Part I: Discussion Time of Approximately 15 Minutes

Transcription

1 PARTICIPANT S GUIDE At What Cost? Issues and Resources for Participants The film is structured in three parts to allow discussion at the end of each part. The topics below are suggestions for DLA Piper presenters to raise as topics for discussion at the end of each portion; depending on the time allotted for the presentation. The total running time of the film is approximately 45 minutes. In addition to raising some of the questions below, presenters should also encourage members of the audience to suggest questions or issues that they identify and consider important. A series of general topics and questions is also provided for additional discussion following the film if time permits. These additional discussion points can also be introduced as themes prior to showing the film. Part I: Discussion Time of Approximately 15 Minutes Is it realistic to expect the General Counsel to also serve as the Chief Compliance Officer? Should there be a separate position for a Chief Compliance Officer? Consider best practices for a particular company given its operating environment, industry, risk profile, resources, and organizational structure. See The Business Case for Creating a Standalone Chief Compliance Officer Position, Ethisphere, available at What procedures should be in place for the General Counsel or the Chief Compliance Officer to report compliance issues to the Board of Directors? Should that reporting be through the Audit Committee? Revisions made in 2010 to the US Sentencing Guidelines require that individuals with operational responsibility for the compliance and ethics programs of the company have direct reporting obligations to the Audit Committee, Board of Directors, or other governing authority of the corporation. See the U.S. Sentencing Guidelines Manual, available at: This independence has been increasingly emphasized in settlements and deferred prosecution agreements with US regulatory authorities, which have required an independent reporting chain of the compliance executive to the Board or Audit Committee. See also Emily Chasan, Many Compliance Officers Still Report to General Counsel, Wall Street Journal, May 23, 2011; Audit Committee s Interactions with Chief Compliance Officer, KPMG Quarterly Audit Committee Webcast, June 28, 2012 DLA Piper 1

2 Due diligence and background checks for senior company employees and executives, including those hired in acquisitions or mergers, are critical to ensuring that a company knows its leadership and partners. It may be appropriate to outsource this function, including to investigative service firms to ensure independent review and thoroughness. Failure to do basic background review can result in bad publicity as well as risk for the company for example, the resignation of Scott Thompson (CEO of Yahoo) in 2012 after discovery that he had falsely reported receiving a degree in computer science. See Julianne Pepitone, Yahoo confirms CEO is out after resume scandal, CNNMoneyTech, May 14, 2012, available at In 2009, Halliburton paid over $579 million in criminal and civil fines under the FCPA to resolve charges that it missed or ignored red flags in its acquisition of KBR, with liability premised in part on Halliburton s control and supervision of its new acquisition, including the hiring and replacement (and lack of replacement) of KBR s senior officials. See Lauren Brubaker Calkins, KBR, Halliburton agree to $579 Million Fine for Nigeria Bribes, Bloomberg, Feb. 12, 2009, available at How should the General Counsel address the CFO s conversations with her husband about company business? SEC Rule 10b-52 emphasizes that disclosure to family members of material, non-public information can be grounds for prosecution for insider trading. Trading by family members of employees broadly defined, and can include in-laws is subject to essentially the same standards as insider trading by employees. In 2011, the wife of a partner at Deloitte Touche relayed to her sister and brother-in-law information she overheard from her husband s phone conversations. Those relatives then traded on the tips and shared approximately $3 million in profits with the wife. She subsequently pled guilty to insider trading and was sentenced to 11 months in US federal prison. See Phil Milford, Ex-Deloitte Partner s Wife Faces Prison in Insider Case after Guilty Plea, Bloomberg, Apr. 7, 2011, available at: What is the role and obligation of the General Counsel and CFO to maximize shareholder value? Is that role conflicted if part of the compensation for these executives is in stock options? A variety of compensation arrangements can raise concerns, including if end-of-year performance by the company factors in the allocation of options to the General Counsel and CFO. In April 2012, the CEO and Chairman of Chesapeake Energy, an oil and gas company, resigned as chairman after the disclosure that part of his compensation package allowed him to buy stakes in the company s wells. He had also obtained the money for the purchase of those interests from a group to which Chesapeake Energy was negotiating to sell some of its assets. See Clifford Krause, Chesapeake s Chief Executive Addresses DLA Piper 2

