When a corporation engages in misconduct that is widespread or pervasive, courts, regulators, or prosecutors often insist that the firm obtain assistance from an independent third party — a monitor — to oversee the firm’s remediation effort. The largest firms in the world — from Deutsche Bank, to Volkswagen, to Carnival Cruise Lines — have found themselves having to retain a monitor for corporate misconduct, despite attempts to avoid a monitorship entirely. Traditionally, monitors, or their special master forebearers, were utilized by courts to assist in overseeing compliance with court orders, and their work was both accessible and transparent. As corporate monitorships have evolved over the past fifteen to twenty years, however, the transparency norm has receded, even when the success or failure of the underlying remediation effort invokes issues of public concern.
This lack of transparency would, potentially, be of little concern if the courts, regulators, and prosecutors that are party to monitorships were fully able and willing to ensure the monitorship achieved its goals. The reality, however, is that these governmental actors have demonstrated their own susceptibility to concerns related to cronyism, capture, and, perhaps, competence. Because the governmental actors involved in monitorships have proven to, understandably, lack perfection in their supervision capabilities, the lack of transparency and oversight over monitors and monitorships has prompted public critique, academic debate, and litigation. And yet, it has proven next to impossible to identify a comprehensive manner in which to regulate monitorships.
This Article suggests a novel path forward through a mix of federal interventions. The Article argues that at the conclusion of all monitorships, the public should receive an accounting that details whether the firm has or has not engaged in a successful remediation effort. This Article suggests two paths for the public to receive this information: (i) a securities disclosure and (ii) the adoption of a new policy regarding the use of monitors via the Office of Management and Budget. The result of these interventions will be greatly increased public access to information about the conclusion of a firm’s monitorship. All monitors, regardless of type, gather, assess, analyze, and disseminate information, yet this information is often kept outside of the public sphere. This Article presents a piecemeal set of interventions that would help generate the move toward greater public reporting of monitorship outcomes.
Introduction
In 2020, the United Auto Workers (UAW) union entered into a settlement with the Department of Justice (DOJ) to resolve allegations of corruption and fraud within the organization.1 The DOJ brought both civil and criminal proceedings against the UAW and its members.2 In particular, the government’s investigation “revealed an extensive and long-lasting effort by two former UAW presidents and their underlings to embezzle over $1.5 million in UAW money for their personal benefit through a series of fraud schemes.”3 Additionally, the investigation “uncovered a scheme by one former UAW vice president and two other high-level UAW officers to demand and accept over $2 million in kickbacks from contractors.”4 On the civil side, UAW officials received bribes from and embezzled money with executives at Fiat Chrysler —in the amount of over $3.5 million.5 In short, the DOJ uncovered a culture of corruption and fraud within and throughout the UAW.
When misconduct is pervasive and widespread, as was found at the UAW, a question that often arises is whether the organization has the competence to remedy and respond to the misconduct on its own. If a determination is made — either by the court, regulator, or prosecutor —that oversight over the remediation effort6 would be helpful, a monitor is often tasked with responsibility for overseeing that process. A monitor is “(i) an independent, private outsider, (ii) employed after an institution is found to have engaged in wrongdoing, (iii) who effectuates remediation of the institution’s misconduct, and (iv) provides information to outside actors about the status of the institution’s remediation efforts.”7 Perhaps unsurprisingly given the sweeping nature of the misconduct uncovered at the UAW, a monitor was appointed to oversee operations at the UAW for a period of six years and assist it in rooting out the corrupt culture that permeated the organization.8
Monitors are utilized by courts, the DOJ, the Department of Health and Human Services, the Federal Trade Commission (FTC), the Securities and Exchange Commission (SEC), and a plethora of other governmental actors to ensure that firms engage in effective remediation efforts.9 Remediation can take a variety of forms, from effectuating detailed mandates from a court or government regulator to creating a new compliance program, and remediation efforts are often overseen by monitors. Indeed, even as the use of monitors ebbs and flows as administrations change,10 monitors continue to provide an incredibly important function in industries of all types across the nation. The monitor is charged with (i) ensuring that the remediation effort is successful or (ii) alerting those involved in the agreement giving rise to the monitorship that the firm failed to meet its remediation obligations. The monitor has access to a wide range of nonpublic information within and throughout the firm and uses that information to evaluate the progress the firm is making toward remedying the underlying misconduct. Whether it is Volkswagen’s dodging of U.S. emissions standards,11 HSBC’s failure to prevent money laundering by drug cartels,12 ZTE’s delivery of U.S. goods to Iran in contravention of U.S. export control and sanctions laws,13 or Carnival Cruise Line’s continual violation of environmental laws and requirements,14 corruption is uncovered at sophisticated organizations time after time. And when this misconduct is significant, widespread, or pervasive, the courts, regulators, or prosecutors often require the firm to retain (and pay the fees for) a monitor to oversee its remediation process targeted at resolving and responding to that misconduct.
