers and promotion. Historically, movies that are promoted in the Super Bowl far exceed total box office receipts of those that are marketed more traditionally. Historically there have been eight to 10 movie trailers in the Super Bowl. This year there is expected to be three or four. The increasing cost of ads and declining box office revenue are contributing to this effect.

Dr. Linda Ferrell is professor and chair of the Department of Marketing in Auburn University’s Harbert College of Business. Her research interests include marketing ethics, ethics training and effectiveness, the legalization of business ethics as well as corporate social responsibility and sustainability. She has served as an account executive in advertising with McDonalds’ and Pizza Hut’s advertising agencies in Houston, Indianapolis and Philadelphia. She was recently honored as the Innovative Marketer of the Year by the Marketing Management Association.

Market Volatility: Weighing the Wide Swings

John S. Jahera Jr., Lowder Professor of Finance, Auburn University

What is market volatility?
We have all witnessed the swings in the market that can range from a 600-point increase in the Dow Jones Industrial Average to a 600-point drop on any given day. Many people try to better understand what causes such volatility and what it means for all of us. First, what is volatility and, second, how does one measure volatility? Volatility refers to wide swings in prices within a certain time period in the markets. Quite simply, it can be measured as the standard deviation of the returns for a stock or for the market as a whole. Volatility is not new and will always be with us. While many are concerned about the market ups and downs of the last several months, the volatility we are seeing is not unusual.

To get a better understanding of volatility, consider what drives value in the marketplace. The fundamental drivers of the value of common stock are the amount, the timing and the risk of the future cash flows. In theory, valuation is quite simple. Investors give up money today in the hope of gaining even more at some point in time in the future; hence the amount, the timing and the risk. The players in the market are constantly receiving new information that causes a reassessment of one or more of those three drivers of value. Volatility should be no surprise for us given the exceedingly rapid flow of new information.

Market volatility tends to increase when markets are falling, so given the declines in recent months, one might expect more volatility. Another characteristic of a volatile market is heavy trading. Of course, it depends on what happens to how investors view the markets.

Volatility can be impacted by many factors but the fundamental reason is something happens to change expectations. Given the domestic political environment as well as global issues, the volatility is not surprising. Interestingly, volatility over time has varied greatly but in general, what we are seeing today is not different from earlier times, such as the Great Depression years. The decade of 2000 saw a great deal of volatility particularly during the financial crisis years.

What are some key factors at play in upending some of the market’s previous, record-setting gains?

In terms of factors, it is hard to be precise but many analysts might argue that volatility is affected by changing expectations on the part of investors. That is, as investors become a bit more fearful of the market, more volatility can ensue. More recently, there have been concerns regarding the tariff issues with China. Also there may be other factors such as actions by the Fed to increase interest rates and, of course, more recently the government shutdown. Some would argue that computer trading and algorithmic trading have increased volatility. Upwards of 50 percent of trades are done via computer trading and trading algorithms. Some say the percent is as high as 70 percent. Those types of trading activity do the same thing individuals would do in terms of triggering orders to buy and sell. However, such trading can make trades faster and at a much higher volume than individuals. It is the speed at which trading algorithms can respond that some say drives volatility. We still have to remember that the market has been setting record high levels throughout the last two years, so it is not unexpected that we would see some adjustment at some point…markets go up and then markets go down. That is part of the cycle.

What other factors are out there that could cause further upset to the market?

Other factors could include global issues from outside the U.S. but that might impact our economy. There may also be some concerns with rising inflation. The recent increase in inflation has been very modest, however, and overall inflation remains quite low. In addition, we all know that markets move in cycles and some are of the belief that the bull market has run its natural course.

How should people respond to the ups and downs of the financial market?

While we certainly witnessed a number of large downturns and also upturns in the market in 2018, this was not necessarily out of the ordinary. Looking back over time, 2017 was somewhat unusual in terms of a lower standard deviation of return around 7 percent while 2018 reflected a more normal standard deviation around 14-15 percent. So we have to recognize that what happened in 2018 is not out of the ordinary and we must be careful to not overreact.

