Executive Beware: The SEC Now Wants To Police Unet
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Posted On: 06/27/2014 9:22:40 AM
Executive Beware: The SEC Now Wants To Police Unethical Corporate Conduct
SEC Do you know it when you see it? Unethical corporate behavior that is. It’s more than a flip question, since Securities & Exchange Commission Chair Mary Jo White declared last October that the agency would take a “broken windows” approach to enforcement and go after “even the smallest infractions,” along with the big stuff. White was U.S. Attorney in Manhattan in the mid 1990s when New York City’s police department famously adopted that approach, which is based on the notion that if you ignore the little stuff (e.g.broken windows), it creates an environment of disorder and disregard for rules, which leads to even more serious crime. From what I’ve seen of corporate crimes and culture, White’s approach makes a lot of sense— so long as the SEC doesn’t get carried away, as New York City did with its aggressive stop-and-frisk practies. In the following guest post, BakerHostetler partner John Carney, a former federal prosecutor and SEC counsel, and firm associate Jenna Felz, provide background on federal efforts to regulate corporate ethics and guidance on what corporations should do now to prepare themselves for this era of ethics-cop-on-the-beat enforcement. Carney last wrote for Forbes on the SEC’ s new “RoboCop” for spotting possible accounting fraud
Executive Beware: The SEC Now Wants To Police Unethical Corporate Conduct
By John Carney and Jenna Felz
With the appointment of Chairwoman Mary Jo White, President Obama made clear that a tough cop would run the Securities Exchange Commission (SEC) and make enforcement a top priority. This pro-enforcement, “tough cop,” stance is nothing new to an agency with a storied history of investigating and civilly prosecuting some of the biggest frauds on Wall Street. But what is new is the Chairwoman’s tactical decision to redeploy significant enforcement resources on small, non-criminal violations. Chairwoman White underscored the importance of the SEC’s role as “tough cop” especially in cases “when there is no criminal violation,” declaring that the SEC “is the only agency that can play that role.” These bold statements signal the SEC’s renewed focus on policing not only illegal, but also unethical, conduct.
Big violations are easy to define and the bad actors most always know they are engaging in wrongdoing, but what constitutes a small violation worthy of the costs and ramifications of a federal civil prosecution? Where will the SEC draw that blurry line between conduct that is unlawful versus merely unethical? Or, in the eyes of the SEC, is the largely undefined concept of unethical corporate financial behavior always unlawful? If so, then are we seeing the dawn of an ethics-based enforcement program?
This article addresses the importance of defining and identifying unethical corporate conduct, the pitfalls that can result from unethical behavior, and best practices for creating an environment of ethical corporate compliance.
Corporate Ethics: A Brief History
The focus on ethics in corporate operating procedures is a trend that has grown over the last few decades. This growth has largely been driven by the passage of and amendments to three major pieces of legislation: the Foreign Corrupt Practices Act (FCPA), the Federal Sentencing Guidelines (FSG), and the Sarbanes-Oxley Act of 2002 (SOX Act).
The FCPA, passed by Congress in 1977, marked the beginning of prosecuting unethical corporate conduct. It was passed in response to Congress’s realization that a massive number of American companies were engaged in the unethical practice of bribery overseas. It criminalized illegal and questionable payments to foreign government officials, and required publicly traded companies to maintain records that accurately and fairly represent the company’s transactions.
The Federal Sentencing Guidelines, established by the U.S. Sentencing Commission in 1991 and amended in 2004, took the concept of policing and punishing unethical compliance even further. In 2004, Chapter 8 of the FSG, which applies to organizations, was amended to include for the first time the word “ethics.” The FSG now require companies to comply with “ethics” in two distinct ways: (1) create “compliance and ethics” programs, and (2) “otherwise promote an organizational culture that encourages ‘ethical’ conduct and a commitment to compliance with the law.” A compliance and ethics program is defined as “a program designed to prevent and detect criminal conduct.”[ii]
The guidelines incentivize corporations to institute compliance and ethics programs, the adoption of which may be used as a mitigating factor in assessing fines for the corporation’s criminal conduct. In amending the FSG, the Sentencing Commission made clear that it would credit companies that are compliant in practice, not just on paper. Underscoring this concept, the Sentencing Commission noted that Enron had “a fully compliant ethics program. . . . on paper and not in reality.”[iii] While not clearly defining the standard of ethical behavior, the FSG urge organizations to comply with more than the basic legal requirements; to consider what organizations should do to promote an ethical environment, as opposed to what they must do to avoid fines and imprisonment.[iv]
The Sarbanes-Oxley Act requires public companies to adopt a “code of ethics” designed to deter criminal behavior and to promote “honest and ethical conduct.” Notably, the SOX Act requires public companies to develop and publish a separate code of ethics solely for senior financial officers. Non-complying companies must publicly report their reasoning. The Act defines a code of ethics as written standards that are reasonably designed to deter wrongdoing and promote: (1) honest and ethical conduct; (2) full, fair, accurate, timely, and understandable disclosure in reports and documents that a company files with, or submits to, the SEC and in other public communications made by the company; (3) and compliance with applicable government laws, rules and regulations.[v] Similar to the FSG, the SOX Act encourages honest and ethical conduct but does not elaborate on its definition.
