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Corporate Crime Reporter: Reuben Guttman on the Failure of Corporate Compliance

Corporate Crime Reporter, Volume 34, Number 3, Monday, January 20, 2020

REUBEN GUTTMAN ON THE FAILURE OF CORPORATE COMPLIANCE

Internal corporate compliance programs do nothing to address pervasive wrongdoing central to a company’s business model.

That’s the take of Reuben Guttman of Guttman, Buschner & Brooks in Washington, D.C.

“This I know from 30 years plus of litigation against corporate wrongdoers,” Guttman says.

“WorldCom, Enron and Tyco all had on paper compliance programs that would impress the lay person and might impress somebody teaching at a law school. But the misconduct was ingrained into the business model,” Guttman told Corporate Crime Reporter in an interview last week.

“Where the conduct is pervasive and part of the business model, the internal compliance program is not going to correct it,” Guttman said. “I have litigated against Abbott Labs. The company engaged in pervasive misconduct with regard to the marketing of the anti-epileptic drug Depakote. It resulted in both civil and criminal sanctions against the company. It was a total $1.6 billion settlement.”

“What we found in the Depakote case was that the existence of the corporate compliance program assuaged insiders in the corporation so that they thought there could be no wrongdoing going on. It is like – I s_aw the doctor last week so I can’t possibly be sick when in fact you could be terminally ill.”

“Compliance programs in part are being used to assuage people and not make them second guess because they believe someone else is taking care of it.”

“When we first interviewed our original client in the Depakote case – is your company off label marketing the drug? And the answer was – no, we are not off label marketing the drug. We have an internal compliance program. Everything we do is legal. We are told everything we do has to be legal.”

“But when we started getting into the actual facts of how the drug was being marketed, we saw major problems. Internal compliance programs have the ability to convince people that there can be no wrong. We saw the same situation in GlaxoSmithKline involving a number of drugs. I think the False Claims Act settlement was $1 billion. We settled on the eve of trial against Celgene for $280 million.”

“And the sales people say – we do no wrong, we are a terrific company. I have written an article about this for the Safra Center for Ethics at Harvard Law School. It’s titled – Internal Compliance – Is It Really About Compliance?”

“Our niche as a law finn is challenging corporate conduct that is pervasive and intertwined with the business model of a corporation. The conduct is so central to the business model that if you take out the conduct, it will materially impact the value of the company. It’s shareholders will take notice.”

“Where you have conduct that is central to the business model, the compliance program won’t do much. Will it make people think more about compliance? Maybe it couldn’t hurt. But what makes people sit up and notice is the Sally Yates memo of September 2015. It says, when corporations get into trouble, we are going to be looking at individual liability. The reality is that corporations can’t do what they do absent the conduct of individuals. That is going to be the best way to enforce compliance.”

“I come from a labor background. Statutory labor law has been around for about 80 years. One of the things that is central to labor law is that company dominated unions are unlawful. If a company says – you don’t need a union, we have our own union, go join our union – that’s a violation of the National Labor Relations Act.”

“In many respects you have compliance programs that are analogous to company dominated unions. Instead of an outside entity doing the investigation and making transparent the wrongdoing, the internal compliance department is the first vacuum that sweeps up the information. And the corporation decides what they want to do
with it.”

“Sometimes the information that the whistleblower is reporting has significant impact not just within the corporation but to parties outside the corporation. For example, let’s say you have a drug that is being marketed for the wrong purposes, or a drug that has been adulterated, or a medical product that is problematic and the company doesn’t resolve the full results of tests.”

If compliance programs are not working, if it’s an internal police force controlled by the corporation, what do you propose? “I’m not suggesting eliminating internal corporate compliance. I’m suggesting you not rely on it as the panacea. Maybe it doesn’t hurt. But don’t count it as the solution. Recognize that it has a serious potential to be a mechanism to conceal wrongdoing.”

“I debated somebody a number of years ago on Bloomberg. We were discussing the SEC whistleblower program. And the question was – must you go to internal corporate compliance first before you go to the SEC?”

