Orrick Partner Richard Morvillo on Corporate Criminal Defense in the Age of the Deferred Prosecution Agreement

Earlier this month, the Justice Department imposed a $33 million penalty on Lumber Liquidators, one of the nation’s largest flooring products retailers, for filing a materially false and misleading statement to investors regarding the sale of its laminate flooring from China to its customers in the United States.

Richard Morvillo Partner Orrick Washington DC

The case was primarily focused on the fact that Lumber Liquidators knowingly filed a false and misleading statement to investors broadly denying the allegations featured in a March 2015 episode of 60 Minutes, and affirming that the company complied with California Air Resources Board (CARB) regulations.

The Justice Department case was opened after a seven-month 60 Minutes undercover investigation in 2015, which found Lumber Liquidators falsely claimed its flooring complied with California Air Resource Board’s maximum acceptable limits for formaldehyde emissions.

After the investigation, the company halted the sale of Chinese made laminate flooring in the U.S., and a number of top company executives, including its founder, Tom Sullivan, left the company.

Lumber Liquidators did not report the wrongdoing to the Justice Department and it has a past criminal record.

In 2016, the company pled guilty in federal court in Norfolk, Virginia, to environmental crimes related to its illegal importation of hardwood flooring, much of which was manufactured in China from timber that had been illegally logged in far eastern Russia, in the habitat of the last remaining Siberian tigers and Amur leopards in the world, announced the Department of Justice.

Yet it still received a deferred prosecution agreement (DPA).

The company was represented by Richard Morvillo, a partner at Orrick in Washington DC.

How did the Lumber Liquidators case come in the door?

“I got a call one day,” Morvillo told Corporate Crime Reporter in an interview last week. “The company was interested in changing counsel. If you read the deferred prosecution agreement, it appears they didn’t get off to a great start with their predecessor counsel and the Department.”

“We came in and we tried to remediate whatever issues had arisen between the prosecution and the company. We built a good relationship of openness and trust. We continued to do some investigative work internally. By and large, the company was very willing and open in terms of being cooperative. They also undertook enormous remediation steps, including the changing of all senior management. And that enabled me to make a pitch to the government to see if I could get a deferred prosecution agreement. The company pled guilty to a Lacey Act violation in 2016, about a year before I came in as counsel.”

“We were already starting out with one demerit. We wanted to try and reestablish a relationship of trust and confidence with the government, which requires openness and collaboration. We succeeded in restoring a balance. When we got around to talking about disposing of the case, we were able to convince the government to give the company a second chance. That meant a deferred prosecution agreement as opposed to the government insisting on a guilty plea. Simultaneously, we talked with the SEC and we were able to get that resolved in an administrative proceeding. And while it cost the company some money, this is one of those cases where you can see that cooperation sometimes does have some benefits.”

It’s unusual for a company that has a criminal record and doesn’t self-report to be able to pull off a deferred prosecution agreement?

“To some extent. The fact of the matter is that the activities that led to both cases were going on essentially at the same time. We were able to argue that it’s not as if the company didn’t pay attention to the lessons learned from the first issues. They were pretty much occurring simultaneously. The company reacted to both at roughly the same period of time. It didn’t seem fair for the government to punish them for being a recidivist.”

How did they get out of the blocks so badly the first time around?

“I don’t know the answer to that. The sense of the government was that the company wasn’t getting the seriousness of the investigation at the outset. It’s important when you are dealing with the government to let the government know that even if you have your own view of the merits of the case, you are attendant and responsive to their concerns. And I find that when you engage, you often are able to resolve what appears to be insurmountable problems. You do that by digging in, understanding the government’s needs and trying to convince them of your needs and wants. The relationship improved significantly.”

“We brought new management in to meet with the Department and the SEC. It’s not something I do all the time. But we did bring in the new management so that the government could see for themselves that the new management was committed to the right kind of culture and business environment.”

How did you convince the government that the company was committed to an ethical corporate culture?

“We showed them exactly what we had done in terms of educating our employees, building out a compliance structure. We brought in a new compliance officer. We brought in a new general counsel. We began programs for our vendors so that they would understand their obligations and where those obligations intersected with ours. We committed to a robust compliance program. We expanded the committees of the board of directors and created a compliance committee.”

“The company took tangible steps to demonstrate to the Department of Justice that it was taking this matter seriously and was committed to working toward good corporate governance in the future.”

There was no self-reporting though. This activity was reported by CBS News 60 Minutes.

“The initial investigation began as a result of the 60 Minutes report. There were however periods where we did internal investigations into particular issues. And we were able to help move the ball along in the criminal case and reported on the results of our investigation.”

What about the revolving door and its impact on the independence of prosecutors?

“I actually think the revolving door serves a positive purpose,” Morvillo said. “There are exceptions to every story. But I know when I go down to the SEC or to the U.S. Attorney’s Office, or when my colleagues go down, we may have changed stripes or become zealous advocates for our own side, but there is some issue of integrity, history, accountability. Were I the prosecutor, I’m taking some comfort from the fact that the person who is in my office arguing for the defense sat in my chair before me. There is some kind of common connection that former and current prosecutors share. It can be abused. The perception that people who were on the inside get special favors. I don’t find it that way. I find that there is a level of trust that is developed by reason of your history as a prosecutor. And if you treat it right and utilize it correctly, it’s going to pay dividends.”

“If you abuse it, go in and take positions that are irresponsible, stretching the law, stretching the facts, you are going to lose that credibility. And you are going to be seen as somebody who has stopped doing good in order to do well. And that is not going to resonate very well with the prosecutor.”

“I see it more of a problem at the highest levels of government. But the everyday interactions between prosecutors and former prosecutors is still quite healthy. The public interest is actually served. I know my clients, when they hire me, hire somebody who knows what it is like on the inside. I don’t know how to game the system. I know how to work within the system. The years of experience that I and others have in working side by side with prosecutors is invaluable.”

“In the Lumber Liquidators case, because we were former prosecutors, that helped us establish the kind of relationship that resurrected the government’s faith in Lumber Liquidators as a corporate citizen. And we were able to get a deferred prosecution agreement in large part because of the relationship we had with the government.”

[For the complete q/a format Interview with Richard Morvillo, see 33 Corporate Crime Reporter 13(12), April 1, 2019, print edition only.]

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