SARBANES-OXLEY’S NEW CRIMES, ENHANCED PENALTIES AND
WAYS TO AVOID THEM
Mark A. Rush, Esquire
Kirkpatrick & Lockhart LLP
I.
INTRODUCTION
The Sarbanes-Oxley Act of 2002 (the “Act”) is the Congressional
response to the highly publicized corporate failures of 2001. The Act
created a number of new criminal offenses and increased penalties for
existing offenses. For forward-thinking corporations, these developments
present corporations the opportunity to re-examine their business ethics,
compliance procedures and safeguards against fraud.
Many of the “new” crimes created by the Act could have been prosecuted
under existing federal law. However, both the language and requirements
of the Act indicate that its purpose is to create an environment where good
corporate governance is the standard from the CEO down. The Act
facilitates that standard by requiring the corporate control group to
“know” the details of its business and to certify compliance with the law.
The Act provides for criminal citations and severe sanctions for failing
that standard and knowledge.
Broadly stated, the new crimes under the Act impose a requirement of
truthfulness, accuracy and responsiveness in an effort to make corporate
governance more transparent. In the new world created by the Act,
knowledge by the control group and effective corporate compliance
programs are crucial. Thus, perhaps the most important preventative
actions a corporation can take in response to the Act is to: (i) ensure that
its control group is informed through appropriate audits and/or internal
investigations and (ii) then create or continue its compliance and training
programs, demanding and facilitating an ethical and lawful work
environment.
This article reviews the new statute and significant changes in the
enforcement regime and sentencing issues. It highlights the benefits of
corporate reform through the institution or further development of
compliance programs and internal investigations. It also discusses
pragmatic approaches and considerations when drafting a corporate policy
and guide to employees who may be contacted by law enforcement
officials.
II.
THE NEW OFFENSES, EXPANDED PENALTIES, AND
SENTENCING GUIDELINES UNDER SARBANES-OXLEY1
A.
The New Offenses
The Sarbanes-Oxley Act of 2002 created what has been
characterized as “the new crime of corporate securities fraud.”
While most, if not all, of the conduct the act penalizes was already
punishable through existing criminal statutes covering mail fraud,
wire fraud, aiding and abetting, conspiracy and obstruction of
justice, in passing the Act, Congress intended to make clear that
all offenses involving publicly traded companies now may — and
should — be prosecuted under federal criminal law. As a result, it
is likely that more law enforcement resources will be dedicated to
investigating and prosecuting suspected violations.
1.
Securities fraud
Section 807 of the Act creates the new federal criminal
offense of securities fraud. It provides:
Whoever knowingly executes, or attempts to
execute, a scheme or artifice—
1
(1)
to defraud any person in connection with
any security of an issuer with a class of
securities registered under section 12 of the
Securities Exchange Act of 1934 (15 U.S.C.
781) or that is required to file reports under
section 15(d) of the Securities Exchange Act
of 1934 (15 U.S.C. 780(d)); or
(2)
to obtain, by means of false or fraudulent
pretenses, representations, or promises,
money or property in connection with the
purchase or sale of any security of an issuer
with a class of securities registered under
section 12 of the Securities Exchange Act of
1934 (15 U.S.C. 781) or that is required to
For a more thorough discussion of the Sarbanes-Oxley Act and Compliance, See
SARBANES-OXLEY PLANNING & COMPLIANCE, KIRKPATRICK & LOCKHART LLP
(Thompson Publishing Group, 2003). Contact Mark A. Rush, Esq. at
mrush@kl.com if you are interested in receiving a copy of the publication.
file reports under section 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C.
780(d));
shall be fined under this title, or imprisoned not
more than 25 years, or both.
a.
General principles
Most of the conduct criminalized under this
section could have been prosecuted prior to
enactment of the Act under the more
generic mail or wire fraud statutes.
However, Congress felt that the corporate
climate in publicly traded companies
demanded a more specific statute, with a
threat of more substantial punishment, to
stress the importance of strict compliance
with the securities laws. Actual periods of
incarceration are calculated through
application of the Sentencing Guidelines,
which have been amended pursuant to the
Act.
b.
“Knowingly” and “Willfully”
This new crime punishes conduct that is
committed “knowingly,” even if it is not
committed “willfully.” The distinction between
these terms is extremely important in criminal law,
as “knowingly” generally denotes a lower level of
intent, meaning only that the offender knows he or
she is taking the proscribed action, even if he or
she does not know that doing so is a crime.
