59. What do you do when your board receives a subpoena or the government is investigating your company?

Ian Roffman advises boards, directors and company executives when there is trouble - a government subpoena, a whistleblower complaint, a letter or a phone call from a government regulator.  In this episode we talk about what a board and management should do when this happens - and how they can position themselves in advance for an inquiry by the government.

Big Ideas/Thoughts/Quotes:

Our guest Ian Roffman helps boards, directors and company executives when they're facing what can be a significant moment in the existence of a company. Those moments can come upon the receipt of a government subpoena, a whistleblower complaint or even something as seemingly innocuous as a letter or a phone call from a government regulator. Ian comes in to help the boards, help individual directors and help executives as they make their way through those sometimes sticky periods.

One of the most important things a company or a board can do when there is a government inquiry is to try to get its arms around the issue as soon as possible. There's a balance that boards need to strike between speed and hastiness. You want to act quickly, but not at the expense of good judgment.

The desire to ignore or push off bad news can be pretty strong, but directors have a duty to think about the steps that they need to take to reasonably make sure that they're fulfilling their duty to shareholders, employees and all of their relevant constituencies.

The SEC has said that there are the four benchmarks they will look at to evaluate whether a company and its board are good corporate citizens:

 

1.     Self-policing (did you have in place good internal controls? Did you have a good risk function? Did you have an internal audit function, etc.?)

2.     Self-reporting (was there transparency and speed in the reporting of the issue?)

3.     Remediation (whatever the problem was, did you fix it?)

4.     Cooperation (when we asked you for documents, did you give them to us? Did you also give us the documents that we didn't know to ask for? The SEC is very clear that cooperation doesn't just mean you did the things you're required to do. It means you did something extra.)

 

Even though other regulators don't use that same nomenclature, the concepts are always the same.

Question: When you get there and you see that there has been some, let's call it, avoidance or cover up, what kinds of things do you tell them to do then?

 

Answer. Often it comes from a really good place, which is that people see a problem and they try to fix it. Where it becomes a "cover up" rather than a solution is if there's a lack of transparency. Really, the key, when you identify a problem, is whether you're trying to fix it secretly versus trying to fix it transparently, and the fix might be identical, but a secret fix is a problem and a transparent fix is a solution.

 

Transparency and collaboration within an organization are among the most powerful things that companies can do to put themselves in a position to deal with regulatory inquiries.

 

Directors’ Duty of Oversight. The Marchand decision (2019) is sort of “Caremark duties on steroids.” The case involved the Blue Bell Ice Cream Company, which had a Listeria outbreak in its ice cream.  The directors were sued, with a dereliction-of-duty-type theory. The Delaware Supreme Court said that directors have an active duty to oversee the operations of the company, especially when it comes to areas of significant risk within the important areas of the company's operations. In that instance, it was food safety.  The director’s duty described in Marchand is much more active than what many boards had expected.

Whistleblowers.  It's in the company's best interest to take a whistleblower complaint seriously - so listen to what it is, look into it. If there's something to it, deal with it. If there's nothing to it, make clear to the government that there's nothing to it, but do not be dismissive of your duty.

 

Insider trading.  Insider trading investigations can be incredibly invasive because when the government is looking to see if someone engaged in insider trading, they know that people communicate on their phones and through WhatsApp, WeChat, Slack, Telegram, Snapchat and all those other apps, and so the government is going to go in and they will take your devices. They will require you to image your devices. They'll get forensic images of your device. It is incredibly invasive, and so what a company ought to do is  manage its investigative risk around insider trading.