INTERNAL INVESTIGATIONS: AVOIDING PITFALLS Sherilyn Pastor, McCarter & English, LLP (and) Rosemary Stewart, Hollingsworth LLP
I. The use of internal investigations has increased significantly. Based on expanded criminal prosecutions of corporations Sarbanes-Oxley Act of 2002, Dodd-Frank Act (2010), and other get tough legislation U.S. Sentencing Commission Guidelines Making a company s involvement in or tolerance of criminal activity a factor in sentencing Decreasing penalties if there is an effective program to prevent and detect violations of law Expanded use of other government penalties vs. corporations (debarments, suspensions, civil money penalties, fines) Increased civil litigation and judgments vs. corporations for liability to private plaintiffs Whistle-blower encouragement, protections and payoff s
II. Wide variety of reasons for internal investigations, e.g. : To determine if alleged misconduct actually occurred What happened? Who was involved, directly and/or indirectly? Was money paid/received? Were other benefits given/received? Were corporate interests compromised? Can the matter be resolved prior to (or in lieu of) an indictment or other government action? To determine if the alleged pollution or contamination actually occurred What happened? Who was responsible? Can it be fixed? How best to fix it? Can the matter be resolved prior to costly government investigation or litigation? To investigate an employee s claim of harassment or discrimination What happened? Who was involved? Who said what to whom? Can the claim be addressed and resolved prior to costly litigation?
III. Despite the subject matter, the first goal is always to find out what actually happened. By preserving, collecting, and reviewing relevant corporate records (including director, officer and employee files, documents, emails, etc.) By interviewing the appropriate employees and managers By discreet inquiries to third parties (corporate counsel, accountants, tax preparers) And document all of the above IV. Questions about whether or how the issue should be resolved necessarily come later. The fact-finding and the consideration of possible resolutions are very separate steps. Fact-finding usually done by independent counsel (with or without other investigative help). Managers or policy makers must then decide upon resolutions (i.e., individual punishment for wrongdoing; new compliance programs; voluntary clean-up s), future risk reduction, and disclosures
V. In-house counsel often responsible for important decisions or recommendations to management about the internal investigation: Who should conduct the investigation? What instructions to issue to the investigators? What internal document preservation instructions? (Internal investigations may fall outside normal document preservation policies/practices.) Who within the company should be told about the internal investigation? Is public disclosure required under securities laws or regulations? Is disclosure to other government regulators required or recommended for reasons of compliance/cooperation?
VI. Considerations re who should conduct the internal investigation: Is the matter so serious that it could destroy the company and leave directors and/or officers facing criminal prosecution? And civil liability as well? Is it a discreet matter involving only lower-level employees? Are the protections of the attorney-client privilege likely to be important to the company? In-house counsel and/or regulatory counsel may not be able to preserve the A-C privilege AND may have conflict of interest if senior level managers are or may be involved in the alleged wrongdoing. Use of independent counsel more likely to preserve the A-C privilege. BUT the company must often consider whether to waive the A-C privilege in any event (more on this later).
VI. Considerations re who should conduct the internal investigation (cont d): Does counsel need the assistance of specialists? (i.e., for complicated accounting issues? For complicated or hidden transactions in foreign countries?) Discrimination or harassment allegations may require that the right questions be asked during an investigation.
VII. Potential Pitfalls in terms of ethical issues to be addressed Ethical issues may arise in several contexts: Employees may believe that the interviewing attorney is representing them as well as the company. Employees may not realize that what they say to an internal investigator could lead to discipline, dismissal or even criminal proceedings against themselves or others or the company itself. Participants in the investigation may not realize that what they say may be turned over to government regulators or criminal prosecutors (even if an attorney is asking the questions). Do counsel handling or supervising an internal investigation owe their loyalty only to the company? Or should they also be fair and deferential to the company s employees? (Often not easy to do both.) State Ethics Rules vary
Be Mindful of Your Client Model RPC 1.13: A lawyer employed or retained by an organization represents the organization... Be aware always of the distinction between the organization and the members through which it acts A lawyer employed or retained to represent an organization represents the organization as distinct from its directors, officers, employees, members, shareholders or other constituents... (E.g., NJ RPC 1.13)
Correct Misunderstandings RPC 1.13(f) - In dealing with an organization's directors, officers, employees, members, shareholders or other constituents, a lawyer shall explain the identity of the client when the lawyer knows or reasonably should know that the organization's interests are adverse to those of the constituents with whom the lawyer is dealing.
Correct Misunderstandings RPC 4.3 - In dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer s role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding....
Dual Representation RPC 1.13 In addition to the corporation, the lawyer may also represent the corporation s constituents Dual representation requires consent by appropriate corporate official Consent cannot be given by the same official the lawyer represents individually Dual representation is subject to conflict of interest rules (RPC 1.7)
Conflicts of Interest Rule 1.7(a) - Except as provided in paragraph (b) [the waiver rules], a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if: The representation of one client will be directly adverse to another client; or There is a significant risk that the representation of one or more clients will be materially limited by the lawyer s responsibilities to another client, a former client, or a third person or by a personal interest of the lawyer.
Corporate Miranda Warnings Where there is a duty to clarify or warn because of an actual or potential conflict, the lawyer should advise the constituent: A conflict of interest may exist, The lawyer is not the constituent s personal lawyer and cannot represent the constituent, and The employee should consider retaining independent counsel
Sample Miranda Warning As I am sure you know, I and the other members of this office/firm represent the corporation. We don't represent you personally. Based on what you have said, your personal interest may be in conflict with that of the corporation, and we cannot represent you. In addition, I have an obligation to pass on to the corporation everything you have told me and will tell me. The corporation may then choose to disclose it or use it adverse to your interests. I recommend that you seriously consider retaining a lawyer. Only your own personal lawyer can promise you that your discussions with him or her will remain strictly confidential. Because of my position as a lawyer for the corporation, I am not your lawyer and cannot give you that assurance.