“Willfully,” by contrast, indicates that the offender
is aware that what he or she is doing constitutes
fraud, but does it anyway.
The legislative history surrounding the Act
indicates that Congress specifically chose to
eliminate the requirement under the mail and wire
fraud statutes that the conduct at issue in this new
statute be “willful.” Aggressive prosecutors may
latch on to this distinction to prosecute CEOs or
CFOs for more technical violations of the rules
than in the past, even if the officers do not have the
level of willfulness previously required. However,
in practice, the distinction may not have much
effect, since the proof of “knowing” conduct and
“willful” conduct tends to overlap. Moreover, in
the long run, the courts will need to determine if
such a prosecution can stand. Nonetheless, public
companies — and their executives — must be
aware that this distinction may permit a more
aggressive criminal enforcement program.
2.
Failure of corporate officers to certify financial reports
Section 906 of the Act requires CEOs and CFOs to certify
financial reports for publicly traded companies. It
provides:
Whoever:
(1)
certifies any statement as set forth in
subsections (a) and (b) of this section
knowing that the periodic report
accompanying the statement does not
comport with all the requirements set forth
in this section shall be fined not more than
$1,000,000 or imprisoned not more than 10
years, or both;
or
(2)
willfully certifies any statement as set forth
in subsections (a) and (b) of this section
knowing that the periodic report
accompanying the statement does not
comport with all the requirements in this
section shall be fined not more than
$5,000,000, or imprisoned not more than 20
years, or both.
a.
General principles
Under this provision, codified at 18 U.S.C. § 1350,
CEOs and CFOs are required to certify that their
company’s financial statements fully comply with
the reporting obligations of the securities laws and
that they fairly represent, in all material respects,
the financial condition and operating results of the
company.
Penalties for violating the provision vary
depending on the level of intent. An officer who
certifies a periodic report that he knows does not
comport with the reporting requirements of the
federal securities laws (§§ 13(a) and 15(d) of the
Securities Exchange Act of 1934) may be fined not
more than $1 million and imprisoned not more
than 10 years. If the officer acts “willfully,” the
penalty is a fine of not more than $5 million and
imprisonment of not more than 20 years.
It is the first provision, which punishes “knowing”
conduct, which poses the most risk for executives.
For example, even if a CEO or CFO does not
direct that a fraudulent report be made (which
would be classified as willful conduct), he or she
can now be prosecuted for making a certification if
he or she knows the report is inaccurate.
Aggressive federal prosecutors might even attempt
to prosecute individuals who did not create or
direct the creation of false financials, but who were
deliberately indifferent to the truth or falsity of the
reports or who failed to perform any due diligence
to ensure they were correct. Accordingly, due
diligence and good corporate compliance policies
are essential to avoid such prosecutions.
3.
2
Offenses relating to obstructing investigations2
These offenses do not directly implicate a corporation’s internal investigation.
However, it is important to note that most recently the Department of Justice has
increased the frequency of requests that corporations under investigation waive
their work product privilege. Accordingly, an employee who obstructs an internal
investigation beyond mere “silence” may not only find himself unemployed but
may also become subject to charges of obstruction of justice in the event of a
waiver.
The Act also created new offenses regarding obstruction
of justice. Section 802 adds provisions relating to the
destruction, alteration or falsification of records in federal
investigations or bankruptcy, and destruction of corporate
audit records (18 U.S.C. § 1520). Two other sections
provide civil remedies for whistleblowers and criminal
penalties for retaliation against informants. These are
discussed in the next three sections.
a.
Destruction, alteration or falsification of records
Section 802(a) adds a new Section 1519 to Title
18, which 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 of any
department or agency of the United States
or any case filed under title 11, or in
relation to or contemplation of any such
matter or case, shall be fined under this
title, imprisoned not more than 20 years, or
both.
(1.)
General principles
This provision of the Act broadens the
scope of existing obstruction of justice
crimes and imposes strict duties on
subordinates. Prior to the Act, existing law
criminalized the conduct only of the
individual directing or authorizing an act
of obstruction. The Act also covers those
individuals who obstruct justice at the
direction of others.
This provision applies regardless of
whether an investigation is underway or
bankruptcy proceedings have begun. The
statute makes it a crime to alter, destroy or
falsify a document in relation to or in
contemplation of a matter which may
possibly come up in the jurisdiction of any
department or agency of the United States
or any bankruptcy case. Thus, it is likely
that the statute will be used as an
enhancement in cases where an
investigation or a bankruptcy either is
ongoing or has been completed and a
person is found to have altered or
destroyed documents.
b.