In terms of individual investors, any reaction you may have will depend on your time horizon. For those who are older perhaps a move to “safer” investments would be warranted. For those with a longer time horizon, one could just continue to hold and ride out the downturn so to speak. Just like when the market fell nearly 50 percent during the financial crisis, it will come back at some point in time. Market timing is exceedingly difficult and too often people sell at the wrong time and buy at the wrong time. It is important the people not panic and rush to sell.

John S. Jahera Jr. serves as the Bobby Lowder Professor of Finance in Auburn University’s Harbert College of Business. He is the author of more than 90 articles in a variety of academic and professional journals including the Journal of Financial Research, the Journal of Law, Economics & Organization, Research in Finance, the Journal of Real Estate Finance & Economics and the Journal of Banking & Finance. The primary focus of his research has been in the area of banking, corporate finance and corporate governance. He serves as co-editor of the Journal of Financial Economic Policy and is on the editorial board of Corporate Finance Review, Review of Pacific Basin Financial Markets & Policies and International Journal of Business & Finance Research.

Fraud in Your Workplace

Photo by Jefferson Santos on Unsplash

Ominous music. Dark lighting. A menacing aura. These are just a few of the cues that help us determine when a film character may be up to criminal activity. However, when trying to identify a wrongdoer in our day-to-day lives, the task becomes much more difficult. Could you point out a criminal on the street? What about in your workplace?

Unfortunately, many company leaders haven’t learned this crucial skill. According to the Association of Certified Fraud Examiners (ACFE), an estimated five percent of annual revenues from companies just like yours are lost to financial crime, including fraud. In 85 percent of cases, fraudsters display at least one behavioral red flag — and in 50 percent of cases, they display multiple. And yet, fraud continues to have a devastating impact on businesses across the country. In order to get ahead of this disturbing trend, management must understand the red flags that fraudsters display, and be empowered with knowledge on how to combat the potential threat.

But first, leadership must understand why employees are driven to commit fraud.

Why Good Employees Become Fraudsters

Often, an individual’s temptation to commit fraud begins while working in an environment with lax internal controls. These employees are often left in a position to check their own work, have broad access to money going in and out of the business and have unfettered access to company cards.

While being in this position does not a fraudster make, when combined with external stressors — such as bad economic times, a divorce, an illness, a gambling habit or the failure of a business — lenient internal controls provide the opportunity for employees to commit fraud, then rationalize their actions by saying, “I’ll only take a small amount, then return it later when I’m in a better situation.”

As evidenced here, fraud is often committed in desperate times, and even trusted, longtime employees can fall victim to temptation. This means they often won’t seem like criminals from the movies. In order to discover these fraudsters, management must be vigilant about watching for potential warning signals.

Habits of Typical Perpetrators

Remember the book series Where’s Waldo? Each page would ask readers to find the striped-shirted hero among highly detailed scenes. Finding workplace criminals is very similar to playing a game of Where’s Waldo. You must use attention to detail and be able to pick out anomalies within the actions of your employees.

Behavioral anomalies often manifest in the same patterns, and can include showing consistent unhappiness with their job, habitually finding ways around established procedures to “beat the system” or showcasing an extreme reluctance to relinquish control or share information with colleagues or management. These actions all serve as red flags of potential involvement in fraud.

It is important to note that the existence of one or two of these indicators does not always correlate with guilt. However, if these signals are present, it is a good idea to take a closer look to ensure that a larger threat is not occurring. If it is, you must be prepared with an action plan to stop the plot before it causes irreparable damage to the company.

Appropriate Responses to Fraud in the Workplace

If you suspect fraud in your workplace, immediately secure any evidence that could be helpful to your investigation team. This includes computers, flash drives, cell phones and digital accounts. “Secure” is the operative word — don’t tamper with the evidence. An act as simple as attaching an external device to a computer can render the evidence useless. Instead, assemble a team of forensic experts to investigate as soon as possible.

