Financial Fraud Law Report

Transcription

1 Financial Fraud Law Report An A.S. Pratt & Sons PublicatioN april 2014 Editor s Note: Financial Fraud Law in the Courts Steven A. Meyerowitz Fate of Securities Class Actions in Question Following Argument Before High Court in Halliburton Co. v. Erica P. John Fund, Inc. Michael R. Smith, Jeffrey S. Bucholtz, Benjamin Lee, and M. Andrew Zee Testify First, Know Why Later: Responding to Civil Investigative Demands for Testimony in False Claims Act Cases Karen F. Green and James J. Fauci The Survival Guide to Regulatory Examinations John Sakhleh FATCA Update for Investment Funds Joseph A. Riley Deferred Prosecution Agreements Enter into Force in the UK Lord Goldsmith QC, Karolos Seeger, Matthew Howard Getz, and Robin Lööf Compliance Risk Management: What Financial Institutions Need to Know About Reporting Elder Financial Exploitation V. Gerard Comizio, Kevin L. Petrasic, and Amanda Kowalski Anti-Money Laundering Guidance Issued for Banks Seeking to Service Marijuana-Related Businesses Jodi L. Avergun and Joseph V. Moreno Dodd-Frank Wall Street Reform and Consumer Protection Act Update David A. Elliott, Rachel Blackmon Cash, Kristen Peters Watson, and E. Jordan Teague

2 Editor-in-chief Steven A. Meyerowitz President, Meyerowitz Communications Inc. Board of Editors Frank W. Abagnale Author, Lecturer, and Consultant Abagnale and Associates Stephen L. Ascher Jenner & Block LLP Thomas C. Bogle Dechert LLP David J. Cook Cook Collection Attorneys David A. Elliott Burr & Forman LLP William J. Kelleher III Corporate Counsel People s United Bank James M. Keneally Kelley Drye & Warren LLP H. David Kotz Director Berkeley Research Group, LLC Richard H. Kravitz Founding Director Center for Socially Responsible Accounting Frank C. Razzano Pepper Hamilton LLP Sareena Malik Sawhney Director Marks Paneth & Shron LLP Mara V.J. Senn Arnold & Porter LLP John R. Snyder Bingham McCutchen LLP Jennifer Taylor McDermott Will & Emery LLP Bruce E. Yannett Debevoise & Plimpton LLP The Financial Fraud Law Report is published 10 times per year by Matthew Bender & Company, Inc. Copyright 2014 Reed Elsevier Properties SA., used under license by Matthew Bender & Company, Inc. All rights reserved. No part of this journal may be reproduced in any form by microfilm, xerography, or otherwise or incorporated into any information retrieval system without the written permission of the copyright owner. For permission to photocopy or use material electronically from the Financial Fraud Law Report, please access com or contact the Copyright Clearance Center, Inc. (CCC), 222 Rosewood Drive, Danvers, MA 01923, CCC is a not-for-profit organization that provides licenses and registration for a variety of users. For subscription information and customer service, call Direct any editorial inquires and send any material for publication to Steven A. Meyerowitz, Editor-in-Chief, Meyerowitz Communications Inc., PO Box 7080, Miller Place, NY 11764, smeyerow@optonline.net, (phone) / (fax). Material for publication is welcomed articles, decisions, or other items of interest. This publication is designed to be accurate and authoritative, but neither the publisher nor the authors are rendering legal, accounting, or other professional services in this publication. If legal or other expert advice is desired, retain the services of an appropriate professional. The articles and columns reflect only the present considerations and views of the authors and do not necessarily reflect those of the firms or organizations with which they are affiliated, any of the former or present clients of the authors or their firms or organizations, or the editors or publisher. POSTMASTER: Send address changes to the Financial Fraud Law Report, LexisNexis Matthew Bender, 121 Chanlon Road, North Building, New Providence, NJ Direct inquiries for editorial department to catherine. dillon@lexisnexis.com. ISBN:

3 Testify First, Know Why Later: Responding to Civil Investigative Demands for Testimony in False Claims Act Cases Karen F. Green and James J. Fauci This article outlines the rules governing Civil Investigative Demands for oral testimony and how they differ from the rules governing depositions. It then discusses issues a company should consider when the government demands that its employees (or former employees) testify early in an investigation. The Department of Justice s use of Civil Investigative Demands ( CIDs ) in False Claims Act ( FCA ) investigations has dramatically increased during the past four years. CIDs allow the government, prior to intervening in an FCA case or the unsealing of a complaint, to compel witnesses to testify under oath. 1 Because qui tam relators file FCA cases under seal, witnesses may be called to testify before a company has seen the complaint against it or even begun an internal investigation. In many cases, the receipt of a CID is the first indication that an investigation exists at all. This article first outlines the rules governing CIDs for oral testimony and how they differ from the rules governing depositions. It next discusses issues a company should consider when the government demands that its em- Karen F. Green is a partner in Wilmer Cutler Pickering Hale and Dorr LLP s Litigation/Controversy department and a member of its Investigations and Criminal Litigation, False Claims Act, and Life Sciences Practice Groups. James J. Fauci is a senior associate at the firm. The authors may be contacted at karen.green@ wilmerhale.com and james.fauci@wilmerhale.com, respectively. Published by Matthew Bender & Company, Inc. in the April 2014 issue of Financial Fraud Law Report. Copyright 2014 Reed Elsevier Properties SA. 301

4 Financial Fraud Law Report ployees (or former employees) testify early in an investigation. These issues include the consequences of employees invocation of the Fifth Amendment and, where employees agree to testify, whether their testimony will be admissible against the company. Rules Governing CIDs for Oral Testimony The Fraud Enforcement and Recovery Act of 2009, 2 amended the FCA to permit the Attorney General to delegate his authority to issue CIDs. In March 2010, the Department of Justice ( DOJ ) delegated that authority to all United States Attorneys and, since then, the DOJ s use of CIDs has increased substantially; in fiscal year 2011, the DOJ issued 888 CIDs, which is more than 10 times the number issued in the preceding two years. 3 The DOJ may issue a CID whenever it has reason to believe that a person possesses information relevant to an FCA investigation. 4 CIDs may be issued to any natural person, partnership, corporation, association, or other legal entity[.] 5 The government may use CIDs to demand documentary evidence, answers to written interrogatories, and most importantly oral testimony. 6 There are few statutory limits on the DOJ s authority to issue CIDs, except that the DOJ is generally barred from issuing multiple demands for oral testimony to the same person. 7 The government is only required to serve a CID on the person whose testimony is being demanded and, in the case of a CID issued to a company s employee or former employee, the FCA does not mandate that any notice be given to the company under investigation. 8 Moreover, even if a company receives notice of a CID to one of its employees, the FCA explicitly limits who may attend the examination to the government, the witness, and the witness s attorney. 9 Corporate counsel have no right to attend examinations, though the government and witness may permit corporate counsel to attend in order to protect the company s privileged information. Unlike a typical notice of deposition, the FCA requires that CIDs provide certain information about the scope of the demanded testimony. Specifically, CIDs must describe the nature of the conduct constituting the alleged violation of a false claims law which is under investigation. 10 When a CID is for oral testimony, it must also describe the general nature of the testimony, 302

5 Testify First, Know Why Later including the primary areas of inquiry, which will be taken pursuant to the demand. 11 Given that a CID may be the first notice that an investigation exists, its description of the conduct under investigation and of the nature of the testimony demanded may be all of the information available to help a witness prepare. If those descriptions lack specificity, counsel should seek additional information from the government. If those efforts fail, counsel should consider moving for a protective order on the ground that the CID is too vague to permit a witness to prepare effectively. The FCA provides at least one advantage to witnesses not available in depositions. It states that during an examination taken pursuant to a CID, counsel may advise a witness in confidence, with respect to any question asked. 12 Given the challenges of preparing a witness to testify so early in an investigation, counsel should make liberal use of this provision if the government s examination veers off in unexpected directions. Also, because the FCA requires that a CID for oral testimony describe the primary areas of inquiry, counsel should consider objecting or instructing the witness not to answer 13 when questions call for information beyond what is described in the CID. Issues to Consider When Preparing a Witness to Testify CIDs for oral testimony pose many risks for companies, particularly when they are issued in the early stages of an investigation. A company s employees may feel compelled to invoke their Fifth Amendment right against self-incrimination given the uncertain scope of the government s investigation and the potential for a parallel, criminal investigation. As discussed below, this can subject a company to an adverse inference at trial, even if its employees later withdraw their assertion of the Fifth Amendment and testify during discovery. Under federal law, it is well-established that courts and juries may draw an adverse inference in civil proceedings from a party s invocation of the Fifth Amendment. 14 Such an inference can seriously impair a company s ability to defend itself. In general, courts have held that an adverse inference may be given significant weight because silence when one would be expected to speak is a powerful persuader. 15 A company is potentially subject to an adverse inference whenever its employee invokes the Fifth Amendment, pro- 303

