climbing the corporate ladder: looking up the chain of ... · • 1963 -graham v. allis-chalmers...

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Copyright © 2011 Barnett Benvenuti & Butler PLLCCopyright © 2010 Barnett Benvenuti & Butler PLLC

Copyright © 2009 Barnett Benvenuti & Butler PLLC

Climbing the Corporate Ladder: Climbing the Corporate Ladder: Climbing the Corporate Ladder: Climbing the Corporate Ladder: Climbing the Corporate Ladder: Climbing the Corporate Ladder: Climbing the Corporate Ladder: Climbing the Corporate Ladder:

Looking Up the Chain of Command Looking Up the Chain of Command Looking Up the Chain of Command Looking Up the Chain of Command Looking Up the Chain of Command Looking Up the Chain of Command Looking Up the Chain of Command Looking Up the Chain of Command

in Fraud & Abuse Investigationsin Fraud & Abuse Investigationsin Fraud & Abuse Investigationsin Fraud & Abuse Investigationsin Fraud & Abuse Investigationsin Fraud & Abuse Investigationsin Fraud & Abuse Investigationsin Fraud & Abuse Investigations

2011 HCCA Compliance Institute Program2011 HCCA Compliance Institute Program2011 HCCA Compliance Institute Program2011 HCCA Compliance Institute Program2011 HCCA Compliance Institute Program2011 HCCA Compliance Institute Program2011 HCCA Compliance Institute Program2011 HCCA Compliance Institute ProgramLongLong--Term Care TrackTerm Care Track


Program AgendaProgram AgendaProgram AgendaProgram AgendaProgram AgendaProgram AgendaProgram AgendaProgram Agenda

I.I. The Evolution of Corporate ResponsibilityThe Evolution of Corporate Responsibility

A. Historical ViewA. Historical View

B. Current View B. Current View

II.II. Enforcement ExamplesEnforcement Examples

III.III. Practical Implications and Responses Practical Implications and Responses

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The Evolution of Corporate The Evolution of Corporate The Evolution of Corporate The Evolution of Corporate The Evolution of Corporate The Evolution of Corporate The Evolution of Corporate The Evolution of Corporate

Leadership ResponsibilityLeadership ResponsibilityLeadership ResponsibilityLeadership ResponsibilityLeadership ResponsibilityLeadership ResponsibilityLeadership ResponsibilityLeadership Responsibility


Old SchoolOld School

• 1963 - Graham v. Allis-Chalmers Manufacturing Co., 188 A.2d 125 (Del. 1963).).).).

– Absent cause for suspicion, there is no dutyupon the directors to install and operate acorporate system of espionage to ferret outwrongdoing which they have no reason tosuspect exists.

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New SchoolNew School

• 1991 - Promulgation of Organizational SentencingGuidelines Pursuant to the U.S. Federal SentencingGuidelines – Chapter Eight.

• The Guidelines are designed to further two keyobjectives:

– Just punishment – is intended to ensure that thepunishment received corresponds to the degreeof blameworthiness of the offender.

– Deterrence – is intended to provide incentives fororganizations to detect and prevent offenses.


Sentencing GuidelinesSentencing Guidelines

• The Guidelines are based on “Culpability Scores”which are used to measure and determine theorganization’s punishment.

• Culpability Scores are subject to enhancements orreductions.

• This “carrot and stick” approach provided theunderpinnings for compliance program guidanceauthored by various government agencies.

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The Ability to MitigateThe Ability to Mitigate

• The Organizational Federal Sentencing Guidelinesallow organizations to mitigate sentences if they candemonstrate adherence to seven (7) elements thatevidence an effective compliance program.

• Additionally, mitigation can also be accomplished byself-reporting, cooperation (with the government),and acceptance of responsibility.


The Ability to Mitigate The Ability to Mitigate (cont.)(cont.)

• For example:

– Companies that self report and fully cooperatewith the government can receive up to a five (5)point reduction under section 8C2, 5(g)(i).

– The “report” must be made prior to theimminent threat of disclosure or governmentinvestigation and within a reasonably prompttime after becoming aware of the offense.

– The company must clearly demonstraterecognition and affirmative acceptance ofresponsibility for its conduct.

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The Ability to Go From Bad to The Ability to Go From Bad to

WorseWorse

• An organization’s sentence can be harsher when:

– High-level personnel participated in or

condoned the wrongdoing.

