FIFA Indictments, Corporate Compliance, Alfred Kinsey and Robert Lee

Shaving too close.

Shaving too close.

Law360’s Zachary Zagger has a nice piece on the FIFA prosecution and quotes, among others, Jack Sharman:

“Given this many defendants and the fact that there is going to be at least some who are going to cooperate, it would not surprise me if there wasn’t a second wave of charges or people coming out of the woodwork, people you have not heard of yet,” said Jackson R. Sharman III, a white collar criminal defense attorney with Lightfoot Franklin & White LLC.

“If it is going to survive, it is going to have to have a more rigorous compliance structure than some of the items that have come across thus far,” Sharman said suggesting that it may need to create something like a corporate board of directors or an inspector general-type official to address compliance issues directly.

Here is a link to the full article:  3 Things To Watch Out For In The FIFA Corruption Case

Compliance drill.

Compliance drill.

We have spoken with the Wall Street Journal previously about the FIFA case: FIFA Indictments and the Notion of Global Compliance:

Jackson Sharman, a white collar specialist at Lightfoot, Franklin & White LLC, says that the case shows that the notion of a swelling, global compliance culture may be exaggerated. Attorneys and compliance professionals often make the mistake of believing their concerns about bribery are representative of the organizations where they work, he said. “It’s dangerous to assume that a legal regime is being internalized by everybody, because clearly it’s not,” Mr. Sharman said. “Assuming that others think the same way as you think can be fatal.”

Setting others aside, it can also be fatal to your enterprise if you fail to understand how you going about thinking through compliance questions.

Robert Edward Lee

Robert Edward Lee

Much has been made recently of Confederate images and names.  On the compliance front, I invoked Robert E. Lee last year in a post about McKinsey, General Lee and the Culture of Compliance:

Except perhaps for “paradigm” and “silo,” the word “culture” is one of the most abused in the vocabulary of compliance, ethics and consultants.  (I once heard a consultant say that he needed “a high hover over the silos.”  I thought it an ironic mash-up about drones and agriculture; it was not).  Yet, “culture” has a meaning in the broader world; in commerce; and in compliance.  “Culture” represents a gear-shift in compliance and ethics, and can be smooth or bone-rattling.

 

Not Robert Edward Lee.

Not Robert Edward Lee.

(For the careless reader, note that the title refers to McKinsey, the consulting firm, not to Alfred Kinsey, the sex researcher).

 

 

Global or domestic, “compliance” comes in three flavors — criminal, civil and regulatory.  Sometimes, you get a mouthful of all three at once.

Why is that?  And, what to do about it?

A few thoughts here:

 


FIFA Indictments and the Notion of Global Compliance

Well played?

Well played?

In an article by Joel Schectman for the Wall Street Journal and its “Morning Risk Report,” Jack Sharman is interviewed about the idea of a global compliance regime in light of the recent indictments of FIFA officials:

Jackson Sharman, a white collar specialist at Lightfoot, Franklin & White LLC, says that the case shows that the notion of a swelling, global compliance culture may be exaggerated. Attorneys and compliance professionals often make the mistake of believing their concerns about bribery are representative of the organizations where they work, he said. “It’s dangerous to assume that a legal regime is being internalized by everybody, because clearly it’s not,” Mr. Sharman said. “Assuming that others think the same way as you think can be fatal.”

Read the full article here: The Morning Risk Report: FIFA Allegations Shows Old School Bribery Lives On

Compliance drill.

Compliance drill.

There will doubtless be much fodder for discussion in the FIFA cases — bribery, FCPA, jurisdiction, cooperation and many more issues — but here here is a good place to start.


Dear Colleagues All: University Discipline, Sexual Assault and The Department of Education

It's the new campus thing.

It’s the new campus thing.

Title IX. Crime. Sexual assault. University disciplinary procedures. Civil litigation. Enormous amounts of money. The Fifth Amendment.

And that’s all before you hire a lawyer.

This is a perilous time for university disciplinary systems and those who administer them, especially with regard to claims of sexual assault.  A college or university can find itself in the midst of – indeed, at the helm of – a set of quasi-criminal parallel proceedings that can make the school liable to student complainants, student respondents and federal enforcement authorities.

How does this happen, and what are the factors to keep in mind to minimize that exposure?

Disciplinary systems and educational missions have been uncomfortable fellow travelers going back at least to Tom Brown’s Schooldays:

As the concept of in loco parentis came in and out and back into fashion, the nature of university disciplinary systems changed accordingly.

What remained unchanged, however, are the two broad areas that most collegiate disciplinary systems address:  “conduct” and “ethics” (or sometimes “honor”).  The latter involves cheating, plagiarism and the like.   The former involves infractions of nonacademic policies – drinking, destruction of property, and violations of civil or criminal law.

Not so many pranks today.

Not so many pranks today.

