When Is Discretion the Better Part of Valor?

The SEC has set forth the criteria it considers in determining how much to credit corporations with self-reporting and cooperation. The agency evaluates, inter alia: 1) 'Did the company cooperate completely with appropriate regulatory and law enforcement bodies?' 2) 'Did the company identify what additional related misconduct is likely to have occurred?' 3) 'Did it do a thorough review of the nature, extent, origins and consequences of the conduct and related behavior?' and 4) 'Did the company promptly make available to our staff the results of its review and provide sufficient documentation reflecting its response to the situation?' SEC Release No. 44969 (Oct. 23, 2001).

White-collar practitioners should be aware that punishments meted out by the SEC can be as harsh as those from the DOJ. In addition to civil penalties and disgorgement remedies, the SEC can require the imposition of monitors ' a disciplinary measure capable of drastically burdening a company's operations.

The stark contrast between the articulated rewards for cooperation and penalties for non-cooperation places immense pressure on companies to make prompt voluntary disclosures. In making a clear-eyed decision whether to make a voluntary disclosure, counsel should consider at least five primary factors.

Has The Situation Been Stabilized?

The first two questions the government will ask after a disclosure are 'Has the conduct stopped?' and 'Have relevant documents been preserved?' Counsel should be ready to say Yes to both before offering cooperation.

Outside counsel should ascertain the extent of illegal conduct and whether it is ongoing. A common pitfall is to undertake a prompt disclosure about one business unit only to learn later that the wrongdoing encompasses several company divisions. For example, a financial-reporting fraud found in one department actually permeates the entire corporation. An ill-prepared disclosure may result in the government's discovering other criminal conduct on its own, with no the benefits of cooperation to the company. Counsel therefore must assess not only the initial locus of alleged misconduct, but also other departments vulnerable to the same scheme or lapse in compliance.

Rather than simply accepting em-ployee representations, the company must conduct a preliminary inquiry to confirm independently that the conduct has ceased. Only as to past misconduct does the company sometimes have a choice about disclosure. When ongoing criminal conduct cannot be halted immediately, the company may be obligated to disclose it to government officials.

As soon as wrongdoing is identified, the company must preserve potentially relevant documents. Routine document destruction must be suspended immediately. A preservation hold no-tice should be issued to employees and separate instructions sent to IT de-partments regarding the preservation of back-up tapes.

Relying on preservation notices, however, is insufficient. Counsel should confirm that employees have been following the notices and consider retaining an outside electronic consultant to capture forensic images of hard drives.

Will the Information Become Known Through Other Channels?

The new civil and criminal exposure imposed on CEOs and CFOs by ' 906 of the Sarbanes-Oxley Act (SOX) has led companies to err on the side of disclosure in its SEC filings. While common sense should make a company disclose to enforcement officials any potentially criminal conduct revealed in SEC filings, companies often disclose information in a filing ' for example, describing 'material pending legal proceedings' pursuant to Item 103 of Regulation S-K ' but overlook disclosure to enforcement officials. Potentially criminal conduct should be voluntarily disclosed to enforcement officials prior to, or simultaneously with, the SEC filing. Remember that a company need only disclose the relevant facts in order to receive the benefits of voluntary disclosure: The company is not required to present legal conclusions or admit that conduct was illegal.

Similarly, counsel should consider the need to disclose any criminal conduct that has been previously disclosed to, or is likely to be discovered by, a foreign government or other U.S. regulatory agencies. Whenever a company is aware of a whistleblower, the prudent course often is to make a voluntary disclosure as soon as possible. Even if the whistleblower has not yet provided information to any third parties, the company's own disclosure minimizes the negative implications that would arise from allegations being initially raised to the government by a concerned employee. Proactively disclosing the information possessed by a whistleblower also minimizes the possibility of retaliation by an overzealous supervisor. This benefit is particularly important in light of the expansive civil and criminal liabilities created by SOX for retaliating against a whistleblower.

Can Privilege and Work Product Be Preserved?