“The corporations, the Chamber of Commerce was saying – you must go to corporate internal compliance first before you go to the SEC. My perspective was – absolutely not. At the least, you should have a choice. You don’t know whether the corporation is going to make transparent the problems that may not only impact the bottom line for the shareholders, but may involve life saving devices for consumers or devices like automobiles that cause injury.”

“Look at the GM ignition switch case. Look at Boeing. Boeing is classic. Do you really want the 737 MAX to be something that is investigated by internal compliance, remains in internal compliance and never sees the light of day?”

A strong internal compliance program would find the problem, resolve the problem and report it to the government. But from your experience within the pharnrnceutical industry – “Not just the pharmaceutical industry. But look at GM and the ignition switch. Look at Boeing.

These programs just don’t work. If these programs were working, we wouldn’t be seeing the pervasive wrongdoing we are seeing. Internal compliance is not going to have the leverage within a corporation to say – we have to take the 73 7 M AXs out of the air. That’s a really tough call for a corporation to make. That’s why you need outside regulators. You shouldn’t be cutting the company slack because it has an internal compliance program.”

“In fact, if the company has an internal compliance program and you found that the company engaged in wrongdoing, it is worse, because it means the internal compliance program wasn’t working. It means it was worthless.”

Is there any evidence that the government corporate criminal enforcement program is deterring wrongdoing? “Based on the wrongdoing I’ve seen, no.”

“Each of the big phannaceutical frauds I have seen, the companies are paying amounts of money that cause the public to take notice. But in fact, what is going on is much of the litigation across the board is effectively setting a fee for a license to break the law.”

“The litigation is not having an impact. I don’t think the corporate compliance programs are having an impact. What will have an impact is sticking to the letter of the Sally Yates memo of September 2015.”

INTERVIEW WITH REUBEN GUTTMAN, GUTTMAN, BUSCHNER & BROOKS, WASHINGTON, D.C.

Internal corporate compliance programs do nothing to address pervasive wrongdoing central to a company’s business model.

That’s the take of Reuben Guttman of Guttman, Buschner & Brooks in Washington, D.C.

“This I know from 30 years plus of litigation against corporate wrongdoers,” Guttman says. We interviewed Guttman on January 13, 2020.

CCR: You graduated from Emory Law School in 1985. What have you been doing since?

GUTTMAN: I have been doing litigation against large corporations. Between 1985 and 1990, I was counsel to the Service Employees International Union.

I was the chief outside counsel to the Oil Chemical and Atomic Workers Union (OCA W). l represented OCA W in the nuclear weapons sector. I brought significant cases against the Department of Energy and environmental and safety and health issues.

I have had a corporate fraud practice under the False Claims Act and other statutes. I have been involved in cases against the major pharmaceutical companies – Pfizer, GlaxoSmithKline, Wyeth, Celgene, Abbott Labs. And collectively these cases have resulted in recoveries totaling $6 billion.

I have done lots of litigation under the Fair Labor Standards Act against the meatpacking industry involving meatpackers in the midwest.

Primarily my expertise is corporate fraud and mismanagement. I bring securities class actions based on breaches of fiduciary duties. I have litigated the issue of whether the Hershey Corporation had to make disclosures about records regarding its use of child labor in the Ivory Coast and Ghana.

I have had a pretty broad practice over 35 years. I have reinforced that through teaching at various law schools – including Rutgers and Emory.

I’m writing a book on pre-trial litigation which will be published by Walters Kluwer hopefully in the fall. My co-author is Jason Lore at Rutgers.

I do a regular blog for the National Institute of Trial Advocacy called The Rule of Law blog. I was on the board of directors of the American Constitution Society for six years – I’m now on the advisory board. It’s been 35 years of an eclectic practice.

CCR: What is the primary practice of your law firm?

GUTTMAN: It is complex litigation involving corporations.

CCR: Is your practice exclusively plaintiffs’ side?

GUTTMAN: Yes.

CCR: What percentage of your practice is False Claims Act?

GUTTMAN: Seventy percent.

CCR: Other than False Claims Act, what kind of cases do you bring?

GUTTMAN: We have a large class action under ERISA against the mortgage servicers. It’s a novel theory. The court has sustained our complaint. I’m sitting in South Carolina now.

We are settling a civil rights class action against the South Carolina prison system. The settlement will require the treatment of thousands of prisoners for Hepatitis C. It has partially settled already. It requires the state to test prisoners.

