by Dustin Ruta, FTI Consulting, Inc. and Laura I. Bushnell, Latham & Watkins LLP
All indicators out of the new administration point to a new wave of regulatory activism against corporate misdeeds. Recent statements by SEC officials make clear their intention to restore investor confidence by embarking on a new path of reinvigorated enforcement. On May 20, 2009, President Obama signed the Fraud Enforcement and Recovery Act of 2009, enhancing the ability of federal enforcement agencies to combat fraud and committing additional resources dedicated to white collar crime enforcement. Many expect government regulators to bring an increased number of actions against individuals in addition to corporate entities, emphasizing individual responsibility for corporate wrongdoing.
Following discovery of potential misconduct, a corporation may initiate an internal investigation to gather all relevant facts. Individual employees who wind up either firmly or tangentially involved may not necessarily be rogues, but well-meaning employees who made an honest mistake or inadvertently committed a technical violation to benefit their employer. Or, they may simply be an innocent bystander, free of any culpability. Out of fear for their jobs and reputation, they cooperate with internal investigators to be helpful and expedite a resolution, as the willingness to cooperate and the speed with which a company responds will be measured closely by regulators. Not realizing that a criminal probe may loom, employees willingly provide potentially damaging statements and documentation, often without having had an opportunity to obtain legal advice.
In light of the current regulatory environment, corporate officers and other senior personnel at companies conducting an internal investigation should proceed with caution and consider consulting with individual counsel prior to being interviewed as a material witness in the investigation. Cooperating without the benefit of individual legal representation could result in the impairment of fundamental rights.
Companies frequently communicate internal investigation findings to regulators before enforcement action is initiated. Regulators encourage prompt self-reporting by providing the incentive of reduced penalties. Recognizing the severity of potential punishments, corporate decision makers weigh the cost of mounting a defense versus pursuing the path of least resistance. If the investigation findings indicate any wrongdoing, a company may choose the latter and cooperate by turning over all information gathered in the investigation. By cooperating with regulators, the company hopes to earn credit toward reduced sanctions and fines.
Unfortunately, corporate cooperation sometimes comes at the expense of putting company employees in jeopardy and may subject them to a parallel government investigation. In an effort to cooperate, the company may take actions that adversely affect employees’ rights by granting the prosecution access to materials that might otherwise be protected by attorney-client privilege or the attorney work product doctrine. Under the Constitution, prosecutors cannot force employees to testify absent a formal grant of immunity, but should the company provide the government with key information, testimony may not be needed to pursue an indictment against an employee. The employee’s ability to choose what privileged material is provided to the government is limited.
While the interests of the company and the employee may be aligned at the outset of the investigation, these interests can diverge as the investigation progresses. The employee may need to be interviewed by the government, testify at a deposition or appear before a grand jury. At this point, the risk and exposure to the employee witness may have dramatically changed. The divergence of the interests of the employee and company can have unintended consequences that frustrate resolution of the government’s case for all parties involved. Employees should be proactive in seeking to understand, throughout the course of the investigation, whether their own interests may or may not be aligned with their employer. By retaining individual counsel, an employee can obtain the legal advice needed to determine when his or her interests have diverged from the company’s.
At the outset of an investigation, an employee may have a chance to speak informally with company counsel; however, consulting with company lawyers may not be sufficient. Furthermore, employees should not expect company counsel to tell them whether they need their own lawyer. To address cost concerns, an employee should explore indemnification provisions in the company charter and bylaws, as well as any existing agreements between the employee and company. Indemnification provisions and state corporate law may obligate the company to pay the employee’s legal fees. While an employee must cooperate with their employer generally as a condition of employment and in no event should obstruct an investigation, exercising caution and consulting with individual counsel at the outset of the inquiry can maximize the protection of individual rights.
About the Authors
Dustin Ruta is a director in the forensic and litigation consulting practice group of FTI Consulting. He specializes in assisting external counsel with corporate investigations and other litigation issues related to accounting and finance and can be reached at dustin.ruta@fticonsulting.com. Laura Bushnell is a partner in the company representation practice group of Latham & Watkins LLP. She routinely advises companies as primary outside corporate counsel and can be reached at laura.bushnell@lw.com.