Munger, Tolles & Olson LLP
PRACTICAL TIPS FOR ADVISING
A CORPORATION
IN A
CRIMINAL INVESTIGATION
Brad D. Brian
USC Law School and L.A. County Bar
Corporate Law Departments Section
2003 Institute for Corporate Counsel
Marriott Downtown
March 21, 2003
891024.2
Munger, Tolles & Olson LLP
I.Introduction
The past two years have been dominated by corporate scandals and by the management changes and government investigations that inevitably follow such scandals. Almost daily we read in the national press about restatements of earnings, resignations by senior officers, and massive civil and criminal litigation. Congress, too, has acted – passing the Sarbanes-Oxley Act[1] that fundamentally changes the responsibilities of corporate executives, accounting firms, and lawyers.
What went wrong to cause all these problems? Did the companies not have effective compliance programs or, as with any compliance program, were some “bad” individuals able to circumvent well-meaning compliance policies in pursuit of their own selfish goals?
We may never know all the answers to these questions, though countless plaintiffs’ lawyers, SEC enforcement attorneys, and government prosecutors are determined to find out. But, whether or not we ever learn why the scandals occurred, all corporate lawyers need to learn from these scandals so that they are not repeated elsewhere.
In his thoughtful piece entitled, Is Not Having a Compliance System Malpractice?, Daniel S. Bishop details the many reasons a compliance program is necessary in Corporate America, describes the key features of an effective compliance program, and discusses the role such a program plays to prevent illegal behavior within a company. I do not intend to repeat that discussion here. Rather, I intend to address the steps a company needs to take when, for whatever reason, potential illegality has occurred. In that situation, the company and its lawyers immediately confront many serious questions:
- Should the company conduct its own internal investigation?
- If so, who should conduct the investigation?
- Is the investigation protected by the company’s attorney-client privilege and the attorney work product doctrine?
- How should the company treat its employees, including those who are suspected of misconduct and those who are witnesses in a government investigation?
- How should the company interact with the Justice Department, the SEC, and other government regulators who may be investigating the alleged illegality?
How the company answers these questions could not only affect the likelihood of its own criminal liability but also, as we saw in the case of Arthur Andersen, determine its very survival. The answers to these questions are complex, and I will not attempt to answer them completely in this short piece. But I will attempt to lay out a framework that, if followed, should enable a company facing allegations of illegal behavior to act responsibly with the government and thereby maximize its chances of a satisfactory resolution.
II.Discovering the Problems
At the outset, let me distinguish between two very different sets of circumstances -- first, when a company learns of the alleged illegality from a grand jury subpoena, a search warrant, or some other investigative action by the government; and, second, when the company discovers the problem through an internal audit, a “hotline” call, or some other mechanism that exists as part of the company’s compliance program. These circumstances differ markedly and could lead to very different decisions – both by the company and by government authorities who ultimately might have to make an enforcement decision.
The latter set of circumstances really presents a situation where a company’s compliance program has worked effectively. No compliance program, however well-designed and comprehensive, can prevent all employee misconduct. Indeed, a key feature of any effective compliance program is its ability to detect such misconduct, report it to management, and begin the process toward corrective action, discipline and, in many cases, voluntary disclosure to the government.
Under these circumstances, I would argue strongly that a company that detects, corrects, and reports such misconduct should not face either a criminal prosecution or an SEC enforcement action. After all, the compliance program has functioned properly and the common goals of the company and the government -- to detect wrongdoing and root out wrongdoers -- have been achieved. Assuming the company had in place a comprehensive, effective compliance program, I believe that the government should exercise its discretion not to pursue such an enforcement action.[2]
The other scenario -- when the company first learns of the alleged illegal conduct through a government investigation -- presents the company with different challenges. There the company cannot argue that its compliance program worked, cannot proactively correct the problem and discipline the wrongdoer, and cannot choose to disclose the problem voluntarily to the government authorities.
So what should the company do in these circumstances? That is the question I intend to answer in the remaining pages of this piece.
III.Whether To Conduct An Internal Investigation
Should a company faced with allegations of illegal behavior conduct its own investigation? This question may seem odd to some readers, but it is surprising how many companies, at least initially, are reluctant to conduct their own investigations once a government investigation has ensued. After all, the argument goes, the government will find out the facts, and the company could face additional liability if its investigation interferes with -- i.e., “obstructs” -- the government’s investigation.