We are involved in derivative litigation in Delaware.

CCR: You are primarily a False Claims Act firm.

GUTTMAN: We actually litigate non-intervene cases. For Celgene, we settled on the eve of trial. We took tons of depositions. We are trial lawyers. We are not lawyers who put the case in play hoping the government will settle.

Right now we are suing Massachusetts General Hospital in a non intervene case. We are litigating against a urologist in New York City in a nonintervene case. We settled the intervene portion of it for $12.3 million in November.

We are always in discovery, we are always taking depositions.

CCR: Are you saying that the majority of your False Claims Act cases are non-intervene cases?

GUTTMAN: A decent percentage of them. We litigate more False Claims Act cases than anybody else in the country. That’s just my perspective.

CCR: How many False Claims Act cases do you have going at any one time?

GUTTMAN: We get anywhere between 500 and 1,000 knocks on the door a year. We will cull that down to four, five or six False Claims Act cases that we take a year.

We vet these cases so heavily that by the time they get to the government, the government is looking at a case that is strong on the merits.

CCR: You have a strong filter. Do you know pretty much know within the first couple of minutes of talking with a whistleblower whether or not it’s going to be a case for your or not?

GUTTMAN: We can tell from the first twenty or thirty minutes. Let me give you an anecdote. A number of years ago I had a case against Abbott Labs.

The case settled for $1.6 billion. 1 asked the government lawyer a little while after the case settled – when did you realize it was a good case? And the government lawyer said – about 30 minutes into the client interview. We can pretty much tell up front whether it has some heft, whether it’s a case that we are going to dig into and investigate. There are ways to eliminate cases quickly.

CCR: How many cases are you carrying at any one time?

GUTTMAN: Dozens.

CCR: How many cases do you settle a year?

GUTTMAN: In the last five years, we have been resolving four or five cases a year.

CCR: We posted a story on Twitter from the Wall Street Journal about an interview with a Justice Department official, Matt Miner. He was talking about how internal compliance programs can help prevent corporate crimes. You went onto our Twitter feed and wrote – “Internal compliance programs do nothing to address pervasive wrongdoing central to a company’s business model, as in Enron, Tyco and WorldCom. This I know from 30 years plus of litigation against corporate wrongdoers.”

I read that to Duke Law Professor Sam Buell. He told us this – “This guy is saying – I’ve seen companies spend lots of money on compliance and it didn’t make a difference because they were thoroughly corrupt and everyone in the company didn’t care about compliance. But other people will say- I’ve seen companies with good compliance who generally stayed away from enforcement actions. Or I’ve seen companies with bad compliance but they got better; and their problems with the government decreased. Everyone is talking anecdotes. Companies are enormously complex. They are the most complicated things we have in our society. They become extremely difficult to study empirically.”

GUTTMAN: I was at Milberg Weiss and Grant & Eisenhofer. At Milberg, we were part of the Enron litigation. Milberg was also part of the Worldcom litigation.

When I was at Grant & Eisenhofer, they were part of the Tyco litigation. WorldCom, Enron and Tyco all had on paper compliance programs that would impress the lay person and might impress somebody teaching at a law school. But the misconduct was ingrained into the business model.

Where the conduct is pervasive and part of the business model, the internal compliance program is not going to correct it. I have litigated against Abbott Labs.

The company engaged in pervasive misconduct with regard to the marketing of the anti-epileptic drug Depakote. lt resulted in both civil and criminal sanctions against the company. It was a total $1.6 billion settlement.

What we found in the Depakote case was that the existence of the corporate compliance program assuaged insiders in the corporation so that they thought there could be no wrongdoing going on. It is like – I saw the doctor last week so I can’t possibly be sick when in fact you could be terminally ill. Compliance programs in part are being used to 14 CORPORATE CRIME REPORTER MONDAY JANUARY 20, 2020 assuage people and not make them second guess because they believe someone else is taking care of it.

