Internal Investigations Blog

News and Opinions on Corporate Inquiries

 

Human Trafficking Concerns for 7-Eleven in Wake of Payroll Scam

by admin on June 18, 2013 in Blog with No comments

While FCPA and health care fraud probably run one and two in garnering the attention of compliance departments, human trafficking and its permutations are coming up on the outside in government enforcement like Orb at the Belmont Stakes. Evidence of increased attention being focused on corporate complicity in the human trafficking problem might be seen as recently as yesterday, when federal, state, and local law enforcement agencies descended upon 7-Eleven stores in New York and Virginia seemingly with their fingers – at least tangentially – in that pie.

The New York Times reported that federal authorities seized fourteen 7-Eleven stores on Long Island and in Virginia while arresting nine owners and managers and seizing property – including five homes – after one of the largest criminal immigrant employment investigations ever conducted by the Justice and Homeland Security Departments. The investigation of 40 other 7-Eleven franchises in New York City is continuing and presents additional concerns for the convenience store giant.

Charges against eight people that included wire fraud, conspiracy, and aggravated identity theft were announced at a news conference by Loretta E. Lynch, the U.S. Attorney in Brooklyn and James T. Hayes, who is in charge of ICE’s investigations in New York City. Also present were officials from the New York State Police and the Suffolk County Police Department. The charges resulted from an investigation that began two years ago when one 7-Eleven employee approached the NYSP and another contacted the SCPD about not being paid for their work. It ultimately led to two families and their associates with roots in Pakistan and the Philippines who recruited workers from their own ethnic communities.

In an uncomplicated scheme, the defendants found more than 50 illegal immigrants and gave them identities stolen from American citizens, including children and dead people. These employees then worked for as much as 100 hours a week, but were paid for a fraction of that time, and were forced to live in substandard housing owned by the operators of the convenience stores. In one instance, an employee of one franchise was paid using the Social Security number of a former 7-Eleven employee – a person who had not worked for the store for 10 years – despite the same individual being the target of IRS collection efforts much of that time. Lynch described the scenario as “a modern-day plantation system.”

The organizational concern for 7-Eleven ought to be predicated upon its role in failing to detect this scam, paying these illegal immigrant employees, and any resulting liability that it might have for the same. As reported by the Times, the defendants entered each employee’s personal information and hours worked into computer terminals at the stores. The parent company then processed the payroll and sent the wages to the employers for distribution. Allegedly, the employers then paid the workers fractional amounts of that which they were due and pocketed the rest.

Lynch said that 7-Eleven, Inc. made “little to no effort to insure the integrity of [its] payroll system.” This failure to have anti-fraud safeguards in place by the company – which has more than 7,600 stores in the United States – allowed the store owners and managers to escape notice for as much as a decade. During that time, they realized more than $180 million in revenue.

The conduct of the eight defendants at issue here implicates not only the wire fraud and identity theft crimes alleged but should also implicate human trafficking activity if employees were brought in and compelled to live in company houses and work for substandard wages as reported. Given the normal zealousness of federal law enforcement, it is a somewhat of surprise that the individual defendants were not charged with human rights crimes, although that might still be a possibility.

But what of 7-Eleven’s role on the payroll fraud and the higher-profile human trafficking angles, if any?

If the company adheres to even yesterday’s best practices, it should have audit and compliance monitoring rights over its suppliers and franchisees. If so – and if Loretta Lynch is wrong about 7-Eleven making no effort whatsoever to monitor its payroll system – then 7-Eleven’s people should have caught onto the entire fraud scheme and conducted an internal investigation that would have yielded not only the payroll scam, but the concomitant human rights abuses that reportedly went along with it.

Given that the latter is rising on the government’s enforcement priority list and that the circumstances for these employees mimic those recently garnering the attention of a recent, analogous Wall Street Journal story, 7-Eleven would have been wise to commission an internal inquiry into the payroll matter in the past and/or to begin a parallel one now, with an eye toward exonerating itself and its systems from participation in the more heinous human trafficking aspect of this case.

Further, its future due diligence efforts as regards suppliers and franchisees should include a review for human rights abuses such as those suggested here. Otherwise, it will have to sell a helluva lot of Slurpees to pay the fines, costs, and disgorgements that a failure to do so will no doubt entail.

Physician Heal Thyself: Scoping FCPA Investigations and Earning Declinations

by admin on June 5, 2013 in Blog with 1 Comment

They say there’s never a second chance to make a good impression and in trying to make one on the Department of Justice’s FCPA unit, seriousness goes a long way. As regards internal investigations, this translates into proper scoping, focused digging, and an honest assessment of the results. Then, maybe – just maybe – a declination is in a company’s future.

In an article last week entitled, “How Do You Make the Justice Department Go Away?” on The Wall Street Journal Law Blog, Nathaniel Edmonds gave the DOJ take on earning a prosecution declination from the perspective of a former FCPA unit supervisor. Having left government service, he is now a partner at Paul Hastings, LLC, and recently co-authored a client advisory on what companies can do to earn “the real golden carrot” of having the government drop an FCPA case – even when prosecutors find potentially-corrupt activity – without bringing charges.

The WSJ article reports that Edmonds believes that to get the ultimate corporate reward from the DOJ, a company has to have a strong and nimble compliance program in place, which he equates with one that evolves with best practices in that area. Then, building on that foundation, it has to stop illicit payments when they are suspected and conduct serious internal investigations into nuts and bolts of it overseas goings-on when the company finds a potential problem on its own. From his vantage point, only then – with raw knuckles and a dirty face from digging in earnest – can that business hope to avoid the sting of an FCPA enforcement action.

