United States: managing relationships
In responding to any inquiry from the government it is critical that defence counsel understand the government lawyer’s perspective and expectations. This article explores a hypothetical investigation from both the prosecutors’ and defence counsel’s viewpoints. The article sets forth several decision points and suggests best practices for managing the regulators’ expectations to put the company in the most advantageous position possible.
The investigation commences
The Securities and Exchange Commission (SEC) has received a whistle-blower complaint from a compliance analyst at ABC Mining Corp, a multinational corporation whose stock traded on the New York Stock Exchange, stating that ABC bribed local officials in Ederia to obtain the rights to mine land owned by a state-controlled Ederian company. Specifically, the whistle-blower claims that the head of ABC’s London Office, Mr Sales, had retained a person named Mr Connected to provide consulting services in connection with ABC’s bid for the mining rights. Mr Connected has well-known ties to Ederian officials. The whistle-blower states that ABC paid over
US$2 million to the consultant in the year prior to the commencement of the mining. The whistle-blower attaches to his letter a copy of an invoice to ABC from an entity called Ederian Mining Consultants for US$100,000, which states that the payment is a retainer for consulting services rendered in connection with the bid for mining rights.
The SEC staff attorney conducts a preliminary review of the complaint, and notes that ABC’s Form 10-K states that the Ederian Mining operation was responsible for a 10 per cent increase in revenue in the last fiscal year. The staff attorney decides to conduct further investigation. In addition, she contacts the local US Attorney’s Office and informs the Assistant US Attorney (AUSA) in charge of the securities unit about the complaint and her initial research. The AUSA, together with the FBI, decides to commence a parallel criminal investigation.
The criminal authorities learn from the Department of Homeland Security that Mr Sales is planning to visit New York the following week. Two FBI agents meet Mr Sales at the airport and question him about ABC’s acquisition of the Ederian mining rights, and specifically about Mr Connected and Ederian Mining Consultants. Mr Sales denies knowing either Mr Connected or Ederian Mining Consultants. After the interview ends, Mr Sales writes an e-mail to his assistant in London instructing her to destroy the files relating to Ederian Mining Consultants and Mr Connected.
After being briefed by the agents about their interview of Mr Sales, the AUSA sends a Grand Jury subpoena to ABC’s General Counsel asking broadly for information concerning (i) ABC’s acquisition of the Ederian mining rights; and (ii) revenues related to the Ederian Mine. The AUSA briefs the SEC staff attorney about the FBI interview, and that same day, the staff attorney obtains a formal order of investigation and serves an SEC subpoena on ABC’s general counsel seeking essentially the same documents.
The initial steps in responding to a governmental investigation are critical. Of course, the general counsel should immediately notify the senior management team and members of the board of directors and/or the audit committee. Early decisions will need to be made quickly in connection with the investigation. One of the most important immediate decisions will be the determination of who will oversee the company’s response to the investigation. Often, a company will appoint an independent committee comprised of outside (non-executive) directors to undertake this responsibility. Similarly, the company will need to determine what outside counsel will represent the company, the board or the audit committee, and what outside counsel will take the lead in responding to the inquiry. As a general matter, the criminal authorities and the SEC staff will expect to hear from counsel who are experienced in responding to government investigations and who are independent. The government will expect that those conducting and overseeing the investigation will be sufficiently independent to ensure that a complete and credible investigation is conducted.
The following steps should also be taken:
Organise a crisis response team to coordinate information
An immediate priority will be organising a crisis response team within the company. This team should have clear lines of communication and should be spearheaded by in-house counsel who can manage the investigation and the flow of information to the company’s stakeholders. The team should also include outside counsel and the company’s public relations department or firm.
Notification of stakeholders
Early on in the investigation, the company will be required to consider whether the investigation is a material event that requires notification to is auditors and public disclosure. The company should carefully consider the timing and phrasing of any announcement. In addition, the company should consider how and when to communicate with other stakeholders, such as employees or large customers. Finally, the company must make the required notifications to its insurance carrier in a timely manner.
Immediate preservation of documents
The company should take immediate action to ensure that all relevant documents are preserved and retained. The company’s normal document retention/deletion policy should be suspended. A written document preservation notice must be swiftly distributed to all employees that require them not to destroy or remove documents – either electronic or hard copy – that might be relevant to the government’s investigation or the company’s internal investigation. To the extent possible, relevant portions of the company’s computer system should be mirrored or backed-up. The hypothetical above indicates that an employee took steps to destroy documents after he was interviewed by FBI agents about the subject matter of the investigation and before the company received the subpoenas. This is classic obstruction of justice. It will undoubtedly come to light through the company’s investigation and response to the subpoenas. The company will then have to persuade the government that it did not know about the attempted obstruction and that it took reasonable steps to preserve documents upon receipt of the subpoena.
