Paul Fiorelli

1
Update On Federal Regulations
The Federal Sentencing Guidelines for
Organizations Past and Present

• Paul Fiorelli
• Member, Ad Hoc Advisory Group, U.S. Federal
  Sentencing Commission

Organizational Compliance Ethics Update
2
Update On Federal Regulations

• Presentation
• Overview of Current US Sentencing Commission
  Guidelines
• Individuals
• Organizations
• Overview of USSC Proposals

Organizational Compliance Ethics Update
3
Update On Federal Regulations

• INDIVIDUAL GUIDELINES
• Dynergy - Jamie Olis sentenced to 24 years on
  4/04
• Blamed for more than 100 million of stock losses
• 3 counts of wire fraud, one count of securities
  fraud, and one count of conspiracy
• His boss plead and cooperated and was sentenced
  to 5 year max

Jamie Olis
Organizational Compliance Ethics Update
4
Update On Federal Regulations

• INDIVIDUAL GUIDELINES
• Frank Quattrone convicted of obstruction on
  5/3/04
• Sam Wacksal - CEO of Imclone, 7 years for Insider
  Trading
• Martha Stewart - 10 months for obstruction of
  justice

5
7
Update On Federal Regulations

• Minimum Requirements
• COMPLIANCE STANDARDS
• HIGH LEVEL OVERSIGHT
• CAREFUL DELEGATION
• EFFECTIVE COMMUNICATION
• MONITORING/COMPLIANCE
• CONSISTENT DISCIPLINE
• PROCESS MODIFICATIONS

Organizational Compliance Ethics Update
6
Update On Federal Regulations
GOODCO v. BADCO
Ethics Curve

• 80,000,000 v. 1,000,000
• 801 SWING IN FINES

Organizational Compliance Ethics Update
7
Update On Federal Regulations

• USSC Revision Process
• Fall 2001- USSC announces intention to form
  Advisory
  Group on Organizational Guidelines (AGOG)
• February 2002 - AGOG empanelled
• 16 people (3 academics, DoJ, Ethics and
  Compliance Communities)
• November 2002 - Public hearing

Organizational Compliance Ethics Update
8
Update On Federal Regulations

• USSC Revision Process
• October 2003 - Final report to USSC
• Available at www.ussc.gov
• March 2004 - USSC held public hearing
• May 1, 2004 - USSC sends amendments to Congress

9
Update On Federal Regulations

• USSC Proposals
• Stand-alone guideline
• Assessing the risk
• Periodic evaluation of program effectiveness
• Defining Standards and Procedures
• Delegation of Substantial Authority
• Training requirement
• Reporting systems
• Promoting Ethics
• Culture promoting ethical conduct and commitment
  to compliance with the law

Organizational Compliance Ethics Update
10
Update On Federal Regulations

• USSC Vice Chair - John SteerAlthough those
  immediate objectives (of preventing and detecting
  violations) were bold advances in their own
  right, the Commissions vision for its
  organizational guideline structure was even more
  ambitious and forward-looking. The Commission
  hoped this punishment scheme initiative would
  help contribute, over time, to a more healthy,
  values-based way of doing business in America.
  (26/4/01) (emphasis added by author).

Organizational Compliance Ethics Update
11
Update On Federal Regulations

• New Stand-alone Guideline
• Section 8B2.1
• Elevate from application note to guideline
• Maintained and refined seven minimum requirements

Organizational Compliance Ethics Update
12
Update On Federal Regulations

• Risk Assessment
• Implicit in current guidelines
• Ongoing review

Organizational Compliance Ethics Update
13
Update On Federal Regulations

• Defining Compliance Standards and Procedures
• Standards of conduct and internal controls that
  are reasonably capable of reducing the likelihood
  of criminal conduct

Organizational Compliance Ethics Update
14
Update On Federal Regulations

• Delegation of Substantial Authority
• Current guidelines exclude from substantial
  authority personnel, those with a propensity
  towards illegal activity (mind reader standard)
• Proposal
• knew or should have known
• screen out those with a history of violations, or
  conduct inconsistent with an effective program

Organizational Compliance Ethics Update
15
Update On Federal Regulations

• Periodic Evaluation of Program Effectiveness
• Current guidelines suggest monitoring and
  auditing as possible way to implement reasonable
  steps to achieve compliance
• Proposal requires monitoring and auditing
• Evaluate program effectiveness
• Detect criminal conduct

Organizational Compliance Ethics Update
16
Update On Federal Regulations

• Training
• Current guidelines suggest it is an option
• Proposal requires training
• All employees of the organization
• Board and governing authority must be trained
• Training need not be formal
• Orientation or monthly meetings for small
  organzations

Organizational Compliance Ethics Update
17
Update On Federal Regulations

• Reporting Systems
• Current guidelines address anti-retaliation
• Proposal requires reporting mechanism
• Allow for anonymity and confidentiality
• Employees and agents may report, or seek guidance
• Without fear of retaliation
• Similar to Sarbanes-Oxley

Organizational Compliance Ethics Update
18
Update On Federal Regulations

• Organizational Culture and Leadership
• Increased leadership responsibility for
  compliance
• Governing authority knowledgeable about content
  and operation of Compliance and Ethics Program
• Ethics Officer given adequate resources,
  authority and access to governing authority
• Promote organizational culture that encourages
  ethical conduct and a commitment to compliance

Organizational Compliance Ethics Update