Responding to Government Investigations: p g g Legal and Ethical - - PowerPoint PPT Presentation

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Responding to Government Investigations: p g g Legal and Ethical Considerations

Strategies for In‐House Counsel to Meet Corporate Obligations and Avoid Individual Liability

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURS DAY, MARCH 10, 2011

Today’s faculty features: Jonathan S . S ack, Principal, Morvillo Abramowitz Grand Iason Anello & Bohrer, New Y

• rk

Eric Corngold, Partner, Friedman Kaplan Seiler & Adelman, New Y

• rk

The audio portion of the conference may be accessed via the

Thomas M. Merritt, Deputy General Counsel, Knight Capital Group, Jersey City, N.J.

p y telephone or by using your computer's speakers.

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Responding to Government Responding to Government p g p g Investigations: Legal and Ethical Investigations: Legal and Ethical Considerations Considerations Considerations Considerations

March 10, 2011

Jonathan S. Sack M ill Ab i G d I Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C.

Jonathan S. Sack is a principal of Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C. His practice includes the representation of corporations and individuals in federal and state investigations and prosecutions civil and criminal and state investigations and prosecutions, civil and criminal enforcement actions, regulatory proceedings and internal

• investigations. Before joining Morvillo, Abramowitz, Grand,

Iason, Anello & Bohrer, P.C., Mr. Sack served for more than 12 years as an Assistant U.S. Attorney for the Eastern District of New York, where he held a number of supervisory positions, including Chief of the Criminal

• Division. Mr. Sack has written and spoken on issues

relating to attorney-client privilege, work product protection and internal investigations. He is also an adjunct professor at St. John's University School of Law, where he teaches a course in White Collar Crime He is also co author with the

(212) 880 9410

course in White-Collar Crime. He is also co-author with the

• Hon. Jed S. Rakoff, of Federal Corporate Sentencing:

Compliance and Mitigation, published by Law Journal Press.

(212) 880-9410 jsack@maglaw.com

5

Eric Corngold F i d K l S il & Ad l LLP Friedman, Kaplan, Seiler & Adelman LLP

Eric Corngold is at partner at Friedman, Kaplan, Seiler & Adelman, LLP, where he leads the firm's white-collar criminal defense and investigations practice He represents businesses their executives and their

• practice. He represents businesses, their executives, and their

employees during federal and state criminal investigations, as well as in regulatory matters involving the Securities and Exchange Commission and other federal and state government agencies. He also conducts internal investigations for corporations and other institutions on behalf of

• fficers, boards of directors, and audit committees. Before joining

j g Friedman, Kaplan, Mr. Corngold served as New York State's Executive Deputy Attorney General for Economic Justice from 2007 to 2009, where he was the principal advisor to the New York Attorney General on litigation and policy concerning financial markets, antitrust matters, corporate and consumer fraud, and housing. Prior to his time in the New Y k Att G l' Offi M C ld A i t t U it d York Attorney General's Office, Mr. Corngold was an Assistant United States Attorney in the Eastern District of New York for more than a

• decade. In that office, Mr. Corngold had a number of different positions,

including serving as the office's Chief Assistant United States Attorney from 2005 to 2007, and the Chief of the office's Business and Securities Frauds Unit from 1999 to 2005 Mr Corngold frequently lectures on

(212) 833-1114 ecorngold@fklaw.com

Frauds Unit from 1999 to 2005. Mr. Corngold frequently lectures on white-collar crime, securities law, and criminal procedure topics, and is currently an adjunct Professor of Law at St. John's University School of Law, where he teaches that school's course on White Collar Crime. 6

Thomas M. Merritt D G l C l K i h Deputy General Counsel, Knight Capital Group, Inc.

