Think Strategically When Responding to a Corporate Crisis

crisis-ceo-storm-umbrella[su_dropcap style=”flat”]A[/su_dropcap] CORPORATE CRISIS can quickly become the ultimate Black Swan event for an organization.   As any organization that has ever experienced a crisis can attest, a corporate crisis can become an extremely kairotic moment in the life of the organization.   A corporate crisis will critically test with unrelenting consequences both the corporation’s crisis response protocols as well as the conduct of corporate management, particularly should circumstances suggest any degree of civil or criminal liability exposure from within the organization.

For a corporation experiencing a corporate crisis, almost every crisis event will present the organization with some degree of liability exposure. Claims will come from those alleging to have been adversely affected or otherwise “injured” from the crisis either directly or tangentially. There will certainly exist no shortage of legal theories suggesting that the organization could have prevented or mitigated the crisis, responded more appropriately or more fully disclosed the risks associated with the crisis event.

In the event that the crisis event itself does not create liability exposure for the organization, a poor or improper organizational response to the crisis or any indication of corporate misconduct possesses the potential to trigger a separate set of liability concerns.   Should the crisis possess any possible transnational dimension, the complexities and challenges associated with a corporate crisis will significantly increase.   Given the transnational nature of corporate operations today, multi-national companies need to plan for this contingency.

In today’s sophisticated and highly regulated corporate environment, it would be naïve and irresponsible for a corporation experiencing a crisis to believe that they can prevent or contain any possible liability ramifications arising from a crisis to a single investigation or enforcement action by the government. In order to be fully prepared when experiencing a crisis, an organization should expect and plan for concurrent multijurisdictional enforcement proceedings.

Though not a new phenomenon, in recent years there has been an increased degree of cooperation among government agencies when it comes to matters involving corporate governance.   Corporations are also experiencing a greater emphasis on the encouragement of corporate whistleblowing in addition to the Justice Department’s reinvigorated focus on individual accountability.

The combination of these factors have all contributed to a corresponding increase in the number of concurrent criminal, civil regulatory enforcement proceedings.   It is now common practice for instance to see an U.S. Attorney working with the SEC, resulting in the simultaneous filing of an indictment and civil complaint.

From that point the process follows a rather predictable routine, with the U.S. Attorney going to Court to intervene and requesting a stay of the SEC’s civil enforcement action, claiming that the defendant, should benefit by receiving any “special advantage” of civil discovery, not available in a criminal proceeding.  We are currently seeing this routine play out in the Federal prosecution of Martin Shkreli, the pharmaceutical executive facing criminal securities fraud charges. In that matter, the U.S. Attorney for the Eastern District of New York is currently seeking a delay in the SEC’s parallel proceeding.

Gavel-Books-300x200It will be interesting to see how the Court will rule on Shkreli’s challenge of the U.S. Attorney’s motion to put the SEC parallel case on hold. Shkreli is arguing that the SEC’s concurrent enforcement action is jeopardizing his reputation and livelihood. There are now more judges denying the government’s motion in these instances, ruling that any potential prejudice that exists was caused by the government’s own actions. Federal Judge Jed S. Rakoff wrote in SEC v. Saad, 229 F.R.D. 90, 92 (S.D.N.Y) 2005, “ finding it stranger still that the U.S. Attorney’s Office having closely coordinated with the SEC in bringing simultaneous civil and criminal actions against some hapless defendant, should then wish to be relieved of the consequences that will flow if the two actions proceed simultaneously”.

 Given the long term ramifications posed by a corporate crisis, including how the resolution of one proceeding could potentially impact other proceedings, an organization must craft its crisis response in such a manner as to strike a balance best suited to mitigate its overall liability exposure when addressing the varied interests and concerns of the organization’s many constituencies.

Throughout the life of the crisis, the organization will become the center of the universe to its various constituencies.   This in turn will result in the organization experiencing demands for information from multiple directions and sources.   Each individual constituent will be carefully evaluating every aspect of the organization’s crisis response and public comments.   All of these constituencies will want to insure that their individual interests and objectives are addressed.

As a crisis continues to unfold, the event will certainly attract the attention of government regulators and prosecutors.   Further complicating their involvement is the fact that each of these agencies possesses not only different enforcement powers, but very often competing objectives. When attempting to address these multiple layers of liability exposure, the organization should not attempt to treat their involvement as if each was a separate stand-alone proceeding.

