Corporate Fraud Investigations and Compliance Programs.

• Author: Brown, H. Lowell
• Position: Brief Article - Review

Published by Oceana Publications Inc., Dobbs Ferry, N.Y., 359 pages, $110.00

A CRIMINAL investigation and prosecution can have a devastating effect on a corporation: -- Management, who themselves may face criminal prosecution, may be distracted from directing the business of the corporation;

-- Investors and creditors may become anxious;

-- Customers may lose confidence in the corporation's integrity; and

-- Employees may become demoralized, and as a consequence become less productive.

The corporation and its directors and officers may face criminal penalties (including substantial fines and imprisonment, for individuals) and civil liability from shareholder derivative claims. Even if successful in avoiding prosecution or conviction, the cost of defense may be measured in tens of millions of dollars. Corporations operating in regulated industries (e.g., broker-dealers, government contractors, healthcare providers) face the additional threat of suspension (upon indictment) and debarment (upon conviction) from doing business.

For corporations that have been subject to government investigation, the experience has been sobering. Yet many (I would dare say most) directors and managers are either unaware of or have not prepared for this area of significant legal and financial risk.

For them and for corporate counselors, Corporate Fraud Investigations and Compliance Programs is a primer. Eugene Propper, a former federal prosecutor and now a partner in the law firm of Holland & Knight, has brought his considerable experience to bear in analyzing and explaining the strategies available to corporations in responding to allegations of misconduct made either by the government or by persons inside the corporation. His book has profited from the collaboration of his colleagues at Holland & Knight, and others, who have contributed their substantial expertise in areas such as environmental law and the regulation of healthcare providers.

Indeed, the chapter concerning the corporation's vicarious liability for the acts of employees and agents, and the chapter discussing the corporate governance responsibility to investigate reports of wrongdoing, should be required reading for directors and managers of publicly held corporations. As Propper observes, the 1996 decision of the Delaware Chancery Court in In Re: Caremark International Inc. Derivative Litigation strongly suggests that a director has a personal obligation to exercise business judgment to ensure...