Thomas M. Merritt is Senior Managing Director and Deputy General Counsel of Knight Capital Group, Inc. He has over 15 f i i th iti i d t d h 15 years of experience in the securities industry and has been with Knight Capital Group, Inc. since June 2000. From December 1996 to June 2000, Tom served as an enforcement attorney with NASD (now FINRA) in New

• York. Prior thereto, Tom was an Assistant County Attorney

in Suffolk County New York and was in private practice in Suffolk County, New York and was in private practice. Tom received a B.S. degree in Business Administration in 1986 from SUNY Albany and a J.D. in 1989 from Hofstra University School of Law.

tmerrritt@knight.com

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Agenda Agenda

1:00-1:05 Introduction: Why Discuss In-House Lawyers’ Role in Government Investigations and Related Role in Government Investigations and Related Ethical Issues? 1:05-1:30 Preparing for Investigations 1:30-2:00 Conducting Investigations 2:00 2:15 Post Investigative Best Practices 2:00-2:15 Post-Investigative Best Practices 2:15-2:30 Questions and Concluding Remarks

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Program Scope

I Preparing for investigations I. Preparing for investigations

• II. Conducting investigations
• III. Post-investigative best practices

g p

9

I. Preparing for investigations

A Determining whether to investigate

• A. Determining whether to investigate
• B. Determining who should conduct the investigation –

in house or outside counsel in-house or outside counsel C. Determining whether to self-report investigation to the government government D. Determining scope of investigation E. Clarifying role of in-house counsel

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A. Determining whether to investigate

1. Under what circumstances should a company commence an internal investigation on its own initiative? a. Internal company information b. News stories b. Government inquiry q y 2. What considerations should be kept in mind when responding to whistleblower complaints? a Seriousness of offense a. Seriousness of offense b. Source of allegation c. Specificity of information d. Affected individuals e. Regulatory requirements

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A. Determining whether to investigate ( ’d) (cont’d)

3. Whistleblower issues a. Section 922 of the Dodd-Frank Act requires the SEC to pay between 10% and 30% of any recovery over $1 million to persons who voluntarily provide the SEC with original voluntarily provide the SEC with original information regarding a violation of the securities laws that leads to a successful enforcement action by the SEC. i. Except when the entity does not act within a reasonable time period or conducts itself in bad faith, information from certain sources (including attorney-client sources (including attorney client communications; information obtained by auditors; and information obtained in violation of the criminal laws) will not be considered original

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considered original.

A. Determining whether to investigate ( ’d) (cont’d)

3. Whistleblower issues (cont’d) ( ) b. SEC proposed rules were released in November 2010 and can be found at November 2010, and can be found at www.sec.gov/rules/proposed/2010/34- 63237.htm c. Concern that proposed rules undermine corporate compliance programs.

13

A. Determining whether to investigate ( ’d) (cont’d)

4 Would a shareholder demand letter typically trigger the need 4. Would a shareholder demand letter typically trigger the need for an internal investigation? 5 Ethical and statutory obligations of in house counsel 5. Ethical and statutory obligations of in-house counsel. a. Rules of Professional Conduct b Sarbanes Oxley Act Section 307 b. Sarbanes-Oxley Act, Section 307

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Rule 1.13 of the Model Rules of Professional Conduct

(a) A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents. (b) If a lawyer for an organization knows that an officer, employee or other person associated with the

• rganization is engaged in action, intends to act or refuses to act in a matter related to the representation that

is a violation of a legal obligation to the organization or a violation of law that reasonably might be imputed to is a violation of a legal obligation to the organization, or a violation of law that reasonably might be imputed to the organization, and that is likely to result in substantial injury to the organization, then the lawyer shall proceed as is reasonably necessary in the best interest of the organization. Unless the lawyer reasonably believes that it is not necessary in the best interest of the organization to do so, the lawyer shall refer the matter to higher authority in the organization, including, if warranted by the circumstances to the highest authority that can act on behalf of the organization as determined by applicable law. (c) Except as provided in paragraph (d), if (1) despite the lawyer's efforts in accordance with paragraph (b) the highest authority that can act on behalf of the organization insists upon or fails to address in a timely and appropriate manner an action, or a refusal to act, that is clearly a violation of law, and act, that is clearly a violation of law, and (2) the lawyer reasonably believes that the violation is reasonably certain to result in substantial injury to the

• rganization,

then the lawyer may reveal information relating to the representation whether or not Rule 1.6 [which sets forth y y g p [ circumstances under which lawyers may reveal confidential information] permits such disclosure, but only if and to the extent the lawyer reasonably believes necessary to prevent substantial injury to the organization. (d) Paragraph (c) shall not apply with respect to information relating to a lawyer's representation of an

• rganization to investigate an alleged violation of law, or to defend the organization or an officer, employee or
• ther constituent associated with the organization against a claim arising out of an alleged violation of law

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• ther constituent associated with the organization against a claim arising out of an alleged violation of law.

