Complying with customers’ conflict of interest requirements

A federal indictment handed down this week charged a former CEO of CalPERS (the California Public Employees Retirement System), who had become a consultant to a “placement agent” just one day after leaving CalPERS,  with defrauding Apollo Global Management in connection with Apollo’s payment of  14 million dollars in fees to the placement agent for its role in persuading CalPERS to hire Apollo to manage some of its funds.  As charged in the indictment, Apollo asked the agent to have a CalPERS official sign a letter saying that they were aware of the placement agent’s role in getting Apollo the business, but CalPERSs’ officials – presumably concerned with the conflict of interest involved – refused to do so. So, the former CEO and a colleague at the placement agent allegedly created and presented to Apollo phony letters evidencing such approval.

This is a fairly unusual (as well as tangled) case and apparently leaves open a number of  important questions regarding CapPERS and Apollo.  But it also raises the broader and more general question which countless companies face on a frequent basis:  what should be done to ensure that one’s employees and agents are complying with a customer’s COI standards, (a topic we haven’t explored since the early days of the blog)?

There are a number of possibilities here, including the following:

– Mandating that your company’s employees/agents comply with relevant customer standards, i.e., building such an expectation into your code of conduct, other policies and agency agreements.

– Training and otherwise communicating periodically to at-risk employees and agents on such expectations.

– Making an effort to ensure that employees/agents are in fact aware of applicable customer standards, such as by collecting and distributing relevant sections (e.g., on gifts, entertainment and travel) of customer codes of conduct to employees/agents who deal with such parties.

– Including such standards in one’s audit protocols.

– Contacting the customer with respect to specific contemplated actions that could raise COI  issues under the customer’s policies or relevant law.

The last of these measures is, of course, the most delicate – and it is not something that companies tend to do for small-scale matters (e.g., taking a customer’s employee to lunch).  However, for potentially weightier COI issues it is often warranted (and, of course, should be done where required by law – as was the case in the CapPERS matter).

Finally, it is worth considering that there are different  types of effort that each of the above compliance measures can entail.  For instance, regarding the delicate but potentially important customer-contact-related measure one can require that:

– Written notice be given to the customer (e.g., the supervisor of an employee of a government agency who one would like to invite on a business trip) –  a one-way written communication.

– The customer confirm in writing its approval of the contemplated action (e.g., what Apollo sought to do here) –  a two-way written communication.

– There there be an in-person or telephonic contact with the customer – to avoid the type of fraud that happened in the CalPERs case.

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