"Need to Know" White Collar Enforcement Trends for Directors
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
“Need to Know” White Collar Enforcement Trends for
Directors
Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation,
on Monday December 29, 2014
Editor’s Note: The following post comes to us from Michael W. Peregrine, partner at
McDermott Will & Emery LLP. This post is based on an article by Mr. Peregrine; the views
expressed therein do not necessarily reflect the views of McDermott Will & Emery LLP or its
clients.
The ability of corporate directors to exercise effective judgment and oversight will be aided by an
awareness of emerging white collar enforcement trends of the federal government.
These trends are primarily reflected in a notable series of significant speeches and other public
comments made this fall by representatives of the Department of Justice. These include
speeches made by senior officials of DOJ’s Criminal and Antitrust Divisions, as well as Attorney
General Holder. Collectively, these trends may help to inform boards with respect to transactional
planning, risk evaluation and compliance oversight, among other critical matters.
These trends speak to such critical issues as corporate cooperation with the government, the
application of compliance programs to growing corporations, practical elements of an effective
compliance program, the continued importance of “tone at the top” and an interest in holding
decision makers responsible for corporate malfeasance. To a certain degree, they confirm
previously expressed positions. To another degree, they project notable new perspectives; e.g.,
the emphasis on corporations identifying employees personally responsible for wrongdoing.
Viewed as a whole, they reflect a serious federal commitment to enforcement of criminal laws as
may be applied to corporations and their leadership. Board members will benefit from an
awareness of these trends.
Corporate Cooperation
An overarching theme expressed in all of the DOJ speeches is an expectation that corporations
alleged to have engaged in wrongdoing will cooperate with a government investigation of the
11
allegations. This is the “we seek it but will not wait for it” perspective. In this regard, the DOJ
officials point to the publicly disclosed actions of Morgan Stanley and Petro Tiger Ltd. in
voluntarily disclosing potentially illegal activities in some of their respective business units, as
2
exemplary examples of corporate cooperation. Indeed, the officials referred to this cooperation
as a primary reason why DOJ declined to prosecute the corporations in these cases. Notably the
DOJ officials also identified examples (e.g., Marubeni) in which the failure of the corporation to
3
cooperate prompted “an extensive, multi-tool investigation” by DOJ.
Several of the DOJ presentations focused specifically on the extent to which a compliance plan
may help a company self-report criminal antitrust violations to the Antitrust Division under its
“Corporate Leniency Program”. This program provides that in exchange for self-reporting the
illegal conduct, and for “complete cooperation” with the DOJ’s resulting investigation, a corporate
4
leniency applicant will not be prosecuted by the Antitrust Division.
Of course, “cooperation” is a term capable of multiple interpretations, and a corporation should
base any decision on whether (and if so to what extent) to cooperate on the advice of its white
collar defense counsel. Yet, it is important that the board have a basic understanding of the
government’s expectation, and of the consequences that may arise from the failure to cooperate.
Cooperation and Individual Prosecutions
Closely related to the government’s perspective on corporate cooperation is the relationship of
such cooperation to the prosecution of individuals determined to be responsible for the corporate
misconduct. In the context of an investigation, DOJ can be expected to “pressure test” whether
the corporation made a concerted effort to identify the source of the wrongdoing and the
5
responsible parties. Several of the recent DOJ speeches have underscored the importance
attributed by the government to corporate efforts to identify evidence implicating culpable
individuals. This is the “throw your employees under the bus” concept:
At the risk of being a little too Brooklyn, I’m going to be blunt. If you want
cooperation credit, make your extensive efforts to secure evidence of individual
culpability the first thing you talk about when you walk in the door to make your
1
Remarks of Marshall L. Miller, Principal Deputy Ass’t Att’y General, Criminal Division, Department of Justice,
at the Global Investigation Review Program, September 17, 2014 (“Miller 9/7/14 Remarks”); Remarks of Marshall L. Miller,
Principal Deputy Ass’t Att’y General, Criminal Division, Department of Justice, at the Advanced Compliance and Ethics
Workshop, October 7, 2014 (“Miller 10/7/14 Remarks”).
2
Id.
3
Miller 9/17/14 Remarks.
