Compliance Officer Liability: Three Tales

Good lord, compliance community, what happened to us last week?

After years as a relatively calm, staid profession, we had three reports of compliance officers accused of misconduct. All are head-scratchers that require more detail, and I suspect we’ll be following them in the future. The coincidental timing of them, however, is nothing short of remarkable. Altogether, they make last week one for the ages. Let’s review.

The CCO Who Pushed Back

First is the case of Todd Barretta, former chief compliance officer of New Jersey Transit. NJT fired Barretta two weeks ago, and said little about the circumstances of his departure. The agency has been under scrutiny for its financial and safety practices, and Barretta was fired after only six months on the job “pending an internal investigation.” Hmmm, I thought at the time. That sounds weird.

Now we know more. Last Friday Barretta testified before a New Jersey state legislative committee and painted a damning picture of NJ Transit— calling it, naturally, “a runaway train.” He claimed that NJT executive director Steve Santoro pressured him not to document problems he found (they might later turn up in public records requests); not to discipline two errant employees (let the Federal Railroad Administration do the dirty work); and to ignore other safety and personnel problems as well.

Testifying later that day, Santoro said Barretta was fired for improper personal use of a New Jersey Transit car. He also claimed that if Barretta’s allegations were all true, “I wonder how we’re operating at all”— which, of course, is exactly what New Jersey commuters wonder about the agency every day.

If Barretta is claiming that a state agency is inept, riddled with patronage, and seeking to shield its inner workings from prying public eyes— well, that’s not a far-fetched claim to make, especially when the state in question is New Jersey. So I’m going with Barretta on this one. I’ll doubt the counterclaim about misusing the company car until we see mileage records. That are confirmed as authentic.

The Conflict of Interest, Maybe

Second is João Adalberto Elek, head of governance and executive compliance officer at Petrobras. Elek was suspended last week amid an investigation into whether he improperly awarded an $8 million no-bid contract to Deloitte, while his daughter was interviewing at the firm for a job.

According to a filing Petrobras submitted to the Securities and Exchange Commission last week, the alleged quid pro quo unfolded in the fall of 2015. Elek was looking for an audit firm to help the company investigate claims coming through its internal hotline. Because Petrobras’ need was so urgent, the company waived its usual bidding process. At roughly the same time, Elek’s daughter interviewed for a job at the firm, which she did eventually get.

That said, a closer examination of the timeline is in order. Elek’s daughter began interviewing at Deloitte in September 2015. Then Petrobras’ legal and internal audit teams gave their blessings to a no-bid contract process. Then Elek awarded the contract to Deloitte, on Dec. 18, 2015. Then Deloitte hired his daughter in March 2016. Elek informed the Petrobras ethics committee that same month that his daughter had the job— and for the record, none of her duties there intersected with Deloitte’s Petrobras work.

In September 2016, an anonymous person called Petrobras’ internal reporting hotline to question whether l’affaire d’Elek was a conflict of interest. The board created a special committee, headed by the audit committee chair, to investigate; and had the internal audit department do another review of the matter. The committee decided Elek was in the clear.

Still, Petrobras also referred the matter to a separate government ethics committee. That committee decided that the deal is a conflict of interest, although it also “confirms the understanding of the [Petrobras] committee that it is possible to conclude that ‘there are no elements suggesting undue influence as described by the anonymous accusation’ to Mr. Elek.”

Petrobras then suspended Elek, while he appeals. Petrobras’ deputy compliance officer will step into Elek’s role for the interim.

CCO Liability in Focus

Last, and perhaps most troubling, is the case of David Osunkwo. He was principal at the vaguely named Strategic Consulting Advisors, which provided outsourced compliance services to investment funds Aegis Capital and Circle One Wealth Management in 2010 and 2011. In essence, Osunkwo was the firms’ outsourced chief compliance officer.

In that role, Osunkwo had to prepare a Form ADV for the firms as they prepared to merge in 2011. For compliance officers not in the financial world, that’s the annual form advisory firms submit to the SEC that lists a firm’s investment style, key officers, and total assets under management (AUM).

Osunkwo got his information about the firms’ chief investment adviser, who told Osunkwo via email that the AUM total to be reported was $182.9 million. One problem: the correct AUM actually was only $62.8 million AUM.

The SEC’s administrative order against Osunkwo says he “adopted these estimates without taking sufficient steps to ascertain their accuracy.” And because the firms were against a tight filing deadline, Osunkwo also listed the chief investment officer as certifying the information on the Form ADV, without confirming that the investment officer had certified the numbers as accurate (which they were not).

For those errors, Osunkwo was fined $30,000 and barred from some investment firm jobs for one year.

Compliance officers in the financial world may be uneasy about the Osunkwo case because it dwells on how far they must go to verify data provided to them by senior executives. It’s a duty of care created by the Investment Companies Act of 1940, which doesn’t exist for ethics and compliance officers in most other industries. For those in the investment world, however, this case can jar the nerves.

On one hand, outsourced compliance officers can only take so many steps to verify the accuracy of information a client firm provides to them. They’re not auditors, and they’re certainly not paid like auditors. The SEC order doesn’t give many facts about the case; not enough for us to know whether Osunkwo knew of potential trouble or turned a blind eye to it. (Compare this case to a previous compliance officer sanction in January, where the compliance officer was grossly negligent.)

Then again, Osunkwo listed the investment officer as a signatory certifying the numbers on the Form ADV, when Osunkwo hadn’t confirmed anything with him. That put Osunkwo at risk, and the risk came to pass. It demonstrates the difficulty CCOs in the investment world have. Doug Cornelius, chief compliance officer at Beacon Capital Partners, has a sharp analysis on the case posted on his ComplianceBuilding.Com blog.

So there we have it: three examples of compliance officers under pressure for misconduct, real or otherwise. It’s a noble, important, honorable profession— and it has its risks for the people who undertake it.