This transcript was auto-generated using Adobe Premiere Pro.
00;00;01;23 - 00;00;35;25
Gregg Sofer
Ever wonder what is going on behind the scenes as the government investigates criminal cases? Are you interested in the strategies the government employs when bringing prosecutions? I'm your host, Gregg Sofer, and along with my colleagues in Husch Blackwell's White Collar, Internal Investigations and Compliance team, we will bring to bear over 200 years of experience inside the government to provide you and your business thought provoking and topical legal analysis as we discuss some of the country's most interesting criminal cases and issues related to compliance and internal investigations.
00;00;37;14 - 00;01;01;02
Gregg Sofer
Welcome to the latest edition of the Justice Insiders. Thanks for joining us today. I'm lucky enough again to be joined by a colleague of mine here at Husch Blackwell, Rebecca Furdek, who's a senior associate at Hush Blackwell's Milwaukee office. And she focuses her practice on white collar crime, government enforcement and internal investigations. Rebecca, thank you so much for joining us today.
00;01;01;12 - 00;01;02;16
Rebecca Furdek
Thanks for having me, Gregg.
00;01;03;00 - 00;01;28;19
Gregg Sofer
Today, we're going to explore a recent SEC enforcement action that involved McDonald's 2019 termination of its then CEO, Stephen Easterbrook. It's a case that breaks new ground and could well be a harbinger for what's to come out of the SEC and other federal government agencies regarding a corporation's ability to manage the human resources component of its operations. And that will likely have a big impact on compliance programs.
00;01;29;09 - 00;01;33;29
Gregg Sofer
So, Rebecca, if you'd be so kind, can you walk us through the basics of what happened in this case?
00;01;35;10 - 00;02;09;28
Rebecca Furdek
Well, thanks, Greg. To give a little background to this case, really kicked off in late 2019 when McDonald's terminated its former CEO, Stephen Easterbrook, after finding in the course of an internal investigation that he had engaged in an inappropriate personal relationship with a McDonald's employee in violation of corporate policy. McDonald's exercised its discretion to terminate him without cause, and because he was terminated without cause, his stock options and performance based restricted stock units continue to vest or would be exercisable.
00;02;10;22 - 00;02;14;23
Rebecca Furdek
And I understand that this would not have been the case had he been terminated for cause.
00;02;15;26 - 00;02;19;06
Gregg Sofer
Let me let me interrupt you for a second there. The numbers are pretty big here, aren't they?
00;02;19;07 - 00;02;49;17
Rebecca Furdek
They are. They are. So after he was terminated, McDonald's calculated that Easterbrook would ultimately receive about 47.5 million, I believe, of which nearly 44 million was composed of those stock options and the PRSUs. And then in subsequently filing its 8-K, McDonald's confirmed that he would also be eligible for severance benefits. And in filing its definitive proxy statement for fiscal year 2020, McDonald's explicitly disclosed that he was terminated without cause.
00;02;50;13 - 00;03;22;22
Rebecca Furdek
So fast forward then a couple of months to July 2020, McDonald's received an anonymous complaint from another employee alleging that Easterbrook had engaged in an inappropriate personal relationship with another employee. McDonald's conducted a second internal investigation, which did yield evidence that he did, in fact, engage in multiple inappropriate personal relationships. And Easterbrook had failed to disclose in the course of the first internal investigation that led to his termination that there were multiple such relationships.
00;03;23;14 - 00;03;42;17
Gregg Sofer
McDonald's is just I'm sorry to interrupt, but let's just let's just look at the filings themselves. So the these filings that were conducted, that is the A.K. and the proxy statement, those were accurate statements certainly at the time that they were filed. Would you agree with that?
00;03;42;27 - 00;04;14;06
Rebecca Furdek
My understanding from the statements rendered by McDonald's is yes, because they were not aware that there were multiple relationships. They, according to their own internal policies, had terminated him without cause, with discretion. That was apparently built into that policy. And again, McDonald's has said that if they knew about the fact that there were multiple such relationships, they would have terminated him for cause, which again, indicates to me that that's something in one of their internal policies at play.
