Conducting Effective Internal Investigations:

Practice Pointers and Privilege Considerations

Internal Investigations 2015 Practising Law Institute

Chicago, IL

June 9, 2015

Mark Pollack Paul Hastings LLP 191 N. Wacker Drive Chicago, IL 60606 (312) 499-6050 markpollack@paulhastings.com

Emily Seymore Paul Hastings LLP 191 N. Wacker Drive Chicago, IL 60606 (312) 499-6088 emilyseymore@paulhastings.com

TABLE OF CONTENTS

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A. ESSENTIAL STRATEGIC CONSIDERATIONS ......... 1

1. General Overview ...................................................... 1

2. When to Conduct an Investigation ............................. 4

3. “Cooperation” Considerations When Dealing With a Government Agency ...................................... 6

B. SETTING GUIDELINES FOR INTERNAL INVESTIGATIONS ........................................................ 9

1. Planning an Investigation ......................................... 10

2. Practical Steps in an Investigation ........................... 10

C. SELECTION OF THE INVESTIGATORS BY THE SPECIAL COMMITTEE ..................................... 12

1. Considerations When Selecting Counsel ................. 12

2. Considerations After Decision Is Made to Utilize Outside Counsel (Regular Or Specially Retained) .................................................................. 14

D. DOCUMENT PRESERVATION & REVIEW ............. 14

1. Timing & Structure of the Review .......................... 14

2. The Litigation Hold ................................................. 15

3. Data Collection & Review ....................................... 19

E. WITNESS INTERVIEWS ............................................ 21

1. Order of Witness Interviews .................................... 21

2. Timing & Preparation .............................................. 21

3. Notifying Employee Witnesses & Giving Appropriate Warnings .............................................. 22

a. Upjohn Warning ............................................... 23

b. Zar Warning ..................................................... 23

4. Practical Steps When Conducting Interviews .......... 24

TABLE OF CONTENTS

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5. Individual Cooperation Incentives ........................... 26

6. Interviewing Former Employees ............................. 27

F. POST-INVESTIGATION FOLLOW-UP ..................... 28

1. Whether to Create or Disclose a Final Investigation Report ................................................. 28

2. Implementing Remedial Measures .......................... 29

G. SPECIAL PRIVILEGE CONSIDERATIONS ............. 31

1. Applicable Privileges, Waiver, & Special Considerations for Corporations .............................. 32

2. Waivers of Privilege & Cooperation Credit ............ 35

3. Use of Non-Legal Personnel During the Investigation ............................................................. 38

H. POST-INVESTIGATION RELATIONS WITH THE GOVERNMENT .................................................. 39

1. Disclosure of Investigation Findings ....................... 40

2. Responding to a Government Investigation ............. 41

Conducting Effective Internal Investigations:

Practice Pointers and Privilege Considerations1

A. ESSENTIAL STRATEGIC CONSIDERATIONS

1. General Overview

The need for internal investigations continues to evolve significantly in light of heightened post-financial-crisis scrutiny into improper corporate practices by the Securities and Exchange Commission, the Department of Justice, and other regulatory bodies. Under the Sarbanes-Oxley Act (“SOX”), 15 U.S.C. § 78 et. seq. (2012), executives have an obligation to ensure that effective mechanisms are in place to monitor and respond to instances of corporate misconduct as they arise. That obligation requires those executives to regularly review and refine internal corporate compliance practices. Moreover, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), 15 U.S.C. § 78u-6 (2012), created significant incentives for employees to circumvent internal reporting channels and instead report potential misconduct directly to the government. These incentives include a possible collection of between 10-30% of total monetary sanctions imposed on violators. Indeed, the SEC recently authorized its largest award ever to a whistleblower totaling more than $30 million—more than double the amount of the previous highest award. See Press Release, Securities and Exchange Commission, SEC Announces Largest-Ever Whistleblower Award (Sept. 22, 2014); SEC & EXCHANGE COMM’N, 2014 ANNUAL REPORT TO CONGRESS ON THE DODD- 1 This article was prepared by Mark D. Pollack, litigation partner in Paul Hastings’ Chicago Office, and Emily L. Seymore, litigation associate in Paul Hastings’ Chicago Office, for use in connection with the PLI Program on “Internal Investigations 2015” to be held in Chicago, IL on June 9, 2015, and updates prior surveys of the subject prepared by the authors in connection with earlier PLI programs.

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FRANK WHISTLEBLOWER PROGRAM, 10 (2014) (“SEC Dodd-Frank Annual Report 2014”). The Supreme Court of the United States has also interpreted SOX whistleblower provisions quite broadly, extending them to cover employees of a public company’s private contractors, in addition to a company’s direct employees. Lawson v. FMR LLC, 188 L. Ed. 2d 158, No.12-3,2014 U.S. LEXIS 1783, at *36 (Mar. 4, 2014). The combination of aggressive agency action, heightened corporate executive obligations, enhanced whistleblower incentives, and the ever-present fear of private civil lawsuits, dictates that corporations must be poised to respond quickly and ably to allegations of misconduct by conducting effective internal investigations.

Companies gain a head start by anticipating the various types of internal misconduct they are most likely to encounter (e.g., insider trading, inaccurate or misleading public disclosures, or executive misconduct). This information can then be used in designing an internal compliance system that will address troublesome risk areas, target employees most likely to have key information, and account for potential pitfalls in reporting structures that may create conflicts of interest. Internal compliance systems should allow companies to capture and review alleged or actual misconduct. They further increase the odds of detecting potentially damaging information early, which can maximize available lead time to remedy potential misconduct. By contrast, when notice of misconduct first comes from an investigating governmental agency, a whistleblower report, an audit, or a private lawsuit, a company is appreciably disadvantaged, as it is forced to play catchup, has lost the ability to address and resolve the problem internally, and will have a much more difficult argument that it should receive credit for self-reporting or being proactive.

Internal investigations are a necessary counterpart to internal compliance systems. They reduce potential liability and protect individuals found to be uninvolved with actual misconduct. Investigations may also identify gaps in internal compliance systems (i.e., what could be done differently to prevent misconduct in the future), as well as assist in promptly identifying those individuals responsible for the misconduct. Investigations best prepare a company to respond proactively and strategically to agency or law enforcement inquiries, analyze the truth of the

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allegations, implement remedial steps, engage in decision-making about whether to disclose the investigation or its findings, and, ultimately, respond if government action commences.

For example, a company’s initiation of an internal investigation may result in the discovery of facts sufficient to refute allegations of criminal activity and curtail a DOJ action or negotiate a settlement to avoid formal charges. In determining whether to bring charges, the DOJ typically considers the nature and extent of a company’s internal investigation, which could heavily influence the ultimate charging decision. In its review, the DOJ places significant emphasis on whether the company understands the seriousness and pervasiveness of the alleged misconduct, along with the extent the company cooperates with and discloses information to the DOJ’s agents. DEP’T OF JUSTICE, U.S. ATTORNEYS’ MANUAL, tit. 9, ch. 9-28.300, 9-28.700, 9-28.800 (2008) (listing factors prosecutors should consider when “conducting an investigation, determining whether to bring charges, and negotiating plea or other agreements” and establishing unique guidelines to address “The Value of Cooperation” and “Corporate Compliance Programs”). Information gathered during an investigation may assist the company in settlement discussions with other agencies as well. SEC. & EXCHANGE COMM’N & DEP’T OF JUSTICE, A RESOURCE GUIDE TO THE U.S. FOREIGN CORRUPT PRACTICES ACT, 61 (Nov. 14, 2012) (including internal investigations within its list of the “Hallmarks of Effective Compliance Programs”), available at http://www.sec.gov/spotlight/fcpa/fcpa-resource-guide.pdf.

In sum, while the strategic considerations discussed below must be taken into account when determining the appropriate level of cooperation, it is vital that companies are able to credibly establish that they routinely monitor and effectively address allegations of potential misconduct. The prompt initiation of an internal investigation, which also helps to protect a company’s confidentiality and legal privileges, is a critical first step. Id. at 77-78, n. 307, 383 (describing several instances where the SEC declined to take action against companies that “fully cooperated [and] identified and remediated the misconduct quickly,” including Morgan Stanley, which was “not charged” because the company “cooperated with the SEC’s inquiry and conducted a thorough

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internal investigation to determine the scope of the improper payments and other misconduct involved”); see also Press Release, Securities and Exchange Commission, SEC Announces Non-Prosecution Agreement with Ralph Lauren Corporation Involving FCPA Misconduct (Apr. 22, 2013) (crediting Ralph Lauren’s own internal review as having “uncovered” illegal bribery misconduct prohibited by the Foreign Corrupt Practices Act: “This NPA shows the benefit of implementing an effective compliance program. Ralph Lauren Corporation discovered this problem after it put in place an enhanced compliance program and began training its employees. That level of self-policing along with its self-reporting and cooperation led to this resolution.”); Press Release, Securities and Exchange Commission, SEC Charges Animal Feed Company and Top Executives in China and U.S. with Accounting Fraud (Mar. 11, 2014) (publicizing that settlement reached with company’s former CFO reflected his assistance in the SEC’s investigation) available at http://www.sec.gov/News/PressRelease/ Detail/PressRelease/ 13705 41102314. The DOJ also continues to affirm that cooperation stemming from private internal investigations are one of the many tools they use to prosecute their cases. Dep’t of Justice, “Remarks by Principal Deputy Assistant Attorney General for the Criminal Division Marshall L. Miller at the Global Investigation Review Program” (“Miller DOJ Remarks”) (Sept. 17, 2014), available at http://www.justice.gov/ criminal/pr/speeches/2014/crm-speech-1409171.html (noting that a company’s cooperation is “not an insignificant tool, [and] can expedite the department’s ability to act”).

2. When to Conduct an Investigation

Perhaps surprisingly, there are relatively few statutes or regulations establishing instances in which internal investigations and reporting of misconduct are mandatory. Increased reporting and investigating obligations were placed upon auditors and attorneys under SOX. 15 U.S.C. § 78 et. seq. (2012). SOX amended section 10A of the Securities Exchange Act of 1934 to place additional reporting and investigation requirements on auditors, including that an audit committee establish internal reporting mechanisms and, if necessary, exercise its authority to retain counsel to fulfill its auditing role. 15 U.S.C. § 78(m) (2012). An investigation thus should be conducted where it is necessary to

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adhere to this SOX directive, as it may also help protect against allegations that audit committee members did not comply with their obligations. Attorneys are also now required to report evidence of material violations of securities law or breaches of fiduciary duty, etc. to the chief legal counsel of the company, and to the audit committee or board of directors if the chief legal counsel fails to respond adequately. See id. at § 7245. See also Lawson 188 L. Ed. 2d 158, 2014 U.S. LEXIS 1783, at *36 (noting that “lawyers and accountants are subject to extensive regulations and sanctions throughout [SOX]).”

