Business Crimes Hotline

The selection of monitors in deferred-prosecution agreements and non-prosecution agreements has recently generated controversy because monitorships are perceived as lucrative, no-bid contracts that are frequently awarded to former prosecutors and government lawyers. Among recent recipients of monitor jobs include former Attorney General John Ashcroft, former New Jersey Attorney General David Samson, former U.S. Attorney for the Southern District of New York David Kelley, and former U.S. Attorney for the Central District of California Debra Wong. Ashcroft's monitorship is reported to have paid him and his firm somewhere between $28 to $52 million. Among the guidance offered by DOJ is an instruction to prosecutors to consider the cost of a monitor to a corporation and its impact on the corporation's operations.

The first guiding principle discussed in the memorandum is about the selection of monitors. Prosecutors are instructed by the guidelines to discuss with the corporation the qualifications for a monitor based on the facts of the case. The monitor must be selected on the merits, and their selection must avoid potential and actual conflicts of interest. Candidates must be presented to a committee within the DOJ, and the Office of the Deputy Attorney General must approve the monitor's appointment. The guidelines also address the monitor's impartiality ' a monitor cannot have an interest in or a relationship with the corporation and the corporation, cannot employ the monitor for at least one year after the termination of the monitorship.

The memorandum also discusses guiding principles for the use of monitors and their responsibilities. Monitors must be independent third-parties whose primary responsibility is to assess and monitor the corporation's compliance with the terms of the agreement that are designed to address and reduce the risk of recidivism. The guidelines caution, however, that a monitor's responsibilities should be no broader than is necessary to address and reduce the risk of misconduct by the corporation. Any agreement governing the responsibilities of a monitor should clearly identify the types of previously undisclosed or new misconduct that the monitor must report to the government. The guidelines encourage regular communication among the government, the corporation, and the monitor. Monitors and the corporation are urged to inform the government if the corporation fails to adopt a recommendation by the monitor within a reasonable amount of time. A monitor's term should be tailored to the facts of each case and agreements with monitors should contain a provision allowing the monitor's term to be cut or extended depending on the corporation's satisfaction of the obligations under the agreement.

The Morford memorandum was released one day before the House Judiciary Subcommittee on Commercial and Administrative Law held a hearing on March 11, 2008, entitled, 'Deferred Prosecution: Should Corporate Settlement Agreements Be Without Guidelines?' In his opening statement, chairman of the House Committee on the Judiciary, John Conyers, Jr. expressed concern that additional guidance was needed to regulate the underlying deferred-prosecution agreements and non-prosecution agreements. '[D]espite the guidance the Department released just yesterday regarding use of corporate monitors in these agreements, this guidance still fails to ensure uniformity in the agreements themselves. Indeed, some agreements require the implementation of compliance programs, restitution and fines, while others do not,' said Conyers. Statement of the Honorable John Conyers, Jr., Deferred Prosecution: Should Corporate Settlement Agreements be Without Guidelines? (Mar. 11, 2008), available at http://judiciary.house.gov/OversightOpeningStatement.aspx?ID=110.

SEC

SEC Proposes Anti-Fraud Rule on Naked Short Selling

The SEC proposed tougher rules to prevent naked short-selling abuses and prevent market price manipulation. In a naked short sell, the investor sells stock he has not yet borrowed. The proposed rule 10b-21 would target investors who do not deliver the securities by the delivery date and who knowingly deceive brokers about obtaining securities before initiating a short sale. The comment period for the proposal will end 60 days from the date of publication of the proposed rule in the Federal Register. SEC Press Release, http://www.sec.gov/news/press/2008/2008-38.htm.