Destruction of corporate audit records
Section 802(a) of the Act, codified in part at 18
U.S.C. § 1520, also creates the new crime of
destroying audit records. This provision requires
accountants to maintain for five years “audits or
review workpapers,” and provides criminal
penalties, including imprisonment of up to 10
years, for those who “knowingly and willfully” fail
to do so. The five-year retention period was
deemed necessary to permit authorities to discover
any inappropriate auditing and financial
statements.
Section 802(a) also instructs the Securities and
Exchange Commission (SEC) to create necessary
rules and regulations for the
“retention of relevant records such as workpapers,
documents that form the basis of an audit or
review, memoranda, correspondence,
communications, other documents, and records
(including electronic records) which are created,
sent, or received in connection with an audit or
review and contain conclusions, opinions,
analyses, or financial data relating to such an
audit or review, which is conducted by any
accountant who conducts an audit of an issuer of
securities....”
A person who knowingly and willfully fails to
maintain these other papers as required by the SEC
regulations may be fined and imprisoned for up to
10 years.
c.
Retaliation against informants
Section 1107 of the Act adds a new provision,
codified at 18 U.S.C. § 1513(e), that provides
penalties of up to 10 years for any person who
“knowingly” takes any action harmful to any
persons reporting or providing truthful information
to a law enforcement officer relating to the
commission or possible commission of any federal
criminal offense. This provision is designed to
protect whistleblowers from retaliation. The
provision covers any type of retaliation, not merely
actions related to employment, as long as the
information provided to the law enforcement
personnel was truthful. The Act also protects
“whistleblowers” whose conditions of employment
are affected in retaliation for providing
information with respect to or otherwise
cooperating with an investigation into securities
fraud.
B.
Expanded Criminal Penalties
The Act imposes severe maximum penalties on those who are
convicted of any of the newly created offenses. Those who are
convicted of securities fraud may be imprisoned for up to 25 years
and fined. Those convicted of obstructing investigations by
altering or destroying documents may be imprisoned for 20 years.
Those convicted of destroying audit records or workpapers face
imprisonment of up to 10 years.
Other provisions of the Act increase the maximum penalties for
existing offenses to similar levels. Section 903 of the Act
increases maximum penalties for mail and wire fraud from five
years to 20 years in prison. That section, combined with section
1106, increased maximum penalties for criminal violations of the
securities laws from 10 years and $2.5 million to 20 years and, in
some cases, $25 million. Section 904 increases maximum
penalties for willful violations of the reporting and disclosure
provisions of the Employee Retirement Income Security Act of
1974 from one to 10 years’ incarceration and fines from $1,000
for individuals to $100,000, and from $100,000 for organizations
to $500,000.
1.
Attempt and conspiracy
In addition to the increased maximum penalties for
offenses, section 902 of the Act punishes any attempt or
conspiracy to commit fraud — including bank, mail, wire
or securities fraud — as severely as the actual offense.
Section 902 of the Act increases the maximum possible
sentences for conspiracies and attempts to commit fraud to
imprisonment of 20 years. As a result, an individual who
conspires (i.e., agrees with at least one other person) to
commit securities fraud, or attempts to commit securities
fraud, whether successful or not, now faces substantially
increased maximum penalties. While the Sentencing
Guidelines govern the actual sentence imposed, frequently
at levels far below the legal maximums, the new statute
contemplates far more severe sentences than were
previously available.
C.
Effect on the Sentencing Guidelines
Sections 805 and 905 of the Act direct the U.S. Sentencing
Commission, which issues the Sentencing Guidelines, to review
and amend the Sentencing Guidelines and related policy
statements to ensure that the sentences prescribed in the
Guidelines are sufficient to deter and punish the crimes addressed
by the Act. These changes are likely to have a more significant
impact than the increases in maximum penalties.
The Act required that these revisions be completed within 180
days of its enactment. To meet this deadline, the U.S. Sentencing
Commission released an emergency amendment to the Sentencing
Guidelines on Jan. 25, 2003, which expired on Nov. 1, 2003. The
Commission submitted to Congress on May 1, 2003, its proposed
amendments to the Guidelines, which became effective on Nov. 1,
2003. The discussion below is of the Commission’s amendments.
1.
