The rules of engagement are changing for senior executives and other employees of corporations subject to government investigation. The pending American International Group (AIG) investigation and two recent cases in New York illustrate how DOJ's new strategy forces companies to "turn in" even the highest level executives and waive any confidentiality of its internal investigations in exchange for avoiding prosecution. The most recent amendments to the Corporate Sentencing Guidelines incorporate this new DOJ approach.
Before The Scandals
Before the Enron scandal, the approach taken by most corporations facing a federal investigation took the form of
- defending the good intentions of the employees, if not the conduct itself;
- correcting but not disclosing to the government the internal problems unless there was a legal requirement to do so (and there are actually very few); and
- if the government sought to interview employees it suspected of wrongdoing, advancing fees for the employees' own lawyers.
Most thought that a good defense for the employees was the only defense for the company since it was the employees' conduct that defines the corporation's liability. Company attorneys routinely elected to enter into joint defense agreements with counsel for the employees they often had a role in selecting, who then were able either to slow down an investigation reluctant to offer immunity or, even better for the executive, negotiate immunity from prosecution for the employee.
For years, the government did not understand joint defense agreements because few were in writing and their operations were not a subject of frequent discussion between defense counsel and prosecutors. When the government eventually realized how they worked, it did not like it. But, attacks on the joint defense agreements through motions to disqualify counsel were rejected by the courts.
The rare exception to this "circle the wagons" approach employed by corporations and their lawyers was investigations that arose in midst of an acquisition or a bankruptcy where the acquiring company had no loyalty to the employees of the old company and had not as much to lose from a criminal investigation. More often than not, it was in the acquiror's financial interest to blame the acquired company - in some cases all the costs were borne by the old company anyway, and it was much better to get the cloud lifted than risk tainting the new company and its management.
A Change In DOJ Approach
The DOJ's new strategy has been pretty clear for some time. It is just the consequence to executives that is starting to sink in: If a company wants to avoid prosecution, it must be willing to open its internal investigation files even if that means essentially turning on its own people. This DOJ tactic initially became manifest in January 2003 when then Deputy Attorney General Thompson revised the Department's Memorandum on Principles of Federal Prosecution of Business Organizations. Thompson explained that one of his purposes was to redefine "cooperation" by a corporation: [I]f a corporation wants to get the benefit of cooperation and "maybe" escape prosecution altogether, it must be willing to:
- "identify the culprits,"
- conduct its own internal investigation and make complete disclosure, and
- "if necessary," waive its "attorney-client and work product protections" that otherwise would protect statements by employees during an internal investigation.
No longer are corporations allowed to cooperate and continue to "stand on their rights" or for that matter give any weight to the welfare of its employees. Now the government considers a new factor in weighing the company's cooperation: whether the company supports culpable employees "through the (1) advancement of legal fees, (2) retaining employees without sanction for their misconduct, or (3) providing information to the employees about the Government's investigation pursuant to a joint defense agreement." On May 13, 2004, the current Deputy Attorney General, James Comey, said: "It's hard for me to understand why a corporation would ever enter into a joint defense agreement."
Following on that same theme, the amended Guidelines for Organizational Defendants, which went into effect on November 1, 2004, tells convicted corporations they will not get sentencing credit for their otherwise qualified compliance programs if they "delayed reporting the offense to appropriate governmental authorities," and that companies will be expected to waive the attorney-client privilege and work product protections if "such waiver is necessary to provide timely and thorough disclosure of all pertinent information known to the corporation."
How The DOJ Strategy Changes Corporate Internal Investigations
Counsel for corporations and their executives still must begin every representation as if the company has a defense and its executives deserve a defense. But, counsel must anticipate that just like any other target or subject of an investigation, the government may make someone, here the corporation, an offer it cannot refuse - immunity in exchange for turning on its executives. Recognizing corporate counsel's ethical obligations, an offer of non-prosecution or even the possibility that the company can avoid prosecution requires that even inside counsel consider first the interests of the institutional client.
That life is on the record in corporate internal investigations is really not that new and should not be a hard principle for counsel to live with, but how counsel deals with corporate executives caught up in the process may need to change. Long ago, company counsel learned how to tell corporate employees that they only represent the corporation and that the attorney-client privilege belongs to the corporation - and not the employee - without saying it in a way that made the employee run out of the room. The reality in most companies is even after this Miranda-type advice, most executives mistakenly continue to view the company counsel as their own lawyer and loyal to them.
