Stepping Back From the Freeh Report: Evolving Procedural Overkill?

JURIST Guest Columnist Douglas Branson of the University of Pittsburgh School of Law says that the trend of hiring independent corporate investigators and monitors, as exemplified by the most recent investigation into The Pennsylvania State University, has become overly expensive and fails to bring about greater accountability...

I take no position on the Jerry Sandusky affair, Coach Joe Paterno, President Graham Spanier or the severe sanctions the National Collegiate Athletic Association (NCAA) has levied on Penn State. I have opinions on those subjects but will keep them to myself.

What I wish to do is to take a step or two back to view the process as it has developed and, in the last decade especially, more rapidly evolved, culminating in this instance with the Freeh Report released in July. I want to take the long view.

The Louis Freeh Report about Penn State and the Jerry Sandusky affair has been very much in the news these days. Among other things, the report and its findings have been the basis for the demonization of the once-beloved Joe Paterno and for the severe sanctions levied by the NCAA on Penn State. Lately, former Penn State President Graham Spanier and his counsel, former federal court of appeals judge Timothy K. Lewis, have blasted the Freeh Report as a "blundering and indefensible indictment." Spanier and Lewis opined "that Judge Freeh was not an independent investigator but a self-anointed accuser, who in his zeal to protect victims of wrongdoing ... recklessly and without justification created victims of his own."

In olden days, which were not too long ago, when an institution encountered serious wrongdoing, or wrongdoing followed by a cover-up, the procedure pretty much was uniform. The governing body of the institution (for example, the board of directors in the case of corporations, or the board of trustees in larger not-for-profit entities) would vet the board's members for possible conflicts of interest. Those potentially or actually at risk for favoring the interests of themselves, family, friends, associates or other businesses or entities in which they had an interest, would be excluded. If a critical mass remained, the board would appoint a subgroup of the disinterested as a committee.

The board would charge the committee so constituted with investigating all possible wrongdoing, to culminate in a written report back to the board.

If the vetting process resulted in a too small a mass, or no disinterested directors or trustees at all, the board might consider amending the bylaws, increasing the board size. To the newly created board positions, the directors would appoint persons of stature who also could have no conceivable connection to either the alleged wrongdoing or the alleged cover-up. Even if a critical mass existed, out of an abundance of caution, a board might appoint expansion directors or trustees. In yet another version of the procedure, the board members remaining would petition a court to name "expansion directors" who would staff the investigative committee.

So constituted, the investigative committee would retain a law firm to assist it. The firm so selected usually would be one different from the law firm which ordinarily represented the corporation or non-profit in some or most of its other affairs.

In the mid-1970s, the Securities and Exchange Commission (SEC) became aware that several hundred US publicly held corporations had made illegal foreign payments (bribes to foreign officials mainly). In the alternative, many US corporations had made illegal contributions to partisan campaigns for political office. In particular, they contributed to the Committee for the Re-Election of the President, headed by former Secretary of Commerce Maurice Stans who had become President Richard Nixon's head fundraiser.

The SEC simply did not have the resources to investigate and possibly prosecute the 700-plus cases of which it was aware. So the SEC announced a self-regulatory program. If in good faith a corporation conducted an internal investigation, as outlined above, the corporation could "come in from the cold," so to speak. The SEC would levy only modest sanctions, or no sanctions at all.

Thus, the internal investigation process was born, or at least achieved wide currency.

The internal investigation process was expensive. Typically, the large law firm hired as special counsel would charge $400,000, $500,000, or even more (noble as they are, large law firms will defend you, or in this case investigate, to your last dime — at least if you let them). But the alternative, conviction of a felony for misleading and illegal financial statements (because of the unreported bribe or campaign contributions) was worse. The 1970s, 1980s and 1990s saw growing numbers of these internal investigations.

In a significant subgroup of cases, a bankruptcy may follow (for a corporation, for a municipality, sometimes for a non-profit). If fraud or other serious wrongdoing is suspected, the bankruptcy court may appoint an examiner. The examiner, usually an attorney of some standing, will conduct another investigation, report on allegations of wrongdoing or cover-up, and urge upon the court remedial steps. In the WorldCom bankruptcy, for example, former Attorney General Richard Thornburgh, assisted by the large law firm in which he is a partner, acted as the bankruptcy examiner. He and his firm investigated and rendered not one but three reports.

The Thornburgh Report was, of course, laid over a report [PDF] done by a committee comprised of WorldCom expansion directors, as outlined above.

Beginning in the late 1990s, a third layer of complexity and expense was added to all of this. In particularly egregious cases, or newsworthy ones, ex-government officials, or large law firms, many of which now bill themselves as experts in corporate investigations, vie to be named as a special, independent investigator. The fees they are able to charge are enormous: 20 and 30 times the fees charged not so long ago.

Penn State paid Special Investigator Louis Freeh $6.5 million, which culminated in a 267-page report. And Penn State got off cheap. It is not unusual for a special investigator, or "corporate monitor" as they are sometimes called in the business world, to present a bill for $10 or $12 million.