4
Remarks of Brent Snyder, Deputy Ass’t. Att’y Gen., Antitrust Division, Department of Justice, “Compliance is a
Culture, Not Just a Policy” September 9, 2014 (“Snyder Remarks”); Remarks of Bill Baer, Ass’t. Att’y Gen., Antitrust
Division, Department of Justice, “Prosecuting Antitrust Crimes”; September 10, 2014 (“Baer Remarks”).
5
Miller 9/17/14 Remarks.
2presentation. Make those efforts the last thing you talk about before you walk out.
And, importantly, make securing evidence of individual culpability the focus of
6
your investigative efforts so that you may have a strong record on which to rely.
This harsh perspective is perceived as a response to public criticism of DOJ’s record in criminally
prosecuting senior officials of banks and other firms involved in the recent financial crisis. It may
require changes in the way many corporations approach internal compliance investigations, and
may lead to changes in organizational culture. How will it affect the board-executive leadership-
management dynamic? It is thus a perspective with which the board—or at least its key
committees—should have some basic familiarity. Certainly, the board should look to its white
collar counsel for a full appreciation of the organizational implications of the government’s
evolving views on the meaning of effective corporate cooperation.
Compliance Plans
Another consistently expressed theme is the effectiveness of corporate compliance plans. DOJ
officials have historically spoken to the role an effective corporate compliance plan can play in
detecting and remedying potentially illegal behavior. That’s not new. What is somewhat new is
DOJ’s emphasis on certain elements of an effective compliance plan. Most notable in this regard
is an expectation that companies will view their compliance plans as “live organisms that [also]
7
change and grow with the company”. In other words, there is an expectation that companies will
upgrade their compliance program commitments as necessary to reflect change over time
through natural growth, mergers and acquisitions.
8
This is a very important point for boards in the context of their “Caremark” compliance plan
oversight obligations. It may be particularly relevant with respect to companies that are pursuing
significant growth—especially through international operations—and in industries such as health
care, with its rapid consolidation activity. Boards should be positioned to ask management
whether the compliance plan (and its staffing and funding) is keeping pace with corporate growth.
Also notable is the emphasis on the role of compliance in detecting and preventing violations of
the criminal antitrust laws, e.g., conspiring to fix prices, rig bids or allocate markets. This is
6
Id.
7
Remarks of Leslie Caldwell, Ass’t Att’y Gen., Criminal Division, 22nd Annual Ethics and Compliance
Conference, October 1, 2014 (“Caldwell Remarks”).
8
In re Caremark International Derivative Litigation, 698 A.2d959 (Del.Ch.1996); see also, Miller 10/7/14
Remarks.
3particularly important given the organizational and individual risks of being held to have
9
participated in a price-fixing cartel or similar arrangement.
It is also clear from these speeches that DOJ has a very clear perspective of where the “fault
lines” can arise in the compliance plans of major corporations. There is a palpable sensitivity to
10
“compliance programs that appear strong on paper, but much weaker in practice”. Such
weaknesses have arisen through inadequate compliance staffing, lack of anti-corruption training,
and deficient systems for employee reporting of ethics and compliance violations. The recent
resolution of criminal allegations involving several multinational corporations serves to underscore
DOJ’s concern with “paper plans”, even in the context of highly sophisticated enterprises.
One senior DOJ official recently spoke on the particularly complicated issue of compliance officer
independence. His comments indicated that DOJ does not require the separation of corporate
compliance and legal functions, nor does it proscribe compliance officer-to-general counsel
reporting relationships. Rather, the government’s focus in on more substantive factors, e.g.,
11
whether the compliance plan is well designed, is applied in good faith and operates effectively.
This perspective may create some consternation with compliance industry leaders, many of
whom are extraordinarily concerned with protecting the “independence” of the compliance officer.
“Tone at the Top”
Certainly, corporate leadership has heard for years lessons on the importance of maintaining a
strong, transparent commitment to corporate compliance; the so-called “tone at the top” and the
12
board’s obligation to promote a culture of compliance. What is new from the DOJ speeches is
the offering of very practical (and in certain instances very basic) examples of how “tone at the
top” has been manifested—and failed to be manifested.