00;04;15;14 - 00;04;39;12
Rebecca Furdek
And then the very next month. So just August 2020, McDonald's then filed a suit against Easterbrook in Delaware, seeking to recover the compensation he received pursuant to a separation agreement that settled then a year later, and then, I believe, late 2021, resulting in Easterbrook having to pay back his entire severance package, which I guess was valued at over 100 million between cash and stock.
00;04;40;19 - 00;05;28;26
Rebecca Furdek
So fast forward again and enter the S.E.C. Following its own investigation, the SEC issued an order early this year, January 9th, 2023, finding a number of violations. First of all, they found that Easterbrook violated 10b5, which among other things, prohibits someone from making an untrue statement of a material fact or omitting a material fact. They found that he violated Securities Act Section 17, as well as caused violations of Section 13a, which, among other things, prohibits an issuer so their McDonald's from filing periodic or current reports that contain materially false or misleading information, that he found that McDonald's as well committed some violations.
00;05;29;08 - 00;06;09;15
Rebecca Furdek
They found that McDonald's violated Section 14 of the act. Item 402b specifically provides that their compensation and discussion, compensation, discussion and analysis section of their filing quote shall explain all material elements of the registrant's compensation of the named executive officers and just to break that down a little bit, I guess the instructions for 402b for companies say that they have to address, quote, specific decisions that were made or steps that were taken that could affect a fair understanding of the named executive officers compensation, unquote.
00;06;10;12 - 00;06;40;27
Rebecca Furdek
And another item within that list requires disclosure and or of any material factors regarding a contract that provides for payment. So taking that together, the S.E.C. ultimately found that McDonald's failed to disclose that it used discretion in treating Easterbrook's termination as without cause under the relevant plan documents, and that CC pointed out that as a result of that, Easterbrook retained that equity based compensation that he otherwise would have had to have forfeited.
00;06;42;15 - 00;07;06;28
Rebecca Furdek
In addition to that, you know, the SCC highlighted and I'm sure we'll talk about this later, the fact that McDonald's substantially and promptly cooperated. They voluntarily provided documents and testimony as well as made their leadership available for interviews. As a result, the S.E.C. found that Easterbrook and McDonald's ordered both of them to cease and desist, obviously, from causing securities violations.
00;07;07;09 - 00;07;20;15
Rebecca Furdek
Easterbrook was required to pay 400,000 of a civil monetary penalty to the SEC. And crucially and interestingly for companies, McDonald's did not receive any civil monetary penalty based upon its cooperation.
00;07;21;09 - 00;07;50;00
Gregg Sofer
All right. Well, let's explore some of the facts involved here. First, there's the alleged material omission, and that is the failure to disclose McDonald's use of discretion in firing their CEO without cause as opposed to for cause. Then there's the implication of this being material that is that investors in a company that had over $100 billion in revenue and nearly $12 billion in profit need to know about precisely how the CEO was fired.
00;07;50;20 - 00;08;13;13
Gregg Sofer
Now, granted, the departing CEO was taking over $100 million with him out the door. But even if one were to concede the materiality issue here to question whether there was discretion or not involved in this decision and whether that triggers a securities law disclosure, it almost seems to implicate the company's code of conduct or the compliance manual or its h.r.
00;08;13;13 - 00;08;18;26
Gregg Sofer
Manual. That seems fairly far afield from the sec's previous enforcement scope.
00;08;19;21 - 00;08;47;00
Rebecca Furdek
Absolutely. You know, going forward, this could very well serve as precedent for the SEC to engage and use a similar argument when there is other information that's not disclosed that would cause a company to just reconsider its relationship with or compensation of a key executive. And that could take a variety of forms as well as just new questions now of material that materiality is defined in that space.
