navigating the complex issues presented to in-house ... · navigating the complex issues presented...

Navigating the Complex Issues Navigating the Complex Issues Presented to In-House Counsel i I t l I ti tiin Internal Investigations

Presented by:

James V Masella III Blank Rome LLP moderatorJames V. Masella III, Blank Rome LLP - moderator

Joseph G. Poluka, Blank Rome LLP

Catherine A Armentano Bl k R PCatherine A. Armentano, Blank Rome LLP

Michelle Gitlitz Courtney, Blank Rome LLP

L A GLawrence A. Gross, Godiva Chocolatier, Inc.

Robbyn Reichman, Aon Risk Services

@BlankRomeLLP #EmergingIssues7

Jeremy L. Reiss, Blank Rome LLP

Hypothetically Speaking . . . Wi C ti C Winesap Computing Company • On March 1, the Winesap Computing Company releases its p p g p y

revolutionary redBIRD Phone.

• The redBIRD has the ability to play Internet movies and beam y p ythem to a TV set; play music stored in MP3 format; send and receive e-mails; surf the Web; and, of course, make telephone


calls.

• As part of the launch, Winesap enters into an arrangement p p gwith Mobiltron, the largest cellular provider in North America, to be the exclusive network for the redBIRD. Under the

t th t f hi h t bli l di l d agreement, the terms of which are not publicly disclosed, Winesap agrees to sell and service its redBIRD device through Mobiltron for a period of 3 yearsthrough Mobiltron for a period of 3 years.

• On February 25, the Chief Technology Officer of Winesappurchases $2 million shares of the Company Previously she purchases $2 million shares of the Company. Previously, she had never purchased shares of the Company, instead receiving shares and options as part of her compensation


g p p ppackage.

• The redBIRD is a huge success, with the Winesap share g pprice doubling within two weeks of its release.

• On March 20, a lawsuit is filed in New York against Winesap,alleging it violated federal antitrust laws by entering into an exclusive arrangement with Mobiltron.

• On March 22, Winesap receives an inquiry from the Securities and Exchange Commission that suggests the SEC is investigating whether insiders at Winesap traded on is investigating whether insiders at Winesap traded on material non-public information in advance of the release of the redBIRD.


redBIRD.

• On March 25, the Board of Directors of Winesap receives a pletter from a shareholder demanding that the Board terminate the employment of, and sue, those executives who agreed to th l i t ith M bilt th d th t the exclusive arrangement with Mobiltron on the grounds that the arrangement exposed the Company to antitrust liability and litigation expenseslitigation expenses.

• You are the General Counsel of Winesap. The Chairman of the Board calls you at 10 p m on March 25 and asks your the Board calls you at 10 p.m. on March 25 and asks your advice. What do you tell her?


Triggers for an Internal Investigation and theCreation of a Special Litigation Committee (“SLC”) Creation of a Special Litigation Committee (“SLC”)

• Shareholder demand alleging misconduct by corporate officers or misconduct by corporate officers or agents

• “Whistleblower” allegations of unlawful Whistleblower allegations of unlawful conduct

• Regulatory and/or criminal subpoenas and investigations

• Employee, customer, or vendor complaintscomplaints

• Auditors’ concerns• Allegations in civil litigation


• Allegations in civil litigation

CLASS DERIVATIVEACTION

PLAINTIFFS

DERIVATIVE ACTION

PLAINTIFFS

COMPANY

and the rest . . .


DOJ SECHERDING THE CATS

PARTIES & ATTORNEYSSHAREHOLDERS

Special Committee

(Investigation)

Special Litigation

CommitteeExisting

ExistingExistingDirector

ExistingDirector

SHAREHOLDERS

ClassAction

Plaintiffs

Derivative Action

Plaintiffs

Shareholder AdvocateSh h ld

BOARD

(Investigation)ExistingDirector

FormerDirector

ExistingDirector

DirectorDirector

FormerDirector

FormerDirector

StateState FederalFederal

AdvocateShareholder Advocate

COMPANY EMPLOYEESMANAGEMENT

ExistingOfficerExisting

OfficerExistingOfficerExisting

OfficerExisting FormerF

PRInsuranceAUDITORS

FormerOfficerFormer

OfficerFormerOfficer

Officer EmployeeFormerEmployeeFormer

EmployeeFormerEmployee

PR Consultant

Insurance Broker/Agent

INSURERGOVERNMENT

AUDITORS

INSURER

MEDIAMEDIA


OthersDOJSEC INSURER MEDIA

MEDIAINSURER

Scope and Power of the SLC

• Shareholder Derivative Context – Investigate allegations retain counsel and make a recommendation to – Investigate allegations, retain counsel, and make a recommendation to

the Board (if the Board is independent), or retain authority regarding a final determination as to alleged wrongdoing (if the Board is not independent or demand is excused).

– Whether the SLC or the Board retains the authority to make the final determination about the alleged wrongdoing will determine which entity will eventually seek the protection of the business judgment rule for that decisiondecision.