However well-meaning this impulse might be, it is very misguided. For one thing, a corporation has its own interest, independent of the government, in: (1)learning what happened; (2) determining whether any illegality occurred and, if so, who committed it; (3) taking appropriate corrective action; and (4) preventing any recurrences of the misconduct.
It is understandable, of course, for a company to want to avoid charges of obstructing a government investigation. Such obstruction, if done with the requisite state of mind, is itself criminal[3] and could expose the company to additional and arguably more severe penalties.
But this fear does not justify either turning a blind eye to the corporation’s need to learn the facts, or delegating the entire investigative process to the government. As noted above, the corporation has its own independent interest in learning the facts and taking appropriate action. Nor can the company depend upon the government investigators to ascertain exactly what happened. Absent the company’s own investigation, all the relevant facts might not be uncovered and the company might never learn the full extent and nature of the problem. Conversely, some government investigators, once they start an investigation, seem determined to obtain a prosecution and, as a result, sometimes fail to appreciate facts and witnesses that might point to a different conclusion. In those circumstances, the company’s own investigation can act as a check on the government’s investigation, properly limit the scope of the company’s liability, and thereby protect the interests of the shareholders.
None of this discussion is intended to minimize the need to be careful in conducting the corporation’s investigation and thereby avoid any potential for violating the obstruction of justice statutes. The breadth of those statutes is beyond the scope of this piece. For a recent, thoughtful discussion of those statutes and similar statutes prohibiting perjury and subornation of perjury, see Gary P. Naftalis and David S. Frankel, “Perjury, Obstruction of Justice, and the Victim and Witness Protection Act,” contained in Brad D. Brian and Barry F. McNeil, Internal Corporation Investigations (2d ed.) (ABA 2002), at 109 et seq. (hereinafter “Brian & McNeil, Internal Corporation Investigations”).
IV.Who Should CONDUCT The Company’s Investigation?
In more routine internal investigations -- i.e., those prompted by an internal audit, hotline call, or the like -- there often is considerable discussion about who should conduct the investigation. Should it be conducted by counsel and, if so, by in-house counsel or outside counsel? Alternatively, should the investigation be conducted by the human resources department, in-house security personnel, or in-house auditors? Many companies answer these questions differently, depending upon the nature and severity of the allegations, cost, and other factors.
But when a company’s internal investigation is prompted by a government investigation, the answer to this question is clear: The company’s internal investigation should be conducted, or at least supervised, by a lawyer.
There are two principal reasons for the need for counsel to conduct this internal investigation.
For one thing, it is important, when conducting the investigation, to have in mind the company’s legal exposure and potential defenses to liability. A lawyer almost certainly will have these issues in mind more than a layperson. This mindset helps to ensure that the investigation will pursue questions and conduct follow-up work designed to determine this potential liability and to evaluate potential defenses. Second, as set forth below, when a lawyer conducts the investigation, the investigation itself should be protected by the attorney-client privilege, at least if the lawyer is gathering facts in order to provide legal advice to the company.
This does not mean that only lawyers can play roles in the internal investigation. Internal investigations often involve complex accounting, securities, engineering, and other factual issues. It is often quite helpful to add non-legal experts to the investigative team. Similarly, it sometimes makes sense to use private investigators or other non-lawyers to conduct witness interviews or to review volumes of documents. But even in those circumstances, I strongly recommend that a lawyer head up the investigative team and that all non-lawyer members of that team report directly to that lead lawyer.
Should the lawyer leading the company’s investigation be an in-house or outside lawyer? The answer to this question depends on a number of factors, including the experience levels of the in-house lawyers, time availability and cost. Many companies use in-house counsel to conduct most of their internal investigations, while other companies retain outside lawyers for all their investigations.
When a government prosecutor or enforcement agency is conducting an investigation, however, I recommend that the company retain outside counsel to run its own investigation or, at a minimum, to work with experienced in-house counsel. Because in-house lawyers have just one client, they can be perceived by the government as being less independent than outside counsel. As a result, and because an experienced outside counsel often has developed a reputation with the government agency or prosecutor, outside counsel often bring more creditability to their discussions with the government.
V.Whether The Investigation Is Privileged.
In Upjohn Co. v. United States,[4] the United States Supreme Court held that communications between corporate employees and company counsel during an internal investigation are protected by the company’s attorney-client privilege provided certain circumstances exist -- principally that the communications take place so that the company’s counsel can provide the company with legal advice; that the communications relate to matters within the course and scope of the employees’ employment; and that the employees are instructed to keep the communications confidential.[5] Because the privilege is held by the company, not the individual employees, only the company (i.e., the client) can waive the attorney-client privilege and disclose the otherwise privileged communications.