00;08;48;18 - 00;09;23;23
Gregg Sofer
And I think it it it's going to potentially to the extent that, you know, this is a shot across the bow, you almost have to look at your whole system for terminating employees. It sounds like, for instance, if there had been no discretion here, maybe this wouldn't have been a problem for McDonald's. Now, it may still have ended up being a problem for their CEO because he's the one who sort of tricked his employer or did not disclose to his employer what what else he was doing at work.
00;09;24;23 - 00;09;45;13
Gregg Sofer
But but the company itself seems to have run afoul of the FCC based on this concept of the fact that they were they had that they employed discretion in making the decision. And they really appear to want to peer into exactly what happened in terms of making that decision as well.
00;09;46;09 - 00;10;05;26
Rebecca Furdek
Absolutely. And it may this decision may prompt some companies to revisit their policies regarding compensation, regarding hiring and firing, to decide whether to potentially narrow the scope of discretion in those decisions to maybe make that a little more airtight for future enforcement actions.
00;10;07;10 - 00;10;36;04
Gregg Sofer
You know, you almost get the feeling that what the SEC wanted to see here was the was related actually to the HR policies, meaning they actually wanted to see him fired for cause and have all of his compensation taken away from him. In other words, had the company learned of, you know, multiple dalliances on his part and decided to still exercise some kind of discretion and not fire more.
00;10;36;05 - 00;10;57;11
Gregg Sofer
Let's say their employee manual said we're not going to fire you for cause under these five different kinds of circumstances. But it still offended the SEC that this guy walked out the door with $47 million. You almost get the impression that they're wading into the substance, the substantive decision of firing him for cause or not for.
00;10;57;24 - 00;11;18;17
Rebecca Furdek
I don't I don't think that impression is unreasonable, just in light of the SEC and DOJ having a lot of emphasis lately on clawbacks and other other enforcement focuses on executive compensation. It all it all alliance and one sort of enforcement policy priority across administration or across agencies, rather.
00;11;19;05 - 00;11;43;19
Gregg Sofer
So it's important here to draw a distinction between the CEO's behavior here, which I think most of us would find unacceptable and what the securities laws actually require. Seems to me that you really have to strain the language of the existing securities regulations in order for the SEC's rationale to make any sense. Also, the S.E.C. had never pursued this interpretation before, at least not as far as I know.
00;11;44;09 - 00;11;59;09
Gregg Sofer
So you're left with the possible conclusion that what the SEC is really doing here has less to do with enforcing the securities laws and more to do with regulating the way businesses approach these kinds of H.R. situations. But it's an extremely slippery slope, isn't it?
00;12;00;17 - 00;12;05;23
Rebecca Furdek
It certainly is. And that was definitely a key theme of the dissent of the SEC Order.
00;12;07;07 - 00;12;21;16
Gregg Sofer
Well, let's talk a little bit about that. What did the. So there was a there were two commissioners who actually dissented and pretty harsh dissent in terms of what what you see coming out of the SEC. And in most cases it was.
00;12;21;16 - 00;12;48;09
Rebecca Furdek
Yeah. And dissenting from the order two commissioners, Hester Peirce Mark Uyeda, stated that the order is a novel interpretation of the Commission's expansive executive compensation disclosure requirements. And they actually said, We are unaware of any prior commission or staff actions or positions which would include, you know, sub regulatory guidance or policy positions stated online applying item 402 in this way.
00;12;48;28 - 00;13;16;14
Rebecca Furdek
These two commissioners said that hiring and firing discussion and analysis is beyond the rule scope. And they made two broad comments really about how as a whole this enforcement action against McDonald's and Easterbrook was essentially replacing what should be a more traditional, transparent, deliberate regulatory approach. They said, you know, industry practice for complying with item 402 was developed over many years.
00;13;16;24 - 00;13;47;01
Rebecca Furdek
I believe that the most recent, the current version of 402 was published in 2006. So you're talking about 16 plus years. And they said so, quote, To spring a novel interpretation through an enforcement action is not a reasonable regulatory approach, unquote. They said that instead the U.S. should be publicly articulating its views through rulemaking or formal guidance so that companies can actually understand the requirement before the SEC starts enforcing it.