Rule 1.13 of the New York Rules of Professional Conduct Conduct

(a) . . . . (b) If a lawyer for an organization knows that an officer, employee or the person associated with the

• rganization is engaged in action or intends to act or refuses to act in a matter related to the

representation that (i) is a violation of a legal obligation to the organization or a violation of law that representation that (i) is a violation of a legal obligation to the organization or a violation of law that reasonably might be imputed to the organization, and (ii) is likely to result in substantial injury to the

• rganization, then the lawyer shall proceed as is reasonably necessary in the best interest of the
• rganization. In determining how to proceed, the lawyer shall give due consideration to the

seriousness of the violation and its consequences, the scope and nature of the lawyer’s representation, the responsibility in the organization and the apparent motivation of the person i l d th li i f th i ti i h tt d th l t involved, the policies of the organization concerning such matters and any other relevant

• considerations. Any measures taken shall be designed to minimize disruption of the
• rganization and the risk of revealing information relating to the representation to persons
• utside the organization. Such measures may include, among others:

(1) asking reconsideration of the matter; (2) advising that a separate legal opinion on the matter be sought for presentation to an (2) advising that a separate legal opinion on the matter be sought for presentation to an appropriate authority in the organization; and (3) referring the matter to higher authority in the organization, including, if warranted by the seriousness of the matter, referral to the highest authority that can act in behalf of the

• rganization as determined by applicable law.

(c) If, despite the lawyer’s efforts in accordance with paragraph (b), the highest authority that can act (c) If, despite the lawyer s efforts in accordance with paragraph (b), the highest authority that can act

• n behalf of the organization insists upon action, or a refusal to act, that is clearly in violation of law

and is likely to result in a substantial injury to the organization, the lawyer may reveal confidential information only if permitted by Rule 1.6, and may resign in accordance with Rule 1.16.

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Section 307 of the Sarbanes-Oxley Act of 2002

Section 307 directed the SEC to, within 180 days, issue rules “setting forth minimum standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers,” including a rule – “(1) requiring an attorney to report evidence of a material violation

• f securities law or breach of fiduciary duty or similar violation by

h h f h hi f l l l the company or any agent thereof, to the chief legal counselor or the chief executive officer of the company (or the equivalent thereof); and (2) if the counsel or officer does not appropriately respond to the evidence (adopting, as necessary, appropriate remedial respond to the evidence (adopting, as necessary, appropriate remedial measures or sanctions with respect to the violation), requiring the attorney to report the evidence to the audit committee of the board of directors of the issuer or to another committee of the board of directors i d l l f di t t l d di tl i di tl b th comprised solely of directors not employed directly or indirectly by the issuer, or to the board of directors.”

17

17 C.F.R. Section 205

• In response to Section 307 of the Sarbanes-Oxley Act, the SEC

l t d 17 C F R S ti 205 hi h b f d t promulgated 17 C.F.R. Section 205, which can be found at http://www.sec.gov/rules/final/33-8185.htm 17 C F R Section 205 includes rigorous up-the-ladder reporting

• 17 C.F.R. Section 205, includes rigorous up-the-ladder reporting

requirements and requires that a chief legal officer inquire into the “evidence of a material violation” of the securities laws.

• Section 205.2(e) defines “evidence of a material violation” as

“credible evidence, based upon which it would be unreasonable, under the circumstances, for a prudent and competent attorney not to conclude that it is reasonably likely that a material violation has to conclude that it is reasonably likely that a material violation has

• ccurred, is ongoing, or is about to occur.”

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B. Determining who should conduct the i i i i h id investigation – in-house or outside counsel

1. Who is the client – management or the board (or a b d i )? board committee)? 2. When can in-house counsel conduct the investigation? 3. When should outside counsel conduct the investigation? a. When should a company’s regular outside corporate counsel conduct the investigation? b. When should independent outside counsel conduct the investigation?

