Sills Cummis' Peter Verniero On The Compliance Discussion

Editor: Mr. Verniero, you have had an extremely interesting career to date. Would you tell us about some of the high points of your time as Attorney General of New Jersey? And as a member of the New Jersey Supreme Court?

Verniero: The New Jersey Office of Attorney General has broad jurisdiction. It is one of the largest state attorney general offices in the country, and, indeed, has more authority than the attorneys general of most of the larger states, including California, New York and Texas. That surprises many people. It is a consequence of the 1947-48 reform that gave New Jersey its modern constitution, which includes a powerful governor and powerful attorney general model.

One of the high points of my time as Attorney General was my arguing the Megan's Law cases in federal court. The principal one was E.B. v. Verniero before the Third Circuit Court of Appeals, which was the first federal appeals court to uphold any state's version of Megan's Law. It was a very significant case.

During my tenure as Attorney General, my office argued and won the Ellis Island case before the United States Supreme Court. The Court determined that most of the island was within the jurisdiction of New Jersey, not New York.

As a member of the Supreme Court of New Jersey, I was one of seven members of the state's highest court. The New Jersey Supreme Court is highly regarded, and many of its decisions are cited in courts throughout the country. One such decision, which I wrote, was In Re PSE&G, in which the Court determined the standard to be used when evaluating how boards of directors decide whether to dismiss shareholder derivative lawsuits. That opinion articulated a modified business judgment rule, and it has been cited by the Second Circuit, the Third Circuit, the U.S. District Court of New Jersey and other courts. It has been gratifying to see these other courts approvingly cite the PSE&G decision.

Editor: Please tell us about the practice you have built since joining Sills Cummis in 2004.

Verniero: I am co-chair of corporate internal investigations and chair an appellate practice. These are active areas for the firm. In the current climate - post-Enron, post-Sarbanes-Oxley - there is a premium on corporate internal investigations. The past two years have been interesting and stimulating for me.

Editor: You have spoken and written on corporate compliance issues in recent years. How is this discussion evolving? What are the issues that compliance professionals are focusing on today?

Verniero: A big issue has been the erosion of the attorney-client privilege. The attorney-client privilege has been at the center of our jurisprudence since about the 16th century. It seeks to protect conversations between lawyer and client as a way of encouraging both individuals and institutions to have recourse to legal guidance when necessary.

The U.S. Department of Justice's Thompson Memorandum is a collection of guidelines used by federal prosecutors when deciding whether to charge corporations with criminal conduct. One of the definitions of "cooperation" in that context involves the waiver of the attorney-client privilege. This is a reality that a company must consider whenever a compliance issue arises.

Many people believe that the Thompson Memorandum goes too far, and, indeed, there is some evidence that the pendulum is swinging back. Judge Kaplan of the U.S. District Court of New York recently declared part of the Thompson Memorandum unconstitutional. About a year ago I predicted that if the government's policing of the marketplace were perceived as overreaching, the courts were likely to intervene to level the playing field. If Judge Kaplan's decision is any guide, it appears that that process is now underway. It will be interesting to see how this develops.

Editor: The American Bar Association has also come out strongly in defense of the privilege.

Verniero: Yes, in connection with both the Thompson Memorandum and the U.S. Sentencing Guidelines. The guidelines had suggested that the leniency of a corporation's sentence might turn on its willingness to waive the attorney-client privilege. An unprecedented coalition of lawyers, business leaders, civil libertarians, and the ABA recently convinced the U.S. Sentencing Commission to remove that suggestion from the guidelines. It has now done so, and the revisions will become effective November 1, 2006, unless Congress acts to overrule them, which is unlikely.

Editor: Does this mean that we are turning the corner on this issue or are there still battles to be fought?

Verniero: There will always be battles to fight in this area. No honest investor desires to see corporate fraud in any form, and we rely on the government to call executives and their companies to account for their wrongdoing. That said, we operate under a system of fundamental fairness. Corporate executives and their companies are entitled to the same degree of fairness that we would expect across the entire spectrum of our justice system. Judge Kaplan's decision and the action of the U.S. Sentencing Commission are part of a trend, I think, where, following an overreaction to the corporate scandals, the pendulum is now swinging back to a more moderate approach.