3 Disclosures, New York Times, May 2, 2012, available at: Is there a potential conflict of interest for a CEO interviewing or negotiating with another company for a potential job? The interests of the CEO s current corporation and his prospective employer may conflict. For example, the former deputy mayor of San Antonio is currently under investigation by the city s ethics board for his role in selecting a contractor for the city s biggest contract in history, at the same time that he was negotiating the terms of deal for a new job with a company affiliated with the contractor s President and CEO. See Josh Baugh, Castro suggests ethics amendments, mysanatonio.com, Jan. 16, 2013, available at: The CEO of Elan, an Irish drug company, issued a letter to shareholders in 2010, confirming that he and other directors had relationships with companies that did business with Elan. An audit of Elan s corporate governance procedures and policies by an outside law firm found no wrongdoing by the company, but several directors were forced to resign because of the alleged conflicts. See Ed Silverman, Elan is Under Siege as It Battles Dissident Directors, pharmalot.com, Sep. 7, 2012, available at: Can the company s bonuses be tied too closely to short term gains? Short term incentives can create concerns regarding risk management. For example, see SEC v. Baker, No. A-12-CA-285-SS, 2012, WL (W.D. Tex. Nov. 13, 2012) (affirming that Section 304 of Sarbanes Oxley requires CEOs and CFOs to forfeit bonuses and other compensation in years where corporations restate their financials, even where there is no evidence of misconduct by these individuals). What obligations do the corporate executives and officers have to verify the value of property and assets, such as the one in Poland used to obtain funding? Section 302 of Sarbanes Oxley requires CEOs and CFOs of publicly traded companies to certify the accuracy of their financial statements and disclosures, and to ensure that they fairly present, in all material respects, the operations and financial condition of the company. The CEO of HealthSouth was prosecuted in 2003 for certification of the company s financials when he was alleged to have known or was reckless in not knowing that they were materially false and misleading. See Carrie Johnson, HealthSouth Founder Charged with Fraud, Washington Post, Nov. 5, 2003, available at: A jury, however, subsequently acquitted the CEO of all charges. See Greg Farrell, Scrushy acquitted of all 36 charges, USA Today, June 28, 2005, available at: DLA Piper 3

4 Part II: Discussion Time of Approximately 15 Minutes What is the CFO s obligation with respect to advising auditors, including external auditors, of issues identified by the company such as those in Asia? Failure to provide truthful information and access to auditors, either in internal or external audits, can pose issues with accountability. If internal auditors are prevented from doing their jobs, or there are known issues that are not flagged and followed up on for an internal audit, then it indicates weakness in internal controls. Despite the CFO mentioning several times her personal friendship with the outside audit partner, and telling him their conversation is off the record, it may not be realistic to think that the external auditor can keep information that he learns about the company confidential. The Securities and Exchange Act of 1934 requires auditors to report to the SEC information that suggests illegal acts that have a material impact on the financial statements of a corporation where management or the Board is not taking steps to remedy the issue. What is the company s obligation to evaluate whether the external auditor is sufficiently qualified and/or has enough resources and experience to do the audit work? The Public Company Accounting Board has found the quality of many independent audits to be lacking. See Michael Rapoport, Audit Firms Work Deemed Deficient, Wall Street Journal, September 16, 2012, available at: PCAOB and NYSE listing standards suggest that boards should regularly evaluate their independent auditors to evaluate the quality of the audit to meet the audit committee s duties and obligations under Sarbanes Oxley. For example, see Audit Committee Resource Guide, January 2013, Deloitte, available at How should the whistleblower complaint be addressed? Section 922 of the Dodd-Frank Act added a provision to the securities laws which allows the SEC to give monetary awards to whistleblowers who provide information leading to monetary sanctions against companies through SEC actions. The financial incentives are substantial, as awards range from 10-30% of the monetary sanctions collected by the SEC. There is no requirement under the Act that the whistleblower first raise the concern internally to the company. The SEC received over 3,000 whistleblower tips potentially eligible for such awards in In 2012, the SEC also issued its first monetary award, based on a court order of over $1 million in sanctions, with 30% of that collected so far awarded to the whistleblower. Even absent the direct evidence that the CEO suggests should be present before seriously considering the whistleblower complaint, the company should review the allegations. DLA Piper 4

