Last April, as a follow-up to revelations that Wal-Mart had allegedly covered up bribes paid by its Mexican subsidiary, the great Corporate Counsel reporter Sue Reisinger ran a very surprising piece. Despite the scandal engulfing Wal-Mart, defense lawyers told Reisinger that the company may have made a strategically smart decision not to disclose the matter to the government. Smart? Really? Would Wal-Mart’s alleged bribery have blown up into a public relations fiasco that cried out for governmental consequences if the company had quietly admitted the facts to the Securities and Exchange Commission or the Justice Department?
I figured Dodd-Frank’s whistle-blower provisions would make corporate self-reporting even more of a no-brainer, since insiders now have not only a moral and legal incentive but also a powerful financial motive to alert the SEC when they suspect wrongdoing. According to BuckleySandler partner Thomas Sporkin, who until last June was chief of the SEC’s Office of Market Intelligence, the commission receives 1.2 whistle-blower tips a day, on average. If I were a corporate official wondering whether to self-report, I’d assume that one of those tips was about my company and run to the feds before they came to me.
But according to several of the most prominent SEC enforcement advisers in Washington, w ho were speaking Thursday at Securities Docket’s Securities Enforcement Forum, corporations should think hard about the decision to confess their sins or handle problems internally. “You have to decide whether the issue merits the government’s involvement,” said William McLucas of Wilmer Cutler Pickering Hale and Dorr in a follow-up phone conversation Friday. Even in an era in which “you have to assume there are no secrets,” McLucas said, problems that fall short of systemic wrongdoing call for judgment, not reflexive confession. “That’s why you have compliance systems and controls,” he said.
William Baker of Latham & Watkins told me Friday that under Dodd-Frank, companies have to be wary that whistle-blowers will go to the SEC, but, like McLucas, said there is a range of problems that can be handled effectively enough in-house that even if the SEC launches an investigation, the agency will be satisfied with the company’s response. If, on the other hand, the wrongdoing involves anything that would affect public disclosures, Baker said, it must be reported. “It’s a very difficult, very nuanced decision for a company,” he said.
It’s also difficult for outside counsel, McLucas said at Thursday’s conference. If outside lawyers recommend that clients throw themselves on the mercy of the government and the government doesn’t show mercy, that’s not a good outcome for the lawyers. Clients, Baker added, also have to think about the higher cost of dealing with a government investigation rather than handling a problem internally. In a panel on the Foreign Corrupt Practices Act, former SEC FCPA enforcement chief Cheryl Scarboro of Simpson Thacher & Bartlett said that while government policy is to reward self-reporting, it’s not always clear what the benefits are. And if companies do report that they’ve made illegal payments to officials in one country, added Joseph Warin of Gibson, Dunn & Crutcher, they often find their practices in other countries under investigation.