Following the recent spate of corporate scandals, government enforcement authorities have increasingly relied upon corporate monitors to help ensure law compliance and reduce the number of future violations. These monitors also permit enforcement authorities, such as the Securities & Exchange Commission and others, to leverage their enforcement resources in overseeing corporate behavior. However, there are few descriptive or normative analyses of the role and scope of corporate monitors. This paper provides such an analysis. After sketching out the historical development of corporate monitors, the paper examines the most common features of the current set of monitor appointments supplemented by interviews with monitors. This is followed by a normative analysis that examines when it is desirable to appoint monitors and what powers and obligations they should have. Based on this analysis, we provide a number of recommendations for enhancing the potential of corporate monitors to serve a useful deterrent and law enforcement function without being unduly burdensome on corporations. This involves, among other things, discussion of the kinds of powers monitors should have and the fiduciary' duties monitors should owe to the shareholders whose businesses they are monitoring.
TABLE OF CONTENTS INTRODUCTION I. FROM MASTER TO MONITOR A. Historical Underpinnings B. RICO and Beyond C. Prudential and DOJ Memoranda II. THE PROCESS OF APPOINTING CORPORATE MONITORS AND THEIR POWERS III. ANALYSIS OF THE NEW CORPORATE CZARS A. Cash Fines versus Noncash, Monitor-Like Penalties 1. More Influential Monitors 2. Monitors More Akin To Advisors B. Monitor-Like Sanctions C. Duties for Monitors? 1. More Influential Monitors 2. Monitors More Akin to Advisors D. Back to the Past?: Comparison with Professional Director Recommendations CONCLUSION APPENDIX INTRODUCTION
Following the recent spate of corporate scandals, government enforcement authorities have increasingly relied upon corporate monitors to help ensure law compliance and reduce the number of future violations. (1) These monitors also permit enforcement authorities, such as the Securities & Exchange Commission ("SEC") and others, to leverage their enforcement resources in overseeing corporate behavior. However, there are few descriptive or normative analyses of the role and scope of corporate monitors. (2) This paper provides such an analysis.
We begin with an operative definition of corporate monitors--people appointed to supervise a firm for a certain period of time as part of a Deferred Prosecution Agreement ("DPA") or a NonProsecution Agreement ("NPA"). Such agreements are entered into by government regulators and the firms that are the subject of enforcement actions. If the firm satisfies the terms of this agreement, then prosecution can be avoided. (3) The monitor's range of influence in these agreements may be limited to only compliance issues or may extend more broadly to many (or all) aspects of the firm's operations. Further, the monitor's compensation is paid for by the firm.
With this definition in mind, we move on to Part I where we sketch the historical development of corporate monitors in order to better understand the enforcement background against which they developed. Part II then examines the most common features of the current set of monitor appointments providing us with an overview of this new enforcement mechanism. The details of these arrangements are supplemented by interviews with monitors to provide a deeper sense of how these mechanisms work. Part III follows with a normative analysis that examines when it is desirable to appoint monitors and what powers and obligations they should have. Based on this analysis, we provide a number of recommendations for enhancing the potential of corporate monitors to serve a useful deterrent and law enforcement function without being unduly burdensome on corporations. We conclude with recommendations and observations on the potential growth of the corporate monitor.
FROM MASTER TO MONITOR
Although corporate monitors are relatively recent law-enforcement innovations, they have long and deep historical roots. We begin by discussing the antecedents of the corporate monitor in order to better understand the context in which the monitor developed.
The corporate monitor of today can be traced to the special masters of the past. (4) Special masters originated in the use of adjuncts to the judiciary in English Chancery practices dating back to the early sixteenth century. (5) Thus, the use of outside supervisory resources has a lengthy historical pedigree. Moreover, the evolution of the corporate monitor follows in a somewhat logical progression from a court's use of "outside" resources to leverage its own supervisory objectives. We begin by examining how these special masters operated and how the corporate monitor sprung from them.
