Please consider the fact pattern below on a fictional company, Falstaff Corporation. You are Falstaff’s Chief Compliance Officer. Based upon the facts and items to address at the end of the fact pattern, you are to prepare a memorandum to the Falstaff Corporation Board of Directors. Your memorandum should be a maximum of seven pages, single-spaced, in 12 point font, and with one inch margins. In preparing your memorandum, you can use all lecture and reading materials from class, as well as any additional outside research you would like to include with proper citations.
Your final memorandum will have a possible total of 100 points, with the following factors to be considered:
Content = 70 points
Style/Coherence = 10 points
Organization = 10 points
Research/Citations = 10 points
FACTS
Falstaff Corporation is a software company with its headquarters in Wilmington, Delaware. Falstaff manufactures software installed in cars, trucks, and other vehicles designed to collect data on the vehicle’s operation as well as operator driving patterns. It has worldwide annual revenues of $10 billion, and its stock is listed on the New York Stock Exchange. In addition to its Wilmington headquarters, Falstaff has offices in London and Mumbai, India.
You are Falstaff’s first Chief Compliance Officer, having been hired six months ago to develop and manage Falstaff’s compliance program globally. You have a staff of two compliance professionals. You report directly to Falstaff’s CEO, Hal Kingsly, and have a dual reporting line to the Audit Committee of the Falstaff Board of Directors. Although you are trying to implement significant enhancements rapidly, to date Falstaff’s compliance program consists only of a Code of Conduct and a compliance helpline for complaints. Hal Kingsly, has been generally supportive of your compliance program efforts but often reminds you of working within budget constraints.
Last week, Falstaff’s Director of Internal Audit, Bill Pistol, entered your office with a tired and worried look. Bill had recently been at Falstaff’s Mumbai office conducting an audit of its operations. The office was in a wonderful mood. Falstaff had just been awarded an exclusive $500 million contract to provide software to the Indian Ministry of Defence for incorporation into a wide range of military vehicles. Falstaff was particularly surprised at the award, given extensive communications between Falstaff and competitive bidders indicating that competitors may be submitting bids at a lower contract price and possibly they should all seek a way to “level the playing field”.
As the Champagne flowed at the office party celebrating the contract, a mid-level sales manager pulled Bill aside with concerns regarding the contract process. According to the sales manager, all contact with the Indian Ministry of Defence occurred through a third-party sales agent called Panalmagma. Panalmagma had told Falstaff’s Mumbai Director of Operations that to “get the deal done” Falstaff should revise and increase its contract bid by 10%. The 10% additional amount would be used as a “processing fee” to be disbursed among Ministry of Defence officials reviewing the contract. The mid-level sales manager was directed by the Director of Operations to make the necessary changes to contract documents and Falstaff’s books and records to reflect the adjustment. Panalmagma assured Falstaff’s Mumbai office that this process was very much routine in dealings with the Indian Ministry of Defence and presented no concerns. Bill thanked the sales manager for the information and promptly requested another glass of Champagne.
The following day, Bill confronted the Mumbai Director of Operations with the scenario. The Director confirmed that the contract process occurred in the manner described. He also noted that he had briefed Hal Kingsly regarding the increased bid amount, and Hal authorized the action before the revised bid was submitted. As Bill was leaving the Director’s office, the Director in passing noted how excited his neighbor, an employee in the Ministry of Defence, was about the new software and its capabilities for India’s Defence program.
When the meeting with Bill in your office ended, you scheduled an immediate meeting among you, Bill, and Hal Kingsly to discuss your concerns. In that meeting, Hal confirmed his approval of the contract process for the India Ministry of Defence deal. He noted that he had been assured by the Mumbai Director of Operations that the process was very routine and completely “above board” for doing government contracting in India. You suggested that Bill and the Compliance team conduct an internal investigation to gather additional facts and interview employees to determine what concerns are raised and what additional action may be required. You also recommended that the Audit Committee of the Board of Directors be informed of the internal investigation. Hal strongly encouraged you and Bill not to take any action until after Falstaff’s quarterly earnings release at the end of the month. Hal noted that the India Ministry of Defence deal was going to be the difference between Falstaff meeting stock analyst earnings estimates or not, and that the deal had already been booked to the company’s quarterly earnings.
As you returned to your office, your phone rang and a number with the Washington, D.C. 202 area code appeared. The call was from the Enforcement Division of the U.S. Securities & Exchange Commission. The SEC said that in their routine review of unusual New York Stock Exchange transactions, they had flagged unusual stock trading patterns among certain Falstaff executives. Among the executives was Hal Kingsly. You informed the SEC that you would look into the activity and get back to them.
On the long drive home, you decided that your next step was to prepare a memorandum to the Audit Committee of the Falstaff Board of Directors.
1. What potential legal issues and areas of corporate deviance are raised in this scenario?
2. What is the potential exposure to Falstaff executives and members of its Board of Directors?
3. If you could turn back the clock, what elements of a Falstaff Compliance Program or corporate culture would have potentially prevented the activity involved or at least reduced the risk of significant regulatory action?
4. What next steps do you recommend for the Falstaff Board of Directors, and what is the scope of their duties under applicable law to take additional action?