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B. Determining who should conduct the i i i i h id investigation – in-house or outside counsel

4. Foreign privilege issues a. Akzo Nobel Chemicals, Ltd. and Akcros Chemicals, Ltd. v. Comm’n, Case-550/07 P (September 14, 2010), reaffirmed a 1982 case (September 14, 2010), reaffirmed a 1982 case AM&S Europe Ltd. v. Commission, Case 155/79 (1982), which held that legal advice is privileged

• nly if it relates to the “client’s right of defence”

(meaning that the client affirmatively is seeking legal advice) and is imparted by an independent lawyer who is a member of an EU Bar Association The Akzo Nobel court held

• Association. The Akzo Nobel court held

that because of their economic dependence on their employers, in-house lawyers are not sufficiently independent to warrant privilege

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y p p g protection.

C. Determining Whether to Self-Report the I i i h G Investigation to the Government

1 Wh h ld i ti ti b t d t 1. When should an investigation be reported to the government and which government agency should be notified? a. Reporting obligations in regulated industries 2. If the government commences a separate investigation, how should counsel respond to the government’s requests to interview employees g q p y and subpoenas for documentary evidence?

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D. Determining Scope of Investigation

1. How does the client determine the appropriate scope

• f the investigation?

2. When should the scope of the investigation change? p g g

22

E. Clarifying Role of In-House Counsel

1. Competing pressures on in-house counsel a. Criminal prosecution – Indictment in United States v. Stevens, Case No. 10-CR-694 (D.

• Md. Nov. 8, 2010)

b. Sarbanes-Oxley/ethical obligations c. In-house counsel as advocate for company c. In house counsel as advocate for company client d. In-house counsel and legal compliance e. In-house counsel as gatekeepers

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E. Clarifying Role of In-House Counsel

2. Role of in-house counsel in investigations conducted by outside counsel? a. Joint responsibility with outside counsel? p y i. Active role at interviews?

• b. Assist with obtaining and analyzing

information? c. Alternatives to in-house counsel support: internal audit, business unit?

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• II. Conducting Investigations

A Document retention strategies A. Document retention strategies B Interviewing employees B. Interviewing employees C. Preserving privileges D. Selecting experts

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A. Document retention strategies

1. Document holds a. How much information to retain? i. Predicting scope of internal investigation and possible civil investigation and possible civil litigations and government investigations. b. For how long? c. To whom is document hold directed?

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A. Document retention strategies cont'd

3 I l t ti i l t i d t 3. Implementation issues – electronic data 4. Subpoenas – negotiations with government 5. Obstruction of justice -- 18 U.S.C. § 1519 -- Destruction, alteration, or falsification of records in Federal investigations and bankruptcy: “Whoever knowingly alters destroys mutilates conceals covers up falsifies alters, destroys, mutilates, conceals, covers up, falsifies,

• r makes a false entry in any record, document, or

tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency matter within the jurisdiction of any department or agency

• f the United States or any case filed under title 11, or in

relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.” y a. Investigation need not have been commenced b D t i illf l t t t f i d

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b. Does not require a willful or corrupt state of mind

A. Document retention strategies cont'd

6. Civil litigation/spoliation issues a. Duty to preserve precedes filing of a complaint and attaches where party is on notice that litigation is likely to be commenced or bl ti i t liti ti reasonably anticipates litigation b. In a series of decisions in 2003 and 2004, in the Zubulake v. UBS Warburg case, Judge Shira g , g Scheindlin of the SDNY addressed a number of issues relating to the preservation of electronic evidence including: i) the scope of a party's duty to preserve electronic evidence; ii) a lawyer's d i li ’ li i h duty to monitor a client’s compliance with electronic data preservation and production; iii) data sampling; iv) cost shifting; and v) the imposition of sanctions for the spoliation (or destruction) of electronic evidence

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destruction) of electronic evidence

B. Interviewing Employees

1. Upjohn v. United States, 449 U.S. 383 (1981) – Supreme Court held that a corporation can assert the attorney-client privilege 2. The privilege generally applies to communications between attorneys for a corporation and the corporation’s employees if: a. Communication was made on orders of superiors to get legal advice for the company; b. Required information was not available to management; g ; c. Communication related to the employees’ corporate duties; d. Employees were made aware that the reason for the communication was so that the corporation could l l d i d secure legal advice; and e. Communication was ordered to be kept confidential and did remain confidential.

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B. Interviewing Employees (cont’d)

3.