Take Carnival Cruise Lines. In April 2017, a subsidiary of Carnival Cruise Lines, Princess Cruise Lines Ltd., pleaded “guilty to felony charges stemming from its deliberate dumping of oil-contaminated waste from one of its vessels and intentional acts to cover it up.”15 A $40 million criminal penalty and five-year probationary period were imposed, during which “all Carnival related cruise lines vessels eligible to trade in U.S. ports were required to comply with a court approved and supervised environmental compliance plan . . . including audits by an independent company and oversight by a Court Appointed Monitor.”16 During the first two years of the probationary period, the monitor identified numerous additional violations ongoing at the company, including purposeful actions taken by Carnival to conceal violations of the environmental compliance plan.17 The discovery of these violations led to additional monetary penalties in the amount of $20 million and even more enhanced supervision.18 The monitor in the Carnival case is a traditional, court-ordered monitor. The monitor files his reports with the court — making them publicly accessible — and plays an integral role in conveying information about the status of Carnival’s remediation efforts to the government, the prosecutor, the court, and the public.19 And yet, most corporate monitorships today, unlike the Carnival monitorship, occur without meaningful, or any, court supervision and its accompanying high levels of transparency.
Indeed, many corporate monitors perform their work without much, if any, public accounting regarding their efforts or findings, or the firm’s success or failure in its remediation effort. Take the monitoring of HSBC. In 2012, HSBC Bank USA N.A. and HSBC Holdings plc (collectively, “HSBC”) entered into a deferred prosecution agreement with the DOJ after admitting that HSBC failed to “maintain an effective anti–money laundering program” and to “conduct appropriate due diligence on its foreign correspondent account holders.”20 Through this agreement, HSBC entered into a corporate compliance monitorship for a period of five years.21 In addition to ensuring that HSBC complied with the agreement’s requirements, the monitor was also tasked with providing yearly reports and assessments to — among others — HSBC’s Board of Directors and the DOJ.22 Importantly, the HSBC monitor’s reports, unlike those in the cases of the UAW and Carnival, were kept secret.23
To limit access to the monitor’s reports, the government moved to have the first report placed under seal.24 The district court, however, rejected this motion and entered an order that would have permitted the public dissemination of the monitor’s report with redactions for sensitive information.25 HSBC, the DOJ, and the monitor all objected to the release of information, stating that it would impede the monitor’s effectiveness26 and that the report at issue was an interim, not a final, report.27 Moreover, the monitor expressed concerns that releasing the interim report might create a “chilling effect” on his ability to work with HSBC employees.28 Ultimately, the Second Circuit reversed the district court’s order, effectively blocking public access to the monitor’s report.29
Scholars have long debated whether monitors’ key deliverables — their reports generated during, and at the conclusion of, the monitorship — should be disclosed to the public30 or kept confidential.31 Many believe the reports prepared and turned over to the government and firm should simultaneously be turned over to the public, as has been the case for decades for traditional, court-ordered monitorships. Others, myself included, believe that because there has been a norm of secrecy for many corporate monitorships since around 2004, a push toward full transparency of existing monitor reports would likely result in material changes to the information contained therein. There is no legal requirement for corporate monitors to issue a written report; it is a custom. As a result, there is nothing stopping the monitor from providing a different method of disseminating information to the firm and governmental actor that required the retention of the monitor.32
If the court, regulator, or prosecutor that is party to the monitorship were able to supervise the monitor’s work perfectly in each instance of a monitorship, one might have a strong argument that there should be minimal concerns about keeping the monitor’s work from the public. Unfortunately, the governmental actors that are parties to the creation of monitorships are not, in fact, perfect. Whether the reasons are (i) concerns about cronyism in the monitor-selection process,33 (ii) objections related to improper relationships between the monitor and the government,34 (iii) fears of potential capture by the firm of regulators or prosecutors,35 or (iv) doubts about the ability of the court or government to supervise actively all aspects of the work performed by a monitor — particularly when that work is outside of the expertise of a court, regulator, or prosecutor36 — there are many grounds for believing that despite their best efforts, these governmental actors are unable to engage in perfect supervision of the work undertaken by monitors.37 Indeed, in a review conducted by the Deputy Attorney General that was discussed publicly in September 2022, it was determined “that some monitors were not properly vetted for conflicts of interest or overseen to make sure they stayed on budget or task and that they did not always have a plan.”38
Given this reality, scholars and practitioners have debated two particularly important questions on the issue of monitors today. First, scholars and practitioners ask what amount of public disclosure is appropriate for the work undertaken by monitors. As demonstrated by the HSBC example, the public often has very little access to much detail surrounding the corporate monitor’s work or the remediation efforts of the monitored corporation. Indeed, even in instances where the public was told that a corporation’s conduct was so concerning that it necessitated the retention of a monitor to oversee its remediation effort, the DOJ has opposed having the monitor’s identity and the monitor’s assessments publicly disclosed.39 The upshot is that for most monitorships that take place without meaningful court involvement, very little information is disclosed about the ultimate success of the remediation effort the monitor was responsible for overseeing.