Positive examples include matters with which most audit and compliance committees are familiar;
e.g., fully funded compliance programs; compliance executives occupying positions of true
authority reporting directly to independent monitoring bodies (e.g., internal audit committees or
boards of directors); and extending compliance programs to all affiliates and subsidiaries,
13
including those that are recently acquired.
9
Snyder Remarks, supra.
10
Caldwell Remarks, supra.
11
Lisa Shuchman, DOJ Wants Compliance Independent, If Not Separate, Corporate Counsel, Oct. 29, 2014
(including remarks attributed to James Koukios, Ass’t Att’y General, Ass’t Chief, Foreign Corrupt Practices Act Unit,
Department of Justice, at the 2014 Association of Corporate Counsel (ACC) Annual Meeting session, “Chair’s Choice:
What’s Not Legal About Compliance” (October 28, 2014)).
12
See, e.g., U.S. Sentencing Commission, Organizational Sentencing Guidelines, §8B2.1(a); (b)(2)(A).
13
Caldwell Remarks, supra.
4The audit & compliance committee may be less aware of the extent to which—in DOJ’s
perspective—board or executive conduct can reflect poorly on the organization’s commitment to
compliance. This can be something as significant as a decision not to fully punish an executive or
employee for failure to follow compliance requirements. It can be something as basic as
countenancing the physical location of the compliance office at a ‘backwater’ office, far removed
from headquarters. Or, it can be something seemingly minor, such as casual (if indiscreet)
comments or actions (even body language or facial expressions of leaders) that are interpreted
14
as disparaging of compliance. In the context of an investigation, little things may count.
Individual Accountability
Even if more philosophical in note, recent comments by Attorney General Holder warrant board
attention to the extent they speak to matters of personal accountability. While arising in the
context of criminal prosecution of individuals involved in financial fraud, he expressed frustration
with the difficulty in holding corporate decision-makers “properly accountable” for organizational
malfeasance:
…[t]he buck needs to stop somewhere where corporate misconduct is
concerned. We ought to consider this further and modify our laws where
appropriate. It would be going too far to suggest revising the presumption of
innocence for any executive, even one atop the most poorly-run institution. But
we need not tolerate a system that permits top executives to enjoy all of the
15
rewards of excessively-risky activity while bearing none of the responsibility.
In other words, the Attorney General’s view is that the corporate responsibility provisions in laws
such as Dodd-Frank, Sarbanes-Oxley and the “responsible corporate officer doctrine” in the
Food, Drug and Cosmetic Act may not be sufficient to hold individuals responsible for corporate
misconduct. He noted favorably a new British law that requires financial companies to designate
16
an officer who would be accountable for misconduct at the firm. The board’s white collar
counsel will advise it that government prosecutors often hope for such legislation, and that there
are compelling reasons why such a law would be unjust. Yet, it is very important for the board to
be aware of this “buck needs to stop somewhere” perspective as it evaluates its risk management
activities and the appropriate level of risk associated with particular strategies.
14
Id.
15
Remarks of Eric Holder, Attorney General of the United States, Remarks on Financial Fraud Prosecutions at
NYU School of Law, September 17, 2014 (“Holder Remarks”).
16
Id.
5Why Bother the Board?
A briefing on these and similar developments can serve an important purpose, whether directed
at the full board, or at key committees. In the conduct of board affairs, there are multiple
instances where matters of white collar enforcement intersect with fiduciary responsibilities.
These include at the executive committee, where major proposed business transactions are
considered; at the audit & compliance committee, where critical legal oversight is effected and
organizational risk identified and evaluated; at the strategic planning committee, where corporate
initiatives are scripted; and at the executive compensation committee, where the CEO is
evaluated and incentive compensation targets are developed. The expectation is that
board/committee oversight and decision-making will benefit from this briefing, whether it is led
solely by the general counsel or with the support of white collar counsel.
This is not to suggest that such a briefing is in any way a substitute for more focused advice from
outside counsel. Indeed, to the contrary—a goal of this briefing is to enhance the awareness of
the board to federal criminal law enforcement practices and priorities—and how they affect the
corporation. This, in turn, should make the board much more alert to the circumstances that call
for the involvement of outside white collar counsel, and more willing to seek their engagement.
The recent DOJ speeches provide an excellent prompt for scheduling such a briefing.
6You can also read