California

SEC Settles Charges Against Broadcom's Former VP of Human Resources for Stock Option Backdatings

The SEC settled charges against Nancy M. Tullos, the former vice president of human resources at Broadcom Corporation, for her role in an options backdating plan for Broadcom employees and officers that stretched from 1998 to 2003. Tullos also allegedly personally gained $1.2 million after receiving and exercising backdated stock options. The options backdating investigation caused Broadcom to restate its financial results in January 2007 and reported an additional $2.22 billion in compensation expenses ' the largest restatement to date arising from stock option backdating, according to the SEC. Tullos has agreed to pay over $1.3 million in disgorgement and prejudgment interest, which will be offset by the value of her exercisable stock options that Broadcom cancelled. She will also pay a $100,000 civil penalty. The SEC indicated that its investigation in this matter is ongoing. SEC v. Nancy M. Tullos, No. 08 Civ. 242 (C.D. Cal. Mar. 4, 2008); Complaint, available at http://www.sec.gov/litigation/complaints/2008/comp20476.pdf.

Massachusetts

Fidelity Investments to Pay $8 Million for Improperly Accepting Gifts from Brokers

Fidelity Investments and 13 current or former employees were charged by the SEC with improperly accepting over $1.6 million gifts, travel, and entertainment from brokers seeking to trade for the mutual fund manager. Fidelity will pay $8 million to settle the charges. Fidelity was also censured by the SEC and required to retain an independent compliance consultant to review Fidelity's policies in this area. According to the SEC, among the inducements offered by brokers was a $160,000 trip to Miami that included female escorts and 'ecstasy pills,' and tickets to the Super Bowl, Wimbledon, and various other events. The SEC alleged that Fidelity failed to seek the best terms when trading for their customers because Fidelity employees favored brokers who improperly offered gifts. Fidelity employees also favored brokers with whom they had family ties and romantic relationships, according to the SEC. The settlement was the result of a three-year investigation by the SEC. SEC Press Release, http://www.sec.gov/news/press/2008/2008-32.htm.

DOJ

DOJ Issues Guidelines for Selection and Use of Monitors

Amid increasing scrutiny from Congress, the DOJ issued guidelines in the form of a memorandum for the selection and use of monitors in deferred-prosecution agreements and non-prosecution agreements with corporations. The guidelines set forth 'nine basic principles in the areas of selection, scope of duties, and duration' of monitorships. Craig S. Morford, Selection and Use of Monitors in Deferred Prosecution Agreements and Non-Prosecution Agreements with Corporations (Mar. 7, 2008), http://www.usdoj.gov/usao/eousa/foia_reading_room/usam/title9/crm00163.htm. The DOJ memorandum states: that 'A monitor's primary responsibility is to assess and monitor a corporation's compliance with the terms of the agreement specifically designed to address and reduce the risk of recurrence of the corporation's misconduct, and not to further punitive goals.' The new guidelines were issued by Acting Deputy Attorney General Craig S. Morford to heads of department components at U.S. Attorneys' Offices. They apply only to the selection and use of monitors by the DOJ and are only for internal guidance at the department.

The selection of monitors in deferred-prosecution agreements and non-prosecution agreements has recently generated controversy because monitorships are perceived as lucrative, no-bid contracts that are frequently awarded to former prosecutors and government lawyers. Among recent recipients of monitor jobs include former Attorney General John Ashcroft, former New Jersey Attorney General David Samson, former U.S. Attorney for the Southern District of New York David Kelley, and former U.S. Attorney for the Central District of California Debra Wong. Ashcroft's monitorship is reported to have paid him and his firm somewhere between $28 to $52 million. Among the guidance offered by DOJ is an instruction to prosecutors to consider the cost of a monitor to a corporation and its impact on the corporation's operations.

The first guiding principle discussed in the memorandum is about the selection of monitors. Prosecutors are instructed by the guidelines to discuss with the corporation the qualifications for a monitor based on the facts of the case. The monitor must be selected on the merits, and their selection must avoid potential and actual conflicts of interest. Candidates must be presented to a committee within the DOJ, and the Office of the Deputy Attorney General must approve the monitor's appointment. The guidelines also address the monitor's impartiality ' a monitor cannot have an interest in or a relationship with the corporation and the corporation, cannot employ the monitor for at least one year after the termination of the monitorship.