Specific guideline enhancements
The Act required the Sentencing Commission to adjust the
enhancement levels of the base offense number for certain
white-collar crimes by revising enhancements that would
most likely apply to perpetrators of large-scale securities
fraud. Each enhancement level increases the minimum
and maximum sentence an offender can receive under the
Guidelines. For example, an enhancement of just three
levels can move a defendant facing a possible sentence of
between 51 and 63 months in jail to facing a sentence of
between 71 and 87 months. The revised enhancements
include:
•
number of victims;
•
number of employees and soundness of financial
institutions;
•
officers’ and/or directors’ involvement; and
•
increased loss categories.
As described below, the application of these enhancements
in the context of large securities fraud cases can produce
substantially longer sentences and higher fines.
a.
Number of victims
The amendments to the Sentencing Guidelines
increased the enhancements as follows:
●
10 to 49 victims, the court must add a twolevel enhancement;
●
50 to 249 victims, the court must add a fourlevel enhancement; and
●
250 or more victims, the court must add a
six-level enhancement.
In practice, a corporation or individual who
defrauds stockholders will almost always be
subject to a six-level enhancement because the
number of victims is almost always going to be
greater than 250. Executives of large publicly
traded corporations found guilty of violating the
criminal provisions of the Act or related federal
criminal laws would almost certainly incur the sixlevel enhancement.
b.
Number of employees; soundness of financial
institutions
In addition, the amendment also provides a fourlevel enhancement to the base offense level if,
among other things:
●
the offense substantially jeopardized the
safety and soundness of a financial
institution;
●
the offense substantially endangered the
solvency or financial security of an
organization;
●
the offender was a publicly traded company
or had 1,000 or more employees; or
●
the offender substantially endangered the
solvency or financial security of 100 or more
victims.
These increases are to be applied cumulatively
with the enhancements for the number of victims
listed above.
c.
Officers and directors of publicly traded
companies
The Sentencing Commission amended the
Guidelines to enhance by four levels the base
offense level of a crime committed by an officer or
director of a publicly traded company if that
officer or director was found guilty of a separate
offense that involved a violation of securities law.
If this enhancement applies, it replaces the existing
two-level enhancement for abuse of a position of
trust.
d.
Loss categories
The largest enhancement factor in most fraud cases
is based on the amount of loss resulting from the
fraud. Because the financial loss in several recent
cases has well exceeded the maximum loss
contemplated by the Guidelines, the amendments
are a response to Congress’ directive to re-examine
the amounts. Prior to the amendment, the loss
table provided enhancements of up to 26 levels for
offenses in which the loss exceeded $100 million.
The amendments capped the 26-level enhancement
at losses of up to $200 million and added two
additional categories:
●
for a loss between $200,000,001 and $400
million, the court must add a 28-level
enhancement; and
●
for a loss greater than $400 million, the court
must add a 30-level enhancement.
The Sentencing Commission concedes in its
commentary that the new categories will affect
relatively few cases however, it noted that the
change would allow for greater sentences should
the need arise. These enhancements represent an
increase of more than five years to a prison
sentence.
2.
Increased fines and sentences for traditional whitecollar crimes
In response to the Act’s direction to review, revise and
modify the fines and sentences detailed in the Sentencing
Guidelines to deter, prevent and punish offenses in ways
that reflect the serious nature of the offenses, the
Sentencing Commission’s amendments also changed the
Guidelines’ treatment of several additional white-collar
crimes.
a.
Fraud (U.S. Sentencing Guideline §2B1.1)
New Sentencing Guideline §2B1.1 covers a variety
of forms of fraud, including larceny,
embezzlement and other forms of theft; offenses
involving stolen property; property damage or
destruction; fraud and deceit; forgery; and offenses
involving altered or counterfeit instruments other
than counterfeit bearer obligations of the U.S.
government. The Sentencing Commission’s
amendments did not treat all types of fraud
equally, however, and Congress dealt with some
types, such as mail and wire fraud, directly in the
Act.
b.
