Issues In Internal Investigations for Company Counsel in the Post-Enron Era September 13, 2006

Transcription

1 Issues In Internal Investigations for Company Counsel in the Post-Enron Era September 13, Morrison & Foerster LLP All Rights Reserved

2 Overview Risks and benefits of internal investigations When do you need to investigate? Who should conduct the investigation? How should you conduct the investigation? Ethical issues Cooperation with the government

3 Benefits of Internal Investigations Reduces exposure to government action Provides information that management and directors need to fulfill their responsibilities Presents opportunity to correct problems before they lead to litigation or worse Permits Board to retain control

4 Risks of Internal Investigations Costly and time-consuming Can create evidence that private plaintiffs or regulators will use against you No guarantee SEC or DOJ will find investigation sufficient Government may press for privilege waiver If leaked, mere fact of investigation may prompt interest from private plaintiffs or regulators

5 When Do You Need To Investigate? Red Flags Questionable accounting (restatement) Suspicious stock sales Doubts about management s integrity How Red Flags can be raised Government inquiry or subpoena SROs Private plaintiffs (securities and derivative) Auditors Whistleblowers Media

6 Threshold Questions in Any Investigation Identify Client and Scope of Investigation Who conducts the investigation? How is privilege handled? What s the end product?

7 Scope of the Investigation Lawyers generally have two goals: To uncover the facts. To advise management (or client) regarding the corporation s potential liability. Ideally unlimited scope, including the specific issues that give rise to the need to investigate.

8 Who Should Conduct the Investigation? Management (company counsel or regular outside counsel) Board committee (independent counsel)

9 Management- or Board-Led Investigation? Factors Alleged role of senior management Seriousness of allegations Source of allegations Identity of potential witnesses Costs and resources

10 Company vs. Outside Counsel Advantages of Outside Counsel: Potentially more objective Appearance of independence Experience Attorney/client privilege easier to protect Advantages of Company Counsel: Better acquainted with the Company Employees may be more open Saves $$$

11 Independence of Investigators Independent attorneys and forensic accountants Not a whitewash accusations involving prominent firm of Vinson & Elkins in Enron If it is later deemed not to be independent, you may have to redo the investigation Independence less important if top management appears not to be involved

12 Reasons for Decisions Made by Enron Lawyers accept limitations on the scope of their work all the time. Lawyers are not experts in all matters. A company can t perform a full-blown, civil discovery-type internal investigation every time it receives an allegation of wrongdoing. Sometimes speed is of the essence.

13 Investigation Integrity Issues Lawyer must have authority sufficient to conduct a credible and competent investigation. Scope of investigation should be unlimited. Lawyers should be careful not to accept limitations that will compromise investigation s credibility.

14 Selecting Outside Counsel & Experts Post-Enron, not advisable to use long-standing outside counsel for an internal investigation, unless top management clearly not involved. Company s usual auditors cannot do the forensic accounting investigation. Outside firm must conduct its own conflict evaluation to assess if its prior work for the company may hinder the firm s judgment. Law firm must have requisite expertise.

15 Who Is the Client? Organization itself is the client. Executives and officers, board members, shareholders, and other stakeholders are part of the corporation, but individuals are not the client. Joint representation?

16 Ethical Obligations California Rule of Professional Conduct 3-600(E) Organization is the client Joint representation subject to Rule SEC s Attorney Conduct Rules (17 C.F.R (a)) Ethical duties owed to the issuer as client ABA Model Rule 1.13

17 Risks of Multiple Representation Conflict may arise later. Loss of credibility with investigating agency. Complications in the attorney s ability to report findings because of attorney-client privilege.

18 In re Grand Jury Subpoena: Under Seal (AOL) Lawyers told employees: we can and could represent company and you Avoid ambiguous advice Actual multiple representation would have: Hindered company s ability to waive privilege and cooperate with government investigation Likely forced withdrawal from all representation in order to maintain confidences

19 Minimizing Drawbacks of Multiple Representation Prospective waivers and advance permission to reveal confidential information Contractual limits on representation Co-counsel / shadow counsel But: generally a bad idea in most investigations

20 Conducting Employee Interviews Best done by at least two people Tape recorder or stenographer?? Relevant technical experts should attend Thoroughness and objectivity Notes should be taken by an attorney (and contain attorney s opinions and mental impressions) Promptly prepare interview memorandum from notes Preserve all notes

21 Witness Warnings: Elements Nature and purpose of the investigation Interviewer is counsel for the corporation or board committee not the employee Privilege belongs to the corporation or committee and may be waived Substance of the interview may be disclosed to management, the board, regulators, or prosecutors Expectation of cooperation Right to separate counsel

22 Expectation of Cooperation Employee has right to refuse to be interviewed, but may face consequence of losing job. Interviewee may face criminal liability for lying or misleading lawyers during internal investigation. Obstruction charges against witnesses who lied to counsel conducting internal investigation. Computer Associates Singleton

23 Separate Counsel for Witnesses Corporation as client Fairness to employees is a proper corporate concern Does separate counsel help or hurt? Efficiency Accuracy

24 What Does the Government Expect? Independent counsel with expertise Thorough review End product What type of report? Remedial action PRIVILEGE WAIVER

25 SEC s Seaboard Report Did the company commit to learn the truth, fully and expeditiously? Did it do a thorough review of the nature, extent, origins and consequences of the conduct and related behavior? Did the company promptly make available to our staff the results of its review?

26 DOJ s Thompson Memo of 2003 First and foremost, prosecutors should be aware of the important public benefits that may flow from indicting a corporation in appropriate cases. Prosecutors should weigh a corporation s timely and voluntary disclosure of wrongdoing and willingness to cooperate, including, if necessary, the waiver of attorney-client and work product protection. McCallum memorandum (Oct 05): USAOs should create written waiver review process for each district

27 Thompson Memo: Cooperation Issues Company s promise of support to culpable employees and agents may lead to denial of cooperation credit Providing or paying for legal counsel Joint defense agreements Sharing corporate records and historical information about conduct under investigation Failing to fire or discipline employees who exercise Fifth Amendment rights in response to government information requests Impact on individuals: strong ABA opposition

28 The KPMG Case : U.S. v. Stein Judge Kaplan (SDNY) in June and July 2006 rulings Thompson Memo provision making company s advancement of attorneys fees to employees a factor in cooperation violates Fifth and Sixth Amendments KPMG employees statements improperly coerced because of government and KPMG s pressure to cooperate as condition of continued employment and payment of legal fees

29 Thompson Memo: Culture of Waiver? Holder Memo of 1999, Thompson Memo, plus USSG Section 8C2.5 (Nov. 2004) encourage AUSAs to seek voluntary waiver as part of cooperation Benefits: obtain statements of possible witnesses, subjects and targets without having to negotiate individual cooperation or immunity agreements. ABA Criticism: results routinely in compelled waiver that ultimately impedes lawyers ability to counsel compliance with the law Ten prominent former DOJ officials wrote to AG on Sept 5 expressing opposition to Thompson Memo waiver provisions