Effective Compliance Programs Require a Commitment from the Top

Written by Jessica L. Sussman, Joseph C. Toris and Summer Law Clerk Bridget Jeong

We follow the leader wherever we go, and that applies to compliance, as well. While federal and state laws require organizations to adopt compliance programs, a low level of commitment to these compliance efforts from the highest levels of management can pose a serious threat to the implementation and sustainability of such programs. It is easy to say “we are committed to compliance,” but how do organizations put this into practice? Employees must be able to trust that their leaders are first buying into the organization’s compliance policies and are following the appropriate processes themselves.

The Occupational Safety and Health Administration (“OSHA”), which enforces the whistleblower provisions of 22 federal statutes, has published Recommended Practices for Anti-Retaliation Programs. According to the Recommended Practices, management leadership, commitment, and accountability are the first elements to effective compliance. Management can demonstrate its commitment by backing up words with actions, such as:

  • making readily available a written Code that is clear and equally applicable to everyone in the organization;
  • ensuring that there is a manager who is responsible and accountable for the enforcement of the reporting system;
  • ensuring managers have access to senior management for compliance concerns;
  • engage in a dialogue with employees to create and improve management awareness of potential issues and anti-retaliation policies and practices;
  • requiring training for senior management so that they understand their legal obligations, and are able to identify issues that may impact these obligations;
  • implementing a mechanism to accurately evaluate employees’ willingness to report concerns and the employer’s actual record of responses to the employees who report; and
  • when appropriate, publicly recognizing the positive contributions of reporting employees.

Once it is clear that the management team understands the need, benefits, and processes of a compliance program, it can effectively contribute to building awareness of the rules throughout the workplace and educating employees about the proper procedures for reporting concerns. Active leadership and commitment by senior management will reinforce the written standards and signal to employees that ethics and corporate governance are essential to the sustainability of the organization.

On June 26, 2018, Michigan State University put these principles into action when it announced the creation of a new Office of Enterprise Risk Management, Ethics and Compliance. The Office is intended to ensure the University adheres to its internal polices as well as legal and regulatory requirements. The Office is the direct result of a request from the University’s Board of Trustees to help maintain the University’s integrity and develop a culture of compliance. In connection with the new Office, Michigan State intends to hire a Chief Compliance Officer to oversee the development of an ethics and compliance program to identify, prioritize and manage risk. The COO will also develop training and communication strategies as part of the compliance program. The COO will report to the University President, but will work independently with the Board’s newly established Committee on Audit, Risk and Compliance.

Maritime Technician Exonerated in Theft of Trade Secret Case

Following a month-long trial in Hartford, Connecticut, before Chief U.S. District Judge Alvin Thompson, a jury returned a split verdict in a case charging two defendants with conspiracy and theft of trade secrets. The jury completely exonerated one of two defendants, Jay Williams, represented by Jackson Lewis, while returning guilty verdicts on certain counts against his co-defendant, and acquitting him on several other counts.

Dylan Sparks, an electrical engineer from Ardmore, Oklahoma, and Jay Williams, a maritime technician from Griswold, Connecticut, formerly worked for LBI, a military contractor from Groton, Connecticut, specializing in the fabrication of marine vessels. The company worked together with two other contractors which specialized in navigational software, Charles River Analytics (CRA) of Cambridge, Massachusetts, and Metron Scientific Solutions of Arlington, Virginia, to design, build, and test an autonomous unmanned underwater vehicle for the Office of Naval Research (ONR). After working on the program for just over a year, ONR decided to discontinue LBI’s role on the project due to technical deficiencies, missed deadlines, cost overruns, and communications issues. Sparks and Williams, who had been involved on the program from the outset, wanted to remain involved in this important ONR research effort. Just prior to the start of the expanded CRA contract, both of them left their employment with LBI and took positions with CRA.

An indictment was returned in November 2016, charging Sparks and Williams with conspiracy to steal, upload, transmit, and possess stolen trade secrets — namely, alleged proprietary photographs, diagrams, and schematics of technology alleging belonging to LBI, in violation of 18 U.S.C. §1832. Each defendant also was charged with substantive offenses under the same federal statute; Sparks with 21 separate counts of uploading, transmittal and possession, and Williams with 7 counts of possession of stolen trade secrets. The allegations involved the defendants’ use of the cloud-based software known as “Dropbox,” which was used to upload and store various photographs, drawings, and other materials in personal accounts. The defense argued that this activity was for lawful and legitimate purposes, while the government alleged that it amounted to theft and possession of stolen trade secrets. There was no evidence offered at trial that any of the alleged proprietary data was ever shared with CRA, Metron, or anyone else.

