Washington Lawyer - January/February 2019 - 33

TAKING THE STAND
"Taking the Stand" appears periodically in Washington Lawyer as a forum for D.C. Bar members to address issues
of importance to them and that would be of interest to others. The opinions expressed are the authors' own.

TRUST BUT VERIFY
How Corporate Monitorships Rein in Misbehavior

By Michael Battle & Karen McGee

rom its roots as a mechanism judges used to enforce their orders against
sometimes recalcitrant defendants, corporate monitorship has evolved into
a powerful tool for helping companies get themselves out of trouble.

Monitors may be disruptive, expensive, and distracting to management, but
they're better than the alternative. In the worst case, a criminal conviction can
effectively shut the business down, as happened to accounting giant Arthur
Andersen in 2002.
Given the stakes, it's hardly surprising that companies decide that opening their
operations to scrutiny from an independent monitor is preferable than taking
their chances at trial. But it's far from an easy decision. Corporate monitors
operate free from management control, can pull documents and interview
employees at will, and can deploy their investigators and attorneys across the
globe in search of signs of backsliding into corporate misbehavior. It isn't cheap,
either: Monitorship over a multinational corporation may last years - and cost
tens of millions of dollars.
But faced with a pattern of serious wrongdoing and doubts that management
can fix the deficiencies that led to it, prosecutors and government regulators
will frequently decide the best solution is to install their own eyes and ears in
the company to ensure compliance. While the Trump administration recently
issued new guidance favoring giving corporate defendants a chance to clean
up their act first, corporate monitors aren't going away.
Courts have long been empowered to appoint monitors under Rule 53 of the
Federal Rules of Civil Procedure, serving as independent agents to ensure compliance with a judge's orders. Federal prosecutors used monitors in the 1980s to
enforce settlements with labor unions and companies accused of securities law
violations, but the process entered the mainstream of enforcement tools in the
1990s as prosecutors began routinely demanding that settlement agreements
with corporate defendants include the installation of a monitor to ensure
compliance.
The WorldCom case in 2002 provided one of the highest-profile examples of
a corporate monitor when U.S. District Judge Jed Rakoff appointed former U.S.
Securities and Exchange Commission chair Richard Breeden with the relatively
narrow responsibility of preventing the destruction of evidence and excessive
executive pay. But Breeden's duties expanded as the fraud-riddled company
filed for bankruptcy, and the monitor was empowered to oversee a broad array
of business operations to ensure assets were preserved through the reorganization. Judge Rakoff summed up Breeden's evolving role this way:
While the Corporate Monitor's efforts were initially directed at preventing
corporate looting and document destruction, his role and duties have
steadily expanded, with the parties' full consent, to the point where he now
acts not only as financial watchdog (in which capacity he has saved the

Illustrations by James O'Brien

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.

THESE AREN'T YOUR LAWYERS
As the WorldCom example illustrates, monitors play a very different role than
outside attorneys hired by management to conduct an internal investigation.
Both are trying to ferret out wrongdoing and make sure it doesn't reoccur.
But there the similarity ends. There is no attorney-client privilege between
a company and its independent monitor, and indeed, one of the most important tasks for monitors is to maintain their independence throughout what can
be a long and close relationship with the company. The rules of professional
conduct that normally govern the attorney-client relationship simply don't
apply to independent monitors.
Corporate monitors are also forward looking. Unlike a law firm hired to investigate a past episode of misconduct and identify those responsible, corporate
monitors are more concerned with making sure the bad behavior doesn't occur
again. They can remain on the job three, five, or even 10 years in particularly
complex cases.
The government doesn't impose monitors without good reason. While the
practice has expanded in recent years - about a third of corporate criminal
settlements coming through the U.S. Department of Justice's Fraud Section in
the past five years involved imposing a monitor, according to the Wall Street
Journal - the Trump administration has signaled it will be more selective going
forward. In an October 2018 speech, Brian A. Benczkowski, assistant attorney
general in charge of the Criminal Division, explained new guidelines under
which the Justice Department will favor allowing companies to prove they've
mended their ways before resorting to a monitor.
Among the factors the government will consider are whether management has
changed since the wrongdoing occurred, whether the company has a functioning corporate compliance system, and whether the misconduct was pervasive or facilitated by top management. If the latter, prosecutors are likely to insist
upon bringing in an independent set of eyes to make sure the company is
obeying the law and has systems to detect and prevent wrongdoing. When it
happens, in our experience, there's almost a consensus among everyone
involved that a monitor is the only way to save a sinking ship.

QUALIFICATIONS FOR THE JOB
While the government and courts have the power to impose monitors on
companies without their approval, there are comprehensive rules to make sure
the process is transparent and fair. A law firm of any size can apply for a monitorship role, but it must be prepared to demonstrate a variety of qualifications and
capabilities, depending upon the assignment. Those can include:

JANUARY/FEBRUARY 2019

WASHINGTON LAWYER 33

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Washington Lawyer - January/February 2019

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