During a crisis, the organization will be tasked with two critical imperatives.   The first is the ability of the organization to respond in a strategic and timely manner.   Second, the organization must possess the necessary expertise to accurately anticipate the degree and direction of any potential liability exposure they may be facing.   During a crisis, it is essential that the organization become aware of any possibility that errors in judgment or mistakes by company personnel may have been contributing factors.

The correct analysis and evaluation of the organization’s crisis response and disclosure obligations, as well as correctly assessing any potential liability exposure all factor into the organization’s crisis response.   The correct response and disclosure under one set of facts or with one government agency may be incorrect under different circumstances and agencies.

Throughout the crisis, the organization must ensure that its crisis-related disclosures and comments are both accurate and flexible, allowing for any adjustment that may arise from the different reporting requirements and objectives of each government agency involved.

A corporation’s required disclosures can never be made in a vacuum.   Crisis mitigation strategies need to be developed in such a manner so that the defense of individual proceedings are carefully coordinated with all other actions. Also, all corporate disclosures made pursuant to the organization’s various reporting obligations must also be coordinated with the organization’s overall communications strategy.

The organization’s failure to properly evaluate their coordinated disclosure requirements or liability exposure could transform a single crisis into multiple crises.   It is essential that during a crisis, the organization’s overall crisis response efforts and disclosures remain consistent, centralized and coordinated.

Regardless of whether the organization’s crisis communication strategy is aggressive or minimal, it should never be strictly reactive. All corporate advisories and communications directed outside the organization need to remain strategic rather than tactical.

During a corporate crisis, the initiation of an internal investigation is an integral part of the crisis response process.   In order to properly determine both scope and magnitude of the crisis, the organization needs to undertake such an inquiry.   In addition, a properly conducted internal investigation provides the organization with a number of tangible benefits.   Included among these benefits are the identification of potential defenses and mitigation facts, the determination of reporting obligations and the assessment of third party liability.

Ignorance of the facts will not only paralyze the crisis response team, it will have the potential to place the organization in the position of making inaccurate statements and/or inaccurate denials. No organization during a crisis wants to be placed in the unenviable position of having to admit that it misspoke and risk damaging its credibility with regulators, prosecutors or the public. It is always better for the organization to know The Good, The Bad and The Ugly than not know

When implementing its crisis communications strategy, it is essential that any announcements or advisories advanced by the organization not interfere with the organization’s potential litigation strategies. Crisis communications should remain flexible so as not to limit the organization’s ability to reach a possible compromise if required at a later time.

The organization’s crisis communications should never comment on possible litigation in a manner that does not accurately reflect the organizations actual assessment of the crisis. Routine or pro-forma statements such as stating any allegations are without merit or that the organization cannot wait to defend its position in court could very well lead to subsequent problems if it becomes apparent that the organization’s position on the matter was different at the time the initial statements were made.

At the center of any crisis related internal investigation, should be the determination of whether the organization faces any degree of criminal liability exposure. The outcome of this determination may very well influence every subsequent corporate decision regarding the organization’s overall crisis mitigation strategy.

The conducting of an internal investigation, has always presented corporations with some degree of difficulty. The Justice Department’s intensified focus on individual responsibility as articulated in the Yates Memo, has introduced a new level of complexity into the internal investigative process. An organization’s overall internal investigation protocols from the initiation of the investigation throughout its focus and disclosure obligations are now directly influenced by the Justice Department requirements outlined in the Yates Memo.

In order to be fully compliant with the Justice Department requirements, organizations need to upgrade their crisis response best practices to include the principles outlined in Yates, when structuring the internal investigation process.

The Department of Justice, now specifically directs that an organization when initiating and conducting an internal investigation, accurately attempt to identify individual culpability for any misconduct or other potential criminal conduct identified. In addition, in order to earn potential cooperation credit, the organization must now provide the government with all relevant facts and documents, witness names and statements, as well as any other record or potential evidence uncovered through the organizations investigation.

Adherence to these Justice Department’s requirements, will serve to further complicate the corporation’s ability to conduct thorough internal investigations. At the very least, the consequences of the Yates Memo will highlight the divergent interests that will now exist between the corporation and its officers, directors and employees.