Defining Unethical Behavior
As shown above, relevant rules and legislation in the corporate context strongly discourage unethical behavior but fail to define such conduct beyond its common meaning. The Merriam-Webster Dictionary defines “unethical” behavior as “not conforming to a high moral standard.” Clearly corporate bribery, insider trading, and intentional manipulation of financial results are both unlawful and unethical, but what about lesser misconduct? If a permissible, but highly aggressive, accounting treatment is employed to enhance financial reporting results, is the result legal but unethical because of the underlying motivation? Moreover, even if the acts in question technically comply with the law, does the unethical behavior violate the spirit of the law and expose the individual or entity to the unwanted consequences of a government investigation or shareholder suit?
Consider the following examples:
In the mid-2000s, the SEC investigated dozens and dozens of companies for backdating trades as part of executive compensation to attract the best talent to their companies.[vi] Backdating often involved granting an “in-the-money” option, or an option with an exercise price lower than that day’s market price. In so doing, companies misrepresented the date of the option grant to make it appear as if the option was made on an earlier date when the market value was lower. This allowed the person receiving the option to realize larger potential gains without the company reporting it as compensation on financial statements. While the SEC investigated dozens of companies, it brought only a handful of cases. The SEC’s limited prosecution begs the question: was the conduct really illegal, merely unethical, or neither? The results are unclear.
In 2002, Motorola, Inc. was under SEC investigation for allegedly selectively disclosing specific statistics about its quarterly sales loss during private telephone calls with sell-side analysts, but only disclosing vague information to the public. While the SEC never commenced an enforcement action, it did publicly announce that the conduct was “inconsistent” with the federal securities laws. By investigating and publicly reporting on allegedly “inconsistent” but legal behavior, was the SEC really policing an ethical line?
Most recently, in 2013, the SEC conducted an investigation into the City of Harrisburg, Pennsylvania for the potential liability of public officials with regard to disclosure obligations in the secondary market. The SEC found that Harrisburg officials publicly released statements and financial information that omitted or misstated material information about Harrisburg’s deteriorating financial condition and credit ratings downgrades, in violation of the antifraud provisions of the Securities Exchange Act of 1934 (Exchange Act). While the SEC brought an action against the city of Harrisburg, it declined to bring charges against the individual officials involved. Was this because their conduct of causing the misstatements was merely unethical, but not illegal?
In the above examples, the SEC initiated an investigation into allegedly offending behavior and decided not to prosecute the individuals and sometimes the companies. While the conduct did not rise to the level of a civil or criminal action, the SEC found the behavior sufficiently troubling to merit a formal investigation, and the companies and individuals bore the time, expense, and unwanted publicity of the SEC’s scrutiny.
Why Do Corporate Ethics Matter?
Many of the negative effects caused by criminal behavior similarly may apply to unethical behavior in a corporation. Ethically questionable behavior, when unchecked, can lead to a host of consequences for a company:
•government investigation and/or prosecution and fines
•negative corporate reputation
•loss of valuable employees
•decrease in productivity and efficiency
•damage to brand
•damage to customer base
• harm to stock price
• increased employee fraud
• worsened communications between management and employees
• high legal costs
Creating a corporate culture and framework that is capable of identifying, preventing and punishing unethical behavior is critical to preventing these negative consequences.