In certain instances, director and officer duties include appropriately responding to suspected misconduct, which, in turn, could require an internal investigation to avoid or minimize their degree of personal liability. The “oversight duty,” as it is often called, refers to whether directors breach a fiduciary duty when they fail to act in good faith to prevent or remedy a violation they knew or should have known existed. In re Abbott Depakote S'holder Derivative Litig., 909 F. Supp. 2d 984, 993-94 (N.D. Ill. 2012) (dismissing claim against company but giving plaintiff leave to amend and correct deficiencies so as to “sufficiently allege demand futility if they allege inactivity coupled with specific ‘red flags’ suggesting that the company’s internal controls are inadequate and that these inadequacies give rise to substantial risk of illegal activity occurring”); In re Discover Fin. Servs. Derivative Litig., 2015 U.S. Dist. LEXIS 35423, *40 (N.D. Ill. Mar. 23, 2015) (similarly dismissing second–amended complaint but allowing plaintiff leave to file memorandum of law in support of request for leave to amend a third time); Westmoreland County Emple. Ret. Sys. v. Parkinson, 727 F.3d 719, 726-27 (7th Cir. 2013) (excusing need for demand on board of directors to remedy ongoing FDA violations where “directors knew of the violations of law, took no steps in an effort to prevent or remedy the situation, and that failure to take any action for such an inordinate amount of time resulted in substantial corporate losses” (internal citations omitted); Rosenbloom v. Pyott, 765 F.3d 1137, 1159 (9th Cir. Cal. 2014) (reversing dismissal where lower court failed to draw inferences in favor of plaintiffs that demand was excused in light of, inter alia, board having “heard from at least one employee whistleblower about unethical off-label marketing”); Gulbrandsen v. Stumpf, No. 12-5968, 2013 U.S. Dist. LEXIS 172471, at *20-21

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(N.D. Cal. Dec. 6, 2013) (also dismissing claims against individual executives of financial institution where plaintiff failed to allege more than the existence of a compliance mechanism that was overseen by the institution’s governing Board).

Companies should also conduct an internal investigation where there is concern about the ability of officers or directors to comply with their SOX duties to certify the accuracy and fairness of financial reports. 15 U.S.C. § 7241(a) (2012) (principal executive and financial officers must certify compliance with list of affirmative actions). Officers and directors can face substantial financial consequences for failure to meet SOX obligations. See id. at § 7243 (personal reimbursement to company of bonuses and profits from securities sales). See also SEC v. Jasper, 678 F.3d 1116 (9th Cir. 2012) (affirming order, pursuant to 15 U.S.C. § 7243, that former CFO of publicly traded Silicon Valley company reimburse company almost $1.8 million in bonuses and profits from the sale of stock during the period when he certified company’s false financial statements), cert denied, 133 S. Ct. 1492 (2013).

Beyond these statutory and fiduciary obligations, investigations should be conducted to proactively assess conduct within the company that may subject it to criminal, civil, or regulatory liability. Just as importantly, a company should investigate and gain awareness of conduct that could damage its financial condition, contradict its public disclosures, or negatively affect its operations, management, and overall public image. As a general rule, early investigations not only will prove more beneficial, but also can limit liability downstream by catching problems before they escalate and establishing a corporate culture of integrity and responsiveness.

3. “Cooperation” Considerations When Dealing With a Government Agency

Another key reason that companies initiate their own investigation is that such action is often “credited” when a regulatory agency makes its charging or sanctions decisions. “Cooperation” with governmental agencies, as it is artfully termed, is of growing importance. Cooperation in this context refers to

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proactive self-regulation by companies and increased transparency regarding their investigations. Press Release, Securities and Exchange Commission, SEC Announces Initiative to Encourage Individuals and Companies to Cooperate and Assist in Investigations (Jan. 13, 2010), available at www.sec.gov/news/ press/2010/2010-6.htm.

Government agencies increasingly weigh cooperation as a factor when determining whether to take action against a company (i.e., issuing formal charges), and when calculating penalties and sanctions. Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and SEC Statement on the Relationship of Cooperation to Agency Enforcement Decisions (the “Seaboard Report”), Exchange Act Release No. 44,969, 76 SEC Docket 220 (Oct. 23, 2001), available at www.sec.gov/litigation/investreport/34-44969.htm. The SEC, for example, explains that self-reporting of improper conduct is a factor to be considered when assessing a penalty, and has extended this consideration in certain instances to cooperation by individuals. Press Release, Securities and Exchange Commission, Statement of the SEC Concerning Financial Penalties 2006-4 (Jan. 4, 2006), available at www.sec.gov/news/press/2006-4.htm; Policy Statement Concerning Cooperation By Individuals in Its Investigations and Related Enforcement Actions, Exchange Act Release No. 61340, 97 SEC Docket 2077 (Jan. 13, 2010). The SEC occasionally considers a company’s cooperation even where there is ample evidence of improper conduct. S.E.C. v. Pfizer, Inc., Wyeth LLC, Exchange Act Release No. 3399, 2012 WL 3201839 (Aug. 8, 2012) (consideration given in context of conduct dating back more than 10 years and across eight countries to fact that Pfizer “fully cooperated” and “took such extensive remedial actions as undertaking a comprehensive worldwide review of its compliance programs”). In addition to self-reporting, the agency also considers proactive compliance measures and remediation efforts. S.E.C. v. Oracle Corp., Exchange Act Release No. 22450, 2012 WL 3548182 (Aug. 16, 2012) (noting “settlement takes into account Oracle’s voluntary disclosure of the conduct [at-issue] and its cooperation with the SEC’s investigation, as well as remedial measures taken by the company, including firing the employees involved in the misconduct and making significant enhancements to its [Federal Corrupt Practices Act] compliance program”);

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S.E.C. v. Volt Informational Sci. Inc., Exchange Act Release No. 22589, 2013 WL 139425 (Jan. 11, 2013) (acknowledging Company’s cooperation during SEC’s investigation and undertaking of “significant remedial efforts”).

The DOJ has issued similar guidelines and, in fact, expects cooperative companies to fully disclose all relevant facts discovered during an investigation. DEP’T OF JUSTICE, U.S. ATTORNEYS’ MANUAL, tit. 9, ch. 9-28.720 (“the government’s key measure of cooperation must remain . . . has the party timely disclosed the relevant facts about the putative conduct?”). Conservatively interpreted, this requirement pushes the boundaries surrounding disclosure of potentially privileged materials, despite parallel guidance that companies “should receive the same credit for disclosing facts contained in materials not protected by the attorney-client privilege or work-product privilege as it would for disclosing identical facts contained in materials that are so protected.” Id.

Cooperation is also a factor, to some degree, in calculating sentencing under the Federal Sentencing Guidelines. UNITED STATES SENTENCING COMM’N, 2014 USSC GUIDELINES MANUAL, ch. 8 (Nov. 1, 2014) (“The two factors that mitigate the ultimate punishment of an organization are: (i) the existence of an effective compliance and ethics program; and (ii) self-reporting, cooperation, or acceptance of responsibility”). Prompt investigatory action could also lead to the government’s willingness to enter into “cooperation agreements,” “non-prosecution agreements,” or “deferred prosecution agreements.” See SEC. AND EXCHANGE COMM’N COOPERATION PROGRAM AGREEMENTS, http://www.sec.gov/litigation/cooperation.shtml (last visited Mar. 25, 2014); see also SEC. AND EXCHANGE COMM’N ENFORCEMENT COOPERATION PROGRAM, http://www.sec.gov/spotlight/enfcoopinitiative.shtml (Jan. 26, 2015) (last visited Mar. 25, 2014) (reaffirming SEC’s emphasis on cooperation by entities and individuals, and providing links to various Cooperation, Deferred Prosecution, and Non-Prosecution Agreements).

Of course, there will be cases in which no degree of cooperation can mitigate a particularly egregious situation. See

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Seaboard Report (“there may be circumstances where conduct is so egregious, and harm so great, that no amount of cooperation or other mitigating conduct can justify a decision not to bring any enforcement action at all”). Moreover, the government is highly unlikely to make any promises in exchange for a company’s cooperation at the outset of an investigation, so often the company will have to decide the extent of its cooperation before knowing if or how it may benefit. The failure to cooperate, however, is likely to cause the SEC to scrutinize the corporation, institute proceedings, or expose the company to increased sanctions. In the Matter of the Application of Re. Bassie & Co. and R. Everett Bassie, C.P.A. for Review of Disciplinary Action Taken by PCAOB, Exchange Act Release No. 3354, 2012 WL 90269 (Jan. 10, 2012) (sustaining findings of misconduct and sanctions where auditing firm refused to cooperate with board investigation”); In the Matter of the Application of Asenio & Co., Inc. for Review of Action Taken by FINRA, Exchange Act Release No. 68505, 2012 WL 6642666 (Dec. 20, 2012) (auditing firm’s arguments did not overcome presumption of denial by FINRA membership based on “failure to cooperate with a FINRA investigation”). See also Press Release 2013-252, Securities and Exchange Commission, SEC Charges Weatherford Int’l with FCPA Violations (Nov. 26, 2013) ($1.875 million penalty assessed in part for lack of cooperation early in the investigation); Press Release 2012-249, Securities and Exchange Commission, SEC Charges China Affiliates of Big Four Accounting Firms with Violating U.S. Securities Laws in Refusing to Produce Documents (Dec. 3, 2012) (emphasizing refusal of audit firms to cooperate in SEC investigations or provide requested audit materials); Press Release 2004-67, Securities and Exchange Commission, Lucent Settles SEC Enforcement Action Charging the Company with $1.1 Billion Accounting Fraud (May 17, 2004) (noting that $25 million of the settlement was for lack of cooperation during SEC investigation).

Although often advisable, cooperation may not always be appropriate where certain risks are attendant. For example, where the potential loss of privilege outweighs the benefits of fully cooperating, cooperation should not extend to disclosure of privileged information. If privilege is waived, companies confront the very real possibility that all communications and documents relating to the same subject matter will no longer be protected from

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disclosure in related litigation or other contexts. Because private litigation often follows on the heels of any governmental action, companies must assess all waiver decisions with an eye to the future. Accordingly, a company must carefully weigh and assess the benefits and risks, particularly those attendant to a potentially broad waiver of applicable privileges, in evaluating whether and to what extent it will choose to cooperate with a government information request or voluntarily self-disclose the results of its internal investigation.