After deliberating the case for approximately 15 hours, the jury found Williams not guilty of all charges against him, and found Sparks not guilty on 9 counts, but guilty on 13 counts – – primarily involving the theft and uploading charges.

According to Paul Kelly, counsel to Williams along with Sarah Walsh (of Jackson Lewis Boston office), “As we advised the jury, this case was a glaring example of government overreach, and the prosecution taking sides in what is essentially a civil dispute between two companies. Contrary to the government’s press release, this was not a case about protecting the national security or the intellectual property of LBI. In fact, the dedicated efforts of these two individuals served to enhance the security of the nation and contributed to the advancement of an important project for the U.S. Navy and its fleet.”

Jackson Lewis will be working as co-counsel to assist co-defendant Dylan Sparks on post-trial motions, including motion for dismissal based on government misconduct for failure to disclose exculpatory evidence before and during the trial.

Effective Compliance Starts at Home: Ensuring Your Company Learns of Issues Before Everyone Else Does

The need for an effective compliance program to assist companies in preventing, detecting and, if necessary, promptly correcting issues before they become problems is nothing new. However, there is an increased focus by the government designed to induce employees to report suspected unlawful conduct by their employers to regulatory agencies. While this focus may benefit consumers and investors, it also raises the real possibility a company will first learn about an issue after an audit or enforcement action has already been commenced, and control of the situation is largely out of the company’s hands. This new era of external enforcement means that companies must place an even greater emphasis on their internal compliance programs. But where to start?

In order to create or revise a compliance program, it is important to remember the basic elements required for an effective compliance program. According to the United States Sentencing Commission Guidelines Manual, in order for an ethics and compliance program to be effective, the organization must, through its Compliance Program, “exercise due diligence to prevent and detect criminal conduct” and “otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.” To accomplish these goals, every compliance program must contain seven key elements:

  • Compliance standards and procedures reasonably capable of reducing the prospect of misconduct;
  • Specific “High-level Personnel” assigned to oversee compliance;
  • Care in delegation of authority;
  • Effective communication of standards and procedures to all employees;
  • Implementation of reasonable compliance measures, such as monitoring, auditing and reporting systems;
  • Consistent enforcement through corrective actions; and
  • All reasonable steps taken to respond appropriately after an offense has been detected.

These elements naturally leave companies a wide latitude in developing policies and mechanisms to address the particular needs of the company and industry. However, by addressing each of these elements, the company is increasing the likelihood it will learn of, and more importantly be able to address, potential issues before regulators come knocking.

Record High Awards and Supreme Court Decision Further Incent Potential Whistleblowers to Report Conduct to the SEC

On March 19, 2018, the Securities and Exchange Commission (“SEC”) announced its highest ever Dodd-Frank Act (“DFA”) bounty awards to three whistleblowers. These SEC awards represent a new milestone in the SEC’s ongoing efforts to incentivize would-be whistleblowers to report unlawful conduct directly to the Commission. Two whistleblowers will divide a nearly $50 million award and a third whistleblower received $33 million; both awards shattered the previous high award of $30 million and continue the SEC’s trend of issued rising awards.

In a press release, Jane Norberg, Chief of the SEC’s Office of the Whistleblower, said these awards demonstrate that whistleblowers can provide the SEC with information that allows the agency to pursue and remedy violations that may otherwise go unnoticed. While these awards demonstrate the role whistleblowers play in assisting the SEC, multi-million dollar awards are likely to incentivize others with high quality information to file reports with the agency.

Since issuing its first award in 2012, the Commission has awarded more than $262 million to whistleblowers who have aided in their investigations. These awards are paid by an investor protection fund that Congress created in connection with passage of the Dodd-Frank Act. The fund is financed entirely through monetary sanctions paid by securities violators to the SEC. Notably, despite the sizeable awards, this DFA whistleblower fund does not have any impact to or reduce the funds collected for the benefit of harmed investors.

While the sheer size of these awards may be enough to entice potential whistleblowers, the Supreme Court’s recent decision in Digital Reality Trust, Inc. v. Somers also provides further incentive for whistleblowers to report suspected unlawful conduct directly to the SEC, and to bypass a company’s internal reporting mechanisms (i.e. hotline). In Digital Reality, the Supreme Court held the Dodd-Frank’s anti-retaliation provision only protects from retaliation those employees who first provide information of a violation of the securities laws to the SEC. In other words, employees who merely make an internal report through a company’s reporting processes, without notifying the SEC, cannot avail themselves of the DFA anti-retaliation protections. Hence, the Digital Realty Trust decision, together with the record-setting SEC awards, will likely prompt whistleblowers of all types – those with actual concerns of wrongdoing as well as opportunistic whistleblowers, to make their reports directly to the SEC.

