Defending Financial Institutions in Italian Sanctioning Proceedings — Part 2
Whatever comes out of these gates,
we have’got a better chance of survival if we work together”
Maximus Decimus Meridius, a.k.a. “The Spaniard”
“- I don’t know how I let this happen
- Man, I don’t know what to do
(Say it wasn’t you)
- Alright”
Shaggy
“And if a house be divided against itself, that house cannot stand”
Mark, 3:25
From the Macedonian phalanx led by Alexander the Great at Gaugamela in 331 B.C., to the 79thCameron Highlanders’ squares facing the charges of the French cuirassiers at Waterloo in 1815, the idea that staying close would significantly increase the chances of success in battle has been a fundamental tenet of military tactics (that is, at least, until the rise of automatic firearms and modern artillery in the second half of the XIX Century completely changed The face of battle,to put it with John Keegan).
The principle is boldly stated, in true Hollywood style, by Russel Crowe in The Gladiator’s scene in which the battle of Zama is reenacted in the Coliseum’s arena (although with a somewhat different ending from the real battle, to Emperor Commodus discontent).
I posit in this post — a follow up to a previous post — that the same principle generally applies in the context of financial sanctioning proceedings. As a rule of thumb, institutions and individuals involved in alleged breaches of financial regulations should adopt a unitary defensive stance. It is generally unwise for individual positions to be asserted out of the choir.
Rules of thumb being what they are, though, require proper handling of the necessary exceptions.
Consider the following scenarios, which I have laid down along a continuum of progressive complexity.
· Case 1. All the directors of Bank Alfa have been involved in a given decision and have all actively taken part to the decision-making process; they all still sit on the board. The decision is then characterized by the Regulator as a breach of regulations and a sanctioning proceeding is initiated.
This is an easy case. Interests will be aligned and defendants have all reasons to adopt a unitary strategy.
More frequently than one would imagine, though, individuals may be tempted to part company from the others and to adopt a different defensive strategy or to ask that the specificities of their positions be emphasized in the company’s defenses.
In fact, individual conduct is not always irrelevant.
After all, piper Kenneth Mackay stepped outside the Highlanders’ square at Waterloo to play Scottish war songs on his bagpipe, thus encouraging his comrades while French lead was flying all around him.
There may exist arguments that are specific to an individual’s position and do not hold for the others. These arguments need to be analyzed carefully, as whether or not it is appropriate to use them depends on the circumstances and the analysis can lead to opposing conclusions.
Compare the next two cases.
· Case 2. Director Luigi Verdi has been sitting on the board for a much shorter period of time than the other directors, a period which does not coincide with the entire period of time to which the breaches refer.
This is also a straightforward case: To say the least, Mr. Verdi is entitled to receive only a reduced sanction.
The key point here is that advancing such individual argument does not generate a tension with the position of the other individuals involved. The additional and specific defense works for the individual involved while coming at no cost for the others.
These two conditions do not always hold together.
· Case 3. Insurer Beta’s board of directors is led by a hegemonic CEO. Decisions are effectively taken outside the board and meetings are just a formality, with little or no debate. Maybe the supporting documents are circulated to the board with little or no advance notice. Director Mario Rossi, however, has sometimes voiced his dissenting views on the proposed decisions.
Mr. Rossi may be tempted to try to claim in the defenses that he has tried to oppose the views of the CEO, so his positions should be assessed in a more benevolent way by the Regulator.
Not so fast, I am afraid. Did Mr. Rossi ever cast a dissenting vote or did he systematically vote, in the end, in favor of the decision, just like any other director? Chances are the second scenario is more likely, at least based on my experience. If this is true, from an administrative sanctioning standpoint it is not only useless to take an “It wasn’t me” kind of strategy, like the unfaithful protagonist of Shaggy’s song who has been discovered while cheating on his partner. That strategy can actually backfire, as you may end up reading in the motives of the sanctions something along the following lines: “Mr. Rossi has argued in his defenses that he had voiced his dissent against the CEO. This is actually an aggravating factor, as it shows that Mr. Rossi was aware that the proposed decision might be in breach of applicable rules and so his failure to comply with his duties is particularly grave”.
Finger-pointing(as in Case 3 above), can be dangerous, while addinga layer of defense (as in Case 2) is not incompatible with a unitary and coherent approach.
Individual defenses, even when they do not explicitly imply finger-pointing, may still need to be handled carefully, as in the following case.
· Case 4. Mr. Paolo Bianchi heads the compliance function of Asset Manager Gamma. The reports he has addressed to the board contain references to deficiencies in the compliance framework. The board has acknowledged the content of the report and has also taken certain follow-up initiatives.
However, the Regulator has deemed those initiatives insufficient and has initiated a sanctioning proceeding.
Things get trickier here. Mr. Bianchi may understandably want to emphasize that he had duly raised a red flag: In the end he has brought the issue to the attention of the board, which arguably had a greater ability to correct the alleged deficiencies. However, such arguments may quite easily be used as evidence that the board is responsible for not correcting the breaches. The board would thus in turn have to argue that he had taken proper corrective measures. I think it is easy to see how this is a slippery path both for the board and for the head of compliance. After all we are assuming Mr. Bianchi still heads the compliance function and presumably pointing the finger against the board might not prove particularly smart.
The optimal strategy may need to be adapted, at times even radically changed, if other variables come into play. One fairly common variable to be factored has to do with whether only sanctioning proceedings are being carried out.
· Case 5. What if in Case 3 the breaches are so serious that also criminal proceedings are initiated? If the stakes involved include also the risk of criminal sanctions, it may become appropriate for Mr. Rossi to advance the argument that he had indeed tried to counter the hegemonic role of the CEO, even though in the end he followed the herd and voted with the other directors.
Mr. Rossi may be willing to weaken his position in the context of the administrative proceeding — possibly also to relinquish any chance of acquittal — if that can buttress his position in the context of the criminal proceeding.
Finally, another variable which may come into play is whether the relevant individuals hold the same positions they held at the time of the facts underlying the sanctioning proceeding or not.
· Case 6. What if in Case 4 Mr. Bianchi has been ousted from his position, upon the initiative of the board beforethe commencement of the sanctioning proceeding? That may completely change the direction of the defensive arguments for both the board and Mr. Bianchi: The latter may want to try to saddle all responsibility on the board, arguing that the board had all information to take proper actions; the board may want to blame Mr. Bianchi arguing, say, that he had not provided all information, that the reports were late, that the board has fired Mr. Bianchi, etc.
The list of possible scenarios could go on for long, but I hope I have made the fundamental point clear: As the specific circumstances of the case to be strategized become more complex, the web of interests, sometimes opposing interests, to be balanced, also become more complex, and defining an optimal strategy becomes a quest for equilibrium.
