Originally published March 17, 2008

On Friday, March 7, 2008, the Department of Justice issued guidelines governing the selection, duties and terms of independent monitors — outside experts, usually lawyers, who oversee a corporation investigated by the government for misconduct as part of a settlement or deferred prosecution agreement. Until last week’s memo issued by Acting Deputy Attorney General Craig S. Morford, the process of selecting and utilizing corporate monitors was left to individual federal prosecutors in field offices operating without any formal guidance from the Department.

Background and Scrutiny of Recent Monitor Appointments

The use of monitors dates back to the mid-1990s, but has been steadily growing in popularity. These monitors — also called examiners, consultants, experts and compliance officers in some cases — are generally selected and paid for by the corporation with the Government’s approval. They usually have broad discretion to interview employees, review documents and make recommendations to the corporation on everything from internal compliance programs to the hiring and firing of executives and senior managers.

Because of their expansive powers, high fees (often in the tens of millions), and frequent ties to the Government (ex-prosecutors are retained more often than any others), the selection and use of monitors has come under scrutiny in recent years. In one high-profile case, former federal judge and FBI Director Louis Freeh was retained as Daimler’s monitor in a cross-border anti-corruption case. Frederick Lacey, a former federal judge and US Attorney in the same district in which the case was filed, was retained by Bristol-Myers Squibb to monitor its compliance with a deferred prosecution agreement. Former Judge Lacey frequently attended corporate board meetings and ultimately recommended the firing of the Bristol Meyer Squibb’s CEO and general counsel. More recently, the US Attorney in the same district approved the appointment of former Attorney General John Ashcroft and his consulting firm as monitor for Zimmer Holdings, a case involving resolution of anti-kickback charges under the Medicare program for payments to physicians to promote Zimmer’s medical devices, such as artificial knees and hips. Mr. Ashcroft’s engagement, with a fee potential of approximately $52 million, raised questions about conflicts of interest in the appointment of friends and former colleagues of the prosecuting attorneys.

Although the Justice Department has maintained that it had been discussing the issuance of guidelines for some time, the announcement of the guidelines came on the eve of a scheduled House Judiciary Subcommittee hearing on deferred prosecution agreements and monitors, at which Ashcroft denied any conflict of interest in his firm’s appointment.

New Principles for Selection and Use

The guidelines issued by the Justice Department are intended to assist federal prosecutors with the drafting of provisions pertaining to the use of monitors in deferred prosecution agreements and other settlements. According to the memo, a monitor’s primary responsibility is "to assess and monitor a corporation’s compliance with the terms of the [deferred prosecution] agreement specifically designed to address and reduce the risk of recurrence of the corporation’s misconduct, and not to further punitive goals." The guidance states that prosecutors should balance the benefit of a monitor to the corporation and the public with the potential costs to, and impact on, the corporation. Prosecutors are told to notify their US Attorney or department head before executing an agreement that includes a monitor, who must provide a copy of the executed agreement to the Assistant Attorney General for the Criminal Division.

Regarding selection, the guidelines state that monitors "must be selected based on the merits," but do not provide any further guidance other than to require that monitors be "highly qualified and respected," not subject to "potential and actual conflicts of interests," and able to "instill public confidence." Each US Attorney’s office and Justice Department component shall create a committee of prosecutors to consider the selection of monitors, and the Deputy Attorney General must approve those monitors selected. The memo recognizes that "attorneys, including but not limited to former Government attorneys, may have certain skills that qualify them" to be effective monitors.

The guidance relating to the duties of a monitor largely formalizes the standard practice and understanding of a monitor’s role. A monitor is "an independent third-party" whose "primary role is to evaluate whether a corporation has both adopted and effectively implemented ethics and compliance programs to address and reduce the risk of recurrence of the corporation’s misconduct." The guidelines state that the monitor’s responsibilities should not be too narrowly or too broadly defined and should be tailored to the facts of each case. The memo outlines the appropriate role of the monitor in issuing written reports to the corporation and the Government, and in making recommendations to the corporation regarding ethics and compliance issues. If the corporation does not adopt the monitor’s recommendations, the guidelines state that the Government may consider such conduct in determining whether the corporation has fulfilled its obligations under the settlement or deferred prosecution agreement. A monitor also has the discretion to report instances of new misconduct directly to the Government.

Finally, the memo addresses the duration of a monitor’s term, stating that it should be tailored to the corporation’s individual problems, and it may be shortened or lengthened depending on whether the corporation has satisfied its obligations under the settlement or deferred prosecution agreement.

Conclusion and Recommendation

The adoption of guidelines by the Justice Department should bring more clarity and consistency to the process of selecting and employing independent monitors as an alternative to prosecuting corporations. However, because the memo lacks any strong controls on the breadth of a monitor’s oversight, on the requirement of corporate compliance with a monitor’s recommendations as a condition of settlement or non-prosecution, or the fees paid to monitors, there are still many unknowns associated with a company’s agreement to a monitor provision in a settlement or deferred prosecution agreement. Some corporations may even be able to convince the Government that no monitor is necessary if the corporation has performed a full inquiry into any alleged misconduct and the company has taken steps to address weaknesses in internal controls or compliance policies that lead to the problem. When entering into a settlement or deferred prosecution agreement that includes a monitor, corporations should take care to avoid the appearance of conflicts of interest, and work to craft an agreement that narrowly tailors the scope and duration of a monitor’s responsibilities to the specific facts of the case.

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