Best Practices For Creating An Ethical Culture
Creating an ethical corporate culture has a multitude of benefits. Organizations that have robust ethical compliance programs, cooperate with government investigations, and accept responsibility can reduce federal fines by up to 95%.[vii] Establishing an ethical culture involves far more than just memorializing an ethical compliance program, and requires the active participation of every member of the organization, from upper management to the most junior employee.
Create an effective ethical compliance program. As each organization is different, a cookie-cutter approach to creating an ethical compliance program simply will not work. It is essential that management tailor any program to its organization. But there are several key factors that researchers and practitioners alike have identified as successful.[viii]
•Employees’ perception that the organization has “shared values.” The term “shared values” has been defined as “the shared set of norms and beliefs that guide individual and organizational behavior.”[ix] Studies have shown that clearly articulated organizational values make a significant difference in the lives of employees, as well as to an organization’s success.[x] A concerted effort by management to articulate the overarching values that guide the organization, through success and failure, helps the employee to understand the context and potential far-reaching consequences of his or her own unethical actions.
•The “tone” of the organization. Setting an ethical “tone” for an organization involves promoting the organization’s set of shared values at each level of management. It is of utmost importance that executive leaders embody the values the organization wishes to promote, as they represent the “face” of the organization. It is also equally important that middle management actively exemplify those values, as most employees have more daily contact with middle management than do executive leaders.
•The system of communication within the organization. An effective system of communication between employees and management is perhaps the most important element of an effective ethical compliance program. Whistleblowers who fear retribution for reporting unethical behavior are less likely to report corporate wrongdoing. Ensuring an effective system of communication involves several factors, including: (1) the opportunity and frequency in discussing compliance and ethics issues, (2) employee willingness to bring bad news forward, (3) managerial follow-through, and (4) a system for rewarding good behavior.[xi]
Second, strengthen management integrity. “Integrity capacity” is the individual and collective capability for the repeated alignment of moral awareness, deliberation, character, and conduct that demonstrates balanced judgment, enhances ongoing moral development, and promotes supportive systems for moral decision making.[xii] Enhancing management’s integrity capacity is crucial to fostering a more ethical workplace. One best practice is to train management to avoid compartmentalizing unethical acts and instead deal with ethical issues in a holistic manner, considering the implications that one unethical act can have on every aspect of the business. Another is to empower employees of all levels to participate in the corporate governance process, and take ownership of their own actions and the actions of their fellow employees.
Other recommendations:
•Expand and strengthen ethics training programs. Host training programs for employees of all levels, and provide a forum for discussions in which employees can voice ethical concerns and suggest potential courses of action.[xiii]
•Get trustworthy legal advice. Especially in the financial industry, institutions rely on their lawyers to determine what is and is not legally permissible. Soliciting legal advice from a trusted source that understands the business and, more importantly, the industry’s regulatory structure, is essential.[xiv]
•Engage in regular internal audits. Independent, internal audits designed to expose white-collar crime should be a regular practice. Independent auditors must have direct access to the ethics officer and general counsel in the event any wrongdoing is discovered.[xv]
•Enforce ethics violations strictly and consistently. Establish a system that punishes violators of all titles and rank equally for unethical and illegal conduct. Make all employees aware of the potential consequences that result from engaging in illegal or unethical conduct.[xvi]
In an era of increasing regulatory scrutiny, the line between unethical and illegal conduct is blurring. Even if the unethical conduct is technically legal, the consequences can often be just as damaging as if it were illegal. Until regulatory bodies or the courts better define “unethical” behavior, it will remain very difficult to identify the fine line between conduct that is merely unethical versus illegal. Until then, instituting a universal ethical framework tailored to a company’s individual needs, enforced by a system of internal checks and balances, may be the best way to prevent the unintended consequences of unethical conduct.
John Carney, a former federal prosecutor and SEC counsel, is a partner at BakerHostetler who regularly serves as outside ethics and compliance counsel to corporations. Jenna Felz is an associate in BakerHostetler’s New York office.