– The organization had a recent prior history of

similar misconduct.

– The organization willfully obstructed or

attempted to obstruct justice during the

investigation, prosecution, or sentencing stages..


A Duty to be Active MonitorsA Duty to be Active Monitors

1996 - In re Caremark International, Inc. Derivative

Litigation, 698 A. 2d. 959 (Del. Ch. 1996)

• Directors were alleged to have breached theirfiduciary duty of care by allowing a situation todevelop and continue which exposed thecorporation to liability and in doing so theyviolated a duty to be active monitors of corporateperformance.

• The Court noted that, “any rational personattempting in good faith to meet an organizationalgovernance responsibility would be bound to takeinto account [the Guidelines] and the enhancedpenalties and the opportunities for reducedsanctions that [they] offer.”

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A Duty to be Active Monitors A Duty to be Active Monitors (cont.)(cont.)

1996 - In re Caremark International, Inc. Derivative

Litigation, 698 A. 2d. 959 (Del. Ch. 1996) (cont.)

• “A director’s obligation includes a duty to attempt

in good faith to assure that a corporateinformation and reporting system, which the boardconcludes is adequate, exists, and that failure todo so under some circumstances may, in theory atleast, render a director liable for losses caused bynon-compliance with applicable legal standards.”


Got Compliance EraGot Compliance Era

Ostrich-like behavior does not conform tomodern day standards of corporateresponsibility and ethics.

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Preventive Compliance MeasuresPreventive Compliance Measures

• 2000 - HHS-OIG issues Compliance ProgramGuidance for Nursing Facilities. (See, 65 FR 14289,March 16, 2000).

• 2001 – McCall v. Scott, 239 F.3d 808 (6th Cir.),amended in part 250 F.3d. 997 (6th Cir. 2001).– Decision did not reach the merits of the shareholder’sclaims, but is nonetheless insightful.– In a case alleging a failure to take preventive compliancemeasures, shareholders need not allege that directorsacted with an intent to harm the company; they needonly allege that they acted recklessly.


Failure to Dig Deeper?Failure to Dig Deeper?

The court in McCall v. Scott noted that at least certainboard members should have been sensitive to various“red flags that warned of the systematic fraudulent

practices employed and encouraged by Columbia

management.”• Members of the audit committee had reviewed audit reportsthat showed “unmistakable signs that improper practiceswere being employed.”• That some members had personal knowledge of thecompany’s allegedly improper acquisition tactics.• That the company had been named in a qui tam action, which,though dismissed, clearly presented claims of improperpractices.

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Department of Justice GuidelinesDepartment of Justice Guidelines

• 2003 - DOJ publishes Guidelines Regarding theFederal Prosecution of Corporations

• Factors to be considered:– Nature and seriousness of the offense;– Pervasiveness of the wrongdoing within the entity;– History of similar conduct;– Timely and voluntary disclosure of wrongdoing andwillingness to cooperate with the government’sinvestigation;– Existence and adequacy of the corporation’s complianceprogram;– Remedial actions taken by the corporation;– Collateral consequences of a conviction;– Adequacy of the prosecution of the individualsresponsible;– Adequacy of non-criminal alternatives.


Failure to have an Effective Failure to have an Effective

Compliance ProgramCompliance Program

• 2004 - United States v. Merck-Medco ManagedCare, L.L.C., 336 F. Supp. 2nd 430 (E.D. Pa. 2004).

– Court held that an assertion that a companyfailed to maintain an effective corporatecompliance program is sufficient, under theFalse Claims Act, to allege the companysubmitted false claims with “reckless disregard”of their falsity, even though there is noallegation that upper management had actualknowledge that false claims were beingsubmitted.

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The Ever Increasing Focus on The Ever Increasing Focus on

Organizational Culture and Organizational Culture and

LeadershipLeadership

• 2004 - Amendments to the FederalSentencing Guidelines for Organizations.

– Exercise due diligence to prevent and detectcriminal conduct; and otherwise promote anorganizational culture that encourages ethicalconduct and a commitment to compliance withthe law.


Culture and Leadership Culture and Leadership (cont.)(cont.)