B. SETTING GUIDELINES FOR INTERNAL INVESTIGATIONS

Just as a company establishes procedures for its internal compliance program, guidelines must be prepared for more extensive internal investigations. Proper investigation management can prevent further unlawful actions, such as forms of retaliation against whistleblowers or other employees, and can minimize an agency’s criticism of the investigation. Further, while cost-effectiveness should not outweigh other essential investigation considerations, preparation may reduce costs in the long run, by, for example, clarifying the extent to which insurance providers will cover investigation costs and associated requirements.

1. Planning an Investigation

When the need for an investigation arises, companies should take action immediately by preparing a tailored plan for each situation that develops. First, the company should identify the reasons for and general scope of the investigation. These should be specific enough to target potential issues for investigators but sufficiently flexible to shift if new issues come to light. Clarifying this scope in the engagement letter with retained counsel not only documents it for future purposes but also allows for easy amendment. Communicating the proper scope is also vital to ensure that proper document retention, witness selection, and other investigation parameters are appropriate and thorough.

The company should then establish the investigation’s purpose, which is usually to gather information in order to provide legal advice to the company regarding its current practices and

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possible related litigation. Guidelines for discussing the investigation should be clearly established, including that communications about the investigation should extend only to necessary individuals and counsel. See infra Section G(1) (specifically addressing the many privilege considerations inherent in an internal investigation). Caution should be taken not to reveal too much about the investigation to anyone not in the “need to know” sphere. As one example, interviews with employees—administrative level to executives—should be limited to the content necessary to provide the attorney with the facts he or she requires. Similarly, confidentiality is key, and privacy should be guarded when conducting steps of the investigation (e.g., interviews should be private). Proper labeling of investigation documents as privileged and confidential should be routine practice, and the committee overseeing the investigation should ensure confidential, restricted, and safe storage of investigation documents.

2. Practical Steps in an Investigation

When initiating the investigation, the company should first assess the magnitude of the situation and alleged or potential improper conduct. Second, it should consider whether to appoint an independent “special committee” to manage the investigation. See infra Section C. The independence of the investigative team is critical, as its credibility could be questioned if there is any hint of bias. See Seaboard Report (asking “[d]id management, the Board or committees consisting solely of outside directors oversee the review . . . [d]id company employees or outside persons perform the review,” i.e., weighing independence factors). To address that concern, a company should never involve anyone implicated in or even possibly associated with the alleged improper conduct (i.e., executives or senior officials accused of approving, even tacitly, any misconduct). Nach v. Baldwin, No. C 07-0740, 2008 WL 410261, at *8 (N.D. Cal. Feb. 12, 2008) (discussing and contrasting the independence of board members in different internal investigations). Likewise, in-house counsel or company employees responsible for compliance issues often are deemed insufficiently impartial in view of their perceived bias toward the company and its personnel. In re John Doe Corp., 675 F.2d 482, 491 (2d Cir. 1982) (in-house counsel may be in an “uncomfortable

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position” upon the discovery of evidence of wrongdoing and, thus, the “wiser course may be to hire counsel with no connection to the corporation to conduct investigations”); see also Seaboard Report (noting this is a factor considered in decision to give company credit for self-investigation). If utilized, an independent “special committee” is often comprised of outside members of the board of directors having no conflicting interests or close relationships to the company. It can also be comprised of the members of the audit committee in instances where the allegations relate to firm finances or accounting.

If a special committee is formed, it usually is advisable for the committee to engage counsel to conduct the investigation under its supervision. As emphasized in Section C, the best practice typically is to retain outside counsel. Counsel should then immediately implement a litigation hold. See infra Section D(2). Care and caution regarding communications and sharing of documents should also rise to the forefront. In order to preserve certain privileges, counsel—not the special committee—should retain necessary experts or advisors to assist with the investigation. See infra Section G(3). Counsel should document its procedures throughout the investigation, taking care to maintain facts separate from legal analysis or opinions, and, if determined advisable, prepare the final written report.

C. SELECTION OF THE INVESTIGATORS BY THE SPECIAL COMMITTEE

As noted, a key first step of the special committee is to select counsel to conduct and advise with respect to the investigation process. Utilizing counsel not only best protects the confidentiality of the investigation, it also can ensure that appropriate and timely consideration is given to the risks associated with potential exposures (civil and criminal), as well as the legal implications of voluntary and involuntary disclosures of information.

1. Considerations When Selecting Counsel

There are essentially three tiers from which to select counsel, each providing progressively more protection and independence to the investigation. Using in-house counsel provides the lowest level

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of protection and independence and can be particularly risky. Regularly retained outside counsel can provide more independence, but there is still the risk of either a conflict of interest or that outside counsel worked on some aspect of the matter being investigated. Engaging special outside counsel to handle the investigation provides the greatest degree of protection and independence. Which of these alternatives is most appropriate will typically depend on the nature and degree of the alleged misconduct—serious allegations of financial concerns, executive misconduct, or internal compliance deficiencies present a higher likelihood that outside special counsel should be retained. Retention of outside counsel is even more critical if in-house counsel could at all be implicated. Finally, if the investigation results are likely to be publicly disclosed, outside counsel will be better positioned to preserve legal privileges. The key is to balance in-house counsel’s intimate knowledge of the company against the need for the kind of objectivity and credibility that outside counsel can better provide.

One consideration that may tip the balance in favor of retaining outside counsel is the clarity of outside counsel’s role in the investigation. Simply put, attorney-client and work-product privileges may be more fully retained where it is clear that outside counsel is unquestionably providing legal advice, and not, in the case of in-house counsel, juggling dual roles of giving both legal and business advice. See Upjohn Co. v. United States, 449 U.S. 383, 394 (1981) (seminal case regarding whether communications were made in order to secure legal advice from counsel); United States v. Singhal, 800 F. Supp. 2d 1, 6-7 (D.D.C. 2011) (“Where business and legal advice are intertwined, the legal advice must predominate for the communication to be protected.”); First Fin. Bank, N.A. v. Citibank, N.A., 1:11-CV-0226-WTL-DML, 2012 WL 626272, at *4 (S.D. Ind. Feb. 24, 2012) (reiterating authority that corporate context can pose “challenges” because of the “difficultly [sic] in some circumstances in distinguishing between communications made to obtain business—as opposed to legal—advice; or, where the communications are with in-house counsel, distinguishing whether counsel was acting in his legal—as opposed to a general business—capacity”); Am. Nat'l Bank & Trust Co. v. Equitable Life Assur. Soc'y of the United States, 406 F.3d 867, 879 (7th Cir. 2005) (reversing sanctions against

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company on grounds that it showed “good faith” in distinguishing documents as legal vs. business advice, an area the Court recognized to be “especially difficult”) (internal citations omitted) .

In many situations, retention of special outside counsel—not the company’s regular outside counsel—should be considered, especially where there is a heightened need to show an investigation was conducted independently. Considerations here include whether regular outside counsel advised at all in relation to the alleged improper conduct and whether there are any potential accusations they overlooked or even passively facilitated. See S.E.C. v. Korkuc, Exchange Act Release No. 1803, 80 SEC Docket 1462 (June 19, 2003) (external investigation ultimately finding much more than initial internal review, including thwarts to internal investigation, providing misinformation, and concealment of documents). Privilege considerations may also be decisive if regular outside counsel is simultaneously representing, or anticipates representing, individual officers, directors, or employees. See United States v. Nichols, 606 F. Supp. 2d 1109 (C.D. Cal. 2009) rev’d, 583 F. 3d 600 (9th Cir. 2009) (reversing determination that counsel had failed to accurately give certain Upjohn warnings, and finding individual did not expect his statements would be kept confidential); see also United States v. Ruehle, 583 F.3d 600 (9th Cir. 2009) (associated criminal case). Another consideration is whether established relationships between executives and regular outside counsel would hinder a robust investigation or full reporting. Specially retained counsel unfamiliar with the company or its representatives will not have such concerns and may better protect the company’s relationship with regular outside counsel. Ultimately, it may not be possible for regular outside counsel to been seen as, or remain, neutral.

2. Considerations After Decision Is Made to Utilize Outside Counsel (Regular Or Specially Retained)

The role of outside counsel can vary in degree from merely advising on investigation findings to taking over complete responsibility for the entire investigation. The first step, however, is for the company to designate a liaison with outside counsel, who will disseminate litigation hold instructions, facilitate the interview process, and forward approved communications. Regular updates

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and communications between counsel and the special committee or whoever is overseeing the investigation should be established to keep the investigation progressing and on target. As previously noted, outside counsel should take the lead and serve in a full investigatory capacity to the special committee, which includes advising on how the investigation is unfolding, making recommendations at each step, and retaining any necessary experts or consultants.

D. DOCUMENT PRESERVATION & REVIEW

1. Timing & Structure of the Review

An investigation typically begins with the collection and review of key documents and internal communications, although this process may often overlap with the conducting of witness interviews. Counsel’s strategy for whom to interview and what questions to ask will be guided by the information discovered through the document review, making it an important aspect of the investigation.

While the investigation may be initiated for internal fact-finding purposes, all investigation procedures should be structured in anticipation of litigation. As it relates to document review, and as with traditional litigation, counsel should carefully catalogue documents, identifying their source, when they were created, and where within the company’s records they were found. This organization will help to avoid duplicative searches and also to ensure that documents have been gathered from all relevant custodians, categories, and data storage areas. As always, it is critical to identify and segregate privileged or potentially privileged documents to avoid issues of inadvertent waiver.