00;13;47;14 - 00;14;15;11
Gregg Sofer
I think, you know, maybe the reason why McDonald's wasn't asked to pay a large civil penalty could be there could be multiple reasons for that. One is they cooperated. And, of course, we've talked a lot about that on the podcast. And they certainly offered up their CEO as quickly as they could and sue them promptly as well. The two internal investigations ultimately resulted in them digging out the information that was important.
00;14;15;28 - 00;14;38;13
Gregg Sofer
But the bottom line is that you could never say that they were being reckless or not careful about trying to find the wrongdoing. But I also think the SEC is on dangerous legal ground here. And, you know, especially with these two commissioners dissenting and describing what they were doing, you can see that they're they're really they've taken such an aggressive view of this.
00;14;38;13 - 00;15;02;25
Gregg Sofer
And you've got to ask some due process questions. This is something that came up in another podcast with Professor Richard Epstein. If the way you tell everybody that you're making a radical change to the way that you interpret some, you know, back water regulation, potentially a section four or item four or two, for instance, that most people are not walking around with great understanding of that.
00;15;02;25 - 00;15;23;10
Gregg Sofer
As you said, it's been a long time since the SEC has opined on it or said any out any guidance. If the first time you decide to radically alter that, you're doing so by taking enforcement action against a large public corporation and then and an individual, you know, there's a real question of whether that's fair and whether that's a proper due process.
00;15;23;23 - 00;15;46;23
Gregg Sofer
Again, is what the dissent very much was saying. And, you know, you'd think you'd think that with such aggression they'd give some people more notice. But apparently for McDonald's and Mr. Easterbrook, they didn't get any. So what else can we glean from this opinion, Rebecca? What other thoughts do you have about what happened here?
00;15;47;24 - 00;16;16;10
Rebecca Furdek
Well, I think there's sort of an SEC specific takeaway and then a kind of a more broad enforcement related takeaway. You know, here McDonald's is clearly being used as an example, I think, by the SEC to shape its own future enforcement. Just as to that provision, of course, you know that the companies are now going to consider when they're making hiring and firing decisions those contours of the discretion, the specific decisions they're making.
00;16;16;10 - 00;16;43;16
Rebecca Furdek
I'm sure companies will now maybe disclose a little more information, more detail, maybe even the necessary, just to ensure that they're complying. In addition to that, just see specific trend. I think the emphasis here on, you know, the prompts company cooperation, which I know is something you've talked a lot on this podcast about, as well as compliance enforcement through executive compensation just aligns with and first of our many bad puns.
00;16;43;16 - 00;17;08;15
Rebecca Furdek
Perhaps this is really just a McFlurry of similar recent pronouncements across administrative agencies. And I'll just note, you know, as a preview to that, before I joined Hush, I worked at an administrative agency. I was counsel to the solicitor at Department of Labor and the prior administrator. An and in that role, I learned that agencies within an administration will share some policy goals and enforcement priorities.
00;17;08;25 - 00;17;38;28
Rebecca Furdek
So this isn't necessarily surprising to see. But, you know, I'm noticing a couple of cross-agency trends, and the first is just this emphasis on cooperation. The SEC here said that McDonald's was prompt, substantially cooperated. DOJ has been all over this in the last year and a half, just March 2nd. Deputy Attorney General Lisa Monaco gave remarks where she again emphasized this The next day, I believe Assistant Attorney General Kelly said kind of the same thing.
00;17;39;25 - 00;18;13;09
Rebecca Furdek
The second trend, I would say is driving driving compliance through individual executive compensation. And that was obviously the focus here. In October 2022, the SEC adopted its final rule to require public companies to implement policies to recover or claw back or erroneously awarded incentive based compensation, just even in the event of an accounting restatement. And again, DOJ talks about this all of the time, including the March 2nd and 3rd remarks.