Now, more than ever, employers need to pay attention to their internal corporate governance programs to ensure they are effective in re-enforcing the Company’s commitment to operating ethically and according to applicable laws, make it easy for employees to know where to go if they observe unlawful activity, and promote trust in the Company’s response to issues raised.

* Darran St. Ange, Summer Law Clerk, assisted in the preparation of this post.

Retaliation Plaintiff Not a Covered Whistleblower under Plain Reading of Dodd-Frank Act, Court Rules

A former employee who failed to show he reported alleged securities law violations to the Securities and Exchange Commission (SEC), as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA), cannot claim his former employer unlawfully retaliated against him, federal Judge William J. Martini has ruled. Price v. UBS Financial Services, Inc., No. 2:17-01882 (D. N.J. Apr. 19, 2018).

To read full article please click here.

Walk the Compliance Walk in 2018

The New Year is prime time to take a look at your Code of Conduct and compliance policies both to consider whether you are up to date on all applicable requirements, but also so that you are fluent in your own processes and prepared to take prompt and compliant action when issues arise. Those policies likely already include a prohibition against unlawful harassment and a process for employees to report concerns about harassment or other possible misconduct. But policies and procedures aren’t enough without a comprehensive outlook and culture supporting equal employment opportunity. So how will you walk that walk?

The ongoing media attention on sexual harassment presents a challenge to employers across industries and sizes to ensure that they have more than just paper commitments to a harassment-free workplace.  The current climate also provides employers with the opportunity to think more broadly about what kind of company culture brand you want to convey to employees, as well as the public. As you refresh your recollection (as lawyers like to say) of your Code of Conduct and compliance policies, consider:

  • Do you clearly articulate a top-to-bottom commitment to achieving business goals and promoting a productive, positive culture?
  • Do your policies and Code properly reflect your company brand and culture?
  • Is the language of your Code and other compliance policies crafted so that employees understand them as clear and sincere?
  • Do you include and commit to effective and innovative avenues for employees to raise concerns without fear of retaliation?

With confidence in the content of those written commitments, what more will your organization do to demonstrate these commitments? Legal compliance is rooted in preventive practices. It is more important now than ever to conduct harassment prevention training. Consider innovative training platforms with content that is specifically-tailored to your organization and its different employee populations, including training for you Board of Directors and C-Suite executives.  Consider how you can weave your company brand and culture into this training so employees walk away feeling energized, not just about your commitment to anti-harassment initiatives, but about their role in the company.  Also consider whether there are opportunities to take the pulse of your employees on workplace culture concerns and incorporate those concerns into training and other preventive efforts.

If you do receive complaints, your internal investigation processes should be primed and ready to go. The best time to develop these processes are when you are not faced with an actual complaint. This “peace time” provides the opportunity to consider objectively how investigators will be assigned (e.g., HR, inside counsel, outside counsel); forms and other guidance for developing an investigation plan; factors for identifying witnesses; guidelines for investigatory interviews; goals for timelines; requirements for information gathering, review and preservation; and public relations considerations. Ultimately, the investigation will consider whether remedial action is appropriate. Again, here is where you walk the walk. While disciplining the direct actor may remedy the immediate situation, it may not satisfy the Company’s commitment to prevent future harassment. Think of your Code, policies, training and internal investigations practices holistically as they relate to and promote the organization’s EEO culture through the tone and content of employee-facing communications, responsiveness, and leading by example.

U.S. Department of Justice Reverses Hands-Off Enforcement Policy on Marijuana

Just days after retail sales of recreational marijuana became legal in California, U.S. Attorney General Jeff Sessions announced a new marijuana enforcement policy that calls for rescinding the long-standing, lenient policy set by the Obama Administration.  Now it is up to the individual U.S. Attorney’s Offices to determine whether and how to pursue criminal prosecutions in their districts.

For more information, see the article by Matthew F. Nieman and Kathryn J. Russo of Jackson Lewis, P.C. in the following link:

U.S. Department of Justice Reverses Hands-Off Enforcement Policy on Marijuana

New Chairman and Board Members Appointed to the SEC Board Created by the Sarbanes-Oxley Act of 2002

Written by Holly L. Cini and Sarah J. Ryan

The Securities and Exchange Commission recently announced the appointment of William D. Duhnke III as Chairman and J. Robert Brown, Kathleen M. Hamm, James G. Kaiser, and Duane M. DesParte as board members of the Public Company Accounting Oversight Board (PCAOB). The Sarbanes-Oxley Act of 2002 established the PCAOB to oversee public companies and broker-dealers.  The PCAOB’s activities include conducting inspections and pursuing disciplinary actions.