The memorandum also discusses guiding principles for the use of monitors and their responsibilities. Monitors must be independent third-parties whose primary responsibility is to assess and monitor the corporation's compliance with the terms of the agreement that are designed to address and reduce the risk of recidivism. The guidelines caution, however, that a monitor's responsibilities should be no broader than is necessary to address and reduce the risk of misconduct by the corporation. Any agreement governing the responsibilities of a monitor should clearly identify the types of previously undisclosed or new misconduct that the monitor must report to the government. The guidelines encourage regular communication among the government, the corporation, and the monitor. Monitors and the corporation are urged to inform the government if the corporation fails to adopt a recommendation by the monitor within a reasonable amount of time. A monitor's term should be tailored to the facts of each case and agreements with monitors should contain a provision allowing the monitor's term to be cut or extended depending on the corporation's satisfaction of the obligations under the agreement.

The Morford memorandum was released one day before the House Judiciary Subcommittee on Commercial and Administrative Law held a hearing on March 11, 2008, entitled, 'Deferred Prosecution: Should Corporate Settlement Agreements Be Without Guidelines?' In his opening statement, chairman of the House Committee on the Judiciary, John Conyers, Jr. expressed concern that additional guidance was needed to regulate the underlying deferred-prosecution agreements and non-prosecution agreements. '[D]espite the guidance the Department released just yesterday regarding use of corporate monitors in these agreements, this guidance still fails to ensure uniformity in the agreements themselves. Indeed, some agreements require the implementation of compliance programs, restitution and fines, while others do not,' said Conyers. Statement of the Honorable John Conyers, Jr., Deferred Prosecution: Should Corporate Settlement Agreements be Without Guidelines? (Mar. 11, 2008), available at http://judiciary.house.gov/OversightOpeningStatement.aspx?ID=110.

SEC

SEC Proposes Anti-Fraud Rule on Naked Short Selling

The SEC proposed tougher rules to prevent naked short-selling abuses and prevent market price manipulation. In a naked short sell, the investor sells stock he has not yet borrowed. The proposed rule 10b-21 would target investors who do not deliver the securities by the delivery date and who knowingly deceive brokers about obtaining securities before initiating a short sale. The comment period for the proposal will end 60 days from the date of publication of the proposed rule in the Federal Register. SEC Press Release, http://www.sec.gov/news/press/2008/2008-38.htm.

California

SEC Settles Charges Against Broadcom's Former VP of Human Resources for Stock Option Backdatings

The SEC settled charges against Nancy M. Tullos, the former vice president of human resources at Broadcom Corporation, for her role in an options backdating plan for Broadcom employees and officers that stretched from 1998 to 2003. Tullos also allegedly personally gained $1.2 million after receiving and exercising backdated stock options. The options backdating investigation caused Broadcom to restate its financial results in January 2007 and reported an additional $2.22 billion in compensation expenses ' the largest restatement to date arising from stock option backdating, according to the SEC. Tullos has agreed to pay over $1.3 million in disgorgement and prejudgment interest, which will be offset by the value of her exercisable stock options that Broadcom cancelled. She will also pay a $100,000 civil penalty. The SEC indicated that its investigation in this matter is ongoing. SEC v. Nancy M. Tullos, No. 08 Civ. 242 (C.D. Cal. Mar. 4, 2008); Complaint, available at http://www.sec.gov/litigation/complaints/2008/comp20476.pdf.

Massachusetts

Fidelity Investments to Pay $8 Million for Improperly Accepting Gifts from Brokers

Fidelity Investments and 13 current or former employees were charged by the SEC with improperly accepting over $1.6 million gifts, travel, and entertainment from brokers seeking to trade for the mutual fund manager. Fidelity will pay $8 million to settle the charges. Fidelity was also censured by the SEC and required to retain an independent compliance consultant to review Fidelity's policies in this area. According to the SEC, among the inducements offered by brokers was a $160,000 trip to Miami that included female escorts and 'ecstasy pills,' and tickets to the Super Bowl, Wimbledon, and various other events. The SEC alleged that Fidelity failed to seek the best terms when trading for their customers because Fidelity employees favored brokers who improperly offered gifts. Fidelity employees also favored brokers with whom they had family ties and romantic relationships, according to the SEC. The settlement was the result of a three-year investigation by the SEC. SEC Press Release, http://www.sec.gov/news/press/2008/2008-32.htm.