Company Interviews of Employees Suspected of Wrongdoing

To minimize the repercussions from possible wrongdoing, the company generally should conduct the investigation in a manner acceptable to the government. There are times when the government does not want a company to conduct its own investigation for fear that wrongdoers will get wind of the inquiry, tailor their stories, destroy evidence or tamper with witnesses. Should that happen, the entity could find itself more likely to be charged by the government for the underlying conduct. At other times, the government will attempt to place restrictions on the company's investigation, such as controlling what documents can be provided to potential witnesses.

Suppose the Client Compliance Officer at a public company is informed through the hotline that, in order to show the expected quarterly revenues, a major division of the company has reported fictitious sales over a period of years. The informant claims that the senior division officers all know about it and have received inflated bonuses from the fictitious sales, adding that low-level employees have knowingly created false invoices under threat of termination, but did not personally benefit from the wrongdoing. A few of those employees signed Sarbanes-Oxley certifications that the financial statements were prepared in accordance with GAAP and that there were no known instances of fraud.

What to Do

One of the first things the company should do is hire conflict-free counsel to conduct the investigation. So in-house counsel consults with regular outside counsel, and they decide to bring in a law firm that has not previously represented the company and is well-versed in SEC and U.S. Attorney matters. The company decides to inform the U.S. Attorney and the SEC of the hot-line report, and both agencies permit the company to proceed with an internal investigation to determine whether the hot line tip is true and, if so, the dollars and time period involved, and which employees participated and to what extent. The government requires the company to report back regularly.

One of the first things that needs to be done is to prepare an action plan outlining the steps to be taken in the investigation, including hiring an investigative firm to assist in the interviews, and perhaps an accounting firm knowledgeable about public company reporting obligations.

In our hypothetical, employees have varying levels of exposure. Senior executives of the division instituted the practice, benefited from it, and threatened the employees to coerce them to participate. There can be no question that they would be denominated as targets or at least subjects of a criminal inquiry. At a lower level of culpability are the employees who created and certified false documents, albeit reluctantly and without any financial benefit. They too have regulatory and criminal exposure (particularly anyone who signed a Sarbanes-Oxley certificate), though hopefully a reasonable prosecutor and regulator would exercise discretion and decline to charge them. Still less culpable are employees did not participate in the misconduct but knew about it and did nothing to stop it.

At the outset of an investigation, the usual course is for counsel to set up an initial interview with an employee and begin by making it clear that ' with respect to the interview ' the attorney represents the corporation, not the employee; that the information provided to the attorney is privileged, but the privilege is held by the corporation, not the employee; and that the corporation alone decides whether to share any of the information imparted by the employee with third parties. These warnings are critical because many employees are under the understandable misimpression that the company's lawyers are also representing them as constituents of the company.

Confronted with this stark reminder that the corporation is acting in its own best interests, some employees accept these warnings without comment and proceed immediately with the interview, preferring to cooperate with the employer's ground rules rather than appear defensive or defiant. Other employees may inquire of the interviewing counsel whether he or she should consult with independent counsel before proceeding. A standard response is for counsel to reiterate that counsel only represents the corporation and cannot advise the employee. See D.R. 7-104(a)(2) (lawyer cannot advise unrepresented parties other than to secure counsel if interests are possibly in conflict with interests of lawyer's client). Although this response ignores the reality that some of the implicated employees in our hypothetical would be better off having independent counsel before the interview (to avoid unguarded testimony), New York's rules do not expressly require counsel to advise an employee to secure an attorney (whether or not the employee inquires). The ethical rules of other states are somewhat more protective of employees, stating that when corporate counsel identifies actual or potential adverse interests between a corporation and an employee, the attorney 'should advise' the individual that he or she 'may wish to obtain independent representation.' Comment 10 to ABA Model Rule 1.13.

