Moses Malone died yesterday. I do not often have the chance to celebrate a true first but Malone was a true first. The first high school basketball player to go from high school to professional basketball, when he was drafted by the Utah Stars from the old American Basketball Association (ABA) in 1974. He later played for the (then) sad-sack Houston Rockets, who had never won anything, after the merger between the ABA and the National Basketball Association (NBA). He led the Rockets to their first NBA championship finals, losing to the Boston Celtics in 1981. He was also a two-time MVP for the Rockets. After the 1982 season he was traded to the Philadelphia 76ers who he did lead to the promised land of a NBA title in 1983. So here’s to Malone, his “Fo-Fo-Fo” championship for the 76ers and a host of great memories for a Houstonian. I hope you are banging out those rebounds in the Court of Dreams in the Great Hereafter.
Although not a first last, week I do think there was a sea change in the world of Foreign Corrupt Practices Act (FCPA) enforcement recently. It was around the changes announced by Deputy Attorney General Sally Yates in a speech and in the Department of Justice (DOJ) contemporaneously releasing a Memo (the “Yates Memo”). The speech was made to the New York University School of Law and was entitled, “New Policy on Individual Liability in Matters of Corporate Wrongdoing.” The “Yates Memo” was entitled “Individual Accountability for Corporate Wrongdoing.” This change relates to the DOJ’s now stated goal of going after culpable individuals rather than simply settling with corporations that pay large fines.
Ever since former Attorney General Eric Holder’s remarks about banks being “too big to jail” in the context of prosecuting individuals whose actions helped lead to the financial crisis of 2007-08; there have been critics of the government’s lack of prosecutions of Wall Street. Even a sitting federal judge, US District Judge Jed Rakoff, has been unremitting for the Justice Department. In an article in the Lunch with the FT column, reporter Kara Scannell wrote that Judge Rakoff has “has relentlessly criticised the Securities and Exchange Commission (SEC) and the Department of Justice, most notably for not holding individuals accountable for the financial crisis and for settlements that looked like sweetheart deals.” Judge Rakoff’s ire was focused on a settlement between the SEC and Citigroup, which the judge initially rejected. However, “an appeals court voided Rakoff’s decision and, last year, the deal was approved. Rakoff said he had little choice but to approve the deal, which did not require the bank to admit to any wrongdoing. This did not stop him, though, from writing in an opinion that the appeals court “has now fixed the menu, leaving this court with nothing but sour grapes”.”
In her speech, Yates said the following, “Effective immediately, we have revised our policy guidance to require that if a company wants any credit for cooperation, any credit at all, it must identify all individuals involved in the wrongdoing, regardless of their position, status or seniority in the company and provide all relevant facts about their misconduct. It’s all or nothing. No more picking and choosing what gets disclosed. No more partial credit for cooperation that doesn’t include information about individuals.” This statement ties directly into the first point of the Yates Memo, which has the title “To be eligible for any cooperation credit, corporations must provide to the Department all relevant facts about the individuals involved in corporate misconduct.” [Emphasis in original]
In her remarks, Yates recognized the basic fact that corporate governance makes specific identification of senior executives who engage in bribery and corruption difficult in FCPA cases when she said, “In modern corporations, where responsibility is often diffuse, it can be extremely difficult to identify the single person or group of people who possessed the knowledge or criminal intent necessary to establish proof beyond a reasonable doubt. This is particularly true of high-level executives, who are often insulated from the day-to-day activity in which the misconduct occurs.”
Richard Bistrong often talks about those salespersons being the ‘sharp end of the [corporate] spear’ and that point has some merit in the discussion about FCPA compliance. However, for every sharp end of the spear, there is an even longer shaft to that spear and some senior executive to throw or aim the spear. It could be as simple as Henry II-ish ‘Will no one rid me of that meddlesome priest’ and make some sales in X-country. It could be the middle manager that tells the front line sales person, no sales, no job, you ‘figure out what that means’. I wonder just how far back up the spear a corporation will be willing to look? Moreover, is telling someone to make their numbers or suffer the consequences enough to satisfy the intent requirement under the FCPA? How about a CEO who makes clear that if you miss your numbers for two quarters you will be shown the door?
But I think the Yates Memo and her remarks portend a new era. She wants the DOJ and SEC to investigate individuals immediately at the start of investigations. She stated, “the department yesterday instructed its attorneys that, going forward, they are to focus on individuals from the start of an investigation, regardless of whether the investigation begins civilly or criminally. Moreover, once a case is underway, the inquiry into individual misconduct can and should proceed in tandem with the broader corporate investigation. Delays in the corporate case will no longer suffice as a reason to delay pursuit of the individuals involved.” Even though these remarks were directed at government lawyers, I think it clearly means that corporations will be required to initially change the focus of their investigations from attempting to perform any type of root cause analysis to obtaining evidence against individuals and turning it over to the government as soon as possible.
Yates made clear that both she and the DOJ want companies to give up senior executives involved in illegal conduct. She said “We’re not going to be accepting a company’s cooperation when they just offer up the vice president in charge of going to jail.” This means that high heads in an organization could very well start to roll.
Over the next few weeks, I will be exploring some of the issues I see raised by this change in DOJ focus. However, for now, every Chief Compliance Officer (CCO) and compliance practitioner needs to review their investigation protocol and make sure all steps are present to quickly and efficiently triage incident reports as they come in, secure all evidence and move forward to initiate an internal investigation sooner, rather than later. If the DOJ determines the focus of your investigation was not in individuals immediately, you may well find yourself not receiving any credit for cooperation going forward. All of these changes will make a difficult situation even more challenging.
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© Thomas R. Fox, 2015