00;18;14;02 - 00;18;51;13
Rebecca Furdek
For instance, Deputy AG Monaco said that she cited DOJ's priorities of driving compliance, promoting behavior through innovative approaches to compensation and the use of clawbacks and DOJ's criminal division. I understand, is now implementing a pilot program to provide fine reductions to companies who will seek back to clawback that compensation related to that, too, I mean, this is this is an even broader trend, but kind of a willingness in general to just use other mechanisms, aside from formal rulemaking, to achieve particular policy goals here.
00;18;51;13 - 00;19;05;28
Rebecca Furdek
And we talked a little bit about H.R. related concerns being one of those goals. You know, one might cite this observation is just reflective of a wider philosophy concerning how the federal government perceives its role in the regulatory process.
00;19;06;09 - 00;19;39;08
Gregg Sofer
What's interesting to me with these developments is the distinction that one could draw between corporate crime or corruption, that is instances of outright fraud or malfeasance and these alleged violations of the law that until this action, very few people might have considered to be material or otherwise relevant from the perspective of securities law enforcement, you pair that with obvious and focus here on the individual accountability or the accountability of individuals in compensation, and you have the makings of a real mess from a compliance standpoint.
00;19;39;22 - 00;19;59;23
Gregg Sofer
I mean, if the FCC is now going to attempt to regulate what are more or less discretionary decisions, what other areas of the operation will they use, securities law to pry open? I mean, ultimately, if everything is material, then I guess nothing is. But be that as it may, the takeaway from a compliance standpoint is more than a little muddy here.
00;19;59;24 - 00;20;17;07
Gregg Sofer
I guess you could take discretion out of your employee handbook or severely limit discretion in your employee handbook or code of conduct from a compliance officer or C-suite perspective. You have to look at this case and wonder what McDonald's possibly could have done to avoid this situation.
00;20;19;11 - 00;20;52;25
Rebecca Furdek
I think that's exactly right. I think it will lead many companies to consider the implications of terminating someone without cause, exercising their discretion to do so. We've talked about that before. Perhaps it will incentivize companies to narrow what's within without cause and widen what is with cause and no discretion for the company. In addition, I think that this frankly puts a lot of companies in a bind because DOJ and SEC are telling you, okay, you should promptly disclose misconduct.
00;20;53;05 - 00;21;26;08
Rebecca Furdek
Well, if anything, this situation reveals the importance of conducting a really thorough investigation. You know, I don't know how quickly McDonald's did their first investigation, but, you know, an argument may be made that if it were more thorough, perhaps more information would have come to light the first time around. I don't know. I mean, nobody knows necessarily, but it should create some pause for companies to consider where is that fine line between promptly disclosing and doing all the necessary legwork before doing so?
00;21;27;26 - 00;21;47;11
Gregg Sofer
That's a really good point. And we've talked about that a lot on the podcast, that there's such a push for disclosure, disclosure of disclosure. But if you don't actually know the facts, then the next phase is, well, you, you made a material misstatement or a material omission because you didn't do enough work. And those things certainly are at odds with each other.
00;21;47;11 - 00;22;07;07
Gregg Sofer
And I agree, you have to be very careful. Now, of course, these are mandatory filings. The company didn't have a chance then. They were a choice not to file certain things, but generally speaking, and certainly in the DOJ context, your point's very well taken. Well, thank you so much, Rebecca, for your time and your insight. We really appreciate it.
00;22;07;07 - 00;22;08;29
Gregg Sofer
Thanks for coming on to Justice Insiders.
00;22;08;29 - 00;22;09;21
Rebecca Furdek
Thanks so much.
00;22;10;19 - 00;22;25;11
Gregg Sofer
Thanks for joining us on the Justice Insiders. We hope you enjoyed this episode. Please go to Apple Podcasts or wherever you listen to podcasts to subscribe, rate and review the Justice Insiders. I'm your host, Gregg Sofer. And until next time, be well.