son-of-frankensteinWelcome to my third installment in this month’s classic monster movie festival. This year I am revisiting the Frankenstein series. Today I want to explore the final movie where Boris Karloff starred as Frankenstein’s Monster; Son of Frankenstein. I want to use this final installment in the Karloff trilogy to look at how the character he played evolved through the three movies; Frankenstein, Bride of Frankenstein and Son of Frankenstein.

Joyce Wegmuller, reviewing Son of Frankenstein in Kiss My Review, said, “The progression of the character as Karloff played him through three movies is fascinating. In “Frankenstein” he is an infant — new born to the world, ignorant and curious. He first learns fear when Fritz taunts him with fire. His next lesson is abandonment by his creator. He experiences some tenderness with little Maria, but in his innocent attempt to share in the playful game, he kills her and learns another confusing lesson in loss. More betrayal by his creator drives him to rage and murder.”

In Bride of Frankenstein Karloff starts his character with rage. Wegmuller wrote, “His attempts to find some relief are met with violence from the villagers. During his one brief moment of solace with the blind hermit, he learns about friendship and love, not to mention the pleasures of wine and cigars. This interlude is interrupted and he finds refuge in the tomb where he meets Doctor Pretorius who puts the idea of a girlfriend to him. Even after Doctor Pretorius persuades Henry Frankenstein to help him create a mate for Karloff, things go very badly. The Monster is rejected and hated by the one creature who might possibly have accepted and loved him, his bride.”

At the beginning of the Son of Frankenstein, the Monster is not in a very trusting mood. He finds companionship in one character, the demented Ygor (played by Bela Lugosi) who compels him to murder enemies of Ygor. After the Monster believes that the son of his creator, Wolf von Frankenstein (played by Basil Rathbone), killed Ygor the Monster kidnaps Wolf’s son but in the end yields to his basic humanity and does not harm the boy. The Son of Frankenstein was a great end to the three picture run of Karloff as the Monster.

I thought about this development of Karloff as Frankenstein’s Monster when I read a blog post by Tony Maida and Rebecca C. Martin, writing in the Harvard Law School Forum on Corporate Governance and Financial Regulation blog entitled “One Year Later: The Yates Memo, False Claims Act and Director & Executive Liability”. In the piece they discussed two recent False Claims Act (FCA) cases which may shed light on the direction the Department of Justice (DOJ) is headed under the Yates Memo and FCPA Pilot Program.

The first involved North American Health Care Inc. (NAHC) and two individuals, its chairman of the board and a senior vice president of reimbursement. The company settled potential FCA claims for a total of $30MM and the two individuals agreed to pay $1MM and $500,000 respectively. The second matter involved the former Chief Executive Officer (CEO) of Tuomey Healthcare, after the company paid $72.4MM in its FCA settlement and two years after his departure from company, resolved his “own liability for $1 million, has been required to release any indemnification claims he may have had against the company, and has agreed to a four-year period of exclusion from participating in federal health care programs.”

For both cases, the authors note that with “each of these closely timed settlements, the government’s announcement highlights the inclusion of individuals in the resolution and draws a clear connection to the Yates Memo’s premise.” They also point to the remarks of DOJ official Bill Baer at the SCCE 2016 Compliance and Ethics Institute, stating, “he spoke at length about the application of the Yates memo to civil matters, emphasizing the need for companies proactively to provide to the government information about all relevant facts, including those relating to individuals “no matter where those individuals fall in the corporate hierarchy”. The timing of these settlements and DOJ’s additional guidance suggests that we are seeing the impact of Yates on civil resolutions.” For my summary of Baer’s remarks, see this prior post.

Kevin M. LaCroix, writing in his always informative D&O Diary, in a piece entitled “The Yates Memo and Civil Liability for Corporate Officers and Directors, noted three key elements in these FCA settlements, which raise issues for Foreign Corrupt Practices Act (FCPA) enforcement actions after the Yates Memo and FCPA Pilot Program. First these cases were civil not criminal resolutions. LaCroix believes, I think rightly, that the DOJ intends to implement the Yates Memo’s guidelines on individual liability in connection with civil actions, in addition to criminal matters. He went to opine, “The fact that the principles embodied in the Yates Memo will be extended to civil enforcement actions as well is an added concern for corporate executives. At a minimum, the clear implication is that in connection with government-led civil enforcement actions, corporate executives could find themselves specifically targeted for civil liability.”

I would also add that under the FCPA Pilot Program, there were two recent settlements of privately held companies, HMT LLC and NCH Corporation, which are not subject to the Securities and Exchange Commission (SEC) oversight for FCPA jurisdiction. Yet both companies were required to disgorge profits to receive declinations. Clear evidence that there will be a blurring of previously distinct remedies on the civil and criminal sides of FCPA enforcement.

Second, LaCroix believes it is significant that the individuals were not required to admit to criminal liability. As you might expect from his perspective as an expert in directors and officers’ insurance coverage, he is concerned “that individual’s caught up in one of these kinds of regulatory actions would be compelled as a condition of settlement to make admissions that potentially could eliminate whatever remaining possibility there might have been for the individuals to seek coverage under their company’s D&O insurance policies.” However, with no criminal admissions this concern was lessened, although not ameliorated because of LaCroix’s third element.

It was that Ralph J. Cox III, the former CEO of Tuomey Healthcare, was required to relinquish any right to indemnification. While noting this was not “unprecedented”; LaCroix pointed out that “if an executive waives his or her right to indemnification from the company, that likely would preclude the possibility for coverage under the D&O insurance policy’s corporate reimbursement coverage.” This element not only could negatively impact the corporate officer or director involved in any such enforcement action but potentially could impact the corporate defendant as well. By furnishing indemnity protection, it tends to keep all the defendants aligned. If an officer or director has to pay his own defense, they may well decide their interests are not aligned with the corporation and take actions based upon this calculus.

Many compliance practitioners have speculated on the evolution of DOJ prosecutions after the Yates Memo and announcement of the FCPA Pilot Program. These cases show one clear direction which the DOJ is headed. With the focus on the civil side of enforcement, these cases could well herald what the DOJ may expect in the area of individual enforcement actions involving senior executives or Board of Director members going forward. When you couple these cases with the remarks of Bill Baer, at the SCCE 2016 Compliance and Ethics Institute, the evolution is appearing clearer.


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© Thomas R. Fox, 2016