Should You Tell Employees How Their Company Can Get Immunity From Prosecution?

The landscape has changed for many senior executives and other employees of corporations subject to government investigation. Two recent cases show how prosecutors virtually forced companies to “turn in” suspect executives and other employees to avoid prosecution. Amendments to the Sentencing Guidelines, effective Nov. 1, 2004, incorporate this change in the way courts will assess a corporation's compliance program.

Before the Scandals

Pre-Enron, most corporations facing a federal investigation understood the benefits of loyalty to employees, which took the form of:

• defending the good intentions of the employees, if not the conduct itself;
• correcting but not disclosing to the government the internal problems unless there was a legal duty to do so (and there are actually very few); and
• advancing fees for the employees' own lawyers if the government sought to interview employees it suspected of wrongdoing.

This could be called a “circle the wagons” approach, and it usually worked well for everyone except the government investigators.

The New Tactic — Computer Associates and Symbol Technologies Cases

In these two cases, the government nailed executives by using the companies' internal investigations to exploit a common interest in rooting out fraud — and in blaming the employees.

Both Computer Associates (CA), a software company in New York, and Symbol Technologies, stood accused of manipulating their revenues to meet Wall Street quarterly earning estimates. CA's former CEO has been indicted for securities fraud and obstruction of justice, under the Sarbanes-Oxley (SOX) provision 18 U.S.C. ' 1512(c)(2)(2), essentially for not being truthful in the course of the company's internal investigation. Other executives have pleaded guilty, including the former CFO, General Counsel, and Chief of Sales. The employees were not charged with lying to the government. Instead, the government bootstrapped their false statements to the company into a federal felony by alleging that they “well knew and believed that [their] false statements would be conveyed to the Government.” (The only judicial authority for this theory is the district court acceptance of the plea in this case.)

Predictably, the Department of Justice (DOJ) announced CA had “accepted responsibility” and would not be prosecuted as part of a deferred prosecution, an SEC settlement, a payment of $225 million, and 18 months' probation with an independent monitor.

In June 2004, the same U.S. Attorney's Office (Eastern District of New York) indicted the former CEO and seven other executives of Symbol Technologies, an early manufacturer of wireless and mobile computing, and agreed not to prosecute the company, which again “accepted responsibility” by cooperating. Symbol agreed to an independent monitor, a permanent injunction, and a $139-million payment to the SEC and stockholders. As part of “accepting responsibility,” the U.S. Attorney said: “Symbol has shared the substance of hundreds of interviews conducted with current and former Symbol employees … and also waived attorney-client privilege to assist the investigation … ”

Change in DOJ Approach

The DOJ's message is clear — no longer can companies agree to support the defense of their employees. This DOJ tactic became manifest when then Deputy Attorney General Thompson re-issued the Department's Memorandum on Principles of Federal Prosecution of Business Organizations. Thompson explained that one of his purposes was to redefine “cooperation” by a corporation: if a corporation wants to get the benefit of cooperation and “maybe” escape prosecution altogether, it must be willing to:

•  ”identify the culprits”;
• conduct its own internal investigation and make complete disclosure; and
•  ”if necessary,” waive its “attorney-client and work product protections” that otherwise would protect statements by employees during an internal investigation.

In addition, now the government may consider a new factor in weighing the company's cooperation: whether the company supports culpable employees “through 1) the advancement of legal fees; 2) retaining employees without sanction for their misconduct; or 3) providing information to the employees about the government's investigation pursuant to a joint defense agreement.” On May 13, 2004, the current Deputy Attorney General, James Comey, told health care lawyers: “Its hard for me to understand why a corporation would ever enter into a joint defense agreement.”

Following on that same theme, the amended Guidelines for Organizational Defendants, which went into effect on Nov. 1, 2004, tell convicted corporations they will not get sentencing credit for their otherwise qualified compliance programs if they “delayed reporting the offense to appropriate governmental authorities,” and that companies will be expected to waive the attorney-client privilege and work product protections if “such waiver is necessary to provide timely and thorough disclosure of all pertinent information known to the corporation.”

Must the Company Give Its Employees a Miranda-like Warning?

It is not an exaggeration to say that with the offer of possible immunity from prosecution, companies now have a greater commonality of interest with prosecutors than with their own employees. Until now, companies never even thought about warning employees that they may be subject to criminal prosecution for lying during an internal interview. Often they were told the company would treat the interviews confidentially under the company's attorney-client privilege. Now, disclosure to prosecutors is foreseeable and often likely — a fact that presents ethical issues for attorneys conducting the company's investigation.

The ABA Model Rules of Professional Conduct, Rule 4.1, Truthfulness in Statements to Others, and Rule 4.3, Dealing with Unrepresented Persons, require an attorney be fair and candid with corporate employees. But can a corporation's lawyers be truly candid and reasonably expect anyone will talk to them without their own counsel being present? While corporate counsel can boldly refer to “talk or walk” policies, how many companies will be comfortable with that approach, and how long will it work before the fabric of corporate culture, the so-called “family,” unravels?

