By Jay Edmond Russ, Esq. CCEP
Russ & Russ PC
jayruss@russrusspc.com
To the Editor of The New York Times
On December 22, 2015, you ran an article, authored by corporate governance expert, Michael W. Peregrine, Esq., titled “Caution by Company Officers Can Create Problems for Boards.” The thrust of the article was, essentially, that: 1) the government and regulators have “new enforcement policies” directed toward individual wrong-doers in the corporate setting, and 2) this is having a chilling effect upon corporate officers in the exercise of their duties. Please allow me to express a contrary view.
First, the “new enforcement policies” are, really, not “new.” The recent pronouncements from the government and regulators such as the “Yates Memo” (a memorandum from Deputy Attorney General Sally Quillian Yates to all DOJ attorneys, including U.S. Attorneys across the country), are merely reminders to federal prosecutors that they should focus on individual culpability in the corporate setting, a concept that predates the Yates Memo (see, for example, The Holder Memo, from 1999, which Professor Jennifer Arlen from New York University stated incentivized corporations to launch internal investigations and turn-over information that may help bring charges against responsible individuals). References in the article to the SEC are assumed to be to a speech with like content given by Andrew Ceresney, Director of the SEC’s Enforcement Division, on May 13, 2015, at the University of Texas, School of Law Government Enforcement Institute.
Some of the rhetoric around the Yates Memo might be “new.” Some commentators might consider this the time to sound a warning bell at the level of the Board of Directors, to re-emphasize the importance of corporate legal counsel and investigative legal counsel, but the fact remains that individual culpability within a corporation has never been ignored by prosecutors and there is no “new” or expanded need for counsel.
The Yates Memo reminds federal prosecutors to focus on individual culpability at the very inception of a criminal investigation. A corollary to this is that a corporate internal investigation, which likely takes place before a criminal investigation, should address individual wrong-doing. But that is consistent with existing practice within corporations; a corporate investigation should seek to identify individual wrongdoing for purposes of self-reporting, remediating, training and disciplining. These are an integral part of an effective corporate compliance program.
The DOJ reminder that prosecutors and civil enforcement attorneys doing corporate investigations should contact each other is also not new as the DOJ has for years worked on criminal investigations parallel to civil enforcement attorneys.The DOJ reminder emphasizes pursuit of culpable individuals at every level of the enterprise, but, again that is not “new.” Prosecutors pursue lower-level participants to gain cooperation and information against those higher in the corporate governance structure.
The author states that corporate officers increasingly see themselves at greater personal legal risk because of these “new” policies, and because there are now incentives for corporations to “give up individuals believed responsible for corporate wrong-doing, in order to receive leniency in any possible settlement with the government.” The author states that there are new grounds for tension in the relationship between management and the Board of Directors, and that the Board members should be nervous “for the fate of major strategies that management is charged with putting into effect.” He opines that the Board of Directors and management might now have different concepts of risk in connection with major strategies and that corporate officers “may engage in self-protective conduct that hampers valid company initiatives.” This conduct, he suggest, might be subtly seen in “written or oral expressions of discomfort made to corporate leadership” or in“substantial equivocation in observations or recommendations or simply delegating initiative responsibility to a lower level of management.” Turning to the responsibility of Board of Directors, the author suggests that the Board of Directors “assure gatekeepers that the corporation is protective of their personal interests.” He proposes that “all major decisions have been carefully vetted by experienced legal counsel.”
Respectfully, my view is that this is inaccurate. In this era of sharply increased awareness and participation by Boards of Directors, whether in public or private, for-profit or not-for-profit settings, corporate officers have every reason to feel supported in the legitimate exercise of their responsibilities, even if that means promoting an aggressive business agenda.
It is the function of every member of the Board of Directors, and every member of the management team, to identify and disclose wrong-doing and the individual parties responsible.
Compliance is the duty of everyone. It has long been the case that corporations will internally investigate and “give up” to use the author’s word, wrong-doers, not “to receive leniency” but because it is required by every ethical and legal principle applicable to the Board of Directors, the officers, management team and the enterprise. The concept of leniency arising from self-reporting wrong-doing arises from the Federal Sentencing Guidelines For Organizations (rules that set out a uniform sentencing policy for individuals and organizations convicted of felonies and serious misdemeanors in the United States federal courts system) first promulgated in 1987. The days are long over when counsel, whether internal or external, would “circle the wagons” and embark on a protective strategy marked by non-disclosure of wrong-doing. Counsel, working closely with an effective Compliance Officer, and Compliance Committee of the Board of Directors, and entire management team, know that self-disclose of wrong-doing is essential.
The Yates Memo and recent pronouncements by the SEC do not establish new grounds for tension in the relationship between the Board of Directors and management, nor threats to major strategies that management is charged with developing and implementing. In these complicated economic times, and with the geometric speed of technological advances, the need for new, innovative corporate strategies are obvious. It is the duty of every Board of Directors to recruit and retain capable executives. A manager or corporate officer who engages in “self-protective conduct that hampers valid company initiatives” is occupying space that should be occupied by a more committed and engaged executive, and is violating his/her employment agreement. and the trust placed in him/her. A manager or corporate officer who engages in “substantial equivocation in observations or recommendations” is playing a dangerous mind game.
The risk to managers and corporate officers of criminal prosecution, based only upon individual conduct that one believes is legitimate, and is vetted through the management team and the Board of Directors, is exceedingly small. We all live with the risk of injustice; however, for individual wrong-doers, there is only one response to be expected from the Board of Directors: “Do not expect the corporation to protect you.” When individuals within the corporation are wrongfully pursued by aggressive prosecutors, the answer, in my judgment, does not lie in D&O insurance coverage (which would likely exclude the acts complained of), or in expanded access to corporate counsel, who is responsible first, and foremost, to the enterprise. It is not the role of the Boards of Directors to “assure gatekeepers that the corporation is protective of their personal interests.” They should assure gatekeepers that the corporate interest is paramount, when based upon lawful and compliant conduct.
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