Of course, the natural response when a situation like this is discovered is to fire the employee. However, you should not do so at the initial discovery point. Employees have a duty to cooperate with employers during a lawful investigation. Consider keeping them on payroll until the evidence has been sufficiently developed by the investigation team. Once the employee is aware they are the subject of an internal investigation, restrict their access to their office and company information systems. This will prevent them from covering their tracks, encrypting programs, stealing confidential information and deleting incriminating evidence.

Finally, you should contact your insurer as early as possible. Many policies have a 30- or 60-day notification provision, beginning from the first day that you discover a loss may have occurred. Failing to notify insurance may void your coverage, making an already difficult loss even greater.

Preventative Measures to Take Now

Even if you do not currently suspect wrongdoing in your workplace, take precautionary measures to deter future fraudsters from committing financial crimes.

Preventative measures include segregating duties, placing daily and monthly limits on company cards, and monitoring electronic audit trails. Also, be sure to maintain strong employee recruiting controls to check the background of all potential new hires, helping to avoid hiring those with a questionable past. Finally, if possible, try to rotate staff within critical financial areas such as cash management, accounts receivable or purchasing. This ensures that no one employee can gain too much power or become secretive about a segment of your business.

While the extra workload of putting these preventative measures in place can be time-consuming, it pays off to protect yourself from the threat of fraud within your office.

Discovering fraud in the workplace isn’t easy. Unlike the movies, criminals don’t wear suspicious clothing and aren’t accompanied by a sinister theme song. However, with the right tools, you can identify real-life criminals in your office, one red flag at a time.

Kelly Todd is a managing member and the member in charge of forensic investigations at Forensic Strategic Solutions. Todd has a broad range of forensic experience, including financial and whitecollar investigations, fraudulent financial reporting, accounting malpractice, and the calculation of economic damages. For more information on how fraud can affect your company, email her at kelly@forensicstrategic.com or visit www.forensicstrategic.com.

Alabama’s Booming Manufacturing Sector: Key Points to Know About the Alabama Workers’ Compensation Act

Manufacturing in Alabama is booming. Stats tell the story. On August 10, 2018, a publication in Global Trade ranked Alabama as a national leader for manufacturing, given Alabama’s combination of a skilled workforce, industrial base, investment incentives, and business-friendly tax and regulatory structures. Mercedes, Toyota, Mazda, Honda and Hyundai production facilities pushed Alabama’s ranking to fifth nationally in automobile production, with vehicles being Alabama’s top export. Alabama was also mentioned as a leader in aerospace production, given Mobile’s Airbus production facility. Meanwhile, a study by SmartAsset analyzed data covering 500 cities, ranked the “Talladega-Sylacauga Micropolitan Statistical Area” as the top location in America for manufacturing.

Trey Dowdey

Alabama’s key manufacturing sectors include motor vehicles and parts, chemical products, primary metals, paper products, aerospace and other transportation equipment, food, beverage, tobacco products, fabricated metal products, petroleum and coal products, plastics and rubber products, and wood products. Based on data from the National Association of Manufacturers, those working in Alabama manufacturing comprised more than 270,000 jobs (13% of Alabama’s workforce), with an average annual compensation reaching $64,023.00 by 2015. Further, between 2004 and 2014, Alabama’s exports increased 115%, with the total output from Alabama manufacturing hitting $35.12 billion by 2015 and $19.43 billion in manufactured goods exports by 2016.

Foreign direct investment is a major catalyst behind this manufacturing boom. Between 1999 and 2014, Alabama saw a foreign investment surge totaling $24.5 billion. From 2013 to 2014, Alabama garnered $2.5 billion in foreign direct investment (creating approximately 6,000 new jobs), while the top five foreign direct investment countries were: (1) Germany (72 companies), (2) Japan (66 companies), (3) South Korea (63 companies), (4) Canada (48 companies), and (5) France (40 companies). In 2015 alone, Alabama realized $5.3 billion in mobile capital investment. 2016 resulted in just shy of $1.6 billion in foreign direct investment. Most recently, 2018 shows continued promise, with Toyota and Mazda selecting Alabama for a $1.6 billion plant in the Huntsville area with plans to employ up to 4,000 and produce around 300,000 vehicles annually.

