Corporate Compliance Prof Blog

Compliance on Television

Maybe it's an occupational hazard, but every time I watch a television show or movie set in a workplace, I start to issue spot compliance problems. Call me a compliance geek. So, on occasion, and to break the dour/Chicken Little mood endemic to compliance, I will mention some of my favorite compliance moments from television and movies. I have opened comments on this post if anyone has their own favorites.

I’ll start with a show that I have just finished watching on DVD – the BBC comedy The Office. There are so many true-to-life moments in this show that I recommend the entire series (a total of only twelve episodes, and a Christmas special). In particular, there is an episode on employee training (which is re-created in the American version, which airs on NBC), that ought to be required viewing for compliance personnel.

That’s just teaser – will have more later. The meeting is about to start.

Limited Blogging Today . . .

while I am in Austin for a State Bar Committee meeting.

More on Deferred Prosecution Agreements

The White Collar Crime Prof Blog has a great post discussing and citing to an article on the appalling lack of data on who gets deferred prosecution agreements (DPA) and why.  (I have discussed DPA’s in a prior post.)  Unlike sentencing decisions, in which judges must articulate the basis for their decisions, the government’s decision who gets a DPA (and the precise terms of the DPA) is rarely explained in a publicly available form.  The post ends with this important observation:

Perhaps the most ironic aspect of this entire scenario is that on one hand the government is pushing for strict adherence to the sentencing guidelines in order to have consistency in sentencing; but the real consistency will always be lacking if there is no transparency as to why some companies will be entitled to a deferred prosecution when others will not.

Lower Incidence of Tort Cases in Federal Court

Well, it looks like tort reform is working, or Americans have become less litigious, at least in the federal courts.  The August 2005 Bureau of Justice Statistics Bulletin reports the following findings from the Federal Justice Statistics Program:

From 1985 to 2003 the number of tort trials terminated in U.S. district courts declined 79%. Juries decided about 71% of tort trials in 2002-03, while judges adjudicated the remainder.  Plaintiffs won in almost half of tort trials, and the estimated median award garnered by plaintiff winners in these trials was $201,000. Personal injury claims comprised almost 90% of tort trials in U.S. district courts and property damage cases accounted for the remaining 10%. Almost two-thirds of tort trials were disposed of within 2 years of the filing date.

These are some of the findings from a report presenting data on tort cases decided by a jury or bench trial in U.S. district courts during fiscal years 2002 and 2003. Data for this 2-year period were combined to provide a larger number of cases for detailed analysis.  Previously, the Bureau of Justice Statistics (BJS) reported findings from a study of tort trials terminated in U.S. district courts during fiscal years 1994-95 and 1996-97.  This report focuses primarily on tort cases terminated by trial in U.S. district courts during fiscal years 2002-03 as well as trends in tort cases terminated in U.S. district courts since 1970.

Analysis is limited to those cases terminated after the completion of a trial by jury or a trial before a district judge or magistrate judge. According to the Administrative Office of the U.S. Courts (AOUSC), a trial is considered complete when a verdict is returned by a jury or a decision is rendered by the court.  Jury or bench trials terminated before verdict or judgment were excluded from this analysis. Tort cases that were settled, dismissed, or disposed through summary judgment in the Federal district courts were not reported.

Of course, given the amount in controversy, diversity, and federal question requirements for federal subject matter jurisdiction, most tort cases are filed in state, not federal, courts.  Indeed, the Bulletin notes:

The National Center for State Courts (NCSC) reports that in 2002 16.3 million civil cases were filed in State courts of general (7.7 million) and limited (8.6 million) jurisdiction. In comparison, 274,841 civil cases were filed in Federal district courts during fiscal year 2002. NCSC, Examining the Work of State Courts, 2003: A National Perspective from the Court Statistics Project, Williamsburg, VA, and AOUSC, 2002 Annual Report of the Director: Judicial Business of the U.S. Courts, Washington, D.C.