Not surprisingly, most universities have proven themselves more adept at dealing with “academic” infractions then with “conduct” issues.  With the advent of coeducation and then a more culturally diverse (and potentially more fractious) student, faculty and staff composition, the proficiency gap between academic-related discipline and conduct-related discipline, in many instances, grew more pronounced.

Back in 2011, the federal Department of Education’s Office of Civil Rights issued a “Dear Colleague” letter on the subject of campus sexual assault and how, under Title IX, OCR expects colleges and universities to handle claims of sexual assault. More recently, a White House summit on campus sexual assault; a number of high-profile lawsuits and OCR investigations; and new congressional legislative interest have all conspired to mean that colleges and universities ignore the “Dear Colleague” situation to their peril.

So, my Lightfoot law partner William King (who runs our NCAA practice); summer associate Caitlin Looney; and I (the white-collar guy) prepared a memo.  (Truthfully, Caitlin wrote it.  All we did was read it and change the date):

On Wednesday, July 30, 2014, a bipartisan group of eight senators introduced legislation aimed at curbing on-campus rape. “The Campus Safety and Accountability Act” would require colleges to assign campus “Confidential Advisors” to act as a resource to victims of sexual assault. The Act would also require a uniform process for disciplinary proceedings and require colleges to coordinate investigations with law enforcement. Penalties for noncompliance could include up to 1% of their total operating budget and a $150,000 fine per violation. The Act would also include annual surveys of students, the results of which would be posted online for the benefit of parents and prospective students. The proposed Act represents the latest development in a flurry of governmental involvement in recent years on issue of sexual assault in schools.

Here is the entire paper: University Disciplinary Procedures and the Dear Colleague Letter on Sexual Assault.

The Senate solution.

The Senate solution.

The Campus Safety and Accountability Act, the bill proposed in the Senate, relies in part on a Scarlet Letter approach driven by disclosure of sexual assault (as self-reported by students, rather than administrators or law enforcement), and hefty fines for non-disclosure.  As reported by the New York Times:

Every college would be required to participate in the survey and publish results online, and the penalty for colleges that don’t report sexual assault crimes, as required by the Clery Act, would increase to $150,000 from $35,000 per violation.

The new bill proposes fines of up to 1 percent of a college’s operating budget. If Harvard were found responsible, for example, the university would be on the line for $42 million — a sizable fine, but one that would probably not hurt the university’s students. [Harvard’s trustees might differ, but that is another issue. – Ed.]

Colleges would be required to supply confidential advisers to victims and train counselors. Athletic departments would not be allowed to handle sexual assault complaints. Colleges would need to coordinate a uniform plan with local law enforcement agencies. And the bill would provide federal funding to create and distribute an inexpensive, anonymous annual survey that asks all undergraduate students about experiences with sexual violence. Parents and students would be able to see the data, which may influence their decisions when applying to college.

Whether deserved or not in any particular circumstance, college athletic departments are a particular focus, as noted here.

Awaiting the parallel proceedings.

Awaiting the parallel proceedings.

Unlike the disciplinary process for a cheating scandal, a university’s investigation, adjudication and resolution of a sexual assault case is a classic parallel-proceedings scenario.  At any moment there may be simultaneously ongoing (1) an administrative proceeding (run by the university); (2) a criminal investigation (run by external law enforcement, sometimes in concert with internal university security and sometimes not); and (3) potential civil lawsuits by either the accuser or the respondent.

Even in the “normal” scenario, parallel proceedings raise thorny issues. In the university disciplinary context, however, they raise at least two special issues, issues often troubling and sometimes disastrous.

First, there is a fourth parallel overlay – the Department of Education’s OCR – that is not present in the usual parallel proceedings situation. The threatened loss of Title IX funds is a near-nuclear scenario for many institutions. (The closest but still imperfect parallel in the business world would be a federal indictment of a company).  A Title IX investigation is unpleasant but survivable. The actual loss of Title IX funding may not be.

Second, the due process and Fifth Amendment implications for the student respondent/defendant are exacerbated in ways that are foreign to customary practice and procedure.

Why is this so?

Put yourself in the chair of a defense lawyer whose new client is a student.  A complaint has been launched in the university disciplinary system against your client, alleging rape or other serious sexual assault.  Consistent with the “Dear Colleague” letter, the university process unfolds swiftly, and your client will soon be offered an opportunity to “tell his side of the story” to a panel of university administrators and faculty.  The local police investigators have requested an interview of your client. You have received an email from a lawyer representing the alleged victim who demands that your client preserve all electronic information on his phone such as photos and texts.

Just a few questions.

Just a few questions.

At this stage, the defense lawyer may not know much, but she or he knows two things.

First, the lawyer knows that the client is not talking to anybody until counsel is quite certain of the legal landscape generally and, in particular, the client’s status in the criminal investigation.

