ABA Criminal Justice Section
Internal Investigations:
Navigating the Ethical Minefield
Fact Pattern Assumptions
• CCO reports to Audit Committee not through
General Counsel
• Allegation of widespread antitrust violations
• [Susan question]: when does this get handled by
Audit Committee? When by a Special
Committee?
2
Who conducts the investigation into the
whistleblower allegations?
•
[Susan] General counsel knows the company well; very cost effective; large in-house legal
department. If no allegation made about GC, can GC direct investigation using outside investigative
support?
•
[Patrick] Assuming no one thinks that it is a good idea for the GC to run it, what if GC wants to detail
some of his/her folks to the effort because of substantive knowledge and cost effectiveness?
•
[Ted] Chief compliance officer "what if compliance officer hires outside investigators to get a sense
of whether there is any there , any issues?"
– [perhaps explain Halliburton case in DC: district court viewed internal investigation as not being
privileged since there was obligation to investigate in order to comply with a reporting
obligation; DC Circuit: as long as a “significant” purpose was to provide legal advice, there is
privilege]
•
[Lori Lightfoot] Regular outside counsel knows the company; has really excellent judgment; will
be efficient
– What triggers need to go past regular outside counsel? how assess “independence”?
Does the fact that you stood up a Special Committee dictate independent counsel?
How would answer change if the matter were being handled by the Audit Committee?
Does the need for a Special Committee in part depend on the qualifications and temperament of
who is on your audit committee? If so, how do you accomplish this?
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What are risks to counsel not being
independent?
• What has SEC said?
– Some Seaboard Report factors:
• Reaction to misconduct and steps taken in response
• Cooperation with law enforcement
• Who oversaw the review of misconduct:
– “Where the review was conducted by outside counsel, had management previously engaged such
counsel?”
• [Judge Holmes] What kind of questions do you get from GCs and Boards at the time of
engagement about scope of prior work? What questions come later from the Government when
you make any report?
• New internal controls to prevent reoccurrence of misconduct
• Extreme cases:
• [Dan Webb]: what can go wrong?
– Enron/[Vinson & Elkins]: $ 30 million payment; dragged before Congress; partner
testified at Skilling trial
– Global Crossing/[Simpson]: $ 19 million payment
– Hewlett Packard use of [Wilson Sonsini] criticized
• [Lori/Ted]: does the "independence" question get viewed differently overseas?
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Assume: Go with Independent Firm
• Who does the firm represent?
– Company?
– Board?
– Special Committee?
– [Judge Durkin] when you were a practitioner did
employees and officers fully understand this?
• [Susan L] How can a GC make sure that this does
not go off the rails in terms of scope/expense
without looking obstructionist?
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General Counsel Role when
Independent Look
• [Dan Webb]: How comfortable do you feel when you get a call
from the GC asking for an update?
– When would you feel comfortable doing that?
– When not?
• [slide three] Kirschner v. K & L Gates LLP: Plaintiffs’ complaint
was legally sufficient as to outside counsel’s breach of
professional duty where the implicated CEO was provided
regular updates on the investigation, including “a description of
the topics that K&L Gates intended to address during employee
interviews, thus enabling [the CEO] to coach those witnesses
before their interviews.”
• [need volunteer] How do you deal with SEC disclosures about
pending material matters?
• [Kris]: how do the auditors deal with independent investigation
by Special Committee?
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Outside Lawyer Interviewing
Witnesses
• [Patrick C] What do you tell witnesses about who you
are?
• Explain Upjohn in practice. Any gray areas?
Disclosure to Witnesses
• Witnesses need to understand that:
– Lawyer represents Special Committee and not the individual
– Privilege belongs to company and company can waive it
– Substance can be disclosed to management, board and
government
– Especially where there is a criminal investigation overlay,
right to have personal counsel
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Consequence of not telling witness?
– Inadmissibility in court
– [slide four] ABA Model Rule 1.13(f): “In dealing with an
organization's directors, officers, employees . . . or other
constituents, a lawyer shall explain the identity of the client
when the lawyer knows or reasonably should know that the
organization's interests are adverse to those of the constituents
with whom the lawyer is dealing.”
– ABA Model Rule 4.3: “In dealing on behalf of a client with a
person who is not represented by counsel, a lawyer shall not
state or imply that the lawyer is disinterested. When the lawyer
knows or reasonably should know that the unrepresented person
misunderstands the lawyer’s role in the matter, the lawyer shall
make reasonable efforts to correct the misunderstanding.”
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Words Matter
• Sue is a corporate employee: “I understood what you just
said about how you represent the company and not me, but
the way I see it as long as the company and I have the same
interests, can you represent me too?”
• Lawyer: “As long as no conflict of interest is present, we
could represent you too.”
[Judge Holmes] Good answer or bad?
• [slide five] In re Grand Jury Subpoena Under Seal: 415
F.3d 333 (4th Cir. 2005): that answer is a “potential legal and
ethical mine field”
• If there had been an attorney-client relationship, then how
could they later waive?
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Confidentiality Statements
• [Collins] KBR had a recent issue with the SEC in the
spring of this year concerning how it handled
witnesses, whom the sec viewed as potential
whistleblowers.