I'm not quite sure what to make of this from a compliance perspective.  On the one hand, the data indicates lower tort risk, which should affect where one prioritizes tort liability in the risk assessment.  On the other hand, this is just federal courts, and (as noted above) most tort suits are filed in state court.  Further, it says little about the incidence of tort suits in specific industries, focusing on braod categories such as product liability and medical malpractice.  Also, we do not know whether the decline in federal tort suits is due to changes in tort law, federal jurisdiction, improvements in product/service safety, or some other factor.  Probably not enough in this report to affect or inform an organization's risk assessment.

Article of Interest

Another article of interest from the Social Science Research Network:

Pay without Performance: Overview of the Issues (July 2005)

Lucian Arye Bebchuk (Harvard Law School)
Jesse M. Fried (University of California, Berkeley - School of Law)

In a recent book, and accompanying articles we critique existing executive pay arrangements and the corporate governance processes producing them, and put forward proposals for improving both executive pay and corporate governance. This paper provides an overview of the main elements of our critique and proposals. We show that, under current legal arrangements, boards cannot be expected to contract at arm's length with the executives whose pay they set. We discuss how managers' influence can explain many features of the executive compensation landscape, including ones that researchers subscribing to the arm's length contracting view have long viewed as puzzling. We also explain how managerial influence can lead to inefficient arrangements that generate weak or even perverse incentives, as well as to arrangements that make the amount and performance-insensitivity of pay less transparent.  Finally, we outline our proposals for improving the transparency of executive pay, the connection between pay and performance, and the accountability of corporate boards.

Compliance 101 -- The 2004 Amendments to the Sentencing Guidelines

This post follows up on a post last week that described the origins of the federal organizational sentencing guidelines.  This week, we cover the November 2004 amendments to the guidelines.

In early 2002, the United States Sentencing Commission appointed an Ad Hoc Advisory Group to review the organizational sentencing guidelines and propose needed changes.  The Advisory Group learned that in the decade since the original guidelines were introduced, companies and compliance professionals had evolved best practices that refined and built on the original seven criteria.  The Advisory Group sought to codify many of these best practices in the amendments it recommended to the Commission.  (For those interested in a detailed review of compliance history, sources, and emthods, the Advisory Group's Report is a fantastic read.)  The Commission, in turn, proposed most of these amendments to Congress, whose inaction allowed the amendments to take effect on November 1 of last year.  In the coming weeks, I will highlight specific changes made in the 2004 amendments to the organizational sentencing guidelines.  Today, I begin with a change that affects the treatment of small organizations, and relatively ignored constituency in compliance.  (And I speak with some experience here, as my organization qualifies as “small” under the sentencing guidelines.)

Small organizations, which the guidelines define as any organization with less than 200 employees (section 8C2.5, Application Note 1), had two complaints about the original sentencing guidelines.  First, a small organization could not feasibly implement a compliance program that met the guidelines' seven criteria.  For example, the original guidelines required that "high-level personnel of the organization [be] assigned overall responsibility to oversee" the compliance program.  (section 8A1.2, Application Note 3.k(2).)  Yet, in some small organizations, it would be unrealistic for a single person to undertake the compliance function.  And while the guidelines provided that the "requisite degree of formality of a program to prevent and detect violations of law will vary with the size of the organization," they offered no specific guidance regarding what informal compliance measures small organizations might adopt.

The amended guidelines fill this gap by offering concrete examples of how small organizations might feasibly implement an effective program:

Examples of the informality and use of fewer resources with which a small organization may meet the requirements of this guideline include the following: (I) the governing authority's discharge of its responsibility for oversight of the compliance and ethics program by directly managing the organization's compliance and ethics efforts; (II) training employees through informal staff meetings, and monitoring through regular "walk-arounds" or continuous observation while managing the organization; (III) using available personnel, rather than employing separate staff, to carry out the compliance and ethics program; and (IV) modeling its own compliance and ethics program on existing, well-regarded compliance and ethics programs and best practices of other similar organizations.

(section 8B2.1, Application Note 2(C)(iii).)  The guidelines make clear, however, that informal does not equal lax: "small organizations shall demonstrate the same degree of commitment to ethical conduct and compliance with the law as large organizations."   So, small organizations must have the same commitment to compliance, but can do compliance differently.