Attorney's Dilemma

The lawyer conducting the internal investigation faces a dilemma, particularly as he or she goes up the chain and interviews more senior personnel against whom the informant has made the most serious allegations. The company wants counsel to learn as much as possible about the potential misconduct and to learn it as quickly as possible. The senior employees are in the best position to provide information as to the company's potential exposure and the extent of the wrongdoing. If the employee obtains separate counsel before the initial interview, the likely result will be to postpone (temporarily or permanently) the interview while the individual's attorney learns the facts and assesses the situation. If the interview occurs, the independently represented employee is likely to be better prepared for questioning and more guarded in responding than he or she would otherwise have been. This tension between the company's interest in quickly learning the truth and the individual's interests in avoiding potential self-incrimination is present in almost every corporate investigation.

Let's assume that the next interview to be conducted by the investigating counsel is of the division CFO, who has been identified by several witnesses as a central player in the scheme. The CFO asks at the outset whether he should have a lawyer during the interview. At this point, company counsel has a reasonable basis to believe that the corporation may have interests adverse to the CFO's and knows that (if there is any truth to the allegations) it is unlikely counsel could represent both the corporation and the individual as the investigation proceeds. See DR 5-105 (precluding representation of multiple clients where their interests may be adverse). If the attorney advises the CFO that he would be prudent to have separate counsel, although that advice is permitted by the disciplinary rules, one could argue that the attorney has failed zealously to represent the corporation by delaying the interview until the employee is represented. Thus, an investigating attorney may be placed in the uncomfortable position of trying to cajole an employee to be interviewed without his own lawyer, even where the attorney knows the employee's testimony (whether truthfully incriminating or falsely exculpatory) may well work to the employee's eventual detriment when it is provided to the government or used as a basis for termination of employment.

Some corporations avoid this dilemma by instructing outside counsel to recommend independent counsel for its employees whenever potentially adverse interests exist. This decision comports with fundamental fairness to the employee. Indeed, while there will almost certainly be some delay and a lessened likelihood that employee will blurt out an unthinking admission, separate counsel may often assist the corporation by transmitting information to the company in a cogent and comprehensive way. This process also insures that employees are aware of their rights and not maneuvered into a game of 'gotcha.' Although a company might fear that government would consider the presence of a separate lawyer for employees to be a hindrance to eventual prosecution, a company's good-faith decision to recommend separate counsel should not be viewed negatively by the government, particularly in light of Judge Lewis Kaplan's criticism of the government's alleged efforts to discourage KPMG from advancing attorneys' fees for separately represented employees. See United States v. Stein, 435 F. Supp. 2d 330 (S.D.N.Y. 2006). In our view, justice is best served if the company recommends separate counsel when the employee appears to be at serious personal risk.

Marjorie J. Peerce ([email protected]), a member of this newsletter's Board of Editors, and John B. Harris are partners at Stillman, Friedman & Shechtman, P.C., in New York, NY.

Since Sarbanes-Oxley ('SOX') became law in 2002, companies have had a heightened interest in determining if there has been wrongdoing within their business. When a company has reason to believe that one or more employees may have engaged in practices that could expose it and them to civil lawsuits, regulatory actions or criminal charges, good business practice calls for the company to find out what occurred, who was involved, how extensive the conduct was, and how it happened. From the very beginning of this process, a particularly difficult issue is what employees interviewed in the company's investigation should be told about getting their own lawyers.

Prompt Action

In today's climate, prompt investigative action by the company is crucial. The company must decide when and whether to inform government agencies, and, if so, must work with those agencies to ensure that the company gets credit for the early and timely reporting. The federal Sentencing Guidelines and the so-called McNulty Memo and Seaboard Release set out factors that are considered by the Department of Justice and the SEC in determining whether a company will be charged for the acts of its employees and, if so, what sanction if any will be imposed on the company.

To minimize the repercussions from possible wrongdoing, the company generally should conduct the investigation in a manner acceptable to the government. There are times when the government does not want a company to conduct its own investigation for fear that wrongdoers will get wind of the inquiry, tailor their stories, destroy evidence or tamper with witnesses. Should that happen, the entity could find itself more likely to be charged by the government for the underlying conduct. At other times, the government will attempt to place restrictions on the company's investigation, such as controlling what documents can be provided to potential witnesses.