Instructions regarding discretion
At the same time, employees who become aware of the investigation should be instructed that they should be discreet and keep the investigation confidential. The purpose of this is to avoid creating disruption within the company and also to avoid the unnecessary creation of additional evidence. Employees should be advised that non-privileged conversations that they have and non-privileged documents they create may be subject to disclosure to the government.
Develop the investigation plan
The company or independent board committee (with independent investigation counsel) should create a detailed plan that defines the scope and cost of the investigation. The plan should include an assessment of which company operations are involved and what offices or locations will be the focus of the investigation. It will also provide an overview of documents to be reviewed and employees or other witnesses to be interviewed.
Initial fact gathering
The company should take steps to identify and debrief employees with knowledge of the issues presented and locate relevant documents. These interviews must be conducted with a view to protecting the attorney–client privilege. The company must create a written record establishing that a significant purpose of the interviews is for counsel to obtain information for the purpose of providing legal advice to the company.1 This can be done by a memorandum to counsel authorising the investigation or by creating a record that employees have been advised that a significant purpose of the interview is to provide legal advice to the company. In addition, because the interests of the company and individual may conflict, the employees must be given Upjohn warnings (ie, warnings that the interviewing attorneys are acting on behalf of the company) that the conversation is privileged, that the company controls the attorney–client privilege, and that the company may decide to waive the privilege.2
Initial contact with the regulators
In his interview during the company’s initial investigation, Mr Sales advises ABC’s investigating counsel that FBI agents approached him in the airport, but that ‘there is no problem because he told them that he did not know Mr Connected and had never heard of Ederian Mining Consultants.’ When counsel show Mr Sales a copy of an e-mail he sent to Mr Connected that references a trip to Las Vegas for members of the Ederian Mining Commission, Mr Sales refuses to speak to counsel further and demands an opportunity to consult with his own counsel. Counsel report this development to senior management and to the audit committee, which is overseeing the investigation. The audit committee immediately suspends Mr Sales. In addition, the company refers Mr Sales to a white-collar criminal defence lawyer and reaches an agreement that the company will advance attorneys’ fees for Mr Sales. Further review of the company’s records uncovers the e-mail that Mr Sales sent to his assistant instructing her to destroy documents.
Contact the government attorneys
Once retained, outside counsel conducting the investigation should promptly contact the prosecutor and the SEC staff attorneys who served the subpoenas. This conversation will generally have the following objectives:
- As an initial matter, it is important that the government know that the company is represented by counsel, which prohibits the prosecutor from authorising further covert interviews.
- Second, counsel will want to press the prosecutor and the SEC staff for information about their concerns and the company’s status (whether it is a target, subject, or witness) and attempt to learn as much as possible about the nature and scope of the government’s investigation.3 (For example, it would be helpful for the company to know how the matter came to the government’s attention and what information the government already has. The government is unlikely to share this information at this stage, however.)
- Third, in most cases, counsel will want to assure the government that the company intends to cooperate. Although there may be cases where the company will want to assert appropriate defences, most companies will cooperate because cooperation with the government is the most likely road to a favourable resolution to the matter. By being cooperative the corporation may be able to provide documents and other materials responsive to the subpoena to the government on a voluntary, negotiated basis (avoiding having the government take intrusive measures such as seeking a search warrant).
- Fourth, counsel will want to specifically address with the government any concerns or objections to the subpoena (such as its breadth) and will negotiate details concerning the scope of the documents to be produced (ie, how the company will conduct its search and what limitations the government will accept on the search scope), the manner in which the documents will be produced (native or .tif format, whether metadata will be produced) and the timing of any production.
Collection of documents
Once counsel has reached agreement with the government concerning the scope, method and timing of production, counsel should develop a protocol for collection and a timetable for review and production. Consideration should be given to whether the collection of documents will be done in the first instance by employees or by counsel. If the former, counsel should provide detailed instructions for the employees to follow and may consider requesting that employees sign a declaration memorialising their compliance with the instructions.