No doubt, the manufacturing climate in Alabama is booming and the increase in jobs will likely cause a rise in workers’ compensation claims. As such, and with potentially new employers, insurance providers, and claims professionals handling an increased volume of work injury claims in Alabama, an awareness of the applicable workers’ compensation laws interplaying with the manufacturing sector is fundamental.

The first thing to understand is that the Alabama Workers’ Compensation Act (“the Act”), Alabama Code Title 25, Chapter 5 (Ala. Code §25-5-1, et seq.) is a purely statutory cause of action. Alabama Code 1975, § 25-5-53, provides that an action brought under the Act is the exclusive remedy for an employee’s injuries sustained in the course of his employment. The Act was created as a compromise between employers and employees, liberally designed to favor employees while providing an exclusive remedy to protect employers from employee tort claims such as negligence, which permit compensatory and punitive damages. Accordingly, fault became largely irrelevant under the Act. Second, contested workers’ compensation cases are tried as civil causes of action, in Alabama’s State Circuit Courts, with most issues being decided by an elected judge (not a jury and not by an administrative law judge as in other states). As such, it is critical to understand the law on venue, where a case will be tried, and which judge will ultimately decide the case. The Act was intended to be liberally construed to favor injured employees, where denial of workers’ compensation benefits would be the exception. Knowing this from the start can help keep expectations realistic, help move claims faster, decrease litigation costs, and reduce distractions to production.

Within the manufacturing industry in Alabama, a frequently encountered situation involves the use of staffing agencies which provide critical labor. These arrangements help reduce costs, increase efficiency, and reduce administrative burdens on employers, while also providing skilled labor. It should be kept in mind that these types of “dual employment” arrangements create what have been termed “general employer” and “special employer” situations under Alabama law. With this dual employment paradigm, an injured employee may decide to bring suit against either the staffing company (the “general employer”), the manufacturing company (the “special employer”), or both. The exclusive remedy protections of the Alabama Workers’ Compensation Act were extended to include, and protect, special employers, and this is a key protection that special employers should leverage to preclude tort claims and damages.

Accordingly, Alabama, pursuant to Terry v. Read Steel Products, 430 So. 2d 862 (Ala. 1983), utilizes a three-pronged test to determine when an employee of a general employer also becomes a special employer’s employee. When a general employer lends its employee to a special employer, the special employer also becomes liable for workers’ compensation benefits (but immune from an employee’s tort actions) only if:

(a) The employee made a contract of hire, express or implied, with the special employer;(b) The work being done is essentially that of the special employer; and,
(c) The special employer has the right to control the details of the work.

If all three conditions are met by both employers, then both employers may be liable for workers’ compensation benefits, but they would, significantly, remain immune from tort liability. As a practical matter, manufacturers should be aware that with any such dual employment arrangement, should a settlement be reached between an injured employee and the general employer, the special employer should make sure that it is included in the terms of any settlement reached. A second practical aspect of handling work injury claims within the context of a “dual employer” scenario is to ensure good communication between the general and special employers when these claims arise, which will assist with the overall investigation (and possible defense) of same.

Another issue that may arise in the context of work injuries with manufacturing jobs, includes the potential defense of willful failure to use or removal of a safety device. Alabama Code § 25-5-51 provides that “no compensation shall be allowed for an injury or death caused by … the willful failure or willful refusal to use safety appliances provided by the employer….” For this defense, “willful” means the employee’s actions were conscious or deliberate. The employer also bears the burden of proving the injury was proximately caused by the employee’s misconduct, and this defense, if successful, only precludes an employee’s right to recover “compensation” (as defined under the Act in §25-5-1 (1) as “the money benefits to be paid on account of injury or death….”). The defense does not relieve the employer or insurance carrier of the obligation to provide reasonably necessary medical treatment with an otherwise compensable work injury.

An additional area that can come into play in the manufacturing industry involves possible tort claims by (or on behalf of) an employee’s child, where the child is injured while in utero. It should be noted that the Supreme Court of Alabama held the exclusivity provisions of the Alabama Workers’ Compensation Act do not preclude personal injury tort claims brought on behalf of a minor (a non-employee), against an employer, where the injury takes place while the child was in utero and during the mother’s employment. Namislo v. Akzo Chems., 620 So. 2d 573 (Ala. 1993).

