The Justice Department will begin rewarding companies who claw back pay from employees involved in white-collar crime in a bid to improve corporate culture that thrusts prosecutors onto new and legally ambiguous terrain.
Deputy Attorney General Lisa Monaco announced this month that prosecutors—in evaluating a company’s compliance program to determine potential charges for crimes such as securities fraud or bribing international officials—will begin assessing whether it financially penalizes employees “whose direct or supervisory actions or omissions contributed to criminal conduct.”
DOJ’s objective is to deter corporate crime by pushing clawback policies into the mainstream, after they’ve applied in far more limited circumstances in recent decades, said Monaco’s deputy, Marshall Miller, in a recent speech. Gaining traction will hinge on the willingness of companies to enforce a policy that could ease the chance of legal peril but expose them to potential employee suits, particularly from those who can’t be proven culpable or who work overseas.
“In practice it’s going to be a much more challenging task than it sounds like it would be in the memo, especially given the cross-jurisdictional nature of many of these criminal cases,” said Laura Perkins, a former DOJ fraud section supervisor who’s now the co-managing partner at Hughes Hubbard & Reed.
Monaco’s memo, which will be fleshed out in guidance that she’s instructed the Criminal Division to develop by year’s end, leaves open whether the department expects financial penalties to apply to those with less direct involvement in a crime or won’t actually be indicted. It’s also unclear how much sensitivity prosecutors will show to a company’s liability to lawsuits alleging they weren’t entitled to dock salary or bonuses, especially under more worker-friendly international laws.
“I think what DOJ is saying is you can’t just roll over” when facing “the inevitable employee lawsuit, particularly outside the US,” said Ryan Rohlfsen, co-chair of Ropes & Gray’s anticorruption practice and former senior trial attorney at the DOJ criminal fraud section’s FCPA unit. “There’s an expectation that companies will be pursuing those cases and defending themselves.”
Rohlfsen predicts the department will “likely be reasonable in considering lower-level employee lawsuits where the cost of litigation far exceeds the amounts in dispute” or in countries with “exceptionally” worker-friendly labor laws.
Certain companies, such as those with a European presence, already have clawback policies to comply with laws mandating they reach deferred compensation arrangements—which can be rescinded from wrongdoing executives.
While the US generally lags behind other countries in adopting such requirements , the Securities and Exchange Commission (SEC) is working to finish long-stalled rules stemming from the 2008 financial crisis that would ensure executives return funds they are overpaid when a company publishes incorrect information in its financial statements.
Monaco’s wide-ranging corporate crime policy encouraged businesses to offer positive financial incentives, such as making compliance-promoting behavior a benchmark in employee performance reviews.
Still, it’s the punitive aspect that’s spurred more questions from white-collar defense attorneys and former prosecutors.
For instance, while Monaco stated the policy will “align the interests of the C-suite with the interests of the compliance department,” some lawyers are skeptical that it will affect senior executives when lower-to-mid level employees are historically more likely to be found culpable.
CEOs and other top executives have frequently avoided charges brought against their subordinates in past corporate crime cases. Although other elements of DOJ’s new white-collar playbook are designed to yield evidence enabling more indictments of senior-ranked individuals, until that pans out, the clawbacks may only reach those much lower down the chain, several defense attorneys said.
The memo directs prosecutors to look for compensation systems that “enable penalties to be levied against current or former employees, executives, or directors.” But in practice, the word executive can be applied loosely, such as at banks with multiple “vice presidents.”
“It’s usually the middle managers that are in trouble, not CEOs,” said Billy Jacobson, an Allen & Overy partner and former manager in DOJ’s fraud section. “They’re at the pointy end of the stick most often” so DOJ is likely “thinking to a large degree about middle managers on up.”
If the department extends clawback expectations to supervisors and others without the same level of culpability, then enforcing the clauses will get trickier for companies.
“Do you have to be charged?” said Dwight Draughon, a former federal prosecutor who’s now a partner at Steptoe & Johnson LLP. “Do you have to be somebody for which the prosecution determined there was enough to charge even if they decided not to? Will it be something that’s more subjective that the company can make a determination? That’s something that will need to be ironed out.”
Given the prospect of a more lenient deal from prosecutors in a future DOJ investigation, there’s still an expectation that businesses will seek the counsel of employment attorneys to determine if they can introduce clawbacks.
“If a clawback system is not something that the company has implemented or can implement at that time, I think there needs to be some explanation” to present to prosecutors, said Katie Matsoukas, who co-chairs the white collar practice at Barnes & Thornburg. “At least they need to tell the story of how they considered it, where they came down.”
For now, the white-collar defense bar is waiting to see whether Monaco can achieve her goal of shifting corporate financial penalties from shareholders to the actual wrongdoers.
“This is an issue that has come up previously but DAG Monaco’s remarks seem to be the strongest articulation—where she directly is connecting a company’s compensation model to corporate culture,” said Kristy Greenberg, who was deputy criminal chief at the Southern District of New York before joining Hogan Lovells as a partner this month. “Whether that will be effective, it remains to be seen.”