Second, the lawyer may try a “real world” fix: for Fifth Amendment reasons, stay the civil proceedings pending resolution of the criminal investigation and potential prosecution.  Taking the “Dear Colleague” letter at face value, however, and given the prevailing sentiment in this area, a Title IX-compliant university will not be staying much of anything. Although a very short pause in the disciplinary proceedings – on the order of days – is clearly permissible for law enforcement to conduct basic investigative tasks, the kind of stays we in the external world — months and months — is unlikely.  Or, as OCR says:

Police investigations may be useful for fact-gathering; but because the standards for criminal investigations are different, police investigations or reports are not determinative of whether sexual harassment or violence violates Title IX. Conduct may constitute unlawful sexual harassment under Title IX even if the police do not have sufficient evidence of a criminal violation. In addition, a criminal investigation into allegations of sexual violence does not relieve the school of its duty under Title IX to resolve complaints promptly and equitably.

A school should notify a complainant of the right to file a criminal complaint, and should not dissuade a victim from doing so either during or after the school’s internal Title IX investigation. For instance, if a complainant wants to file a police report, the school should not tell the complainant that it is working toward a solution and instruct, or ask, the complainant to wait to file the report.

Schools should not wait for the conclusion of a criminal investigation or criminal proceeding to begin their own Title IX investigation and, if needed, must take immediate steps to protect the student in the educational setting. For example, a school should not delay conducting its own investigation or taking steps to protect the complainant because it wants to see whether the alleged perpetrator will be found guilty of a crime. Any agreement or Memorandum of Understanding (MOU) with a local police department must allow the school to meet its Title IX obligation to resolve complaints promptly and equitably. Although a school may need to delay temporarily the fact-finding portion of a Title IX investigation while the police are gathering evidence, once notified that the police department has completed its gathering of evidence (not the ultimate outcome of the investigation or the filing of any charges), the school must promptly resume and complete its fact-finding for the Title IX investigation.

Thus, the respondent/defendant is in a crucible.  Does he fight the charge in the university’s disciplinary proceeding, or decline to participate in the proceeding so as to avoid statements that the government could use, fairly or unfairly, in a criminal prosecution?

Each situation is different, but rock breaks scissors, and prison trumps college.  The respondent/defendant may sue the university on due process grounds, as a Duke student recently did with success, but that is a temporary solution:

Some students who have been expelled or suspended pursuant to a university policy on sexual assault are suing those schools, claiming their rights to a fair hearing were violated. Schools currently involved in litigation with students under these circumstances include: Vassar College, the University of Michigan, Duke University, Occidental College, Columbia University, Xavier University, Swarthmore College, and Delaware State University, among others. Most of these claims have centered on the argument that the hearing processes under new, more stringent standards are unfair. Some of the accused have claimed that the discipline system is now skewed against them because of their male gender and should likewise be considered a violation of Title IX. The likely success of these lawsuits for the accused remains undetermined, but there has been at least one instance in which a judge intervened to keep a school from expelling a student using its internal procedure.

On May 29, 2014, a judge in North Carolina put the expulsion of a Duke University student on hold. Duke determined the student, Lewis McLeod, had committed a sexual assault and should be expelled before spring finals during his senior year of college.Judge W. Osmond Smith III ruled that McLeod would likely suffer irreparable harm if expelled. His ruling blocked Duke from expelling McLeod pending a final determination on the merits.

OCR is not a party to these lawsuits, but the “Dear Colleague” letter makes its position clear, were it required to take one:

Public and state-supported schools must provide due process to the alleged perpetrator. However, schools should ensure that steps taken to accord due process rights to the alleged perpetrator do not restrict or unnecessarily delay the Title IX protections for the complainant.

Quite a burden.

Quite a burden.

With regard to due process (and evidence presented in the process), another vexing issue for universities is the question of the appropriate “burden of proof” to apply in campus sexual-assault cases.  Historically, most schools seemed to use a standard that was lower than the “beyond a reasonable doubt” requirement that criminal prosecutors must meet but something greater than the “preponderance of the evidence” standard customary in civil lawsuits.  It is unclear (at least to me) what the complete constitutional and evidentiary consequences are of making findings that are both civil and criminal using only a civil standard.

It is not unclear to OCR, however:

[I]n order for a school’s grievance procedures to be consistent with Title IX standards, the school must use a preponderance of the evidence standard (i.e., it is more likely than not that sexual harassment or violence occurred). The “clear and convincing” standard (i.e., it is highly probable or reasonably certain that the sexual harassment or violence occurred), currently used by some schools, is a higher standard of proof. Grievance procedures that use this higher standard are inconsistent with the standard of proof established for violations of the civil rights laws, and are thus not equitable under Title IX. Therefore, preponderance of the evidence is the appropriate standard for investigating allegations of sexual harassment or violence.