Ethical rules -- Rule 1.13(a) of the NY Rules of Professional Conduct – “(a) When a lawyer employed or retained by an organization is dealing with the organization’s directors officers employees with the organization s directors, officers, employees, members, shareholders or other constituents, and it appears that the organization’s interests may differ from those of the constituents with whom the lawyer is dealing, the lawyer shall explain that the lawyer is the lawyer for the lawyer shall explain that the lawyer is the lawyer for the organization.” 4. Attorneys interviewing corporate employees should give corporate Miranda warnings See United States v corporate Miranda warnings. See United States v. Ruehle, 583 F.3d 600 (9th Cir. 2010) (reversing the district court’s holding that suppressed statements

• btained by company counsel from an employee and

subsequently disclosed to the government) The Ninth subsequently disclosed to the government). The Ninth Circuit held that because the employee knew that the company intended to disclose the statement to the government before he made them, he did not intend the statements to be confidential.

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statements to be confidential.

B. Interviewing Employees (cont’d)

• 4. Corporate Miranda warnings (cont’d):
• The interviewing attorney is counsel to the company;
• The interview is being conducted to assist the company;
• The interview is being conducted to assist the company;
• The employee is expected to keep the substance of the interview

confidential;

• The communications are privileged and the privilege belongs to

the company;

• The company will determine whether to waive or assert the

privilege; and

• The company may share information with the government

The company may share information with the government. 5. Optional warnings:

• The employee can retain separate counsel if he or she wishes;

p y p ;

• The employee must tell the truth; and
• The employee may be criminally prosecuted if he or she is not

truthful and the company conveys the false information to the government (See e g U S v Kumar)

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government (See e.g., U.S. v. Kumar).

B. Interviewing Employees (cont’d)

6. Counsel for employees a. When appropriate? b. Pool or individual counsel? c Indemnification/advancement of c. Indemnification/advancement of legal fees i Permitted by the laws of most states i. Permitted by the laws of most states and in some circumstances required by state law.

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B. Interviewing Employees (cont'd)

I d ifi ti / d t f l l f ( t’d) c. Indemnification/advancement of legal fees (cont’d) ii. The right to indemnification or advancement may be derived from a company’s bylaws, an agreement or an understanding based on prior agreement, or an understanding based on prior practices. iii. An undertaking may be required in the case of advancement. iv. United States v. Stein, 541 F.3d 130 (2d Cir. 2008) – KPMG had a practice of advancing and indemnifying legal fees and costs of partners and employees (and an agreement to finance the legal employees (and an agreement to finance the legal representation of one defendant). Government coerced KPMG to withhold payment of legal fees and expenses from indicted employees. The Second Circuit affirmed that the government g unconstitutionally interfered with the employees’ Sixth Amendment right to counsel and to present a complete defense. The indictment ultimately was dismissed as to many defendants.

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B. Interviewing Employees (cont'd)

c. Indemnification/advancement of legal fees (cont'd) v In response in 2008 the DOJ released a new v. In response, in 2008, the DOJ released a new version of “Principles of Federal Prosecution of Business Organizations” (the “Filip Memo”), which prohibits prosecutors when evaluating a which prohibits prosecutors, when evaluating a company’s cooperation, from considering, among other things, whether the company is advancing or reimbursing attorneys fees to its g g y employees. d Directors and Officers Liability Insurance d. Directors and Officers Liability Insurance

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B. Interviewing Employees (cont’d)

7. Representation of company and employees: conflicts analysis a. In government investigations, attorneys ethically may represent both a corporation and its “constituents” if their interests actually or potentially differ if: p y i. the attorney concludes that in the view of a disinterested lawyer, the t ti ld i th representation would services the interests of both the corporation and its constituents; and ii. Both clients give knowledgeable and ii. Both clients give knowledgeable and informed consent. See Assoc. of the Bar of the City of New York Comm. on

35

Prof’l & Judicial Ethics, Formal Op. 2004-02 (June 2004)

B. Interviewing Employees (cont’d)

b. Must be mindful of changes in circumstances to be sure the “disinterested lawyers” test continues to be met over the course of the representation. c. Structure representation to minimize adverse effects if an actual conflict develops. i. Prospective waivers that permit an attorney to continue to represent the company if a conflict arises. ii. Explicit agreements with individuals on the scope of the attorney-client privilege and the permissible use of information

• btained
• btained.

iii. Shadow counsel for employees.

