If You Have to Ask, It`s Too Late! (Cont`d)

Julianne Belaga – Avnet
Peter J. Anderson – Sutherland
Marc A. Rawls – Sutherland
October 9, 2012
What Keeps Corporate Counsel Awake at
• The Office of General Counsel Is Not a Profit Center:
• FCPA: Best Practices to Maintain Regulatory
• Is Someone Whistling While You Work?
Whistleblower Procedures Post Dodd-Frank
• General Counsel Do Advise Directors and Officers
©2012 Sutherland Asbill & Brennan LLP
The Office of General Counsel Is Not a
Profit Center: Wrong
©2012 Sutherland Asbill & Brennan LLP
Order of Priorities/Objectives for a Client to
Understand in Any Governmental Investigation,
Civil or Criminal
• Keep your freedom, i.e., stay out of jail at all costs
• Keep from getting “charged” in the first place, avoid
becoming a defendant, civil or criminal
• Keep one’s job
• Keep your accumulated wealth
• Keep your head held high
©2012 Sutherland Asbill & Brennan LLP
Who Pays for the Defense When and If There Is
an Investigation and/or Prosecution?
• Indemnification/Advancement
 Delaware law is broad
 Check your corporate bylaws now, especially if not a
Delaware corporation
 Undertakings by corporate officers, directors to trigger
 Acted in good faith
 No self interest
 No fraud
©2012 Sutherland Asbill & Brennan LLP
Who Pays for the Defense When and If There Is
an Investigation and/or Prosecution? (Cont’d)
• D&O, E&O Insurance Coverage
 As a corporate counsel, send notice early, even if no
asserted claim as defined by the Policy
 Subpoenas
 Formal Orders from Securities and Exchange
Commission which mention the Company, its officers
and/or directors
 Wells Notices
 Litigation Demands
 Regulatory exception which appears in many D&O policies
 Consider “paying up” if protection is available
 Insurance does not cover penalties
©2012 Sutherland Asbill & Brennan LLP
What Do We Do When Stuff Has Hit the Fan?
If You Have to Ask, It’s Too Late!
Possible accounting fraud
Insider trading
©2012 Sutherland Asbill & Brennan LLP
What Do We Do When Stuff Has Hit the Fan?
If You Have to Ask, It’s Too Late! (Cont’d)
Two levels of preparation are necessary to successfully weather
a crisis
 Crisis prevention
 Controls
 Information flow has implications for insider trading
 Tone of compliance by management
 Communicating a true commitment to compliance with policies,
procedures, and training, and establishing ways for employees
to report issues and concerns (e.g., through an employee
hotline) can help prevent a crisis
 Preplanning and the exercise of sound judgment are critical
 Consistent discipline
 Training
 Due Diligence
©2012 Sutherland Asbill & Brennan LLP
What Do We Do When Stuff Has Hit the Fan?
If You Have to Ask, It’s Too Late! (Cont’d)
Two levels of preparation are necessary to successfully weather
a crisis (Cont’d)
 Crisis response
 What role will general counsel/general counsel’s team play?
 When is outside counsel brought in?
 Counsel to the Special Committee
 Who is “calling the shots”?
 Usually not in-house counsel, but there are important roles to play
©2012 Sutherland Asbill & Brennan LLP
What Do We Do When Stuff Has Hit the Fan?
If You Have to Ask, It’s Too Late! (Cont’d)
• “Lawyering Up”
 Who needs to know internally when a problem first
 Internal investigations are usually external
 Loss of privilege for corporate officers – “what do you
mean you are not my lawyer?”
 Conflicts
 Even mid-level employees should have counsel
 Litigation hold
 How broad?
 Who gets?
 What should it say?
©2012 Sutherland Asbill & Brennan LLP
What Do We Do When Stuff Has Hit the Fan?
If You Have to Ask, It’s Too Late! (Cont’d)
• There is still a business to run:
 Are we concerned about a whistle blower?
 Is the matter public?