While not an exhaustive list of legal concerns for employers, insurance providers, or claims professionals in Alabama’s manufacturing sector, a working knowledge of the parameters of the Alabama Workers’ Compensation Act is key. This knowledge can help employers set expectations, issue spot, manage employees, decrease costs and expenses, and improve ways to handle work injuries, all while staying focused on production.

Carl “Trey” K. Dowdey, III, is a senior attorney in Swift Currie’s Birmingham office. While his practice concentrates primarily on workers’ compensation matters, he also defends employers against retaliatory discharge and co-employee liability claims and handles automobile and premises liability defense litigation. He may be reached at trey.dowdey@swiftcurrie.com.

Weathering the Storm: Insurance Coverage For Risks Posed By Natural Disasters

Alabama businesses face significant risks posed by weather-related natural disasters, including physical losses to property, business interruptions and loss of income. Though Alabama was mostly unaffected by the devastating natural disasters suffered throughout the country last year, these events resulted in more than $330 billion in losses according to some insurance industry estimates.

While the full economic impact of the 2017 natural disasters is not fully realized, a 2013 study by the American Sustainable Business Council revealed natural disasters are particularly devastating to small- and mid-size businesses. According to the study, one-quarter of small and mid-size businesses hit by a catastrophic storm do not reopen. The researchers also estimated small businesses lose an average of $3, 000 per day after closing caused by a major storm event.

The impact of last year’s extreme natural disasters, as well as those other disasters of the past decade, demonstrate how important insurance is for businesses in absorbing resulting financial losses. Thus, Alabama businesses should take proactive measures to ensure their insurance policies meet their particular risks and expectations.

Insurance coverage for damage caused by a natural disaster is available through a variety of common insurance products generally referred to as “property” insurance policies, but they come under other names, such as “inland marine, ” “fire, ” or “multi-peril” or “all risk” insurance policies. Depending on the circumstances of the loss, the following coverages are available to insure damages caused by natural disasters:

Physical Loss or Property Damage

Property damage coverage generally provides coverage for physical loss or damage to business property, such as buildings, machinery, equipment, inventory and raw materials. The typical property insurance policy provides coverage for the cost to repair, replace or rebuild property that suffers physical damage. However, the cause of the loss is often crucial to determining whether coverage is afforded under the typical property insurance policy. For example, most property policies cover damages caused by fire, windstorms, hail, riots and explosions. However, many property insurance policies contain exclusions for flood damages, but flood insurance is generally available either as stand-alone products or as endorsements to other policies. Thus, Alabama businesses vulnerable to flood damages should review their insurance programs to ensure insurance is available to provide coverage for flood risks.

Debris Removal

Debris removal coverage is a common additional coverage to most property insurance policies. It covers expenses incurred in the removal of debris of covered property damaged by an insured peril, such as a tornado or hurricane. Debris removal coverage can be particularly valuable for businesses needing to dispose of hazardous materials following a natural disaster due to the high costs associated with the disposal of such materials. However, debris removal coverage may be limited to a percentage of the total loss and may exclude trees, shrubs and plants.

Extra Expense Coverage

Natural disasters often cause businesses to incur additional expenses beyond repairing or replacing damaged property. The cost of operating a business often increases during the aftermath of a natural disaster. Extra expense coverage is intended to cover the insured for such extra expenses. Extra expense coverage may include the cost of generators when electricity is lost in the aftermath of a storm, costs of security guards to prevent looting or costs associated with the usage of a temporary business location during the restoration period.

Business Interruption Coverage

In the aftermath of a natural disaster, businesses likely suffer lost income and profits from the suspension of their operations. Business interruption coverage is designed to cover lost income and profits. This coverage is typically limited, however, to the loss of income sustained during a “necessary suspension” of operations. Depending on the policy, this may require a total cessation of operations or a partial cessation. Additionally, most policies include a 72-hour waiting period after the damage occurs before business interruption will be covered. Thus, business owners are advised to read this coverage closely and determine whether their needs are being met for potential business interruption risks.