OCR roots this principle not in Title IX but in the caselaw developed in civil race-discrimination cases under Title VII of the Civil Rights Act of 1964.  The statutory foundations of this approach merit further thought, but it is noteworthy that while sexual assault and racial discrimination are both odious and unlawful, only the former is a crime (except for instances of federal deprivation-of-civil-rights situations).

The Crimson offense (or defense?)

The Crimson offense (or defense?)

In any event, the shift to the preponderance-of-the-evidence standard is occurring rapidly, as at Harvard:

The new policy, unveiled Wednesday, dramatically changes how cases of sexual assault are handled at Harvard. The new Office of Sexual and Gender Based Dispute Resolution will employ professional investigators and essentially remove investigative responsibility from individual disciplinary boards across schools. Based on the facts provided by the central office, those disciplinary boards will work with University Title IX Officer Mia Karvonides to issue sanctions.

The “preponderance of the evidence” standard that the office will employ is seen by many as a lower burden of proof than the “sufficiently persuaded” standard currently used by the College’s Administrative Board. The preponderance of the evidence standard, favored by the U.S. Department of Education’s Office for Civil Rights, is generally understood to require more than 50 percent certainty to determine guilt.

Absent from the new policy is an affirmative consent requirement, under which partners must affirmatively communicate their willingness to participate in sexual activity. Activists on Harvard’s campus, such as those involved with the group Our Harvard Can Do Better, and across the country have lobbied for such a clause.

(The Crimson article attaches a copy of the new Harvard policy).

Damn committee reports.

Damn committee reports.

So, what are the takeaways for university administrators and others charged with development an oversight of university disciplinary systems, especially with regard to claims of sexual assault?

OCR-ready.

OCR-ready.

Bulk up on the skill.  You cannot delegate away “Dear Colleague” responsibility; nor can you simply add it as another part of the job description in Legal or Compliance; nor can you have your “Dear Colleague” program run by someone who is not sensitive to the legal, administrative and — bluntly — political issues that swirl around this effort.

Cut down on the windowdressing.  Some companies have magnificent paper compliance programs and codes of business ethics, policies that set lofty standards which, if not undergirded by the actual work, only make the situation worse in the midst of a compliance failure or white-collar criminal investigation.  (This is the “don’t write a check your body can’t cash” problem).  The university setting is no different.  Plus, colleges are thick with committees, panels, town halls, manifestos and missions.  Don’t write a policy without thinking through the process, and how defensible it is.  And do not confuse compliance with ethics.

Focus on high-visibility groups. Athletic teams and fraternities, fairly or unfairly, bear the brunt of criticism for undesirable campus conduct.  On the other hand, those groups are important to university life; have strong alumni support; are in many cases revenue generators (in the case of the athletic department, at least); and can be on–campus bellwethers.  Whatever your policy direction and compliance program, if you have these constituencies with you, the job will be much easier.

How to get sued.

How to get sued.

Don’t Nifong respondents.  We mentioned the Duke lawsuit above.  A prime example of how not to handle university disciplinary procedures was Duke’s process, actions and inactions during the false rape claims lodged against several of its lacrosse players against the backdrop of the misconduct of the now-disbarred criminal prosecutor, Mike Nifong.  (We have written about the Duke lacrosse case here. The definitive work on the case remains Taylor and Johnson’s Until Proven Innocent).

A university’s best defense in the “Dear Colleague” era is a combination of sound preparation; an honest approach in plain English; and a firm devotion to the integrity of process for the benefit of its students without regard to externalities (an unethical and unfit prosecutor, for example) or internal pressures (such as small groups of virulent ideologues).

 

 

 


The Winter Olympics of Cooperation: The Bridge On The River Kwai, White-Collar Self-Image and Federal Sentencing

“Cooperation” is a complex concept for individuals and businesses caught up in white-collar criminal cases, compliance reviews and breakdowns of business ethics.  As with the more obscure or corrupt Winter Olympic events, there are ways to demystify the complexity, but it is not easy.

The Bridge On The River Kwai (1957).

The Bridge On The River Kwai (1957).

In David Lean’s 1957 film The Bridge On The River Kwai, we see cross-currents of duty, vainglory, cooperation, resistance, collaboration and death.  (We also hear some great whistling, but that is another matter).  All of these ideas and emotions come into play when a colleague, an employee or a corporate officer or director is faced with the question: “Do I [or we] cooperate with [the Government, the Audit Committee Special counsel, the court-appointed corporate monitor, etc.]?

Remember that, in the sense in which we use the term, “cooperate” is not exactly the opposite of “be obstreperous.”  Rather, we mean to work together with whatever authority is opposed to us, in the hopes of a better outcome, rather than going down another path.

So, before we choose whichever path, a few observations to guide those of us — internal counsel, internal audit, compliance, risk management and outside counsel — charged in turn with guiding the unfortunates who must actually make the decision.

Not your everyday Saturday morning cartoon about cooperation.