Companies face an extremely difficult decision in determining whether to share internal investigation reports with a regulatory agency. Refusing may invite the agency to pursue its own investigation, while providing investigation materials poses the significant risk that they will lose their attorney-client privilege and/or work-product protection and be discoverable by parties in civil litigation. The vast majority of circuits have rejected the 'selective-waiver doctrine,' which would allow a company to disclose privileged information to a government agency while asserting attorney-client privilege against other parties. See, e.g., United States v. Mass. Inst. of Tech., 129 F.3d 681 (1st Cir. 1997); Genentech, Inc. v. United States Int'l Trade Comm'n, 122 F.3d 1407, 1417 (Fed. Cir. 1997). And a company cannot rely upon a confidentiality agreement with the government to prevent waiver of attorney-client privilege. As the Third Circuit has noted, 'under traditional waiver doctrine a voluntary disclosure to a third party waives the attorney-client privilege even if the third party agrees not to disclose the communications to anyone else.' Westinghouse Elec. Corp. v. Republic of Philippines, 951 F.2d 1414, 1427 (3d Cir. 1991). Nor can a confidentiality agreement be relied upon to avert waiver of work-product protection. Although certain steps may be taken to bolster a common-interest claim, companies should assume from the outset that a voluntary disclosure will result in a waiver.

Are Your Disclosures Accurate And the Information Trustworthy?

Make sure employees understand that any material misrepresentations in an internal investigation may result in criminal liability. The government has indicted employees for making false statements to outside counsel conducting an internal investigation. See United States v. Sanjay Kumar and Stephen Richards, Docket No. 04-CR-00846 (E.D.N.Y. 2004). This indictment in the recent investigation of Com-puter Associates illustrates the vast scope of criminal liability faced even by employees who do not directly interact with the government. Through vicarious liability, a company may find itself charged for an employee's false statements that outside counsel discloses to the government. Moreover, incomplete or misleading disclosures may result in obstruction of justice charges against the company. Counsel must fully document the internal investigation's findings in the event that the government alleges shortcomings in disclosure were intentional instances of obstruction.

How Will Disclosure Help You Present Your Client's Side of the Story?

By making a disclosure, a company is usually given the chance to investigate itself before the government moves in with agents and a grand jury. An internal investigation is less disruptive to the company's business, more cost efficient, and more apt to communicate the company's perspective to the government. The company may also avoid the burdens and pitfalls that accompany a barrage of broad subpoenas.

Conclusion

Whether to disclose criminal conduct is not an easy decision; it requires a conscientious assessment of the costs and benefits. Voluntary disclosure does not ensure leniency, particularly if the government believes that the company has not been forthcoming or has failed to take effective remedial action. While the factors discussed within this article are by no means an exhaustive list, companies should carefully consider them before making the decision to disclose.

Laurence A. Urgenson ([email protected]), a member of this newsletter's Board of Editors, is a partner at Kirkland & Ellis LLP in Washington, DC. He has served as Acting Deputy Assistant General, Chief of the Fraud Section, and Executive Director of the Economic Crime Counsel in the Criminal Division of the Department of Justice. Bradley Bondi is a partner in the same office, where he is a member of the white-collar criminal defense and securities litigation practice groups. Christopher Chiou is an associate in the firm's Los Angeles office, specializing in commercial litigation and white-collar representations.

Counsel for companies faced with criminal violations of securities laws must maneuver carefully through a gamut of factors to determine whether to voluntarily disclose criminal conduct. A corporation may face administrative and criminal sanctions for non-cooperation from both the Department of Justice (DOJ) and the SEC. But the DOJ's 'Thompson Memorandum' also bestows attractive benefits for cooperation, measured in part by the corporation's willingness 'to disclose the complete results of its internal investigation.' The prosecution may grant a corporation 'immunity or amnesty or pretrial diversion' or 'a non-prosecution agreement in exchange for cooperation.'

