Corporate Monitors: Who, What, and Why?

Mauricio Perlaza – WorldCom, Enron, and the Madoff Ponzi Scheme: aside from the obvious fraud, what do these financial fiascos have in common? In each case, a court-appointed fiduciary was tasked with overseeing the remedial measures ordered by a presiding court. However, while the bankruptcy trustee in Enron and the receiver over Madoff set important precedent for future compliance initiatives, the corporate monitor in WorldCom was instructive in all the wrong ways.

A corporate monitor is a subset of a larger group of court-appointed fiduciaries or “fiscal agents” that serve as remediation tools for a range of security enforcement actions. Its counterparts––receivers and bankruptcy trustees––are better known but materially different from corporate monitors. The main distinction is that receivers and trustees are given expansive authority to carry out their goals. In contrast, a monitor typically performs a specific set of functions or has a single-purpose duty. In this way, a monitor’s targeted nature makes it a less intrusive alternative that is more attractive to courts.

Consider this example: a hedge fund operating a Ponzi scheme defrauds hundreds of international investors out of millions of dollars. Bankruptcy proceedings through a trustee would likely involve hundreds of separate filings, probably in different states because of the range of investors, and runs the risk of expending the available funds even before recovery negotiations. A receiver would be similarly draconian; likely displacing management in the process of taking control of the entity and potentially leaving it in shambles. In contrast, the nature, scope, and duration of a corporate monitor allows for pareto efficiency in favor of aggrieved investors.

Unlike a receiver, who often plays a disruptively managerial role, a monitor is supervisory in nature and able to assist in the preservation and distribution of assets while deterring future misconduct (like soliciting new investors to defraud). Moreover, a monitor is unlike a bankruptcy trustee in scope because it does not carry the burden of filing individual proceedings per claimant. Instead, a monitor can act as a collective fiduciary that aggregates claims and devises a distribution plan for representative reimbursement—all under one roof.

Further still, the differences in nature and scope illustrated above suggest that corporate monitors are less temporally intrusive than their counterparts. This illustrates one reason corporate monitors have gained increased favor with the courts––their problem-solving attention. Especially when granting an equitable remedy, courts have to balance between upholding justice and managing government overreach. Corporate monitors equip courts with the tools necessary to maintain this balance by negotiating the misconduct without necessarily foreshadowing corporate demise, which so often happens with its counterparts.

Arising out of this increased favor, a corporate monitor is more likely to be appointed than other types of court-appointed fiduciaries. This in turn creates two important advantages for claimants: (1) improved investor confidence and (2) cost-saving effectiveness.

Corporate monitors are more available now than ever before. Traditional use of court-appointed fiduciaries tethered the remedy to a less frequent, upper-echelon case type, like that of WorldCom. As a result, private claimants damaged by small to medium-sized companies were deterred from pursuing the remedy. As the tide changes and corporate monitors become more accessible, claimants become more confident as they are afforded a likely remedy in matters where other fiduciaries would be out of contention.

Further, monitors have the unique ability of saving claimants time and expense. From their infiltrated vantage point, monitors provide time-efficient investigations and sidestep the burdensome discovery process of traditional litigation. Moreover, monitorship agreements employ a cost-shifting model where the monitor’s cost is borne by the company being overseen, not the claimant. In addition, monitors increase claimants’ chances at recovery. Prolonged investigations exacerbate the risk of asset dissipation and jeopardize a claimant’s recovery. A monitor mitigates this risk by overseeing a corporation’s business operations and preserving its assets upon appointment.

Notably, claimants are not the only beneficiaries from corporate monitors. In fact, critics argue that monitorships are overly kind to defendant corporations because monitors work to maintain the company’s status quo. Whether the glass is half full or half empty, preserving status quo can prevent unnecessary economic waste. Unlike a receiver who frequently displaces management, often leaving a company to its demise, a monitor helps implement court-ordered remediation to redirect failing aspects of a company. This restorative approach invites the important implication of deterring future misconduct. Whatever the revamp, implementing new procedures motivates a fresh start. This is especially true when a company’s commitment to improvement curtails the need for public corporate prosecutions and, by extension, negative news.

There is certainly more to come as the corporate monitor trend continues forward. Counsel on both ends of the aisle should familiarize themselves with the remedy, and claimants should ask their attorneys about whether this remedy is appropriate for their case.

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