None of the prior President Obama-era board members were reappointed.  One departing board member noted that the SEC has never before declined to reappoint PCAOB board members who are eligible for another term.  The total replacement of the board may have been as a result of clashes between the prior board and the SEC and the accounting industry.

Chairman William D. Duhnke III has acted as General Counsel to U.S. Senate Committee on Rules and Administration and previously served in the U.S Navy.  J. Robert Brown has been teaching for 25 years and is currently a professor at the University of Denver.  Kathleen Hamm works as counsel for Promontory Financial Group, an IBM company, and previously worked at the U.S. Department of Treasury, the American Stock Exchange, and the SEC.  James Kaiser is a partner at PricewaterhouseCoopers where he has worked for 38 years.  Duane DesParte will soon retire as Senior Vice President and Corporate Controller of Exelon Corporation.  He was previously an audit partner at Deloitte & Touche.

Plans to ‘Reframe’ Title IX Enforcement Announced

The Trump Administration believes that Obama-era guidance regarding sexual assault on college campuses created a “failed system” that was a “disservice to everyone involved,” Education Secretary Betsy DeVos said on September 7, 2017. According to DeVos, “There must be a better way forward.”

Enacted in 1972, Title IX is a federal law that prohibits discrimination based on sex in the educational setting. This includes protection from sexual harassment, including sexual violence.

In April 2011, under the Obama Administration, the Department of Education Office for Civil Rights issued guidance to educational institutions across the country, known as the “Dear Colleague Letter” (DCL). This DCL, in conjunction with the 2014 Q&As, stated that sexual violence is a form of discrimination under Title IX and that educational institutions had to address sexual violence in order to provide equal access to education. The DCL also set forth expectations for educational institutions in addressing sexual violence claims. Critics have said the guidance is unfair toward the accused and has created a quasi-legal system.

While DeVos made clear that the Trump Administration plans to step away from the sexual assault guidelines issued during the Obama-era, she did not announce any new policies that would be put in place immediately to help combat sexual assault on college and university campuses across the country. However, she said that, in developing rules to replace the current policy, the Department of Education would launch a notice-and-comment process to incorporate the insights of all parties and it also would seek university, legal, and medical expertise. Further, DeVos said “the era of ‘rule by letter’ is over” (apparently referring to the 2011 DCL and its subsequent guidance), and promised that the Office for Civil Rights, which is comprised of unelected officials, would stop its previous practice of issuing guidance through letters.

Jackson Lewis will continue to monitor this situation and provide updates.

New DOJ Policy Likely to Result in Increase in Forfeitures

Attorney General Jeff Sessions has announced a new Department of Justice policy regarding the federal adoption of assets seized by state or local law enforcement under state law. The new policy, issued on July 19, 2017, is intended to strengthen and streamline the civil asset forfeiture program allowing a more aggressive pursuit of asset forfeiture cases and the increased sharing of proceeds of those seizures with local law enforcement.

The asset forfeiture program encompasses the seizure and sale of assets that represent the proceeds of, or were used to facilitate crimes. In other words, federal and local law enforcement remove the proceeds of crime and other assets relied upon by criminals to perpetuate their criminal activity.  Those assets are then sold and the proceeds used to further law enforcement objectives. In some instances, the government can forfeit these assets even if there is no pending criminal charge.

In 2014, more than $5 billion was taken through the asset forfeiture program. Because of this high dollar amount and because of reported abuses of this forfeiture power, then-Attorney General Eric Holder in 2015 enacted new policies in an effort to limit asset forfeiture to the most serious illegal transactions.  This policy was intended to specifically curtail the kind of forfeiture that allowed local police to share part of their proceeds with federal authorities, otherwise known as “equitable sharing.”

Now, Sessions has reversed this two-year-old policy. He proposes to curb the abuses by expediting notice procedures and requiring that local law enforcement agencies engage in training before participating in equitable sharing.  Yet, these steps will be weighed against local law enforcement’s interest in keeping the assets they seize, a balancing test that will allow local law enforcement to circumvent tight budgets.

With equitable sharing again on the rise, it is realistic to expect forfeiture cases to continue to grow under this new policy. Jackson Lewis attorneys experienced in white collar and government enforcement matters are available to advise companies on the scope of law enforcement seizure rights, asset forfeiture, and the Mandatory Victims Restitution Act.

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