Cooperation means fully cooperate
As a practical matter, although a corporate entity should explore all of its defences and options when confronted with an investigation, most large institutions and corporations typically will conclude that it is in their best interest to cooperate with the government’s investigation. The government will expect that a company that is cooperating will fully cooperate. This means that the government will expect that the company will produce factual information that can used to advance the investigation, such as binders of key documents and the identities of key witnesses and will provide regular updates concerning the investigation. The government will also expect that, to the extent possible, the company will instruct its employees to cooperate with the government and facilitate government interviews of employees. Moreover, the government will expect that a company that is cooperating will advise the government when it learns of bad facts. However, a cooperative posture enables the company will do so in a manner that provides context that makes the bad facts more explainable. For example, in the hypothetical, the company has information suggesting, at a minimum, that Mr Sales lied to the FBI agents in his initial interview and attempted to destroy relevant documents. The prosecutors already know that he lied because they possess a document that contradicts his story. It would be in the company’s interest to disclose what it knows about Mr Sales promptly in order to get credit for cooperating, but it can do so in a manner that emphasises the fact that the company was not aware of the obstructive conduct until after the fact and has taken prompt measures to remove him from his post.
Decide whether and to what extent the company will waive the attorney–client privilege
The current version of the US Attorney’s Manual (USAM) provides that waiving the attorney–client or attorney work-product protections are not a prerequisite under the Department’s prosecution guidelines for a corporation to be viewed as cooperative. In fact, the current version of the manual states that ‘while a corporation remains free to convey non-factual or ‘core’ attorney–client communications or work product – if and only if the corporation voluntarily chooses to do so – prosecutors should not ask for such waivers and are directed not to do so.’4 Instead, the USAM stresses that the sort of cooperation that is most relevant is disclosure of the relevant facts concerning the matters under investigation. It should not matter how the corporation gathered the facts (whether through a privileged internal investigation or otherwise); the company will be entitled credit for cooperation so long as the corporation timely discloses the relevant facts relating to the investigation. It will be up to company counsel to decide the manner in which factual information is conveyed to the government.
Provide counsel to officers, directors and employees
In the course of its investigation, the company will need to determine whether it can provide counsel for the company’s officers, directors and employees. It is important to review the company’s articles of incorporation and applicable law to determine whether indemnification or advancement of attorneys’ fees is permissible or required.5
In the course of its review of the company’s computerised records, company counsel discovers that a compliance analyst based in New York, Harry Honest, sent a number of documents relating to the Ederian mining rights from his work computer to a Gmail account, [email protected] The documents include, among other things, a copy of an invoice from Ederian Mining Consultants to ABC for US$100,000, which states that the payment is a retainer for consulting services rendered in connection with the bid for mining rights. The documents also include an e-mail that Honest wrote to his supervisors in the compliance department and senior management, including the CEO and CFO, which expresses his concerns about ABC’s acquisition of the Ederian Mining rights. This e-mail was sent shortly before ABC issued its Form 10-K for the previous fiscal year. Honest’s personnel files indicate that he has been formally warned twice in the last year for absenteeism, inappropriate behaviour in the workplace towards female colleagues, and poor work product. In an interview with counsel, Honest states that he has provided information to the government and is invoking his rights as a whistle-blower. He declines to speak further without counsel and requests that the company provide him with his own counsel.
Take care in dealing with whistle-blowers
Under US federal law, an issuer is prohibited from retaliating against an individual who provides information to the SEC relating to violations of the US securities laws.6 An employer who engages in retaliation may be liable to the employee for back pay, attorneys’ fees and other money damages. More significantly, in the context of a government investigation, the government will take a dim view of any retaliatory treatment of whistle-blowers. In the hypothetical, the company is faced with some thorny issues. On the one hand, there plainly can be no retaliation against Harry Honest based upon his report to the SEC. On the other hand, there is documentation in the file that would warrant adverse employment action. The company should document all of its interactions with the whistle-blower, investigate his claims to the extent warranted by the facts, ensure that all decisions made about his terms and conditions of employment are supported by legitimate and documented business reasons. Further, counsel should advise the government of the facts surrounding the company’s discovery of the whistle-blower’s identity, his employment record, and the documents that relate to his concerns about the company’s activities in Ederia.
Sensitive developments concerning senior management
The discovery of documents suggesting that senior management was aware of concerns with the Ederian mining rights prior to the issuance of the company’s 10-K raises a host of sensitive concerns. As an initial matter, this information must be immediately communicated to the board of directors and/or the audit committee. The board must then consider what, if any, action should be taken. At a minimum, counsel must investigate what senior management knew about the Ederian mining rights and the concerns raised by the compliance analyst. Moreover, this information creates a potential conflict between the company and the executives. Consequently, they should retain independent counsel. In addition, since the company is cooperating with the government’s investigations, it must consider how and when it will disclose these facts to the government.
