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The Cost of Cooperation
Cooperation with government investigators has long been important for companies under the specter of an investigation. Under current agency policies and practices of the Securities and Exchange Commission (SEC) and U.S. Department of Justice (DOJ), and relevant provisions of the Sentencing Guidelines for Organizational Offenders, a “cooperative” corporation can realize substantial reductions in penalties or even avoid an enforcement action altogether. Seaboard Corporation in 2001 and HomeStore, Inc. in 2002 are excellent examples — both were able to avoid SEC enforcement actions because of the extent and nature of their cooperation with investigators.
The multi-million dollar question is what will be defined as “cooperation.” Over the past 10 years, the answer has evolved, and at each step, the requirements have increased. Waiver of the attorney-client privilege and work product protection is one of the “costs” that a corporation will likely have to pay. Recent enforcement actions also strongly suggest that a corporation will likely not be deemed “cooperative” without divulging its privileged internal investigation findings.
The SEC, in its recent Lucent Technologies action, raised the bar for what constitutes cooperation. See “Lucent Settles SEC Enforcement Action Charging the Company with $1.1 Billion Accounting Fraud: Lucent Agrees to Pay $25 Million Penalty: SEC Charges 10 Individuals with Securities Fraud,” SEC press release of May 17, 2004, available at http://www.sec.gov/news/press/2004-67.htm. The Lucent penalty suggests government investigators will scrutinize a corporation's policies and practices concerning indemnification in evaluating the extent of its cooperation. This new focus has implications for the corporate entity and its officers, directors, and employees. When companies want the benefits of cooperation, they may be precluded from advancing the cost of representation for employees, even where their indemnification obligations require it. Individuals who find themselves subjects or targets of a criminal or civil enforcement action may now be on their own when it comes to paying for defending themselves.
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