New York partner John J. Carney and associate Francesca M. Harker co-authored “Disclosing Corporate Misconduct: When Does Voluntary Become Mandatory?” in the White Collar Crime section of the October 12, 2010, New York Law Journal.
In the article, Carney and Harker noted that government agencies have steadily increased enforcement efforts, as well as calls for voluntary disclosure and increased cooperation by the companies that may find themselves targeted by these investigations.
“[B]efore weighing the pros and cons of cooperation and voluntary disclosure, public corporations and their boards of directors first need to have a clear understanding of when disclosing is not simply a matter of choice but an affirmative obligation,” they wrote.
The article explained that public companies do not necessarily have an affirmative duty to self-report to the government illegal activity its employees may have committed. However, if the government uncovers a crime through any other means besides self-disclosure and it is determined the company tried to conceal the act, the company may be subject to prosecution as well as additional penalties. “Thus, a company’s obligation to disclose a known violation can become mandatory when not disclosing could subject it to liability for collateral offenses such as obstruction of justice, false statements, misprision of felony, conspiracy, aiding and abetting or accessory after the fact,” the authors noted.
The authors also explained that, in terms of federal civil law obligations, there are a number of regulatory requirements that can create mandatory disclosure situations for companies in specific scenarios.
When determining whether or not to disclose problematic actions, companies should weigh potential ongoing costs with possible benefits. “The principal cost is the possibility that the company will face civil and criminal prosecution that it otherwise might have avoided, but for the disclosure. Disclosure opens the door to potential ‘continued government oversight, civil or criminal penalties against the corporation and its officers, significant harm to the corporation’s reputation, civil lawsuits [or] SEC enforcement actions.’ There is also the possibility that once the government has commenced its own investigation it will discover additional crimes of which the company was not initially aware,” they explained. Companies also may face civil litigation such as shareholder derivative suits.
Looking at possible benefits, the authors noted that “Voluntary disclosure can allow a company to present the situation to a prosecutor in the most favorable and complete factual context, thereby allowing the government to understand all of the possible defenses and mitigating circumstances. By setting the tone for the disclosure, companies have the potential to shape the scope and direction of the government’s investigation... Government disclosure will also place the company in a more favorable light when it comes time for the prosecutor to decide whether to prosecute.”
In conclusion, Carney and Harker point out that a key part of a company’s decision-making process “requires asking early on the question of whether this is an ‘if we disclose’ or a ‘when we disclose’ situation. Answering that question early can make all the difference.”
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