That, of course, is just what the government is seeking in any investigation.

Practice Tips

For Corporate Counsel:

Anticipate at the start of the investigation what cooperation is likely to mean for your client. Any interview memoranda need to be prepared expecting disclosure to DOJ. At a minimum, this means eliminating lawyer opinion, conjecture and suspicions, and fully recounting the employee's inculpatory and exculpatory statements.

Find a way to advise employees fully and fairly of the consequences of non-truthful responses to the company's questions. This means telling them whether the company plans to cooperate with the government by disclosing its investigation results, and also warning them that inaccurate information provided to the company may further damage the employee's position in the eyes of the government. If the employee is a likely target, a full and candid explanation of the risks likely will lead the employee to consult counsel before submitting to the interview.

When the company decides to advance fees for individual counsel, a key factor is whether the employee was acting in the interest of the company during the disputed events and the company is prepared to defend the conduct. When asked, the company should agree to individual counsel's presence at interviews.

For Corporate Employees:

Listen carefully to the advice of corporate counsel and negotiate the commitment to indemnify and advance fees consistent with state law before submitting to an interview. Request copies of any interview memoranda.

Before trouble comes, review your employment contract and consider requesting contractual indemnification in addition to any obligation of the company under state law or corporate bylaws. For executives in sensitive positions such as CFO and Compliance Officers, contracts that spell out the company's obligation to pay for counsel for all matters arising in the employment could become the standard.

Treat company interviews with the same seriousness as FBI interviews or grand jury appearances with regard to truthfulness, accuracy and completeness of your responses. Ask for an opportunity to review and correct any written record of the interview.

Conclusion

The public's indignation over corporate scandals has given the DOJ a platform to redefine what “cooperation” is expected of corporations. There is little understanding or sympathy for corporate privileges or joint defense arrangements with suspected employees. In consequence, employees cannot count on the corporation to defend them and may be more on their own than they know.

Questions: Will the new attitude about corporate prosecution lead toward assigning criminal responsibility to the most culpable senior corporate executive? Or does the company's new partnership with prosecutors risk scape-goating those employees the company elects not to defend? Can companies continue to expect employees to “cooperate” once they are properly advised of their personal risks? Or will properly advised employees become “lawyered up,” making internal investigations no more effective than the grand jury?

The landscape has changed for many senior executives and other employees of corporations subject to government investigation. Two recent cases show how prosecutors virtually forced companies to “turn in” suspect executives and other employees to avoid prosecution. Amendments to the Sentencing Guidelines, effective Nov. 1, 2004, incorporate this change in the way courts will assess a corporation's compliance program.

Before the Scandals

Pre-Enron, most corporations facing a federal investigation understood the benefits of loyalty to employees, which took the form of:

• defending the good intentions of the employees, if not the conduct itself;
• correcting but not disclosing to the government the internal problems unless there was a legal duty to do so (and there are actually very few); and
• advancing fees for the employees' own lawyers if the government sought to interview employees it suspected of wrongdoing.

This could be called a “circle the wagons” approach, and it usually worked well for everyone except the government investigators.

The New Tactic — Computer Associates and Symbol Technologies Cases

In these two cases, the government nailed executives by using the companies' internal investigations to exploit a common interest in rooting out fraud — and in blaming the employees.

Both Computer Associates (CA), a software company in New York, and Symbol Technologies, stood accused of manipulating their revenues to meet Wall Street quarterly earning estimates. CA's former CEO has been indicted for securities fraud and obstruction of justice, under the Sarbanes-Oxley (SOX) provision 18 U.S.C. ' 1512(c)(2)(2), essentially for not being truthful in the course of the company's internal investigation. Other executives have pleaded guilty, including the former CFO, General Counsel, and Chief of Sales. The employees were not charged with lying to the government. Instead, the government bootstrapped their false statements to the company into a federal felony by alleging that they “well knew and believed that [their] false statements would be conveyed to the Government.” (The only judicial authority for this theory is the district court acceptance of the plea in this case.)

Predictably, the Department of Justice (DOJ) announced CA had “accepted responsibility” and would not be prosecuted as part of a deferred prosecution, an SEC settlement, a payment of $225 million, and 18 months' probation with an independent monitor.

