Conflict-of-Interest Issues -- Meeting the Challenges

Transcription

1 Conflict-of-Interest Issues -- Meeting the Presentation for Society of Corporate Compliance and Ethics Southeast Regional Compliance and Ethics Conference October 2011 Atlanta, Georgia DeWitt R. Rogers Troutman Sanders LLP Telephone: Conflict-of-Interest Issues -- Meeting the Introduction A lesson from Enron. Two key regulatory standards. Dealing with the wide range of conflict-ofinterest issues and a suggested approach for employee training. Lessons from recent cases. 2 1

2 A Lesson From Enron Rules are important, but you should not be a slave to rules either. Former Enron Corporation Chairman Kenneth Lay testifying at his 2006 trial about how he violated Enron s Code of Ethics by not disclosing the possible conflict of interest implications of investments by him and former Enron President Jeffrey Skilling in PhotoFete.Com Inc., an Enron vendor. 3 Two Key Regulatory Standards Sarbanes-Oxley Act of 2002 (Section 406) Instructed Securities and Exchange Commission to issue rules and regulations requiring public companies to disclose whether they had adopted a code of ethics for senior financial officers and to disclose waivers. The SOX Act defined code of ethics to include such standards as are reasonably necessary to promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships. SEC rules (adopted January 23, 2003) Require public companies to disclose whether they have adopted written standards applicable to the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. 4 2

3 Two Key Regulatory Standards (cont.) New York Stock Exchange Corporate Governance Standards (submitted to SEC April 4, 2003) Require, in Section 303A.10 of the NYSE s Listed Company Manual, that listed companies adopt and disclose a code of business conduct and ethics applicable to all directors, officers and employees. The codes must be posted on company websites. Waivers may be granted only by Board of Directors or a Board committee and they must be disclosed to shareholders. 5 Two Key Regulatory Standards (cont.) New York Stock Exchange Listed Company Standards. Each company may determine its own policies but all corporate codes of business conduct and ethics should address the most important topics, including: Conflicts of interest. A conflict of interest occurs when an individual s private interest interferes in any way or even appears to interfere with the interests of the corporation as a whole. A conflict situation can arise when an employee, officer or director takes actions or has interests that may make it difficult to perform his or her company work objectively and effectively. Conflicts of interest also arise when an employee, officer or director, or a member of his or her family, receives improper personal benefits as a result of his or her position in the company. Loans to, or guarantees of obligations of, such persons are of special concern. The listed company should have a policy prohibiting such conflicts of interest, and providing a means for employees, officers and directors to communicate potential conflicts to the company. Corporate opportunities. Employees, officers and directors should be prohibited from (a) taking for themselves personally opportunities that are discovered through the use of corporate property, information or position; (b) using corporate property, information, or position for personal gain; and (c) competing with the company. Employees, officers and directors owe a duty to the company to advance its legitimate interests when the opportunity to do so arises. 6 3

4 The Wide Range of Conflict-of-Interest Issues Theft. Receipt of bribes and kickbacks. Personal use of corporate property, position or information for personal gain. Personal use of corporate opportunities. Insider trading. Other self-dealing. Receipt of gifts. Receipt of other personal benefits. Outside employment. Personal investments. Favors for family members and friends. Government service. Civic activities. Political activities. 7 Options for Dealing with Conflict-of-Interest Issues Disclosure and review by management (and, in some instances, by the Board of Directors). Prohibited conflicts. Benign and permitted conflicts (sometimes allowed with conditions). Conflicts requiring public disclosure. Waived conflicts. Recusal remedy. 8 4

5 for Ethics & Compliance Personnel Conflict-of-interest issues arise at all personnel levels. Directors, senior officers, middle management, rank-and-file employees, consultants and other independent contractors will have issues. Deciding the appropriate resolution of issues can be difficult because the issues are often not clear cut. Many conflict issues fall into grey areas. Multiple internal ethics and compliance policies and policy provisions may be applicable. Laws and regulations (SEC disclosure rules, for example) and other external standards (professional standards, for example) may be relevant, but often are not. An appearance of conflict can be as serious a problem as an actual conflict. 9 A Suggestion for Employee Training Consolidate training for most, if not all, conflictof-interest issues. The basic theme for each type of issue is similar: conflicts between individual interests and the company s interests. The key process for resolving many types of conflict issues is similar: disclosure to, and vetting by, management. Applicable internal policies and procedures may overlap. There s generally no need to silo the various types of conflict issues. 10 5

6 Lessons From Recent Cases The new federal enforcement focus on insider trading. Resignation of David Sokol at Berkshire Hathaway, Inc. (March April 2011). State of Georgia v. Dwight T. Brown (Cobb Electric Membership Corporation) (July 7, 2011). 11 Insider Trading A New Era of Federal Enforcement In October 2010, U.S. Attorney Preet Bharara in New York City gave a little-noticed speech in which he said that insider trading was a rampant problem not only on Wall Street but also at Main Street companies. Insider trading, he said, was an increasingly noteworthy topic in white collar enforcement, one he predicted will become only more so in the future. Since that time, Mr. Bharara has led an unprecedented federal enforcement campaign. The Justice Department and the Securities and Exchange Commission have made it clear that they are taking a broad new view of the conduct that should be prosecuted as insider trading. A lesson: insider trading is now perhaps a greater area of compliance risk than it has ever been. 12 6

7 Resignation of David Sokol at Berkshire Hathaway, Inc. In March 2011, Warren Buffett shocked Wall Street when he disclosed the surprise resignation of David Sokol, Chairman of MidAmerican Energy, Berkshire s electric and gas utility holding company. Mr. Sokol was one of Mr. Buffett s most trusted subordinates and had been groomed as a possible candidate to succeed Mr. Buffett as Berkshire CEO. Mr. Buffett revealed that Mr. Sokol had purchased stock in Lubrizol Corp. shortly before urging in January 2011 that Berkshire consider purchasing Lubrizol. The Berkshire Board s Audit Committee issued a scathing report in April 2011 alleging that Mr. Sokol had violated Berkshire s Code of Ethics and other policies by buying the shares while serving as a representative of Berkshire Hathaway in connection with a possible business combination with Lubrizol and making misleading incomplete disclosures to senior management about his purchases. -- The report can be accessed at Information Regarding Trading in Lubrizol Corp. Shares by David L. Solkol ). We expect this report to send a loud message that those policies are designed to be read broadly, and to deter anyone who may be contemplating a violation of the spirit or letter of those policies in the future, the Audit Committee report stated. A lesson: the details in a Company s conflict-of-interest policies and procedures can matter. 13 Indictment of Dwight T. Brown (Cobb Electric Membership Corporation) 2007: A group of customers of Marietta, GA-based Cobb EMC file a lawsuit against Cobb EMC alleging that CEO Dwight Brown and others profited improperly from establishing in 1997 a for-profit entity, Cobb Energy, that has provided extensive services to Cobb EMC. April 2009: Cobb County and state criminal investigators execute search warrants at Cobb EMC s offices and at the homes of Mr. Brown and three Cobb EMC Board members. January 6, 2011: Cobb County Grand Jury indicts Mr. Brown on 31 counts of theft by taking, racketeering, conspiracy to commit fraud and making false statements relating to Cobb Energy s operations. March 22, 2011: Indictment is dismissed on a technicality. July 7, 2011: Mr. Brown is re-indicted. Mr. Brown maintains his innocence and has been fighting the charges vigorously. A lesson: conflict-of-interest problems can have serious consequences v1 14 7