2. The Litigation Hold

Equally as important as keeping track of privileged documents, counsel must prevent the destruction of all potentially relevant documents, both to preserve useful information and to avoid the appearance of culpability, spoliation issues, and a potential “adverse inference” instruction. See, e.g., Phillips v. Covenant Clinic, 625 N.W.2d 714, 718 (Iowa 2001) (“It is a well-

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established legal principle that the intentional destruction of or the failure to produce documents or physical evidence relevant to the proof of an issue in a legal proceeding supports an inference that the evidence would have been unfavorable to the party responsible for the destruction or nonproduction.”). In determining whether an “adverse inference” instruction is appropriate, courts will generally consider whether the party had an obligation to preserve the documents at the time of the loss, whether the lost documents were relevant or necessary to the opposing party’s claim or defense, and whether the loss or destruction was effectuated with a culpable state of mind. See, e.g., Chin v. Port Auth. of N.Y. & N.J., 685 F.3d 135, 162 (2d Cir. 2012) (noting that failure to institute litigation hold does not constitute gross negligence per se but failure to adopt good preservation practices is one factor in determining whether discovery sanctions are appropriate), cert. denied, 133 S.Ct. 1724 (2013); Jandreau v. Nicholson, 492 F.3d 1372 (Fed. Cir. 2007). Jurisdictions vary, however, regarding what level of intent is required to issue the adverse inference instruction. Some circuits require evidence of bad faith. See, e.g., Bracey v. Grondin, 712 F.3d 1012 (7th Cir. 2013); Mann v. Taser Int’l, Inc., 588 F.3d 1291 (11th Cir. 2009); Condrey v. SunTrust Bank of Ga., 431 F.3d 191 (5th Cir. 2005); Park v. City of Chicago, 297 F.3d 606 (7th Cir. 2002). Other courts apply lesser standards, such as ordinary negligence or willful conduct. See, e.g., Beaven v. U.S. Dep’t of Justice, 622 F.3d 540 (6th Cir. 2010) (noting that culpable state of mind for adverse inference is satisfied by showing evidence was destroyed knowingly or negligently); Hodge v. Wal-Mart Stores, Inc., 360 F.3d 446 (4th Cir. 2004) (noting that adverse inference requires showing that party knew evidence was relevant and willful conduct resulted in loss or destruction); Blinzler v. Marriott Int’l, Inc., 81 F.3d 1148 (1st Cir. 1996) (noting that when evidence indicates that party is aware of circumstances likely to give rise to litigation and destroys potentially relevant documents without particularized inquiry, fact finder may reasonably infer that party probably did so because records would harm its case).

Spoliation and failure to produce relevant documents during the discovery process can also lead to other sanctions, such as monetary penalties or even a default judgment. See, e.g., Domanus v. Lewicki, 742 F.3d 290 (7th Cir. 2014) (affirming district court’s entry of default judgment and holding of defendant in comtempt as

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sanctions for repeated discovery abuses, including spoliation); Sanofi-Aventis Deutschland GmbH v. Glenmark Pharms., Inc., 748 F.3d 1354, 1363 (Fed. Cir. 2014) (denying motion for new trial where jury was instructed that destroyed documents may have been unfavorable because “[t]he destruction of documents in the course of preparation for litigation has no entitlement to judicial protection, and need not be concealed from the jury.”); Southern New England Tel. Co. v. Global NAPs Inc., 624 F.3d 123, 147-48 (2d Cir. 2010) (affirming district court’s entry of default against defendants based on evidence of prolonged pattern of discovery obstruction, including intentional deletion of relevant documents and lies about existence and whereabouts of other key documents); Tracinda Corp. v. DaimlerChrysler AG, 502 F.3d 212, 241-44 (3d Cir. 2007) (affirming district court’s imposition of over $550,000 in penalties for late production of documents, which prejudiced plaintiff’s case); In re Seroquel Prods. Liab. Litig., 244 F.R.D. 650 (M.D. Fla. 2007) (granting motion for sanctions for failure to produce discovery in usable format); Metro. Opera Ass’n, Inc. v. Local 100, Hotel Emps. & Rest. Emps. Int’l Union, 212 F.R.D. 178, 222 (S.D.N.Y. 2003) (granting attorneys’ fees and additional monetary penalties for egregious discovery violations); In re Wells Fargo Advisors, LLC, Exchange Act Release No. 73175, 2014 SEC LEXIS 3574, *26-28 (Sept. 22, 2014) (issuing fine against defendant of $5 million where it unreasonably delayed in producing certain documents to the SEC, and then produced an “altered” document); In re Banc of Am. Sec. LLC, Exchange Act Release No. 49386, 82 SEC Docket 1264 (Mar. 10, 2004) (issuing fine against defendant of $10 million for violating § 17 of the Exchange Act for failure to produce documents during SEC investigation).

The key questions regarding a party’s duty to preserve are when the duty attached and what evidence is protected or covered under this duty. Both of these questions were addressed in the seminal case of Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 216 (S.D.N.Y. 2003). In Zubulake, the court explained that “[t]he scope of a party’s preservation obligation can be described as follows: Once a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a ‘litigation hold’ to ensure the preservation of relevant documents.” Id. at 218. In the securities context, the triggering

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event for a litigation hold may be quite varied, and could arise from a whistleblower complaint, a report submitted through the company’s internal compliance system, notice from a government agency that it is initiating formal or informal proceedings, or, for self-initiated, prophylactic investigations, the first hint of potential misconduct. The duty to preserve extends “to any documents or tangible things…made by individuals likely to have discoverable information that the disclosing party may use to support its claims or defenses.” Id. at 217-18 (internal quotation omitted). Parties must therefore retain all documents that constitute “unique, relevant evidence that might be useful to an adversary.” Id. at 217.

To properly preserve the documents relevant to the investigation, counsel should suspend the company’s automated, data-deletion cycles and document-retention procedures and issue a memorandum outlining the litigation hold for documents. Because the hold must be prepared at the outset of the investigation, when the precise scope of the inquiry may not yet be fully known or defined, best practices dictate that counsel should err on the side of issuing a broad document preservation order. For example, the memorandum should avoid including overly narrow date ranges for preservation, which could become a point of contention during litigation. In addition, the memorandum should specify that the company should identify and preserve all materials related to the matter.

The litigation hold notice should include: (1) a summary description of the issue triggering the hold, (2) definitions of terms like “documents and data” and “sources” to avoid confusion over the scope of the hold, (3) an explanation or reference to the risks of noncompliance, and (4) an intranet website, if the company has one, where employees can obtain more detailed guidance on the litigation hold procedures. The notice may also include instructions to: (1) temporarily suspend the rotation of back-up tapes, (2) pull specific back-up tapes that have been identified as containing critical information relevant to the investigation, and (3) identify key directors and employees who are likely to have relevant information and make sure that they know not to delete their own documents and emails. For multinational corporations, counsel also must consider how to handle and coordinate with overseas employees and foreign locations where data may be

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stored. As a practical consideration, any written directives disseminated to employees should require recipients to confirm their receipt and acknowledge their compliance with the instructions. If the scope of the investigation changes as the process unfolds, it will be important for counsel to continue to update these document preservation instructions, both to ensure that important documents are kept and, if the scope of the investigation is narrowed, to eliminate the need for keeping unnecessary information. See Zubulake v. UBS Warburg LLC, 229 F.R.D. 422, 432 (S.D.N.Y. 2004) (“[I]t is not sufficient to notify all employees of a litigation hold and expect that the party will then retain and produce all relevant information. Counsel must take affirmative steps to monitor compliance so that all sources of discoverable information are identified and searched.”).

Creating clear, comprehensive, transparent guidelines for document preservation is a critical element of establishing credibility in the investigation process. The appearance, later, that relevant documents were destroyed not only will affect a company’s ability to get credit for cooperating with the regulatory agency, but also will cast doubt on the legitimacy and accuracy of the investigation itself. It could also lead to significant monetary penalties in civil proceedings and possible criminal charges for obstruction of justice. For example, Section 802 of the Sarbanes-Oxley Act of 2002 provides:

Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or 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 proceedings of any department or agency of the United States or any case filed under Title 11, or in relation to or in contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.

18 U.S.C. § 1519 (2012).

Moreover, although Federal Rule of Civil Procedure 37(e) provides a safe harbor for “routine, good-faith” loss of data, courts

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will carefully explore any evidence of questionable loss or suspicious circumstances. See, e.g., In re Pradaxa Prods. Liab. Litig., No. 312 MD 02385, 2013 WL 5377164, at *11 (S.D. Ill. Sept. 25, 2013) (noting in camera review of litigation hold notices in determining whether sanctions were warranted for destruction of documents). This safe harbor provision, however, is read narrowly and inadvertent loss, particularly of electronic data, may not be excused if caused by negligence. For example, in Wilson v. Thorn Energy, LLC, the court held that Rule 37(e)’s safe harbor did not apply to the loss of electronic data on a flash drive. 08 Civ. 9009 (FM), 2010 WL 1712236, at *3 (S.D.N.Y. Mar. 15, 2010). Although defendants argued the loss was an innocent mistake and that there was nothing suspicious about the surrounding circumstances, the court determined that the loss was not “routine.” Id. Citing the 2006 Advisory Committee notes, the court explained that loss through “routine operation” relates to the “ways in which such [electronic information] systems are designed, programmed, and implemented to meet the party’s technical and business needs.” Id. But in this case, “the data on the flash drive was not overridden or erased as part of standard protocol; rather, it was lost because the Defendants failed to make a copy.” Id.

In general courts look for reasonable, good faith efforts when it comes to document preservation and production obligations. A carefully crafted litigation hold memorandum can become the cornerstone of demonstrating a company’s good faith efforts if its cooperation is ever challenged. An effective letter is issued early, contains clear and comprehensive directives, and impresses upon employees that the matter and its incumbent obligations must be taken very seriously.

3. Data Collection & Review

Review of electronic documents and data can be a particularly unwieldy undertaking. In large corporations, the amount of electronically stored information (“ESI”) can be extensive and may require a significant allocation of time and resources to cull through. The company’s IT specialists and outside forensic experts should be enlisted not only to determine where relevant data is stored, but also to ensure that metadata is not changed during the collection process. Doing so will avoid the risk of losing critical

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information about the dates on which documents were created, changed, or shared. The types of relevant documents will vary from case to case, but typically in securities-related investigations, key documents will include public filings, board minutes, financial records, and internal communications among key employees and company officers.

Because the preservation and review of electronic documents can be daunting, it is also critical to spend time developing a focused but effective list of search terms that will help narrow down the ESI to the relevant documents. If the search terms are too narrow, the results will not include all of the relevant documents, and the company runs the risk of appearing uncooperative or using an under-inclusive search to accomplish the same ends as document destruction. If, however, the search terms are too broad and over-inclusive, counsel runs the risk of derailing the investigation with volumes of irrelevant data, making it more likely that the relevant documents will get lost in the landslide of otherwise unimportant materials. To that end, it is often helpful to get input on the search terms from a variety of the key players, including the company’s auditors, directors, in-house counsel, and key employees. These individuals can help identify the jargon, abbreviations, and vocabulary used in relation to a given project or issue and provide details about the types of communications or contexts in which the matter was likely to be discussed.

