Have you ever wondered how a corporation continues to operate while embroiled in a criminal investigation? Many times, prosecutors and government enforcement agencies will need many months to investigate a business and they face the serious risk that management may dissipate investor funds or assets. This blog post explains corporate monitors, one of the three types of court-appointed fiduciaries that assist in operating the company and maintaining the status quo during an investigation.
In the age of ponzi schemes, the courts have responded to corporations’ needs to maintain operating while the corporation is being investigated. All too often we hear about the destruction of documents, dissipation of assets, and other inappropriate behavior in times of legal trouble. The rationale behind court-appointed fiduciaries is that while the corporation is being scrutinized, it can be hard to trust management to maintain the status quo.
Who are Court-Appointed Fiduciaries?
There are three main court-appointed fiduciaries, all with the same goal: maintain the status quo until the conclusion of the investigation. Court-appointed fiduciaries are independent third parties who assess and monitor a company’s adherence to compliance requirements. Receivers and trustees have a broad range power. Both typically completely displace management, taking control of all managerial duties. With such expansive powers, receivers or trustees could potentially harm a company. Thus, a corporate monitor may be a more suitable option.
What are Corporate Monitors?
A more balanced approach to maintaining the status quo is to utilize a corporate monitor whose powers are more limited. Monitors are usually appointed to perform a specific set of duties, and often only have a single-purpose duty. Corporate monitors only supervise rather than manage. Specifically, the Department of Justice has stated that the scope of the monitor ship should be tailored to address the specific issues and concerns that created the need for a monitor. Some corporate monitors have some broader powers, including the right to sue third parties on behalf of the company, but still do not take over management. There are corporate monitors who are appointed to assist with businesses continuing operation and those which are no longer operating.
For those businesses still operating during an investigation, the corporate monitor serves as a sort of financial police. The corporate monitor oversees management and many times even improve the company’s internal controls and corporate governance. Those companies which are no longer operating, but are under investigation, must also maintain the status quo. For such businesses, typically, the duties of a corporate monitor would be to hold assets or serve as a liquidation agent to repay creditors.
When will the Court Appoint a Corporate Monitor?
There are generally two reasons why a corporate monitor is appointed: (1) the prosecution or investigating agency moves the court for a corporate monitor because it believes there is a need for oversight within the business or (2) the corporation, in an abundance of caution, requests the court to appoint a monitor to avoid even the appearance of inappropriate behavior during the investigation.