With an offer of possible immunity from prosecution, a company now will have at least in the short term a greater commonality of interest with the prosecutors making the offer than with its own employees. Until now, companies never even thought about warning employees that they may be subject to criminal prosecution for lying during an internal interview, as occurred in the Computer Associates case described below. Often they were told the company would treat the interviews confidentially under the company's attorney-client privilege, and any decision on disclosure would be made much later by the corporation.
The ABA Model Rules of Professional Conduct, Rule 4.1, Truthfulness in Statements to Others, and Rule 4.3, Dealing with Unrepresented Persons, require that an attorney be fair and candid with corporate employees. But can a corporation's lawyers be truly candid and reasonably expect anyone will talk to them without his or her own counsel being present? While corporate counsel can boldly refer to "talk or walk" policies, how many companies will be comfortable with that approach, and how long will it work before the fabric of corporate culture, the so-called "family," unravels?
That, of course, appears to be just what the government is seeking in any investigation.
Some Examples Of The Approach
In two well-publicized cases in New York, the government built cases against company executives by using the company's internal investigation to exploit a common interest in rooting out fraud - and in blaming the now-former executives.
Both Computer Associates ("CA"), a software company in New York, and Symbol Technologies stood accused of manipulating their revenues to meet Wall Street quarterly earning estimates. CA's former CEO has been indicted under the Sarbanes-Oxley obstruction of justice provision, essentially for not being truthful in the course of the company's internal investigation. Other executives have pleaded guilty, including the former CFO, General Counsel, and Chief of Sales. The employees were not charged with lying directly to the government. Instead, the government bootstrapped their false statements to the company into a federal felony by alleging that they "well knew and believed that [their] false statements would be conveyed to the government."
Predictably, the Department of Justice announced CA had "accepted responsibility" and would not be prosecuted as part of a deferred prosecution, an SEC settlement, a payment of $225 million, and 18 months' probation with an independent monitor.
In June 2004, the same U.S. Attorney's Office (Eastern District of New York) indicted the former CEO and six other executives of Symbol Technologies, an early manufacturer of wireless and mobile computing, and agreed to not prosecute the company, which "accepted responsibility" by cooperating. Symbol agreed to an independent monitor, a permanent injunction, and a $139 million payment to the SEC and stockholders. As part of "accepting responsibility," the U.S. Attorney said: "Symbol has shared the substance of hundreds of interviews conducted with current and former Symbol employees . . . and also waived privilege to assist the investigation . . . ."
More recently, last month insurance giant AIG had to decide whether it was going to defend the conduct of its founder or join the government investigating his conduct in hope of benefiting the stockholders. It is clear they thought they had no choice.
What Should Corporations Do Differently?
For corporate counsel:
- at the start of the investigation what cooperation is likely to mean for your client. Any interview memoranda need to be prepared expecting disclosure to DOJ. At a minimum, this means eliminating lawyer opinion, conjecture, and suspicions and fully recounting the employee's inculpatory and exculpatory statements.
- Find a way to fully and fairly advise employees of the consequences of non-truthful responses to the company's questions. This means telling them whether the company plans to cooperate with the government by disclosing its investigation results, and also warning them that inaccurate information provided to the company may further damage the employee's position in the eyes of the government.
- When the company decides to advance fees for individual counsel consistent with state law and company bylaws, a key factor is an evaluation of the likelihood at the end of the investigation that the evidence will show that the employee was acting in the interest of the company during the disputed events.
For corporate employees:
- Listen carefully to the advice of corporate counsel and negotiate the commitment to indemnify and advance fees consistent with state law before submitting to an interview. Request copies of any interview memoranda.
- Before trouble arises, review your employment contract and consider requesting contractual indemnification in addition to any obligation of the company under state law or corporate bylaws.
- Treat company interviews with the same seriousness as FBI interviews or grand jury appearances with regard to truthfulness, accuracy, and completeness of your responses.
Conclusion
Corporate criminal investigations are but one of many areas where the expectations regarding loyalty between corporations and their employees is changing.
Published June 1, 2005.