U.S. Sentencing Guidelines Manual § 8B2.1(a)(2) (2013). [ii] U.S. Sentencing Guidelines Manual § 8B2.1 cmt. n. 1 (2013). [iii] Public Hearing Held by the Ad Hoc Advisory Group on Organizational Sentencing Guidelines 60 (2002) (Testimony of Dr. Stuart Gillman, former President of the Ethics Resource Center) [iv] See Paul Fiorelli & Ann Marie Tracey, Why Comply? Organizational Guidelines Offer a Safer Harbor in the Storm, 32 J. Corp. L 467, 484 (2007). [v] Sarbanes-Oxley Act of 2002 § 406, 15 U.S.C. § 7264 (2002). [vi] Wall Street Journal, The Perfect Payday [vii] See Paul Fiorelli & Ann Marie Tracey, supra note 4, at 467. [viii] See id. at 485 (citing Lynn Sharp Paine, Managing for Organizational Integrity, 72 Harv. Bus. Rev. 106, 111 (Mar.-Apr. 1994); Linda Klebe Treviño et al., Managing Ethics and Legal Compliance: What Works and What Hurts, 41 Cal. Mgmt. Rev. 131 (1999); Paul Fiorelli, Will U.S. Sentencing Commission Amendments Encourage a New Ethical Culture Within Organizations?, 39 Wake Forest L. Rev. 565 (2004)). [ix] See id. (citing Linda Klebe Treviño et al.,Managing Ethics and Legal Compliance: What Works and What Hurts, 41 Cal. Mgmt. Rev. 131 (1999)). [x] See, e.g., Shared values make a difference: An empirical test of corporate culture, 24 Hum. Res. Mgmt. 3, 293-309 (Fall 1985). [xi] See Paul Fiorelli & Ann Marie Tracey, supra note 4, at 485. [xii] See J.A. Petrick & J.F. Quinn, The Integrity Capacity Construct and Moral Progress in Business, 23 J. of Bus. Ethics 1, 3-18 (2000). [xiii] See Thomas Lalla, Easy Steps to Keep Unethical Behavior at Bay, Inside Counsel, Sept. 24, 2012, [xiv] See Andrew Ross Sorkin, Honesty that Benefits All, N.Y. Times, Nov. 12, 2013, at F10. [xv] See Lalla, supra note 18. [xvi] See id.
The 10 Biggest Frauds In Recent U.S. History
1 of 11
Our Take On The 10 Biggest Frauds In Recent U.S. History
Our Take On The 10 Biggest Frauds In Recent U.S. History
We looked at investor losses, Securities & Exchange Commission and Department of Justice enforcement actions and private lawsuits, as well as societal impact, to come up with our picks for the ten biggest frauds in the U.S. of the past quarter century.
http://www.forbes.com/sites/janetnovack/2014/...e-conduct/
SEC Do you know it when you see it? Unethical corporate behavior that is. It’s more than a flip question, since Securities & Exchange Commission Chair Mary Jo White declared last October that the agency would take a “broken windows” approach to enforcement and go after “even the smallest infractions,” along with the big stuff. White was U.S. Attorney in Manhattan in the mid 1990s when New York City’s police department famously adopted that approach, which is based on the notion that if you ignore the little stuff (e.g.broken windows), it creates an environment of disorder and disregard for rules, which leads to even more serious crime. From what I’ve seen of corporate crimes and culture, White’s approach makes a lot of sense— so long as the SEC doesn’t get carried away, as New York City did with its aggressive stop-and-frisk practies. In the following guest post, BakerHostetler partner John Carney, a former federal prosecutor and SEC counsel, and firm associate Jenna Felz, provide background on federal efforts to regulate corporate ethics and guidance on what corporations should do now to prepare themselves for this era of ethics-cop-on-the-beat enforcement. Carney last wrote for Forbes on the SEC’ s new “RoboCop” for spotting possible accounting fraud
Executive Beware: The SEC Now Wants To Police Unethical Corporate Conduct
By John Carney and Jenna Felz
With the appointment of Chairwoman Mary Jo White, President Obama made clear that a tough cop would run the Securities Exchange Commission (SEC) and make enforcement a top priority. This pro-enforcement, “tough cop,” stance is nothing new to an agency with a storied history of investigating and civilly prosecuting some of the biggest frauds on Wall Street. But what is new is the Chairwoman’s tactical decision to redeploy significant enforcement resources on small, non-criminal violations. Chairwoman White underscored the importance of the SEC’s role as “tough cop” especially in cases “when there is no criminal violation,” declaring that the SEC “is the only agency that can play that role.” These bold statements signal the SEC’s renewed focus on policing not only illegal, but also unethical, conduct.
Big violations are easy to define and the bad actors most always know they are engaging in wrongdoing, but what constitutes a small violation worthy of the costs and ramifications of a federal civil prosecution? Where will the SEC draw that blurry line between conduct that is unlawful versus merely unethical? Or, in the eyes of the SEC, is the largely undefined concept of unethical corporate financial behavior always unlawful? If so, then are we seeing the dawn of an ethics-based enforcement program?
