Most respondents on the receiving end of a government investigation would rank the experience somewhere between a root canal and a train wreck, depending on the outcome, with the root canal at the preferred end of the range. Generally, the investigation extends for years, takes up a vast amount of time, imposes considerable stress as well as financial cost, and can threaten the professional future of an individual and the corporate existence of an entity, independent of whether the investigation is justified.
Given those realities, it is difficult to imagine any upside in either the investigative process or the result.
Certainly for individuals, none leaps to mind. Charges can range from fraud to the improper exercise of professional judgment, with as many potential outcomes as there are points across the charging spectrum. Regardless, every investigation likely leaves a mark on the individuals caught up in the process.
Corporate respondents may have a somewhat different perspective. Although no entity rationally welcomes a government investigation, the resulting developments may either promise or require improvement of the company’s processes and operations.
The respondent company’s board of directors generally monitors the development of such an investigation and, at its conclusion, seeks to understand the conditions that prompted it in the first place. Management shares those same concerns, with the added emphasis that both the corporate response to the investigation and the ultimate outcome often reflect, directly or indirectly, on their managerial ability.
Because neither management nor the board wants to repeat the experience, all of that external and internal attention may well result in considerable improvements in the entity’s structure, controls, and operations.
Regulators often share with the regulated entity an interest in its self-assessment. Sometimes, in fact, regulators look to the respondent entity to identify what it has learned from the process and to formulate a concrete plan of action to address any identified or perceived deficiencies. Regulatory authorities similarly monitor—and, in fact, encourage—self-assessment, whether in the form of voluntary activity by the corporation or mandated undertakings in the resolution of the matter. Responding entities regularly begin a self-assessment even during the course of an investigation and remediate even while the investigation continues.
In the right circumstances, these efforts can favorably affect the ultimate resolution of the investigation. Some government agencies have made clear that cooperation in an investigation may have distinct, positive advantages.
As the Securities and Exchange Commission (SEC) notes, credit for cooperation in an investigation is available to both individuals and companies, and it “may range from taking no enforcement action to pursuing reduced charges and sanctions in connection with enforcement actions.” See SEC, Div. of Enforcement, Enforcement Manual §§ 6.2–6.3 (Jan. 13, 2010, with conforming revisions as of Mar. 3, 2010), available at www.sec.gov/divisions/enforce/
The SEC Enforcement Division has developed several cooperation tools. These include proffer agreements, cooperation agreements, deferred prosecution agreements, non-prosecution agreements, and immunity requests.
Although each has its own terms and conditions, the fundamental analytic framework that supports and determines the application of these tools was established in 2001 in what has become known as the Seaboard Report (Report of Investigations, Exchange Act Release No. 44,969 (Oct. 23, 2011), available at www
34-44969.htm; Enforcement Manual § 6.1.2.). That report described the several factors the commission considers in determining whether, and to what extent, it “grants leniency to investigated companies for cooperating in its investigations and for related good corporate citizenship.” Enforcement Manual § 6.1.2.
The four critical elements of the Seaboard analytical framework encompass self-policing, self-reporting, remediation, and cooperation. The concept of “lessons learned” fits well within the remediation category. There, the commission focused on, among other things, personnel decisions, enhanced internal controls, and procedures to prevent the recurrence of the misconduct.
In identifying remediation as both
a goal and a potential credit in an enforcement action, the commission’s interests reflected and aligned with good corporate practice. Similarly, the commission’s reference to internal controls reflects a primary point of attention by a company’s board of directors and management during or after a government investigation.
The company’s internal controls encompass the related areas of authorization for transactions, the flow of information through reporting lines, corporate governance, and the rational management of risk by the corporation in its relevant markets. Management and the board should view each of these elements as vital to an entity’s success.
Ownership of remedial efforts is critical. Individual persons and corporate departments must take responsibility for the successful implementation of corrective measures. In addition, compensation incentives should align to emphasize and achieve the remedial goals identified.
Most important, however, the company’s personnel have to understand that both their credibility and the entity’s credibility with the regulatory authorities depend on the successful completion of these remedial tasks.
Having survived the regulatory equivalent of a tsunami, company personnel understandably may be reluctant to revisit the facts, communications, and events that led to the government investigation in the first place. But the solution going forward is to build on the insight derived from the investigation and to integrate and act on it.
None of this, of course, takes place in a vacuum. Civil litigation, other governmental investigations, and general market conditions all can—and do—affect the response of the entity to the concluded investigation. Counsel’s ability to provide privileged advice is typically critical, and the availability of outside consulting guidance can be profoundly useful to inform and achieve the desired change in culture and operations.
Although nobody wishes for a government investigation, sustaining a proactive and constructive response to the benefits that can be achieved through an investigation can take a company to a stronger, better informed, and more balanced position in addressing market challenges.
Credible relationships with government regulators also can provide the basis for establishing confident and effective client relationships.
In these ways, “lessons learned” can, in the end, be effective and beneficial to the organization.