It would be easy to frame the problem around former Attorney General John Ashcroft. Last year, the U.S. attorney for New Jersey awarded the former U.S. attorney general, now a Washington lobbyist, a no-bid contract—worth from $28 million to $52 million—to monitor internal compliance at an Indiana medical device company that hoped to avoid criminal fraud charges. If the price of the contract wasn't enough to raise eyebrows, the fact that the prosecutor was a former Ashcroft assistant surely was.
From the start, there have been questions over Ashcroft's 18-month contract with Zimmer Holdings, which was dealing with allegations that it used consulting relationships with surgeons to induce them to use the company's products. "We must assure the public that the Justice Department is not rewarding political allies," said Rep. John Conyers, a Michigan Democrat, at a congressional hearing today. "Currently, there is no transparency."
But at the hearing, it was clear that the questions about these compliance monitors go far beyond the Ashcroft deal. The Ashcroft matter has only highlighted the Justice Department's little-known and unregulated practice of using compliance monitors as part of its fight against corporate crime.
The idea is simple: To avoid criminal prosecution, a company suspected of wrongdoing agrees to pay an outside monitor to review its books and oversee its internal compliance system. These agreements, which often allow prosecutors to bring criminal charges if the company fails to improve, can work well. Companies save the cost of a trial and avoid bankruptcy, while prosecutors can assure the public that the company is changing its ways, all at no cost to the taxpayer.
Dating back to the 1990s, the use of compliance monitors has become increasingly common since the Enron, WorldCom, and other corporate scandals. And the pace appears to be picking up: Last year, according to a recent study, there were 35 agreements using compliance monitors, up from 20 in 2006. "[Monitors] encourage companies to root out illegal conduct and can help restore integrity," said David Nahmias, U.S. attorney for the Northern District of Georgia.
That was how Ashcroft explained his contract with Zimmer. He told Congress that he had no knowledge of the bidding process. "There is not a conflict. There is not an appearance of a conflict," he said, defending himself and the New Jersey prosecutor, Christopher Christie.
Whatever the case, there has been little uniformity in the use of compliance monitors. There are no clear rules on when a prosecutor should assign a monitor: When, for instance, does the government simply decline to prosecute? When does it settle for money? And when does it require a monitor in the first place?
How a monitor is chosen also varies: Some corporate monitors are chosen by the prosecutor, some by the company, and some by a combination of both. Some agreements are filed with the court; others are not. And the responsibilities and duration of a monitor vary widely. Some have focused on a narrow area of the company; others have had wide latitude to examine broader corporate activity.
These differences have troubled companies complaining that they have little choice in how compliance monitors are set up. The impact of monitors can be quite significant, as was the case when the recommendations of a monitor for Bristol-Myers Squibb led to the dismissal of the company's CEO and general counsel. "We're missing the underlying question of should the DOJ be using this tool as frequently as they have," says Susan Hackett, general counsel of the Association of Corporate Counsel.
The Justice Department, taking note of these discrepancies, issued its first guidelines this week to create more transparency with monitors. The new rules require that a committee of prosecutors choose monitors and seek the approval of the deputy attorney general. The rules call for the committee to make all possible efforts to avoid real or potential conflicts of interest. And they note that monitors' recommendations are not binding on the company and should be limited to the initial wrongdoing—not extended to other potential malfeasance.
Yet many outside experts say that the Justice Department's guidelines do not go far enough. Timothy Dickinson, an attorney who has been a monitor, suggested that the government outline ground rules for when monitors should be allowed—something he suggested was necessary only when controls have broken down and when the company has failed to adequately address the problem. "They should be the exception, not the rule," he said.