Over the next several weeks, LEVICK Daily will share selected interviews from our recent NACD Directorship article entitled “What’s Next? The Top Issues of 2013 and Beyond.” Today, we feature a discussion of civil and criminal litigation and investigations with Gregory Little, a Partner in the New York office of White & Case.
Mr. Little is a trial lawyer who counsels clients on successfully avoiding, resolving, and winning litigation. He has broad commercial litigation experience, with an emphasis on SEC enforcement actions, securities litigation, and product liability. In addition to leading high-stakes corporate litigation strategy and serving as national coordinating counsel for Fortune 10 companies, Mr. Little has been lead trial counsel in over 45 trials in state and federal courts nationwide.
At the conclusion of the interview, you can find LEVICK’s own communications best practices appended.
How is Dodd-Frank implementation most dramatically affecting director liability issues?
Gregory Little: There are many provisions in Dodd-Frank that impact director liability. The provision that has the most potential impact is the SEC whistleblower bounty program. This program authorizes the SEC to pay monetary awards to whistleblowers who provide information that relates to violation of the federal securities laws and results in sanctions exceeding $1 million. The monetary awards are significant and can range from ten to 30 percent of the total amount of sanctions recovered. The whistleblower bounty program has been described by the SEC as a "game changer." That description could prove to be an understatement. At its peak, the SEC has announced it was receiving 7-9 tips per day. That number likely will increase dramatically once payments have actually been made and publicized.
What trends stand out most to you in the area of SEC enforcement?
Gregory Little: There are several trends that stand out in the area of SEC enforcement that could directly impact directors. In the past several years, the SEC has been involved in a number of high-profile insider trading cases. Many of the allegations involved evidence of directors of public companies providing material nonpublic information to friends and business associates. Insider trading cases, of course, have been around for years. However, recent cases have demonstrated that the SEC is working more closely with the Department of Justice and taking full advantage of the DOJ's ability to bring criminal actions and seek enhanced investigatory powers like wiretaps and informants.
At the other end of the spectrum, the SEC has also announced a willingness to pursue civil cases in which defendants are accused of negligence only. Traditionally, the SEC pursued individuals engaged in intentional misconduct leading to investor losses. By pursuing negligence-based claims, the SEC will increase the number of potential targets to include those who had no intent to deceive investors but simply did not act in a reasonable manner. If a business decision results in significant shareholder loss, there may be a tendency to view all actions and disclosures surrounding that decision as unreasonable. The bottom line is the SEC will potentially be bringing more claims with a significantly reduced burden of proof. This new focus will reinforce the need for robust compliance programs.
How can boards of directors best serve a company in the midst of a civil or criminal investigation?
Gregory Little: In most investigations, there are three distinct phases that require three distinct approaches. In the beginning stages of the investigation, every effort should be made to demonstrate to investigators that the company intends to be part of the solution – not part of the problem. Whether it is the SEC, the DOJ, or a state attorney general, regulators and prosecutors are very quick to make a determination as to whether your company is truly committed to solving a perceived problem or perpetuating it.
If the investigation proceeds to the second stage where the regulators and/or prosecutors believe a problem exists, the company should make an objective assessment as to whether that is the case and, if so, demonstrate why that problem is an aberration in an otherwise strong compliance program. If the board concludes that the regulators and/or prosecutors are wrong about whether the problem exists, the company should work closely with them to explain why the conclusion is erroneous.
Finally, if the regulators/prosecutors are apparently committed to moving forward with an enforcement action, the company must be prepared to show it is committed to winning in court. Even if the company ultimately decides to resolve the dispute, the willingness and ability to pose a vigorous defense will enhance the negotiating posture of the company.
BEST COMMUNICATIONS PRACTICES:
1. New whistleblower rules have changed the game. Boards must ensure that all employees know every channel by which they can report compliance issues internally, before they turn to the government.
2. Companies are naturally reticent to aggressively communicate on compliance. But the more they do, the more they condition the marketplace, investors, and regulators to give them the benefit of the doubt should trouble arise.
3. When it becomes clear that an investigation will result in charges, boards must ensure that companies articulate their willingness to aggressively defend against dubious allegations. At the very least, they strengthen their position at the bargaining table by doing so.
This post is excerpted from Richard Levick’s recent NACD Directorship feature “What’s Next? The Top Issues of 2013 and Beyond.” To read the full article and learn more about the most significant issues impacting boardrooms today, click here.