5 Who should investigate the whistleblower complaint and the issues that have been identified by internal audit? It is important to have a clear escalation procedure and protocol within the company. It may be necessary to conduct the review under privilege, especially if there is concern about any non-privileged written report being subject to seizure by regulators or to discovery in litigation. Consider also whether there is a need for the appearance of independence, such as through the appointment of outside counsel. In 2012, it was alleged that Wal-Mart knew of bribery committed by its Mexican subsidiary, and discovered those bribes through the company s own internal investigation several years earlier. Yet the company took no action and did not appropriately expand the scope of its review. Wal-Mart is now engaged in an on-going review being conducted by outside counsel, and is under Congressional and shareholder scrutiny for the steps the company took when it first became aware of those bribes. What level of review should be done, given that the CEO wants to complete the closing in 60 days or less? In November 2012, the DOJ and SEC issued jointly A Resource Guide to the Foreign Corrupt Practices Act, available at This guide emphasized the need for sufficient due diligence and review prior to acquisitions or transactions, noting: A company that does not perform adequate FCPA due diligence prior to a merger or acquisition may face both legal and business risks. Perhaps most commonly, inadequate due diligence can allow a course of bribery to continue - with all the attendant harms to a business s profitability and reputation, as well as potential civil and criminal liability. For example, in 2011, the SEC alleged that Ball Corporation, a manufacturing company, acquired an Argentinian company - Formametal SA - and learned in the course of that acquisition that Formametal had made illegal payments in the past. Ball subsequently settled with the SEC for $300,000 after further allegations that Ball had failed to institute sufficient compliance processes and policies to prevent future bribery, and had also covered up the prior improper payments. The time allotted for closing of a deal also needs to be adequate to raise questions and evaluate any red flags and necessary conditions for the transaction including, but not limited to quarterly reporting deadlines for public filings, dates for potential debt offerings, the status of any share repurchase program, due diligence for credit facility renewals, and scheduled meetings with investors. It may also be prudent to consider post-closing protections, including obligations for further cooperation by the target company. What issues regarding directors and officers insurance coverage are important for the Board to consider? Amount of coverage is important but not the only issue, including for the corporation. Consider also, for example, the adequacy the various types of coverage (e.g., Side A (covers payment to directors and officers directly for losses, including legal defense) and DLA Piper 5

6 Side B coverage (covers payment to the company for money paid as indemnification for directors and officers)). Part III: Discussion Time of Approximately 13 Minutes When should a preservation notice be issued? Events that trigger the need for issuance of such a notice is not defined in federal, civil, or criminal procedure, or the rules of evidence. The duty to preserve relevant information is commonly triggered when a complaint is served, a governmental proceeding is initiated, or a subpoena is received. But it is also triggered when there is a reasonable awareness of a need to preserve, such as through the receipt of a whistleblower complaint that suggests the need for a more detailed investigation. Consider consulting materials produced by the Sedona Conference regarding when and how to issue a preservation notice, and what follow-up steps are recommended to adequately implement and administer the preservation notice. For example, see Commentary on Legal Holds: The Trigger & The Process (2010), available at: ary%20on%20legal%20holds (noting, for example there may be no duty to affirmatively disprove allegations associated with a threat before concluding that a threat lacks credibility, the facts and circumstances may suggest the prudence of making an inquiry before reaching such a conclusion ). What is the appropriate scope of the investigation to be conducted by the Legal department? The scope of the review done by Internal Audit may or may not be sufficient to address issues, especially if new matters have arisen since that review. Consider the nature of the investigation to be conducted and whether it should be concerned with broader risks, such as where there is a pattern of problematic practices or the anticipated need to defend against civil, regulatory or criminal charges. If the investigation is to cover issues that are the subject of pending or threatened litigation, conducting the review under privilege may be advisable. What is the role of local counsel to advise when the investigation is conducted internally? Some issues may be addressed independently from the substance of the investigation, such as local laws concerning disclosures to employees before they are interviewed. Other matters may require more involvement of local counsel in the substantive issues of the investigation, such as what notice/consent is needed for data collection - in certain countries it depends, in part, on the reason for the collection of the information, how it will be used, if there is possible criminal law exposure, and whether the information will be transferred outside the country where it is located. DLA Piper 6

