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With apologies to the Bard: “To disclose or not disclose, that is the question. Whether ’tis nobler in the boardroom to suffer the risk of discovery or, by taking actions against a sea of troubles, to limit them.” Corporate executives, board members and their counsel increasingly must decide whether to make voluntary disclosures of possible violations by their companies. Addressing the issues is not made any less difficult by advice that suggests that these decisions are philosophical ones, whereby a company chooses to generally favor disclosure or not. It is better to address these as strategic legal decisions that, while difficult, require the same intelligent analysis necessary to any informed choice. Driving an increased frequency of disclosure issues is the increased pressure on public companies from enforcement authorities and shareholders to police their own operations for unlawful activities or other operational malfeasance. Board members, especially audit committee members, rightly demand that “red flags” suggestive of corporate wrongdoing be thoroughly examined, and that such remedial actions as are necessary to protect shareholder interests be aggressively undertaken. The results of these external and internal pressures are often exacting internal investigations of suspected corporate wrongdoing. When the factual inquiry yields evidence of potential legal liability, especially for criminal violations, the question immediately arises whether disclosure to the appropriate authorities of the facts uncovered is a fundamental remedial step. First voluntary-disclosure program began in the 1980s Not so very long ago, such voluntary disclosures were almost unheard of. The first voluntary-disclosure program involving corporate misdeeds arose in the 1980s in connection with a series of scandalous defense-procurement cases. The Department of Defense and the Department of Justice created a program anchored by the so-called “XYZ agreement,” which provided the terms and parameters by which defense contractors could make voluntary disclosures in return for a certain amount of prosecutorial leniency. At the same time, enforcement authorities in both agencies increased scrutiny of defense-procurement practices, which later expanded more generally to federal procurement as a whole. This development led government contractors to increase their self-examination and to conduct internal investigations of apparently more serious compliance issues. Many availed themselves of voluntary disclosure to mitigate the adverse consequences of enforcement actions. In the 1990s, the Antitrust Division of the Department of Justice adopted a corporate leniency policy whereby companies making a timely disclosure of their involvement in anti-competitive activity could avoid criminal prosecution under the antitrust laws so long as they were the first among conspirators to disclose. This “race to DOJ” often led to disclosures being made before more detailed internal investigations. As a result of these programs, and a similar but less certain policy encouraging the voluntary disclosure of environmental violations, corporate management, boards and the defense bar began to accept the concept of mitigating the severity of punishment through timely internal investigation and voluntary disclosure of potential liabilities. The sentencing guidelines for organizational defendants and the rewards available to companies in trouble that instituted and/or maintained aggressive compliance programs also advanced the notion that internal policing, self-examination and voluntary disclosure should be the norm rather than the exception with regard to corporate conduct. Settlement agreements in civil and criminal enforcement matters that require self-policing and disclosure have also widened the scope of these activities in business operations. Today, companies with an enforcement problem often take immediate remedial measures that include more self-examination, internal investigation and voluntary disclosure because current enforcement policy rewards these steps by mitigating the adverse consequences to the company of the underlying wrong. As federal regulation of business expanded and the use of criminal sanctions increased proportionately, the expectation of regulatory agencies that companies would voluntarily disclose their own transgressions grew. In the health care industry, for example, the inspector general at the Department of Health and Human Services has instituted its own voluntary-disclosure program. Most recently, the demands of Sarbanes-Oxley Act reviews and certifications, coupled with the burdens placed on auditors in conjunction with the act, took this trend to new heights, resulting in what is often termed “the compliance culture.” This corporate-culture phenomenon is openly derided by some as having gone beyond any economic justification and as adversely affecting the competitiveness of American markets and of companies subject to U.S. enforcement authorities. Others tout these developments as bringing to corporations needed transparency and commitment to compliance with the law when there would otherwise be precious little incentive for either and scant chance that compliance deviations would be discovered by enforcement authorities working with limited resources. Debate is likely to continue on the issue. Regardless of the merits of the competing views, companies holding information concerning potential legal liability have to address disclosure issues. These issues are best seen as not unlike any other choice of legal strategy and tactics that needs to be made in the context of particular circumstances. Relevant considerations include the business conduct at issue, the circumstances of the company at the time in which the issue arises, the potential extent of direct enforcement liability and potential collateral liability to third parties, as well as an objective assessment of what is in the best interests of the company and its shareholders. Certain clear principles must be considered in the analysis as to whether voluntary disclosure is indicated. For public companies, the fiduciary duty of officers and directors to shareholders is a paramount concern. The overarching duty to protect shareholder value often dictates the necessity to aggressively investigate suspicions or reports of internal wrongdoing. Likewise, the duty to mitigate adverse consequences to the corporation and its shareholders may also compel making a voluntary disclosure when one can be reasonably assured that doing so will mitigate financial penalties and other adverse consequences that can affect shareholder value. The latter cannot be overlooked in the analysis because the potential for stock price and corporate reputation to be battered by allegations of corporate criminal wrongdoing can be, and has been, mitigated by timely voluntary disclosures and aggressive remedial measures. Conversely, addressing potential corporate misconduct poorly can have extreme adverse consequences even when subsequent events show that the corporation did not commit a crime, or that its misdeeds were not as serious as first reported. Thus, analysis may show that it is better to disclose, even when the potential for legal liability does not seem great, because the disclosure can put the corporation on the “right side” of the good-bad ledger of public perception. The disclosure equation may also assess the risk of government discovery absent disclosure. Often, the government is unlikely to learn of corporate misdeeds that might be subject to a voluntary disclosure. When discovery is unlikely, the benefits of disclosure often seem remote and the decision to sit on the information becomes more enticing. While it might seem counterintuitive to suggest that the discovery factor is irrelevant, from the perspective of protecting shareholder value, it is. Not making a disclosure that could help mitigate adverse consequences could be difficult to justify on the basis that management or the board concluded that discovery was unlikely. Reputational interests should be key consideration The voluntary-disclosure question also should turn on the protection of reputational interests. This applies not just to public companies, but to other large institutions to which public confidence in the rectitude of their operations is essential. Charitable institutions that depend on public largess are a prime example. So are institutions that provide essential services to the public in areas such as health care, finance and utilities. Imagine the public reaction if the local water utility was found to be accepting bribes to cover shoddy work by those responsible for systems that assure the quality of its product. The credibility of the disclosure is also a critical factor in assessing its worth to a corporation and shareholders. Indeed, an incomplete disclosure � one in which material facts are either overlooked or omitted � is worse by far than no disclosure at all. This often means that a fairly intensive fact-gathering exercise is a necessary predicate to making an informed disclosure decision. When a decision to disclose is made, the government, in assessing the disclosure’s value, will take into account the quality of the investigation, including the experience and the credibility of those doing the work. While analysis will often result in a conclusion that disclosure is the best course in a given matter, that is not always the case. Legitimate reasons create significant exceptions. However, an adherence to an across-the-board rule against disclosures cannot be justified in the current enforcement environment, particularly when a public company is involved. This is no less so even when one can easily recognize that there is a certain � perhaps even a considerable � amount of pain that can be attendant to an affirmative voluntary-disclosure decision. George J. Terwilliger III is a partner in the Washington office of White & Case and the head of the firm’s global white-collar practice; he previously served as the deputy attorney general of the United States, as well as a U.S. attorney and an assistant U.S. attorney during 15 years of public service.

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