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B. Interviewing Employees (cont'd)

8. Coordination with Employees’ Counsel a. Joint Defense Agreements i. Written or verbal? ii. Formal or informal? b. Information sharing between company and employees c. Confidentiality agreement

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B. Interviewing Employees (cont'd)

9. Interviewing unrepresented employees a. No contact rule – Rule 4.2(a) of the Model Rules of Professional Conduct prohibits an Rules of Professional Conduct prohibits an attorney from communicating with a “person” the attorney knows to be represented by counsel in that “matter” without prior consent from counsel for that person from counsel for that person. b. The New York rule uses the word “party” rather than “person,” which suggests that p , gg attorneys representing corporations in New York may be permitted to interview represented persons who are not parties to the litigation without their lawyers’ permission. g y p But, in practice, most NY lawyers do not interview represented persons outside the presence of their lawyers.

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B. Interviewing Employees (cont'd)

10. Interviewing unrepresented employees cont'd c. Rule 4.3 of the Model Rules of Professional Conduct prohibits a lawyer from giving advice to an unrepresented person, “other than the advice to secure counsel, if the lawyer knows or reasonably should know that the interests of such a person are or have a reasonable possibility of being in conflict with the interests of the client.”

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C. Preserving privileges

1. The corporate attorney-client privilege is well- developed in the U.S. but has been under attack in government investigations. a. In 2003, the DOJ issued the Thompson memo which permitted federal prosecutors to seek waivers by corporations of their attorney-client privilege as a quid-pro-quo for favorable treatment by the quid-pro-quo for favorable treatment by the prosecutor in considering whether to indict the corporation. i Prosecutors are widely seen to have been i. Prosecutors are widely seen to have been

• verly aggressive in demanding such

waives and other concessions from companies.

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C. Preserving privileges (cont’d)

b. The McNulty memo (2006) restricted waiver demands but still permitted waiver demands but still permitted prosecutors to be able to offer cooperation credit in exchange for a corporation’s agreement to waive privilege at the government’s request government s request. c. The Filip memo (2008) shifts the focus from disclosure of privilege to the disclosure of p g “relevant facts” and prohibits prosecutors from requesting waivers of “core” attorney-client communications of work product or from crediting corporations who do waive privilege g p p g with respect to this information.

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C. Preserving privileges (cont'd)

2. Civil Regulatory Authorities a. 2001 SEC Seaboard Report set forth the factors the SEC considers in determining whether to bring f t ti Th t it d th enforcement actions. The report cited the corporation’s willingness to waive privilege as a reason that action was not taken against the company. b. NYSE Information Memorandum No. 05-65 (2005) c. FINRA Regulatory Notice 08-70 (Nov. 2008) 3. 2004 Amendments to the Corporate Sentencing G id li ( i l d i 2006) Guidelines (unanimously reversed in 2006) a. In April 2006 the Sentencing Commission voted unanimously to reverse a November 2004 amendment to the Guidelines that added commentary amendment to the Guidelines that added commentary stating that an organization’s willingness to waive the privilege and/or work product doctrine could be relevant to a determination that the entity was cooperating with the government and therefore li ibl f d d lt

42

eligible for a reduced penalty.

C. Preserving privileges (cont'd)

4. The government’s policies and practices prompted Congressional and Judicial opposition. a. United States v. Stein decisions focused primarily on advancement but were p y highly critical of the DOJ policies regarding privilege waiver. b. Attorney-Client Privilege Protection Act, introduced by Senator Arlen Specter in 2006, 2007, 2008 and 2009, provides that , , , p the government may not request that an

• rganization waive privilege.

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C. Preserving privileges (cont'd)

5. In response to pressure from the judiciary and Congress, in 2008 the DOJ revised the “Principles of Federal Prosecution

• f Business Organizations” (The “Filip Memorandum”). The

revision which is known as the Filip Memorandum: revision, which is known as the Filip Memorandum: a. Requires that an assessment of a corporation’s cooperation be based on disclosure of relevant facts p concerning the alleged misconduct, rather than the waiver of any privilege. i Is this a distinction without a difference? i. Is this a distinction without a difference? b. Prohibits federal prosecutors from requesting waivers of “core” attorney-client communications or work product or from crediting corporations that agree to waive privilege with respect to this

• information. “Core” material includes notes

and memos generated by attorneys during internal

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g y y g investigations.

