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2 Corporate Compliance Served Two Ways: Leveraging Your Compliance Program For When the Government Comes Knocking September 13, 2016 Presented By: Farella Braun + Martel LLP Jessica K. Nall, Chair of White Collar Crime and Corporate Investigations Group Marat A. Massen, Senior Associate, Business Transactions Group Association of Corporate Counsel

3 Presenters Jessica Nall is a partner and chair of Farella Braun s white collar defense and corporate internal investigations practice group. She has conducted dozens of internal investigations for companies both large and small, public and private. She has also defended corporate individuals, including c-level executives and general counsels, in regulatory and criminal investigations relating to alleged corporate compliance failures. Marat Massen is a senior associate in Farella s Business Transactions practice group. He previously worked as a transactional associate at Skadden Arps. Marat represents private and public companies and investors in a variety of matters, including mergers and acquisitions, securities law compliance and other general corporate matters.

4 Introduction Corporate compliance continues to dominate headlines, with federal and state prosecutors and regulators aggressively pursuing cases. Government investigators increasingly focus on gatekeepers, including senior in-house attorneys and compliance officers. Our presentation addresses corporate compliance matters important to in-house counsel from two perspectives: 1. Recommendations for setting up an effective corporate compliance program consistent with best practices. 2. Practical takeaways from internal and government investigations that can help inform the construction and application of a compliance program that will best serve to protect the company from negative government intervention.

5 Our Two-Perspective Approach Focuses on Two Questions 1. Looking Ahead What are best practices for instituting and maintaining good governance and the roles of the Board, corporate officers, in house counsel and outside advisors? 2. Looking Back What can a company do in devising its compliance and governance programs to best protect against or potentially reduce the scope of a government investigation or prosecution?

6 Recent White Collar Investigations

7 Areas of Concern for In House Attorneys Source: Society of Corporate Compliance Ethics, January 2016 Poll

8 Impact of White Collar Investigations and Prosecutions Operational disruptions. Reputational harm. Stock price impacts. Derivative lawsuits. Empowering activist shareholders and increasing pressure on management and board. Proxy contests. Moral panic leading to legislative changes.

9 Investigators Focus Government investigators focus on gatekeepers (board members, compliance officers, senior legal counsel). Private company enforcement. Internal controls failures allowing financial statement fraud, corruption, asset misappropriation. Individuals: 2015 Yates Memorandum highlights DOJ focus on prosecuting individuals. To obtain cooperation credit, companies must provide information about individual wrongdoers hiring of DOJ Compliance Expert Hui Chen. Whistleblowing and Employee Protection.

10 Practical Effects of Yates Memo All or Nothing Approach to Cooperation. Considerations for Compliance Programs/Personnel Potential Impact on Internal Investigations. More Government Intervention. Privilege Issues Impacting Parallel Proceedings. Potential Conflicts of Interest Between Company and Employees. Reconsider provision of separate counsel for individuals? New Considerations re: Attorney Client Privileges and Work Product Protections.

11 SEC Emphasizing Focus On Individuals Top SEC Officials, including current SEC chair, have echoed a focus on individual accountability. Renewed enforcement focus on gate keepers compliance officers, audit committee members, independent directors, accountants, and in-house attorneys. Expectation and duty for compliance officers, directors and others to exercise effective oversight. Investigate red flag situations. No rubber stamping.

12 SEC: When Gatekeepers Go Astray In House Counsel: Charged For Involvement in Alleged Financial Reporting Fraud. (Superior Bank). Audit Committee Members: Charged For Failing to Conduct Internal Investigation and Remedy Wrongdoing. (AgFeed Industries). Charged For Untrue SOX Certification. (L&L Energy Inc.). Charged For Ignoring Findings of Internal Investigation. (MusclePharm). Outside Auditors: BDO settlement; Taylor Bean case (PwC).

13 Compliance Officers in the Crosshairs FINCEN v. Thomas Haider of MoneyGram Facing $1M personal civil penalty for failure to develop effective compliance program/failure to investigate. Privilege concerns Attorney client privilege rarely attaches. True even if COO is an attorney.