Scoping the resulting investigation, then, is a critical step that companies must take to get declination consideration. Edmonds, along with his client advisory co-authors Palmina M. Fava and Morgan J. Miller, writes that:

“Companies often fail to appropriately scope an internal investigation – either looking much too broadly or not broadly enough. The inquiry must be scoped to determine if the allegation is a single failure of strong internal controls or a systemic problem that has ramifications beyond the issue identified. DOJ does not expect every company to conduct a worldwide review based on a single unsubstantiated allegation. Nor should companies only look at the payment in an isolated fashion and not examine how that particular internal control failure may have ramifications elsewhere in the company. Companies must ensure the investigation scope is appropriate to meet DOJ’s expectations without wasting limited compliance funds.”

This is the requisite seriousness referenced above.

Inquiries scoped too broadly – utilizing a cookie-cutter, one-size-fits-all approach – is an inappropriate response and it betrays a view of the internal investigation process as corporate gamesmanship. That can’t be seen by the DOJ – or anyone else – as an earnest and focused effort to find, document, and root out corruption any more than the homecoming mercy date with the class nerd can be seen as evidence of genuine romance. [This is true, notwithstanding the fact that George McFly did, in fact, get Lorraine to ultimately marry him thanks to Doc Brown, a DeLorean time machine, and a well-timed lightening strike.]

Alternatively, scoping an internal investigation too narrowly will be perceived as inept at best or as an attempt at concealment by misdirection at worst. The “nothing to see here, folks; move along, move along” tactic certainly won’t buy a company a declination, although it might buy it an obstruction count or two.

The rightly-scoped – and often re-scoped in midstream – inquiry is the measured one that the DOJ is looking for from companies dealing on their own with bribery allegations. It is the only form of internal probe that speaks to the corporate understanding that running a clean company is part of the company’s mission. To use a medical metaphor, it evinces a commitment – from the top down – to seeking out diseased tissue within the body corporate, excising that cancer, and taking the prescribed aftercare measures to ensure that the sickness does not return.

Though an apple a day may keep the doctor away, a solid internal investigation might get your company a golden carrot.

Shakespearean Take on Rutgers and Julie Hermann

by admin on May 30, 2013 in Blog with No comments

The furor over Rutgers’ hiring of Julie Hermann to replace Tim Pernetti as athletic director in the wake of the Mike Rice player-abuse allegations has generated much hand-wringing and mildly-salacious media coverage. But is the school getting punished for Hermann’s supposed past indiscretions while the volleyball coach at Tennessee or for the fact that these issues were not found in advance of her inking a contract to lead the university’s athletic department? And even if the allegations against Hermann were true, would their substance have prevented Rutgers from hiring her, were it not for the unique situation presented by the Rice matter? A similar – albeit lower-profile – case suggests not.

Just last week, Yahoo!Sports reported that the University of Wisconsin at Green Bay was retaining Men’s Head Basketball Coach Brian Wardle in the wake of an investigation into allegations of player abuse. There, three players alleged that Wardle – himself a notable former Marquette b-baller – was verbally abusive to them; compelled one to run conditioning drills when sick, causing him to defecate on himself; was not attentive enough to a player with behavioral issues; and engaged in punitive behavior – such as locker reassignments – towards underperforming players.

The bulk of the claims revolved around Wardle’s frequent and semi-confirmed use of the adjective form of the big kahuna of cuss words – it rhymes with “clucking” but has nothing to do with poultry – in conjunction with various slang terms for a part of the female anatomy located in the lower abdomen. This name-calling was partially acknowledged by the coach – he admitted using some vulgarities but not others – and was done for motivational purposes. Regrettably, these terms are now part of the lexicon of sports and social life for youngsters down to age twelve and can be heard daily on almost any ball diamond or playing field.

There was also significant attention given to Wardle’s supposed recommendation on more than one occasion that two players might benefit athletically from gaining accessing some of the same female anatomy referenced above as a means of improving play. Perhaps “lay-ups” have changed in the vernacular as well.

The report prepared by the outside counsel retained by UWGB to conduct an internal investigation of the matter found some of the allegations to be unfounded and others to be outside the scope of its inquiry. As to the coarse language and sexual references, it found that while these might have been unpleasant, their use did not violate any of the school’s athletics or coaching policies. It should also be noted that the report also found those policies to be weak or ill-defined and encouraged strengthening the same to create more bright-line parameters for staff to mind.

Had Tennessee dug into the allegations– including calling her charges “whores, alcoholics, and learning disabled” – against Hermann sixteen years ago or had Rutgers found them and dug into them recently, one would suspect that the result would be much like that at UWGB. Hermann would have likely been found to have employed aggressive and confrontational coaching techniques that – though once commonplace – are no longer in vogue in today’s kinder and gentler academic and athletic cultures but that no UT, SEC, or NCAA rules were violated by the use of those methods.

Although the latest reports are that Rutgers will stand by Hermann and that she is not going anywhere, the hoopla enveloping the New Jersey school falls largely at the feet of the executive search firm that missed the nugget from Hermann’s past that has resulted in the present firestorm.

An Asbury Park Press story reported that the university had paid $70,000 to Parker Executive Search of Atlanta for the background check and work-up on Hermann. That investigation specifically included “conduct[ing] media reviews for potentially controversial areas of concern” and the due diligence team surely missed the boat on this one. Doing so might have been excusable were it not for the very same allegations surrounding Mike Rice’s departure from the Rutgers athletic program. Searching for any indicia of similar allegations in Hermann’s background should have been a top priority and surely someone at Tennessee during her tenure there should and would have recalled the complaint letter of her former team.