C. Preserving privileges (cont'd)

6. 2010 revisions to SEC Enforcement Manual a Focuses on voluntary disclosure of relevant a. Focuses on voluntary disclosure of relevant information by corporations seeking cooperation credit. b. Section 4.3 does not prohibit SEC attorneys from seeking waivers but directs them not to do so without obtaining approval from the Director or Deputy Director Director or Deputy Director. c. Warns that although a corporation need not produce privileged notes and memos g generated by attorneys during the course of any internal investigation, the SEC staff may request relevant factual information acquired through those interviews.

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g

C. Preserving privileges (cont'd)

7. Selective waiver V l di l h a. Voluntary disclosure to the government may waive the attorney client privilege and work product protection as to other adversaries. b. Possible exceptions for work product: i C i t t th i. Common interest theory ii. Explicit confidentiality agreements with the government (Second Circuit) with the government (Second Circuit)

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C. Preserving privileges (cont'd)

7. Selective waiver (cont’d) c. Federal Rule of Evidence 502 limits subject matter waivers i. The drafters did not include proposal to allow for selective disclosure 8. Practical considerations concerning waiver

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• C. Preserving privileges (cont'd)

g p g ( )

9. Control over the privilege a. Under Upjohn, the attorney-client privilege applies not only to the corporation but also to employees if they are considered “clients.” p y y b. See CFTC v. Weintraub, 471 U.S. 343, 348 (1985) (holding that the trustee of a corporation in bankruptcy controls the privilege corporation in bankruptcy controls the privilege and has the power to waive the corporation's attorney-client privilege with respect to pre- bankruptcy communications).

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C. Preserving privileges (cont'd)

10. Assertion of privilege by employees a. To determine when an employee may assert th i il t t t f di l the privilege to protect from disclosure communications that the corporation seeks to reveal, cases have inquired into the particular communications between counsel and the employee employee. b. See United States v. Int’l Bhd. of Teamsters, 119 F.3d 210 (2d Cir. 1997) -- to assert the privilege, l t h th thi th t employees must show, among other things, that the employees were speaking with the attorney for the purpose of obtaining legal advice, and the employees “made it clear to the attorney that they were seeking legal advice in their individual they were seeking legal advice in their individual rather than in their representative capacities.”

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C. Preserving privileges (cont'd)

11. Assertion of privilege by employees (cont’d) c In United States v Graf 610 F 3d 1148 (9th c. In United States v. Graf, 610 F.3d 1148 (9th

• Cir. 2010), the Ninth Circuit Court of Appeals

adopted a five-part test, established by the Third Circuit in In re Bevill, Bresler & Schulman Asset Mgmt Corp 802 F 2d 120 Schulman Asset Mgmt. Corp., 802 F.2d 120, 123 (3d Cir. 1986), to determine whether the attorney-client privilege belongs to a corporate officer or employee or to the corporation The Bevill test also has been

• corporation. The Bevill test also has been

adopted by the First, Second, and Tenth

• Circuits. See In re Grand Jury Subpoena

(Newparent), 274 F.3d 563, 571-72 (1st Cir. 2001); In re Grand Jury Subpoenas (Roe and 2001); In re Grand Jury Subpoenas (Roe and Doe), 144 F.3d 653, 659 (10th Cir. 1998); United States v. Int’l Bhd. of Teamsters, 199 F.3d 210, 214-15 (2d Cir. 1997).

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C. Preserving privileges (cont'd)

11. Assertion of privilege by employees (cont’d) a. Under the Bevill test, a corporate officer seeking to assert a personal privilege claim must demonstrate: (1) that he approached counsel for the purposes of seeking legal advice; (2) that when he approached advice; (2) that when he approached counsel, he made it clear that he was seeking legal advice in his individual rather than his representative capacity; (3) that than his representative capacity; (3) that counsel communicated with him in his individual capacity, knowing that a possible conflict could arise; (4) that his ti ith l conversations with counsel were confidential; and (5) that the substance of the conversations did not concern the company

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company.