Cooperation

Besides the Thompson Memorandum, public companies should be familiar with the Securities and Exchange Commission's (SEC's) statements on cooperation. Earlier this year, the SEC announced that when determining whether to impose civil penalties against a corporation, the agency would consider a list of 'principal considerations' and 'additional factors.' On the factor 'Extent of cooperation with Commission and other law enforcement,' the SEC stated: 'The degree to which a corporation has self-reported an offense, or otherwise cooperated with the investigation and remediation of the offense, is a factor that the Commission will consider in determining the propriety of a corporate penalty.' SEC Statement Concerning Financial Penalties (Jan. 4, 2006), www.sec.gov/news/press/2006-4.htm.

The SEC has set forth the criteria it considers in determining how much to credit corporations with self-reporting and cooperation. The agency evaluates, inter alia: 1) 'Did the company cooperate completely with appropriate regulatory and law enforcement bodies?' 2) 'Did the company identify what additional related misconduct is likely to have occurred?' 3) 'Did it do a thorough review of the nature, extent, origins and consequences of the conduct and related behavior?' and 4) 'Did the company promptly make available to our staff the results of its review and provide sufficient documentation reflecting its response to the situation?' SEC Release No. 44969 (Oct. 23, 2001).

White-collar practitioners should be aware that punishments meted out by the SEC can be as harsh as those from the DOJ. In addition to civil penalties and disgorgement remedies, the SEC can require the imposition of monitors ' a disciplinary measure capable of drastically burdening a company's operations.

The stark contrast between the articulated rewards for cooperation and penalties for non-cooperation places immense pressure on companies to make prompt voluntary disclosures. In making a clear-eyed decision whether to make a voluntary disclosure, counsel should consider at least five primary factors.

Has The Situation Been Stabilized?

The first two questions the government will ask after a disclosure are 'Has the conduct stopped?' and 'Have relevant documents been preserved?' Counsel should be ready to say Yes to both before offering cooperation.

Outside counsel should ascertain the extent of illegal conduct and whether it is ongoing. A common pitfall is to undertake a prompt disclosure about one business unit only to learn later that the wrongdoing encompasses several company divisions. For example, a financial-reporting fraud found in one department actually permeates the entire corporation. An ill-prepared disclosure may result in the government's discovering other criminal conduct on its own, with no the benefits of cooperation to the company. Counsel therefore must assess not only the initial locus of alleged misconduct, but also other departments vulnerable to the same scheme or lapse in compliance.

Rather than simply accepting em-ployee representations, the company must conduct a preliminary inquiry to confirm independently that the conduct has ceased. Only as to past misconduct does the company sometimes have a choice about disclosure. When ongoing criminal conduct cannot be halted immediately, the company may be obligated to disclose it to government officials.

As soon as wrongdoing is identified, the company must preserve potentially relevant documents. Routine document destruction must be suspended immediately. A preservation hold no-tice should be issued to employees and separate instructions sent to IT de-partments regarding the preservation of back-up tapes.

Relying on preservation notices, however, is insufficient. Counsel should confirm that employees have been following the notices and consider retaining an outside electronic consultant to capture forensic images of hard drives.

Will the Information Become Known Through Other Channels?

The new civil and criminal exposure imposed on CEOs and CFOs by ' 906 of the Sarbanes-Oxley Act (SOX) has led companies to err on the side of disclosure in its SEC filings. While common sense should make a company disclose to enforcement officials any potentially criminal conduct revealed in SEC filings, companies often disclose information in a filing ' for example, describing 'material pending legal proceedings' pursuant to Item 103 of Regulation S-K ' but overlook disclosure to enforcement officials. Potentially criminal conduct should be voluntarily disclosed to enforcement officials prior to, or simultaneously with, the SEC filing. Remember that a company need only disclose the relevant facts in order to receive the benefits of voluntary disclosure: The company is not required to present legal conclusions or admit that conduct was illegal.