That said, it seems that Hermann and Rutgers will continue to get pummeled for not for her actual sins – if any – but for the professionals that the school hired not finding those supposed transgressions. Assuming that Hermann would have gotten a clean bill of health if an investigation into her past coaching practices had been undertaken and that she would have then gotten the Rutgers AD job just the same, then – while terrific media fodder – all of this is likely much ado about nothing.

Harvard Investigations Wait On Grades

by admin on May 23, 2013 in Blog with No comments

For most colleges, the academic year has ended. Harvard’s trudges on as it awaits a final grade on its investigations of a cheating scandal involving an undergraduate course in the College of Arts and Sciences. Amid allegations that an e-mail search conducted as a part of that probe violated university policy and the privacy rights of faculty members, the Ivy League school has commissioned an internal investigation of its own internal investigation that is still progress.

As first reported last August in a Harvard Gazette story, the mess in which Harvard remains began with the suspicion of cheating in an undergraduate course subsequently identified as Government 1310. In the wake of allegations that a significant number of students enrolled in that course during the previous semester may have inappropriately collaborated on answers or plagiarized their classmates’ responses on the final exam, the Harvard College Administrative Board began an inquiry into the matter.

The Board undertook a comprehensive review of more than 250 take-home final exams submitted at the end of the course that resulted in nearly half of the students in Government 1310 being brought up on academic misconduct charges. Students found responsible for academic dishonesty were subject to disciplinary action that might have included – but was not limited to – forced withdrawal from Harvard College for a year.  According to a subsequent Harvard Magazine article, more than three-quarters of those students implicated in the cheating scandal were ultimately disciplined by compulsory withdrawal from the school for some period of time or placed on academic probation.

Information about those involved and impending punishments from an Administrative Board communication was allegedly leaked to news outlets by a school employee. This kicked off a second investigation of faculty and administrative personnel that primarily entailed searches of their e-mail accounts. Then – as now – Harvard College policy requires that faculty e-mail searches get the approval of the Dean of the Faculty of Arts and Sciences, while searches of administrative personnel do not require the same.

In the first round of searches, only administrative e-mails were scoured by subject line. In a second round, investigators specifically queried the administrative and faculty accounts of one of the Resident Deans – sixteen faculty members who advise undergraduate students and represent them in proceedings before the Administrative Board – in pursuit of e-mails from Harvard Crimson reporters covering the cheating case. This included a subject-line search of the latter account. These searches turned up two e-mails with a queried search phrase. Both were from the same Resident Dean. He or she was questioned and found to have inadvertently forwarded the Administrative Board message to two Harvard Crimson scribes.

As the Harvard Crimson reported in April, the second set of e-mail searches was authorized by Harvard College Dean Evelynn M. Hammonds without the approval of the FAS Dean, despite her earlier representations to the contrary. This touched off a furor that – according to another Harvard Crimson account – led to Harvard University President Drew G. Faust engaging Boston attorney and Harvard Law alumnus Michael B. Keating of Foley Hoag to look into the matter, specifically, the conflicting accounts of prior approval for the second e-mail searches. He will report to a newly created subcommittee of the Harvard Corporation, the University’s highest governing body.

In a piece at JDSupra entitled, “Harvard’s Secret E-Mail Search: The Intersection of Internal Investigations and Digital Privacy”, colleague Benjamin Fischer partly laments the fact that the investigation of the investigation has now completely overshadowed the student conduct at the heart of the matter. Rightly critiquing the second investigation into the leaked Administrative Board actions vis-à-vis the cheating students – where this all began to fall apart – he writes that:

“[a] growing criticism of Harvard’s approach centers on whether Harvard could have stopped short of a secret e-mail search to determine the source of the leak. Why didn’t the University just interview the 16 Resident Deans, thereby conducting a search in a way that would have limited the privacy intrusion? Fundamentally, from Harvard’s perspective, its decision to search e-mail subject lines, rather than interview 16 Resident Deans, reflected a cost-effective and efficient way to investigate and determine the source of the leak. Moreover, perhaps Harvard’s approach reflected a concern that if the Resident Deans were on notice of the investigation and were called in for interviews, they would, for some reason, be less than candid regarding their responsibility in forwarding the confidential e-mail, or, even worse, attempt to delete the forwarded e-mail, thereby creating even bigger problems for themselves and the University. In other words, perhaps Harvard believed a quick, simple and limited e-mail search would nip this problem in the bud and allow the University to confront the alleged source of the leak in the most streamlined way possible. But, as noted below, this approach, while efficient and arguably appropriate in light of the University’s authority to search these e-mails, does not come without serious consequences and backlash in the digital age.”

These are valid points and simply questioning the Resident Deans would have been a viable alternative to the searches now under fire. But better alternatives would have been to (1) secure the servers hosting the administrative and faculty e-mail accounts, advise the Resident Deans or that step, and request their consent to search those accounts; (2) secure the servers, advise the Resident Deans of the same, interview them to try to develop something tantamount to reasonable suspicion or probable cause about a particular one’s involvement in the leak, and then seek approval from the FAS Dean to conduct a limited search of that individual’s e-mail accounts; or (3) secure the server and proceed with searches of both types of e-mail accounts after obtaining the necessary, considered approval from the FAS Dean as required by school policy.

Any of these three options would have allowed Harvard to better protect the privacy rights of its people, forego the scrutiny and humiliation that it is now feeling, and to have avoided waiting on the results of the internal investigation of its first internal investigation of its initial cheating investigation.