 Saying less is more
 Don’t p… off government
 Anything you say will be used against you
 You don’t know what you don’t know
 How much time do we have before we need to disclose
 To the government?
 To the investing public?
 Get the basic facts quickly
 Identify the usual suspects
©2012 Sutherland Asbill & Brennan LLP
FCPA: Best Practices to Maintain
Regulatory Compliance
©2012 Sutherland Asbill & Brennan LLP
Where is the Corruption?
Source: Transparency International’s Corruption Perception Index
©2012 Sutherland Asbill & Brennan LLP
FCPA vs. U.K. Bribery Act
FCPA (Effective 1977)
Covers issuers, U.S. “domestic
concerns” and agents
Focuses on bribes of foreign
officials (“FO”)
Making a payment to a person
defendant knew or believed to be
a FO
Or where defendant knew all or
portion of money would be
offered, given, or promised
directly or indirectly to a FO
U.K. Bribery Act (Effective July 2011)
Covers private citizens and companies
which “carry on business” in the U.K.
Bribes don’t have to be of foreign or
government officials
Established a “Prevention Offense” which
is strict liability
No exception for facilitation payments
Defense to Prevention Offense is having
appropriate procedures
Recipients of bribes can be charged
Books and records violations are
independent basis of liability
Allows “facilitation payments”
No strict liability
Recipients of bribes are not
©2012 Sutherland Asbill & Brennan LLP
What About Foreign Payment Keeps
You Up At Night?
Use of third-party providers
New acquisitions or contracts
Facilitation payments
Understanding who is a foreign official
©2012 Sutherland Asbill & Brennan LLP
What About Foreign Payment Keeps
You Up At Night? (Cont’d)
• Travel and entertainment
Product demonstration
Excessive travel and entertainment to government officials
Inaccurate accounting of travel and entertainment to government
Pretextual reason for product demonstration
Meals and entertainment provided in connection with routine
business activity (i.e., product demonstration, training, sales
meetings) rise to a violation of the FCPA.
Certain gratuities are ‘de minimis’
An approval process for expenses
©2012 Sutherland Asbill & Brennan LLP
What About Gratuities Keeps You Up
At Night?
• Gifts
 Gift giving pursuant to local customs or holidays
 Not to offend business partners
 Given as cultural display of respect and good will
©2012 Sutherland Asbill & Brennan LLP
Third Parties
How to Rein in Rogue Third-Party Providers
• Communicate existence of company’s anti-bribery
• Write in contracts: “We expect you to comply with
• Demand reciprocal compliance
• Require annual certification of compliance
• Insist on monetary clawbacks if violations discovered
as condition of contract
• Report third parties’ violations
©2012 Sutherland Asbill & Brennan LLP
Contracts and Acquisitions
Acquisition due diligence
1. Inadequate due diligence and
failing to respond to red flags may
give rise to violations
2. There is great fear that
companies will be held liable for
the pre-acquisition conduct of
acquired companies
Create customized due diligence
Conduct thorough document review
Interview key personnel in various
Consider self-reporting if
irregularities are found
©2012 Sutherland Asbill & Brennan LLP
Should We Waive the Privilege?
• No waiver of privilege just the facts
 Expects a company to provide the basic facts that the government
needs to learn, while also allowing the company to protect its own
work product and privileged communications
©2012 Sutherland Asbill & Brennan LLP
FCPA Best Practices
• Identify high-risk countries and high-risk business
• Increase monitoring of all payments across the
supply chain
• Conduct annual compliance policy review and
• Draft policies governing facilitation payments
• Expand application of internal policies to outside
vendors and agents
• Appoint a senior corporate executive to oversee
compliance policy who directly reports to a board
©2012 Sutherland Asbill & Brennan LLP
The U.K. Guidance on Bribery Act of 2011
Best Practices for Prevention
International businesses struggle with their responsibilities to
monitor and control the conduct of third parties with whom they
do business: distributors and sub-distributors, joint venture
partners, dealers, and resellers
Senior management’s commitment to culture of compliance
Rigorous and appropriate procedures
Annual risk assessments
Due diligence on acquisitions and new business endeavors
Communication and training to employees and third-party
Monitoring and external validation
Reports to board of directors
©2012 Sutherland Asbill & Brennan LLP
What If We Keep Quiet?
