Nov 18, 2020
Hello to you. My name is Michael Santos and on behalf of everyone on our team, I welcome you. Our websites include Prison Professors dot com and Compliance Mitigation dot com.
We offer services to help people and businesses with risk mitigation and avoiding government investigations.
For those who have been targeted for prosecution, we create mitigation strategies. We help with sentencing and preparations for the journey ahead.
Visit us at either PrisonProfessors.com or ComplianceMitigation.com. Call or text 949-205-6056.
To understand corporate fraud, we should begin with a basic review of how our nation’s founders structured our government. Most all people that attended school in America remember that we have three separate branches of government:
- • Legislative Branch: Includes the Senate and the House of Representatives. In these two houses of Congress, legislators pass laws that people in our country must follow. The Congress also controls the country’s budget.
- • Executive Branch: Our president leads the Executive Branch, signing legislative bills into law, and overseeing numerous administrative and law-enforcement agencies to ensure people comply with the laws.
- • Judicial Branch: The president appoints judges at the district court level to make factual findings, appellate court judges to assess due process in the lower courts, and the Supreme Court, which has the final say over all courts in the United States.
Since we declared our independence, our nation’s government has grown. As a result, every individual and every business is subject to following more than 4,500 laws and millions of pages of regulations in the federal system. Besides the federal system, each of our 50 states has its own body of laws. Like the federal government, each state has many regulatory agencies and law enforcement divisions that enforce compliance.
Despite starting with an intent to create jobs and solve problems for customers, on any given day, business leaders could violate regulations or laws. Sometimes, decisions made in the course of business can lead to civil or criminal investigations. Sadly, investigators can also draw rank-and-file employees into those investigations.
The investigations may start in any number of ways. Ordinarily, they begin in secret. Investigators gather information with hopes of building a case. They may seek documents to review. They may identify people with whom they want to speak:
- • As witnesses to a government investigation,
- • As subjects to a government investigation, or
- • As the target of a government investigation.
Whether a person responds as a witness, a subject, or a target, when people respond to government investigators, they expose themselves to potential liability. Despite not having known whether they’ve done anything wrong, people may face civil or criminal charges for corporate fraud, obstruction of justice, or any number of white-collar crimes.
With so much at stake, it makes sense for people to learn as much as possible about government investigations and how they operate. More knowledge about government investigations will help people make better decisions. In some cases, it may make sense to get counsel by hiring a lawyer who has experience with government investigations.
How do Government Investigations Begin?
Agencies like the Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC) publish articles on their websites that offer information on how they begin investigations. Those agencies do not hide the fact that they begin in secret. Neither business owners, nor the people that work in the businesses, will know that they’re being investigated until the agencies are ready to reveal what they’re doing. An agency will not make its case public until the investigative team believes it has the evidence to prevail in the lawsuit or complaint.
Investigators may begin making inquiries for any number of reasons. They may receive a tip, or a complaint. That tip may come from a disgruntled consumer, from a whistleblower, or from a representative at a consumer-protection group, such as the Better Business Bureau. Once the complaint begins, the investigators start working to gather data. If the data suggests that the target has violated regulations, or engaged in corporate fraud, the agency may choose to handle the matter administratively, or it may file a lawsuit in court.
Business owners and employees protect themselves when they understand the power of government investigators. That means, if they’re talking over the phone, if they’re sending an email, if they’re sending a text message, they may want to think about how government investigators would construe their words. The more knowledge a person has about what could happen, the more cautious a person would be when communicating within the organization, or with prospective consumers.
For example, in a case that the Federal Trade Commission was making against a real estate developer that operated a call center, investigators conducted an undercover call. The undercover agents went through the company’s process:
- • Step 1: They filled out a lead form on the company’s website.
- • Step 2: They agreed to participate in a telephone pitch at a scheduled time.
- • Step 3: They started a recording before the pitch, identifying themselves as agents of the FTC, stating the date, time, and stating that the purpose of the call was to investigate the real estate developer.
- • Step 4: The agent’s spoke with the developer’s representative and asked questions with an intent of gathering evidence to build their case.
- • Step 5: After the call, the agent’s marked the recording into evidence, without the representative ever knowing that she was speaking to a government agency, and that her voice had been recorded and would be used to further a government investigation.
- • Step 6: Later, after the FTC filed its lawsuit, the telemarketing sales agent became subjected to a deposition under oath. If investigators believed that the telemarketer had lied, or misled consumers, they could threaten her with either civil or criminal charges.
What is the takeaway from the information above?
As business owners, it’s crucial to recognize that government investigators have many resources at their disposal. When they begin investigations, they have an interest in penalizing the company and the individuals that work with the company. Since the agents have authority to conduct their investigation in secret, they do not have a duty to let the person know that they’re being recorded.
Our team at Compliance Mitigation wants to help both business leaders and team members protect themselves. As citizens, we protect ourselves when we document every stage of our processes. We want to show that we’re acting in good faith, because government investigators will always view our decisions from a cynical perspective—exposing people and businesses to sanctions.