When conducting their internal investigation, the corporation should keep in mind that the government will be conducting its own parallel investigation and will at some point compare its findings with the investigative report submitted by the organization.

When it comes to determining the full extent of an organization’s overall cooperation and the awarding of cooperation credit, the Justice Department by its current all or nothing philosophy is signaling that a company will not be able to persuade the government of its full cooperation by submitting an investigative report that rivals War and Peace in length and Alice in Wonderland in content.

Blue Bell Creameries and Chipotle are two of the most recent examples demonstrating how a corporation can face simultaneous criminal and civil liability exposure arising from a single crisis event.

Both companies are currently experiencing the reality of how an organization chooses to address the challenges posed by the initial crisis combined with the corresponding conduct of company personnel can adversely affect the organization long after the original crisis has concluded.

The Chipotle crisis began as a localized FDA inquiry focusing on a single restaurant norovirus outbreak.   The FDA inquiry quickly escalated from FDA inspectors to include FDA criminal investigators.   From there came a criminal referral to the U.S. Attorney.   Under the direction of the U.S. Attorney, the investigation expanded from a single location into a national criminal investigation.   Possibly influenced by the Yates Memo, the U.S. Attorney’s investigation is now targeting individual personnel at corporate headquarters as well as examining how similar incidents as far back as three years ago were handled.

Chipotle is now finding itself defending itself both civilly and criminally and facing concurrent demands for information from civil plaintiffs and the government in addition to the mandatory filings they have to make to the SEC. Currently, Chipotle sales are down approximately 36%. As the criminal matter progresses, future earnings will also be impacted.

Like Chipotle, Blue Bell Creameries is now facing concurrent civil and criminal probes along with the simultaneous demands for information.

The Department of Justice is currently in the process of conducting a criminal investigation over a listeria outbreak that has resulted in three deaths.   The Justice Department investigation quickly started to target Blue Bell executives over their knowledge of the incidents and their subsequent conduct before, during and after the initial outbreak.

The Blue Bell criminal investigation bears a striking resemblance to the criminal probe and subsequent federal criminal prosecution of an executive from the now defunct Peanut Corporation of America.   In that case, the CEO ordered the shipment of peanuts he knew were contaminated.   The CEO was sentenced to a 28 year term.  Effectively a life sentence for the 61 year old CEO.   The company quality assurance manager was sentenced to 20 years.

When facing concurrent civil and criminal concurrent legal actions, organizations have often approached their crisis response responsibilities more by rote, responding in a cookie cutter manner rather than utilizing a comprehensive long term approach.

In order to be successful when addressing simultaneous civil and criminal legal actions with their divergent consequences, a company must adopt a “Go Long” unified crisis mitigation strategy.

Navigating concurrent legal proceedings requires a solid corporate platform that will involve a multi-disciplinary team of the organization’s best and brightest.   The crisis response team must not only have the ability to be innovative and proactive, they must be provided with the appropriate decision making authority to comprehend and address the compromises inherent in concurrent civil and legal actions.


Michael D. Celock
Michael D. Celock
Michael's public-private sector experience spans both the advisory and operational spectrums of corporate governance and compliance, international affairs, intelligence, national security and law enforcement. Mr. Celock also has substantial experience regarding compliance with the FCPA and multi-jurisdictional government and corporate investigations. Mr. Celock regularly counsels corporate clients on strategic, operational and political risk, cross-border due diligence, corporate internal investigations, crisis mitigation, the FCPA and international crime and corruption issues as well as devising innovative solutions to complex problems arising from non-traditional corporate situations. Mr. Celock’s work is often of a cross-border and international dimension across a variety of industries and is designed to promptly and effectively identify, assess and manage rapidly changing risks facing the client. Mr. Celock’s intervention provides clients with the ability to respond strategically and in a timely manner to existing or emerging situations that threaten the business and reputation of the organization. Mr. Celock was appointed by President Clinton to the position of Special Advisor to the President for National Security Affairs. Mr. Celock has also served as a consultant to CIA’s Office of Transnational Issues. Responsibilities included providing unique functional expertise to assess existing and emerging threats to the national security interests of the United States and to identify, disrupt and prevent illicit financial transactions that threatened U.S. National Security.

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