Does 'Cooperation' Obscure the Truth?

Yet critical testing of allegations is on the wane as our nation rushes to judgment – literally — under tough new laws. Indictments and regulatory complaints are being filed at record pace. Offenses that used to take careful prosecutors many months to investigate, aided by meetings with defense counsel who could proffer competing theories, now take less than half the time. With disturbing frequency, the SEC staff has been recommending enforcement actions so rapidly that defense counsel has no time to submit a fully developed counterargument. Because of enhancements to the Sentencing Guidelines, securities fraud cases now yield prison sentences once reserved for murderers, especially when the defendant chooses to test the government's version of facts and loses. (A recent example is Jamie Olis, the Dynegy trader recently sentenced to 24 years in prison for securities fraud.)

While these are all troubling trends from the perspective of ensuring accurate judgments, the lack of adversarial testing is most problematic for publicly issued corporations that are increasingly required to disclose the results of self-critical internal investigations. Too often, the government then turns the remedial work of company counsel into untested charges against the company.

Purpose of the Internal Investigation

Long before the public heard of Enron or the Sentencing Guidelines, ethical companies investigated suspicions of wrongdoing by their employees and acted swiftly to remedy any problem. When carefully conducted, investigations enable management to identify a problem and take aggressive remedial action.

Internal investigations are fast and almost always non-adversarial, spurred by the company's interest in good corporate governance and quick removal of any perceived bad apples with minimum disruption to business operations. Often there is vast documentary and testimonial evidence to analyze and re-analyze during a compressed timeframe. The investigator prefers to speak with employees before they are “lawyered up,” because lawyer involvement will slow the investigation and prevent spontaneous statements. The investigator often makes complex conclusions of fact and law, which are largely untested.

Notwithstanding these limitations, internal investigations are indispensable in helping companies make structural changes or restitution, take personnel action, including termination, or take other remedial action such as further instruction or training to address the problems identified. Their conclusions, though untested, are good enough for the company to act upon.

The Government's Demand for Waiver

In the past few years, the untested conclusions of internal investigations have increasingly turned into a weapon used by the government and private parties to hammer the company that engaged in the self-analysis.

At least since the Holder Memo issued in June 1999, the Department of Justice has made clear that an important factor in deciding whether to indict a company is the thoroughness of the company's cooperation. The more recent Thompson Memo of January 2003 has driven that point home: “The main focus of the revisions is increased emphasis on and scrutiny of the authenticity of a corporation's cooperation.” The SEC has similarly stressed the importance of full cooperation in its decisions whether and how to charge a company. See Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Exchange Act Release No. 44,969 Fed.Sec.L.Rep. (CCH) ' 74,985 (Oct. 23, 2001).

Increasingly, one measure of “true” cooperation is whether the company turns over the work product of its counsel who conducted an internal investigation. Indeed, governmental use of company work product is so well accepted today that the U.S. Attorney's Office in the Eastern District of New York actually charged three former employees of Computer Associates of obstruction for lying — not to the government, but to the company's internal investigator. See Information in U.S. v. Zar, Cr. No. 4-331 (ILG) (E.D.N.Y.).

This strategy of the government has fundamentally changed the landscape of corporate defense. Because corporations have vicarious criminal liability (and failure-to-supervise liability under the Securities Exchange Act, among others), almost any finding of serious wrongdoing by employees will expose the company itself to charges. So what happens after the internal investigation and its untested conclusions are turned over to the government? While the individuals implicated may later contest any charges against them, the company has admitted that it's guilty.

The Damage of Disclosure

The chief carrot with which the government urges disclosure of work product is that they might not indict if the cooperation is complete: “You can trust us to do the right thing by the company.” This is not reassuring at a time when prosecutors and regulators face public pressure to fight corporate fraud. Indictment is not all the company has to fear. The SEC will rarely decline to sue a company where the wrongdoing causes loss of investor value. Furthermore, in many jurisdictions, the disclosure of work product to the government operates as a waiver of immunity to the whole world, see, e.g., In re Subpoenas Duces Tecum, 738 F.2d 1367, 1370 (D.C. Cir. 1984); Westinghouse Electric Corp. v. Republic of Philippines, 951 F.2d 1414, 1426 (3rd Cir. 1991). Class action lawsuits may claim hundreds of millions of dollars, if not billions, yet the company may be forced to turn over to its adversaries its self-critical analysis.