While the examples in the preceding paragraph are certainly helpful, they highlight the fact that small organizations have little to go on in designing, implementing, and operating a compliance program.  The available best practices material and practice commentary, not surprisingly, focus on larger organizations that have the resources to support such work.  To fill this gap, the Commission and private, non-profit organizations should devote resources to the question of how small organizations can best implement the various compliance functions.

A second complaint was that the original guidelines conclusively deemed a small organization's compliance program to be ineffective if so-called "high-level personnel" broke the law.  (section 8C2.5(f))  The guidelines define "high-level personnel" to mean:

individuals who have substantial control over the organization or who have a substantial role in the making of policy within the organization.  The term includes: a director; an executive officer; an individual in charge of a major business or functional unit of the organization, such as sales, administration, or finance; and an individual with a substantial ownership interest.

(section 8A1.2, Application Note 3(b).)  The problem for small organizations is that they will have a much higher concentration of high-level personnel in their smaller overall staff.  This makes it much more likely that such personnel will be involved in wrongdoing, automatically disqualifying the organization from credit for an effective compliance program.  The amended guidelines eliminate this disadvantage, replacing the disqualification with a rebuttable presumption.  (section 8C2.5(f))  Now, if high-level personnel of a small organization participate in wrongdoing, the organization may still prove that its compliance program was effective.

Why Self-Report?

At one of the panels I attended at the ABA Annual Meeting (oh boy – that meeting is a gift that keeps on giving to this blog), government lawyers on the panel stated that self-reporting of legal violations is often part of full cooperation with a government investigation.  An attendee posed the following comment/question in response to that statement (of course, this is a paraphrase):

Let’s say that a company discovers wrongdoing by one of its employees.  The company investigates, determines the extent of the wrongdoing, remedies the wrongdoing (including making any victims whole), disciplines the wrongdoers (up to and including termination, when warranted), and makes any necessary changes to internal policies and procedures.  If the organization does all of this, why also require self-reporting?  If the organization acted admirably in correcting the misconduct, what else does self-reporting add?

The panelists gave two pretty good answers that I will share here.

First, the question incorrectly assumes that (1) the government ALWAYS expects self-reporting, or (2) absent self-reporting, there will be no credit for cooperating with the government.  Neither assumption is correct.  Rather, self-reporting is A FACTOR to be considered along with many others in determining the culpability of and cooperation offered by the organization.  (The Thompson Memo, which was discussed in a prior post, sets forth the main factors.)

Second, without self-reporting, the government cannot take action that will ensure that the individual wrongdoers will not cause further harm.  If the employee who orchestrated the wrongdoing is simply let go, that person can simply find another organization at which to continue similar wrongdoing.  (This is especially so given employer’s hesitance to give any reference – especially a negative one – for a former employee.)  Self-reporting that includes identification of individual wrongdoers allows the government to take steps, including prosecution or barring the individual from the marketplace, that will protect the public from further wrongdoing.  Allowing organization’s to keep the problem within the family keeps the government from taking action needed to protect society.

Attorney-Client Privilege at the ABA Annual Meeting

The White Collar Crime Prof Blog has a great post on the ABA House of Delegates’ recent resolution on waiver of the attorney-client privilege as a condition of cooperating with government investigations.  The resolution steps into a feud between the government and the white collar defense bar about the propriety of requesting (or demanding, depending on who is framing the issue) that an organization waive the attorney-client privilege in order to receive leniency for “cooperating” with a government investigation.

As a little background, let me describe the scene at just about every compliance CLE I have attended over the last year or two.  A panel is usually devoted to cooperation with the government, where an SEC or DOJ lawyer (or both) might be paired with a white collar defense.  The government lawyer starts by saying something like, “It is NOT government policy to always ask for waiver of the privilege – we only do so when necessary to get a full picture of the wrongdoing.”  The defense lawyer (either on the panel or from the audience) then replies with something like, “Oh yeah – well how come the government ALWAYS asks my clients to waive the privilege?”  The discussion then usually degenerates from there into a version of the old Lite Beer commercials (one side chanting, “We don’t always request waiver,” the other side responding, “Yes you do”).  At some point, a government lawyer will say something like, “Well, if the junior lawyer is demanding waiver, you can always go over their head to their supervisor,” at which point just about every private lawyer in the room looks at the government lawyer as if (s)he has three (maybe four) heads.  (Talk about poisoning the well.)  The private lawyers then retort, “Well, maybe the government ought to better train their newbee attorneys concerning government policy on the privilege.”  By this point, things have irretrievably taken a turn for the worse.