Richard Breeden was chairman of the SEC in the George W. Bush administration. He levered that credential, which basically has little to do with corporate governance, into obtaining judicial appointments of himself as corporate monitor in high-profile cases. In that capacity, he purported to oversee reform of the governance structures at various entities.

Breeden has had himself foisted (in my opinion) as corporate monitor on WorldCom, KPMG, Hollinger International and a number of other large corporations. Breeden and his firm have collected scores, several scores, of millions of fees in these cases. In fact, Breeden has used a portion of the enormous fees he has collected as seed capital for a hedge fund in his own name.

But what, you ask, besides the tremendous escalation in the amount of fees paid, is wrong with this new layer of process, which has become almost de rigueur?

First, of course, is the added expense and the duplication. I suppose, though, that a great deal of duplication is justifiable if, overall, the process overturns some additional rock and finds further evidence of wrongdoing. Whether such a pearl is worth the price is a value judgment about which various persons will differ.

Second is the potential lack of impartiality and fairness. Judges take oaths to be fair and impartial. Independent investigators and corporate monitors do not. Further, most of the judges I know regard being fair and impartial as the highest calling of their positions.

I have sat on several panels charged with making recommendations for federal bankruptcy judges, who are appointed to 14 and one-half year terms by the judges for life (what are termed "Article III judges" after Article III of the US Constitution). The panels always consist of one or two federal district court judges, a federal appeals court judge, sometimes a state court judge and local bar association presidents (I participate as the token law professor). Universally, the first question the judges ask, as to each and every candidate, is: "Can this person be fair and impartial?" "Will this person remain fair and impartial?" "Will this candidate, if appointed, mete out fair and considerate treatment to each and every litigant who appears before him?" They dwell on it.

New judges must take an oath to be fair and impartial. Every judge I know or have heard, with the exception of Antonin Scalia, regards fairness as their highest calling. Independent investigators take no such oaths. Independent investigators are not surrounded by the culture which envelops judges. Independent investigators are not appointed for life. They are dependent on their current gig and perhaps the sensation their findings cause for their next appointment and their next paycheck.

Third, a case may be made that independent investigators and corporate monitors actually do lack impartiality. Viewed in the larger context, the entire special investigation industry seems to be a Johnny-come-lately bootstrap. Monitors and investigators know how they are supposed to come out. Their investigation and final report must find some strong evidence of additional wrongdoing, hopefully sensationalist evidence of wrongdoing and cover-up or, best of all, both.

If the special investigator does not file a headline-grabbing report, at least two consequences follow. One is the particular investigator may risk not being hired again and thus will forego both the celebrity and the huge fees they have lately been able to command. Second is that, if the investigator finds little or no additional evidence of wrongdoing, they, their investigation, and their report most assuredly will be labeled as principal players in a whitewash, at least in some quarters and probably in more than that.

So there is a list of problems endemic to special investigations such as Freeh's at Penn State, or to Breeden's as "corporate monitor." They are a fifth wheel, so to speak, added to a well-developed scenario for investigations. They thus are duplicative, as well as tremendously expensive. They have the external appearance of a giant bootstrap, driven in large part by a motivation to seek out-sized fees. The potential for a lack of fairness and a lack of impartiality, often manifested in a pick-and-choose or cherry-picking approach to the evidence, is great. And, in many or most of the cases, a good argument may be made that an actual lack of fairness is inherent in the process. These investigators and their staffs know how they are expected to come out.

What to do about all of this? Certainly we should be acutely aware of why and how this new-fangled special investigation has evolved. To me, this added layer of complexity seems to have come out of nowhere.

Perhaps we can also enact statutes which require investigators and monitors to take solemn oaths. In England, the Secretary of State has the statutory power to appoint company inspectors. As a matter of practice, on information and belief, many inspectors so appointed take oaths of office. In Australia and New Zealand, judges appoint Royal Commissions to further investigate serious wrongdoing. Again, commissioners must make out oaths, which the Parliament enactments require, and are enveloped by an atmosphere demanding impartiality.

My opinion is that special investigators are motivated by a quest for truth and justice far less than one would imagine. The lucre of exorbitant fees and of celebrity motivates at least some of what is going on. The need to be re-appointed again and again and to become repeat players is where the biggest bucks are located. Presidents appoint federal judges for life. Monitors and investigators are only as good as their last ballgame. Or sometimes perhaps not even as good as that.

Douglas Branson is the W. Edward Sell Chair in Law at the University of Pittsburgh School of Law. Professor Branson's latest books include Three Tastes of Nuoc Mam — The Brown Water Navy and Visits to Vietnam (Hellgate 2012) and The Last Male Bastion — Gender and the CEO Suite at America's Public Companies (Routledge 2010).

Suggested citation: Douglas Branson, Stepping Back From the Freeh Report: Evolving Procedural Overkill?, JURIST - Forum, Aug. 31, 2012, http://jurist.org/forum/2012/08/douglas-branson-freeh-report.php.



This article was prepared for publication by Caleb Pittman, head of JURIST's academic commentary service. Please direct any questions or comments to him at academiccommentary@jurist.org

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