Not your everyday Saturday morning cartoon about cooperation.

Cooperation Is A Shock To The Potential Cooperator.  An innocent-minded employee or corporate officer will see cooperation as natural — What do I have to hide? — until he or she appreciates the necessary condition: a cooperator has something to cooperate about.  He or she has something to offer in exchange for lenient treatment.  If you have something to cooperate about, odds are you have done something to put yourself in that position.  At a minimum, everyone will believe you did.  (We have written earlier about motive and otherwise apparently innocent-minded people, here: Good People, Bad Acts and Intent).

This shock-effect is a close cousin to the reluctance of most businesspeople to invoke their rights under the Fifth Amendment.  We have discussed that reluctance before — Salinas and The Fifth Amendment  — and it can be fatal.

Rejecting the proposed plea agreement.

Rejecting the proposed plea agreement.

Cooperation Is Not A Sign Of Guilt Or Weakness, Nor Is Fighting Proof Of Innocence Or Strength.  Shock may lead to misapprehension of the nature of cooperation.  Cooperation is an economic transaction, not a moral one.  The cooperator offers something of value (information or action) in order to receive something of value (leniency or favor).  We must help our client, employee or colleague understand the transactional nature of cooperation.

 

"Sure, I falsified a couple of wastewater reports, but who knew it's make that much mess?"

“Sure, I falsified a couple of wastewater reports, but who knew it’d make that much mess?”

Cooperation Is Not Explanation, Or Putting The Story In Context.  The innocent-minded may conclude, especially on first blush, that “If I can just tell my story and put things in context, the problem will vanish.”  This is a canard.  (“Canard” is French for “duck,” and I double-majored in political science and French, so I sometimes like to say things like that).  Whatever the external, outside force we are facing — a government investigation, say — its representatives are only tangentially interested in the “truth,” at least in an objective fashion.  Rather, they are assessing a case, fulfilling a mandate or looking to preserve or advance a higher good.  To the FBI or Homeland Security agent, the effort to contextualize will likely be misunderstood and, if understood, then perceived to be an effort to minimize wrongdoing.  They don’t really care.

Testifying in the grand jury on Christmas Eve.

Testifying in the grand jury on Christmas Eve.

Cooperation Has Benefits, But The Burdens Can Run For A Long Time.  For some of the reasons set out below, cooperation can bring benefits, but the extent and duration of cooperation can come as an unpleasant surprise.  You are not selling your soul, but you are putting your conscience and your sleep out on a long-term lease to someone else.

 

 

Early Cooperators Do Better.  This is conventional wisdom, but it is almost always true.  Is it ever too late to cooperate?  Here’s a thoughtful piece Why Didn’t Martoma Cooperate? And Is It Too Late?  by Lawrence S. Goldman at the White Collar Crime Prof blog.

Sharpen your pencils.

Sharpen your pencils.

Cooperation, Resolution and Disclosure

Cooperation can play a significant role in settlement (of a civil enforcement action) or in a plea deal (in a criminal prosecution). The relationship between cooperation and resolution is not precise.  As Professor Peter J. Henning points out in a recent note on the subject — For Settlements, Companies Sketch Contours of a Black Box — it is difficult even to figure out how the government arrives at tan acceptable dollar figure for resolution:

The government is taking an increasingly hard line in seeking large settlements, as shown by the litigation reserves companies are required to set up once they have determined the cost of resolving a case. What we don’t really know, however, is what goes into the process of assessing a penalty and how it relates to the harm caused by a violation.

* * * *

Accounting rules require a company to disclose a material loss because of litigation once it is both probable and the amount can be reasonably estimated. When that line is crossed is a matter of judgment, but once the parameters of a deal with the government are in place, a company can be expected to disclose how much it thinks it will have to pay.

How the two sides arrive at the penalty remains something of a mystery to the general public. Companies rarely disclose what happened in the negotiations, as Avon did.

Federal statutes provide the maximum fine for a violation, but that is only for a single violation. Corporate crime often involves hundreds, or even thousands, of separate offenses, so the total potential fine could be enormous.

The federal sentencing guidelines provide a set of factors to be considered when a court determines a financial penalty. The list includes whether a company cooperated in the investigation and the involvement of senior management in the crime.

But few cases involving large corporations ever see the inside of a courtroom. Instead, the Justice Department usually resolves corporate investigations through deferred and nonprosecution agreements, along with civil settlements, that do not require judicial approval of any penalty assessed against a company. So it is often unclear how the government determined the amount to be paid as the punishment for a violation.

The Sentencing Guidelines: Cooperation, Resolution and Dollars

Contemplating a Guidelines recalculation.

Contemplating a Guidelines recalculation.

Professor Henning mentions the federal Sentencing Guidelines, and it is worth a brief review here as they relate to cooperation, settlement and the amount of a financial penalty.

