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