When we first interviewed our original client in the Depakote case – is your company off label marketing the drug? And the answer was – no, we are not off label marketing the drug. We have an internal compliance program. Everything we do is legal. We are told everything we do has to be legal. But when we started getting into the actual facts of how the drug was being marketed, we saw major problems. Internal compliance programs have the ability to convince people that there can be no wrong. We saw the same situation in GlaxoSmithKline involving a number of drugs. I think the False Claims Act settlement was $1 billion. We settled on the eve of trial against Celgene for $280 million.

And the sales people say – we do no wrong, we are a terrific company. I have written an article about this for the Safra Center for Ethics at Harvard Law School. It’s titled – Internal Compliance – Is It Really About Compliance?

Our niche as a law firm is challenging corporate conduct that is pervasive and intertwined with the business model of a corporation. The conduct is so central to the business model that if you take out the conduct, it will materially impact the value of the company. It’s shareholders will take notice. Where you have conduct that is central to the business model, the compliance program won’t do much. Will it make people think more about compliance?

Maybe it couldn’t hurt. But what makes people sit up and notice is the Sally Yates memo of September 2015.

It says, when corporations get into trouble, we are going to be looking at individual liability. The reality is that corporations can’t do what they do absent the conduct of individuals. That is going to be the best way to enforce compliance. 1 come from a labor background. Statutory labor law has been around for about 80 years. One of the things that is central to labor law is that company dominated unions are unlawful.

If a company says – you don’t need a union, we have our own union, go join our union – that’s a violation of the National Labor Relations Act. In many respects you have compliance programs that are analogous to company dominated unions.

Instead of an outside entity doing the investigation and making transparent the wrongdoing, the internal compliance department is the first vacuum that sweeps up the information. And the corporation decides what they want to do with it.

Sometimes the information that the whistleblower is reporting has significant impact not just within the corporation but to parties outside the corporation.

For example, let’s say you have a drug that is being marketed for the wrong purposes, or a drug that has been adulterated, or a medical product that is problematic and the company doesn’t resolve the full results of tests.

We are now suing Massachusetts General Hospital for overlapping surgeries. The allegations are that they completely overlapped.

CCR: What do you mean by overlapped?

GUTTMAN: In the orthopedic area, you book patients whose~urgeries overlap. The surgeon is running from one surgery to another. We just settled such a case against another hospital in New York City. It’s a Medicare fraud case.

CCR: If compliance programs are not working, if it’s an internal police force controlled by the corporation, what do you propose?

GUTTMAN: I’m not suggesting eliminating internal corporate compliance. I’m suggesting you not rely on it as the panacea. Maybe it doesn’t hurt. But don’t count it as the solution. Recognize that it has a serious potential to be a mechanism to conceal wrongdoing.

I debated somebody a number of years ago on Bloomberg. We were discussing the SEC whistleblower program. And the question was – must you go to internal corporate compliance first before you go to the SEC?

The corporations, the Chamber of Commerce was saying – you must go to corporate internal compliance first before you go to the SEC. My perspective was – absolutely not.

At the least you should have a choice. You don’t know whether the corporation is going to make transparent the problems that may not only impact the bottom line for the shareholders, but may involve life saving devices for consumers or devices like automobiles that cause injury.

Look at the GM ignition switch case. Look at Boeing. Boeing is classic. Do you really want the 737 MAX to be something that is investigated by internal compliance, remains in internal compliance and never sees the light of day?

CCR: A strong internal compliance program would find the problem, resolve the problem and report it to the government. But from your experience within the pharmaceutical industry –

GUTTMAN: Not just the pharmaceutical industry. But look at GM and the ignition switch. Look at Boeing. These programs just don’t work. If these programs were working, we wouldn’t be seeing the pervasive wrongdoing we are seeing. Internal compliance is not going to have the leverage within a corporation to say- we have to take the 737 MAXs out of the air. That’s a really tough call for a corporation to make. That’s why you need outside regulators. You shouldn’t be cutting the company slack because it has an internal compliance program.

In fact, if the company has an internal compliance program and you found that the company engaged in wrongdoing, it is worse, because it means the internal compliance program wasn’t working. It means it was worthless.

CCR: Is there any evidence that the government corporate criminal enforcement program is detening wrongdoing?

GUTTMAN: Based on the wrongdoing I’ve seen, no.