• 2008 - HHS-OIG issues a draft document entitled“Supplemental Compliance Program Guidance forNursing Facilities.” (See, 73 FR 20680, April 16,2008). This document is intended as a supplementto the original guidance issued in 2000.

• Specific discussion regarding 42 CFR part 483shows that regulatory lapses can result in fraudenforcement aimed at the entity’s leadership.

– “It is essential that key members of theorganization understand these requirements andsupport their facility’s commitment tocompliance with these regulations.”

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• Other specific references to leadership and ethicculture in the OIG’s CPG for Nursing Facilitiesinclude:

– “First, and foremost, a nursing facility’sleadership should foster an organizationalculture that values, and even rewards, theprevention, detection, and resolution of qualityof care and compliance problems.”

– “The nursing facility should endeavor todevelop a culture that values compliance fromthe top down and foster compliance from thebottom up. Such an organizational culture is thefoundation of an effective compliance program.”



• 2010 - Amendments to the Federal SentencingGuidelines for Organizations.

• The amendments add a new provision which allowsan entity to receive a three (3) point reduction inculpability score for maintaining an effectivecompliance program even in cases where thegovernment has determined that at least one (1)individual meeting the definition of “high-levelpersonnel” was involved with, condoned, or wasotherwise willfully ignorant of the underlyingcriminal activity.

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Culture and Leadership Culture and Leadership (cont.)(cont.)• If four conditions are met:

– First, the individual or individuals with operationalresponsibility for the compliance program had directreporting obligations to the organization’s governingauthority or subgroup thereof;– Second, the amendments require that the complianceprogram detected the offense before it was discoveredoutside the organization or before such discovery wasreasonably likely;– Third, that the organization promptly reported the offenseto the appropriate governmental authorities; and,– Fourth, that no individual with operational responsibilityfor the compliance program participated in, condoned, orwas willfully ignorant of the offense.


Corporate Leadership LiabilityCorporate Leadership Liability

• OIG’s Permissive Exclusion Authority Under Section1128(b)(15)(A)(ii) allows for the exclusion ofOwners, Officers and Managing Employees of ansanctioned entity, (i.e.) an entity that has beenconvicted of certain offenses or excluded fromparticipation.

• For Owners the statute requires evidence that theowner knew or should have known of the conductthat formed the basis for the sanction.

• When such evidence exists, the OIG will operatewith a presumption in favor of exclusion.

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Corporate Leadership Liability Corporate Leadership Liability

(cont.)(cont.)

• For Officers and Managing Employees the statuteincludes no knowledge element. Therefore, the OIGhas the right to exclude every officer and managingemployee of a sanctioned entity.

• However, the OIG has stated that while there is noknowledge requirement, if the officer or managingemployee knew or should have known of theconduct, it will operate with a presumption in favorof exclusion.



(cont.)(cont.)• Managing Employee is defined broadly as

individuals (including a general manager, a businessmanager, an administrator, or a director) whoexercises operational or managerial control overthe entity or who directly or indirectly conducts theday-to-day operations of the entity.

• With this in mind, it could prove difficult forindividuals meeting the definition of a ManagingEmployee to extricate themselves from anallegation that they “should have known” about theunderlying misconduct.

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(cont.)(cont.)• In determining whether to exclude an Owner,

Officer or Managing Employee, the OIG has statedthat it will consider:– The circumstances of the misconduct and seriousness ofthe offense;– The individual’s role in the sanctioned entity;– The individual’s actions in response to the misconduct;and,– General facts about the sanctioned entity’s structure andhistory, such as whether “the sanctioned entity or arelated entity had previously been convicted of a crime orotherwise found liable for an offense.”



(cont.)(cont.)• Strengthening Medicare Anti-Fraud Measures Act

of 2010.

• Introduced by P. Stark and W. Hedger H.R. 6130 asproposed is intended to addresses certain perceivedgaps that currently exist under the OIG’s permissiveexclusion authority.– First, while Executives from companies that are convictedof fraud can be excluded from Medicare under currentlaw, if the executive has left the company by the time ofconviction, he or she may be able to avoid potentialexclusion.– Likewise, parent corporations are not often heldaccountable for the fraudulent or abusive conduct of theirsubsidiaries.

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(cont.)(cont.)

