Published on November 24th, 2015 by Alan L. Sklover
“When you stretch the truth, watch out for the snapback.”
– Bill Copeland
ACTUAL “CASE HISTORY”: Note – In almost all of our case histories, we alter the names and facts a bit to disguise the true identity of our clients. In this case history, we have not done so, because all of the facts are a matter of public Court record.
In 2008 I represented Joseph Sullivan, a Chief Compliance Officer of New York-based hedge fund Peconic Partners. Sullivan objected to the actions of the principal owner of Peconic Partners, William Harnish, in his timing stock sales that gave Harnish and his family an advantage over Peconic’s investors. The practice is called “front running,” and is considered a breach of fiduciary duty to investors. Sullivan had a written contract of employment, but by its terms was still an “at will” employee.
After Sullivan voiced objection to the seeming “front-running,” he was asked to sign an agreement that, without reason or payment, took away his existing ownership interests in the firm. When I wrote a cordial email to Peconic’s legal counsel asking to discuss the matter, hours later Sullivan was fired.
We initiated Sullivan’s lawsuit in New York Supreme Court, claiming, in essence, that objecting to compliance failures was Sullivan’s very job, and so Peconic’s firing him for doing his job was a breach of his employment contract. No Court in New York had ever made such a ruling on behalf of compliance, risk or ethics officers, but we were determined to change the law. Audacious, yes, but surely needed in this day and age, and especially in New York, considered by many to be the finance capital of the world.
Sure enough, we won: Justice Lowe of the New York Supreme Court ruled in Sullivan’s favor. In doing so, he “went out on a legal limb” of sorts, in that he was brave enough to make “new law” where he saw it as quite logical and necessary to do so. His decision was a big step forward for compliance and risk officers.
Unfortunately, on Harnish’s appeal of the ruling, the New York Court of Appeals, which is New York State’s highest court, overruled Justice Lowe’s decision, effectively leaving New York-based compliance officers in the lurch. The Court’s reasoning, in summary, was that a decision to give new legal protections to compliance officers was not its to make, but rather a decision that had to be made by the state legislature, U.S. Congress, or federal securities regulators.
The Court’s decision was not without strong dissent from some of its more thoughtful Judges. Here is what Chief Judge Lippman of the New York Court of Appeals wrote in his stinging rebuke of the decision reached by the majority on the Court:
“In the wake of the devastation caused by fraudulent financial schemes – such as the Madoff Ponzi operation, infamous for many reasons including the length of time during which it continued undetected – the courts can ill afford to turn a blind eye to the potential for abuses that may be committed by unscrupulous financial services companies in violation of the public trust and the law. In the absence of conscientious efforts by those insiders entrusted to report and prevent such abuses of investors, such behavior can run rampant until a third party outside the company discovers it and takes action. The message that will be taken from the majority’s decision is self evident: if compliance officers (and others similarly situated) wish to keep their jobs, they should keep their heads down and ignore good-faith suspicions or evidence they may have that their employers have engaged in illegal and unethical behavior, even where such violations could cause or have caused staggering losses to their employers’ clients. The majority’s conclusion that an investment advisor like Peconic has every right to fire its compliance officer, simply for doing his job, flies in the face of what we have learned from the Madoff debacle, runs counter to the letter and spirit of this Court’s precedent, and facilitates the perpetration of frauds on the public.”
To put it mildly, we agreed wholeheartedly with Chief Judge Lippman’s sentiments, and we shared his great disappointment, too.
LESSON TO LEARN: There is an undeniable friction between, on the one hand, sales and operations people, whose job it is to increase revenues and profits, and whose performance is judged on numerical metrics, and compliance, risk and ethics officers, on the other hand, whose job it is to make sure that sales and operations are carried out in accordance with legal, regulatory and ethical bounds. It is a natural friction that will never go away.
But there need to be rules to protect compliance, risk and ethics officers, who face pernicious retaliation for simply doing their jobs. Until compliance and risk officers are given job protection by the state and federal legislatures, or federal securities regulators, they will remain in significant job jeopardy for doing their jobs, even in the best of faith. That is bad for them. Worse still is that compliance, risk and ethics officers will feel pressured – directly or indirectly, overt or covert – to ignore breaches of “the rules.”
I simply cannot count the number of times that compliance-oriented clients have reported being criticized for being “too negative,” “too picky,” “trying to run the company,” “getting in the way,’ or “going overboard.” One client received a stern email, in all caps, that read, “CHILL.” (That one terribly chosen word in an email resulted in a negotiated severance settlement of over one million dollars.)
Until this problem is attended to by legislatures and regulators, or perhaps the Courts, compliance, risk and ethics officers are on their own to protect themselves. While compliance, risk and ethics officers may not have sufficient leverage when seeking employment to dictate the terms of their employment relations, nothing stops them from asking for protections against retaliation for doing their jobs in good faith. Imagine, if you would, that all compliance professionals made such requests, employers (most especially in the world of finance) would then be under pressure to grant such protections to all.
Membership organizations and trade groups of compliance officers can lobby, too, for industry standards, regulatory standards and “best practices” standards in the structure of employment agreements for compliance officers. That is already underway; more pressure is still needed.
In representing numerous compliance and risk professionals, I have seen first-hand how doing their job can result in losing their job, and how such damage might have been prevented.
In the meantime, there are things compliance officers can – and should – seek when they are negotiating new employment (or during employment renegotiations) to make themselves more job secure. Remember that “forewarned is forearmed,” and “The Lord helps those who help themselves.”
WHAT YOU CAN DO: It’s readily acknowledged that requesting contractual protections during employment discussions may cast a pall on hiring momentum. At the same time, it’s unquestioned that knowing what to ask for, and asking for it when you have the greatest leverage, can only help. The following are the ten items we suggest all compliance, risk and ethics officers raise in employment discussions.
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