Anthony S Barkow and Michael Ross, Jenner & Block

This is an extract from the third edition of GIR's The Guide to Monitorships. The whole publication is available here

What should government authorities do when companies get into trouble? That question has become increasingly important among legal practitioners, regulators and commentators – and has led to dialogue about the role of individual responsibility in the corporate setting, the appropriateness of fines and penalties on corporations, and the consequences to a public company of pleading guilty to a crime. As prevailing practices continue to develop, one sanction that has become more common in the corporate setting is the appointment of an independent monitor. In recent years, household names like Apple, Avon and Western Union have all seen government investigations end with the appointment of a monitor to oversee aspects of the company's operations. And, although frequently a tool used by the US Department of Justice (DOJ), numerous other regulators have appointed monitors following an inquiry, including the US Securities and Exchange Commission (SEC), the New York State Department of Financial Services (DFS) and the United Kingdom's Serious Fraud Office (SFO).

This guide takes an in-depth look at the corporate monitor – defined broadly by both the DOJ and SEC as 'an independent third party who assesses and monitors a company's adherence to the compliance requirement of an agreement that was designed to reduce the risk of recurrence of the company's misconduct'. The authors bring extensive experience with corporate monitorships, and each chapter addresses a topic relevant to understanding this important area of practice. The guide first delves into topics common to almost any monitorship – such as the monitor selection process, the task of developing and carrying out a monitorship work plan, and the legal issues that every monitor must face. Next, it provides first-hand perspectives on monitorships from a number of viewpoints (government, in-house and academic), and then addresses a variety of issues that arise during specific types of monitorships, including cross-border and international monitorships, and monitorships within specific industries.

In an era where monitorships have become a regular tool of law enforcement, this guide provides critical insights for any private practitioner, government lawyer, senior executive or general counsel, or board member interested in delving deeply into how monitorships work in practice.

The historical roots of the corporate monitor

The concept of delegating court or government remedial powers to a private actor has historical precedent dating back to English common law. Beginning in the sixteenth century, special masters served as court-appointed assistants with the power to sell property and settle judgments, hold evidentiary hearings, calculate damages and audit financial accounts. These special masters were traditionally private attorneys, law professors or retired judges who were given these powers over a particular case. Appointing such an individual enabled a court to leverage outside resources to achieve its remedial objectives.

More recently, the corporate monitorship has its roots in government efforts to enforce the Racketeer Influenced and Corrupt Organizations Act (RICO) against organised crime. About 35 years ago, the DOJ began a practice of selecting a third-party 'trustee' in RICO cases to implement institutional reforms among labour unions that had come under the influence of organised crime. Between 1982 and 2004, the DOJ filed at least 20 civil cases against unions asserting RICO violations, and in almost all of them, the DOJ successfully secured court appointment of a third party to oversee the implementation of institutional reforms. For the most part, these proto-monitors served as an ongoing fact-finding tool for the court: although some of them had broader powers, the most common function of these trustees was to gather information about and periodically report to the court on factual information relevant to remedying the wrongdoing. These RICO cases provide an early instance of third-party monitoring, building on the historical practice of selecting a private party to enhance a court's ability to exercise its remedial power.

In the early 1990s, external monitors began to be appointed to address corporate wrongdoing. In 1994, a federal court approved what some have described as the first deferred prosecution agreement (DPA), following the DOJ's investigation of Prudential Securities Inc (Prudential) for fraudulently marketing an oil and gas fund to thousands of investors. Prudential had misstated the returns (and tax status) of the fund, used the inflated returns to sell more shares and then paid out returns from new investments (rather than from actual returns). Among the sanctions extracted by the DOJ was the appointment of an 'independent ombudsman' for a three-year term who would sit on Prudential's board of directors and who would be required to submit quarterly reports to the DOJ on any instances of criminal conduct or other 'material improprieties' at the company. To accomplish that, the DPA required Prudential to report such criminal misconduct to the ombudsman and established a hotline through which employees could anonymously make 'complaints about ethics and compliance'. Thus, the ombudsman served as the watchful 'eyes and ears' of the DOJ, providing a mechanism by which the government could monitor the company for additional instances of wrongdoing, for years beyond the case's resolution.

The use of third-party overseers as part of resolving criminal charges coincided with the DOJ's increased reliance on internal investigations by law firms as part of the investigation process itself. In the 2000s, the DOJ and other regulators began to incentivise companies to hire outside counsel to conduct investigations and provide the results of those investigations to the DOJ, both so that the DOJ could outsource the work and also as a lever to make companies demonstrate acceptance of responsibility. This reliance on law firm probes has only increased since in both domestic and international investigations.

