Is a Corporate Monitor Necessary?

When should the government appoint a monitor?

That was one topic that a panel of experts grappled with at the Corporate Crime Reporter’s conference last week at the National Press Club.

On the panel were Dan Newcomb of Shearman and Sterling, George Stamboulidis of Baker Hostetler, Gil Soffer of Katten Muchin, Joseph Warin of Gibson Dunn, and John Buretta, chief of staff of the Criminal Division at the Department.

The panel was moderated by Shirah Neiman of SN Compliance.

“It shouldn’t matter whether it was the result of a guilty plea a deferred prosecution agreement or a non prosecution agreement,” said Neiman, who was a prosecutor with the U.S. Attorney’s office in Manhattan for forty years.

“What matters is — what caused the criminal conduct. Tone at the top is an issue. A monitor is required if the tone at the top was bad.”

“Tone at the top may mean that corporate management was involved in the criminal conduct,” Neiman said. “Tone at the top may mean that corporate management always looked the other way and didn’t care what anybody did because they were happy that the business side was doing well.”

“Tone at the top could also mean that rather than deliberately looking away, they were negligent and never enabled their compliance department to be properly staffed and resourced.”

“If any of those three things are implicated in the criminal prosecution, my view is that a monitor is needed to oversee the creation of an effective compliance program and oversee its implementation — including training.”

Newcomb asked — “What does a monitor do?”

“My wife asked me — you were a monitor, what did you do?” Newcomb said.

“Sometimes I’ve shorthanded it as — corporate probation officer.”

“What Shirah has just described is a corporate probation officer,” Newcomb said.

But Newcomb says he prefers to describe a monitor as “the coach for the compliance program.”

“Not the player — you shouldn’t be calling the plays even,” he said. “But you should be helping the company get to a good compliance program. That’s the real purpose of a monitor.”

“The key metric — what kind of a compliance environment does the company have

and will they be able to get to a state of an effective compliance program,” Newcomb said.

Buretta said that “the Morford Memo sets it out pretty effectively.”

“It centers on the nature of the misconduct, the types of internal controls on paper, what was management’s perspective on the internal controls, what was the history of the company, what remedial efforts did the company engage in,” Buretta said.

“But self disclosure — or not — is a huge marker for us. It’s not dispositive, but important in assessing the ethical culture in the company. That can have an impact on whether we think a monitor is appropriate.”

“We also look whether this is some systemic problem — or was it an isolated situation.”

Stamboulidis said that the monitor could be like a probation officer “to help empower the compliance officer.”

“You do have monitorships where the monitor sits in the boardroom, has access to every inch of the company and every meeting,” Stamboulidis said. “The monitor is in areas where there are attorney client privilege conversations going on and the monitor’s mere presence eliminates the privilege.”

“In the Bristol Myers case, the monitor removed the general counsel, removed the CEO,” Stamboulidis said.

“So, it’s a little more than a probation officer, it’s a little more than empowering the chief compliance officer in that context,” he said.

“I’ve been a monitor a number of times, and I’ve never removed anybody in that space, but I won’t say that we didn’t mix it up now and again and under the appropriate circumstances,” he said.

“You need to, throughout the process, make sure there is a compliance program that works, because the monitorship will end.”

“And when it ends, you hope you left the company better than when you found it.”

“Part of that is making sure that all of the org chart boxes, including compliance, have a voice and are not just ignored. Sometimes that means pulling them into the business units, sometimes that means taking them out of the business units and figuring out how they are compensated.”

“Will they blow the whistle on a big money deal? Or will they not do so because they have a financial incentive?”

Buretta kept circling back to self disclosure.

“There is just a significant premium on self reporting,” Buretta said. “We reward self disclosure. That’s not to say that self disclosure will always ward off a monitor. But it will be a very important factor. It says a lot about the company. It says that the company detected the problem. It says that the company has the kind of ethical and compliance culture, including at the top and that led it to the conclusion that telling the government is the right thing to do.”

There are ways to ward off a monitor.

One way — hiring a compliance consultant at some point before you ink the DPA or NPA.

“There are situations where the company has time before the government is going to make the decision about what the resolution will be to hire compliance experts, sometimes even someone who the government has used as a monitor in the past, to redo and rework their compliance program so that it becomes an effective compliance program that touches all the bases,” Neiman said.

“When I was a prosecutor, my view was that once a company had the program on paper, they had to demonstrate that the program was actually working effectively.”

“Sometimes they can do that. Sometimes enough time has passed that they can show that they have deterred misconduct that was about to be committed, or that they have detected it, they have weeded out the bad actors, even up to firing them, depending on the facts.”

“And that they have plugged the loophole in the compliance program, that they have had a history of good training and that they can demonstrate that the training works, so that if you interview employees at the bottom rung, they all know about the compliance program and they have all been trained.”

“And if the company is lucky enough to be able to demonstrate that, you might not need a monitor.”

“And there is a middle thing you can do — have a monitor go in for as many months as it takes — three months or six months — to see whether there is a working or an effective compliance program,” Neiman said.

“And then the monitor’s duty is to report back on that. If the monitor says — yes, it’s working, seems to be working well, then that’s the end and there is no monitorship.”

“If the monitor says  — it’s working a little bit, but not well enough, there needs to be tweaks, then the government can say, the monitorship continues for the next year or so.”

Neiman and Newcomb asked Buretta about “do it yourself monitoring” or “periodic self certification by the company.”

Buretta said that the Criminal Division doesn’t do it routinely.

But Warin said that oversight is now coming in “all stripes and sizes.”

“The Department of Justice is looking dynamically across corporations, calibrating these things and tweaking them for the specific matter,” Warin said.

“The former idea — one size fits all disposition that always had a monitor — that has sunset and it is much more calibrated now to — does this company need a monitor, does it need of a certain duration or not? If it doesn’t, is there some sort of interim step that a company itself can undertake that can also be scary for people?”

“If the chief executive officer or chief compliance officer is to certify every quarter or twice a year that she or he isn’t aware of any compliance lapses, you better be right on that certification.”

“But that is yet another way that people are slicing the solutions on the post resolution

settlements, sometimes, pre resolution so that the company will go out and hire somebody and say — tear us apart and tell us where we are weak. And then we’ll agree to do that.”

“Then when they go in to make the presentation, the Justice Department will say– we had Susan Jones in and she did a complete autopsy of the company and in that autopsy

what did she find? She found these fifty things that she recommended changing.”

“You have implemented those and as a matter of advocacy to the government you say — we don’t need a monitor given these steps we have undertaken.”

Newcomb said that “we all in our advocacy role have tried to sell the proposition that we don’t need a monitor.”

“And the Department seems to be much more open to alternatives. It’s not a binary you get one or you don’t get one, which was the bad old days. It’s much more let’s — play all the keys on the piano.”

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