A primary source, of course, is the United States Sentencing Commission’s 2010 FEDERAL SENTENCING GUIDELINES MANUAL CHAPTER EIGHT – SENTENCING OF ORGANIZATIONS, which sets out in great detail the Commission’s view of organizational sentencing.  In particular, the Commission sets out four general principles, with “cooperation” being one [emphasis added]:

First, the court must, whenever practicable, order the organization to remedy any harm caused by the offense. The resources expended to remedy the harm should not be viewed as punishment, but rather as a means of making victims whole for the harm caused.

Second, if the organization operated primarily for a criminal purpose or primarily by criminal means, the fine should be set sufficiently high to divest the organization of all its assets.

Third, the fine range for any other organization should be based on the seriousness of the offense and the culpability of the organization. The seriousness of the offense generally will be reflected by the greatest of the pecuniary gain, the pecuniary loss, or the amount in a guideline offense level fine table. Culpability generally will be determined by six factors that the sentencing court must consider. The four factors that increase the ultimate punishment of an organization are: (i) the involvement in or tolerance of criminal activity; (ii) the prior history of the organization; (iii) the violation of an order; and (iv) the obstruction of justice. The two factors that mitigate the ultimate punishment of an organization are: (i) the existence of an effective compliance and ethics program; and (ii) self-reporting, cooperation, or acceptance of responsibility.

Fourth, probation is an appropriate sentence for an organizational defendant when needed to ensure that another sanction will be fully implemented, or to ensure that steps will be taken within the organization to reduce the likelihood of future criminal conduct.

These principles have taken on urgency for companies that do business in the United Kingdom.   As we see here — U.K. Issues New Sentencing Guidelines for Corporate Fraud — the new guidelines are intended to be implemented alongside the UK’s deployment of American-style deferred-prosecution agreements.

The other key document to have to hand is a copy of DOJ’s Principles of Federal Prosecution of Business Organizations, essentially a set of charging guidelines for prosecutors.  They have discretion.  Try to leverage it in your favor.

Speaking of discretion, we leave you with a note from Matthew 5:23-26:

So if you are offering your gift at the altar and there remember that your brother has something against you, leave your gift there before the altar and go. First be reconciled to your brother, and then come and offer your gift. Come to terms quickly with your accuser while you are going with him to court, lest your accuser hand you over to the judge, and the judge to the guard, and you be put in prison. Truly, I say to you, you will never get out until you have paid the last penny.


McKinsey, General Lee and the Culture of Compliance

Except perhaps for “paradigm” and “silo,” the word “culture” is one of the most abused in the vocabulary of compliance, ethics and consultants.  (I once heard a consultant say that he needed “a high hover over the silos.”  I thought it an ironic mash-up about drones and agriculture; it was not).  Yet, “culture” has a meaning in the broader world; in commerce; and in compliance.  “Culture” represents a gear-shift in compliance and ethics, and can be smooth or bone-rattling.

McKinsey

McKinsey

Consider this story about  McKinsey’s culture in the wake of insider-trading scandals:

For a quarter of a century, except for a brief stint as a currency analyst at Rothschild, Mr. Barton has worked at McKinsey, the consulting firm with more than 1,400 partners and 18,500 employees around the world. And that is why he is facing the most daunting task of his career: as McKinsey’s global managing director, he is trying to change the culture of the firm that shaped him.

There are two reasons that Mr. Barton is on this mission: Anil Kumar and Rajat K. Gupta. Mr. Kumar was a McKinsey director who, in 2010, pleaded guilty to insider trading charges and publicly acknowledged giving corporate secrets gleaned on the job to Raj Rajaratnam, a founder of the Galleon Group hedge fund, in return for cash. Never in the history of the firm had a partner been charged with violating securities laws.

A year after the Kumar scandal, the Securities and Exchange Commission filed a civil complaint accusing Mr. Gupta, a Goldman Sachs board member and former McKinsey managing director, of telling Mr. Rajaratnam about a $5 billion investment in Goldman by Warren E. Buffett’s Berkshire Hathaway at the height of the financial crisis. Mr. Gupta, a revered former partner who had been elected managing director three times in a row, serving at the helm for a decade, was ultimately convicted of criminal charges of leaking boardroom business. He awaits the outcome of his appeal, even as insider trading charges continue to occupy prosecutors. The trial of Mathew Martoma, a former trader at SAC Capital Advisors, run by Steven A. Cohen, started last week in Manhattan, not long after another SAC trader, Michael S. Steinberg, was convicted of trading on corporate secrets. SAC itself pleaded guilty in November to violating insider trading laws.

So where does that lead Mr. Barton?