Second, scholars and practitioners inquire about the lack of oversight over monitors themselves. With regard to oversight, it is important to remember that monitors are not members of a recognized profession.40 Many monitors are lawyers or accountants by education and training, but, when undertaking engagements as monitors, they fall outside of the professional oversight that traditionally governs members of these professions.41 Additionally, there is no requirement that a monitor be a member of a recognized profession.42 Therefore, even if the professional regulation of lawyers and accountants were revised to capture conduct undertaken as a monitor, there would still be a class of individuals serving as monitors who would remain outside these traditional oversight mechanisms. Consequently, monitors exist in a regulatory vacuum — a vacuum that has proven quite difficult to fill via congressional action43 or court supervision.44
This Article argues that at the conclusion of all monitorships, the public should receive an accounting that details whether the firm has or has not engaged in a successful remediation effort. Requiring greater transparency of the work done during monitorships would create a backstop to the imperfect supervision undertaken by governmental actors who are parties to monitorships today by addressing the dual problems of a lack of information disclosure by, and oversight for, monitors. Increased transparency regarding the results of monitorships will provide the public an opportunity to know (i) whether a monitored corporation has successfully completed its remediation effort and (ii) whether the monitor has accomplished the goals of the monitorship. This Article proceeds in four parts.
Part I provides a primer on the use and role of monitors and monitorships. Part I defines the term “monitor” and illustrates how monitorships have evolved over time, resulting in different categories of monitorships — (i) traditional, court-ordered monitorships, (ii) enforcement monitorships, (iii) corporate compliance monitorships, and (iv) modern, court-ordered monitorships.45
Part II discusses the problems of attempting to create disclosure and oversight norms for modern-day monitorships. Since the 1999 issuance of the Holder Memorandum46 — which laid the foundation for current corporate enforcement policy47 — many corporations that agree to enter into monitorships do so (i) without formal or robust court involvement48 and (ii) with an assurance of limited public disclosure of the monitor’s reports and assessments.49 Additionally, corporations, monitors, and the DOJ have all resisted attempts to turn over more information regarding monitorships to the public. Thus, there is very limited information disclosure about the ultimate results of monitorships. At the same time, monitors operate in a regulatory vacuum. Congress, courts, policymakers, academics, and the legal profession have all noted this lack of oversight and have engaged in activities to attempt to create boundaries to gov-ern the behavior of monitors.50 These attempts, however, have largely failed, resulting in the absence of formal oversight governing today’s monitorships.51
Part III puts forth the thesis of this Article. It argues that at the conclusion of all monitorships, the public should receive an accounting that details the work completed by the monitor and the firm. The creation of a public report detailing the work done during the monitorship would help to address the problems of a lack of information disclosure and oversight for monitors by providing the public an opportunity to know (i) whether a monitored corporation has successfully completed its remediation effort and (ii) whether the monitor has accomplished the goals of the monitorship.
Part III begins by describing two potential, complementary interventions for creating such a mandate: (i) a securities disclosure and (ii) the adoption of a new policy regarding the use of monitorships via the Office of Management and Budget (OMB). The Part goes on to outline the standardized terms that should be considered in crafting a public reporting mandate. The Part then turns to securities literature and analyzes why public companies should be required to provide information about monitorships, whether that information is deemed material or nonmaterial, to both shareholders and stakeholders.52 Drawing on white-collar corporate crime literature, it explains that the general public has an interest in obtaining information about monitorships. It concludes by discussing how a public reporting mandate might also address the oversight problem plaguing monitorships.
Part IV turns to some additional considerations raised by this Article’s argument and proposal. In particular, it addresses why the problems of disclosure and oversight are unlikely to be resolved by requiring the reports that monitors currently generate to be turned over to the public. A supplementary report is necessary. The Part then addresses whether the Article’s proposal will lead to a decrease in the number of monitorships entered into between organizations and governmental actors. It next discusses how a public reporting mandate might increase shareholder activism and potential liability concerns for public corporations. Finally, the Part discusses whether a public reporting mandate might exacerbate concerns about the government abdicating its oversight responsibility through its use of monitorships.
The Article then concludes.
Continue Reading in the Full PDF
* Professor of Law, Duke University School of Law. Many thanks to Atinuke Adediran, Matthew Adler, Lisa Bernstein, Guy-Uriel Charles, John Coates, Kevin E. Davis, Deborah DeMott, Lisa Fairfax, Gina-Gail S. Fletcher, Brandon L. Garrett, Sarah Haan, Bruce Huber, Daniel Kelly, Maria Maciá, Cary Martin Shelby, Patricia O’Hara, Dave Owen, Elizabeth Pollman, Usha Rodrigues, Daria Roithmayr, Jay Tidmarsh, and to the participants of the SMU Dedman School of Law Faculty Colloquia, NDLS PECI Disclosure Roundtable, Lutie A. Lytle Black Women Law Faculty Writing Workshop, the Brooklyn Law School White Collar Crime Semi-nar, the UC Hastings College of the Law Faculty Colloquia, the Touro Law Center Faculty Colloquia, the 2016 Culp Colloquium sponsored by Duke Law School, and the 2015 Legal Ethics Schmooze sponsored by Stanford Law School for helpful comments and conversations. Thanks to Cait-lin-Jean Juricic, Nathanial Hall, Shelby Dedo, Lucas Mears, Veronica Meffe, Marissa (Wahl) Huffman, and Quinn Kane for invaluable research assistance.