C. Preserving privileges (cont'd)

12. Waiver of privilege by employees a. "[O]rdinarily the authority to assert and waive the corporation's privileges 'rests with the the corporation s privileges rests with the corporation's management and is normally exercised by its officers and directors." In re Grand Jury Proceedings, 219 F.3d 175, 183- 84 (2d Cir 2000) (quoting CFTC v Weintraub 84 (2d Cir. 2000) (quoting CFTC v. Weintraub, 471 U.S. 343, 348 (1985). b. However, the Second Circuit has suggested that, under certain circumstances, an that, under certain circumstances, an employee might have the power to waive a corporation's attorney-client privilege notwithstanding the corporation's intention not to do so. See In re Grand Jury

• t to do so See

e G a d Ju y Proceedings, 219 F.3d at 185 (rejecting "per se rule that a corporate officer's waiver in testimony should not be' attributed to the corporation when it has asserted its privilege

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p p g and has not otherwise lost it").

C. Preserving privileges (cont'd)

13. Crime fraud exception a Documents and communications over which a a. Documents and communications over which a corporation seeks to assert the privilege may be discoverable or admissible in a proceeding pursuant to the crime fraud exception to the p p attorney-client privilege. See Posting of Jason Beahm to In House The Findlaw Corporate Counsel Blog, http://blogs.findlaw.com/ in house/010/09/toyotas battle with former in in_house/010/09/toyotas-battle-with-former-in- house-counsel-continues.html (Sept. 28, 2010) (In Biller v. Toyota Motor Corp., arbitrator ruled that pursuant to the crime-fraud exception to the attorney-client privilege, a whistleblowing former in-house counsel could introduce into evidence internal Toyota documents over which Toyota claimed privilege )

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which Toyota claimed privilege.)

D. Selecting experts

1. Forensic accountants 2. Public relations firms 3. Privilege considerations a. Kovel letters to protect privilege

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• III. Post investigative best practices

A Reporting results of A. Reporting results of investigations/determining whether to cooperate with government B. Remediation measures C. Dealing with parallel civil proceedings

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A. Reporting results of investigation/determining whether to cooperate with the government whether to cooperate with the government

1. Written or oral report p 2. Level of detail 3. Practical considerations

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A. Reporting results of investigation/determining whether to cooperate with the government whether to cooperate with the government (cont’d)

4. What disclosure obligations does a public company have for an internal investigation? For a government investigation? For a Wells notice? a. “Materiality” test b Reg S-K which applies to quarterly and annual b. Reg S K, which applies to quarterly and annual reports, requires public companies to “[d]escribe briefly any material pending legal proceedings,

• ther than ordinary routine litigation incidental to

y g the business, to which the registrant or any of its subsidiaries is a party or of which any of their property is the subject.”

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A. Reporting results of investigation/determining whether to cooperate with the government whether to cooperate with the government (cont’d)

c. Goldman Sachs fined by FINRA for failing to disclose receipt of Wells Notices by employees d. Is disclosure required by Reg FD? i. Reg FD requires that when an issuer discloses material nonpublic information to certain individuals or entities generally certain individuals or entities -- generally, securities market professionals, such as stock analysts, or holders of the issuer's securities who may well trade on the basis

• f the information -- the issuer also must

make public disclosure of that information.

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B. Remediation measures

1. Terminate or discipline affected executives and employees 2. Revamp ethics and compliance program 3. Deferred prosecution agreements and non- prosecution agreements 4 Monitorships 5. Governance reforms

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C. Dealing with parallel civil proceedings

1 Civil Litigation (private actions and government 1. Civil Litigation (private actions and government enforcement proceedings) 2. 5th Amendment Considerations 3. Stays – Complete or Partial

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Additional Resources

Jonathan S. Sack, “Internal Investigations: Start Off On the Right Foot, Key Structural Decisions Will Determine Reliability and Credibility”, New York Law Journal, October 12, 2010 http://www.maglaw.com/publications/data/00232/_res/id=sa_File1/070101026Morvillo.pdf Jonathan S. Sack and Barbara L. Trencher, “Whistleblower Laws: Protections For Employees, Risks to Corporations?,” International Comparative Legal Guide to: Business Crime 2011 http://www.maglaw.com/publications/data/00233/_res/id=sa_File1/BC11_Chapter-2_Morvillo.pdf

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