Contingent Business Interruption Coverage

Even if your business is not directly impacted by a natural disaster, you could still suffer losses if your business relies on an affected party. Contingent business interruption coverage provides coverage for loss of income due to physical loss or damage to property of a third party, such as a supplier, customer or logistics company your business relies on to operate your business. For example, a manufacturer can purchase contingent business interruption coverage to protect it if its sole supplier of a key component suffers destruction of its factory and that causes the manufacturer to suffer a business income loss from its inability to complete manufacture of its product. Accordingly, a business that has a close relationship with a supplier physically located in a destroyed building may be able to recover for losses suffered in the wake of the destruction of that supplier’s physical plant. Similar to business interruption coverage, contingent business interruption coverage is often subject to a waiting period and does not incept until after the specified waiting period has elapsed.

Civil Authority Coverage

Civil authority coverage is designed to provide coverage for business income losses incurred as a result of an order by a civil authority preventing access to the insured’s place of business. For example, this coverage applies if an evacuation order, roadblock or forced power outage prohibits access to your business.

Service and Utilities Interruption Coverage

This coverage is designed to provide coverage for business income losses attributable to interruption of utility or telecommunications service. Income losses from such outages should be covered under most property insurance policies. As with contingent extra expenses, a policyholder’s expenses in minimizing the loss caused by service interruption should be covered. For instance, the policy may cover the purchase of cell phones for employees to use while the company’s phone service is out of order.

Builders Risk Insurance Coverage

This coverage is designed to protect construction sites from loss and damages. Businesses in the construction industry should consider builders risk insurance products to protect against damages caused by natural disasters. Like traditional property insurance, builders risk insurance generally provides coverage for damage caused by fire, lightning and wind. However, damages caused by floods are frequently excluded on most builders risk policies. If your business is working in an area where you have a high risk of flooding, you may need to add supplemental coverage to your builders risk policy to cover it.


Each business faces unique obstacles and challenges, and it is critical to develop a plan to prepare for potential impact arising from natural disasters. As we have all been reminded over the past decade, disasters will happen. With this realization, Alabama businesses should consult with their insurance and legal advisors to identify the most appropriate insurance products for their business risks.

Brandon J. Clapp is an attorney in the Birmingham office of Swift, Currie, McGhee & Hiers, LLP. He is a member of the firm’s coverage and commercial litigation section, where he counsels clients in a broad variety of litigation matters, including insurance coverage, construction, commercial disputes, professional liability and personal injury. He may be reached at brandon.clapp@swiftcurrie.com.

Investor Protection Requirements for Seniors and Vulnerable Adults

Sarah Yates, associate with Bressler, Amery & Ross P.C. in Birmingham

Alabama was one of the first states to enact legislation requiring certain financial institutions to report suspected financial exploitation of senior and other vulnerable investors. Other states have since followed suit, and recent efforts by the Financial Industry Regulatory Authority (FINRA) and Congress to protect senior investors indicate that these issues will remain in the spotlight as the senior population continues to grow. Alabama broker-dealers and investment advisers should ensure they are in compliance with the law and monitor continuing developments in this area.

The Protection of Vulnerable Adults from Financial Exploitation Act

Drafted by the Alabama Securities Commission (ASC), the Protection of Vulnerable Adults from Financial Exploitation Act went into effect in July 2016. Its goal is the protection of “vulnerable adults, ” defined to include persons 65 years of age or older and persons over 18 years old who are senile, have intellectual or developmental disabilities, or are mentally or physically incapable of adequately caring for themselves — in short, individuals who are most susceptible to financial abuse.

The Act applies to broker-dealer and investment adviser firms, as well as their agents, investment adviser representatives and persons serving in a supervisory, compliance, legal or associated member capacity. Banks are not subject to the Act.