• Cooperation and self reporting
 There is no discernible difference in the outcome of fines and
penalties for companies that have self-reported potential FCPA
violations versus situations where the government identified
potential problems on its own.
©2012 Sutherland Asbill & Brennan LLP
Is Someone Whistling While You Work?
Whistleblower Procedures Post Dodd-Frank
©2012 Sutherland Asbill & Brennan LLP
Whistling Can Be Profitable
SEC’s final rules effective August 12, 2011 (Regulation 21F)
(“we have already seen an increase in the quality of tips” Sean
McKessy, 8/11/11)
Provide for 10% to 30% of aggregate recovery from related
actions that exceed $ 1 million (penalties, disgorgement, interest)
(Rule 21-F3; 21F-4)
To persons who voluntarily provide original information to the
SEC about possible securities laws violations
If that information substantially
contributes to successful
enforcement action (Rule 21F-3)
As of October 2010, SEC had $451 in
fund for paying awards
©2012 Sutherland Asbill & Brennan LLP
Who Can Whistle?
• Any individual (employee, agent or someone outside
the company such as independent contractors,
consultants, suppliers) (Rule 21F-2)
 As long as it is about a possible federal securities law
violation that has occurred, is ongoing, or is about to occur
 Can be anonymous (through counsel)
• Some exceptions
 Corporations or other entities (Rule 21F-2)
©2012 Sutherland Asbill & Brennan LLP
Who Can’t Whistle
SEC, DOJ, PCAOB, SRO staff, foreign government officials, persons
convicted of related criminal violations, people who lie in their
whistleblower submissions (Rule 21F-8(c));
Attorneys or others with privileged information or information obtained
through representation of a client (information not independent-Rule
21F-4(b)(4)(i), (ii));
Officers, directors, trustees or partners of an entity if informed by others
or the information was learned during the process of addressing
possible violations (same-Rule 21F-4(b)(4)(iii)(A));
By an employees with principally compliance or internal audit
responsibilities (including third parties) (same-Rule 21F-4(b)(4)(iii)(B));
Those employed by or associated with a firm retained to conduct an
inquiry or investigation into possible violations of law (Rule 21F4(b)(4)(iii)(C);
Audit firm employees if information was obtained in connection with
audit required under the federal securities laws (Rule 21F4(b)(4)(iii)(D));
Those who obtain information in a manner determined by a federal court
to violate federal or state criminal law.
©2012 Sutherland Asbill & Brennan LLP
Can swallow the rule: Certain persons can report directly to SEC
 They have a reasonable basis to believe
that disclosure is “necessary to prevent
the relevant entity from engaging in
conduct that is likely to cause substantial
injury to the financial interest or property
of the entity or investors”
(Rule 21F-4(b)(4)(v)(A));
 Waited 120 days after reporting the information
internally to entity’s audit committee, CLO,
CCO, unless they already knew, or to supervisor.
(Rule 21F-4(b)(4)(v)(c)
 For attorneys, disclosure must be consistent with ethical
obligations (attorneys for issuers can make disclosures under SOX
under certain circumstances)
©2012 Sutherland Asbill & Brennan LLP
What’s the tune?
Provision of information must be voluntary, i.e., prior to
personally (or through counsel) receiving request directed to the
whistleblower from SEC or others (e.g., PCAOB, SRO,
Congress, state AG or securities authority, other federal agency)
or having duty to report (may be aware of investigation or inquiry
or internal review)(Rule 21F-4(a))
But can consider submission voluntary if gave information to
other of the organizations before got a request from the SEC
(Rule 21F-4(a)(2); (b)(7))
Not voluntary if have contractual or legal duty to report (Rule
May induce whistleblowers to report quickly
©2012 Sutherland Asbill & Brennan LLP
You Know How to Whistle, Don’t You?