By the early 2000s, the role of the monitor expanded beyond simply reporting on facts, and began to include the responsibility for making affirmative recommendations about how to address ills at an embattled company. The most well-known example occurred in the wake of one of the most significant accounting fraud scandals in American history, WorldCom, Inc WorldCom had overstated its income by $11 billion and its balance sheet by $75 billion by fraudulently booking expenses as investments; and, as part of the flurry of criminal and regulatory activity that followed, the SEC called for the appointment of a monitor. At first, the SEC asked the court for a relatively limited mandate: to ensure that documents were preserved and that no improper payments were made to executives or WorldCom's affiliates.With that mandate in mind, WorldCom and the SEC agreed to appoint former SEC Chairman Richard C Breeden as monitor. But, soon after his appointment, Breeden's role expanded significantly – with consent of the SEC and the company, the court empowered Breeden to review WorldCom's corporate governance structure and to issue broad-ranging recommendations concerning them.

In the end, former SEC Chair Breeden made 78 recommendations designed to address corporate governance weaknesses that caused WorldCom's collapse, all of which were unanimously approved by WorldCom's board of directors in 2003. Among other changes, Breeden recommended that the board adopt provisions that barred directors from serving more than 10 years and a mandate that at least one member depart each year. Other recommendations included switching outside auditors every 10 years and creating a website where investors could bring concerns to the attention of the board and shareholders. Whatever the merits of any particular recommendation, WorldCom as a company benefited. In his final judgment, the district judge praised Breeden 'not only as a financial watchdog (in which capacity he has saved the company tens of millions of dollars) but also as an overseer who has initiated vast improvements in the company's internal controls and corporate governance'. Armed with these changes, together with its successful reorganisation, the company would continue under a new name, MCI Inc, and eventually sell itself to Verizon Communications in 2005 for $6.6 billion.

The contemporary monitor

Since WorldCom, the DOJ and others have come to regularly use the appointment of a monitor as a key tool in resolving investigations into corporate wrongdoing. According to the University of Virginia's corporate prosecution registry, there were 30 independent monitors appointed in DOJ corporate criminal cases between 2001 and 2007 under federal DPAs or non-prosecution agreements (NPAs) – a rate of approximately five per year. Between January 2008 and January 2017, the DOJ matched that pace, appointing at least 51 independent corporate monitorships after NPAs and DPAs. This monitorship activity became so extensive that in November 2015, the DOJ appointed a full-time compliance expert or 'monitor czar' to oversee the monitorship process and to consult with and train prosecutors on compliance issues. Other agencies have also increasingly appointed corporate monitors, including the SEC, state regulators and even foreign regulatory agencies.

These appointments have covered various areas of law and a wide array of industries. Monitors have been appointed following investigations into conduct covered by, for example, bribes in violation of the Foreign and Corrupt Practices Act (FCPA), anticompetitive business practices under antitrust law, improper foreclosures of mortgages and tax evasion, to name just a few. Further, monitorship appointments have touched nearly every industry in which companies do business in the United States: from financial services and healthcare to food services and hospitality.

The powers given to these monitors have also been varied, reflecting in part that monitors are often appointed by agreement between an enforcement agency and a corporation following extensive negotiations. That said, most monitors include a mandate, hearkening back to the role of the ombudsman in Prudential, of providing a fact-finding and reporting function to a court or government agency. Many others include a broader mandate, akin to the WorldCom monitorship, of making recommendations to the company about how to improve its corporate compliance programme or culture. And an array of other functions have also been implemented, such as auditing the organisation's compliance with its DPA or NPA, or investigating the root causes of the compliance failure that resulted in a legal or regulatory violation. The varied functions, agencies and areas of laws encompassed by modern-day monitors reflect the flexibility of the independent monitorship as a tool to remedy corporate malfeasance.

But that flexibility has also seen some tightening around the edges, at least when it comes to the DOJ. With the more frequent use of monitors, the DOJ has come to focus on how and under what circumstances to employ them. Much of that scrutiny came in the mid 2000s, in response to certain controversial decisions of then-US Attorney for the District of New Jersey Christopher J Christie. Christie negotiated DPAs in seven cases during his tenure as US Attorney, of which several included the appointment of a monitor to oversee the corporation's adherence to the agreement. In one instance, Christie negotiated a DPA that appointed a monitor and, as part of the DPA, also required the company to endow an ethics chair at Christie's alma mater, Seton Hall University School of Law. In another, Christie appointed John Ashcroft – his former DOJ boss – as the monitor in a matter that ultimately resulted in a one-page bill, with no hours tracked, for $52 million in fees for 18 months of work.