Regarding back-up tapes, one particularly thorny issue arises in deciding whether or to what extent to restore back-up tapes during an internal investigation. These tapes contain substantial amounts of information and can be very costly to evaluate and review. Moreover, looking ahead to the likelihood of tag-along litigation, the company will often have a strong argument under Federal Rule of Civil Procedure 26(b)(2) that it would be unduly burdensome to produce these tapes. If, however, the company has already restored the tapes during its own internal investigation, in a subsequent shareholder suit it will be much harder to make this argument and thus more likely that the court will order the back-up tapes to be turned over. In sum, document retention and review, although daunting, is a phase of the investigation during which potential issues can arise, but can also be minimized through a cautious and deliberate approach.

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E. WITNESS INTERVIEWS

As soon as sufficient information and context is developed, counsel should begin interviewing executives and other individuals with knowledge of the allegations or potential misconduct. Counsel should begin this phase of the process by identifying a list of individuals who will be interviewed and deciding the order for those interviews.

1. Order of Witness Interviews

The benefit of taking a “bottom-up” approach—interviewing lower-level employees first to determine the details about the alleged misconduct—is that counsel can get a better sense of the landscape of potential issues before establishing how high up the corporate ladder knowledge of any misconduct went. However, starting at the top will allow counsel to figure out much earlier any possible exposure key executives have to individual criminal charges and whether management is implicated in the alleged misconduct. Recognizing that the extent of the involvement of upper-management is often one of the most important issues in any case, the best approach will typically be to interview those officers and executives after counsel has a better sense of the alleged misconduct and has received insight from various employees about the role they may have played. Counsel may consider conducting some interviews without advance warning. Surprise interviews may be necessary and effective if there is a concern that a witness may destroy evidence once notified or a risk that witnesses will attempt to compare and coordinate stories if given time before the interviews.

2. Timing & Preparation

Given that document review and individual interviews will usually progress simultaneously, at least in part, the question becomes how to sequence these two elements of the investigation to get the best possible picture of the alleged misconduct. Counsel should consider which individuals will be most helpful to interview early on to define the scope of the review (i.e., where documents are likely to be found, what the key issues are likely to be, and the roster of individuals within the company potentially

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involved in, or with knowledge of, the alleged misconduct). For other individuals, it may make better strategic sense to interview them later, after counsel has had the opportunity to review key documents and is better equipped to ask informed questions. Regardless, in preparing for interviews, counsel must identify which documents will be referenced, decide whether to provide the witness with these documents beforehand, and create a chronology of events to cover with each witness. As a general rule, in most cases it makes sense to provide witnesses with relevant documents before their interviews and give them an opportunity to review them. This will allow witnesses to refresh their memories in advance of the interview and give more accurate information to counsel during the interview. It also avoids the appearance that counsel is attempting to corner or surprise a witness during the interview. Of course, for witnesses suspected of culpability, the element of surprise may prove to be of paramount concern, in which case documents would not be shared in advance.

3. Notifying Employee Witnesses & Giving Appropriate Warnings

The above preparation will be easiest in smaller organizations. For large-scale investigations, however, in which numerous employees will be interviewed, counsel should consider issuing a memorandum or letter to the witnesses broadly explaining the purpose and circumstances of the interviews. Counsel should be careful not to disclose too many details of the investigation, while still conveying some background and a consistent message from the company. A cautious approach by the attorneys may reduce some of the concern witnesses could have about the interviews.

At the beginning of all employee interviews, counsel may need to give the witness various warnings regarding the confidential nature of the materials discussed and the issue of attorney-client privilege. There are two major warnings that counsel should consider:

a. Upjohn Warning: Based on the Supreme Court’s opinion in Upjohn v. United States, 449 U.S. 383 (1981), this warning requires that counsel explain to company

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employees that counsel is representing the company and not the individual witness. As such, counsel must warn the employee that the attorney-client privilege belongs to the company and not the witness, and that the company may decide to waive the privilege at some point by disclosing the content of the interview to the government or other third parties. Counsel must convey that the decision to disclose is entirely up to the company and that the company is not required to seek the employee’s permission or even provide the employee with notice of its intent to disclose. Counsel should also explain to the employee that the attorneys are conducting the investigation for the sole purposes of providing legal advice to the corporation and preparing for possible litigation. Counsel should add that the company considers the interview and any communication with counsel as confidential and subject to the attorney-client privilege and, thus, the employee should keep the substance of the interview confidential and not discuss it with others, either within or outside the company. See Sandra T.E. v. South Berwyn School Dist. 100, 600 F.3d 612 (7th Cir. 2010) (attorney-client privilege applied to witness interview notes taken during internal investigation, in part because counsel provided Upjohn warning to witnesses); In re Grand Jury Subpoena, 415 F.3d 333 (4th Cir. 2005) (holding former employees could not claim attorney-client privilege regarding communications with corporate counsel during internal investigation when there was no evidence that they were told counsel was representing them personally and they were advised that company had discretion to disclose information provided during interviews).

b. Zar Warning: If the company knows that it will or is likely to cooperate with the government, counsel should issue a “Zar” warning to employees that if they make false statements during internal interviews, they could be charged with obstruction of justice. Press Release, Dep’t of Justice, “Former Computer Associates Executives Indicted on Securities Fraud, Obstruction Charges” (Sept. 22, 2004), available at http//www.justice.gov/

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opa/pr/2004/ September/04_crm_642.htm (obstruction brought against company’s executives, including Ira Zar, for giving false, incomplete, and inaccurate information to counsel with intent that counsel would then provide that information to government); see also United States v. Singleton, No. H-06-080, 2006 WL 1984467 (S.D. Tex. July 14, 2006). “Zar” warnings are not required by law, but they are often given out of a sense of fairness to the witness. There are two downsides, though, to giving this warning: (1) it may discourage individuals from agreeing to be interviewed; and (2) the warning may be perceived by the government as inviting employees not to cooperate with the investigation and, thus, jeopardize the company’s chance of getting cooperation credit.

In addition to the standard Upjohn warning, there also will be times when an employee witness will ask company counsel if he should retain his own attorney before the interview. In these circumstances, counsel should remind the witness that she does not represent him and that if he wishes to consult an attorney before proceeding, the interview can be postponed. In some cases, companies may indemnify certain employees for their attorney fees in connection with the investigation. Again, the most important message to convey to avoid unfairly or inadvertently misleading an employee is that counsel represents the corporation and not any individual within the company.

4. Practical Steps When Conducting Interviews

During interviews, counsel should plan to have two attorneys present—one to lead the questioning and one to take detailed notes. The two-person team will enhance the accuracy of the interview record. After the interview, counsel should proactively ensure that any memorandum summarizing the interview is kept privileged. To do so, the memorandum should state that it contains counsel’s mental impressions, opinions, and conclusions concerning the interview and is not intended as a verbatim recitation of the event described. Accordingly, the “detailed notes” and summary memorandum should not include lengthy sections transcribing the witness’s exact statements. If there is a chance that the memoranda will be shared with third parties, counsel should

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also consider preparing two versions—one which includes any mental impressions and other observations and a second which sticks strictly to a recounting of the facts provided by the witness. The risk with creating two memoranda, however, is that it may be harder to argue later against disclosure of the version that does not contain counsel’s mental impressions.

Interview memoranda containing counsel’s mental impressions and subjective analyses likely will be subject to the protections of the work product doctrine, as most courts have consistently held that requiring counsel to produce such notes is particularly disfavored. See, e.g., Upjohn, 449 U.S. at 399-401 (citing cases holding memoranda created after witness interviews deserve special protection and are rarely discoverable); Baker v. GMC, 209 F.3d 1051, 1054 (8th Cir. 2000) (“Notes and memoranda of an attorney, or an attorney’s agent, from a witness interview are opinion work product entitled to almost absolute immunity.”); SEC v. Sentinel Mgmt. Grp., Inc., 07 C 4684, 2010 WL 4977220, at *7 (N.D. Ill. Dec. 2, 2010) (“Materials prepared by SEC attorneys in anticipation of litigation that disclose what they learned during witness interviews undoubtedly constitute attorney work product.”); United States v. Gallo, 2014 U.S. Dist. LEXIS 61835, *7-8 (S.D. Fla. May 5, 2014) (denying request for interview notes prepared by SEC Receiver’s counsel and counsel’s agents of employee statements because they were “not verbatim witness statements, [but] classic work product notes of [] counsel and agents”); but see United States ex rel. Barko v. Halliburton Co., 2014 U.S. Dist. LEXIS 174607, *21-22 (D.D.C. Dec. 17, 2014) (finding reports “far removed from the core of work product protection for attorney strategy or opinion” where significant portions only gave raw factual content and background material). Because privileges and confidentiality agreements are narrowly construed, counsel must be careful that any interview summaries shared with the government do not include the same information contained in any interview notes that counsel wants to remain privileged. For example, in SEC v. Vitesse Semiconductor Corp., Judge Rakoff denied a motion from Nu Horizons, a non-party, to quash a subpoena by defendant directors of Vitesse, the company being targeted by the SEC investigation, seeking the interview notes from the internal investigation conducted by Nu Horizons’ counsel. No. 10 Civ. 9239 (JSR), 2011 WL 2899082 (S.D.N.Y.

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July 14, 2011). Nu Horizons had cooperated with the SEC and, pursuant to a non-waiver agreement, gave oral summaries of the interviews while keeping confidential counsel’s actual interview notes. Judge Rakoff carefully analyzed the scope of the non-waiver agreement, comparing, in camera, counsel’s notes with the summaries provided to the SEC. Ultimately, the court determined that the summaries were so detailed that in many instances they matched counsel’s notes “almost verbatim.” As a result, the court held that Nu Horizons had waived the work-product privilege by essentially providing counsel’s notes in a different format.

In order to get complete and accurate information, counsel should avoid doing anything during the interview that could be perceived as influencing a witness’s answers. This includes summarizing statements made by other witnesses, characterizing the corporation’s positions, or selectively presenting documents or facts in a way that may mislead the witness or distort the issues.

