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At the beginning of February the Federal Reserve took action against Wells Fargo, placing restrictions on the bank which prevent it from growing any larger than it was at the end of 2017. The restriction is to remain in place until Wells Fargo improves its governance and risk management. It has been reported that such sanctions will reduce the bank’s net income by $300 million to $400 million.

In addition, Wells Fargo is also to replace three current board members by April and a fourth by the end of the year, although such changes were not prescribed by the Federal Reserve.

This settlement with the Federal Reserve is an example of an increasing focus on both sides of the pond to impress upon boards the need for greater corporate governance. This decision by the Federal Reserve follows a turbulent 2017 for the bank during which an independent legal report highlighted the manner in which executives protected each other in the face of the management’s failure to provide accurate information concerning the ability of staff to create thousands of bogus accounts in order to meet personal targets. Two court decisions last year focussed on the systemic issue concerning the unauthorized account-creation practices, and the inadequacy of the bank’s oversight systems and controls in terms of detecting, preventing, and rooting out the issue.

The advent of Deferred Prosecution Agreements (DPAs), introduced in February 2014 under the provisions of the Crime and Courts Act 2013, has brought about a focus on companies self reporting conduct in an attempt to obtain a less draconian penalty. DPAs allow the SFO and Crown Prosecution Services to defer prosecutions of companies in return for such companies agreeing to certain conditions. The ability to be offered a DPA is fact specific but includes such considerations as whether the company self reported the relevant conduct; the extent to which it has co-operated with the investigation and whether it has showed signs of remorse by implementing new reforming procedures.

Ultimately, a DPA needs to be approved by the Court, however its effect will not be too dissimilar to what we have seen with Wells Fargo, the ability to place sanctions on a company and the company seeking to obtain a DPA by showing its “remorse” and intent to reform by changing personnel, directors and procedures. DPAs too increase directors’ accountability with the focus on companies co-operate in investigations to identify those whose conduct has led to the self reporting or the investigation.

The culture of self reporting and legislation focussed on monitoring of procedures has increased the number of internal investigations undertaken by companies which in turn has increased the scrutiny of directors’ and officers’ conduct. From a lawyer’s perspective the effect has been lawyers instructed at earlier stages either for the company or to advise the directors or officers.

The need for early representation highlights the breadth and scope directors’ & officers’ insurance, where, aside from the fact that legal expenses for investigations can be sub-limited providing less cover than initially thought, generally legal expenses cover has been only triggered by formal investigations and not informal investigations. Whilst we are now seeing a few policies being introduced providing legal expense cover for informal investigations, such cover is not mainstream.

The importance of early legal advice and the complexities faced by investigations has been highlighted by recent case law. The Director of the SFO v Eurasian Natural Resources Corporation Ltd [2017] provides a significant concern over the ability, or rather inability, to rely on privilege in internal investigations. This case highlighted the careful considerations that need to be undertaken at the outset of an internal investigation including considering: who is the client for the purpose of any legal advice, it is important for a company to identify a limited group that constitutes the client and through whom all legal advice is sought and received; considering the facts in the around an obtaining a legal opinion as to whether a company or director can rely on privilege, for example whether litigation is in prospect.

Other D&O considerations apply when it comes to investigations, such as do the directors and officers of a company know that there is a D&O policy? Do they know what the triggers of the policy are and what the notification obligations are? How should they communicate a notification to insurers? Ideally the D&O policy should enable directors to notify brokers direct, as opposed having to going through a risk manager or head of legal of the company in circumstances where the company’s position might conflict with that of the director.

The heightened focus on corporate governance is increasing the potential exposures faced by directors and officers of companies. The breadth of issues that boardrooms need to consider and decide upon to successfully run a company and limit exposure, whether regulatory, shareholder or third party driven, is immense. Of equal importance is the requirement and support of adequate insurance.

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Brooke Banks
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Birketts and EC3 Legal announce merger

David Coupe, Senior Partner at EC3 Legal, said of the union: “The focus of EC3 Legal has always been on serving our clients' businesses. Following the merger with Birketts, I am confident that our clients will continue to be the biggest beneficiaries, as the two practices will be able to expand and develop the range of services on offer to new and existing clients.”


Posted 1 May 2020

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