• Regulatory Inquiries and InvestigationsIn estigate allegations retain co nsel and make a recommendation to – Investigate allegations, retain counsel, and make a recommendation to the Board (if the Board is independent), or retain authority regarding a final determination as to alleged wrongdoing (if the Board is not independent).


p )

Selecting and Retaining Counsel for the SLCSelecting and Retaining Counsel for the SLC• Counsel should be independent from:

– The Company,– Directors and Officers, and

Th C ’ l – The Company’s counsel. • Independent counsel will increase the likelihood that the SLC

and its investigation will be found to be independent and and its investigation will be found to be independent and entitled to the protections of the business judgment rule.

– Lemenestrel v. Warden, 2008 Pa. Super. LEXIS 4377 (Dec. 31, Lemenestrel v. Warden, 2008 Pa. Super. LEXIS 4377 (Dec. 31, 2008).

• The SLC (not the Company) should execute the engagement


letter.

What Does Independent Mean?p

• Minimal or no prior (or concurrent) representation of the Companythe Company.

• Minimal or no business or social relationships with the social relationships with the Company, Directors, Officers, or Company counsel.p y


What Happens if Counsel is not Independent?

• The adequacy of the investigation may be called into question, and the actions in reliance on the investigation may not be afforded the protections of the business judgment rule.

Brinckerhoff v JAC Holding Corp 692 N Y S 2d 381 (1st Dep’t – Brinckerhoff v. JAC Holding Corp., 692 N.Y.S.2d 381 (1st Dep’t 1999).

– Par Pharm., Inc. Deriv. Litig., 750 F. Supp. 641 (S.D.N.Y. 1990)., g , pp ( )

• Government regulators may attribute less credibility and g y yintegrity to the investigation.


Allocation of Work between the SLC and its C l Counsel • The SLC should make all decisions regarding the scope and The SLC should make all decisions regarding the scope and

direction of the investigation. – Counsel can make recommendations to the SLC.

• Counsel may do the majority of the work regarding the investigation, including interviewing witnesses and reviewing documents, but there should be established mechanisms for counsel to report to the SLC regarding each of these i ti ti t investigative steps.


Relationship between Counsel for the SLC and In-House Counsel and Other Outside CounselCounsel• Designate one in-house lawyer to assist the SLC in accessing

documents and interviewing personnel. • Coordination with the Company’s other counsel, without

waiving privilege, is fine.• But neither in-house counsel nor any other outside counsel

di t li it th i ti timay direct or limit the investigation.


INTERVIEWS and UPJOHN WARNINGS


* Reproduced with permission of the author and without waiver of copyright

UPJOHN and The Corporate Privilegep g

• Upjohn v. United States, 449 U.S. 383 (1981):pj ( )– Communications between corporate counsel and employees are

privileged.C– The privilege belongs to the Company.

– The Company can waive the privilege.


Purposes of UPJOHN WARNINGp

• Encourage employees to cooperate with g p y pthe investigation

• Clearly explain the nature of the privilege and the potential conflict:

– Ensure that the SLC controls the privilege;– Avoid a later claim that an employee was

“thrown under the bus”; and– Avoid any appearance of dual representationAvoid any appearance of dual representation


Contents of the UPJOHN WARNING

• Winesap has formed a Special Litigation Committee to conduct an investigation.

• We have been retained as counsel for the SLC to assist in the conduct of the investigation You are being interviewed in conduct of the investigation. You are being interviewed in connection with the investigation.

• We represent the SLC only, not the Company or you individually.• This interview is privileged, but the SLC controls the privilege and

may decide to reveal the substance of the interview to regulatory authorities or other third parties.authorities or other third parties.

• Keep substance of the interview confidential.• Any questions? Do you wish to proceed?


Cautionary Talesy• Lack of proper Upjohn warnings can lead to:

– Employees attempting to claim the privilege and/or the Company or the SLC losing control of the privilege:

• U.S. v. Norris, 722 F. Supp.2d 632 (E.D. Pa. 2010), aff’d, 2011 WL 1035723 (3d Cir Mar 23 2011); and(3d Cir. Mar. 23, 2011); and

• U.S. v. Ruehle, 583 F.3d 600 (9th Cir. 2009).– Disciplinary violations:

U S Ni h l 606 F S 2d 1109 (C D C l 2009)• U.S. v. Nicholas, 606 F. Supp.2d 1109 (C.D. Cal. 2009).– Malpractice/Breach of fiduciary duty claims:

• Pendergest-Holt v. Sjoblom, No. 3:09-cv-000578 (N.D. Tex. Mar. 27, 2009).M k i d d h f h i b f • Make sure witnesses understand the nature of the representation before proceeding.

• Make a written record of the Upjohn warnings given.


pj g g• Obtain written waiver where there is a conflict of interest.

The Special Litigation Committee Reportp g p

• Determining whether the report should be oral or written:g p– Consider the end-product at the outset of the internal investigation.– Whether the report is written or oral has important implications for

fclaims of privilege.


Cooperation

• Department of JusticeTh Fili P li (A 28 2008) – The Filip Policy (Aug. 28, 2008):

• Cooperation is relevant in determining whether to charge a corporation with wrongdoing but a “failure to cooperate in and corporation with wrongdoing, but a failure to cooperate in and of itself, does not support or require the filing of charges.”