This article addresses the importance of defining and identifying unethical corporate conduct, the pitfalls that can result from unethical behavior, and best practices for creating an environment of ethical corporate compliance.
Corporate Ethics: A Brief History
The focus on ethics in corporate operating procedures is a trend that has grown over the last few decades. This growth has largely been driven by the passage of and amendments to three major pieces of legislation: the Foreign Corrupt Practices Act (FCPA), the Federal Sentencing Guidelines (FSG), and the Sarbanes-Oxley Act of 2002 (SOX Act).
The FCPA, passed by Congress in 1977, marked the beginning of prosecuting unethical corporate conduct. It was passed in response to Congress’s realization that a massive number of American companies were engaged in the unethical practice of bribery overseas. It criminalized illegal and questionable payments to foreign government officials, and required publicly traded companies to maintain records that accurately and fairly represent the company’s transactions.
The Federal Sentencing Guidelines, established by the U.S. Sentencing Commission in 1991 and amended in 2004, took the concept of policing and punishing unethical compliance even further. In 2004, Chapter 8 of the FSG, which applies to organizations, was amended to include for the first time the word “ethics.” The FSG now require companies to comply with “ethics” in two distinct ways: (1) create “compliance and ethics” programs, and (2) “otherwise promote an organizational culture that encourages ‘ethical’ conduct and a commitment to compliance with the law.” A compliance and ethics program is defined as “a program designed to prevent and detect criminal conduct.”[ii]
The guidelines incentivize corporations to institute compliance and ethics programs, the adoption of which may be used as a mitigating factor in assessing fines for the corporation’s criminal conduct. In amending the FSG, the Sentencing Commission made clear that it would credit companies that are compliant in practice, not just on paper. Underscoring this concept, the Sentencing Commission noted that Enron had “a fully compliant ethics program. . . . on paper and not in reality.”[iii] While not clearly defining the standard of ethical behavior, the FSG urge organizations to comply with more than the basic legal requirements; to consider what organizations should do to promote an ethical environment, as opposed to what they must do to avoid fines and imprisonment.[iv]
The Sarbanes-Oxley Act requires public companies to adopt a “code of ethics” designed to deter criminal behavior and to promote “honest and ethical conduct.” Notably, the SOX Act requires public companies to develop and publish a separate code of ethics solely for senior financial officers. Non-complying companies must publicly report their reasoning. The Act defines a code of ethics as written standards that are reasonably designed to deter wrongdoing and promote: (1) honest and ethical conduct; (2) full, fair, accurate, timely, and understandable disclosure in reports and documents that a company files with, or submits to, the SEC and in other public communications made by the company; (3) and compliance with applicable government laws, rules and regulations.[v] Similar to the FSG, the SOX Act encourages honest and ethical conduct but does not elaborate on its definition.
Defining Unethical Behavior
As shown above, relevant rules and legislation in the corporate context strongly discourage unethical behavior but fail to define such conduct beyond its common meaning. The Merriam-Webster Dictionary defines “unethical” behavior as “not conforming to a high moral standard.” Clearly corporate bribery, insider trading, and intentional manipulation of financial results are both unlawful and unethical, but what about lesser misconduct? If a permissible, but highly aggressive, accounting treatment is employed to enhance financial reporting results, is the result legal but unethical because of the underlying motivation? Moreover, even if the acts in question technically comply with the law, does the unethical behavior violate the spirit of the law and expose the individual or entity to the unwanted consequences of a government investigation or shareholder suit?
Consider the following examples:
In the mid-2000s, the SEC investigated dozens and dozens of companies for backdating trades as part of executive compensation to attract the best talent to their companies.[vi] Backdating often involved granting an “in-the-money” option, or an option with an exercise price lower than that day’s market price. In so doing, companies misrepresented the date of the option grant to make it appear as if the option was made on an earlier date when the market value was lower. This allowed the person receiving the option to realize larger potential gains without the company reporting it as compensation on financial statements. While the SEC investigated dozens of companies, it brought only a handful of cases. The SEC’s limited prosecution begs the question: was the conduct really illegal, merely unethical, or neither? The results are unclear.