• If passed, H.R. 6130 would permit the OIG toexclude corporate officers, executives, managingemployees and parent/related entities fromparticipation, if they were affiliated with the nowsanctioned entity at the time any of the conductforming the basis of conviction or exclusion of thesanctioned entity occurred.

• Thus, the OIG would have the ability to reach backand re-attach a former corporate officer, executiveor managing employee to the sanctioned entity.



(cont.)(cont.)• TheTheTheThe ResponsibleResponsibleResponsibleResponsible CorporateCorporateCorporateCorporate OfficerOfficerOfficerOfficer DoctrineDoctrineDoctrineDoctrine

– Founded in two Supreme Court cases:◦ United States v. Park (1975); United States v.Dotterweich (1943)– Premised on the theory that certain corporate

officials have a “positive duty to seek out andremedy violations when they occur … andimplement measures that will ensure thatviolations will not occur.”◦ The doctrine does not require a showing that thetargeted officials had knowledge of or hadparticipated in the alleged wrongdoing.

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(cont.)(cont.)

• In Park, the Court noted that a corporate officercannot be convicted under this doctrine merelybecause of his or her position in the company.

• Rather, a relationship must exist between theofficer’s corporate functions and the conduct inquestion.

• Basically, a corporate officer could be heldpersonally accountable for criminal acts of thecorporation if the officer had “the power toprevent or correct violations.”



(cont.)(cont.)

• Collective knowledge

– A corporation may be held criminally liable forconduct even though no single agent intended tocommit the offense or even knew the operativefacts that constituted the violation.

– The intent and knowledge of various agents maybe collectively attributed to the corporation,thereby giving rise to corporate criminal liabilitywhere no individual criminal liability would exist.

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(cont.)(cont.)

• What the Government looks for in cases involvingcorporate leaders when investigating Long-TermCare providers:

– Notice, warning, failure to act/respond;

– Gross and/or systemic failures or conditions;

– Evidence of profits over patient care;

– Institutional history and reputation.



Enforcement ExamplesEnforcement ExamplesEnforcement ExamplesEnforcement ExamplesEnforcement ExamplesEnforcement ExamplesEnforcement ExamplesEnforcement Examples

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Enforcement Examples Enforcement Examples (cont.)(cont.)

• Cathedral Rock Nursing Homes, St. Louis, MissouriCathedral Rock Nursing Homes, St. Louis, MissouriCathedral Rock Nursing Homes, St. Louis, MissouriCathedral Rock Nursing Homes, St. Louis, Missouri

– January 2010 criminal and civil settlementinvolving allegations of failure to provideadequate care to Medicare and Medicaidresidents.

– Over $1.6 million paid to resolve civil andcriminal allegations.

– Majority owner enters a deferred prosecutionagreement.



• Cathedral Rock Nursing Homes, St. Louis, Missouri Cathedral Rock Nursing Homes, St. Louis, Missouri Cathedral Rock Nursing Homes, St. Louis, Missouri Cathedral Rock Nursing Homes, St. Louis, Missouri (cont.)(cont.)(cont.)(cont.)

– Admitted conduct includes:◦ Failure to staff at certain times at a level that was notsufficient to provide adequate care.◦ Failure provide appropriate wound care at all times.◦ Falsifying medical records to indicate services wereprovided when they had not been provided via “chartingparties.”◦ Submitting claims for worthless services.

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• PurduePurduePurduePurdue FrederickFrederickFrederickFrederick –––– OxyContinOxyContinOxyContinOxyContin CaseCaseCaseCase

– 2007 COO, CSO, and General Counsel pleadedguilty as responsible corporate officers to one(1) count of misdemeanor misbranding;Corporation pleaded guilty to felonymisbranding.

– 2009 ALJ Affirms 12 year Exclusion of all three(3) corporate officers.

– 2010 federal district court in Washington, D.C.upholds all three (3) exclusions.



• In July 2009 two former Synthes executives eachpleaded guilty to one (1) misdemeanor violation of theFood Drug and Cosmetic Act relative to introducingadulterated and misbranded Norian XR into interstatecommerce.

• The executives included the former president andCOO of Synthes’ spine division as well as the directorof regulatory and clinical affairs for the spine division.

• Norian Corporation paid a $22.5 million fine under aplea agreement and its parent Synthes, Inc. agreed topay a $669,800 fine related to the same underlyingconduct.