A number of scholars have analyzed the appointment authority and duties of special masters. (6) Indeed, it seems courts have often turned to outside parties for assistance, both with prejudgment adjudicatory activities such as the course of discovery and with postjudgment duties such as calculation of damages and implementation and monitoring of consent decrees, particularly in employment discrimination class actions. (7)
The power to appoint such outside parties appears to stem from at least two sources. First, as Justice Brandeis succinctly said in 1920:
Courts have ... inherent power to provide themselves with appropriate instruments required for the performance of their duties. This power includes authority to appoint persons unconnected with the court to aid judges in the performance of specific judicial duties, as they may arise in the progress of a cause. (8) Second, Rule 53 of the Federal Rules of Civil Procedure specifically authorizes special masters (unless a statute provides otherwise) to perform duties consented to by the parties, hold trial proceedings, make or recommend findings of fact on issues in certain circumstances, and address pretrial and post-trial matters that cannot be attended to effectively and in a timely manner by an available district or magistrate judge. (9)
Although special masters provide a template on which to build corporate monitors, they do not provide the strict legal bases for the appointment of monitors. Neither Rule 53 nor the court's inherent powers are the basis for the appointment of monitors. (10) Corporate monitors are appointed as part of a negotiated settlement before judgment between a firm and a government enforcement agency. (11) These settlements are termed Deferred Prosecution Agreements or Non-Prosecution Agreements. (12) The monitor is then a condition of the DPA or NPA (much like a monetary penalty). We discuss how this negotiated entity developed below.
RICO and Beyond
The closest recent ancestors of the modem corporate monitor appeared roughly twenty-five years ago with the implementation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"). Between 1982 and 2004, the Department of Justice ("DOJ") filed at least twenty civil cases asserting RICO violations and, in virtually every case, won the appointment of a trustee, monitor, or other form of court-appointed overseer. (13) Thus, there was an increase in the appointment of people who had some kind of continuing oversight responsibilities for a corporation. However, these people were appointed as a result of a postjudgment action, whereas the corporate monitor is primarily a creation of DPAs and NPAs (i.e., settlements) between regulators and firms before any court verdict is announced.
Settlements were also increasingly used by enforcement authorities. We can see this in the cease-and-desist orders that the SEC used as part of its consent decrees. (14) These orders permitted the SEC to hold companies in contempt if they violated the terms of the cease-and-desist order which was part of the negotiated settlement (i.e., consent decree). (15) Such settlements did not, however, include any ongoing supervisory function by an outside party. (16)
Thus, RICO provides the modern antecedents for ongoing supervisors or monitors after a court judgment, and the SEC's cease-and-desist orders to police settlements regulators reached with firms are examples of negotiated prejudgment settlements (i.e., consent decrees). The corporate monitor reflects the confluence of these two streams--ongoing supervision a la RICO and supervision of a negotiated settlement with a government regulator a la SEC cease-and-desist orders.
Prudential and DOJ Memoranda
As these enforcement methods developed, regulators began to experiment with various types of settlements leading to the landmark 1994 Prudential Securities case in which the government provided for the first modern appointment of an independent expert whose role was to monitor compliance of the company as per a DPA. (17) Unlike more contemporary DPAs and NPAs, the Prudential arrangement was reached through a series of letters from the company's counsel to the U.S. Attorney for the Southern District of New York (18) and a response from the Department of Justice, (19) along with a complaint that set out the alleged violations. (20)
Of particular note in this case are the factors raised by Prudential as reasons why a criminal prosecution of Prudential Securities Incorporated ("PSI," the Prudential subsidiary implicated in the wrongdoing) would be inappropriate. The government adopted this reasoning to justify why a deferral of prosecution was eventually chosen. These factors included (1) the time of the alleged misconduct (i.e. during the tenure of prior management); (2) the time lag from the alleged conduct to the prosecution; (3) the fact that PSI had spent over $1 billion to fund and administer claims of investors; (4) the fact that PSI accepted responsibility for all valid investor claims...