In 2002, Motorola, Inc. was under SEC investigation for allegedly selectively disclosing specific statistics about its quarterly sales loss during private telephone calls with sell-side analysts, but only disclosing vague information to the public. While the SEC never commenced an enforcement action, it did publicly announce that the conduct was “inconsistent” with the federal securities laws. By investigating and publicly reporting on allegedly “inconsistent” but legal behavior, was the SEC really policing an ethical line?
Most recently, in 2013, the SEC conducted an investigation into the City of Harrisburg, Pennsylvania for the potential liability of public officials with regard to disclosure obligations in the secondary market. The SEC found that Harrisburg officials publicly released statements and financial information that omitted or misstated material information about Harrisburg’s deteriorating financial condition and credit ratings downgrades, in violation of the antifraud provisions of the Securities Exchange Act of 1934 (Exchange Act). While the SEC brought an action against the city of Harrisburg, it declined to bring charges against the individual officials involved. Was this because their conduct of causing the misstatements was merely unethical, but not illegal?
In the above examples, the SEC initiated an investigation into allegedly offending behavior and decided not to prosecute the individuals and sometimes the companies. While the conduct did not rise to the level of a civil or criminal action, the SEC found the behavior sufficiently troubling to merit a formal investigation, and the companies and individuals bore the time, expense, and unwanted publicity of the SEC’s scrutiny.
Why Do Corporate Ethics Matter?
Many of the negative effects caused by criminal behavior similarly may apply to unethical behavior in a corporation. Ethically questionable behavior, when unchecked, can lead to a host of consequences for a company:
•government investigation and/or prosecution and fines
•negative corporate reputation
•loss of valuable employees
•decrease in productivity and efficiency
•damage to brand
•damage to customer base
• harm to stock price
• increased employee fraud
• worsened communications between management and employees
• high legal costs
Creating a corporate culture and framework that is capable of identifying, preventing and punishing unethical behavior is critical to preventing these negative consequences.
Best Practices For Creating An Ethical Culture
Creating an ethical corporate culture has a multitude of benefits. Organizations that have robust ethical compliance programs, cooperate with government investigations, and accept responsibility can reduce federal fines by up to 95%.[vii] Establishing an ethical culture involves far more than just memorializing an ethical compliance program, and requires the active participation of every member of the organization, from upper management to the most junior employee.
Create an effective ethical compliance program. As each organization is different, a cookie-cutter approach to creating an ethical compliance program simply will not work. It is essential that management tailor any program to its organization. But there are several key factors that researchers and practitioners alike have identified as successful.[viii]
•Employees’ perception that the organization has “shared values.” The term “shared values” has been defined as “the shared set of norms and beliefs that guide individual and organizational behavior.”[ix] Studies have shown that clearly articulated organizational values make a significant difference in the lives of employees, as well as to an organization’s success.[x] A concerted effort by management to articulate the overarching values that guide the organization, through success and failure, helps the employee to understand the context and potential far-reaching consequences of his or her own unethical actions.
•The “tone” of the organization. Setting an ethical “tone” for an organization involves promoting the organization’s set of shared values at each level of management. It is of utmost importance that executive leaders embody the values the organization wishes to promote, as they represent the “face” of the organization. It is also equally important that middle management actively exemplify those values, as most employees have more daily contact with middle management than do executive leaders.
•The system of communication within the organization. An effective system of communication between employees and management is perhaps the most important element of an effective ethical compliance program. Whistleblowers who fear retribution for reporting unethical behavior are less likely to report corporate wrongdoing. Ensuring an effective system of communication involves several factors, including: (1) the opportunity and frequency in discussing compliance and ethics issues, (2) employee willingness to bring bad news forward, (3) managerial follow-through, and (4) a system for rewarding good behavior.[xi]
Second, strengthen management integrity. “Integrity capacity” is the individual and collective capability for the repeated alignment of moral awareness, deliberation, character, and conduct that demonstrates balanced judgment, enhances ongoing moral development, and promotes supportive systems for moral decision making.[xii] Enhancing management’s integrity capacity is crucial to fostering a more ethical workplace. One best practice is to train management to avoid compartmentalizing unethical acts and instead deal with ethical issues in a holistic manner, considering the implications that one unethical act can have on every aspect of the business. Another is to empower employees of all levels to participate in the corporate governance process, and take ownership of their own actions and the actions of their fellow employees.
