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What New Rules for Compliance Monitors Really Mean

Melissa Klein Aguilar | April 1, 2008

Take it as proof of how pervasive compliance monitors have become in corporate criminal settlements: They now come with their own guidelines, in the form of a Justice Department memo.

Craig Morford, acting deputy attorney general until last month, issued the guidelines on selection of compliance monitors March 7. The rules come amid concerns over transparency and possible conflicts of interest in the selection of monitors. The issue came into sharp relief last year when Christopher Christie, the U.S. attorney for New Jersey, approved a $52 million contract for his former boss (and former Attorney General) John Ashcroft to be compliance monitor at medical device company Zimmer Holdings for all of 18 months. Lawmakers questioned Ashcroft and others about the arrangement at a Congressional hearing on March 11, shortly after the guidelines were issued.

Compliance monitors cropped up occasionally in the 1990s as part of pretrial agreements, but their use became much more widespread following the corporate scandals at the start of this decade. Research shows that almost half of the 35 corporate pretrial agreements signed in 2007 included a compliance monitor, but until last month, prosecutors had no guidance on how to select such overseers. The result, according to observers, has been wide disparity in how much power those monitors wield and how long they stay, among other things.

EYE ON COMPLIANCE

The Department of Justice outlines below the nine principles of corporate monitoring.

1. Before beginning the process of selecting a monitor in connection with
deferred prosecution agreements and non-prosecution agreements, the corporation and the Government should discuss the necessary qualifications for a monitor based on the facts and circumstances of the case. The monitor must be selected based on the merits. The selection process must, at a minimum, be designed to: (1) select a highly qualified and respected person or entity based on suitability for the assignment and all of the
circumstances; (2) avoid potential and actual conflicts of interests, and (3) otherwise instill public confidence by implementing the steps set forth in this Principle.

2. A monitor is an independent third-party, not an employee or agent of the
corporation or of the Government.

3. A monitor’s primary responsibility should be to assess and monitor a
corporation’s compliance with those terms of the agreement that are specifically designed
to address and reduce the risk of recurrence of the corporation’s misconduct, including, in
most cases, evaluating (and where appropriate proposing) internal controls and corporate
ethics and compliance programs.

4. In carrying out his or her duties, a monitor will often need to understand
the full scope of the corporation’s misconduct covered by the agreement, but the monitor’s responsibilities should be no broader than necessary to address and reduce the risk of recurrence of the corporation's misconduct.

5. Communication among the Government, the corporation and the
monitor is in the interest of all the parties. Depending on the facts and circumstances, it
may be appropriate for the monitor to make periodic written reports to both the
Government and the corporation.

6. If the corporation chooses not to adopt recommendations made by the
monitor within a reasonable time, either the monitor or the corporation, or both, should
report that fact to the Government, along with the corporation’s reasons. The Government
may consider this conduct when evaluating whether the corporation has fulfilled its
obligations under the agreement.

7. The agreement should clearly identify any types of previously
undisclosed or new misconduct that the monitor will be required to report directly to the
Government. The agreement should also provide that as to evidence of other such
misconduct, the monitor will have the discretion to report this misconduct to the
Government or the corporation or both.

8. The duration of the agreement should be tailored to the problems that
have been found to exist and the types of remedial measures needed for the monitor to
satisfy his or her mandate.

9. In most cases, an agreement should provide for an extension of the
monitor provision(s) at the discretion of the Government in the event that the corporation
has not successfully satisfied its obligations under the agreement. Conversely, in most
cases, an agreement should provide for early termination if the corporation can
demonstrate to the Government that there exists a change in circumstances sufficient to
eliminate the need for a monitor.



Source

Department of Justice (March 7, 2008).

The new guidelines outline nine principles addressing a monitor selection, scope of duties, and duration. Among other things, they require that the deputy attorney general approve monitor appointments and that prosecutors’ offices establish committees to help pick candidates. They also direct prosecutors to discuss with the corporation the necessary qualifications for a monitor based on the circumstances of the case and to avoid “potential and actual” conflicts of interests.



DiBianco

Gary DiBianco, a partner at the law firm Skadden Arps and a former trial lawyer in the Justice Department’s Criminal Division, says the guidelines should be “very helpful” to corporate counsel in negotiating the terms and duration of a monitor so that criminal probes can be resolved.

Since the guidelines clarify that the monitor’s scope should be limited to assessment and oversight of controls to prevent recurrence of the criminal conduct and they make clear that monitors aren’t supposed to investigate historical conduct, DiBianco says corporations should have some power to limit the scope of a monitor’s duties, and should consider negotiating a monitor’s work plan when hammering out a deferred or non-prosecution agreement.

The guidelines also specify that a monitor is an independent party, not an employee or agent of the corporation or of the government—a key difference from several compliance agreements struck last year, which stipulated that the monitor works exclusively for the government and at the government’s direction.



Gorman

Thomas Gorman, a former Securities and Exchange Commission staff lawyer and now with the law firm Porter Wright Morris & Arthur, says any guidance from the Justice Department is helpful: “Whether you agree or disagree, it’s good to know what it is.”

Beyond the DOJ

While the principles only apply to Justice Department criminal prosecutions, Gorman says they could affect the resolution of other regulatory inquiries like SEC investigations, which often parallel those of the Justice Department.

Likewise, Timothy Dickinson, a partner at the law firm Paul, Hastings, Janofsky & Walker and a compliance monitor himself, says the guidance should resonate well beyond the Justice Department. He expects the SEC to adopt the same guidelines or come out with close versions of their own. He calls the guidelines “an acknowledgement by the DOJ that these issues are out there, which is a very positive development.”

Still, he says the guidance doesn’t go far enough to address the current lack of predictability and consistency regarding when a monitor is required, how a monitor is chosen, and the terms of a monitor’s contract. Dickinson wants to see further guidance that spells out when a monitor is necessary. “It’s become such a common feature, there ought to be transparency in the process,” he says. He suggests a monitor should be imposed only in instances where a company failed to take adequate measures to remediate a problem.



Dickinson

Dickinson also dislikes the lack of a defined method for appointment. Members of Congress raised a similar concern; former prosecutors are frequently tapped as monitors, which raised questions about whether the Justice Department rewards its political allies with monitor assignments.

The primary consideration in selecting a monitor should be the person’s expertise in the area being monitored, Dickinson says. For instance, if a monitor is appointed in connection with alleged violations of the Foreign Corrupt Practices Act, he or she should be an expert on the statute.

“Being a former prosecutor may be a valuable qualification, but in my view, it doesn’t have anything to do with the degree of substantive expertise a monitor should have to be appointed,” he contends.



Henning

Peter Henning, a law professor at Wayne State University, says from a company’s point of view, the guidelines “have very little effect … They’re so general, they provide little real guidance.”

They also don’t address what Henning says is the key issue: what qualifies a corporation to get a deferred or non-prosecution agreement rather than an indictment, and why some companies get one versus the other.

“That’s still entirely at the discretion of U.S. attorneys,” he says. “Companies are still at a substantial disadvantage in the negotiation process.”