Deeper Than the Headlines: A CEO Calls it Quits For Fear of Legal Action

Most of us by now have heard of the Yates’ Memo that directs the Department of Justice attorneys to hold individuals accountable for inappropriate actions associated with corporate wrongdoing. Since the memo, there’s been an increase of corporate accountability in the headlines, which demonstrates that the government is trying to hold more individuals responsible. When Ms. Yates announced the memo in 2015, she also gave a speech in which she admitted this focus might result in some government losses while trying to hold individuals accountable. And some may consider last year’s acquittal of Vascular Solution’s CEO, Howard Root, as one of those government losses. But even though he was acquitted, Root has decided to leave his position as CEO for what he describes as an “increased personal risk.”

Root was acquitted in February of 2016 and in December of 2016. Vascular Solutions announced the company would be sold for $1 billion to Teleflex, Inc. reportedly because Root no longer wanted to be CEO. Root was quoted by the Star Tribune saying, “after going through [a] five-year criminal prosecution by the government over nothing, over what words my sales reps said, I just realized that I don’t want to be in a situation where every night when I go to bed, I worry about whether a sales rep said the wrong words.”

In 2014, Vascular Solutions settled allegations associated with a civil suit for $520,000. The allegations included marketing of a medical device for ablation of perforator veins without FDA approval. The suit was brought by a whistleblower who was a former sales representative. However, even though the civil suit was resolved, the government proceeded with criminal indictments against Mr. Root and Vascular Solutions.

Root and Vascular Solutions were acquitted of the criminal charges but many wonder if he or Vascular Solutions truly “won.” According to Root, the expense to defend the allegations exceeded $25 million and one can only imagine the day to day disruption it caused for the company for those many years.

To these points, Root stated, “We greatly appreciate the jury’s complete rejection of the government’s false allegations. But to get to this result, we were subjected to five years of attacks which forced us to hire 10 separate law firms at a cost of over $25 million to defend against a criminal prosecution that clearly was never warranted by the facts. This case centered on just one version of just one of our more than 100 medical devices – a version that was FDA-cleared, made up only 0.1% of our sales, and, by the government’s own admission, never harmed a single patient. To say that this prosecution was wrong-headed and disproportionate would be the understatement of the year.”

One additional concern Mr. Root expressed involved the jury instructions in his trial. He was quoted as saying the jury was told, “that I didn’t have to do something. I didn’t have to tell someone to do something. I didn’t have to know that anything actually happened. If I was in a position of responsibility and authority to prevent or correct a violation, I was guilty of the crime. … We’re talking about going to prison for that.”

According to court documents, some of the jury instructions did include the following statement by the judge: “In order to find that Defendant Howard Root caused a misbranding violation, you must find beyond a reasonable doubt that, by reason of his position in the corporation, he had the responsibility and authority either to prevent or promptly correct the violation, and that he failed to do so.”

One way that some organizations are trying to avoid even the appearance of wrongdoing is by instituting an effective corporate compliance program. And many executives are asking themselves “what’s the best way to protect the organization and individuals without spending significant legal defense dollars after the fact?” Many are turning to proactive spending on corporate compliance programs.

It is true that a corporate compliance program can’t necessarily prevent every possible non-compliant action, nor will they automatically dissuade enforcement action in all cases, but a good faith effort to continually improve a compliance program can result in many benefits.

The declination by the Department of Justice (DOJ) in the Morgan Stanley case is an example of this. During that case an employee (Peterson) was alleged to have broken the law. The DOJ stated, “After considering all the available facts and circumstances, including that Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not bribing government officials, the Department of Justice declined to bring any enforcement action against Morgan Stanley related to Peterson’s conduct. The company voluntarily disclosed this matter and has cooperated throughout the department’s investigation.”

This would be music to any compliance officer’s ears. Compliance programs should be designed to prevent, detect and correct noncompliance. An effective compliance program with the appropriate organizational “buy-in” just might be the answer to your executives’ question, what’s the best way to protect the organization and the individuals?

Questions or Comments?