Other recommendations:
•Expand and strengthen ethics training programs. Host training programs for employees of all levels, and provide a forum for discussions in which employees can voice ethical concerns and suggest potential courses of action.[xiii]
•Get trustworthy legal advice. Especially in the financial industry, institutions rely on their lawyers to determine what is and is not legally permissible. Soliciting legal advice from a trusted source that understands the business and, more importantly, the industry’s regulatory structure, is essential.[xiv]
•Engage in regular internal audits. Independent, internal audits designed to expose white-collar crime should be a regular practice. Independent auditors must have direct access to the ethics officer and general counsel in the event any wrongdoing is discovered.[xv]
•Enforce ethics violations strictly and consistently. Establish a system that punishes violators of all titles and rank equally for unethical and illegal conduct. Make all employees aware of the potential consequences that result from engaging in illegal or unethical conduct.[xvi]
In an era of increasing regulatory scrutiny, the line between unethical and illegal conduct is blurring. Even if the unethical conduct is technically legal, the consequences can often be just as damaging as if it were illegal. Until regulatory bodies or the courts better define “unethical” behavior, it will remain very difficult to identify the fine line between conduct that is merely unethical versus illegal. Until then, instituting a universal ethical framework tailored to a company’s individual needs, enforced by a system of internal checks and balances, may be the best way to prevent the unintended consequences of unethical conduct.
John Carney, a former federal prosecutor and SEC counsel, is a partner at BakerHostetler who regularly serves as outside ethics and compliance counsel to corporations. Jenna Felz is an associate in BakerHostetler’s New York office.
U.S. Sentencing Guidelines Manual § 8B2.1(a)(2) (2013). [ii] U.S. Sentencing Guidelines Manual § 8B2.1 cmt. n. 1 (2013). [iii] Public Hearing Held by the Ad Hoc Advisory Group on Organizational Sentencing Guidelines 60 (2002) (Testimony of Dr. Stuart Gillman, former President of the Ethics Resource Center) [iv] See Paul Fiorelli & Ann Marie Tracey, Why Comply? Organizational Guidelines Offer a Safer Harbor in the Storm, 32 J. Corp. L 467, 484 (2007). [v] Sarbanes-Oxley Act of 2002 § 406, 15 U.S.C. § 7264 (2002). [vi] Wall Street Journal, The Perfect Payday [vii] See Paul Fiorelli & Ann Marie Tracey, supra note 4, at 467. [viii] See id. at 485 (citing Lynn Sharp Paine, Managing for Organizational Integrity, 72 Harv. Bus. Rev. 106, 111 (Mar.-Apr. 1994); Linda Klebe Treviño et al., Managing Ethics and Legal Compliance: What Works and What Hurts, 41 Cal. Mgmt. Rev. 131 (1999); Paul Fiorelli, Will U.S. Sentencing Commission Amendments Encourage a New Ethical Culture Within Organizations?, 39 Wake Forest L. Rev. 565 (2004)). [ix] See id. (citing Linda Klebe Treviño et al.,Managing Ethics and Legal Compliance: What Works and What Hurts, 41 Cal. Mgmt. Rev. 131 (1999)). [x] See, e.g., Shared values make a difference: An empirical test of corporate culture, 24 Hum. Res. Mgmt. 3, 293-309 (Fall 1985). [xi] See Paul Fiorelli & Ann Marie Tracey, supra note 4, at 485. [xii] See J.A. Petrick & J.F. Quinn, The Integrity Capacity Construct and Moral Progress in Business, 23 J. of Bus. Ethics 1, 3-18 (2000). [xiii] See Thomas Lalla, Easy Steps to Keep Unethical Behavior at Bay, Inside Counsel, Sept. 24, 2012, [xiv] See Andrew Ross Sorkin, Honesty that Benefits All, N.Y. Times, Nov. 12, 2013, at F10. [xv] See Lalla, supra note 18. [xvi] See id.
The 10 Biggest Frauds In Recent U.S. History
1 of 11
Our Take On The 10 Biggest Frauds In Recent U.S. History
Our Take On The 10 Biggest Frauds In Recent U.S. History
We looked at investor losses, Securities & Exchange Commission and Department of Justice enforcement actions and private lawsuits, as well as societal impact, to come up with our picks for the ten biggest frauds in the U.S. of the past quarter century.
http://www.forbes.com/sites/janetnovack/2014/...e-conduct/
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