• Prosecutors “should not ask” for waivers of non-factual or “core” attorney-client communications or work product “and are directed not to do so.”


Cooperation

• Securities and Exchange Commission– Enforcement Manual Section 4.3: “The staff should not ask a party

to waive the attorney-client privilege or work product protection without prior approval of the Director or Deputy Director ” without prior approval of the Director or Deputy Director.

– Cooperation is based on whether or not relevant facts were voluntarily disclosed and not whether a party waived privilege. “[A] party’s decision to assert a legitimate privilege will not negatively affect a claim to credit for cooperation.”

• Risks of waiving privilege • Risks of waiving privilege • Confidentiality agreements and “selective waiver”


Effect of Disclosure of the Report on U d l i M t i lUnderlying Materials

Interview notes underlying data and • Interview notes, underlying data, and memoranda

– If quoted or paraphrased in the report – If quoted or paraphrased in the report, waiver is likely.

– However, a disclosure will not affect a waiver of the privilege as to all information on the same subject matter, unless “fairness” requires further unless fairness requires further disclosure. Fed. R. Evid. 502.

• Drafts of the report


Whose Side Are You On, Anyway?Whose Side Are You On, Anyway?• The DOJ and other federal agencies encourage companies to

fcooperate and disclose the results of internal investigations. • As a result, company counsel may become de facto “deputies”

f l f tof law enforcement.• Counsel’s dual role highlights the risk of conflict between the

company and its executives and employees U S v Nicholas company and its executives and employees. U.S. v. Nicholas, 606 F. Supp.2d 1109 (C.D. Cal. 2009).

• Individuals can be prosecuted for “anticipatory” obstruction of • Individuals can be prosecuted for anticipatory obstruction of justice based on false statements to company counsel. See U.S. v. Ray, No. 2:08-cr-01443 (C.D. Cal. 2008); 18 U.S.C. §


U.S. v. Ray, No. 2:08 cr 01443 (C.D. Cal. 2008); 18 U.S.C. §1519.

In-House Counsel as Targets


In-House Counsel as Targets

• In-house counsel have increasingly become the subject of government investigations and prosecutions.

• Examples of recent cases include:– U S v Stevens No 8:10-cr-00694 (D Md ) (Glaxo-Smith-Kline Associate – U.S. v. Stevens, No. 8:10-cr-00694 (D. Md.) (Glaxo-Smith-Kline Associate

GC indicted for allegedly making false statements, falsifying and/or concealing documents, and obstructing FDA investigation).

– U S v Grass No 1:02-cr-00146-02 (M D Pa ) (former Rite-Aid VP and – U.S. v. Grass, No. 1:02-cr-00146-02 (M.D. Pa.) (former Rite-Aid VP and Chief Legal Counsel convicted of various charges, including conspiracy to obstruct justice, obstructing grand jury and government agency proceedings, and witness tampering).p g , p g)

– U.S. v. Woghin, No. 1:04-cr-00847 (E.D.N.Y.) (former GC of Computer Associates International, Inc. pled guilty to conspiracy to commit securities fraud and obstruction of justice).


j )

Focus on Obstruction

• Obstruction of justice has become a favored charge for indictment of in-favored charge for indictment of inhouse counsel.

• The federal obstruction of justice statutes include:

– 18 U.S.C. § 1503 (criminalizes corruptly influencing, obstructing, or impeding the due course of justice in the context of a judicial or grand jury the context of a judicial or grand jury proceeding).

– 18 U.S.C. § 1505 (penalizes corruptly influencing, obstructing, or impeding pending federal investigations)pending federal investigations).

– 18 U.S.C. § 1512(c) (penalizes corruptly obstructing, influencing, or impeding official proceedings).


Some Steps to Minimize Your Risk

• Preservation memoranda to all relevant employees halting the deletion/destruction of documents and electronic data.

• “Mirroring” of personal computers and company laptops.• When responding to a government subpoena/document request, communicate

and document the scope and meaning of the requests with the issuing agency.• Seek agency approval of search terms and protocols for production of electronic

documents/data.• Document efforts to ensure compliance with production/preservation obligations.• Consider segregating employees, including in-house counsel, who may be

targets of a probe from the document preservation/production process.• When interviewing witnesses, avoid any conduct (e.g., coaching) that could be

construed as influencing the witness’ statementconstrued as influencing the witness statement.• Avoid making unequivocal or absolute statements to the government concerning

the company’s conduct or compliance with an investigation.


SAMPLE TIMELINE

SEC and DOJ subpoenas issued; initial shareholder lawsuits filed; SC formedDetermination of probable need for restatement

Year 1 Year 2 Year 3 Year 4

Determination of probable need for restatement10-K filing deadline missed

SC initial report to BoardSC investigation substantially competed; key remedial actions taken

10-Q filing deadline missedNasdaq delisting hearing

Late 10-K and 10-Q filed with restated financialsProxy statement filedy

Annual meeting held (4 months late)Executive cases filed

SEC case settledCl ti ttl dClass action cases settled

SC motion to dismiss filedMotion denied

Derivative &


executivecases settled

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