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Douglas Jensen

Special to Law.com

December 12, 2007

Imagine that you represent, as outside or in-house counsel, a publicly traded corporation that has recently fallen under the specter of a government investigation. Your internal investigation has revealed accounting misconduct on the part of several employees that will almost certainly result in their indictment. You receive a call from the chief of the Financial Crimes Unit in your jurisdiction's U.S. Attorneys' Office, who informs you that the misconduct went beyond the actions of a few rogue employees and permeated the core of the corporation's business.

The prosecutor indicates that she could easily obtain an indictment of the corporation itself, but is willing to consider another, less onerous alternative: entry into a deferred prosecution agreement or perhaps even a nonprosecution agreement. By entering into and then honoring such an agreement, your client would avoid indictment, but in exchange must agree to implement remedial measures -- among them the appointment of an independent monitor with responsibility for overseeing the corporation's business for the next three years. What, she asks, is your response?

The above scenario, almost unheard of for mainstream corporations 15 years ago, has played out with increasing frequency during the current decade. While the deferred prosecution agreement has long been employed as an alternative to criminal prosecution of certain select individuals, in the wake of the corporate scandals that marked the beginning of the decade -- Enron, WorldCom and Adelphia Communications, among others -- the U.S. Department of Justice has begun to apply it to corporations as well. The list of corporations that have recently agreed to monitorships in connection with a deferred prosecution or nonprosecution agreement includes AOL Time Warner, KPMG, Bristol-Myers Squibb, Monsanto Co., HealthSouth Corp., Mellon Financial Corp. and ITT Corp.

Supporters of monitorships argue that they provide a mechanism for insuring that corporations fully address the problems that led to their investigation while avoiding the unintended collateral consequences that flow from the criminal indictment and prosecution of a corporation -- destruction of the corporation's business, massive loss of jobs and corresponding damage to the economy. Critics contend that the government is over-reaching, both by calling for monitorships in cases where they are not warranted and imbuing monitors -- often, former prosecutors or judges -- with an inappropriate degree of authority over businesses with which they have little familiarity. In order to evaluate these competing claims, though, it is critical to understand exactly what monitorships entail and how they are being applied in practice.

As deployed over the past seven to eight years, monitorships have varied in a number of respects -- the degree of authority wielded by the monitor over the corporation's business, the scope of the monitor's responsibilities, the process by which the monitor is selected and even the position's title -- with monitors alternately referred to as independent examiners, compliance consultants or special compliance officers. The Department of Justice has no guidelines in place with respect to monitorships, and accordingly, counsel can seek to tailor them to the circumstances of their case.

Notwithstanding such variations, most recent monitorships have had common elements. Perhaps most significantly, the monitor must be independent and, with certain exceptions, have no pre-existing business or other relationship with the corporation. In most cases, the monitor is an attorney and is charged with monitoring the corporation's implementation of a compliance program designed to address the specific issues that led to the investigation.

Finally, in most cases the monitor has a reporting obligation, in which it submits periodic reports to the corporation and the government describing the corporation's progress.

Even with these common elements, however, monitorships can lead to very different results. For example, in the recent case of Computer Associates (CA), in September 2004 the corporation entered into a deferred prosecution agreement to resolve an accounting fraud and obstruction investigation. As part of the deferred prosecution agreement, CA agreed to be monitored by an independent examiner for a term of 18 months. Selected by the court from a slate of three candidates, the examiner had broad powers to review CA's compliance with the terms of the agreement, as well as its accounting and management practices. Notwithstanding this broad and vigorously implemented mandate, it appears based on public reports that the relationship between the corporation and the monitor was a constructive one. Indeed, the corporation's former general counsel has been quoted in media reports as suggesting that the monitorship benefited the company.

The recent monitorship of Bristol-Myers Squibb proceeded differently. Under investigation for inflating its sales through the practice of "channel stuffing," Bristol-Myers signed a deferred prosecution agreement in 2005, and a retired federal district judge was appointed as the independent monitor. During his tenure, the monitor learned that Bristol-Myers had cut a secret noncompete deal with a generic drug rival, without the approval of the board of directors or other senior management, and then denied the existence of the deal to the SEC. Along with U.S. Attorney Christopher Christie, the monitor recommended to the board in September 2006 that it fire the corporation's CEO and general counsel, and they resigned the following day. Bristol-Myers, subsequently, agreed to plead guilty to two counts of making false statements to the FTC and to pay a $1 million penalty, while Christie agreed not to prosecute the corporation for violating the deferred prosecution agreement.

Though many factors influence how a monitorship will proceed, much will depend on the attitude that the corporation brings to it. No company wants a monitor. But faced with the unpleasant reality of one, a corporation and its counsel must develop an effective strategy for working with -- rather than against -- the monitor. Among other things, the corporation may often exercise significant influence in the choice of a monitor and delineating the scope of his or her engagement.

Once the monitor is appointed, the corporation should establish a policy of communicating with the monitor both early and often, insuring that if unexpected problems develop -- as they almost certainly will -- the monitor learns of them from the corporation first. By these and other steps, and by treating the monitor as an ally rather than an adversary, a corporation can make the monitorship a constructive experience.

Since monitorships -- whether bane or benefit -- are likely to remain a fixture in the legal and regulatory landscape for the foreseeable future, corporations and their counsel must learn how to deal with them.

Douglas Jensen, counsel at Chadbourne & Parke, served as the independent examiner for Symbol Technologies, Inc. from 2004 through 2007. He is reachable at (212) 408-5562 or djensen@chadbourne.com. Chadbourne associate Matthew Moody assisted in preparing this article.