7 Local counsel may also be needed to advise on regulatory and enforcement risks in the local market, even where the company s focus is on action by US or UK regulatory authorities, for example. What considerations should be applied to determine whether a company executive, such as the CFO, needs her own counsel independent of company lawyers? Employees who are interviewed by the company should be given appropriate disclosures by company lawyers so that the employees understand the nature of the company s inquiry and how it can use information obtained from the interview. For example, see Upjohn Co. v. United States, 449 U.S. 383 (1981) (communications between counsel for the company and employees of the company are privileged but the privilege is held by the company and not the individual). Disclosures should include that the company is the client, the company holds the privilege, the company lawyer represents the company and not the employee, and that the company is the one that can and may decide to waive the privilege by disclosing information, such as to the government in an investigation. When an employee s interests and those of the corporation are in conflict or potential conflict, local bar rules should be consulted to determine whether it is prudent for the company to appoint or pay for independent counsel for the employee. Note that a variety of conflicts may arise, given that the U.S. Sentencing Guidelines offer incentives for corporations in government investigation if they cooperate in the prosecution of individuals. What investigative findings should be reported to auditors, included in disclosures in securities filings, and/or pursued further? Consider various reporting requirements, including FASB standards identifying instances where it appears reasonably possible that an event or actions could lead to a material loss. See A standard such as that identified by the CEO no conclusive evidence of any legal violations may be insufficient to address and evaluate risks. What are the fiduciary obligations of the company s officers with respect to any allegations or concerns raised by an internal investigation? Case law in various jurisdictions increasingly favors holding not only directors, but also officers of companies responsible for exercising fiduciary duties of care and loyalty. For example, see Gantler v. Stephens, 965 A.2d 695 (Del. 2009). A General Counsel may be liable when a company s officers commit fraud or other illegal acts, even when the General Counsel is not aware of and does not participate in the wrongdoing. For example, see Miller v. McDonald (In re World Health Alternatives, Inc.), 385 B.R. 576 (Bankr. D. Del. 2008). (General Counsel has an obligation to take affirmative steps to address fraudulent activities, including reporting and other remedial actions.) DLA Piper 7

8 What steps, other than her phone call to the Chairman of the Board, should the General Counsel take before resigning? In 2002, the General Counsel of the transportation division of Stolt-Nielsen, a shipping company, resigned his position in protest over the company s failure to address collusive trading in violation of antitrust laws. The General Counsel later sued the company, claiming that he had no choice but to resign or become complicit in the illegal conduct. He also became a star witness for the prosecution in the subsequent criminal action against Stolt-Nielsen, claiming he had tried to raise issues to the company s Chairman of the Board. Consider options for raising these issues within the company other than with the CEO, such as with members of the Board other than the chairman (e.g., the head of the Audit Committee), and/or seeking support from others in the company (e.g. the head of Internal Audit or the Chief Compliance Officer). It is important to review bar rules, as well as the ABA Model Rules when in-house counsel is faced with a situation where corporate officers are engaged in illegal activity that the General Counsel cannot stop and cannot disclose to enforcement authorities. For example, ABA Model Rule 1.13(b) requires that counsel may have an obligation to report to a higher level in the organization, such as the Chairman or Vice Chairman of the Board. In-house counsel may be able to retain their own independent counsel to advise of their ethical obligations. See ABA Model Rule 1.7(a). Consider also seeking local counsel s advice on what the obligations of the companies and its officers may be in countries where the misconduct is occurring or likely to occur. If a General Counsel stays with the company despite its problems, she will have to deal with the fallout from these issues and handle clean-up that may be difficult. If she resigns, it may be difficult for her to get another job with a publicly traded company, especially if she cannot discuss the reasons for her resignation due to on-going investigations and privilege protections. For example, see Tough Calls, Inside Counsel, May 1, 2009, available at: Additional Discussion When the stock price is going up and everyone stands to gain, at what cost would you rock the boat? At what cost would you follow an insistence on a particular course of action when all of your instincts and mounting evidence suggest that the path is too risky or otherwise dangerous? When do you draw the line and demand that your concerns be addressed? How? At what cost would you stay in your job despite increasing questions and concerns? Conversely, at what cost would you hold fast to your principles and force others around you to change their behavior? When would you quit? At what cost would you take on a new level of risk to achieve a new level in your career? What cost is too high? DLA Piper 8