Under Upjohn, an internal investigation conducted by counsel should be privileged. This assumes, of course, that the company takes all reasonably necessary steps to maintain the confidentiality of the privileged communications and does not disclose those communications to third parties.
The work-product doctrine provides an independent basis for protecting the confidentiality of an internal investigation. Rule 26(b)(3) of the Federal Rules of Civil Procedure and Rule 16(b)(2) of the Federal Rules of Criminal Procedure protect from discovery “documents and tangible things . . . prepared in anticipation of litigation,”[6] and “reports, memoranda, or other internal defense documents made by the defendant, or the defendant’s attorney or agents in connection with the investigation or defense of the
case . . . ,”[7] respectively.
Both the attorney-client privilege and the work product doctrine are far more complicated than these words, on their face, would suggest, however. Countless court decisions have helped to define the precise parameters of these protections, the circumstances under which a waiver has occurred, the extent to which an adverse party can discover non-opinion work product, and the applicability of the crime-fraud exception to otherwise protected communications and work product. These topics are far too complex for this short piece, but should be considered carefully at the outset of any internal corporate investigation.[8]
VI.How To Treat Employees
Possibly no area is more fraught with peril than a company’s interactions with its employees during a government investigation. Missteps can put back the investigation months, and serious mistakes can subject the company and even its lawyers to an investigation for obstruction of justice.
It is impossible, within the confines of this article, to discuss all the issues that arise within the overall subject of how a company treats its employees during a government investigation. I intend to address only the following key issues: (1)employee interviews; (2)advice to employees in the event they are contacted by government agents; (3) legal representation of employees; and (4)joint defense agreements.
A.Employee Interviews.
Witness interviews are a necessary and extremely valuable, investigative tool. They often provide the only means of obtaining information, as many communications are never memorialized in writing and, in any event, a writing rarely if ever reveals an individual’s state of mind.
Because of the importance of written interviews, lawyers conducting an internal investigation must prepare for them carefully. Spend time determining the best order in which to conduct the interview; organize and study the relevant documents in advance of the interview; and think through the questions to ask at the interview.
Two people should always be present for each interview. One person should act as the principal questioner, while the second should function as the note-taker. I recommend this procedure for two reasons. First, it is impossible for anyone to ask questions and simultaneously take accurate notes of the interview. Second, in the event the employee later changes his or her account of the events, it is useful to have had two witnesses to the employee’s initial account.
At the outset of the interview, the employee should be given certain admonitions, both to protect the company’s attorney-client privilege and to insure the employee understands that the attorney doing the questioning represents the company and not the employee personally. The employee should be told:
- That the lawyer is conducting an investigation so that he or she can provide legal advice to the company;
- That the communications are protected by the attorney-client privilege and should be kept confidential by the employee;
- That the attorney-client privilege belongs to the company, not the individual employee;
- That the attorney represents the company, not the individual employee; and
- That the company can choose to waive the attorney-client privilege, and disclose the contents of the employee’s communications, without the employee’s consent.
Some companies provide these admonitions to the employee in writing and ask the employee to sign an acknowledgement that he or she understands them. Although there is no requirement that the admonitions be in writing, it is essential that the admonitions be given clearly and that they be memorialized in the notes of the interview.
At the close of the interview, the note-taker should prepare a typewritten memorandum of the interview. A draft of this memorandum should be reviewed by the questioner, to ensure that the final version accurately summarizes the employee’s statements in the interview.
B.Advice To Employees In The Event Of Government Contacts.
The government, of course, also recognizes the importance of interviewing corporate employees with knowledge of the relevant facts. Government agents sometimes seek to interview employees early in the investigation, before they have obtained counsel and sometimes before those employees have even talked to the company’s lawyer. Often the government agents do not contact the company’s lawyer to request such interviews, but instead appear suddenly at the employee’s home and seek to conduct a detailed interview.
Confronted with the possibility or even actuality of two government agents appearing unannounced at their homes, some employees ask company counsel what they should do. Should they speak with the government agents, or not? If they speak with the agents, what should they tell them? Alternatively, company counsel might anticipate such contacts by government agents, and advise the employees, before these contacts, about the employees’ rights and obligations in the event those employees are contacted by government agents seeking an interview.