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Enforcement Examples Enforcement Examples (cont.)(cont.)• United States of America v. Dr. Aziz AwadUnited States of America v. Dr. Aziz AwadUnited States of America v. Dr. Aziz AwadUnited States of America v. Dr. Aziz Awad– Convicted of 24 counts of participating in a scheme todefraud Medicare under 18 U.S.C. Section 1347.– Lack of appropriate physician supervision of respiratorytherapies.– Providing and ordering medically unnecessary services.– U.S. Court of Appeals for the Ninth Circuit upholds twolevel sentencing enhancement under the federal sentencingguidelines for “conscious or reckless risk of death orserious bodily injury.”• Enhancement only requires the creation of risk, not theinfliction of injury which was the case here as theconsistent failure to supervise jeopardized patients.



Practical Implications and Responses Practical Implications and Responses Practical Implications and Responses Practical Implications and Responses Practical Implications and Responses Practical Implications and Responses Practical Implications and Responses Practical Implications and Responses

Understand, Lead, and CreateUnderstand, Lead, and Create

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Leaders Should UnderstandLeaders Should Understand

• That the buck truly does stop with them - Fiduciaryduties can not be avoided by ignoring allegations.

• That increased funding, better use of technology,enhanced cooperation and coordination has resultedin more effective and efficient enforcement.

• That State and Federal enforcement agencies havebecome particularly astute at evaluating potentialinvestigative targets (and in many cases beginningcriminal and/or civil investigations) prior to steppingfoot on the targeted provider’s property.


Leaders Should Understand Leaders Should Understand (cont.)(cont.)

• That their practices are transparent to thegovernment – an agent on every shoulder.

• That clinical criteria and evidence based practicedrive medical necessity.

• That they must be prepared to take intelligent andrational positions to support their practices.

• That they must be prepared to react quickly andeffectively to alleged or identified overpayments –the eagle and the windbreaker.

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Leaders Should LeadLeaders Should Lead

• Leaders should demand and support effectiveCompliance and Ethics Programs.

• Leaders should exercise positive authority in thearea of compliance and not merely be a passiveobserver.

• Leaders should understand the extent to which thestrength of the organization’s compliance operationhas a direct impact on the way in which theirorganization responds to government investigationsand/or enforcement actions.


Leaders Should Lead Leaders Should Lead (cont.)(cont.)

• Program effectiveness should be continuouslymonitored by leadership.

• Internal investigations should be robust andforthright.

– Include both interim and final recommendations;– Contain/control ongoing acts of non-

compliance;– Limit exposure and related damage;– Take advantage of “good provider”

opportunities;– Opportunity to refund identified overpayments;– Opportunity to self-disclose.

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Leaders Should Create a Leaders Should Create a

Compliant CultureCompliant Culture• Corporate culture is critical to the success (or

failure) of an Organization’s compliance.

• Leadership creates the culture, culture driveseffectiveness.

• The role of leadership cannot be understated andmust be understood.– Does leadership embrace or merely tolerate complianceand ethics?– How are compliance officials treated and received?– How has leadership demonstrated its ability to deal withbad news?– How has leadership shown its willingness to takeresponsibility?



Compliant CultureCompliant Culture ((((((((cont.)cont.)

• Creating and maintaining an ethical culture removesuncertainty thereby promoting internal reporting.

• Employees that report suspected misconduct,should be encouraged, supported, and protected.

– Positive outcomes normally flow from positivebehaviors.

– The information that is being offered is avaluable gift, treat it that way.

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Compliant CultureCompliant Culture ((((((((cont.)cont.)• Perfection is Not Required, But Good Faith Is.

• Good faith explained – ordinarily used to describe

that state of mind denoting honesty of purpose,

freedom from intention to defraud, and, generally

speaking, means being faithful to one’s duty or

obligation.– Actions speak louder than words.– Do your actions support the “good faith” state-of-mind?• What is your Code of Conduct?– Words on the page or the basis of the corporation’s culture.• Is it your habit to run down the sidelines?


Thank you.Thank you.Robert J. Benvenuti IIIBarnett Benvenuti & Butler PLLC489 East Main Street, Suite 300Lexington, Kentucky 40507Tel 859.226.0312Fax [email protected]

climbing the corporate ladder: looking up the chain of ... · • 1963 -graham v. allis-chalmers...

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