Since leaving the Securities and Exchange Commission in 2004, I’ve done my share of critiquing SEC enforcement policy. So it’s only fair, nearly two years into the tenure of current SEC leadership, to give credit where it’s due.
And as it happens, plenty of credit is due in at least six areas of SEC enforcement policy:
About ten years ago, the SEC departed from historical practice by delegating to senior enforcement staff the commissioners’ legal responsibility for launching formal investigations and unleashing the power to issue subpoenas. Some of us publicly expressed concerns at the time about this dilution of political accountability, given the severe reputational harm and financial expense that can result from investigations, even if no wrongdoing is ever uncovered. Continue reading →
All views here represent the authors’ own views and not their organizations.
There is a cultural moment in the world of corporate compliance. Following recent major corporate scandals, there is now growing recognition among corporate boards and beyond that truly changing corporate misconduct means addressing the toxic elements within cultures.
The central question for companies and regulators is how to assess toxic cultural elements.
Toxic corporate culture exists when organizations, whose chief business and business means are legal, develop structural violations of rules over a period of time.
Our recent paper (PDF: 1.06 MB), published in Administrative Science, offers an in-depth analysis of what toxic cultural elements played a role in three major corporate scandals: BP’s polluting and unsafe oil exploration practices, VW’s diesel emission cheating practices, and Wells Fargo’s fake and unauthorized accounts schemes. In all three cases, the illegal behavior spanned over a decade and investigators concluded that corporate culture was to blame. Yet in all three cases, no one had yet systematically sought to understand what toxic cultural elements sustained the illegal conduct. We developed an analytical framework to examine toxicity in organizational cultures on three levels: structures, values, and practices (see Table 1 below). Continue reading →
Most managers will say that they want to receive information about issues and problems in their organization, including information about misconduct. They wish to see themselves as the type of manager who is open to input from employees, and they know that it is important to receive information about problems in a timely manner. They claim to have “an open door policy.” Nonetheless, when it comes to actual behavior, far too many managers are not nearly as open as they aim or profess to be. Rather than responding in a receptive manner when employees raise concerns, they respond with annoyance, hostility or defensiveness. They deny or dismiss the information. They pretend to listen, but then fail to act.
A consistent and disturbing theme from people who have internally reported misconduct is that the information “fell on deaf ears,” or worse, that they suffered negative career consequences for speaking up. Studies have also shown that it is common, across many different types of workplaces, for employees to feel that speaking up is futile, or that they cannot speak up about a suspected violation without fear of reprisal. As a result, regardless of how open managers think that they are, employees often choose to keep mum when they have concerns.
What accounts for these beliefs and behaviors related to raising issues? In some cases, they may stem from poor management or lack of ethical leadership. There are managers who truly do not want to know what is going on in their organizations. Yet even managers with good intentions, who care about ethics and open communication, may find it hard to be receptive and responsive to information about misconduct. What they do when confronted with such information diverges from what they believe or say that they would do. Continue reading →
Beginning next month, Democrats will control the House of Representatives for the first time since 2010. Given the pent-up demand for House Democrats to make robust use of their oversight and investigative authorities, the current relative lull in congressional investigations of corporations is expected to end. Corporations across sectors should anticipate an uptick in investigative activity.
In addition to holding the majority for the first time in nearly a decade, this will be the first time that Democrats control the House since a 2015 rule change that empowered a number of committee chairs to subpoena witnesses or documents unilaterally. The chairs of the following committees, among others, have this authority: Energy and Commerce; Financial Services; Intelligence; Judiciary; Natural Resources; and Oversight and Government Reform.Continue reading →
In an important speech, Deputy Assistant Attorney General Matthew Miner of the Department of Justice’s Criminal Division announced on Thursday that DOJ will “look to” the principles of the FCPA Corporate Enforcement Policy (PDF: 50.6 KB) in evaluating “other types of potential wrongdoing, not just FCPA violations” that are uncovered in connection with mergers and acquisitions. As a result, when an acquiring company identifies misconduct through pre-transaction due diligence or post-transaction integration, and then self-reports the relevant conduct, DOJ is now more likely to decline to prosecute if the company fully cooperates, remediates in a complete and timely fashion, and disgorges any ill-gotten gains. Continue reading →
On 6 September 2018, following hot on the heels of the important decision on the application of litigation privilege in internal investigations in ENRC v Serious Fraud Office (read our recent summary here), the Administrative Court handed down its judgment in R (KBR Inc.) v Serious Fraud Office concerning the Serious Fraud Office’s (SFO) powers to compel the production of documents held outside of the United Kingdom by companies incorporated outside of the United Kingdom. The Administrative Court held that where there is a “sufficient connection” to the United Kingdom, the SFO can compel the production of such documents. Continue reading →
The Court of Appeal reversed the High Court’s decision and found that all of the interviews conducted by ENRC’s external lawyers were covered by litigation privilege, and so too was the work conducted by the forensic accountancy advisors for the books and records review. The Court of Appeal found that ENRC did in fact reasonably contemplate prosecution when the documents were created. Moreover, while determining that it did not have to decide the issue, the Court of Appeal also stated that it may also have departed from the existing narrow definition of “client” for legal advice privilege purposes in the context of corporate investigations. Continue reading →
On July 31, 2018, the High Court of England and Wales denied the U.S. Justice Department’s request for the extradition of Stuart Scott, a British foreign exchange trader indicted in 2016 as part of the DOJ Fraud Section’s multi-year effort to investigate and prosecute foreign currency market manipulation. The decision in Scott v. Government of the United States of America marks the second time in 2018 that DOJ has lost an extradition fight in London. The Department has reportedly indicated that it will appeal. If the decision stands, Scott will join a handful of U.S. court cases that have the potential to impact DOJ’s ability to reach across the globe to pursue foreign nationals for violations of the FCPA and other financial fraud statutes. Continue reading →
On July 12 and 16, 2018, the U.S. Commodity Futures Trading Commission (“CFTC”) announced two awards to whistleblowers, one its largest-ever award, approximately $30 million, and another its first award to a whistleblower living in a foreign country. These awards—along with recent proposed changes meant to bolster the Securities and Exchange Commission’s (“SEC” or “Commission”) own whistleblower regime—demonstrate that such programs likely will continue to be significant parts of the enforcement programs of both agencies and necessarily help shape their enforcement agendas in the coming years.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) authorized the CFTC to pay awards of between 10 and 30 percent to whistleblowers who voluntarily provide original information to the CFTC leading to the successful enforcement of an action resulting in monetary sanctions exceeding $1 million. Following the introduction of implementing rules, the CFTC’s program became effective in October 2011. Over the next six-and-a-half years, the CFTC has paid whistleblower bounties on only four prior occasions, with awards ranging from $50,000 to $10 million. The $30 million award announced last week, thus, reflects a significant increase. This week’s award to a foreign whistleblower also represents another first for the CFTC’s program and reflects the global scope of the program. Continue reading →
On May 29, 2018, in Lagos v. United States, the Supreme Court unanimously held that the Mandatory Victims Restitution Act of 1996 (the “MVRA”) does not require a criminal defendant to pay the costs and attorneys’ fees associated with an internal investigation conducted by a corporate victim. The Court left open the question of whether the MVRA extends to the costs of an internal investigation that is conducted at the government’s request or invitation. Continue reading →