At McKinsey, Mr. Barton has been trying to prevent another disgrace: a “third man,” as some have put it. McKinsey is known for what it calls its culture based on values and trust — a culture that was created and nurtured by Marvin Bower, its longtime managing director. The values that Mr. Bower instilled included putting the clients’ interests above the firm’s, providing independent advice and keeping confidences. These ideas were imparted from one generation to the next, mentor to apprentice. But after Mr. Kumar’s arrest in late 2009, Mr. Barton, who had been elected to head the firm just months earlier, decided that the honor-driven, values-based system was not enough. What the firm needed was some rules.

“We needed more safety moats around the castle,” he says. “We have this values/trust culture. I get that. Now we have a little more edge.”

The rest of the article details why some in the firm think this a great idea while others pan it.

Multiple rules in the compliance handbook.

Multiple rules in the compliance handbook.

Given the size and diversity of his organization, I applaud Mr. Barton.  For better or for worse, if there is no more “values/trust culture” to be poured in from the top, then the only reasonable thing to do is add “a little more edge.”  Like edging your lawn: it seems to grow luxuriantly by itself, but you don’t want grass clogging the sidewalk.

On the other hand, rules — especially rules that are applied to thousands or tens of thousands of employees, perhaps in dozens of countries — are blunt instruments.  They hack at the lawn, rather than trim it.  In addition, people sometimes revolt against the governing values, but they always revolt against the governing rules.  Finally, the rules do a much better job of describing how you transgress than how you non-transgress.

The Collonade.

The Colonade at W&L

Consider the example of my alma mater, Washington & Lee University in Lexington, Virginia and the Honor System created by President (formerly General) Lee:

The mid-1800s saw the development of honor systems at many colleges. Lee replaced the elaborate disciplinary rules of Washington College by a single standard: “Every student must be a gentleman.” He intended for the young men under his charge to acquire a sense of responsibility based on truth, honor, and courtesy. Lee also placed a premium on civility and spoke to each student as he passed him on campus, encouraging by his example the same show of respect between students.

Today’s honor system, administered by students, has been a unique feature of Washington and Lee University for well over a century. It is based on the fundamental principle of mutual trust among students, faculty, and staff that students attending Washington and Lee will not lie, cheat, steal, or otherwise act dishonorably. With the rule of civility, exemplified by the W&L “speaking tradition,” Lee’s legacy of honor continues to permeate academic and social life at Washington and Lee University and serves as a model nationwide.

 

An Honor System works well at W&L and poorly at many other universities for several reasons.  Some of those reasons illumine the strengths and weaknesses of many corporate compliance programs.

Robert Edward Lee

Robert Edward Lee

First, as implied above, it is a system, not a code:

Young gentleman, we have no printed rules here.  We have but one rule and that is that every student must be a gentleman.

— Robert E. Lee to student Wallace E. Colyar (1866)

Although there are more rules and regulations today in Lexington than there were formerly, the Honor System coalesces around a concept (‘honor”) rather than dividing between thou shalts and thou shalt nots.  Despite lip-service to soft concepts in compliance programs, most come down to crypto-Scriptural commands.

Second, the Honor System is single-sanction.  There is one penalty — dismissal — without regard to the severity of the offense.  In other words, it does not seek proportional justice.  Most corporate compliance officers who tried a single-sanction system would get fired.

Third, it marries two starchy concepts: “honor” and “duty.”  President Lee cherished the latter as much as the former:

The forbearing use of power does not only form a touchstone, but the manner in which an individual enjoys certain advantages over others is a test of a true gentleman.

The power which the strong have over the weak, the employer over the employed, the educated over the unlettered, the experienced over the confiding, even the clever over the silly–the forbearing or inoffensive use of all this power or authority, or a total abstinence from it when the case admits it, will show the men in a plain light.

The gentleman does not needlessly and unnecessarily remind an offender of a wrong he may have committed against him. He cannot only forgive, he can forget; and he strives for that nobleness of self and mildness of character which impart sufficient strength to let the past be but the past. A true man of honor feels humbled when he cannot help humbling others.

“Duty,” for many employees in highly-diversified, extremely large global organizations is a term roughly co-extensive with “pay.”

Fourth,Washington & Lee is a liberal-arts college, not the org-chart Tower of Babel that many large-company compliance officers must deal with.  Coalescing around a concept (like “honor” or “duty”) rather than submitting to a rule or a checklist is easier when at least a core group is composed of individuals who possess more experiences, taboos, creeds and rituals that unite them than divide them.  (Or, at a minimum, they perceive such to be the case).

Corporate compliance programs cannot readily have the grace of the Washington & Lee Honor System — much as (a biased alumnus says) the corporate officer, director or employee without the benefit of a W&L education cannot readily have the grace of a W&L alum.  Both require work; both produce imperfection.  But, as the effort of McKinsey’s Mr. Barton demonstrates, both are commendable.

 



Weekend: GCs on Boards and Gin in Ice

 Notes For the Weekend:

 

I tend to agree:  No, General Counsels Should Not Be On The Board.  The conflicts can be too great.  GCs sometimes have a hard enough time, as it is, being honest brokers and, as the saying goes, speaking truth to power.