6 Financial Fraud Law Report vided that the employee played a material role in the conduct being investigated. 16 A company may even be subject to an adverse inference based on a former employee s invocation of the Fifth Amendment, depending on the extent of the company s control over the former employee, the mutuality of their interests, and the former employee s role in the litigation. 17 The vast majority of cases addressing adverse inferences and the Fifth Amendment involve witnesses who refuse to testify during formal discovery, such as at a deposition. In that situation, courts have reasoned that an adverse inference may be warranted because it would be unfair to force the other party to prepare [its] case without the benefit of knowing the content of the privileged matter. 18 This rationale applies with much less force to witnesses who invoke the Fifth Amendment during an investigation, but then make themselves available for a deposition. In such circumstances, the government and the defendant are on an equal footing as both have the ability to depose relevant witnesses. Moreover, once a witness testifies at a deposition, there should be no need to draw any inferences about his prior silence. Nonetheless, the majority of the small number of published decisions that have addressed this issue have found that an adverse inference may be drawn even when a witness later waives the Fifth Amendment privilege and testifies at a deposition. In permitting adverse inferences to be drawn, two of these decisions did not expressly analyze whether witnesses refusal to testify during the government s investigation had caused any prejudice to the government; instead, they focused on the witnesses motivations for initially invoking the Fifth Amendment privilege. In SEC v. Cassano, 19 for example, the court drew an adverse inference based on witnesses refusal to testify during investigative interviews, and the court did not make any finding as to whether that refusal had resulted in any prejudice to the government given the witnesses later testimony at depositions. 20 According to Cassano, the witnesses reason for refusing to testify during the investigation that they had no idea what the [SEC s] charges were based on is as susceptible of the inference that they were unwilling to testify until they got their stories straight as with any innocent explanation, and the court found that the fact that the witnesses subsequently waived their Fifth Amendment privilege and agreed to testify went to the weight of the inference, not the propriety of drawing it. 21 Similarly, SEC v. Herman also permitted an adverse inference 304

7 Testify First, Know Why Later to be drawn from witnesses invocation of the Fifth Amendment during an SEC investigation, even though the witnesses later testified at depositions. 22 The court did not expressly analyze whether the witnesses initial refusal to testify had prejudiced the government and found, instead, only that their prior use of the Fifth Amendment privilege which [the witnesses] do not even attempt to reconcile with their later testimony is relevant to our inquiry and lends further support to the evidence presented by the SEC. 23 More recent decisions have suggested that the propriety of drawing an adverse inference depends on whether the government was prejudiced by a witness s initial refusal to testify. In SEC v. DiBella, a 2007 decision of the U.S. District Court for the District of Connecticut, the defendant invoked the Fifth Amendment in three investigative interviews between 2000 and The defendant ultimately testified at a deposition in 2006, in which he admitted that his recollection of [the] events in question was compromised due to the long passage of time. 25 The court permitted an adverse inference because the witness s deposition testimony failed to provide meaningful or substantive evidence concerning the key issues in the case. 26 Meanwhile, in SEC v. Freiberg, the court decided that a witness s subsequent testimony prevented an adverse inference from being drawn based on his earlier invocation of the Fifth Amendment. 27 Freiberg involved a witness who exercised his Fifth Amendment right during an SEC investigation, but later testified at a deposition and fully responded to the SEC s questions. 28 The court held that no adverse inference was warranted because the SEC had failed to point out any instance in which the witness had refused to answer a question or stonewalled the proceedings and, thus, there was no indication the SEC was deprived of a fair proceeding. 29 Thus, a company risks having an adverse inference drawn against it if its employee (or former employee) refuses to testify in response to a CID. This risk is present even if the employee later waives the privilege and testifies during civil discovery, although the company certainly may argue that, in light of the employee s subsequent testimony, there is no prejudice to the government and no reason to draw any adverse inference. A company also faces risks when its employees testify in response to a CID, particularly when the CID is issued early in an investigation. Testimony in these circumstances may be tentative, imprecise, or incomplete, 305