If an employee refuses to cooperate with an investigation, counsel should remind the employee of any company policies that require cooperation with investigations, and that failure to cooperate may give rise to a basis for discipline, possibly including discharge. See, e.g., In re Grand Jury Subpoena, 274 F.3d 563, 571 (1st Cir. 2001) (employee has duty to assist corporate counsel with investigation and defense of corporation’s business matters); United States ex rel. Magid v. Barry Wilderman, M.D., P.C., 2006 U.S. Dist. LEXIS 56116, *12 (E.D. Pa. Aug. 10, 2006) (same). Special care must be taken, however, if counsel is interviewing a whistleblower or the employee who came forth with the information that prompted the investigation. In such interviews, counsel should avoid any appearance that the interview was punitive, threatening, or otherwise coercive, and should avoid warnings of discharge or other action that may appear retaliatory until those options are fully assessed. Even if the company or counsel has reason to doubt the credibility of the information provided by the witnesses, it is critical that the company demonstrate that it is sincerely interested in hearing what these witnesses have to say and taking seriously all allegations of misconduct.

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5. Individual Cooperation Incentives

For employees who may be the target of an adverse action by the government or by the company or for those whose interests are at odds with the company, there may be a greater incentive for them to seek an immunity agreement with the government and act as a cooperating witness. This, in turn, increases the pressure on the company to do a quick and thorough investigation to identify and interview these individuals before they approach the government. Counsel should be mindful of these incentives in determining the strategy and sequence for the investigation. This underscores the need to create an effective and credible internal compliance system, which should encourage employees to report first through company channels.

6. Interviewing Former Employees

Before deciding to interview a former employee, counsel should determine the circumstances under which the employee left and whether there is a possibility that the employee may harbor resentment toward the company. In some cases the risk that these employees might divulge confidential information from the interview may outweigh the value of the insight they can provide.

There is a greater likelihood that interviews with former employees will not be covered by the attorney-client privilege because former employees will not be participating in investigatory interviews at the direction of a superior within the corporation. See Upjohn, 449 U.S. at 394 (attorney-client privilege applied in part because employees had communicated with corporate counsel at the direction of corporate superiors for the purpose of securing legal advice). To increase the odds that the attorney-client privilege will be extended to interviews of former employees, the interviews should focus on information that the employee would have learned during his tenure with the company and which would have fallen within the scope of the witness’ employment. See In re Allen, 106 F.3d 582, 605 (4th Cir. 1997) (explaining that “the analysis applied by the Supreme Court in Upjohn to determine which employees fall within the scope of the privilege applies equally to former employees”); In re Coordinated Pretrial Proceedings, 658 F.2d 1355, 1361 n.7 (9th Cir. 1981)

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(“Former employees, as well as current employees, may possess the relevant information needed by corporate counsel to advise the client with respect to actual or potential difficulties.”); Hanover Ins. Co. v. Plaquemines Parish Gov't, 2015 U.S. Dist. LEXIS 16100, *25 (E.D. La. Feb. 10, 2015) (affirming magistrate’s denial of motion to compel former employees to disclose communications with corporate counsel on basis they were privileged where it was clear that the former employees “spoke with the corporate attorneys in order to enable the attorneys to defend [pending] litigation” and further noting it “appears that every federal court to address the issue, with the exception of a single district court decision in 1985, has held that the privilege extends to former employees in certain contexts”); In re Refco Inc. Sec. Litig., No 07 MDL 1902(JSR), 2012 WL 678139, at *2 (S.D.N.Y. Feb. 28, 2012) (noting that district courts in Second Circuit have extended Upjohn to cover communications between corporate counsel and former employees as long as it related to former employee’s conduct or knowledge gained during employment); but see Clark Equip. Co. v. Lift Parts Mfg. Co., No. 82 C 4585, 1985 WL 2917 (N.D. Ill. Oct. 1, 1985) (holding that Upjohn does not apply to post-employment communications with former employees).

Even if the attorney-client privilege is less likely to apply to these interviews, any notes or memoranda created during or after the interview can still be covered by the work-product doctrine if appropriate precautions are taken. See supra Section E(4). This is particularly important in instances where former employees, who have been charged individually for their role in the misconduct, seek production of these notes during their subsequent criminal proceedings.

F. POST-INVESTIGATION FOLLOW-UP

1. Whether to Create or Disclose a Final Investigation Report

Whether to prepare a formal written report upon the conclusion of the investigation requires special and strategic consideration to avoid unwanted disclosure. Given the requirements of certain agencies that companies disclose all

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relevant facts from an investigation, there is some risk that a written report—whether willingly disclosed or not—may become discoverable. The best practice is to determine on a case-by-case basis whether a written report should be drafted after the investigation has been conducted, when counsel has an understanding of what findings the report would contain. In most cases, companies should not commit before the conclusion of the investigation to draft or disclose a report. See United States v. Ruehle, 583 F.3d 600 (9th Cir. 2009) (addressing effect of disclosure to auditors, which may be required, on privilege considerations). Generally, if the investigation is conducted by counsel, then a written report prepared by counsel regarding the investigation would be protected by the attorney-client privilege. Upjohn, 449 U.S. at 401-402; EEOC v. Safeway Store, Inc., No. C-00-3155, 2002 WL 31947153 (N.D. Cal. Sept. 16, 2002). It is essential that proper steps are taken to safeguard that privilege. See infra Section G.

Similarly, disclosure of any of the investigation findings, whether in a final report or not, requires careful consideration. For example, the identities of specific employees found responsible for or involved with improper conduct may be demanded by agencies or the public. Deciding whether to disclose those identities requires balancing liability concerns and employee relations against the need for the company to cooperate, appear forthcoming, or disprove the allegations. Moreover, the company must be mindful that disclosure of investigation findings that cast any employees in a negative light may lead to defamation actions. Particularly with final investigation reports, this risk can be minimized if reference to specific employees is avoided where possible and by making sure that any allegations of misconduct can be substantiated.

In light of the government’s emphasis on the cooperation principles noted above, however, as well as the attendant benefits such disclosure could have on reducing penalties for found violations, documenting investigation findings and possibly disclosing a final report could outweigh privilege considerations. A report, for example, may refute improper misconduct or offer key facts that mitigate the allegations, including documenting the remedial steps taken and new procedures implemented to prevent future instances of the same conduct. Should a company determine

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to disclose an investigative report, such disclosure should be made pursuant to an appropriate confidentiality and non-waiver agreement. See infra Section G(2).

2. Implementing Remedial Measures

Counsel’s responsibilities do not end, however, with the creation of a final report or the close of the investigation. After an internal investigation, counsel must work closely with corporate directors and officers to review and implement the recommendations and remedial measures that have been identified as a result of the investigation. While government agencies often credit cooperation, credit is also based on the company’s commitment to following through and effectuating remedial measures. DEP’T OF JUSTICE, U.S. ATTORNEYS’ MANUAL, tit. 9, ch. 9-28.900 (updated 2008) (noting that prosecutors may consider remedial actions “such as improving an existing compliance program or disciplining wrongdoers” and that a “corporation’s response to misconduct says much about its willingness to ensure that such misconduct does not recur”). Such measures may include discipline of culpable employees, revising internal compliance programs to ensure similar problems are not missed in the future, or creating new checks on accounting procedures. See OFFICE OF CHIEF COUNSEL, SEC, COMM’N DIV. OF ENFORCEMENT, ENFORCEMENT MANUAL, §§ 6.1.2, 6.2.4 (Oct. 9, 2013) (when executing non-prosecution agreements, SEC includes terms that cooperating companies shall make agreed upon disgorgement or penalty payments), available at http://sec.gov/divisions/enforce/ enforcementmanual.pdf. See also Press Release, Securities and Exchange Commission, SEC Charges Goodyear with FCPA Violations (Feb. 24, 2015) (noting settlement exceeding $16 million “reflects the company’s self-reporting, prompt remedial acts, and significant cooperation with the SEC’s investigation”); In re Navistar Int’l Corp., Exchange Act Release No. 3165, 2010 WL 3071892 (Aug. 5, 2010) (in determining not to impose civil penalties, SEC considered remedial measures such as terminating culpable employees or removing them from financial reporting responsibilities, adding over 100 new accounting employees, creating a position for new Corporate Compliance Officer, and instituting new employee training on internal controls and ethics); In re Applied Minerals, Inc., Exchange Act Release No. 9100, 97

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SEC Docket 1648 (Dec. 22, 2009) (consideration of company’s remedial efforts, which included replacing all members of the management team and Board of Directors, adopting a Code of Conduct and Ethics for its CEO and senior financial officers, and retaining a new independent auditor).

Failure to adopt remedial steps in the wake of an investigation that uncovered misconduct or deficient compliance procedures may expose companies (and even individual officers or directors) to additional liability for, among other things, breach of fiduciary duties. Generally, prompt action to implement remedial measures can bolster a company’s arguments regarding its good faith efforts.

An important caveat regarding remedial measures relates to whistleblower protections. If the investigation reveals that a whistleblower or the employee who initially came forward with evidence of misconduct was somehow implicated in the wrongdoing, any adverse employment actions should be considered carefully in light of current whistleblower protections, which may curtail the company’s ability to lawfully terminate or otherwise punish these individuals. See SOX, 18 U.S.C. § 1514A (2012) (prohibiting, inter alia, the discharge, suspension, or harassment, of an employee who provides information to or otherwise assists in an SEC investigation). A decision of the United States Court of Appeals for the Fifth Circuit, Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013), held that the anti-retaliation provisions of the Dodd-Frank Act only protect employees who provide allegations of possible securities law violations directly to the Commission. In its Dodd-Frank Annual Report of 2014, supra Section A, the SEC reiterated its consistent disagreement with the narrow interpretations of the statutory language in Asadi and other decisions. The SEC emphasized that such decisions rules contradict several district court opinions and even a Commission regulation clarifying that “Dodd Frank protections apply not just to individuals who report to the SEC but also to individuals when they, among other things, report potential securities law violations internally at public companies.” 240 C.F.R. § 21F-2(b)(1) (anti-retaliation protections apply whether or not the individual satisfies the requirements to qualify for an award, Id. § 21F-2(b)(1)(ii)).

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The limitations of Dodd Frank’s reach were again bolstered following the Second Circuit’s recent decision in Meng-Lin Liu v. Siemens A.G., 763 F.3d 175, (2nd Cir. 2014), wherein the court found “no evidence that [Dodd Frank’s] retaliation provision is intended to have extraterritorial reach” and concluded it did not apply to extraterritorially to a non-citizen employed abroad by a foreign country. Id. (rejecting whistleblower’s and SEC’s (as amicus curiae) argument that “SEC’s regulations should be accorded weight in determining congressional intent with respect to the extraterritorial application of a statute[;]” rather, “it is far from clear that an agency’s assertion that a statute has extraterritorial effect, unmoored from any plausible statutory basis for rebutting the presumption against extraterritoriality, should be given deference” under Chevron v. U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984)).