Avoiding Interrogations In Corporate Investigations

by admin on May 22, 2013 in Blog with 3 Comments

Catching people doing the wrong thing – or verifying the contrary – is what investigators do. And while external investigations conducted by law enforcement agencies and internal investigations conducted by in-house or by outside counsel share that goal, the methodology of gathering evidence from human sources must be very different in the critical area of gathering information from real people.

In any investigation, questionable data and numbers are invaluable. They raise red flags and point in various directions that the inquiry may take. E-mails, texts, and letters can give context to suspicious conduct. But it is almost always the human component that confirms the worst fears or best hopes of the Board, Audit Committee, CEO, or General Counsel. In the absence of a signed confession – “Yes, I bribed the local customs official, made our division’s sales numbers, got my bonus, and am now off for parts unknown!” – only a living, breathing person or two or more can pull it all together and make an investigation make sense.

Employee and third-party interviews, then, are at the apex of any probe. Their results can make, break, or bog down the investigation. And the different pressures that may be brought to bear when these interviews are conducted by law enforcement personnel versus specialized investigations counsel and their staffs set the tone for these conversations and determine the likelihood of their being fruitful.

Plainly put, law enforcement “interrogates” suspects and witnesses, while everyone else can only “interview” employees and third persons. That makes for a big difference in tone, tactics, and results. It also means that non-law enforcement investigators have to work harder and smarter to get answers to their questions.

Interrogation has an innate, coercive component to it. Fourth, Fifth, and Sixth Amendment protections notwithstanding, there is an oppressive feel to questioning by government agents that is felt intuitively by most people. The David versus Goliath match-up is not so metaphorical, particularly when those being questioned are aware of the implicit – if not, explicit – threat of arrest and prosecution for whatever transgression that law enforcement can see and get past the giggle test of a Grand Jury.

Suffice it to say that it is much easier to get answers and cooperation when the interrogator is perceived as holding the keys to a jail cell and/or the poor house. Even the dimmest bulbs are usually recognize the fact that while a judge might say they were right on Monday morning, a government agent asking questions is judge, jury, and executioner on Friday night. That gets subjects motivated and questions answered.

Alternatively, outside counsel does not have much coercive force to bring in getting human cooperation in an internal investigation, save for the possibility of job losses that may be felt or even acknowledged to witnesses or suspected wrongdoers. In suggesting how to play that weaker hand, The Company Ethicist hit the nail on the head with the title “Internal Investigation: Interview, Don’t Interrogate.”

As said in the preceding paragraph, loss of employment may be the only real fear hanging over an employee or other witness in an internal investigation. Should the allegations being probed constitute a criminal offense, it may still fail as a motivating factor when an individual perceives – rightly or wrongly – that he or she may go to jail for his or her involvement in a given impropriety. Cooperate and save one’s job while handing a prosecutor the evidence for one’s own conviction at the same time? No thanks.

Further, the loss of a job may not be as devastating in today’s highly-mobile professional world as it once was. Or the employee or witness may not care to cooperate and provide information for who knows what reason. As a result, getting that cooperation is highly dependent upon investigators conducting a non-confrontational and conversational interview with an individual, as opposed to interrogating him or her.

Generally, people want to talk. They usually want to get their side of the facts out and understood by others, even investigators. They want someone to understand that if they helped to make or conceal an illegal payoff, it was only because of pressure to make in-time deliveries and to hit sales targets. Or because they felt that it was okay because everyone else was doing the same thing. Employees and other witnesses won’t say these things in what they perceive as a paper-tiger, company-authorized interrogation, but they often will say it in a conversation with investigators whom they rightly perceive as trying to flesh out not only the facts, but also the motivations for – and contexts of – their actions.

This tremendous difference, then, in approaching and obtaining cooperation from human witnesses is an important one that is probably largely unrealized by C-suiters commissioning probes of their organizations. Companies paying for internal investigations ought to be cognizant of the fact that outside counsel often has to take a different and more difficult tack than law enforcement in getting information and evidence from the people involved.

Pilot Flying J Response Not Quite Right

by admin on April 25, 2013 in Blog with No comments

Clevelanders have seen much more of Jimmy Haslam over the past eight months than they could have expected. In addition to him holding forth on rebuilding the Browns, he has been heard from the crucible of an unfolding FBI and IRS investigation of his company, Pilot Flying J.  As a result – and perhaps more than anywhere else in the country save for Knoxville – people here have been exposed to a good bit more of Haslam’s leadership style. While straightforward and blunt, it is also slightly behind the curve when it comes to the internal investigations component of a vigorous compliance and ethics program.

As detailed in the preceding post, Pilot – one of the largest privately-held companies in the U.S. – was raided by FBI and IRS agents last week after whistleblowers within the company came to law enforcement with allegations of fraud in the administration of the company’s trucking fuel rebate program. Purportedly, its employees have schemed to withhold discounts from customers in order to boost company profits and their own sales commissions since 2008.

The scam allegedly included routinely altering spreadsheets to lower the rebates owed customers and systematically blaming computer glitches for shorted rebates, if and when they were discovered by fuel buyers. It also contemplated implementing a two-tiered pricing structure that would impose higher prices on customers not sophisticated enough to detect the practice. Haslam is alleged to have been present for at least one meeting where these practices and the new program were discussed.

Last Friday, he denied that the company has been involved in any wrongdoing, indicated the company would to cooperate with the government probes, and that Pilot would initiate its own internal investigation of the matter. Yesterday, Haslam provided an update on Pilot’s response to the fraud contentions and the events of the previous week while striking a more thoughtful and measured tone.