• Information must also be original
(Rule 21F-2)
 Derived from whistleblower’s independent
knowledge or independent analysis;
 Is not already known to the SEC;
 Doesn’t come from public information
(unless the whistleblower is the source
or analyzes the information to reveal information not
otherwise known to the public)
 Provided to the SEC after July 21, 2010 (Rule 21F-4(b))
• Nothing in the rule explicitly discourages employees
from absconding with corporate information
©2012 Sutherland Asbill & Brennan LLP
Beauty Is In the Eye of the Beholder…
• What’s information that leads to a “successful”
enforcement action?
 Must be sufficiently specific, credible and
timely to cause staff to open, or reopen
an investigation, conduct an examination
or inquire about different conduct
(Rule 21F-4(c)(1))
 Subsequent action based in whole or part on the
information; or
 Information significantly contributes to success of pending
©2012 Sutherland Asbill & Brennan LLP
Will Whistleblowers Report Internally?
• Placeholder and credit provisions
 Rules allow for employee to
report information internally
and preserve ‘place in line’
if reports to the SEC within
120 days (look back)
 Credited with information
company develops if first or
simultaneously reports internally and within 120 days reports
to SEC (Rule (21F-4(c)(3))
 Idea-facilitate internal compliance
©2012 Sutherland Asbill & Brennan LLP
Clean as a Whistle?
Amounts awarded are discretionary with Commission
10-30% penalties, disgorgement, interest, money deposited in disgorgement fund, etc.
Enhancing Factors (Rule 21F-6)
 Whether the whistleblower used internal compliance processes
 Significance of information provided
 Degree of assistance provided
 Timeliness of report, cooperation
 Programmatic interest of SEC, conservation resources
 Unique hardships suffered by whistleblower as result reports and assistance
Diminishing Factors
 Interference with internal compliance policies
 Culpability or involvement in matter at issue (whistleblowing
does not convey amnesty) (Rule 21F-15; 21F-16)
 Financial benefit to whistleblower
 Unreasonable delay (e.g., only after learned of
©2012 Sutherland Asbill & Brennan LLP
If a Tree Falls….
• Companies might not be informed of whistleblower
allegations-discretionary with SEC
• Rules provide for SEC staff to communicate directly
with directors, officers, members, agents and
employees of entities who have initiated
communication regarding a possible securities law
violation even if the entity is represented by counsel
(Rule 21F-17(b))
©2012 Sutherland Asbill & Brennan LLP
What to Do When You Hear Whistling?
Anti-retaliation provisions
 Sec. 922 of Dodd-Frank: no discharging,
demoting, suspending, threatening,
harassing, discriminating, directly or indirectly
 Private right of action (district court) for
those who reasonably believe a violation
has or will occur or is ongoing;
compensation if successful
 Apply to all whistleblowers, not just successful ones (Rule 21F2(b)(ii))
 Can’t require arbitration of whistleblower retaliation dispute
 Subjective and objective elements to test
 Can’t use confidentiality agreements to prevent people from
communicating with SEC (Rule 21F-17)
 Rules give the SEC enforcement authority with respect to
retaliation (Rule 21F-2(b)(2))
©2012 Sutherland Asbill & Brennan LLP
Whistleblower Procedures
• Report via Form TCR (tip, complaint, referral)
 Must be submitted under penalty perjury
 May be anonymous; then attorney must keep form
• Notice of covered action published for matters with
over $1 million in sanctions
 Whistleblowers have 90 days to submit form WB-APP
 Staff’s preliminary determination becomes final in 60 days
 Procedure for contesting whether and to whom to make
• Award mandatory if meet criteria; amount
discretionary (Rule 21F-5)
©2012 Sutherland Asbill & Brennan LLP
• Best internal compliance programs
 Make sure employees have an avenue for expressing
concerns and that concerns are appropriately elevated and
 Try to help employees be comfortable with making internal
 Devote adequate internal resources to evaluating
complaints, tips and whistleblower reports
 Encourage third-party service providers to report internally
 When conducting a review, especially one using third
parties, consider whether that review should be done under
counsel’s direction