Well, not surprisingly, the issue was a hot topic while I was in Chicago for the ABA’s annual meeting.  Here, I add my observations about the resolution passed by the House of Delegates.  As I noted in a prior post, here is the text of the ABA Presidential Task Force on the Attorney-Client Privilege's recommended resolutions as submitted to the ABA House of Delegates prior to the annual meeting:

RESOLVED, that the American Bar Association strongly supports the preservation of the  attorney-client privilege and work product doctrine as essential to maintaining the confidential relationship between client and attorney required to encourage clients to discuss their legal matters fully and candidly with their counsel so as to (1) promote compliance with law through effective counseling, (2) ensure effective advocacy for the client, (3) ensure access to justice and (4) promote the proper and efficient functioning of the American justice system; and

FURTHER RESOLVED, that the American Bar Association opposes policies, practices and    procedures of governmental bodies that have the effect of eroding the attorney-client privilege and work product doctrine and favors policies, practices and procedures that recognize the value of those protections.

FURTHER RESOLVED, that the American Bar Association opposes any attempts by government officials to obtain a waiver of the attorney-client privilege or work product doctrine through the grant or denial of any benefit or advantage.

Note that the third resolution speaks categorically – the ABA “opposes ANY ATTEMPTS by government officials to obtain” waiver of the privilege to gain a benefit for cooperating with the government.  This is a rather hard line stance.  And there was some talk of strengthening the resolution even further, to state that any waiver of the privilege as part of cooperation with a government investigation is per se coerced.  Ultimately, not only was the “coercion” proposal rejected, but the third resolution’s hard line was softened to the following:

FURTHER RESOLVED, that the American Bar Association opposes the routine practice by government officials of seeking to obtain a waiver of the attorney-client privilege or work product doctrine through the granting or denial of any benefit or advantage.

On my reading, we are now back to where we started.  Every government speaker that I have heard claims that the government does NOT have a “routine practice” of asking for waiver.  Rather, the government claims to tailor its cooperation expectations to the particular case.  And that is not really a bad place to be.  If organization’s expect something from the government (credit for cooperation), they should expect to give something in return, perhaps even a waiver of the privilege.  Most reasonable private attorneys I have spoken with concede that this is a justifiable position.  Indeed, their main objection is NOT to giving the government limited access to privileged information, but rather that such a limited waiver opens that information to private plaintiffs and others who wish to come after the organization.  This is a BIG problem, but NOT one that will be resolved by attacking the government’s legitimate interest in obtaining (in the proper cases) access to privileged information.  And the resolutions adopted by the ABA’s House of Delegates do not advance the ball on that issue; only allowing of some form of selective waiver (which courts have pretty roundly rejected) will do so.

No Monday Blogging

Because of jury duty.  I did my civic duty (showed up, read the paper, and -- surprise -- was not picked for a jury), and I will be back to blogging on Tuesday.

Article of Interest

Another article of interest from the Social Science Research Network:

Ameliorating Conflicts of Interest in Auditing: Effects of Recent Reforms on Auditors and their
Clients

Mark W. Nelson (Cornell University, Samuel Curtis Johnson Graduate School of Management)

Moore, Tetlock, Tanlu and Bazerman ("MTTB") write that "moral-seduction theory" predicts that auditor decisions are affected by economic and social pressures in ways that affect audit quality, and that "issue-cycle theory" predicts that efforts to reform the audit industry will be undermined by special interests. MTTB therefore conclude that recent reform efforts are misguided and insufficient, because the reforms do not resolve underlying conflicts of interest. I agree with MTTB's basic premise that economic and social incentives affect behavior, but I do not agree with their characterization of many recent reforms. MTTB misstate some reforms, and do not consider sufficiently how reforms reduce the likelihood of audit failure by affecting the actions of audit clients as well as auditors. I conclude that the evidence does not clearly indicate need for further reform, and that further research is necessary to understand the effects (both intended and unintended) of recent reforms.