In the video of a press conference held at Pilot’s headquarters that accompanied a story by the Knoxville News Sentinel, Haslam listed five steps that the company is taking in the wake of search warrant executions by the FBI and IRS and disclosures about investigations by those agencies. These steps are (1) having internal audit look for over-billings and other billing “loopholes”; (2) placing several direct sales team members on administrative leave; (3) having the Systems, Technology, Process, and Sales department(s) do away with manual fuel transactions; (4) establishing the position of Chief Compliance Officer who will report to Haslam as the CEO; and (5) begin an independent internal investigation of the fuel rebate fraud matter utilizing a special outside investigator. While all five of these reactive measures would be and are standard, there are some problems with the motivation for them and their implementation.

Presumably because of their derogatory language toward customers and their larger implication in the alleged fuel rebate fraud scheme, Pilot placed sales staffers on administrative leave pending the results of the government and internal investigations. It would seem prudent that because Haslam has been implicated as a participant in rebate fraud discussions at sales meetings, he too should be placed on administrative leave – from the CEO’s desk and the board – until vindicated or otherwise. This could be done voluntarily or by board action, but in either case it would protect at least the appearance of fairness and independence as regards the internal probe about to be launched. It is also not too late to do so, as the independent investigator is not due in place until next week.

Then there is Pilot incorrect perspective on the fifth of the five responses to be taken by Pilot as reflected in Haslam’s comments at 8:25:

“We would have done all four of those if there was no outside investigation. That’s just good business practices (sic). That’s how we do things here at Pilot Flying J. The fifth thing, we had a board meeting yesterday and our board members and I agreed that we would bring in a special outside investigator – I don’t know if that’s the proper term or not, but you all follow what I’m saying – to run an independent investigation, if you will, of everything that did or did not transpire here. They (sic) will report to the board of directors – not to me – and I think that’s an outstanding idea.”

This seems to support the notion in many corners that best practices take a while longer to trickle down in privately-held companies than in publicly-traded ones. The notion still prevalent in some “C” suites that the compliance and ethics standards and practices demanded of public companies somehow does not apply to private ones is simply wrong. The United States Sentencing Guidelines don’t differentiate.

What does not seem to be understood here, is that an internal investigation should not be triggered only in response to a government one. If the goal of the USSG is self-policing, then Pilot’s commissioning of an independent investigation should be one of those things lumped in with the first four steps: things done “if there was no outside investigation.” Even if the fuel rebate fraud allegations arose internally and remained entirely so, an independent investigation would have still been called under those circumstances.

Pilot Flying J and other privately-held companies should take note.

Private Equity Investors and the Lesson of Pilot Flying J

by admin on April 22, 2013 in Blog with No comments

From trucking company front offices to ticket holders in the bleachers of the Cleveland Browns’ notorious “Dawg Pound” to governors’ mansions around the country, many people sat up and took notice when the FBI raided the corporate offices of Pilot Flying J last week. In the wake of CEO Jimmy Haslam III’s promise of cooperation with authorities and the launching of a vigorous parallel internal investigation into suspected fuel-rebate fraud at the privately-held company, equity groups – such as London-based, shareholder CVC Capital Partners Ltd. – should take steps to ensure that these commitments are kept.

Across the many forums for compliance and ethics discussions, a common thread can invariably be found. That recurring theme is the complaint that C-suiters or the board or the GC generally don’t want the unvarnished truth about their operations. Whether it is for the more noble purpose of protecting company value for investors or the less noble purpose of protecting their own images, anecdotal evidence points to a large number of corporate leaders that do not really want arms-length internal investigations or the bad news and PR that may flow from them; assertions of vigorous C&E programs and top-down buy-in notwithstanding.

This may be particularly so in privately-held companies where the good and bad motivations of the preceding paragraph may converge in what could be a fatally-perfect storm for internal investigations. While there is certainly no evidence of that at this stage of the Pilot matter, consider the dangers of whitewashed internal probes in circumstances such as the one now playing out in Tennessee.

Pilot is one of the largest privately-held companies in the U.S., operating a tremendous largest chain of truck stops across in North America and serving roughly 3,300 trucking customers. Among other services offered to its customers, Pilot generally agrees to pay fuel rebates based on volume purchases and other variables. Last week the FBI and IRS agents conducted a raid in order to execute search warrants for evidence of irregularities and possible fraud in the administration of that fuel rebate program.

According to an initial Wall Street Journal report, the recently-unsealed affidavit for the search warrants contains assertions that Pilot employees engaged in a scheme to deceptively withhold discounts from customers, in order to boost company profits and their own sales commissions, beginning back in 2008. That year was a particularly tough one for over-the-road carriers, as trucking-company failures soared 54% to 3,065 – the highest number in a 10-year period – according to an American Trucking Associations report.

In furtherance of the supposed scam, a top company sales director allegedly altered spreadsheets to lower the rebates owed customers on a routine basis and if caught, employees were instructed to blame computer glitches for shorted rebates. In addition, the affidavit asserts, sales employees discussed the potential for “a new internal Pilot two-tiered pricing structure that would impose higher prices on less sophisticated customers.” Supposedly this scheme and these practices were discussed at high-level meetings, including one attended by Jimmy Haslam, who is the company’s CEO, owner of the Cleveland Browns, and the brother of Tennessee’s governor, Bill Haslam.

A follow-up Wall Street Journal story noted that Standard & Poor’s had downgraded the corporate credit rating on Pilot last July from “BB-plus” to “BB with a stable outlook”, citing the company’s plans to issue $1.1 billion in additional debt and use part of the proceeds to provide a sizable dividend to its shareholders. S&P said it viewed the financial-risk profile of the company as “significant because its owners’ influence could impede credit quality despite good cash flows and ‘adequate’ liquidity.” S&P also reassessed Pilot’s financial policy as “very aggressive” from “aggressive” because, it said, “the proposed transaction represents the second sizable debt-funded dividend within the past 18 months.” A week later, Jimmy Haslam agreed to buy the Cleveland Browns for $1 billion.