Similarly, counsel should consider the need to disclose any criminal conduct that has been previously disclosed to, or is likely to be discovered by, a foreign government or other U.S. regulatory agencies. Whenever a company is aware of a whistleblower, the prudent course often is to make a voluntary disclosure as soon as possible. Even if the whistleblower has not yet provided information to any third parties, the company's own disclosure minimizes the negative implications that would arise from allegations being initially raised to the government by a concerned employee. Proactively disclosing the information possessed by a whistleblower also minimizes the possibility of retaliation by an overzealous supervisor. This benefit is particularly important in light of the expansive civil and criminal liabilities created by SOX for retaliating against a whistleblower.

Can Privilege and Work Product Be Preserved?

Companies face an extremely difficult decision in determining whether to share internal investigation reports with a regulatory agency. Refusing may invite the agency to pursue its own investigation, while providing investigation materials poses the significant risk that they will lose their attorney-client privilege and/or work-product protection and be discoverable by parties in civil litigation. The vast majority of circuits have rejected the 'selective-waiver doctrine,' which would allow a company to disclose privileged information to a government agency while asserting attorney-client privilege against other parties. See, e.g. , United States v. Mass. Inst. of Tech. , 129 F.3d 681 (1st Cir. 1997); Genentech, Inc. v. United States Int'l Trade Comm'n , 122 F.3d 1407, 1417 (Fed. Cir. 1997). And a company cannot rely upon a confidentiality agreement with the government to prevent waiver of attorney-client privilege. As the Third Circuit has noted, 'under traditional waiver doctrine a voluntary disclosure to a third party waives the attorney-client privilege even if the third party agrees not to disclose the communications to anyone else.' Westinghouse Elec. Corp. v. Republic of Philippines , 951 F.2d 1414, 1427 (3d Cir. 1991). Nor can a confidentiality agreement be relied upon to avert waiver of work-product protection. Although certain steps may be taken to bolster a common-interest claim, companies should assume from the outset that a voluntary disclosure will result in a waiver.

Are Your Disclosures Accurate And the Information Trustworthy?

Make sure employees understand that any material misrepresentations in an internal investigation may result in criminal liability. The government has indicted employees for making false statements to outside counsel conducting an internal investigation. See United States v. Sanjay Kumar and Stephen Richards, Docket No. 04-CR-00846 (E.D.N.Y. 2004). This indictment in the recent investigation of Com-puter Associates illustrates the vast scope of criminal liability faced even by employees who do not directly interact with the government. Through vicarious liability, a company may find itself charged for an employee's false statements that outside counsel discloses to the government. Moreover, incomplete or misleading disclosures may result in obstruction of justice charges against the company. Counsel must fully document the internal investigation's findings in the event that the government alleges shortcomings in disclosure were intentional instances of obstruction.

How Will Disclosure Help You Present Your Client's Side of the Story?

By making a disclosure, a company is usually given the chance to investigate itself before the government moves in with agents and a grand jury. An internal investigation is less disruptive to the company's business, more cost efficient, and more apt to communicate the company's perspective to the government. The company may also avoid the burdens and pitfalls that accompany a barrage of broad subpoenas.

Conclusion

Whether to disclose criminal conduct is not an easy decision; it requires a conscientious assessment of the costs and benefits. Voluntary disclosure does not ensure leniency, particularly if the government believes that the company has not been forthcoming or has failed to take effective remedial action. While the factors discussed within this article are by no means an exhaustive list, companies should carefully consider them before making the decision to disclose.

Laurence A. Urgenson ([email protected]), a member of this newsletter's Board of Editors, is a partner at Kirkland & Ellis LLP in Washington, DC. He has served as Acting Deputy Assistant General, Chief of the Fraud Section, and Executive Director of the Economic Crime Counsel in the Criminal Division of the Department of Justice. Bradley Bondi is a partner in the same office, where he is a member of the white-collar criminal defense and securities litigation practice groups. Christopher Chiou is an associate in the firm's Los Angeles office, specializing in commercial litigation and white-collar representations.