Month: January 2017

A New Level of Compliance Officer Concern: Getting Arrested

Oliver Schmidt is the former top emissions compliance manager for Volkswagen in the United States. The FBI arrested him on Saturday as part of the Volkswagen emissions scandal. He was denied bail, pending a court appearance later this week.

Perhaps, the case is not one of a compliance officer missing a problem, but a compliance officer actively engaged in the wrongdoing. The charges are for conspiracy to :

  1. Defraud the US by impeding the EPA’s function of approving certificates of conformity for vehicles
  2. Commit wire fraud
  3. Violate the Clean Air Act

In this case, it looks like Schmidt was involved in the wrong-doing and the cover-up according to the criminal complaint.

One piece of evidence was that Mr. Schmidt produced a slidedeck regarding the emissions problem. In a meeting with the California Air Resources Board he identified two outcomes: 1- positive, then VW gets approval for 2016 model cars; 2-no explanation for the emission problem=indictment. I’m guessing, he may not have realized that indictment would be aimed at him.

Schmidt was a manager in charge of the Environmental and Engineering Office which is the group in VW that is responsible for communicating and coordinating with regulators. That sounds like a compliance role, but not in the way that most compliance professionals think of the role.

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The New Administration’s Pick for the Chair of the SEC

Wall Street lawyer Jay Clayton is slotted to head the U.S. Securities and Exchange Commission in the Trump administration.

This is a big change from Chair White whose background was in prosecution. Chair White had a long list of prosecutions from serving a decade as the U.S. Attorney for the Southern District of New York. (She is the only woman to have held that position.) Then served another decade as a litigator in private practice.

Mr. Clayton has a wide-ranging corporate practice spanning mergers and acquisitions, IPOs, corporate governance, and investment advice. He is respected lawyer and will likely do a great job with the SEC.

But he is a very different kind of lawyer than Ms. White. He is a deal lawyer, largely working on corporate transactions and governance.

Perhaps that marks a change in the SEC from one of enforcement to one of enhancing the capital markets. Chair White was saddled with the rule-making imperatives from Dodd-Frank. With most of those in place, the SEC will have more bandwidth to focus its agenda. The appointment of Mr. Clayton seems to be an indication that the SEC may focus more on the other prongs of its mission: maintain fair, orderly, and efficient markets, and facilitate capital formation.

The front page of the Wall Street Journal laments the loss of public companies: America’s Roster of Public Companies Is Shrinking Before Our Eyes. I think most people are guessing that Mr. Clayton will try to fix that issue.

With the appointment of Mr. Clayton, that still leaves two open slots to be filled. No word on whether the stalled nominations of Lisa Fairfax and and Hester Peirce will proceed or whether there will be new candidates.

The Latest Word on the SEC’s Administrative Judges

There have been several challenges to the constitutionality of the in-house administrative judges at the Securities and Exchange Commission. The problem is that the judges are appointed by an internal panel instead of by the President or the SEC Commissioners. The SEC has fended off attacks. Now there is break in wall. The 10th Circuit found the use to be unconstitutional.

The Constitutional question is whether the SEC’s ALJs are “Officers of the United States,” including principal and inferior officers, who must be appointed under the Appointments Clause. U.S. Const. art. II, § 2, cl. 2.

For some reason, the SEC does not appoint the ALJ’s directly. If it did so, it could probably erase this problem going forward. I assume the legal advice is that the change would put past cases into jeopardy.

In August, the U.S. Court of Appeals for the D.C. Circuit in Raymond J. Lucia Cos. v. SEC, accepting the SEC’s argument that ALJs are mere “employees,” and not officers at all. This seemed to be the accepted stance when the US Supreme Court in September denied hearing the appeal of Lynn Tilton in her case arguing on roughly the same issue.

The 10th Circuit Court of Appeals came to the opposite conclusion last week in  Bandimere v. SEC. The Bandimere may differ slightly from prior cases. Unlike some of the other attacks, Mr. Bandimere raised the constitutional question before the SEC, which rejected it. The 10th Circuit put the other attacks in the bucket of collateral lawsuits attempting to enjoin the administrative enforcement actions.

The 10th Circuit, based on Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991), concluded that the SEC ALJ who presided over an administrative enforcement action against Mr. Bandimere was an inferior officer who was not constitutionally appointed. The Freytag analysis has three parts to determine if an ALJ is an “inferior officer”:

(1) the position of the SEC ALJ was “established by Law,”;

(2) “the duties, salary, and means of appointment . . . are specified by statute,”.; and

(3) SEC ALJs “exercise significant discretion” in “carrying out . . . important functions,” .

The Bandimere decision rejected the argument in the Lucia case that ALJs do not have final decision-making power. They have enough power to make them an “inferior officer.”

I would place a bet that the SEC will appeal this case to the Supreme Court. Given the split in the circuit courts of appeal, it makes the case more likely to be heard.

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Draining the Swamp?

One of the rallying cries for President-elect Trump was to drain the swamp of corruption. Compliance professionals could think of many things that could happen to remove conflicts or the appearance of conflicts.

Personally, as a compliance professional and a voter, I was disappointed to learn that Hillary Clinton did a poor job of walling off donations to the Clinton Foundation from her role as Secretary of State. If she had established a clear protocol, she could have easily dismissed the charges that donors were paying to gain access.

It is even more disappointing to hear President-elect Trump dismiss the concerns about conflicts between his sprawling business empire and his role as president. There are a little over two weeks until he steps into office and there has been little to show that he has taken material steps to remove the conflicts.

The latest muck in the swamp is Congress eviscerating the independent Office of Congressional Ethics.

Compliance professionals spend a great deal of energy to have independence for reviewing programs and conducting investigations. Direct contact with the board of directors allows compliance to avoid company executives from stifling a problem.

Under the ethics change pushed by Rep. Bob Goodlatte, R-Va., the non-partisan Office of Congressional Ethics would fall under the control of the House Ethics Committee. That committee is composed of sitting members of Congress, five Republicans and five Democrats.

Given the new rules, any investigation can be shut down along party lines before a review has begun.

It’s not that the OCE was fully independent. It was not authorized to sanction members, officers or employees of the House. The Ethics Committee has exclusive authority to determine if a violation has occurred and what the sanction should be. The rule change allows an investigation to shut down before it gets any traction.

This is not a theoretical problem. Through the third quarter of 2016, the OCE started 35 reviews which led to 17 referrals to the House Ethics Committee for review for the 114th Congress.

It sounds like there is little draining of the swamp and more like the swamp is filling up.

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