President Obama, Congress Put Wall Street on Notice: Regulators Are Coming

Obama, Congress give regulators their marching orders; here are yours.

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Robert Abrams and Joel Cohen are partners at Stroock & Stroock & Lavan LLP in New York. Abrams is a former New York State attorney general.

It is a new day in Corporate America. Whether it will be a good one for the corporation of interest to you depends largely on whether its board and executives anticipate, or at least pay heed to, the "preparatory commands" that are now being heard.

What does that mean? Simple! In military drills, commands are usually given in two parts. The preparatory command serves to warn of what is coming, so that when you hear the second part—the "command of execution"—you will be able to carry it out instantaneously.

Make no mistake. Corporate America no longer has only the media and the public's outrage to consider with respect to any arguably "scandalous" excesses—i.e., corporate jets to Washington to secure bailouts for troubled corporations, the awarding of billions in bonuses based on phantom income that came back to haunt. The latest angry throng of corporate onlookers includes more than just irate members of Congress posing for their 15 minutes on C-SPAN—e.g., Sen. Clair McCaskill's attack against those she perceives as the "bunch of idiots on Wall Street that are kicking sand in the face of the American taxpayer." 

On February 4, President Obama himself, heretofore the chief-of-serenity, promptly stepped out of that role and issued a drill sergeant's remonstration against "shameful" Wall Street bonuses in the midst of the financial crisis where Wall Street is seeking, and has gained, billions in bailouts. Listen carefully to that diatribe, because, in it, Obama is effectively telling, perhaps even commanding, every regulator and prosecutor to get busy—to look under every rock and use every legal mechanism available, untried or not, to protect taxpayers, shareholders, and America at large from any perceived wrongdoing as the nation carefully works to rebuild its economic muscle. The command was perhaps most acutely felt by Mary Schapiro, the newly confirmed chair of the Securities and Exchange Commission, who clearly has received a bold call-to-action in the wake of the Madoff mega-mess. 

The other important group of regulators to consider in this mix is the state attorneys general, who each have a keen interest in corporate governance affecting their constituents and whose offices are less encumbered by bureaucracy. One such regulator who has declared his readiness to heed the call is New York Attorney General Andrew Cuomo, the "sheriff" of Wall Street. Mr. Cuomo swiftly called Obama's remarks "a welcome breath of fresh air and a healthy dose of reality for Wall Street" and affirmed his readiness to ensure that the Street "wakes up to its new responsibilities and abides by a new code of corporate responsibility." Like Eliot Spitzer before him, Mr. Cuomo's regulatory jurisdiction uniquely enables him to exact the kind of change that President Obama would argue must, and will, come to Corporate America.

It is precisely these preparatory commands that should compel industry boards and executives to think carefully now about how to prevent the appearance of being flatfooted when the regulators arrive. For once the investigative trail leads to a company's door, therein will lie the moment of truth.

In times of crisis, a company's self-imposed "claw back" of wasteful spending can go a long way toward demonstrating to a regulator that, to the extent that prior practices were not exceptionally prudent, the past is past and management has become sensitized "on its own" to shortcomings. The Department of Justice's Corporate Charging Guidelines clearly state that the existence and adequacy of a company's compliance program, as well as the company's history, are to be considered in charging decisions.

Simply put, burying a board's head in the sand and assuming all is well, while hoping against hope that a subpoena will never come its way, is shortsighted indeed. There are too many prosecutors, too many regulators, and too many disgruntled shareholders to support such optimism.