Involvement of foreign regulators
Because much of the problematic conduct occurred in ABC’s London office, ABC discloses the investigation to the UK Serious Fraud Office. In addition, the company is contacted by Ederian officials, who demand an explanation of the circumstances of the company’s acquisition of the mining rights.
Once ABC discloses the investigation publicly or to other regulators, it is likely that regulators in other jurisdictions will commence their own investigations. These investigations raise a host of problematic issues.
- there may be inconsistent legal standards in the different jurisdictions;
- data privacy and state secret laws may impact the company’s ability to collect and produce documents and information to the US authorities;
- employees may have different rights in foreign jurisdictions; and
- legal standards governing the attorney–client privilege may be different.
Government interviews of company employees
The government investigation has progressed to the point where the government wishes to begin interviewing witnesses. The government has contacted Mr Sales’s counsel, who has indicated that his client will assert his Fifth Amendment rights and decline to be interviewed. The government has also contacted Harry Honest’s lawyer, who has brought his client in for an interview with the AUSA, the FBI agents, and the SEC staff. The government has asked the company to assist in arranging interviews with a number of operations and finance personnel in ABC’s US, London and Ederian offices.
Interviews of company employees present a number of different issues. In this context, the company is cooperating and the government is working through the company to arrange the interviews. The government will expect that the company has informed its employees that they should cooperate with the investigation. Indeed, the government may well expect that the company make cooperation mandatory. Employees who have potential conflicts with the company, or are subjects or targets of the investigation, should be represented by their own counsel. In some cases, it may make sense for the company to have pool counsel who represent a class of persons (ie, employee-witnesses, directors).
If there is a joint defence agreement, the company’s counsel may participate in preparing the witness for the interview (with the consent of the witness and her counsel), but will not likely be able to participate in the interview with the government representatives.
The government may also choose to seek to interview company employees by contacting them directly, sometimes before the company is advised about the interview or even the investigation. The company cannot prohibit employees from speaking to the government, but it can advise employees that they have a right to decline to be interviewed. The company may also advise employees that they have a right to be represented by counsel in all dealings with the government. The company can also ask, but not require, employees to notify company counsel if they are approached by the government. Because these interviews can occur before the company even knows about an investigation, it is wise to include this advice in the employee handbook. Once an investigation is commenced, the employees should be reminded about their rights if they are contacted by government agents.
The government and the SEC have completed their investigations. They separately contact counsel for the company to advise the company that they each intend to bring charges against the company, and certain individuals, and to initiate settlement discussions.7 Outside counsel learns from counsel for the individuals that the US Attorney intends also to seek an indictment against Mr Sales and Mr Connected.
Counsel and appropriate company representatives should meet with the investigating prosecutors and the SEC staff attorneys and, if appropriate, their supervisors. Ultimately, any settlement is going to have to be approved by the chain of command in the agency, up to the United States Attorney (in the case of a criminal settlement) and the Commission (in the case of an SEC settlement). In their presentations, counsel should make use of the facts it developed during the internal investigation, highlighting the exculpatory facts and dealing forthrightly with the negative facts. The presentation should focus on the following issues drawn from the Department of Justice’s Principles of Federal Prosecution of Business Organizations, to the extent they are applicable:8
- the nature and seriousness of the offence, including the risk of harm to the public;
- the pervasiveness of wrongdoing within the corporation, including whether senior management was involved in or aware of the misconduct;
- the corporation’s history of similar misconduct, including prior criminal, civil or regulatory enforcement actions or settlements;
- the corporation’s timely and voluntary disclosure of wrongdoing;
- the corporation’s cooperation in the investigation;
- the existence and effectiveness of the corporation’s pre-existing compliance programme;
- any remedial actions taken by the corporation, including enhancements to the corporation’s compliance programme, updates to the code of conduct and anti-corruption procedures, training officers and employees on the enhanced policies, discipline meted out to wrongdoers, changes to management deemed responsible for failing to prevent the violation, efforts to make restitution to victims, and cooperation;
- collateral consequences to shareholders, investors, pension holders, employees, and others not personally culpable;
- the adequacy of prosecution of individuals responsible for the corporation’s violation; and
- the adequacy of remedies such as civil or regulatory enforcement actions.
Counsel and appropriate company representatives should be prepared to meet multiple times with government representatives and to provide follow-up information. The negotiations may continue after charges are brought, but the government will be more flexible before it seeks a formal indictment or files formal charges.