Editor: In dealing with the attorney-client privilege, where do we draw the line between the rights of the individual and the rights of society? Can we draw such a line?

Verniero: We can draw the line. Indeed, we must draw the line, and I take some comfort from the fact that we have been doing so since this country's founding. The Fourth Amendment is based on reasonable conduct in the execution of search warrants. The case books are filled with situations where the courts have drawn lines regarding what is and what is not reasonable. Achieving the right balance - protecting civil liberties while, at the same time, protecting society as a whole - is one of the great goals of our justice system. It is not always easy to do, but we have been seeking to do it for a long time, and I am convinced that we will continue to do so.

Editor: Everyone is in favor of a strong compliance and ethics culture. Almost by definition, this kind of thing cannot be legislated. How do you go about building a culture of compliance in the company?

Verniero: It has to start at the top and filter down through an organization. Certain concrete steps - the adoption of a code of conduct, for example - are important because they are visible and perceived as definitive. If an allegation of wrongdoing is made, a prompt investigation must follow. A climate must exist in which employees feel unfettered in reporting misconduct - they must believe that they are being heard - and the best way to build such a climate is to act on the allegation.

Editor: If a company takes all appropriate steps to implement the right programs, what is necessary to make them actually stick?

Verniero: The company must follow up and follow through. Adopting a code of conduct and putting it on a shelf is not sufficient. The code must be actively promoted at all levels, which means disseminating it throughout the enterprise, conducting training programs, hiring staff sufficient for the compliance function and providing them with resources sufficient for the effort, and so on. A key indicator is how the principal compliance officer is treated in the hierarchy: if he or she is a low level person, that is probably going to convey a message to the employees that, despite everything that has been said, the company is not really serious about compliance. On the other hand, if the person is at a high level and has direct access to senior management and to the board of directors, the message probably is going to be that the company is serious about implementing a culture of compliance. Those are among the things that, in my view, differentiate a compliance program that will succeed from one that will fail.

Editor: Would you share with us your thoughts about the role of corporate counsel in this process?

Verniero: There is an ongoing debate about whether the general counsel should also be the compliance officer. Some believe that this should be a separate function with its own reporting line to either the CEO or the board or audit committee chairman. The critical thing is to ensure that the compliance officer have sufficient standing within the organization, together with resources and staff, to get the job done.

Editor: And the role of outside counsel?

Verniero: Outside counsel bring an independent perspective to the corporation. They should not be tied to any person within the organization, or to any particular vantage point, and very often that enables them to see things differently from an in-house lawyer. That can be of great benefit to the company.

Editor: How do the different constituencies work together in building a culture of compliance in the company?

Verniero: A direct reporting line between the chief compliance officer and the CEO or board or audit committee chairman is usually important. It is also essential to remember that the people who fill these positions are individuals who have developed personal ties in many instances over long periods of time. The company must fill these positions with people possessed of personal and professional integrity, who will be able to set aside personal relationships in discharging their duties.

In the PSE&G decision the court touched on the issue of whether board members with personal relationships with corporate executives under allegations in the action could be trusted to act in the best interests of the company. The answer is that the mere existence of the relationship, without more, does not compromise the board member's independence. Outside counsel is in a unique position to remind these key players of that duty of independence.

Editor: Our economy today is part of the global economy, and American enterprises are in competition with companies that may not pay much attention to the ethical concerns that increasingly influence how decisions are made in the American corporate context. Are we going to be at a disadvantage as a result of our culture of compliance?

Verniero: We may be, at least in the short term. Simply because corporations in other countries may be cutting corners or condoning questionable practices to gain a competitive edge, however, does not give our corporations the right to follow suit. By the same token, a regulation that does not accomplish its aim but merely places a hurdle in front of the corporation ought to be reconsidered and, if appropriate, modified. The SEC is looking at Sarbanes-Oxley's impact on small-cap companies in this regard, which is a good thing. Our laws are not meant to be static. No one benefits from needless regulation; everyone benefits from an appropriate level of regulation that ensures an honest marketplace.

Published September 1, 2006.