First Steps in Crisis Control
There are few certainties in this world. Death, taxes, and, if you are in the securities industry, the likelihood that at some point your firm will face a crisis that may lead to severe sanctions by regulatory agencies, if not handled appropriately. How will you respond? How a firm chooses to handle its internal investigation will play a key role in determining whether the matter will be picked up by the SEC or other regulatory body for enforcement. Your first steps in the investigation will be critical and will set the stage for all activity that follows.
A May 2, 2006 conference, sponsored by the Washington, DC Bar and entitled Internal Investigations: Voices of Experience, addressed this very topical situation. Of the four presenters, two were former SEC staff employees, one was a general counsel at a public company, and the other was in private practice. Their sentiments echoed my belief that regulators will most likely base their decision whether to pursue an enforcement action against a firm based upon the perceived independence of the individuals responsible for conducting the firm's internal investigation and the quality of that investigation.
Critically, inside counsel must decide early on how to get enough facts to bring himself up to speed quickly, consider whether to recommend the assembly of an internal audit committee to investigate the matter, and consider whether to implement a litigation freeze. But if an internal investigation is to have any chance of heading off a future enforcement action by the staff or DOJ, a predominantly independent committee should oversee a thorough and impartial investigation.
Suggestions for maintaining a high level of committee independence and a quality investigation include:
Every early decision by the firm is important and should be considered fully before action is taken. But if the ultimate goals of the firm are to satisfactorily address and resolve internal problems while possibly preventing the investigation from proceeding to enforcement, independent committees and quality investigations should be considered essentials.
Check back in a couple of days as I plan to make some additional posts that discuss specific pros and cons regarding these critical early decisions.
Here's a (slightly) better idea; don't get into trouble. You make it sound like investigations are inevitable because the perceptions of illegal activity are unavoidable , and they are not. Of course, you might hire an inside trader at your business or law firm. You might hire two or three, or four. You might populate a wing at Danbury Federal Prison; but probably you won't find yourself the next Refco or Fannie Mae.
One key as to whether the dogs of war will be loosed upon you is the kind of behavior you accept and the people you value compared to the people you don't.
Say what you want about, say Orange County's bond trading, what is clear is that the BD made a lot of money doing it and therefore it is unlikely the Orange County account didn't reach the top echelons of the firm. Someone had to see that there was great PR, and possibly legal risk at stake; but they chose to proceed. What leverage do you think the compliance people had to stop the trading? What leverage did Sharon Watkins have at Enron? And so forth. If you don't empower compliance and ethics driven people you get less of either.
The time to address major problems like this is before they happen so they don't happen and putting a Harvey Pitt or the Pope on your board after the fact is way too little way too late.
First, you have to hire people of character and courage. Next you have to convince them that they will be taken seriously if they raise ethical issues and not placated by a cursory review by the firm's outside counsel.
Third, and I don't pretend this is easy, you have to be more concerned with how you reach next quarter's numbers rather than whether you reach them. Now that sounds dangerously like a cliche, and if it so, I remain unabashed by the statement.
The price of non-compliance has just gone up in the last several days, months and years. You can have not one but a pair of SOX and it isn't going to mean a damn thing unless your people know you expect behavoior that is legal and ethical and that they have a forum to raise questionable practices to a high level of the firm and stll be seen as a valuable team member.