When prosecutors and regulators demand production of investigative work product, they unfairly expose companies to being judged on untested conclusions. Companies should be free to make confidential preliminary findings for immediate remedial purposes and then test them later. But as a practical matter, “cooperation” forecloses any second chance. If ever a company disowned the results of its investigation and engaged the government in argument about the conclusions, it would lose the benefits that brought it to the government in the first place. As importantly, making work product available to plaintiffs' lawyers will powerfully draw the company toward expensive settlement.

Return to Privilege and Accuracy

There was a time, not long ago, when a company could engage in aggressive self-analysis without fear that it was putting its financial stability in jeopardy. If the company fired key employees, it could do so with the protections of applicable privileges. When the government came knocking, ethical companies promptly cooperated by insisting that their employees submit to government interviews and by providing whatever documents the government wanted — except the self-evaluation conducted by the company's lawyers. Prosecutors understood the value of internal investigations and respected the age-old interests protected by the attorney-client and work product doctrines. Lawyers for individuals and the company could engage the government in serious debate about the conduct and mental state of the actors and the applicable law. Criminal cases were not resolved as quickly or easily as prosecutors liked, but the chances of error and injustice were substantially less.

We need to return to those days. Some prosecutors or regulators may rejoice in the work the company is doing for them, but they need to appreciate how much damage can flow from the disclosure of untested results. Time and again history has shown that expedience can be the enemy of justice. In the corporate context, justice is achieved when the government carefully finds the facts, and companies are free to conduct protected self-assessment.

Nowadays more than ever, accusations of business crime must be put to the test, since the stakes in this post-Enron era are at an all-time high for an accused company's survival and its executives' personal liberty and reputation. The way we test allegations in Anglo-American law is through the adversary system. Yet, just when it's needed the most, the adversary system is increasingly sidelined. For the public company, adversarialism may no longer be an option at all.

As a society, we have long since accepted the premise that the adversarial process, deeply embedded in our common-law tradition, will get us closer to accurate judgments. This is not just an abstract principle. Seasoned lawyers have all seen their certainty shaken by an adversary's argument. No one sees every perspective to a set of facts. The more an interpretation is tested by an opposing view, the more accurate the resulting judgment is likely to be.

Testing is especially critical in white-collar cases where questions of intent lie at the heart of the charges. Few facts are more difficult to ascertain than the knowledge and willfulness with which a defendant acted. This inherent difficulty has now been compounded by the hastily drafted securities and money laundering laws embodied in the Sarbanes-Oxley Act and the USA Patriot Act, whose elements require careful parsing.

Yet critical testing of allegations is on the wane as our nation rushes to judgment – literally — under tough new laws. Indictments and regulatory complaints are being filed at record pace. Offenses that used to take careful prosecutors many months to investigate, aided by meetings with defense counsel who could proffer competing theories, now take less than half the time. With disturbing frequency, the SEC staff has been recommending enforcement actions so rapidly that defense counsel has no time to submit a fully developed counterargument. Because of enhancements to the Sentencing Guidelines, securities fraud cases now yield prison sentences once reserved for murderers, especially when the defendant chooses to test the government's version of facts and loses. (A recent example is Jamie Olis, the Dynegy trader recently sentenced to 24 years in prison for securities fraud.)

While these are all troubling trends from the perspective of ensuring accurate judgments, the lack of adversarial testing is most problematic for publicly issued corporations that are increasingly required to disclose the results of self-critical internal investigations. Too often, the government then turns the remedial work of company counsel into untested charges against the company.

Purpose of the Internal Investigation

Long before the public heard of Enron or the Sentencing Guidelines, ethical companies investigated suspicions of wrongdoing by their employees and acted swiftly to remedy any problem. When carefully conducted, investigations enable management to identify a problem and take aggressive remedial action.

Internal investigations are fast and almost always non-adversarial, spurred by the company's interest in good corporate governance and quick removal of any perceived bad apples with minimum disruption to business operations. Often there is vast documentary and testimonial evidence to analyze and re-analyze during a compressed timeframe. The investigator prefers to speak with employees before they are “lawyered up,” because lawyer involvement will slow the investigation and prevent spontaneous statements. The investigator often makes complex conclusions of fact and law, which are largely untested.