At a news conference at Pilot’s Knoxville headquarters last Friday, Haslam denied that the company has been involved in any wrongdoing and assured the public of the its integrity. “Our first value every day around here is to do the right thing. It doesn’t occur to us to do things any other way, and any conduct otherwise is intolerable,” he said. Haslam stated that the government’s investigation “is focused on a very narrow band of a very large company –
questions about how rebates were handled to a very small percentage of our trucking company customers.” Today, he indicated once again that the company would continue to cooperate with the FBI and IRS probes and is initiating its own internal investigation of the matter.

And that is where CVC Capital Partners Ltd. ought to come into play. While it may have no independent financial exposure – and its own corporate or like structure provides yet another layer of insulation against incarceration and other pain for its own principals – the investment hit that it is going to take is very real and possibly very substantial.

As has been seen in a number of cases on the FCPA front, costly enforcement actions are not limited to publicly-traded companies, and the exposure of high-earning, high-profile private ones such as Pilot to prying government eyes and subsequent punishment for running afoul of the law is real. In light of the foregoing, minority shareholders such as CVC Capital Partners should mimic the actions of the audit committees and compliance departments of their publicly-traded brethren and demand of investigators the plain truth – however ugly and unpopular with the business units that it may turn out to be – about what happened with the fuel rebate program at Pilot Flying J.

Paradigm Shift for Investigations and Their Costs?

by admin on April 17, 2013 in Blog with No comments

The law generally moves at a glacial pace. It took the U.S. Supreme Court roughly 235 years to determine in Heller and McDonald that the Second Amendment says that individuals can keep and bear arms. That’s a long time to confirm that written words – when given their ordinary meaning as required for statutory interpretation – mean what they say. Change to the practice of law frequently comes at a similar pace, although that is being altered with respect to the engagement and payment of outside counsel by corporate lawyers. This could spur an important alteration of the template for internal investigations.

Catherine Dunn over at Corporate Counsel recently penned a very interesting article entitled “Can Outside Firms Get Over the Discount Mentality?” that focused on the pitfalls of outside firms discounting their fees as a means of pleasing corporate clients and retaining business. With the economic pinch being felt across all sectors of the economy, the boom years for legal billing have reached their end. At a law school conference in North Carolina recently, General Counsel Jim Strother of Wells Fargo told Reuters that after a company review of expenses, it expect[s] to have a meaningful reduction in outside counsel expense.”

According to the article, Legal Executive Leadership CEO Susan Hackett has some tough love for law firms left wondering how they’ll make do with like-minded clients. She disapproves of their “discount mentality” of doing business that compels them to convince themselves that a client’s reduction in legal spend[ing] is a one-time occurrence and dealing with the situation not by making lasting changes but by deciding to suck it up, offer a discount on hourly billing rates, and take a hit ‘ to revenues.

This is wrong to Hackett, because the cuts are here to stay. As a result, these are really discount requests, but a message about “creating a business model that gets more nimble and more effective every year, as opposed to assuming that next year, maybe [there] won’t [be such] cuts.” Otherwise, unless an outside law firm can afford to take a hit every year, it’s won’t survive.”

As Dunn points out, these cuts are being and will continue to be made because corporate legal departments have schooled themselves in their options. Many are willing to jettison exclusive arrangements with “legacy-relationship firms,” in favor of firms that “are able to offer them better service for better price,” according to Hackett. They can also outsource tasks to a growing number of alternative legal services providers and/or can in-source, by hiring more on-staff attorneys to do the work.

General counsel are also more likely now to be aware of the true value of farmed-out work. Brian Lee, a managing director at CEB, a global corporate consultancy, says that his firm is “seeing more general counsel use metrics and big data with regard to not only how much outside counsel cost, but also potentially the ways in which they use them.”

How might – or should – this impact internal investigations?

By all accounts, internal probes – whether conducted in-house or by outside counsel – aspire to be unbiased fact-finding missions. Indeed, the need for the perception – if not the actuality – of independence is the prime mover behind the growth of corporate investigations as a big-money practice area among the mega-firms. But law firms in this niche seem to be selected not only for their investigative expertise, but also for their contacts and negotiating abilities with the DOJ, SEC, or other agencies. Hence, the predominance of big-firm heavy-weights with AUSA bona fides in this practice area.

For the sakes of accuracy, economy, and holding true to the aims of the U. S. Sentencing Guidelines, consider an alternative universe where the GC’s office drives the investigation bus from start to finish. In such a world, corporate law departments would:

• identify and triage all incidents giving rise to investigations;
• determine which to handle in-house – either by lawyers, security people, HR staffers, or others – and which to farm to outside counsel;
• preliminarily scope investigations projects;
• vet and engage suitable external counsels, provide them with liaisons and access to the company as needed, and then give them carte blanche to do their thing;
• interact with investigators, re-scope probes as necessary, and monitor progress throughout their terms;
• receive the investigative report and determine next steps; and
• self-report to the government as necessary and negotiate – alone or with litigation counsel – an enforcement resolution to the problem.

Doing so would not only bolster the true independence and credibility of investigations in the eyes of government agencies, but it would also improve corporate efficiencies in relation to the same. The taking of more active pre- and post-investigation roles by corporate legal departments would reduce the involvement of outside counsel in matters not strictly investigative, and thereby save money in line with the desires of management.