©2012 Sutherland Asbill & Brennan LLP
General Counsel Do Advise Directors and
©2012 Sutherland Asbill & Brennan LLP
General Counsel Do Advise
Directors on Their Duties
Lawyers do a better job of advising directors about fiduciary
duties than advising officers because it is usually more clear cut
and outside counsel usually weigh in
Current decisional law in Delaware is clear that, for directors at
least, the duty of “care in the decision-making context is process
due care only,” i.e., so long as you are not making decisions by
throwing darts at a board, even if the decision proves to turn out
poorly, can’t be criticized
 Gross negligence standards for directors have been interpreted as
reckless indifference/ “blind eye”
The duty of loyalty for directors is quite close to the duty of
loyalty owed by agents
 The duty of loyalty in corporate law takes director conflicts quite
©2012 Sutherland Asbill & Brennan LLP
Officers/Directors Wearing Different Hats in
Corporations Are a Corporate Counsel’s
• Recent focus of SEC investigations
• Not a conflict of interest where both officer and
director of same entity
 Issue arises when positions are held in distinct corporate
• Different standards of care/liability
 For directors, gross negligence, i.e., turning a blind eye
 For officers, breach of ordinary care in similar circumstances
• Two “Masters” conundrum:
 Duty to keep material information confidential
 Duty to put client’s interest first resulting in a duty to disclose
©2012 Sutherland Asbill & Brennan LLP
Officers/Directors Wearing Different Hats in
Corporations Are a Corporate Counsel’s
Headache (Cont’d)
• Multiple hats and the knowledge learned while
wearing each can erode the defenses available
 E.g., proof of gross negligence is easier when in possession
of actual knowledge
 Justifiable reliance on subordinates may be undermined,
where one is charged with supervision activities on ‘day to
day’ basis.
• Can the conflict be waived? Maybe:
 Disclosure of actual conflict v. possible conflict
 Insertion of disinterested proxy (person) for one or both of
©2012 Sutherland Asbill & Brennan LLP
How to Advise When a CEO is Thought
to Have “Screwed Up”
Board of directors typically communicates corporate goals in a very
broad manner, in such metrics as profitability, market share, and growth.
What course of action utilized to achieve those goals is largely up to
senior management.
Discretion over substance of business decisions lies primarily with
corporate officers, not the Board. There is little basis for holding an
officer liable for a substantive decision that deliberately was left to him to
make in the first place.
Officers who follow a sensible decision-making approach when
undertaking ventures that carry significant business risk which end up
failing will not be sued by the corporation. But you may get fired.
©2012 Sutherland Asbill & Brennan LLP
How to Advise When a CEO is Thought
to Have “Screwed Up” (Cont’d)
Officers who get fired rarely face monetary damages for negligence by
the corporation for at least three reasons: First, it is not cost efficient
and a distraction for the corporation to try to detect/prevent all
carelessness or wrongdoing and to pursue legal claims for all such
behavior. Second, the standard is reasonable conduct. An agent is
expected to act only with the care, competence, and diligence “normally
exercised” by similar agents in “similar circumstances.” Third, as to the
substance or merits of the business decision made, the protection of the
business judgment rule is fully available to officers.
Fiduciary duty claims against executives likely are “settled up” at the
departure stage and therefore will not be litigated. Exit packages likely
also entail the mutual release of all claims.
Officer conduct damaging to the company creates a corporate derivative
claim by shareholders and not a direct claim. Board of directors, not
stockholders, are the appropriate body for addressing such claims.
©2012 Sutherland Asbill & Brennan LLP
Julianne Belaga
Vice President and Assistant General Counsel, Global Acquisitions
Avnet, Inc.
[email protected]
Peter J. Anderson
Sutherland Asbill & Brennan LLP
[email protected]
Marc A. Rawls
Sutherland Asbill & Brennan LLP
[email protected]
©2012 Sutherland Asbill & Brennan LLP

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