Upjohn v. U.S., 449 U.S. 383 (1981) Established framework for identifying when communications with employee are protected by attorney-client privilege Privilege applies when the communication is within the scope of employee s duties and the employee is aware he/she is being questioned so the corporation can obtain legal advice Only the company, not the employee, can waive the privilege
Privilege Issues & Disclosures Commentary to Model Rule 1.13 provides that the corporation s lawyer should assure a constituent understands the privilege limitations The lawyer/constituent discussions may be revealed to the corporation The corporation holds the privilege and may waive it and disclose the lawyer/constituent discussions to others
Sample UpJohn Warning I represent Corporation A, and I represent only it. I do not represent you. I am conducting this interview to gather facts to provide legal advice for Corporation A. Your communications with me may be protected by the attorneyclient privilege. But the attorney-client privilege belongs solely to Corporation A, not you. That means Corporation A may elect to waive the privilege and reveal our discussion to third parties, such as federal or state agencies, without notifying you. For this discussion to be subject to the privilege, it must be kept in confidence. In other words, with the exception of your own attorney, you may not disclose the substance of this interview to anyone, including other employees or anyone outside of the company. You may discuss the facts of what happened but you may not discuss this interview. Do you have any questions? Are you willing to proceed?
Gray Areas In most situations, if you have to seriously consider whether to give a warning, you should give it for ethical and practical reasons Addressing allegations that the corporation s lawyers wrongfully extracted information, can be costly, an unnecessary distraction, and result in sanctions Employees who are unprepared and under pressure may offer false exculpatory statements that ultimately hinder fact finding and then make them poor witnesses when defending alleged misconduct
U.S. v. Ruehle, 583 F.3d 600 (9th Cir. 2009) Counsel interviewed CFO, and company later turned over the interview to the US Attorney Dispute over warnings and dual representation CFO moved to suppress statement In absence of documents memorializing warning, the court referred counsel to disciplinary authorities for failing to obtain a written waiver of the conflict and failing to advice the CFO to get separate counsel
Document Warnings Prepare a written outline of the Miranda clarification/warning Keep it handy for unexpected situations When given, take it out and review it with the employee Initial and date the document Give the warning in the presence of a witness, and have them initial and date it
Beware Former Clients Attorneys should consider whether they previously represented an officer, director, or employee individually and have a conflict RPC 1.9 relates to duties to former clients, if the prior matter is "substantially related" to the dispute which has arisen between the individual and the corporate entity The conflict may be waived after informed consent (the waiver must be confirmed in writing)
Unrepresented Persons RPC 4.3 In addition to explaining your role, [a] lawyer shall not give legal 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.
Unrepresented Persons Tougher standards exist Some jurisdictions require: Disclose representative capacity State reason for interview State right to counsel State right to refuse interview
No Contact Rule RPC 4.2 - In representing a client, a lawyer shall not communicate about the subject of the representation with a person the lawyer knows, or by the exercise of reasonable diligence should know, to be represented by another lawyer in the matter
No Contact Rule Applies to all represented persons, not just parties Counsel cannot communicate even if represented person initiates Contact requires consent of the person s counsel, not the person Counsel may not contact a represented party through another
Complications - Whistleblowers Retaliation vs. legitimate performance issues Confidentiality concerns Good recordkeeping
Potential Consequences Unintended attorney-client relationships Disqualification Discovery sanctions Ethical grievances Civil claims, including those for malpractice
IX. Who pays for counsel to company employees? State law or the corporation s charter or bylaws may mandate indemnification for legal fees (other state laws say companies may indemnify). Senior officers or employees may have a contractual right to indemnification. Insurance policies may cover attorneys fees for investigations. Or, is indemnification part of the company s corporate culture? In the best interests of company morale? Agreements to indemnify may be conditioned on lack of culpability of the employee, with an agreement to reimburse in the event the employee turns out not to be eligible.
IX. Who pays for counsel to company employees? (cont d) Whistle-blowers hire counsel much more often in today s world. Interviewer should not offer legal advice to employees about the likelihood of their legal fees being paid unless this has already been decided. Company may consider retaining counsel to advise employees about retaining their own counsel and whether/how such counsel should be paid.
X. Disclosures about the internal investigation and/or its findings Public disclosure may be required by securities laws or SEC rules. Disclosure to regulatory agencies may be expected or required. Disclosure to criminal prosecutors may be the necessary exchange for a conclusion that the company is cooperating with law enforcement. 90+% of all corporate criminal defendants plead guilty. Corporate compliance programs are now the norm and often result in sentencing credits. However, current DOJ policy does not state that waiver of privileges is an absolute requirement.
X. Disclosures about the internal investigation and/or its findings (cont d) Disclosures within the company To whom? When? Board of directors? Senior managers? H.R. Professionals? Supervisors of the suspect? Nosey managers?
XI. Privileged vs. non-privileged investigations Not a question to be answered up-front The privileged relationship itself must first be understood through a review of all privileged communications Many of the communications will not be privileged. Communications may reveal serious problems or situations other than those being investigated. The old self-analysis privilege is dead or extremely limited.
XI. Privileged vs. non-privileged investigations (cont d) What are the risks of other litigation after the government s investigation or review is concluded? Can the timing or the breadth of an A-C waiver be negotiated with the government? Proffer key information without a full document production? Current DOJ policy is to obtain all relevant information, not necessarily to obtain all privileged materials Company s board of directors may be required to make waiver decisions. Document preservation decisions are not determined by whether the internal investigation is privileged or not privileged.
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