Further, this would spur investigations projects that are smaller in scope at the beginning and expanded – only if necessary – when developments mandate the same. This would likely result in the retention and use of smaller investigative teams at the outset and the realization of savings consistent with that economy. Costs would grow only as the inquiries broadened, thereby improving budget management. By way of analogy, instead of sending the U.S. Army to reconnoiter every problem, the GC’s office would send a SEAL Team that can do the same work while always retaining the option of calling in reinforcements.  This, too, would increase efficiency and improve the bottom line.

Just something to think about while tightening the old corporate belt.

Focus for Next Rutgers Investigation

by admin on April 9, 2013 in Blog with No comments

Amidst the fallout for the administration and athletic staff at Rutgers in the wake of the Mike Rice affair becoming known to the public, the school is about to commission another investigation – presumably by additional outside counsel – into the matter. This will be the second time that the school is examined by an independent set of eyes and the focus will surely be the same, but the personnel different.

According to the seminal Outside the Lines story on the Rutgers scandal by ESPN, Athletic Director Tim Pernetti first watched video of Rice’s unique practice behavior on November 26, 2012. Pernetti claimed in his resignation letter of last Friday that his gut told him to fire the men’s basketball coach on the spot, but he then consulted – and properly so – with his boss, University President Robert L. Barchi; Interim General Counsel John B. Wolf; and several human resources employees. Together, they decided to hire John P. Lacey, a northern New Jersey lawyer and former federal prosecutor, to conduct an independent investigation to determine whether Rice had violated any university policies and/or the terms of his employment contract with the school.

On Nov. 27, Pernetti met with Lacey, who was given a copy of the video and his assignment. Seventeen days and 52 pages later, Rutgers had the results.

The report made it clear that Lacey concluded Rice’s behavior violated Rutgers policy barring workplace violence: “In sum, [I] believe there is sufficient evidence to find that certain actions of Coach Rice did ‘cross the line’ of permissible conduct and that such actions constituted harassment or intimidation within Rutgers’ Policy, Section 60.1.13.” That policy is Rutgers’ Workplace Violence Policy, in which “behavior [that] would be interpreted by a reasonable person as being evidenced (sic) of intent to cause physical harm to individuals or property” is prohibited.

Lacey wrote that “due to the intensity with which Coach Rice engaged in some of the misconduct, [I] believe that AD Pernetti could reasonably determine that Coach Rice’s actions tended to embarrass and bring shame or disgrace to Rutgers in violation of Coach Rice’s employment with Rutgers.” He also concluded that Rice violated other terms of his five-year contract that would pay him $700,000 for the 2013-14 season that were added after previous disciplinary issues came to Pernetti’s attention.

While Lacey found that Rice “did engage in certain conduct that went beyond mere cursing, including occasions where [he] used coarse, inappropriate and insulting language during practices and workouts, verbally attacked players in a manner outside the bounds of proper coaching, shoved and grabbed players on multiple occasions and engaged in other boorish and immature behavior,” it did not violate additional university policies – including Rutgers’ anti-bullying policy – and that the coach’s conduct “did not create a ‘hostile work environment’ as that term is understood in connection with anti-discrimination and anti-harassment policies.”

Speaking with Pernetti nearly every day about the progress of his inquiry, Lacey interviewed six players, one former player, a former player who transferred from Rutgers, all of Rice’s assistants and other support personnel in the basketball program, Rice himself, self-proclaimed whistleblower Eric Murdock, Pernetti, and a sports psychologist whom Pernetti consulted earlier this year. In addition, he reviewed nearly 50 hours of videotaped practices – roughly half of all practice time – during the coach’s tenure.

Interestingly, Lacey’s investigation also found that most players didn’t mind Rice’s tactics and that they understood that their coach was throwing basketballs at them and shoving them and screaming obscenities at them in a bid to make them better. They told Lacey that Rice “cared” about them and that they had bought into his practice philosophy that he was attempting to make them “comfortable” in the “chaos” of a basketball game.

In light of all of this, the problem for Rutgers was not and is not the response to the reports about Rice’s behavior. Contrary to the clucking of media tongues about Pernetti’s triaging of the situation and actions in light of the same, the athletic director did what is and should expected of organizations in light of compliance and ethics standards and practices. He should not be pilloried for undertaking the internal probe of the men’s basketball program instead of summarily discharging Rice.

Pernetti’s action or inaction and that of other school administrators – Barchi, Wolf, and Mark Hershhorn, chairman of the school’s Board of Governor’s Committee on Intercollegiate Athletics – in the wake of the Lacey report, however, should be subject to inquiry at this juncture. Indeed, a New York Times article and an NBC Sports report indicate that the university is poised to engage additional outside counsel to do just that.

The coming probe will in turn determine whether any of these administrators violated university policies or their own contractual obligations in how they dealt with Rice after the completion of the Lacey investigation. A factor in this may be the possibility – raised by AOL in an online video report – that the coach’s earlier punishment was colored by Rutgers’ then-pending application to join the Big 10 Conference and a desire not to rock that very lucrative boat. It’s a possibility or contributing factor that should certainly be explored in no small detail.

Regardless of whether breaches of required conduct are found or not, Barchi’s acknowledgement in a press conference that – while he was fully briefed on Rice’s actions and suspension – he had never seen the 30-minute video of his coach’s antics until last week, is particularly confounding. Citing a busy administrative schedule and the organizational need to rely upon the advice and counsel of underlings as a justification for not giving the evidence at least the once-over seems a poor excuse for his ignorance of the situation.

As the adage goes, those who do not learn from history are doomed to repeat it. In claiming justifiable ignorance, Barchi may be mimicking the error of Penn State’s Graham Spanier, much to his school’s detriment and chagrin.