Mail and wire fraud
The Act specifically increases the maximum
incarceration time for a person convicted of mail
or wire fraud from five years to 20 years. Mail
fraud, 18 U.S.C. § 1341, makes it a crime to make
use of the U.S. Postal Service or other private or
commercial interstate carrier in executing a
scheme to defraud others. Similarly, wire fraud,
18 U.S.C. § 1343, makes it a crime to make use of
wire communications (including telephone calls, emails or wire transfers) in executing a scheme to
defraud others. The size of the scheme and the
briefness or relevancy of the use of the mail or
wire system is generally not an issue under these
statutes. Indeed, the use of the mail or wire system
need not have been extensive or even the focus of
the crime, so long as its function was to further the
fraud. Since most fraudulent schemes make some
use of at least one of these means, those crimes can
either be added on to other charges or stand on
their own, regardless of whether the actual scheme
was carried through to completion.
c.
Obstruction of justice (U.S. Sentencing Guideline
§2J1.2)
In order to respond to the directives contained in
the Act relating to obstruction of justice, the
Sentencing Commission increased the base offense
level applicable to all defendants by two levels,
from level 12 to level 14. Because incarceration is
mandatory beginning at offense level 12, and
many offenders receive a two-level downward
departure for acceptance of responsibility, this
change substantially increases the likelihood of
incarceration for these offenders. The
Commission also added a two-level enhancement
if the offense:
d.
●
involved the destruction, alteration or
fabrication of a substantial number of
records, documents or tangible objects;
●
involved the selection of any essential or
especially probative record, document or
tangible object to destroy or alter; or
●
was otherwise extensive in scope, planning
or preparation.
Employee Retirement Income Security Act
(“ERISA”) violations (§2E5.3)
The U.S. Sentencing Commission also concluded,
in light of the substantially increased penalties
Congress imposed on certain violations of ERISA
in the Act, that criminal violations of ERISA that
facilitate fraud were more appropriately sentenced
under the harsher fraud penalties described above.
To effectuate this change, the Commission
provides a cross-reference to the fraud guidelines
directing the sentencing court to use Guideline
§2B1.1 (discussed above) to determine the
appropriate sentence.
III.
COMPLIANCE PROGRAMS AND INTERNAL INVESTIGATIONS
A.
General Principles
There are several actions executives and corporations can
implement to reduce the risks of a federal prosecution or to
mitigate its effects if an investigation turns up evidence of
criminal conduct. Perhaps the most important preventative action
is to create and implement an effective compliance program.
Compliance programs are designed to prevent and to detect
misconduct and to ensure that corporate activities are conducted in
accordance with all applicable criminal and civil laws, regulations,
and rules.
B.
Advantages of a Compliance Program
A compliance program has several advantages for a corporation.
First, it can provide a deterrent for employees who are faced with
the decision of acting illegally on behalf of the corporation.
Second, the addition of a self-reporting mechanism as part of the
compliance program can pre-empt the opportunity for a
whistleblower to bring misconduct to the attention of law
enforcement. Third, having an effective compliance program may
persuade the prosecution to exercise its discretion not to seek an
indictment. Finally, should the government proceed with a
prosecution, an effective compliance program qualifies a
corporation for a reduction in the range of possible penalties as
calculated by the Sentencing Guidelines — a reduction with
significant benefits should the corporation be convicted (U.S.S.G.
§8C2.5(f) & (g)).
C.
Relevant Factors to Consider
In determining whether a compliance program is effective, it is
critical that one consider the organizational due diligence taken to
detect and curtail criminal conduct. Several factors are used to
determine the effectiveness of a compliance program:
(1)
The compliance program must reasonably be capable of
reducing the prospect of criminal conduct;
(2)
High-level personnel must be assigned overall
responsibility to oversee the compliance program;
(3)
The corporation must use due care not to delegate
substantial discretionary authority to individuals whom the
organization knew, or should have known, had a
propensity to engage in illegal activities;
D.
(4)
The corporation must effectively communicate its
compliance program to all employees and other agents;
(5)
The corporation must take reasonable steps to achieve
compliance with its program by utilizing monitoring,
auditing and reporting systems;
(6)
The compliance program must consistently be enforced
through appropriate disciplinary mechanisms;
(7)
After an offense has been detected, the organization must
take all reasonable steps to respond appropriately to the
offense and to prevent further similar offenses.
Other Considerations
In determining whether it is appropriate to pursue criminal
charges, law enforcement officials will consider whether the
corporation has provided sufficient staff to audit, document,
analyze and utilize the results of the corporation’s compliance
efforts.