Especially good corruption, bribery and FCPA collection from Corruption Currents  (via@WSJRisk).

 

 

 

 

 

 

 

500 Pearl St. logo

As always, a good summary of white-collar news from @WaltPavlo and 500 Pearl Street.

 

And finally . . .

The best “coffee-table” book I have read on martinis is The Martini: An Illustrated History of an American Classic by Barnaby Conrad III:

A chilled, crystal glass; the purest gin; a touch of dry vermouth–vigorously shaken, not stirred–and a plump, green olive. The martini was and still is more than just a cocktail. Originally mixed in the nineteenth century, it became an American icon in the twentieth, and the favorite drink of such luminaries as Franklin D. Roosevelt, Winston Churchill, Jack London, and Ernest Hemingway. Bernard De Voto called the martini “the supreme American gift to world culture,” while H. L. Mencken declared it “the only American invention as perfect as a sonnet.”

The first book of its kind to explore the drink’s wide appeal, this volume serves up a fabulous cocktail of martini-inspired art, cartoons, collectibles, advertisements, and film stills that reveal how deeply this classic has permeated every aspect of American culture, from literature and film to politics and high society. Complete with bartending lore, traditional martini recipes, literary excerpts, memorable scenes from James Bond movies, and more, The Martini offers a toast to this intoxicating symbol of the American dream.

 

 


Mine Blast Plea: Dust, Documents and Deaths

coal miners denied time

As the  article (via @Law360) points out, Ex-Massey Exec Gets 42 Months In Mine Blast Case this Massey mining manager pleaded to “pre-notifying” about MSHA inspections (and conspiracy pertaining thereto).  It’s interesting that, in his plea colloquy, he was was apparently careful and narrow, almost ascribing a business-culture source for the conduct:

“I’m sorry for what I’ve done — pre-notifying about mine inspections,” Hughart said at his sentencing, according to the Associated Press. “I grew up that way. I accepted it as common practice. I know better now, and I apologize.”

That kind of approach needs to be handled gingerly, though.  The larger case landscape is important for sentencing considerations (implicitly, if not explicitly):

Hughie Elbert Stover, Massey’s former security chief, was sentenced to three years in prison in February 2012, after being convicted of lying to members of the FBI and the MSHA as well as directing the destruction of security-related documents in order to stymie the investigation into the causes of the mining disaster.

In March 2012, former mine superintendent Gary May pled guilty to charges that he hid from federal investigators hazards at the Upper Big Branch mine such as excessive coal dust piles and poor air flow. The disaster killed all but two miners working in the mine, making it the worst mining accident in the U.S. since 1972.

The combination of the deaths of the miners; the document-destruction; and the false statements was overwhelming.

Here’s another take (via @WSJ):  Former Massey Coal Executive Sentenced to Prison


What They’re Saying About White Collar Wire: “Sage advice . . . to any American citizen.”

Generous comments from Professor Michael Greve at Liberty Law Blog:

You can follow much of the current action [regarding banking and regulation] on WhiteCollarWire, which provides sage advice to bankers and, indeed, any American citizen: “Don’t read us because you’re a criminal. Read us because, some time or other, someone may think you are.” (In addition, the site provides fine literature reviews and martini recipes.)


SEC Goes To Bat For Misled Compliance Officer

From The Wall Street Journal Risk & Compliance blog (and Samuel Rubenfeld @srubenfeld):  Good news for corporate compliance officers whose officers or employees lie to them or mislead them:  SEC Stands Up For Compliance Officers 

The Securities and Exchange Commission took the side of compliance officers — after a Colorado-based investment adviser was caught lying to one.

 

Earlier this week, the SEC said its own probe found that Carl Johns, an investment adviser in Louisville, Colo., concealed several hundred trades in his personal accounts after failing to report them by altering brokerage statements and other documents. He later created false documents that purported to be pre-trade approvals, and misled his firm’s chief compliance officer in her investigation into the trading.

 

Mr. Johns agreed to pay more than $350,000 and be barred from the securities industry for at least five years, the SEC said. The case is the SEC’s first made under a rule of the Investment Company Act that prohibits misleading and obstructing a chief compliance officer.

 

“Compliance officers should be happy that this case was brought because it will help them fulfill their duties,” said Stephen M. Quinlivan, a shareholder of law firm Leonard Street and Dainard. “If people do lie to them, the SEC’s not going to stand for it.”

 

Mr. Quinlivan said he believes that the SEC has generally stepped up its examinations of investment advisers, particularly when it comes to hedge funds and private equity.

 

If a good compliance officer is being lied to, the SEC “could certainly” bring a similar case, Mr. Quinlivan said.

 

Of course, if you’re a compliance officer and the SEC thinks you’re the one lying or misleading — or just being willingly duped — that’s another problem.