In the example given, the business could have protected itself by publishing the scripts it creates for telemarketers. Each of those scripts should have been stored. Then, the business should invest in training, confirming that each of the telemarketers understood the corporate messaging—messaging that should have been vetted by an attorney who would be knowledgeable about the telemarketing sales rule.
Further, the telemarketers should confirm how often they’ve been trained to speak in accordance with corporate messaging—and the penalties associated with noncompliance.
Businesses should also train team members on the penalties that follow for those found to have violated agency regulations, rules, or laws.
Legal Exposure
Business leaders may not be trained in law, but ignorance of the law will not shield them from a government investigation. Government investigators will rely upon a doctrine known as respondeat superior. The translation from Latin means “Let the master answer.” In other words, government agents may hold employers liable for the acts that employees perform during the course of the job.
As an example, we’ll offer insight into a case that led to imprisonment for several officers and directors of a publicly traded company. These are people that served time in federal prison, along with members of our team. We have personal knowledge from listening to their stories.
Those people have since been released from prison, and they’ve gone on to build productive lives. Since the purpose of this exercise is to help our course participants understand the risks, and not to hurt other people, we’ll change the names of the people involved.
- • Those who want to research the matter may search for the U.S. Securities and Exchange Commission case: CV-03-2834 R (RNZBx) (C.D. Cal.)
While confined at the federal prison camp in Lompoc, I met James. As a young entrepreneur, he launched an Internet advertising company. James later hired other people to join his company, including Mike, who served as the company’s senior vice president of business development, and Lisa, who served as the company’s vice president of finance, Cindy, who served as the company’s controller and director of finance.
Eventually, investment bankers brought the company public and it performed well during the dawn of the Internet era. Rather than having a background in finance, James expertise came from selling advertising. He relied upon his team to keep track of records. The company’s compensation plan incentivized people to build higher levels of sales, as all of the company’s leaders had stock in the company. If the company performed well with growing sales, the stock price would rise. If sales faltered, the company understood that stock price would drop in the market.
When a recession threatened to slow sales, Mike, Lisa, and Cindy hatched a scheme. They conspired with leaders at another company. Basically, company A agreed to purchase goods and services from company B, and company B agreed to purchase goods and services for the exact same amount from Company A. Company A sent money to company B, masquerading the transaction as a sale; then, company B sent the exact same amount of money back to company A, masquerading the transaction as a sale.
The sham purchases boosted sales so that investors would think that each company continued bringing in robust sales, even though the conspirators created those sales artificially. In reality, the conspirators understood that those transactions did not represent authentic sales from actual consumers.
As CEO and president of the company, James had direct supervisory authority over Mike, Lisa, and Cindy. James was not on the sales team, nor did he have a finance background. He lacked the requisite skill to understand how Lisa and Cindy would account for the transactions on the financial statements. Nevertheless, James bore responsibility for the actions of the people that worked for him.
Several years later, a larger company made an offer to acquire James’s company. During the due diligence phase, forensic accountants researched all of the corporate records of James’s company. When the auditors discovered the sham sales transactions, the accountants notified investigators at the Securities and Exchange Commission. Investigators subpoenaed the records, launching a government investigation.
Before the investigators began to ask questions, they had a clear understanding of the deception. Yet neither James, Mike, Cindy, nor Lisa knew that they had been under investigation. When the questions came, they did not know how to respond. Each person lied to the investigators. The people did not know that lying to a federal law enforcement officer exposed each person to a criminal conviction, and the potential for up to five years in federal prison.
As the civil investigation advanced, the agents questioned people as witnesses, as subjects, and as targets. People had to hire lawyers. When prosecutors threatened to bring criminal charges that could expose them decades in prison, the people began to cooperate in exchange for leniency.
I met both James and Mike in federal prison. Both of them told me that had they known the severity of the crime, and the punishments that could follow, they would not have participated.
James and Mike told me their perspectives at the time of the crime. When company A purchased a product from company B, and then company A sold a product to company B for the exact same amount, James and Mike believed that it was a wash. They did not see any harm coming from the transaction.
They did not consider the viewpoint of government regulators or prosecutors. In the eyes of law enforcement, James and Mike participated in a conspiracy to deceive investors. As such, they violated securities laws. By violating laws, they faced a criminal prosecution. With the government investigation and criminal prosecution, they had to spend millions of dollars in attorney fees. Further, they damaged their professional reputations, they lost their liberty, and they have to live as convicted felons.
Questions to consider:
- • As the company’s CEO, what level of culpability did James have for the decisions that Mike, Lisa, and Cindy made?
- • In what ways would knowledge about criminal penalties influence corporate leaders like James, Mike, Lisa, and Cindy?
- • Who would law enforcement officials identify as victims in the case above?
- • What type of training could protect a company against decisions like those that James, Mike, Lisa, and Cindy made in the case example above?
During corporate training sessions, it may help for leaders to work through these types of role-playing situations. By helping people understand how government investigations begin, we can go a long way toward helping team members make better decisions. Hopefully, we can also reduce vulnerabilities to government investigations, and also reduce the number of people that face charges for white-collar crime.