Compliance vs. Ethics in Internal Investigations

by admin on April 4, 2013 in Blog with No comments

Compliance and ethics are supposedly siblings in the family of doing the right organizational thing. But they are not identical twins. Each speaks to a different mindset and theoretically, one can be in compliance without being ethical, while one probably cannot be ethical without being in compliance. If companies ought to be both, shouldn’t the outside counsels they hire to conduct internal investigations aspire to be the same, particularly in the realm of interviewing employees?

In a very excellent post on the International Compliance Association blog entitled “A tale of two cultures: Compliance and Ethics”, Mushtaq Dost writes of the differences between these two notions. He writes that:

“[w]ithin the corporate governance environment, compliance means obeying the law. Ethics is the intent to observe the spirit of the law, in other words, it is the express intent to do the right thing: protecting our customers, behaving respectably in the markets and preserving public confidence, and exhibiting a cooperative attitude which enables financial crime to be fought efficiently.

Despite a significant level of investment in compliance by companies, the frequency of major compliance failures and transgressions continue to grow. We have seen many recent examples where corporate troubles have ensued from a culture of setting [behavioral] standards at a purely compliance level with the rules: The `as long as it is legal` approach.”

For authority on this position, Dost cites to Michael Josephson of the Josephson Institute of Ethics in Los Angeles, who has written that:

“The culture of an organization can generally be characterized as either rules-based or values-based.

A purely compliance culture tends to be rules-based[;] meaning the rule itself is the ultimate basis of decisions. This invites a legalistic orientation where obedience to the letter of the law is the objective (i.e., if it’s legal[,] it’s ethical). In a rules-based culture, it’s quite enough that employees know and follow the rules. In a rules-based culture there is a minimalist attitude – just do what is required – and efforts to “bend” the rules or make strained but plausible interpretations of the rules to justify desired conduct can result in behaviors that are legal but undesirable (i.e., lawful but awful).

In contrast, an ethical culture is values-based, dominated by core ethical beliefs and convictions (i.e., values about what is right and good) which underlie each rule or policy. Thus, rules and policies are interpreted and applied in relation to traditional ethical values such as honesty, respect, fairness and responsibility and while employees are expected to know and follow rules and policies they are expected to make a good faith effort to honor the spirit (i.e., purpose) of the rules as well as the letter.

In a values-based ethical culture an employee is expected to understand that there is a difference between what there is a right to do and what is right to do. [That is, to] understand that conduct is not necessarily proper just because it is permissible and that ethics sometimes requires doing more than is required to do and less than is allowed.”

According to Josephson, the choice for individual employees or business units is “Can I?” in a compliance-based culture, whereas it is “Should I?” in an ethics-based culture. Which tack is – or should be – mandated by corporate morality, law enforcement, and common sense? Contrary to what business units might say, the latter it should be the latter.

In terms of economy, the latter choice may also make long-term business sense. If the “Can I?” mentality leads to pushing the envelope, and if pushing the envelope leads to crossing impermissible lines, then resulting costs – investigations, fines, disgorgements, re-tooling, re-training – and whatever enforcement agency comes a-calling likely spurs the company on toward developing the “Should I?” culture that could have been had and would have been preferable in the first place.

What does any of this have to do with the people who are brought in to conduct internal investigations? Well, they should be as stand-up as the clients that they serve, and that should require them to be ethics-based, too.

Consider this in the context of interviewing of employees during a company’s probe of itself. In “Corporate Miranda warnings and the FCPA”, colleague Tom Fox writes

“In the FCPA context, I have pondered about what are not only the rights of those being investigated but also the obligations of those persons conducting an investigation, particularly if the results of the investigation will be turned over to the DOJ and may form the basis of a criminal enforcement action. Put another way, even if the company attorneys handling the investigation provided the now standard corporate attorney Upjohn warnings, how does a company attorney asking questions morph into a de facto federal agent during an internal company investigation regarding alleged FCPA violations and is the attorney thereby required to provide a Miranda warning to employees during a FCPA investigation? Do they have right to counsel?

Employees who are subject to being interviewed or otherwise required to cooperate in an internal investigation may find themselves under the dilemma of requiring either (1) cooperating with the internal investigation or (2) being fired for failure to cooperate by providing documents, testimony or other evidence. Many U.S. businesses mandate full employee cooperation with internal investigations or those handled by outside counsel on behalf of a corporation. These requirements can exert a coercive force, often convincing employees to act contrary to their personal legal interests by disclosing wrongdoing to corporate counsel.”

So what is the investigating attorney to do when he or she knows that questions and answers are putting a cooperative employee in the cross-hairs of a criminal indictment of other legal action? And what of the employee whom they know is unaware of this risk and trusting in the beneficence of his or her employer and its counsel?

It would seem that in a compliance-based culture – and so long as the law allows it – to hell with the employee. Service to the client to the fullest extent permitted by the rules is what pays the bills and what the client expects. Or does it? Maybe there is an ultimately quantitative value to be placed on compassion, corporate loyalty, and doing the right thing. Asking “Should we throw this employee to the wolves?” is an inquiry rooted in an ethics-based culture and one that has an easy answer for a business oriented in that manner.

To a company operating from such an ethics-based framework, the practice of investigating lawyers informing an employee of his or her possible exposure to criminal liability – if and when that becomes apparent – and the advisability of seeking the advice of counsel before proceeding further is the right thing to do. And if the DOJ or anyone other agency won’t give credit for being careful around an employee’s Fifth Amendment rights, it would seem that there is a larger problem with compliance and ethics.

← Older Entries