An effective compliance program can significantly reduce a
corporation’s fine, by as much as 60 percent as calculated by the
Sentencing Guidelines, subject to certain qualifications and
exclusions. One such qualification is that, even with a compliance
program, a corporation will not qualify for a sentencing reduction
if “high-level personnel ... or an individual responsible for the
administration or enforcement of [the compliance] program ...
participated in, condoned or was willfully ignorant of the offense”
(U.S.S.G. §8C2.5(f)). In addition, the corporation must not have
unreasonably delayed reporting the violation if it hopes to receive
credit for having a compliance program.
Additionally, it is important to note that a corporate compliance
program, even one specifically prohibiting the conduct in
question, does not necessarily release the corporation from
criminal liability. See United States v. Beusch, 596 F.2d 871, 878
(9th Cir. 1979) (“[A] corporation may be liable for the acts of its
employees done contrary to express instructions and policies,
but…the existence of such instructions and policies may be
considered in determining whether the employee in fact acted to
the benefit of the corporation.”); see also United States v.
American Radiator & Standard Sanitary Corp., 433 F.2d 174,
204-205 (3rd Cir. 1970) (same).
E.
Internal Investigations upon Discovery of a Violation
1.
General guidelines
Upon the discovery of an illegal act committed by an
employee for the benefit of the corporation, the following
actions must be taken.
•
The corporation should immediately contact legal
counsel and explain the situation. The attorney
will most likely recommend that the corporation
instigate an internal investigation undertaken by
outside counsel.
•
Outside counsel should conduct and orchestrate the
investigation and report the results to high-level
management, or, if management is believed to be
compromised, to independent directors.
•
The corporation should ensure that outside counsel
is independent of the company’s officers, as that
independence will give the ultimate report and
findings more credibility. Such limited reporting
also will help protect the attorney-client privilege
and work product doctrine (entitling the outside
counsel’s work to be protected from discovery in
the event of prosecution) should the company
choose not to waive those privileges.
•
Outside counsel should undertake to determine the
scope and procedure of the investigation and then
retain the appropriate forensic accountants,
investigators or other experts.
•
Outside counsel should then prepare a
memorandum recording the issues, creating a work
plan and defining areas of responsibility. From
there, the actual investigation may begin with both
document collection and review as well as
employee interviews. The interviews and
compilation of documents should be thorough and
should address all issues that could be raised in a
government investigation. Access to interview
memoranda and documents selected in this process
should be strictly limited. All memos should
clearly be marked “Confidential: Attorney-Client
Communications and/or Work Product.” Outside
counsel must consider what, if any, mental
impressions to include in interview memoranda (as
opposed to simply reporting what the interviewee
says).
2.
The role of the board of directors
The company’s board of directors has the ultimate
responsibility to determine what action to take in response
to a violation of law affecting the corporation. Often, if
senior management’s conduct is under investigation, a
board will form a committee of independent or outside
directors to oversee the investigation and take appropriate
action. The board or committee is likely to rely heavily on
outside counsel’s investigation, the findings of which
should be summarized in a report that is presented to the
board or the committee of independent directors. In most
cases, the report should contain:
(1)
a historical analysis of the events that led up to the
investigation;
(2)
a summary of the investigative process;
(3)
a summary of the relevant facts revealed by the
process;
(4)
an analysis of the applicable law;
(5)
an analysis of possible corporate criminal liability;
(6)
recommended preventative measures; and
(7)
possible remedial measures the corporation can take
to remedy any harm.
Based on this report, the seriousness of the situation and
advice from counsel, the board may decide to report the
violation to the appropriate authority. In most cases, selfreporting, coupled with remedial and preventative
measures, will drastically reduce the amount of time,
energy and funds expended by the corporation as
compared with investigations undertaken by the FBI or
another law enforcement agency without cooperation from
the corporation. Additionally, and perhaps most
importantly, the corporation may not be prosecuted at all
as a result of the cooperation or, if prosecuted, will likely
receive a considerably lighter punishment if the crime is
revealed due to its own voluntary disclosure. The U.S.
Department of Justice tends to focus first on the
individuals who committed the crime, and not the
company. Exposure of the company tends to increase if
the conduct is pervasive, recidivistic, reaches the highest
level of the company or if the company attempts a coverup.
3.
Remediation
Upon the discovery, investigation and conclusion that a
corporate crime was committed, the responsible officers or
directors within the corporation immediately should begin
to plan remediation efforts with counsel. The options will
vary depending on the violation that has occurred, but may
include repayment to the victims, self-reporting to the
government, and implementing monitoring, training and
reporting requirements from the corporation. In addition,
the corporation may choose to terminate those employees
involved in the crime. All of these actions can help the
corporation’s position in a possible federal investigation.