Each of the big pharmaceutical frauds I have seen, the companies are paying amounts of money that cause the public to take notice. But in fact, what is going on is much of the litigation across the board is effectively setting a fee for a license to break the law.

The litigation is not having an impact. I don’t think the corporate compliance programs are having an impact.

What will have an impact is sticking to the letter of the Sally Yates memo of September 2015.

CCR: Of your practice, what part of the False Claims Act cases are FCPA or Medicare fraud or other?

GUTTMAN: There is overlap. You could have a situation where a company is unlawfully marketing a drug. And they are not making that disclosure to the public. In a large pharmaceutical fraud case, you are going to have a securities component. We have been involved in a number ofFCPA cases.

CCR: Has the plaintiffs bar moved over the years from primarily class actions to primarily False Claims Act cases now?

GUTTMAN: It’s a complicated question. Elizabeth Burch is a professor of law at the University of Georgia. She has just published a book titled Mass Torts. It would be worth interviewing her on this.

In 1965, Ralph Nader published Unsafe at Any Speed. Before that book, people thought – if you got into a car accident, it was your fault. Nader made people think – it could be a defect in the automobile. He was the impetus for plaintiffs’ class
actions.

In 1968, Congress passed the multi-district litigation (MDL) statute. The courts needed to figure out how to address the 3,000 price fixing cases in the electrical transmission industry. There was an informal mechanism to do that. And that was codified in 1968.

With the rise of the class actions, the defense bar organized and made it harder to certify a class action. I’m actually arguing a class action certification case tomorrow, so it’s on my mind.

By the 1990s, you had two Supreme Court asbestos cases. And with those cases, the Supreme Court made it more difficult to certify class actions. Because cases were not being certified, you had all of these mass tort cases being brought as individual cases. Lawyers on both sides sought to use the MDL process.

It’s not that people are moving into false claims as much as people are moving into these MDL mass tort cases.

Of course, some product liability attorneys want to get into the false claims area. But the reality is that the false claims bar, to some degree, is the impetus for a lot of these cases. We bring the big pharma false claims cases and other cases follow.

Another thing that has been happening is that the courts have been cracking down on access to the courts. The pleading standards have been toughened.

When I got out of law school, there was something called notice pleading. As long as you put the other side on notice about what the case was about, that was enough.

In 2007 or 2008, the Supreme Court came down with a couple of cases requiring the pleading of facts. You can’t just plead conclusions. If you plead conclusions, the court will strip out the conclusion. And then the court will apply a plausibility standard.

And a judge will look at a case and say – is this case plausible? In a false claims case, you have to plead fraud with particularity or specificity. These cases are front loaded in the sense that you have to do the investigation up front. You have to prove a case that the government thinks is a good case – not a case you think is a good case. All of those are filters that whittle down access.

CCR: There is a public debate over the role of the trial lawyer in society. A case can be made that big business has defeated the trial lawyers in the court of public opinion. Why did that happen?

GUTTMAN: I don’t think they have won the debate. Everything we have in this country that makes us safer is the result of transparency in the court system – the trial lawyers.

The trial lawyers brought us Brown v. Board of Education. The trial lawyers brought us Loving v. Virginia – the right to marry who you want to marry without regard to race.

The trial lawyers brought us safer automobiles, seat belts. They exposed the dangers of lead paint. The trial lawyers brought us safer food. We can live safer healthier lives because of trial lawyers.

CCR: You are making the argument. But regular people don’t like trial lawyers.

GUTTMAN: I haven’t done polling. I’m going to court tomorrow morning. I try cases. I have a comfort level because I know I’m saving people’s lives tomorrow morning when I am going to get Hepatitis treatment for thousands of pnsoners.

The state of South Carolina prison system is going to be testing 20,000 people and treating them. I know I’m having an impact.

I have brought cases that have saved people from drugs that are harmful to them. Maybe trial lawyers are not getting the message out. I teach and have a broader public policy perspective.

I try to take cases that have a broader impact. I want to leave the world a better place. I went to law school so that I could do things that make the world a better place.

Contact: Reuben Guttman, Guttman, Buschner & Brooks, 2000 P Street, NW. Suite 300, Washington, D.C. 20036. Phone: 202.800.3001. Email: rguttman@gbblegal.com

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