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226 | 10 Reforming the Corporate Monitor? Vikramaditya Khanna Over the last decade enforcement authorities have increasingly relied on the appointment of corporate monitors as part of DPAs and NPAs. However, this growth has not been without criticism or controversy. In the last few years a great deal of attention has been focused on the conditions for obtaining a DPA or NPA, how monitors are selected, how they are paid, and what kinds of powers and obligations they have.1 This increased attention has been accompanied by a series of legislative and enforcement developments leading to discussions on how to reform and regulate corporate monitors. This chapter explores what steps may prove beneficial in reforming and regulating the corporate monitor. Section I begins by defining some key terms in the debate and examining the growth of corporate monitors until the advent of the so-called Morford Memo in early 2008. During this period, monitoring assignments were subject to little scrutiny outside of the DOJ; thus this time frame represents a period of “organic” growth for monitors. Further, this section also lays out an analytical framework for examining when monitors may be desirable, what powers and obligations they should have, and what steps may facilitate the development of a market for monitor services. Section II explores the most recent developments , including the Morford Memo and recent bills put forward by the U.S. House of Representatives. These developments arose in response to concerns about the appointment and pay of monitors, among other issues, and can be seen as the first steps toward formalizing the process of appointing monitors and creating a market for monitor services.2 This section critically analyzes these developments and proposes further reforms to enhance the benefits of using corporate monitors, recognizing that monitors do have an impact on the governance of firms and what implications arise from that. In particular, this section will explore some measures that might help to enhance the development of a market for monitor services. Section III concludes the chapter. Reforming the Corporate Monitor? | 227 I. The Initial, and Largely Unregulated, Growth of Corporate Monitors Before discussing how to reform corporate monitors, it is important to define the key terms used in this area and to sketch out the initial growth of monitors. A corporate monitor is an individual or entity appointed before judgment and as per agreement (i.e., a DPA or NPA) between enforcement authorities and the firm to monitor a firm’s compliance activities. Sometimes the monitor’s powers exceed simple oversight of compliance efforts and bleed into other aspects of the firm’s operations. For ease of exposition I will use the term DPA to refer to both DPAs and NPAs unless otherwise specified. Although the terms of DPAs were not regulated prior to the Morford Memo or required to follow a set pattern, some common terms developed fairly quickly. In exchange for the DOJ’s deferring and later dismissing charges, firms would often agree to pay fines and restitution, comply with ongoing investigations, accept responsibility for the wrongdoing, and agree to take remedial steps, as well as agreeing to the appointment of a monitor. Further , if a monitor was appointed, its powers could be quite wide-ranging and varied greatly with each DPA, as could the terms of the monitor’s appointment (e.g., duration, postmonitoring obligations).3 This is perhaps not surprising given that DPAs and monitors were largely the result of negotiation on a case-by-case basis by the DOJ, or other enforcement authority, and the firm. A. Overview of Process of Appointing Monitors and Their Scope Initially, DPAs and monitors were a relatively limited phenomenon. The first modern instance of a monitor is found in the 1994 Prudential Securities case, where an independent expert was appointed to monitor Prudential’s compliance as part of a DPA.4 However, monitors made only a handful of appearances in the 1990s, and their real growth began in the early part of the new millennium.5 The Enron series of scandals and the increasing attention to corporate wrongdoing brought the issue of DPAs and monitors to the fore. In particular , the indictment of Arthur Andersen in connection with the Enron scandal and the fairly large collateral consequences propelled interest in considering alternatives to the full criminal process.6 Further, the increasing number of cases of alleged criminal wrongdoing over a short period and the government ’s relatively fixed enforcement budget may have made the value of an [18.216...

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