Thursday, July 14, 2016

Caremark, Compliance, and Cooperation

Two weeks ago, I blogged about the potential unintended consequences of (1) Dodd-Frank whistleblower awards to compliance officers and in-house counsel and (2) the Department of Justice’s Yates Memo, which requires companies to turn over individuals (even before they have determined they are legally culpable) in order to get any cooperation credit from the government.

Today at the International Legal Ethics Conference, I spoke about the intersection of state ethics laws, common law fiduciary duties, SOX §307 and §806, and the potential erosion of the attorney-client relationship. I posed the following questions regarding lawyer/whistleblowers and the Yates Memo at the end of my talk:

  • How will this affect Upjohn warnings? (These are the corporate Miranda warnings and were hard enough for me to administer without me having to tell the employee that I might have to turn them over to the government after our conversation)
  • Will corporate employees ask for their own counsel during investigations or plead the 5th since they now run a real risk of being criminally and civilly prosecuted by DOJ?
  • Will companies have to pay for separate counsel for certain employees and must that payment be disclosed to DOJ?
  • Will companies turn people over to the government before proper investigations are completed just to save the company?
  • Will executives cooperate in an investigation? Why should they?
  • What’s the intersection with the Responsible Corporate Officer Doctrine (which Stephen Bainbridge has already criticized as "running amok")?
  • Will there be more claims/denials for D & O coverage?
  • Will individuals who cooperate get cooperation credit in their own cases?
  • Will employees turn on their superiors without proper investigation?
  • How will individuals/companies deal with parallel civil/criminal enforcement proceedings?
  • What about indemnification clauses in employment contracts?
  • Will there be more trials because there is little incentive for a corporation to plead guilty?
  • What about data privacy restrictions for multinationals who operate in EU?
  • How will this affect voluntary disclosure under the US Federal Sentencing Guidelines for Organizational Defendants, especially in Foreign Corrupt Practices Act cases?
  • What ‘s the impact on joint defense agreements?
  • As a lawyer for lawyers who want to be whistleblowers, can you ever advise them to take the chance of losing their license?

I didn’t have time to talk about the added complication of potential director liability under Caremark and its progeny. During my compliance officer days, I used Caremark’s name in vain to get more staff, budget, and board access so that I could train them on the basics on the US Federal Sentencing Guidelines for Organizations. I explained to the Board that this line of cases required them to have some level of oversight over an effective compliance program. Among other things, Caremark required a program with “timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning the [company’s] compliance with law and its business performance.”

I, like other compliance officers, often reviewed/re-tooled our compliance program after another company had negotiated a deferred or nonprosecution agreement with the government. These DPAs had an appendix with everything that the offending company had to do to avoid prosecution. Rarely, if ever, did the DPA mention an individual wrongdoer, and that’s been the main criticism and likely the genesis of the Yates Memo.

Boards will now likely have to take more of a proactive leadership role in demanding investigations at an early stage rather than relying on the GC or compliance officer to inform them of what has already occurred. Boards may need to hire their own counsel to advise on them on this and/or require the general counsel to have outside counsel conduct internal investigations at the outset. This leads to other interesting questions. For example, what happens if executives retain their own counsel and refuse to participate in an investigation that the Board requests? Should the Board designate a special committee (similar to an SLC in the shareholder derivative context) to make sure that there is no taint in the investigation or recommendations? At what point will the investigation become a reportable event for a public company? Will individual board members themselves lawyer up?

I will definitely have a lot to write about this Fall. If you have any thoughts leave them below or email me at mnarine@stu.edu.

https://lawprofessors.typepad.com/business_law/2016/07/caremark-compliance-and-cooperation.html

Compliance, Conferences, Corporate Governance, Corporations, Ethics, Lawyering, Marcia Narine Weldon, Securities Regulation, Shareholders, White Collar Crime | Permalink

Comments

This is, indeed, a mess. I hope that you can help sort it out. Your questions are good ones, btw. Depending on context, some may be easier to answer than others . . . .

Posted by: joanheminway | Jul 16, 2016 4:06:21 PM

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