IV.
RESPONDING TO A GOVERNMENT INVESTIGATION
In many circumstances, the first notice of potential wrongdoing comes in
the form of an inquiry from the government. In drafting or revising a
corporate policy for employees who are faced with contact from the FBI
or some other law enforcement agency, the following are suggestions for
employee conduct until counsel is able to address the situation with the
government.
A.
Interviews
Employees are not required to speak with law enforcement agents;
it is their choice. Neither corporate policy nor corporate counsel
can instruct employees not to speak. However, an employee’s
decision whether to speak with a law enforcement agent should be
an informed choice. The government, through its agents, can
subpoena the employee to testify at a future time and place, but
the agents cannot command the employee to speak with them
immediately; nor does the employee have to talk with the agents at
the time they serve a subpoena. Employees need to be aware of
these rights if they are to exercise them. Of course, an employee
can agree to be interviewed immediately or at a future time, with
or without counsel present. It is important that employees know
that.
Written company policy should advise that employees may
consult with corporate counsel, even if they do not believe they
have done anything wrong. Additionally, the policy should advise
that counsel may be made available to coordinate and attend any
interview sessions with government agents, although it must be
made clear to the employee that corporate counsel represents the
company, not the employee. The mere presence of an attorney
during the questioning will likely keep the interview focused and
will assist with any follow-up inquiries. Additionally, counsel can
assist in rephrasing questions and, if necessary, restating answers
to ensure that claims of false statement by the agents are
minimized or avoided. The attorney also can analyze the facts,
circumstances and law to determine if it is in the employee’s best
interest to retain separate counsel, consider invoking his or her
Fifth Amendment rights or seek immunity. It should be noted that
the government will likely resist having corporate counsel present
during these interviews.
B.
Searches
The FBI, or other law enforcement agency, does not have the
authority to conduct a search of a business’ premises without a
search warrant or permission. In addition, an employee is not
compelled to turn over documents (including e-mail or other
electronically stored information) or other tangible items unless
the law enforcement agents have a duly issued search warrant.
Thus, to best protect the corporation’s interests, including the
attorney-client privilege, work product doctrine, proprietary
material, trade secrets and the privacy rights of employees and/or
customers, the company’s policies should instruct employees to
inform the agents that counsel will coordinate any responses to
their requests. Employees should ask for the agents’ business
cards and let them know that the corporation’s attorney will
contact them as soon as possible in order to assist them and
answer any questions they may have. The employee should then
immediately contact both their supervisor and corporate counsel.
This will enable the corporation’s attorney to be the first to talk to
the agents, and the employee will not provide any information that
is protected.
If the agents have a search warrant to search the premises, the
corporate counsel or a senior manager should read the warrant
carefully and request a copy but should not impede the search.
The agents should be advised where the relevant documents may
be found, but the corporate representative handling the situation
should advise the agents if the area to be searched may contain
privileged, private or proprietary information and that neither the
company nor any employee is waiving any privilege. In the event
of a search, the responsible employee should notify counsel as
soon as possible. Failure to allow the agents to search the
premises can result in charges brought against the employee for
obstruction of justice. Please note that, even if an employee is in
this situation, neither the employee nor the company is under an
obligation to submit to an interview. Although the company
cannot and should not direct an employee to refuse to cooperate
with the agents, legal counsel can advise employees of their rights,
including the right not to be interviewed. The company can also
choose to permit employees to go home for the day in such
circumstances.
APPENDIX
Form – Board of Directors’ Resolution for Internal Investigation
RESOLUTION
The Board of Directors of ___________________________________ has
passed the following resolution.
IT IS RESOLVED that an investigation should be conducted by
Kirkpatrick & Lockhart LLP, outside counsel, for the purpose of rendering legal
advice to the corporation. It is apparent to the Board that during the course of this
investigation, confidential communications between the attorneys, their retained
experts and the corporation are required.
IT IS FURTHER RESOLVED that this investigation should cover all
areas pertaining to or related to [describe investigation] _____________________
_________________________________________________________________.
The Board recognizes that there is the potential for litigation into matters relating
to such matters.
IT IS FURTHER RESOLVED that all materials and communications
generated during the course of this investigation shall be kept in confidence and
only disclosed as counsel and the corporation deem appropriate.
_____________________________
Date
______________________________
Secretary
(Corporate Seal)