The criminal authorities have a wide range of available charging options. These include entering into a non-prosecution agreement with the entity; entering into a deferred prosecution agreement (where charges are filed, but dismissed after a period of time if the company complies with stated conditions); or filing criminal charges against the entity or one of its subsidiaries. The SEC can institute a civil action or an administrative proceeding. Resolution of the charges will usually involve a financial penalty or restitution, an agreement to a specified statement of facts, and an agreement to undertake remedial measures (such as enhanced compliance procedures or supervision by a monitor).
As described above, a company facing government investigation faces a number of challenges in its dealings with the government investigators. It is imperative that the company understand the government attorneys’ perspective and expectations. The company should seek to gain credibility with the investigators at the outset of the investigation by quickly preserving evidence and conducting its own independent response. Where it makes sense for the company to cooperate, the company should do so completely. The company should be candid in disclosing information, cooperative in providing documents and witnesses, and forthright in taking measures to remediate the issues. If a company does so, it will be able to stress its cooperation and remediation efforts in settlement discussions with the government and may be able to achieve a more positive result.
The authors acknowledge the assistance of Corinne Champilou, a summer associate at the firm, in the preparation of this article.
- See, eg, In re: Kellogg Brown & Root Inc, No. 14-5055 (D.C. Cir. 27 June 2014) (holding that in the context of an organisation’s internal investigation, if one of the significant purposes of the internal investigation was to obtain or provide legal advice, the attorney–client privilege will apply).
- An ‘Upjohn warning’ is notice that corporate counsel gives a company employee to inform him that (i) the attorney represents the company, and not the employee as an individual; (ii) that the interview is protected by the attorney–client privilege (which is controlled by the company, not the employee), and (iii) that the company can decide to waive the privilege and provide information it get to the government or other third parties. See Upjohn Company v United States, 449 U.S. 383 (1981) (holding that the attorney–client privilege exists between the company and its counsel when its counsel communicates with the company’s employees). Employees should be provided with Upjohn warnings and any memorandum summarising the interview should reflect that the Upjohn warnings were given to the employee.
- US criminal authorities will advise persons or entities of their ‘status’ in an investigation. A person is a ‘target’ where there is substantial evidence that could support an indictment, a person is a ‘subject’ where their conduct is within the scope of the investigation, and a person is a ‘witness’ when they have relevant information, but are not currently under investigation. ‘Subject’ is the broadest category. A person’s classification can change as new evidence is obtained by the government. The SEC does not have similar classifications, and will not provide any guidance as to a party’s status in an investigation.
- USAM 9-28.710
- Company counsel should review employment contracts, company by-laws and applicable state law for any obligation to cover employee’s legal fees. After the Stein decision, it is unlikely that the government will take a position concerning the propriety of the company’s determination whether or not to advance attorney’s fees to employees. See United States v Stein, 435 F. Supp. 2d 330 (S.D.N.Y. 2006) aff’d, 486 F.3d 753 (2d Cir. 2007). This is especially so where the company concludes that it has a legal obligation to do so.
- Dodd-Frank Act § 922; 18 U.S.C. § 1513 (e); 18 U.S.C. § 1514A.
- It is common for government representatives to invite a dialogue before bringing charges against a corporate entity, particularly in a case where the company has cooperated in the investigation. Moreover, after the SEC staff investigates a matter and believes that it has established that a violation of the federal securities laws has occurred, it will often issue a ‘Wells notice’ to the individuals and entities that the staff believes are responsible for the violation. That Wells notice informs potential defendants that the staff intends to recommend to the Commission that charges be brought for violation of the securities laws. The recipient of the notice is then allowed to make a written ‘Wells submission’ to the SEC, arguing why the proposed charges should not be brought. The Commission will then review the staff’s recommendation, along with the Wells submission, and decide whether to authorise an enforcement action, typically in the form of a lawsuit or administrative proceeding. See Procedures Relating to the Commencement of Enforcement Proceedings and Termination of Staff Investigations, Securities Act Release No. 5310, Exchange Act Release No. 9796, Investment Company Act Release No. 7390 [1972-1973 Transfer Binder] Fed.Sec.L.Rep. (CCH) paragraph 79,010 at 82,183-86 (27 September 1972).
- USAM 9-28.720. The SEC will consider similar factors in evaluating a corporation’s culpability. See In the Matter of Gisela de Leon-Meredith (Securities Exchange Act Release No. 44969, 23 October 2001) (Seaboard report) (highlighting the importance of timely internal investigations that are followed by prompt disclosure of the misconduct, cooperation with the SEC and establishment of more effective controls and compliance procedures).