What To Do If Your Gut Says It’s Wrong: Lessons from Project Alpha

by Thomas Fox
Contact

I often write about what can happen to companies who run afoul of the Foreign Corrupt Practices Act (FCPA). Usually enforcement actions focus on companies and not individuals. However, as is often pointed out by commentators other than Mitt Romney, corporations are not humans but consist of people. It is individuals who engage in conduct that violates the FCPA, just as it is individuals who engage in conduct which violates other US securities laws.

I was reminded of this in an article by Loren Steffy, of the Houston Chronicle, entitled “She offers cautionary tale for corporate employees”. In this article Steffy writes about Helen Sharkey, who worked for Dynegy Inc, a Houston company which was involved in energy trading and gas transportation. Sharkey was an accountant who worked on an assignment known as Project Alpha, which Steffy wrote was “a $300 million scheme that inflated Dynegy’s cash flow.”

In an interview with Steffy she told him that she was the lowest of seven employees assigned to the project. According to the Securities and Exchange Commission (SEC) Sharkey and others disregarded the company’s external auditor’s advice that certain forms of risk-hedging involving derivative instruments, such as commodity price swaps and interest rate swaps, would defeat Dynegy’s goal of accounting for Alpha as an ordinary operating contract and require recording it as a financing. As reported by Steffy, “If the banks didn’t have risk, it meant the deal was a loan and required different accounting treatment.”

While the Enron Corporation is the poster child for corporate fraud in Houston, three Dynegy employees went to jail over Project Alpha: Sharkey; Gene Foster, who was Dynegy’s Vice President of Taxation during the relevant period; and Jamie Olis, who was Dynegy’s Senior Director, Tax Planning and International. Foster received a sentence of 15 months in jail. Olis, who went to trial, received a whopping sentence of 24 years by the trial judge, although this was later reduced to six years.

What did Sharkey think about the deal at the time? As quoted by Steffy, “Did I feel in my gut that it was wrong? Absolutely. Did I think it was illegal? No way.” Unfortunately Sharkey did not apparently have a mechanism that she could use to raise this concern that was in her gut.

What are some of the lessons that current compliance practitioners can draw from Sharkey, Dynegy and Project Alpha?

Hotlines

One of the results from the actions that companies like Dynegy, Enron and others was the passage of Sarbanes-Oxley (SOX). SOX required publicly traded companies to set up anonymous hotlines to allow employees to report company wrong-doing. This is enshrined in the FCPA world as one of the Ten Hallmarks of an Effective Compliance Program as set out in the Department of Justice (DOJ)/ SEC FCPA Guidance. Under the section entitled “Confidential Reporting and Internal Investigation”, it states, “An effective compliance program should include a mechanism for an organization’s employees and others to report suspected or actual misconduct or violations of the company’s policies on a confidential basis and without fear of retaliation. Companies may employ, for example, anonymous hotlines or ombudsmen.”

Generally, employees tend to trust hotlines maintained by third parties more than they do internally maintained systems. By submitting reports through an external hotline there is a perceived extra layer of anonymity and impartiality compared to a system developed in-house. This is because there can be a fear of retaliation by employees. This fear can destroy the effectiveness of the internal reporting process and poison the corporate culture. The hotline must be seen to offer the highest levels of protection and anonymity. To encourage employee participation, the hotline should allow them to bring their concerns directly to someone outside their immediate chain of command or workplace environment – especially when the complaint concerns an immediate superior. A third party provider is also more likely to bring specialist expertise that’s difficult to match within the organization.

Failure to Escalate

In almost every circumstance where a significant FCPA compliance violation has arisen, if the issue had been reported or at least sent up the chain for consideration, there is a good chance that the incident would not have exploded into a full FCPA compliance violation. Matthew King, Group Head of Internal Audit at HSBC, calls this concept “escalation” and he believes that one of the more key features of any successful compliance program is to escalate compliance concerns up the chain for consideration and/or resolution.

This means that in almost every circumstance regarding a compliance issue he had been involved with, at some point a situation arose where an employee did not report a situation or event up to an appropriate level for additional review. This failure to escalate leads to the issue not reaching the right people in the company for review/action/resolution and the issue later becomes more difficult and more expensive to deal with in the company. A company needs to have a culture in place to not only allow escalation but to actively encourage escalation. This requires that both a structure and process for this must exist. Then the company must train, train and train all of its employees. Lastly, while a whistleblower process or hotlines are necessary these should not be viewed as the only systems which allow an employee to escalate a concern.

The starkest example of which I am aware of this failure to escalate in the FCPA arena is the Hewlett-Packard (HP) matter involving its German subsidiary and allegation of bribery to receive a contract for the sale of hardware into Russia. The Wall Street Journal (WSJ) has reported that at least one witness has said that the transactions in question were internally approved by HP through its then existing, contract approval process. That witness, Dieter Brunner, a contract employee who was working as an accountant on the group that approved the transaction, said in an interview that he was surprised when, as a temporary employee of HP, he first saw an invoice from an agent in 2004. “It didn’t make sense,” because there was no apparent reason for HP to pay such big sums to accounts controlled by small-businesses, Mr. Brunner said. He then proceeded to say he processed the transactions anyway because he was the most junior employee handling the file, “I assumed the deal was OK, because senior officials also signed off on the paperwork”.

Training

Why is training of employees regarding a hotline and the ability to escalate important in the context of an anti-corruption/anti-bribery compliance program? Training is recognized as one of the points in the Ten Hallmarks of an Effective Compliance Program and one of the elements under the US Sentencing Guideline’s Seven Elements of an Effective Compliance Program. It is also recognized in Principle 5 of the Six Principles of an Adequate Procedures compliance program as set out by the UK Ministry of Justice (MOJ). Lastly, it is recognized by the OECD in its 13 Good Practices for Internal Controls, Ethics and Compliance.

In the case of HP, think what position the company might be in today if Brunner had been trained on the company’s system for internally reporting compliance issues? If Brunner had escalated his concern that the payment to the agent “didn’t make sense” perhaps HP would not have been under investigation by governmental authorities in Germany and Russia. In the United States, both the DOJ and SEC have announced they are investigating the transaction, for potential FCPA violations. Further, HP is now investigating other international operations to ascertain if other commissions paid involved similar allegations of bribery and corruption as those in this German subsidiary’s transaction.

Dénouement

Steffy's penultimate paragraph states, “her story lends insight into one of the most enduring questions that linger from a decade ago – how corrupt corporate cultures encouraged so many who considered themselves law-abiding citizens, to commit crimes, often without realizing it.” One of the things that I emphasize in training to employees is that if their guts turns in knots, the hair on the back of their neck stands up or if something doesn’t smell right, just raise your hand. You don’t have to know the ins and outs of the FCPA, but if something does not feel right, raise your hand and get the matter to someone who does know the ins and outs of the FCPA and who can thoroughly investigate the issue that you do not feel right about. If you do not do so, you may end up like Sharkey and, as Steffy writes as the final sentence of his piece, “The one time she wavered became a mistake she’ll regret the rest of her life.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Thomas Fox, Compliance Evangelist | Attorney Advertising

Written by:

Thomas Fox
Contact
more
less

Compliance Evangelist on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.