14 Today s Discussion Topics 1. Maximizing the Value of Board Committees. 2. Managing Cybersecurity and Data Privacy Risks. 3. Monitoring and Evaluating Enterprise Risks. 4. New Developments in Internal Investigations Practice. 5. Preventing Litigation and Creating Defenses.

15 The Role of In-House Counsel ü Devising and implementing corporate governance policies reflecting best practices. ü Proactively fostering culture of accountability and working with directors and officers to understand and enforce Company policies. ü Managing internal audit and compliance functions in the moment. ü Working to continuously improve the Board s relationship with management. ü Good corporate recordkeeping.

16 Board Committees Going beyond the basic requirements and focusing on making Board Committees an active part of the corporate governance structure. Committee structure and operations can be critical to successful internal investigations and crisis response. Forming special committees for investigations and lawsuits and helping members manage the process. Engaging outside legal and financial advisors. Importance of finding qualified and engaged board committee members. For private companies: balancing the need to find engaged and helpful board members with investor demands and oversight.

17 Board Committee Considerations Cyber Security/Data Protection Committees. Rotation System/Term Limits. Service on Other Boards. Outside Director Compensation Procedures. Spending time with the teams from internal audit, corporate accounting and independent auditor. Committee Member Education and Orientation. Authority to Engage Independent Counsel and Other Advisors. Review of Committee Structure. Private Company Board Committees. More flexibility than public companies Finding the right functions and members

18 Cybersecurity Assessing Current Processes and Practices. Who is Responsible? Management. Cyber Security Committee. Board. Working with Management. Outside experts. Assessing risks and identifying key vulnerabilities. Prioritizing assets and understanding risks. Other considerations. Insurance. Monitoring vendors/third parties. Rehearsing cyber events. Reviewing policies and procedures. SEC/Law Enforcement Reporting.

19 Cybersecurity Increased focus on cybersecurity as a due diligence issue in M&A transactions. Companies dealing in sensitive information: Consumer companies. Credit card processing companies. Banking and financial services. Health care industry (HIPAA). Acquirers hire experts and industry advisors to evaluate cybersecurity and network infrastructure as part of M&A process. Purchase Price and Indemnification Issues. Legal and Operational/Integration.

20 Tracking and Monitoring Enterprise Risks

21 Tracking and Monitoring Enterprise Risks Centralized vs. Decentralized. Short View vs. Long View. Who is Primarily Responsible? Management. Board Committee(s). Keeping the Board Informed. Using the review of Risk Factors analysis to facilitate discussion of risk management and mitigation internally. Working with auditors and third parties.

22 Internal Investigations A critical element of an effective compliance program. DOJ and SEC both evaluate credibility of internal investigations in determining cooperation credit. Auditors are required to evaluate investigation procedures and findings: shadow investigation. Investigations handled without outside counsel are facing increased scrutiny. Privilege concerns attach. A do-over by outside counsel may not be as effective/ credible. Increasing government involvement in internal investigations has broad implications for privilege, protection of individuals, and civil liability.

23 Internal Investigations Credibility and bang for the buck from compliance does not have to break the bank. Skilled investigation teams can devise surgical approach. Incorporate compliance assessments into your investigation work plan (control implications should not be an afterthought). Consider proactive compliance consulting. May include front-end evaluation, testing of internal controls and compliance programs.

24 Preventing Litigation and Creating Defenses. Creating and implementing corporate governance policies reflecting best practices. Being proactive: fostering a culture of accountability and working with directors and officers to understand and enforce Company policies. Managing internal audit and compliance functions in the moment. Improving the Board s relationship with management. Good Corporate Recordkeeping. Keeping Outside Advisors Effectively Informed.

25 Lessons and Takeaways Allow the application of business judgment by the Board and management. Compliance policies that employees understand and remember. Culture of compliance. You can t stop every wrongdoing but what will things look like in hindsight? (Getting the bang for your buck from compliance). Effective use of outside counsel and internal investigations.

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