G. SPECIAL PRIVILEGE CONSIDERATIONS

As noted throughout the above sections, privilege considerations are of paramount concern in an internal investigation. A primary benefit of utilizing outside counsel to conduct an investigation is the confidentiality granted to investigation communications and documents by legally-recognized privileges. At all stages of the investigation, privileged communications and documents should be labeled accordingly and kept confidential to avoid waiver (while not over-marking documents so as to dilute what is actually privileged). Investigations also carry inherent risks of inadvertent disclosure and pressure to intentionally disclose aspects of the investigation, either of which may have serious consequences for the company. Thus, from the decision of investigation oversight to the review and protection of documents and communications, caution is required to safeguard several essential yet fragile privileges. Waiver is likely to have profoundly detrimental consequences, both immediately and in the future. Accordingly, those engaged in a corporate internal investigation should maintain awareness of the key privilege considerations summarized below.

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1. Applicable Privileges, Waiver, & Special Considerations for Corporations

A multitude of resources address privilege law in great detail. See, e.g., Jerome G. Snider, CORPORATE PRIVILEGES & CONFIDENTIAL INFORMATION (Law Journal Press rev. ed, 2014); Edna Selan Epstein, THE ATTORNEY-CLIENT PRIVILEGE & THE WORK PRODUCT DOCTRINE (ABA 5th ed. 2007). Parsing those resources, it is most important to note the potentially applicable privileges during an internal investigation, how they are applied to corporate entities, if at all, and the considerations unique to corporations that will help them avoid waiver.

The privileges at issue here are: the attorney-client privilege, which carries special concerns for corporations, because the “client” is not one individual but the corporation as a whole; and the work-product doctrine, which can raise challenges given the potential layers of individuals at a corporation involved in the investigation. Some jurisdictions may apply a self-evaluative privilege protecting actions where the corporation is engaging in self-auditing activities, but that privilege is not extensively recognized. See Peter A. Gish, The Self-Critical Analysis Privilege And Environmental Audit Reports, 25 ENVTL. L. 73, 83-86 (1995) (providing lengthy discussion of court treatment of the privilege).

The attorney-client privilege protects only those communications between the company and counsel that occurred for the purpose of obtaining legal advice. Although it sometimes extends to communications involving third parties, such as consultants, if their role furthers the delivery of legal advice, it is a relatively narrow protection. The attorney work-product doctrine is more broadly construed and protects from disclosure the work and mental impressions of an attorney prepared in anticipation of litigation. It also extends to protect the work product of non-attorneys if prepared under the direction of counsel and in anticipation of litigation. See Abdallah v. Coca-Cola Co., No. 1:98-cv-3679, 2000 U.S. Dist. LEXIS 21025, at *28-29 (N.D. Ga. Jan. 25, 2000) (documents prepared by third party representative during an investigation related to alleged violations of the Office of Federal Contract Compliance Programs were privileged because they were prepared “for the purpose of assisting counsel in

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advising the company in response to the anticipated audit and in anticipation of any [subsequent government] action that might be taken”); Graff v. Haverhill North Coke Co., No. 1:09-cv-670, 2012 U.S. Dist. LEXIS 162013 (Nov. 13, 2012) (finding presence of agent or consultant who “enable[s] the lawyer to give sound and informed legal advice does not destroy the confidential nature of the communication”); United States ex rel. Barko v. Halliburton Co., 2014 U.S. Dist. LEXIS 174607, *21-22 (D.D.C. Dec. 17, 2014) (extending work product doctrine to interview files prepared by agents of counsel).

In the context of internal investigations, however, the work-product doctrine typically applies only to an investigation conducted by counsel, not one conducted by compliance officers or board members. See, e.g., Freedman & Gersten, LLP v. Bank of Am., No. 09-5351, 2010 WL 5139874 (D.N.J. Dec. 8, 2010) (noting that “[in] determining whether a document is privileged, courts stress the purpose and function of the attorney in the particular situation,” and emphasizing that the privilege does not apply when actions are taken to “comply with internal policy”) (emphasis added). Importantly, the work product protection is not absolute, as there is an exception in federal court permitting disclosure where an adversary demonstrates it has a substantial need for the privileged information and that it cannot otherwise obtain it without undue hardship.

Corporations must exercise special care to avoid waiving either of these two privileges. Safeguarding the attorney-client privilege involves particular attention to with whom counsel is discussing the investigation. Adequate Upjohn instructions should be provided during interviews to all employees, including officers and directors, to ensure they understand counsel’s scope of representation and what information must remain confidential (i.e., questions and content of the interview, but not the underlying facts). Officers and directors potentially implicated in the allegations of misconduct should also be counseled as to whether counsel is providing dual representation or, conversely, that they should, if they wish, obtain their own counsel. As discussed more fully below, communications from counsel to the entire board should be carefully evaluated as, depending on the circumstances, they may not be deemed privileged.

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With regard to the work-product doctrine, protection is enhanced where outside counsel—and not in-house counsel—prepare reports or communications regarding the investigation. Documents prepared by independent counsel are more clearly prepared in a legal capacity as opposed to serving an alternate or dual business purpose that in-house counsel typically facilitates. Id. at *6 (finding it unclear exactly what role the investigating individual played throughout the investigation). Similarly, statements about the investigation’s purpose, if any (e.g., to the media), should underscore their legal purpose, as that must be the predominant purpose to protect work product.

Waiver of the attorney-client privilege is of particular concern because it could render discoverable all information regarding the same “subject matter” as what was disclosed. SEC v. Berry, No. C07-04431, 2011 WL 825742, *3-6 (N.D. Cal. Mar. 7, 2011) (finding work product waived by disclosure of interview memoranda to government discussing contents of interviews but not requiring production of attorney notes and draft interviews summaries); Church & Dwight Co., No. C11-3288, 2011 WL 5827222, at *2-3, (N.D. Cal. Nov. 18, 2011) (concluding there was waiver where company “voluntarily submitted to [government] in connection with the [government’s] non-public investigation . . . documents setting forth [company’s] position on the legal merits of its compliance with [the] law”). “Subject matter” waiver is a valid concern, even though some courts have held to the contrary. See Enns Pontiac, Buick & GMC Truck v. Flores, 1:07CV01043 OWW DLB, 2011 WL 2746599, at *3 (E.D. Cal. July 13, 2011) (citing several cases for proposition that “production of a final report generally does not effect a broad waiver as to the entire subject matter of the disclosed material” and finding company’s disclosure of its final assessment report to state agency only obligated it to produce underlying data on which the report was based, but not report-related drafts or notes); see also Freedman v. Weatherford Int'l Ltd., 2014 U.S. Dist. LEXIS 102248, at *12-13 (S.D.N.Y. July 25, 2014) (denying motion to compel disclosure of remaining documents relating to investigation by outside counsel on basis of subject matter waiver after some attorney-client privileged documents were waived during voluntary disclosure to the SEC; “[t]his is not a case where [defendant] appears to be picking and choosing among its opponents, waiving the privilege

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for some and resurrecting the claim of confidentiality to obstruct others, or invoking the privilege as to communications whose confidentiality it has already compromised for [its] own benefit.”) (internal citations omitted). Utmost care should be taken that legal communications are limited to those who “need to know.” In instances of inadvertent disclosure, the work-product privilege may nonetheless be protected where reasonable steps are taken to correct the disclosure. In circumstances where there is an unintentional disclosure of information in a federal proceeding or to a federal office or agency, and a parallel proceeding is underway where that information is offered on grounds that it is no longer subject to a privilege, it may nonetheless be protected if the test of Federal Rule of Evidence 502 is met. FED. R. EVID. 502(b) (unintentional disclosure occurring despite reasonable steps to prevent disclosure, and reasonable steps to correct the disclosure). See infra at Section G(2).

2. Waivers of Privilege & Cooperation Credit

At the other end of the spectrum from inadvertent disclosures are intentional waivers of a privilege. Perhaps one of the most difficult decisions in any internal investigation is whether, and to what extent, the company will disclose potentially privileged or confidential information to the government in the spirit of cooperation. Calculating the risks in this arena can be very challenging because it is a game of high stakes/high rewards. As noted above, the SEC and DOJ have reiterated that cooperation is taken very seriously and can significantly reduce potential penalties and help the company avoid enforcement actions and its officers avoid criminal prosecution. By contrast, if a company is not sufficiently cooperative, agencies may seek increased penalties or otherwise punish companies for failing to adequately assist in the investigation. Thus, companies must strike a balance between disclosing enough information to earn the benefits of cooperation, and being so cautious about releasing information that they are seen as uncooperative or obstructionist, recognizing that information turned over to the government may be discoverable during any subsequent private litigation.

Some guidance is available regarding agency approaches to privileged information. For example, DOJ guidance was recently

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updated to limit the extent to which prosecutors can and should request privileged information, which is discussed below. DEP’T OF JUSTICE, Memorandum from Mark Filip, Deputy Attorney Gen. Dep’t of Justice, to Heads of Dep’t Components, regarding Principles of Federal Prosecutions of Business Organizations (Aug. 28, 2008) (the “Filip Memorandum”), available at http://www.usdoj.gov/dag/readingroom/dag-memo-08282008.pdf. The Filip Memorandum revised prior guidance that focused on an agency’s proving of a “legitimate need” to obtain privileged information to “expedite its investigation” and “evaluate the accuracy and completeness of the company’s voluntary disclosure.” That emphasis has shifted; DOJ guidance now does not require production of attorney generated interview notes, only the relevant factual information. U.S. ATTORNEYS’ MANUAL, tit. 9, ch. 9-28.720(a) n.3 (cooperation not required to produce privileged notes or memoranda, only “relevant factual information”). Moreover, The DOJ manual suggest that the DOJ can’t request privilege waivers and must give equal credit where one makes relevant disclosures, even if they maintain privilege. Id. at 9.28.710 (emphasizing detrimental erosion of privilege such that “prosecutors should not ask for such waivers and are directed not to do so”). Similarly, SEC guidance directs that prior approval is required before requesting a company to waive privileges. OFFICE OF CHIEF COUNSEL, SEC, COMM’N DIV. OF ENFORCEMENT, ENFORCEMENT MANUAL, § 4.3 (Oct. 9, 2013) (“The staff should not ask a party to waive the attorney-client or work product privilege protection without prior approval of the Deputy or Deputy Director.”) (emphasis in original), available at http://sec.gov/divisions/ enforce/enforcementmanual.pdf.