Key Provisions of the Act

First, firms are required to notify both the ASC and the Department of Human Resources (DHR) if they have a reasonable belief that financial exploitation of a vulnerable adult has occurred or is being attempted. Signs that a senior investor could be the victim of financial abuse may include uncharacteristic and repeated cash withdrawals, the appearance of new and unknown associates at meetings, or sudden changes to financial documents such as powers of attorney and account beneficiary forms, among other unusual activity and behaviors. The initial reporting form for suspected financial exploitation was developed by the ASC and DHR and is located on both of their web sites.

Second, firms are permitted (but not required) to notify a trusted third party, such as a family member or someone closely connected to the vulnerable investor, about unusual or potentially exploitive activity. It is up to the firm to choose an appropriate individual to contact; however, in doing so, the firm must abide by federal privacy laws and consider other possible ramifications of sharing sensitive financial information with third parties. Firms can avoid many such issues by taking proactive measures early in the relationship with the investor to identify a trusted contact.

Third, firms are authorized to delay or place a temporary hold on a disbursement of funds from the account of a vulnerable investor in situations of potential financial exploitation. If a firm chooses to delay a disbursement, it is required within two business days to notify all authorized parties on the account at issue and report to the ASC and DHR. The firm must also conduct an internal review of the suspected exploitative activity. The review and final resolution of any potential issue must be expeditious: a firm may not delay a disbursement of funds beyond 15 days without an extension from the ASC or DHR.

Firms that fully comply with these provisions can expect to receive immunity from civil and administrative liability that could result from, for example, disclosing confidential information to third parties. The Act maintains that a firm must act both in good faith and with reasonable care to receive the benefit of immunity.

Guidance from the Alabama Securities Commission

The ASC has provided a written guide for firms to assist in implementation of the Act. The guide—located on the ASC’s web site at http://asc.alabama.gov—discusses policies, procedures, and training that firms should develop to identify vulnerable investors and to detect potential financial abuse. Some suggested practices include specialized training for advisors and other personnel to spot the signs of cognitive decline and to communicate with persons experiencing diminished capacity, and developing policies such as placing “watches” on accounts with suspicious transactions, documenting contact with senior investors, and instituting appropriate escalation procedures. The guide also walks through the mechanics of the Act’s reporting requirements and considerations when notifying third parties or delaying disbursements.

New Developments in Senior Investor Protection

Since the passage of Alabama’s Act, other states have followed suit and enacted their own laws protecting senior investors. Any Alabama broker-dealer or investment adviser seeking to expand their business to another state should be aware of that state’s requirements and how they may differ from Alabama’s requirements. In Missouri, for instance, reporting of suspected financial abuse is optional, not mandatory.

In 2018, both the Financial Industry Regulatory Authority (FINRA) and Congress took action to protect senior investors from potential exploitation. Changes to the FINRA Rules include allowing member firms to place temporary holds on disbursements and requiring firms to make a reasonable effort to identify a trusted third-party contact in connection with the account opening process.

Recent federal legislation titled the Senior Safe Act provides immunity to institutions — including banks, credit unions, insurance companies and insurance agencies, in addition to broker-dealers and investment advisers — if they report suspected exploitation in good faith and with reasonable care and provide related training to their employees. However, unlike Alabama’s Act, the federal Act does not require such reporting or authorize the delay of distributions.

These new developments are not a passing trend. According to the U.S. Census Bureau, by 2035, there will be 78 million people age 65 years and older, meaning that one in every five persons in the U.S. will be retirement age. Baby Boomers currently control $13 trillion in investable assets, and that number will only grow, making financial abuse protection for these older investors acutely important. Alabama financial institutions should prioritize the development of policies and procedures to protect their senior and vulnerable adult investors, not only to comply with Alabama’s Act but to stay ahead of the next wave of rules and regulations.

Sarah Yates is an associate with Bressler, Amery & Ross P.C. in Birmingham. She received her J.D. from the University of Alabama School of Law and her B.A. from the University of Alabama. Yates’ practice focuses on the defense of brokerage firms and financial institutions against claims asserted by their customers. She is also a member of the firm’s Senior Issues: Counseling and Litigation Defense group, which provides counsel to corporate clients who confront issues affecting seniors.

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