We have previously
written about the importance of getting your investigation right before
publicly announcing the results. In other words, do not allow your CEO,
as Renault did, to go on national television and decree that three (former)
executives had foreign bank accounts filled with money from the sale of company
trade secrets, unless you have such facts in your possession. This lesson has
been recently driven home here in the US by the Oracle of Omaha, Warren Buffet
with his remarks at the time of the resignation of company executive David
As quoted in the Wall
Street Journal, on when company executive David Sokol resigned back on
March 30, Buffet said that he thought Sokol's actions were not "in any way
unlawful" when Sokol purchased stock in a company, Lubrizol, that he later
recommended that his employer, Berkshire-Hathaway, purchase. However, the WSJ
reported that this past Saturday, Buffet said that Sokol's purchases violated
the company's insider trading rules and its own Code of Conduct. Further,
Buffet was quoted as saying the company had found some "very damning evidence,
in my view" about the trades and had turned this over to the Securities and
Exchange Commission (SEC). According to today's New York Times, Sokol's lawyer
denied this claim and was quoted as saying, "At no time did Mr. Sokol violate
any law or any Berkshire policy."
What caused Buffet to
change his view on this matter? As reported in the New
York Times, on April 27 the Board of Directors "released a scathing report
accusing Mr. Sokol of misleading Berkshire about his Lubrizol trades and
violating the company's ethics and insider trading policies." In other words,
it appears that Buffet's initial statement back in March was made before the
facts had been fully investigated. Sound familiar?
So how does all of this
relate to the compliance world? We believe that there are at least three
lessons to be learned from this matter.
Aim Before You Fire Off
As with L'Affaire
Renault, we believe that a company needs to get the best handle on the
facts that it can before going public or disclosing to the SEC any allegation
of violations of US Securities Laws. Any allegation of conduct by any senior
management official, which violates US laws, must be taken seriously but a
thorough investigation must occur. Just as Renault fired off too early by
proclaiming facts that have never been found to exist, here Buffet claimed
there was nothing to be concerned about less than one month before his own
company's Board came to the opposite conclusion after an investigation.
Process and Procedure Apply to Everyone
As also noted in today's
York Times, this matter "reveals a lack of appropriate corporate governance
and controls nonetheless." My friend Francine McKenna has written an excellent
piece on this matter which is entitled, "Slippery
People: Corporate Governance at Berkshire Hathaway." One of her points
is that with the decentralized governance and control structure present at
Berkshire Hathaway, the company operates "at low levels of internal controls."
In any best practices compliance program, internal controls are a key
mechanism to detect violations. Even if a company's business model is
successful due to lack of internal controls, it may fail a compliance
examination if there is no oversight of senior executives.
What Did You Do When You Found Out?
Fairly early on in my
compliance career I heard Paul McNulty speak and provide his thoughts on how
the Department of Justice (DOJ) looks at Foreign Corrupt Practices Act (FCPA)
issues. His remarks have stuck with me. He gave his perspective on the three
general areas of inquiry the DOJ would assess regarding an enforcement action.
First: "What did you do to stay out of trouble? Second: "What did you
do when you found out?" and Third: "What remedial action did you take?"
So what did Buffet and
by extension, his company Berkshire Hathaway, do when they found out.
Initially, they announced Sokol was resigning and Buffet made the statements of
support. This is certainly not what the DOJ or SEC expect. If there is evidence
of misconduct which could violate Securities Law, they expect that the company
would self-report the incident and there would be company sanctions against the
This second point is
also critical in setting the "Tone at the Top". Buffet is viewed by many
literally as the "Oracle of Omaha" but the message he sent in his supportive
statements in March may well have sent the wrong message to company employees.
This message may have been corrected by the release of the Board report last
week and by the actions of the company going forward. However the damage may
have been done. Berkshire Hathaway may have to work very hard to remedy the
company's own internal perception now.
We can only hope that
all of this will drive home to all company's the need for rigorous enforcement
of its own Code of Conduct as a first line defense against FCPA violations.
However, this episode shows the vital role that internal controls plays in an
overall compliance program. I am always reminded of then President Reagan's
words to General Secretary Gorbachev regarding the agreement to reduce and
dismantle each country's nuclear arsenal, "Trust - but verify."
If you are in Phoenix or
San Diego, the World Check FCPA Tour will be in your city this week. Please
come out and here about the most current FCPAbest practices.
Tuesday, May 3 from 8-10
AM PDT at McCormick & Schmick's Seafood Restaurant, in Phoenix, AZ. For
information and registration details click here.
Wednesday, May 4 from
8-10 AM PDT at San Diego Marriott Del Mar: Santa Fe Ballroom, in San Diego, CA.
For information and registration details click here.
My colleague Howard
Sklar had an interesting idea. It was that he and I do a video chat each week
on the past week's stories from the world of compliance. We have begun this
journey and the results are "This Week in FCPA"; which can be
Every week, Howard and I
will get together and talk about the week's events in FCPA. This week, we talk
about the UK Bribery Act, and how companies should react; we discuss the
Johnson & Johnson deferred prosecution agreement and J&J's added
undertakings; and we discuss the recent challenges to the idea that state-owned
entities can be foreign officials. We also talk about what contract provisions
should be in every contract, and whether audit rights are a good thing or not.
Visit the FCPA Compliance and Ethics Blog,
hosted by Thomas Fox, for more commentary on FCPA compliance, indemnities and
other forms of risk management for a worldwide energy practice, tax issues
faced by multi-national US companies, insurance coverage issues and protection
of trade secrets.
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© Thomas R. Fox, 2011
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