– What happened? [issue with breath of confidentiality
statement]
– What are we to learn from that? [Make sure not to lead
witnesses to believe they are forbidden from talking to the
government]
• Mary Jo White speech: companies still free to give
Upjohn warnings but need to make sure they do not
chill whistleblowing
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Overseas Investigations
•
[Ted]: If someone in the US claimed that they had reported misconduct to an in house
attorney several years ago, any reason you would not expect the attorney to agree to be
interviewed? Any different overseas? [Brazil example]
•
[Patrick]: UK co-counsel tells you she is about to contact a witness directly and the
witness is located in the UK and only has UK counsel. Says that is OK under UK law.
Any issue for you?
•
[Ted] What rules govern a lawyer in Illinois investigating conduct on behalf of a US
company related to work overseas?
•
Any different approach to the issue of attorney-client privilege for in house counsel in
Europe?
•
[Kris] What considerations when gathering evidence overseas?
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A Wrinkle
• Your whistleblower appears to have gone to a newspaper as well as to your
hotline
• Your local friendly US Attorney’s Office, the SEC, and others serve you with a
subpoena and want to interview the witnesses the independent lawyer is about to
interview
[Judge Holmes] Who deals with SEC and USAO?
Who represents the witnesses?
• [slide six] ABA Model 1.13(g): “A lawyer representing an organization may also
represent any of its directors, officers, employees, members, shareholders or
other constituents” but the organization’s consent might be required.
• ABA Model Rule 1.7(a): “[a] lawyer shall not represent a client if the
representation involves a concurrent conflict of interest.”
How do you handle the “hands on” board member or exec who wants to come along
to meetings with the regulators to “clear things up”?
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Cooperating with the Government
• What happens when the government says "Thanks for
cooperating. We would really appreciate it if you would
let us interview your employees before you do.“
• Is this a recent phenomenon?
– [Judge Durkin] Did you hear that when in private practice?
– [Patrick Collins] Did you ask this question when in government?
– [Panel] How does the outside lawyer respond?
• What happens when the government says “We would be
really grateful if you were not in the room"?"
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Where Government Not Involved Yet
Witness Interviews
• Witness drops a bombshell:
– Admits to fixing prices
– Describes it as “just the way things are done in this
business”
– Payments date back a long time
– Indicates directly that his supervisors knew
– Implies that top management knew (one level above his
supervisors)
– If that is not enough, scheme is ongoing
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What next?
• [Lightfoot] Who does outside lawyer report this
to?
– [Special Committee]
• What duties do outside lawyers have?
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“Up the Ladder” Reporting
•
Sarbanes-Oxley, Section 307: an attorney is required to “report evidence of a material
violation of securities law or breach of fiduciary duty or similar violation by the company . .
. to the chief legal counsel or [CEO].” “[I]f the counsel or officer does not appropriately
respond,” the attorney will be required to report to the audit committee.
•
[slide seven] SEC Attorney Conduct Rules 17 CFR 205.3: “If an attorney, appearing and
practicing before the Commission in the representation of an issuer, becomes aware of
evidence of a material violation by the issuer . . . the attorney shall report such evidence to
the issuer's chief legal officer . . . or to both the issuer's chief legal officer and its chief
executive officer . . . forthwith. By communicating such information to the issuer's officers
or directors, an attorney does not reveal client confidences or secrets or privileged or
otherwise protected information related to the attorney's representation of an issuer.”
•
Import: An attorney facing credible evidence of a material violation must report to higher
authority
•
Generally: must report to CLO and if not a timely, sufficient response then to audit
committee, special committee or full board
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Disclosure Obligations
• Ethical Rules: [slides eight and nine]
– ABA Model Rule 1.13(c)(2): May reveal information when “the lawyer
reasonably believes that the violation is reasonably certain to result in
substantial injury to the organization.”
– ABA Model Rule 1.6: Authorizes disclosure where lawyer’s services
are used in furtherance of crime or fraud
• IL: Lawyer may disclose information to prevent a crime even if lawyer’s
services are not used in furtherance of crime
• SEC Rule 102( e): “The Commission may censure a person or deny,
temporarily or permanently, the privilege of appearing or practicing before it in
any way to any person who is found by the Commission after notice and
opportunity for hearing in the matter” to, among other things, “have willfully
violated, or willfully aided and abetted the violation of any provision of federal
securities laws or the rules and regulations thereunder.”
– SEC Rule 205.1 (17 CFR Section 205.1): “Where the standards of a
state or other United States jurisdiction where an attorney is admitted or
practices conflict with this part, this part shall govern.”
– ABA Model Rule 1.6: allows disclosure to “comply with other law”
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Next Steps
• Special Committee: you are the lawyer, what do
you think we should do?
• [Panel] Tell the government or not?
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Independent Lawyer Does Report
• Shares with Audit Committee
• Audit Committee member:
– This is terrible news but a really thorough report
– Let's share it with full board
[Lightfoot] Do you do so?
Any downside?
• [slide ten] Ryan v. Gifford (Del. Ch. 2007): oral report to full
board, including people who were subject of investigation,
constitutes waiver of entire subject matter
• Selective disclosure
– [Judge Durkin] Can you give us a view from the bench as to what
matters when you are reviewing a dispute about the scope of waiver
that results from a selective disclosure? How do you see it from the
bench compared with how you saw it from the private sector?
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[Panel] What do each of you see as either an emerging
trend that practitioners need to keep their eye on or that
the courts may have to take up?
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