Federal Rule of Evidence 502 squarely addresses waiver in the context of parallel proceedings, stating that “when a disclosure is made in a federal proceeding or to a federal office or agency and waives the attorney-client privilege or work product protection, the waiver extends to an undisclosed communication or information in a federal or state proceeding only if (1) the waiver is intentional; (2) the disclosed and undisclosed communications or information concern the same subject matter; and (3) they ought in fairness to be considered together.” FED. R. EVID. 502(a). Conversely, inadvertent disclosures will not operate as a waiver if the holder of the privilege or protection took reasonable steps to prevent

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disclosure and to subsequently rectify the erroneous disclosure. Id. at 502(b).

To the extent that a company voluntarily decides to disclose confidential or privileged documents to a government agency, it should ask the agency for a confidentiality agreement specifying that the disclosure does not constitute a waiver of any privileges. If the government is willing, the agreement should be in writing, and counsel should try to include provisions that: (1) the agency is prohibited from disclosing the information to any third parties, including other government agencies; (2) the agency will not later argue that any disclosure waived privilege; and (3) the company and the agency are working cooperatively and, thus, the agency will participate in all efforts to preserve the confidentiality of the disclosed information. If the government is not open to entering into a confidentiality agreement, counsel should consider asking the agency to issue a subpoena for the information sought so that, at the very least, the disclosure will be considered involuntary.

The greatest pitfall, however, is that even with a confidentiality agreement in hand, a company cannot rely on courts enforcing that agreement in subsequent private litigation with other third parties. Courts generally still adhere to the traditional view that any intentional disclosure of a privileged document to any third party destroys the privilege against all third parties. Moreover, in assessing the enforceability of a confidentiality agreement, several circuits have specifically held that disclosure pursuant to such agreements will still destroy privilege. See, e.g., In re Qwest Comm’s Int’l Sec. Litig., 450 F.3d 1179, 1194 (10th Cir. 2006); In re Columbia/HCA Healthcare Corp. Billing Prac. Litig., 293 F.3d 289, 307 (6th Cir. 2002); Gruss v. Zwirn, 2013 U.S. Dist. LEXIS 100012, *36 (S.D.N.Y. July 10, 2013) (rejecting selective waiver on grounds that “recent circuit court decisions have not permitted parties who produce documents to an adverse government agency to assert attorney-client privilege and work product protection as to those same documents when demanded by a third party in an unrelated litigation”). This is an additional risk that the company must weigh against the advantages of cooperation. The decision may be based, in part, on an assessment of what types of documents and information are likely to be compelled or produced during

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subsequent litigation and the value of the privileged information to the company. Thus, in most instances where a company voluntarily discloses information to “cooperate” with the government, it will constitute waiver. But see In re McKesson HBOC, Inc. Sec. Litig., No. 99–CV-20743, 2005 WL 934331 (N.D. Ca. Mar. 31, 2005) (discussing the doctrine of selective waiver, recognized in some jurisdictions as holding documents disclosed to the government in one instance as losing their privilege, while still maintain their privilege in subsequent third-party civil litigation); see further G. LEET BUSINESS LAW SYMPOSIUM: LAWYERS IN THE CROSSHAIRS: THE NEW LEGAL AND ETHICAL DUTIES OF CORPORATE ATTORNEYS: REMARKS OF AN SEC ASSOCIATE GENERAL COUNSEL (R. HUMES), 57 CASE W. RES. 341, 352-53 (viewing Qwest, 450 F.3d 1179, and other selective waiver cases as highly “fact specific,” and discussing other caveats of this doctrine).

3. Use of Non-Legal Personnel During the Investigation

A company should strive to use as few non-attorneys as possible during the investigation to avoid disputes regarding whether the attorney-client privilege or work product doctrine applies to these individuals. If non-legal personnel, such as accounting experts or outside investigators, are hired or involved in the investigation, they should be retained by counsel and supervised directly by attorneys. This will avoid confusion as to whether they were hired by the company in a business capacity, in which case any legal privileges would not apply to their work. In the engagement letter sent by counsel, any non-legal experts or consultants should be informed that their services are being used to help render legal advice and, as such, all communications must remain, and be designated, confidential. During interviews, the use of experts should be limited, and counsel should minimize the disclosure of information (providing only the basics necessary for the attorney to conduct the interview), and clarify that the expert’s presence is necessary for counsel to provide legal advice.

Disclosures of investigative information to accountants or auditors, which may be unavoidable in view of the auditor’s financial statement review obligations, should be handled cautiously, as attorney-client privilege is unlikely to extend to such

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communications. One potential compromise is to provide auditors with factual summaries as opposed to complete interview memoranda or other attorney work product. Furthermore, auditors generally should not participate in attorney-led interviews as this presence likely would defeat privilege. United States v. Ruehle, 583 F.3d 600 (9th Cir. 2009). The benefits (and in some cases necessity) of sharing information with auditors, however, may outweigh privilege concerns. Work-product protections may not always be waived in third-party disclosures if those individuals are confidentially shared with a non-adversary. SEC v. Berry, No. C07-04431, 2011 WL 825742, at *6-8 (N.D. Cal. Mar. 7, 2011) (no waiver where information is shared with a non-adversary); but see United States v. Hatfield, No. 06-CR-0550, 2010 WL 183522 (E.D.N.Y. Jan. 8, 2010) (failure to reasonably protect confidentiality when disclosing information to auditors resulted in waiver).

Perhaps less obvious, but more likely to result in an inadvertent waiver, are situations involving communications between counsel and the board of directors, particularly if counsel has been retained by a special committee rather than the full board. While communications between counsel and the special committee are privileged, communications from counsel to the entire board of directors may not be. See Love v. Permanente Med. Group, No. C-12-05679, 2014 U.S. Dist. LEXIS 22243, at *8-9 (N.D. Ca. Feb. 19, 2014) (citing S.E.C. v. Roberts, 254 F.R.D. 371, 383 (N.D. Cal. 2008), for proposition that “communications between attorneys and special committee within board of directors formed to conduct internal investigation into securities law violations are protected by attorney-client privilege; communications between attorneys and members of the board that are not members of the special committee are not protected by the attorney-client privilege”); In Ryan v. Gifford, CIV. A. 2213-CC, 2007 WL 4259557, at *3-4 (Del. Ch. Nov. 30, 2007), outside counsel addressed the entire board to provide legal advice. Certain board members present at the meeting were also defendants in associated derivative litigation and were accompanied by their individual counsel. The court found that the board members received privileged information in dual fiduciary and independent capacities, in part because they ultimately used the information to defend in the derivative action. The individuals were deemed to be acting in their individual, not

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fiduciary, capacity, and as such, their presence destroyed privilege. Id. Based on this concern, counsel should limit communications with the entire board and, when addressing them, expressly state the information is being provided to them solely in their fiduciary capacity.

H. POST-INVESTIGATION RELATIONS WITH THE GOVERNMENT

In light of the prompt actions companies must take when misconduct is discovered, the government’s emphasis on cooperation, and the serious need for directors and officers to manage their fiduciary duties, it is essential that interactions with government agencies are handled properly and strategically. The following considerations typically are among the most challenging issues confronting a company in the wake of an internal investigation.

1. Disclosure of Investigation Findings

After an investigation is complete, a company usually has discretion as to whether it will disclose its findings. Mandatory disclosures are limited and typically arise pursuant to specific statutory provisions. Examples where disclosure is statutorily mandated include environmental laws, e.g., the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9603, and the Clean Water Act, 33 U.S.C. 1321(b)(3), (5), as well as requirements under SOX, see supra Section A(2). Securities laws also may require certain disclosures where necessary to correct a previously inaccurate or misleading public disclosure. See SEC Rule 10b-5. Officer and director duties relating to their fiduciary responsibilities also may require increased transparency. Similarly, a company may have a difficult time refusing to disclose its findings if it previously agreed to do so (for example, in a cooperation agreement); as such, companies are advised not to make such promises at the outset before they are aware of what the investigation will uncover.

Special ethical considerations may also require disclosure. Attorneys may carry such an obligation under their governing rules of professional conduct, despite parallel duties of confidentiality to

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the corporation. There would, for example, be a duty to disclose information necessary to prevent future criminal conduct, which overlaps with considerations of the “crime-fraud” exception to the privilege doctrines.

In most cases, however, disclosure is voluntary, and the decision should be based on an assessment of the attendant benefits and risks. The benefits of disclosure include the vast cooperation considerations previously discussed. See supra Section A(3). In light of the fact that fines and sanctions may be reduced, and, where the DOJ is involved, criminal penalties minimized or avoided, disclosure may be warranted. Similar benefits exist in actions brought by other federal agencies as well, such as the Federal Trade Commission.

The risks are relatively obvious. In addition to the concerns already noted regarding potential waivers of privilege and ramifications of “failing to cooperate,” the disclosure of damaging findings—ranging up to a degree of criminal activity—is likely to expose individuals and the company to increased liability that might not arise if the government was left to its own investigative resources. Ultimately, the company is more likely to discover misconduct faster and more fully, hence the reason for the “cooperation” initiative. Press Release, SEC, SEC Announces Initiative to Encourage Individuals and Companies to Cooperate and Assist in Investigations (Jan. 13, 2010) (referring to the initiative as a game-changer to “develop first-hand evidence” given there “is no substitute for the insiders' view into fraud and misconduct that only cooperating witnesses can provide”).

2. Responding to a Government Investigation

Regardless of what is shared with an investigating government authority, a company should maintain communication with the agency or regulatory body through the end of its involvement. If the company is consistently responsive to agency requests and communications, it can prevent accusations that it appears to be stalling or obstructing the investigation.

The obvious challenge for a company confronting a government investigation is to appear to be responsive and

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cooperative, while also maintaining an eye for the delicate privilege considerations set forth in Section F. This includes responding, to the extent required, to subpoenas and other document requests. Appropriate document preservation notices and collection protocols become particularly important in the context of a government subpoena. Often it is advisable to communicate promptly with the government attorneys and reach agreement so as to limit the scope of an impossibly broad document request. This is easier to accomplish in circumstances where the company already has conducted a thorough investigation and has identified the relevant body of materials. Preparing employees for government interviews requires particularly thorough preparation. Employees must be prepared to provide accurate and complete information. In many cases, employees may request (or should be offered) separate counsel to allow an individualized analysis of whether to consent to a government interview request. In such circumstances, joint defense or common interest agreements are typically utilized to enable corporate counsel and individual counsel to participate jointly in the employee preparation and potential interview sessions.