In June 2004, the same U.S. Attorney's Office (Eastern District of New York) indicted the former CEO and seven other executives of Symbol Technologies, an early manufacturer of wireless and mobile computing, and agreed not to prosecute the company, which again “accepted responsibility” by cooperating. Symbol agreed to an independent monitor, a permanent injunction, and a $139-million payment to the SEC and stockholders. As part of “accepting responsibility,” the U.S. Attorney said: “Symbol has shared the substance of hundreds of interviews conducted with current and former Symbol employees … and also waived attorney-client privilege to assist the investigation … ”

Change in DOJ Approach

The DOJ's message is clear — no longer can companies agree to support the defense of their employees. This DOJ tactic became manifest when then Deputy Attorney General Thompson re-issued the Department's Memorandum on Principles of Federal Prosecution of Business Organizations. Thompson explained that one of his purposes was to redefine “cooperation” by a corporation: if a corporation wants to get the benefit of cooperation and “maybe” escape prosecution altogether, it must be willing to:

•  ”identify the culprits”;
• conduct its own internal investigation and make complete disclosure; and
•  ”if necessary,” waive its “attorney-client and work product protections” that otherwise would protect statements by employees during an internal investigation.

In addition, now the government may consider a new factor in weighing the company's cooperation: whether the company supports culpable employees “through 1) the advancement of legal fees; 2) retaining employees without sanction for their misconduct; or 3) providing information to the employees about the government's investigation pursuant to a joint defense agreement.” On May 13, 2004, the current Deputy Attorney General, James Comey, told health care lawyers: “Its hard for me to understand why a corporation would ever enter into a joint defense agreement.”

Following on that same theme, the amended Guidelines for Organizational Defendants, which went into effect on Nov. 1, 2004, tell convicted corporations they will not get sentencing credit for their otherwise qualified compliance programs if they “delayed reporting the offense to appropriate governmental authorities,” and that companies will be expected to waive the attorney-client privilege and work product protections if “such waiver is necessary to provide timely and thorough disclosure of all pertinent information known to the corporation.”

Must the Company Give Its Employees a Miranda-like Warning?

It is not an exaggeration to say that with the offer of possible immunity from prosecution, companies now have a greater commonality of interest with prosecutors than with their own employees. Until now, companies never even thought about warning employees that they may be subject to criminal prosecution for lying during an internal interview. Often they were told the company would treat the interviews confidentially under the company's attorney-client privilege. Now, disclosure to prosecutors is foreseeable and often likely — a fact that presents ethical issues for attorneys conducting the company's investigation.

The ABA Model Rules of Professional Conduct, Rule 4.1, Truthfulness in Statements to Others, and Rule 4.3, Dealing with Unrepresented Persons, require an attorney be fair and candid with corporate employees. But can a corporation's lawyers be truly candid and reasonably expect anyone will talk to them without their own counsel being present? While corporate counsel can boldly refer to “talk or walk” policies, how many companies will be comfortable with that approach, and how long will it work before the fabric of corporate culture, the so-called “family,” unravels?

That, of course, is just what the government is seeking in any investigation.

Practice Tips

For Corporate Counsel:

Anticipate at the start of the investigation what cooperation is likely to mean for your client. Any interview memoranda need to be prepared expecting disclosure to DOJ. At a minimum, this means eliminating lawyer opinion, conjecture and suspicions, and fully recounting the employee's inculpatory and exculpatory statements.

Find a way to advise employees fully and fairly of the consequences of non-truthful responses to the company's questions. This means telling them whether the company plans to cooperate with the government by disclosing its investigation results, and also warning them that inaccurate information provided to the company may further damage the employee's position in the eyes of the government. If the employee is a likely target, a full and candid explanation of the risks likely will lead the employee to consult counsel before submitting to the interview.

When the company decides to advance fees for individual counsel, a key factor is whether the employee was acting in the interest of the company during the disputed events and the company is prepared to defend the conduct. When asked, the company should agree to individual counsel's presence at interviews.

For Corporate Employees:

Listen carefully to the advice of corporate counsel and negotiate the commitment to indemnify and advance fees consistent with state law before submitting to an interview. Request copies of any interview memoranda.

Before trouble comes, review your employment contract and consider requesting contractual indemnification in addition to any obligation of the company under state law or corporate bylaws. For executives in sensitive positions such as CFO and Compliance Officers, contracts that spell out the company's obligation to pay for counsel for all matters arising in the employment could become the standard.

Treat company interviews with the same seriousness as FBI interviews or grand jury appearances with regard to truthfulness, accuracy and completeness of your responses. Ask for an opportunity to review and correct any written record of the interview.

Conclusion

The public's indignation over corporate scandals has given the DOJ a platform to redefine what “cooperation” is expected of corporations. There is little understanding or sympathy for corporate privileges or joint defense arrangements with suspected employees. In consequence, employees cannot count on the corporation to defend them and may be more on their own than they know.

Questions: Will the new attitude about corporate prosecution lead toward assigning criminal responsibility to the most culpable senior corporate executive? Or does the company's new partnership with prosecutors risk scape-goating those employees the company elects not to defend? Can companies continue to expect employees to “cooperate” once they are properly advised of their personal risks? Or will properly advised employees become “lawyered up,” making internal investigations no more effective than the grand jury?