Editor: Should a company have a compliance program?
Hochberg: Absolutely. A former high level Department of Justice official liked to say that not having a compliance program is "an engraved invitation to charge" the company criminally. Both the Justice Department's "Thompson Memo," which details the discretionary factors which go into corporate charging decisions, and the Sentencing Guidelines highlight the importance of effective compliance programs. In numerous regulated industries, such as health care and government procurement, compliance programs are a necessity. In addition, a practical reason for having a compliance program is that Sarbanes-Oxley requires CEOs and CFOs to personally certify that financial statements fairly present the company's financial condition. That said, a company's compliance program should be tailored to the realities of the company's size and risks.
Editor: What are the Thompson Memo Factors and how are they used?
Hochberg: The nine Thompson Memo factors that prosecutors consider when deciding whether to charge a company include:
1. Nature and seriousness of the offense
2. Pervasiveness of wrongdoing
3. The corporation's history of similar conduct
4. The corporation's timely and voluntary disclosure of wrongdoing and willingness to cooperate in the investigation (including, if necessary, waiver of privilege)
5. Existence and adequacy of the corporation's compliance program
6. Remedial actions
7. Collateral consequences
8. Adequacy of the prosecution of individuals
9. Adequacy of civil or regulatory enforcement
Many of these factors, including numbers one, two, three and five, are largely historical, and while they can be explained, there is nothing that can be done to change what has happened. On the other hand, numbers four and six will often be the key factors in negotiations with the government because they involve actions which the corporation can take to convince government that it is a good corporate citizen. In appropriate cases, number seven, collateral consequences, will also be key in discussions with the government. The Thomson Memo can be accessed by logging onto http://www.usdoj.gov/dag/cftf/business_organizations.pdf.
Editor: What, if any, are the advantages of having a compliance program?
Hochberg: Effective compliance programs help identify wrongdoing and wrongdoers. Both the Department of Justice and the SEC will consider a company's compliance activity in deciding whether criminal charges, injunctive relief, or lesser actions are required. The existence of a compliance program will also influence government's evaluation of the need for a monitor or a severe corporate integrity agreement. The Sentencing Guidelines reduce the fines for corporations with effective compliance programs. The existence of a compliance program and voluntary disclosure may also cap False Claims Act penalties and give the company a way to avoid debarment.
Editor: Should a company conduct an internal investigation after identifying a problem?
Hochberg: A necessary part of a company's compliance program is internal investigations. A well handled investigation is the crucial first step in a company's attempt to address and eliminate a problem, but a badly handled investigation is worse than no investigation at all. The internal investigation cannot be a whitewash. It must encompass all relevant documents and witnesses. The investigation must be free to explore leads generated by the evidence and should not be restricted because of any predefined scope. The government will want to know what efforts were made during the course of the investigation to preserve evidence and stop the wrongdoing. From government's point of view, a badly handled internal investigation will tip off the wrongdoers that they are under investigation and will allow them to manufacture stories and destroy evidence. Obstruction of justice is one of the first charges the government will consider as it tries to simplify otherwise complex issues.
Editor: Why should a company make a voluntary disclosure?
Hochberg: A well handled voluntary disclosure gives the corporation a chance to seize some control of the future external investigation and prepare the government for what the rest of the world will soon be reading about in the newspaper. It allows the corporation to lay out a strategy for handling a problem rather than having government become unpredictably proactive.
Editor: How long should a company wait to disclose information after a problem is identified?
Hochberg: Be sure to watch the clock. Every day of indecision increases the likelihood that the government will learn of the problem on its own. Certain material accounting problems must be reported to the investing public. Plus, corporate secrets are hard to keep. Qui tam relators have a financial stake in reporting misconduct and wrongdoers may report misconduct to blame others.Remember, indecision may result in the government executing a search warrant which is far more disruptive than an arranged production of records pursuant to a voluntary disclosure.
Editor: When making a voluntary disclosure, what should companies state?
Hochberg: The company shouldn't "spin" the voluntary disclosure. The disclosure should be based on the facts, and the company's source of information and available evidence should be explained. The facts should not be minimized. The company should demonstrate that it is dealing with the problem both by removing wrongdoers and by instituting policy changes. Also, don't fail to take remedial action. Remove wrongdoers promptly. The pitch to government is that we have our house in order, this will never happen again, and we will help you to prosecute the wrongdoers. Most importantly, the company must be prepared to accept responsibility for its acts.
Editor: What is a common mistake made by companies when they make a voluntary disclosure?
Hochberg: A common mistake is assuming that a voluntary disclosure is a final step. Voluntary disclosures are a first step and counsel needs to anticipate exactly what government will want. The client needs to understand the implications of offers of cooperation. So expect that further cooperation and tasking by the government will be necessary. Also, expect that the government will want access to witnesses and will request waiver of any privilege protecting the internal investigation. A goal is to keep government happy with your efforts so that government does not try to conduct the investigation by itself.
Editor: What advice would you give outside counsel retained for an investigation and voluntary disclosure?
Hochberg: Do consider and address the Thompson Memo factors and prepare for a possible voluntary disclosure from day one. Make clear to corporate employees, and later the government, that you understand that the true client is, in fact, the company. The client is not the CEO, the General Counsel or any individual employee. Therefore, do not let corporate counsel or in-house counsel handle any matter where they had involvement in the underlying transaction or where their impartiality might later be questioned. It is important to have a credible internal investigation led by someone whose work will be respected by the government. In making a disclosure, detail the type of cooperation you are prepared to give and its value. Explain why the existing compliance program was ineffective and what changes have been instituted. Explain the collateral consequences of a potential criminal prosecution. In early meetings continually urge helpful Thompson Memo criteria with a view towards a later written submission.
Editor: How should a company manage a Department of Justice investigation?
Hochberg: The best course of action is to designate a lead counsel that is responsible for dealing with the DOJ and try to leave other counsel at home for meetings. Lawyers have egos and high-powered attorneys have large egos. The attorney who conducted the internal investigation will want to defend it despite government misgivings and the attorney handling the class action law suit is mainly concerned with that specific suit. Government relishes situations where the attorneys are not on the same page and end up arguing with each other.
Editor: How important is the role of lead counsel?
Hochberg: Many times, the aftermath of a voluntary disclosure is based upon the government's evaluation of whether the attorney representing the company is trustworthy, whether that attorney appears in control of the client, and whether that attorney can be relied upon to handle the negotiations with the government professionally. The government should be encouraged to rely on counsel's experience and judgment in deciding whether witnesses need their own attorneys, whether records are being adequately preserved and retrieved, and whether the government can be given what it needs without a waiver of the attorney client privilege. Counsel will also need a well grounded understanding of the types of settlements which are available, the best strategy for obtaining a good resolution, and internal Department of Justice procedures for reviewing arbitrary decisions by individual offices.
Editor: What should the outcome of a company's internal investigation and voluntary disclosure be?
Hochberg: Don't be inflexible in resolving investigations. Have a realistic goal in mind. Increasingly, the Department of Justice and the SEC are entering into simultaneous and overlapping settlements which give the company finality and place an upper limit on penalties. These settlements take a wide variety of forms so it is important to understand the mandatory and discretionary consequences and obligations of each type of settlement. There are significant differences between civil resolutions, non-prosecution agreements, deferred prosecution agreements, prosecution of a corporate subsidiary and prosecution of the parent company.
Published November 1, 2005.