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Regulatory Compliance Lessons from Baseball

By Mitchel H. Kider and Michael Y. Kieval

(published in Law360 on January 17, 2020)

The Houston Astros won their first World Series title in 2017 and came close to repeating in 2019, winning three straight away games before ultimately losing in seven.  Their place in the annals of the American pastime has been marked with an asterisk, however, because they used a camera to steal signs from visiting teams throughout the 2017 season and into 2018.  This unfortunate episode highlights several lessons for banks and other financial institutions concerning the importance of compliance.  Your regulators are focusing on the same types of issues and expect the same types of institutional controls.

By way of background, the sign-stealing allegations were made public in November 2019, in an article based on statements by a former Astros player, and Commissioner of Baseball Rob Manfred ordered an investigation.  Stealing the signs that a catcher gives to the pitcher without the use of technology has long been a part of baseball, but using technology to steal signs is prohibited, and the Astros are not the first to get in trouble for breaking the rules by using cameras to do so.  Even if some of their competitors have done the same thing previously or subsequently, however, the Astros are the ones in trouble.

With the investigation complete, the Commissioner has issued a nine-page statement that imposes “significant discipline” on the team and on managers who were even tangentially involved.

The team is to forfeit its first two draft picks for two years and pay a $5 million fine (the highest allowable under the Major League Constitution).  The team’s manager and general manager were suspended without pay for one season by MLB (and then fired by the team).  A former assistant general manager was banned from baseball for at least one season for inappropriate comments he made to one or more female reporters.  And at press time, the former bench coach has lost his job managing another team and is still awaiting MLB discipline as part of a continuing investigation into his conduct even after leaving the Astros.

What can we learn from the situation the Astros are in?

A Culture of Compliance Matters

Although the Commissioner found that the team’s owner did not know about the violations—indeed, he was upset by them, was very apologetic, and had even directed a subordinate to ensure that the team did not commit this type of violation—that did not save the team from being severely penalized.  The team’s compliance culture was to blame, and the team is paying the price.  As the Commissioner found, regardless of management’s knowledge, the violations were “attributable . . . to a failure by the leaders of the baseball operations department and the Field Manager to adequately manage the employees under their supervision, to establish a culture in which adherence to the rules is ingrained in the fabric of the organization, and to stop bad behavior as soon as it occurred.”

Reputational Harm Can Be Severe

While the money and the draft picks certainly impact the team, perhaps the most significant harm to the club is that it tarnishes the team’s only World Series title.  Competitors and opposing fans can be expected to use this episode against the team, and some of their own fans may be less supportive than they were in the past.  As in so much of compliance risk, the headline is the harm.

Individuals Have Liability

Individual management employees paid the price.  The team’s field manager did not devise the scheme or participate in it, and even tried to sabotage the equipment used in furtherance of the scheme.  But he did not stop it, did not tell the players to stop it, and did not bring his concerns to the general manager.  Now he is out of a job and out of baseball for the year.  And employees who left the organization (the former bench coach and assistant general manager) were still subject to enforcement.  Enforcement has a tendency to follow people—especially management—when they switch companies.

Beware Unrelated Wrongful Conduct

The investigation extended beyond the conduct in question, and one of the individuals was actually sanctioned on the basis of unrelated conduct.  So, too, for regulated industries, once you have the regulator’s attention, you may get in trouble for things that were not on the radar when the investigation began.

Granular Investigations Find Dirt

Investigators will go through your emails with a fine-tooth comb to show what higher-ups knew and when they knew it.  Here, although the scheme was described as “player-driven,” the Commissioner noted that at least two emails sent to the general manager mentioned sign-stealing efforts in the replay room.

What does this mean in terms of practical steps for banks and non-bank financial institutions?

The compliance issues that proved so harmful for the Astros are many of the same issues that your state and federal regulators will look at as well.  With that in mind, we have a few suggestions for banks and non-bank financial institutions.  First, the tone is set from the top.  Senior management needs to send a consistent message that compliance is important, even when it may be in tension with other business goals.  That message should be explicit, but also has to be implicitly supported by the actions that management takes and the decisions that it makes on a day-to-day basis.  If you preach compliance but make decisions that result in or incentivize non-compliant conduct, your mixed message will be heard loud and clear.

Second, internal supervision is essential.  Giving managers and other employees some independence to meet their business goals can be important, but that cannot mean that they are free to ignore the law.  Strong compliance controls, such as those that Major League Baseball implemented for monitoring replay rooms (discussed in the Commissioner’s Statement) should also be implemented at the organizational level.  But you have to go beyond that as well, to provide meaningful training to employees at all levels and to monitor what is happening on the ground in your retail locations, call centers, and other offices.  Monitor compliance with as much attention as you monitor sales, profitability, and other business data.  If something is happening regularly in one or more branches, you should be aware of it.  Do not rely on your regulators to find violations—you won’t like the results.

Third, establish or improve mechanisms in place for employees and managers to report compliance concerns, make sure there is a formal process for investigating and responding to those reports, and train your personnel on the importance of reporting violations.  Your process should focus on getting it right, not circling the wagons.  Take any reports seriously, investigate, and take appropriate action.  You cannot have a situation where a manager’s emails show that he or she was on notice of clear regulatory violations, or where everyone on the floor knew what was happening, and no one reported it.

Finally, make sure that everyone from senior management on down knows that each employee is accountable for compliance, including compliance by his or her subordinates and the responsibility to report non-compliant conduct of which he or she becomes aware.  Consider including examples of individual liability in your annual trainings to drive the point home.

Ultimately, the Commissioner blamed “the culture of the baseball operations department, manifesting itself in the way its employees are treated,” and in particular its “insular culture – one that valued and rewarded results over other considerations, combined with a staff of individuals who often lacked direction or sufficient oversight.” Don’t let this describe your company or its compliance culture.  And if you see another company get in trouble for something, make sure that your company is not doing the same thing.  Making compliance a priority and investing in a strong compliance management system, rather than simply checking boxes, will help keep your regulatory compliance out of the news and out of the sights of regulators.  This advice is equally applicable to banks and non-bank financial institutions and to baseball teams.

Mitch Kider is the Managing Partner and Michael Kieval is a Partner at financial services law boutique Weiner Brodsky Kider, PC, in Washington, DC.