In Corporate Monitor, a Well-Paying Job but Unknown Results

 

In the insider trading case against SAC Capital Advisors, federal prosecutors have given a particularly nice gift to a former federal prosecutor, Bart M. Schwartz. Mr. Schwartz, who is now the chairman of the consulting firm Guidepost Solutions, was appointed SAC’s independent compliance consultant and is charged with assessing the firm’s future trading practices.

The job is likely to earn Mr. Schwartz millions, but it will do little more than that. It’s all part of the corporate monitoring industry, a full employment act for former federal prosecutors that may have little effect on the way any company that is forced to hire a monitor conducts its business.

SAC Capital’s guilty plea was accepted by a federal judge last week. The firm will pay a record $1.2 billion penalty for insider trading â€" a $900 million fine and about $300 million in forfeited profits.

The hedge fund will survive â€" even after the guilty pleas to insider trading charges by six employees and the conviction of two others â€" but in diminished form. SAC Capital has already renamed itself Point72 Asset Management, making it sound strangely like a 1980s euro trash band. SAC has also left the investment advisory business, meaning it will only be managing about $9 billion, mostly the personal fortune of the firm’s founder, Steven A. Cohen.

Still, is this punishment sufficient? After all, it allows an enterprise that harbored extensive corruption to continue.

Enter Mr. Schwartz, who has a long history of serving as an independent monitor in government investigations. He is the ostensible key to ensuring that Point72 will remain on the straight and narrow.

A compliance monitor or consultant is a creation of the last decade. When a corporation accused of wrongdoing agrees to settle the charges or is sentenced to probation, it is often required to pay for a monitor to ensure that it does not break the law again. The corporate monitor is to supervise the compliance procedures of the company as well as beef them up.

Companies as diverse as Apple, BP, Deutsche Bank and JPMorgan Chase have all been subject to corporate monitors of late. The monitors are supervising areas like compliance with the foreign corrupt practices act and antitrust laws.

And after a violation, why not have a person come in and make sure things go right?

It turns out, there may be problems.

One of the main criticisms of these programs is that they perpetuate an “old boys’ network,” rewarding former federal prosecutors with a job that pays millions of dollars.

Mr. Schwartz, for example, the compliance consultant for Point72, worked in the United States attorney’s office under Rudolph Giuliani. He has made a career out of providing services related to the prosecution of crime, and runs a company that provides not only corporate investigation and monitoring services, but also surveillance systems and DNA analysis.

There are other examples, too. Paul J. McNulty, a former deputy attorney general who wrote the Justice Department’s guidelines on charging corporations with criminal wrongdoing, is a partner at the law firm Baker & McKenzie and leads its compliance and investigations committee.

The work is quite lucrative. The fees that Mr. Schwartz is charging have not been disclosed, but will probably run in the millions, if not tens of millions, of dollars. In 2008, questions were raised over the hiring of former Attorney General John Ashcroft to serve as corporate monitor of Zimmer Holdings, a medical supply company in Indiana accused of paying kickbacks to doctors. Mr. Ashcroft’s firm was selected by Chris Christie, then the United States attorney in New Jersey, to be the monitor, for which he received a fee of up to $52 million. Mr. Ashcroft, by the way, had been Mr. Christie’s boss; Mr. Christie reported to him when Mr. Ashcroft was attorney general. Mr. Christie had previously directed similar corporate monitoring contracts to two former Justice Department officials and a former Republican state attorney general in New Jersey.

The attorney general at the time, Michael B. Mukasey, who was concerned about the appearance of favoritism, opened an internal investigation into the appointment. No specific charges were brought, but in the wake of the Ashcroft deal, the Justice Department adopted the so-called Morford principles, named after the author, Craig S. Morford, the acting deputy attorney general at the time. The principles were intended to stem abuses in the naming of corporate counsel by requiring that monitors be picked for their “merit,” but did not offer specific guidelines or prevent giving out these plum jobs to old colleagues.

Not surprisingly, monitors are still picked in a rather murky way. In the case of SAC, for example, Mr. Schwartz was chosen by the firm, a selection backed by an anonymous committee in the United States attorney’s office. The work of these monitors is also secretive. The Justice Department does not regularly report the existence and names of these monitors. Beyond that, the monitors’ work is almost never disclosed. The monitors are supposed to prepare reports that are given to the government. Any follow-up action by the government is also seldom disclosed.

One estimate of how many monitors have been appointed in the last decade is about a hundred, but we are just not sure.

As part of its agreement with prosecutors, SAC Capital, for example, was required to a hire a “compliance consultant” to review its insider trading policies. Even though the term here is consultant, it is no different than a monitor, because Mr. Schwartz is there to look at the firm’s practices. Mr. Schwartz will file a report after 45 days identifying any “deficiencies” in Point72’s insider trading policies. There will be another report after six months on progress in correcting these deficiencies, if any exist. Asked about his work for SAC, Mr. Schwartz said he had no comment.

James M. Margolin, a spokesman for the United States attorney’s office in Manhattan, which handled the SAC case, said only that the consultant’s “reports are filed with our office; they will not be made public.” He added, “Beyond that, we have no further comment.”

Jonathan Gasthalter, a spokesman for Point72, declined to comment on Mr. Schwartz’s role at the firm or his compensation.

Mr. Schwartz’s reports are advisory, meaning that Point72 can ignore them. But does anyone really think that the monitor’s work will have any effect on how Point72 does business? Mr. Cohen has every incentive to keep on the straight and narrow after avoiding criminal charges. Not only that, but the adoption of insider trading protocols has no doubt been a priority for the company for some time.

Corporate monitors may actually do good work â€" ensuring that a company improves its compliance and does not break the law again. But companies often agree to them to avoid being prosecuted. Why should this compliance be outsourced for millions of dollars? Wouldn’t it be better for the government to take the money and make its own assessment or arrange its own investigation?

I’m not upset that Mr. Cohen is going to be paying the equivalent of the cost of one of his expensive paintings. But it would be nice to know that the public is getting something for this money.

Without seeing the monitors’ work, it’s hard not to think that this is all just part of one of the biggest growth industries around â€" the corporate investigation industry. It’s a nice profit center for former prosecutors, but it may not be much more.