by T. GormanPosted on Posted in SECActions

Earlier this month, Acting Deputy Attorney General Craig S. Morford issued a memorandum entitled “The Selection and Use of Monitors in Deferred Prosecution Agreements and Non-Prosecution Agreements with Corporations.” The nine principles and the related comments in the memorandum are significant in view of the increasing use of monitors, consultants and experts in resolving federal criminal investigations of corporation.

While the principles in the memorandum only apply to Department of Justice criminal prosecutions, they may also impact the resolution of other Federal inquiries such as SEC investigations. In many instances there are parallel settlements of DOJ inquiries and SEC investigations. For example, last year the SEC and DOJ simultaneously settled FCPA charges with York International. The SEC settlement included a requirement that an independent compliance monitor be retained. SEC v. York International Corp., Civil Action No. 7-01750 (D.D.C. Filed Oct. 1, 2007). The DOJ criminal investigation was resolved by entering into a deferred prosecution agreement which required the company to implement a compliance program and procedures reviewed by an independent monitor. U.S. v. York International Corp., No. 07-01750 (D.D.C. Filed Oct. 1, 2007).

According to the memorandum, a “monitor’s primary role is to evaluate whether a corporation has both adopted and effectively implemented ethics and compliance programs to address and reduce the risk of recurrence of the corporation’s misconduct.” At the same time, the duty of compliance remains with the corporation, not the monitor who is not responsible to the shareholders. Key points of consideration under the memorandum include:

1) the government and the company should discuss the necessity of, and role for, a monitor at the outset and ensure that selection is based on merit and avoids any conflict;

2) the monitor must be independent and not affiliated with the business organization;

3) the primary responsibility of the monitor is to ensure compliance with the agreement, either the deferred prosecution or non-prosecution agreement;

4) the monitor’s responsibility should be tailored to his or her specific obligations;

5) communication among the government, the corporation and the monitor, either orally or in writing as appropriate, are in the interest of all the parties;

6) if the business organization elects not to adopt a recommendation made by the monitor that fact, along with the reasons, should be reported to the government;

7) the agreement should specify previously undisclosed or new misconduct that the monitor must report to the government and give him or her the discretion to report other misconduct;

8) the duration of the appointment should only be for a term sufficient to carry out the specific function; and

9) the agreement should provide for an extension at the election of the government under appropriate circumstances and, conversely, for early termination where the business organization can demonstrate that it is appropriate.

The text of the memorandum can be viewed here.

by T. GormanPosted on Posted in SECActions

St. Patrick’s day is a lucky day for the Irish– and on March 17th everyone is Irish. At least it may seem that way to the former Quest Communications CEO Joseph P. Nacchio. On March 17th the Tenth Circuit Court of Appeals handed down an opinion reversing Mr. Nacchio’s conviction on nineteen counts of insider trading and remanded his case for retrial to a new district court judge. U.S. v. Nacchio, Case No. 07-1311 (10th Cir. March 17, 2008). While Mr. Nacchio raised several issues on appeal, including questions concerning the exclusion of proffered classified evidence and relating to the jury instructions, the one that secured him reversal concerned the exclusion of defense economic expert Professor Daniel Fischel.

Professor Fischel was retained to testify as a defense witness regarding Mr. Nacchio’s stock trading patterns and the fact that they were inconsistent with possessing inside information. The key to the reversal was the adequacy of the defendant’s Criminal Rule 16 disclosures and the failure of the district court judge to allow any type of hearing or obtain any evidence relating to a Daubert issue.

Federal Criminal Rule 16 requires a defendant seeking to offer expert testimony to disclose that fact to the government along with the substance of the opinion and other information if the defense has requested similar information from the government. Absent a defense request, disclosure is not required.

In Mr. Nacchio’s case both sides agreed that disclosure was required. The defense furnished a brief description of the proposed testimony. That description did not include any description of Professor Fischel’s methodology. It did however reference the Professor’s vitae and identify his opinions and the basis for them. After briefing the district court, without argument, excluded the testimony.

The Court of Appeals reversed. In reaching its conclusion the Court of Appeals held that “the district court’s belief that Rule 16 also requires extensive discussion of a witness’s methodology was incorrect, and its exclusion of the evidence an abuse of discretion. “ Slip. Op. at 16 (emphasis original). Rule 16 disclosure, according to the court, is only designed to provide notice and “more complete pretrial preparation” by the opposing side. It is not designed to permit the court to make a Daubert determination as was done here. Here the Court held that the defendant’s disclosure was adequate because it set forth the substance of the proposed opinions, along with their basis and reasons for the opinions.

The Tenth Circuit viewed the district court’s ruling as confusing Federal Criminal Rule 16 with the expert disclosure mandated by the Civil Rules: “The district court’s error may have proceeded from confusion between the civil and criminal rules. Unlike under the civil rules, an expert in a criminal case is not required to present and disclose an expert report in advance of testimony. A Rule 16 disclosure must contain only ‘a written summary of any testimony’ and “describe the witness’s opinions, the bases and reasons for those opinions, and the witness’s qualifications’ quoting Fed. R. Crim. P. 16(b)(1)(iv).” Id. at 20. Accordingly, the district court’s comment that a Rule 16 disclosure is “pretty close” to a civil expert report is error.

The Court also rejected the government’s claim that in any event the proposed testimony would have been inadmissible under Daubert. Here there was no hearing or other submission in the district court on this question. Accordingly, the Circuit Court held “[t]he district court could not make an informed Daubert determination without hearing such testimony [regarding the basis for the testimony] or receiving submissions on the issue in some other form.” Id. at 23.

Finally, the Circuit Court conducted a careful review of the evidence to determine whether Mr. Nacchio could be retried. Following a detailed review of the evidence the Court concluded that there was more than sufficient evidence to sustain a conviction by a properly instructed jury. Accordingly, the case was remanded for retrial – but, at Mr. Nacchio’s request, to a different district judge. For now the luck of St. Patrick’s day and the Irish had visited Joseph Nacchio.