Notwithstanding these limitations, internal investigations are indispensable in helping companies make structural changes or restitution, take personnel action, including termination, or take other remedial action such as further instruction or training to address the problems identified. Their conclusions, though untested, are good enough for the company to act upon.

The Government's Demand for Waiver

In the past few years, the untested conclusions of internal investigations have increasingly turned into a weapon used by the government and private parties to hammer the company that engaged in the self-analysis.

At least since the Holder Memo issued in June 1999, the Department of Justice has made clear that an important factor in deciding whether to indict a company is the thoroughness of the company's cooperation. The more recent Thompson Memo of January 2003 has driven that point home: “The main focus of the revisions is increased emphasis on and scrutiny of the authenticity of a corporation's cooperation.” The SEC has similarly stressed the importance of full cooperation in its decisions whether and how to charge a company. See Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Exchange Act Release No. 44,969 Fed.Sec.L.Rep. (CCH) ' 74,985 (Oct. 23, 2001).

Increasingly, one measure of “true” cooperation is whether the company turns over the work product of its counsel who conducted an internal investigation. Indeed, governmental use of company work product is so well accepted today that the U.S. Attorney's Office in the Eastern District of New York actually charged three former employees of Computer Associates of obstruction for lying — not to the government, but to the company's internal investigator. See Information in U.S. v. Zar, Cr. No. 4-331 (ILG) (E.D.N.Y.).

This strategy of the government has fundamentally changed the landscape of corporate defense. Because corporations have vicarious criminal liability (and failure-to-supervise liability under the Securities Exchange Act, among others), almost any finding of serious wrongdoing by employees will expose the company itself to charges. So what happens after the internal investigation and its untested conclusions are turned over to the government? While the individuals implicated may later contest any charges against them, the company has admitted that it's guilty.

The Damage of Disclosure

The chief carrot with which the government urges disclosure of work product is that they might not indict if the cooperation is complete: “You can trust us to do the right thing by the company.” This is not reassuring at a time when prosecutors and regulators face public pressure to fight corporate fraud. Indictment is not all the company has to fear. The SEC will rarely decline to sue a company where the wrongdoing causes loss of investor value. Furthermore, in many jurisdictions, the disclosure of work product to the government operates as a waiver of immunity to the whole world, see, e.g., In re Subpoenas Duces Tecum, 738 F.2d 1367, 1370 (D.C. Cir. 1984); Westinghouse Electric Corp. v. Republic of Philippines , 951 F.2d 1414, 1426 (3rd Cir. 1991). Class action lawsuits may claim hundreds of millions of dollars, if not billions, yet the company may be forced to turn over to its adversaries its self-critical analysis.

When prosecutors and regulators demand production of investigative work product, they unfairly expose companies to being judged on untested conclusions. Companies should be free to make confidential preliminary findings for immediate remedial purposes and then test them later. But as a practical matter, “cooperation” forecloses any second chance. If ever a company disowned the results of its investigation and engaged the government in argument about the conclusions, it would lose the benefits that brought it to the government in the first place. As importantly, making work product available to plaintiffs' lawyers will powerfully draw the company toward expensive settlement.

Return to Privilege and Accuracy

There was a time, not long ago, when a company could engage in aggressive self-analysis without fear that it was putting its financial stability in jeopardy. If the company fired key employees, it could do so with the protections of applicable privileges. When the government came knocking, ethical companies promptly cooperated by insisting that their employees submit to government interviews and by providing whatever documents the government wanted — except the self-evaluation conducted by the company's lawyers. Prosecutors understood the value of internal investigations and respected the age-old interests protected by the attorney-client and work product doctrines. Lawyers for individuals and the company could engage the government in serious debate about the conduct and mental state of the actors and the applicable law. Criminal cases were not resolved as quickly or easily as prosecutors liked, but the chances of error and injustice were substantially less.

We need to return to those days. Some prosecutors or regulators may rejoice in the work the company is doing for them, but they need to appreciate how much damage can flow from the disclosure of untested results. Time and again history has shown that expedience can be the enemy of justice. In the corporate context, justice is achieved when the government carefully finds the facts, and companies are free to conduct protected self-assessment.