8 Financial Fraud Law Report given that witnesses may have limited information on what the government is investigating and may not have had an opportunity to review relevant documents before testifying. The FCA provisions authorizing CIDs do not address whether, or in what circumstances, CID testimony may be used at trial. Federal Rule of Evidence 801(d)(2), however, provides that a statement made by the opposing party s employee on a matter within the scope of that relationship while it existed, which is offered against the opposing party, is no hearsay. 30 Accordingly, a corporate defendant should expect that the government will seek to use CID testimony of its employees at any trial of the government s FCA claims. 31 As a final consideration, recent amendments to the FCA expressly permit the government to share CID testimony with qui tam relators. 32 Thus, unlike grand jury testimony, which is generally protected from disclosure to third parties by Federal Rule of Criminal Procedure 6(e), relators may continue to use CID testimony against a company even in cases in which the government ultimately declines to pursue its investigation. In particular, companies should expect that relators will seek to use CID testimony to bolster their allegations in an effort to satisfy the heightened pleading requirements of Federal Rule of Civil Procedure 9(b). Conclusion The government s increased use of CIDs poses significant challenges for a company under investigation for alleged FCA violations, including the prospect that its employees may be called to testify before the company has completed its own internal investigation. Actions taken during this time frame including an employee s invocation of his Fifth Amendment privilege or his decision to testify with limited information on the nature of the allegations being investigated may have lasting consequences for his corporate employer. NOTES 1 31 U.S.C. 3733(a). 2 P.L. No

9 Testify First, Know Why Later 3 See Press Release, Office of Pub. Affairs, U.S. Dep t of Justice, Acting Assistant Attorney General Stuart F. Delery Speaks at the American Bar Association s Ninth National Institute on the Civil False Claims Act and Qui Tam Enforcement (Jun. 7, 2012), available at U.S.C. 3733(a)(1). 5 Id.; see also 31 U.S.C. 3733(k)(4) U.S.C. 3733(a)(1)(A) (C) U.S.C. 3733(a)(2)(G) U.S.C. 3733(d) U.S.C. 3733(h)(2) U.S.C. 3733(a)(2)(A) U.S.C. 3733(a)(2)(D)(ii) U.S.C. 3733(h)(7)(A). 13 The FCA provides that if a witness refuses to answer a question during a CID examination, the United States may move for an order compelling the witness to answer the question. 31 U.S.C. 3733(h)(7). 14 Baxter v. Palmigiano, 425 U.S. 308, 318 (1976). 15 Libutti v. United States, 178 F.3d 114, 120 (2nd Cir. 1999); see also SEC v. Benson, 657 F.Supp. 1122, 1129 (S.D.N.Y. 1987) ( By hiding behind the protection of the Fifth Amendment as to his contentions, [a defendant] gives up the right to prove them. ). 16 See, e.g., RAD Services, Inc. v. Aetna Casualty and Surety Co., 808 F.2d 271, 275 (3rd Cir. 1986). 17 Libutti v. United States, 107 F.3d 110, (2nd Cir. 1997). 18 SEC v. Greystone Nash, Inc., 25 F.3d 187, 191 (3rd Cir. 1994); see also Gutierrez- Rodriquez v. Cartagena, 882 F.2d 553, 577 (1st Cir. 1989) ( A defendant may not use the fifth amendment to shield herself from the opposition s inquiries during discovery only to impale her accusers with surprise testimony at trial. ); Nationwide Life Ins. Co. v. Richards, 541 F.3d 903, 910 (9th Cir. 2008) ( Trial courts generally will not permit a party to invoke the privilege against selfincrimination with respect to deposition questions and then later testify about the same subject matter at trial. ) WL (S.D.N.Y. Oct. 11, 2000). 20 Id., at * 2 n Id WL (S.D.N.Y. May 5, 2004). 307

10 Financial Fraud Law Report 23 Id., at * WL (D. Conn. May 8, 2007). 25 Id., at * Id., at * WL (D. Utah. Sept. 12, 2007). 28 Id., at * Id. 30 Fed. R. Evid. 801(d)(2). 31 Federal Rule of Civil Procedure 32 addresses the use of deposition testimony at trial. Among other things, Rule 32 provides that deposition testimony may be used against a party at trial if: a) the party was present or represented at the deposition or had reasonable notice of it; b) the testimony is used to the extent it would be admissible under the Federal Rules of Evidence if the witness were present and testifying; and c) the use is allowed by Rule 32(a)(2) through (8). Fed. R. Civ. P. 32. Rule 32(a)(3) permits parties to use the deposition testimony of a party or its officer, director, managing agent, or designee for any purpose. Fed. R. Civ. P. 32(a)(3). To the extent the government argues that the CID testimony of a defendant s employee is similarly admissible against the defendant, defense counsel may respond that Rule 32 should not apply to CID testimony because, unlike at a deposition, the defendant was neither present nor represented at the examination and had not opportunity to cross-examine the witness. 32 See 31 U.S.C. 3733(a)(1). 308