In the wake of outcry about these incidents, the DOJ began to establish guidelines to ensure more transparent procedures around the appointment of monitors. In March 2008, the DOJ issued the 'Morford Memo', its first policy memorandum addressing the selection and use of corporate monitors. To eliminate unilateral selection of a monitorship candidate, the Morford Memo required the government office handling a given case to establish an ad hoc committee to consider monitor candidates and obtain approval of the appointment from the Office of the Attorney General. Providing further guidance around the appointment decision, in October 2018, the DOJ issued a memorandum by Assistant Attorney General for DOJ's Criminal Division Brian A Benczkowski (the Benczkowski Memo), requiring an express analysis of whether a monitor is justified before appointing one in a particular case. The focal point of the Benczkowski Memo is its requirement that the DOJ undertake a cost–benefit analysis, stating that 'the Criminal Division should favor the imposition of a monitor only where there is a demonstrated need for, and clear benefit to be derived from, a monitorship relative to the projected costs and burdens. Several commentators have viewed this new guidance as an attempt by the DOJ to scale back on corporate monitorships, based on the costs that monitorships may impose on companies. But Benczkowski has since disagreed with that view, stating that the memorandum was not designed to 'kill all the monitors', but rather was 'meant to provide greater clarity' to both companies and prosecutors to ensure that 'when they do recommend the appointment of a monitor that they are doing so for the right reasons and with the right scope'.

In addition to requirements on when to appoint a monitor, DOJ guidance has also placed restrictions around the functions that should be assigned to a monitor once appointed. The Morford Memo sets out that a monitor's mandate should be focused on reducing the risk that the misconduct at issue in the investigation might recur – as opposed to a broader mandate that might address the risk of other potential wrongdoing at the company. Thus, even when appointed, a DOJ-appointed monitor is supposed to be circumscribed to the specific wrongdoing at issue.

The DOJ's more recent focus on defining when and how a monitor is appropriate raises the important question of how a monitorship fits within the traditional goals of punishment for wrongdoing. Academic commentary to some extent raises the same question. But, as regulators continue to hone the parameters around the appointment and acceptable mandate of monitors, public commentary indicates that current norms fall comfortably within several well-recognised goals of punishment: deterrence (using punishment to deter wrongdoing by others), incapacitation (preventing wrongdoing by taking away the offender's ability to commit crimes) and rehabilitation (seeking to change the offender's disposition towards criminality).

As commentators have noted, the cost and burdens of a monitorship to a company can serve as an effective deterrent against future corporate misconduct. Those costs come in the form of fees to the monitor but also in that the company must devote time, attention and other resources to interfacing with the monitor and responding to and implementing recommendations or other forms of oversight. Indeed, commentators have noted that some companies fear the appointment of a monitor for just this reason: the disruption they could cause to business operations.

Relatedly, the imposition of a monitor can have important incapacitating effects on a company by rendering the company less likely or willing to engage in misconduct. With a corporate monitor peering into decisions and activities of the company, it may make it harder for a company to undertake a course of action that violates the law, or to make decisions to postpone addressing reported instances of wrongdoing in its midst.

Last, the monitorship can also be seen in the context of rehabilitation. In the context of corporations, rehabilitation can take the form of improving the company's culture and internal procedures to reduce the likelihood of future misconduct. For example, the Morford Memo describes a chief purpose of a monitorship as providing a means to 'address and reduce the risk of recurrence of the corporation's misconduct'. Consistent with that purpose, in an October 2018 speech at the New York University School of Law, Geoffrey Berman, the US Attorney for the Southern District of New York, argued that 'a monitor's role is remedial, not punitive'. If carried out effectively, certainly a monitorship can revitalise a company's compliance systems and culture. As described above, the WorldCom case demonstrated those rehabilitative benefits, as do other monitorships.

Although the precise details of each monitorship may vary, many will likely share these important features that put them squarely within the long-standing goals of punishment for wrongdoing. This guide – which assembles chapters from leading lawyers and practitioners in the field – provides insight into these and other monitorship issues, and is a crucial resource for anyone interested understanding or practising in this important area.

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