Suppose the Client Compliance Officer at a public company is informed through the hotline that, in order to show the expected quarterly revenues, a major division of the company has reported fictitious sales over a period of years. The informant claims that the senior division officers all know about it and have received inflated bonuses from the fictitious sales, adding that low-level employees have knowingly created false invoices under threat of termination, but did not personally benefit from the wrongdoing. A few of those employees signed Sarbanes-Oxley certifications that the financial statements were prepared in accordance with GAAP and that there were no known instances of fraud.

What to Do

One of the first things the company should do is hire conflict-free counsel to conduct the investigation. So in-house counsel consults with regular outside counsel, and they decide to bring in a law firm that has not previously represented the company and is well-versed in SEC and U.S. Attorney matters. The company decides to inform the U.S. Attorney and the SEC of the hot-line report, and both agencies permit the company to proceed with an internal investigation to determine whether the hot line tip is true and, if so, the dollars and time period involved, and which employees participated and to what extent. The government requires the company to report back regularly.

One of the first things that needs to be done is to prepare an action plan outlining the steps to be taken in the investigation, including hiring an investigative firm to assist in the interviews, and perhaps an accounting firm knowledgeable about public company reporting obligations.

In our hypothetical, employees have varying levels of exposure. Senior executives of the division instituted the practice, benefited from it, and threatened the employees to coerce them to participate. There can be no question that they would be denominated as targets or at least subjects of a criminal inquiry. At a lower level of culpability are the employees who created and certified false documents, albeit reluctantly and without any financial benefit. They too have regulatory and criminal exposure (particularly anyone who signed a Sarbanes-Oxley certificate), though hopefully a reasonable prosecutor and regulator would exercise discretion and decline to charge them. Still less culpable are employees did not participate in the misconduct but knew about it and did nothing to stop it.

At the outset of an investigation, the usual course is for counsel to set up an initial interview with an employee and begin by making it clear that ' with respect to the interview ' the attorney represents the corporation, not the employee; that the information provided to the attorney is privileged, but the privilege is held by the corporation, not the employee; and that the corporation alone decides whether to share any of the information imparted by the employee with third parties. These warnings are critical because many employees are under the understandable misimpression that the company's lawyers are also representing them as constituents of the company.

Confronted with this stark reminder that the corporation is acting in its own best interests, some employees accept these warnings without comment and proceed immediately with the interview, preferring to cooperate with the employer's ground rules rather than appear defensive or defiant. Other employees may inquire of the interviewing counsel whether he or she should consult with independent counsel before proceeding. A standard response is for counsel to reiterate that counsel only represents the corporation and cannot advise the employee. See D.R. 7-104(a)(2) (lawyer cannot advise unrepresented parties other than to secure counsel if interests are possibly in conflict with interests of lawyer's client). Although this response ignores the reality that some of the implicated employees in our hypothetical would be better off having independent counsel before the interview (to avoid unguarded testimony), New York's rules do not expressly require counsel to advise an employee to secure an attorney (whether or not the employee inquires). The ethical rules of other states are somewhat more protective of employees, stating that when corporate counsel identifies actual or potential adverse interests between a corporation and an employee, the attorney 'should advise' the individual that he or she 'may wish to obtain independent representation.' Comment 10 to ABA Model Rule 1.13.

Attorney's Dilemma

The lawyer conducting the internal investigation faces a dilemma, particularly as he or she goes up the chain and interviews more senior personnel against whom the informant has made the most serious allegations. The company wants counsel to learn as much as possible about the potential misconduct and to learn it as quickly as possible. The senior employees are in the best position to provide information as to the company's potential exposure and the extent of the wrongdoing. If the employee obtains separate counsel before the initial interview, the likely result will be to postpone (temporarily or permanently) the interview while the individual's attorney learns the facts and assesses the situation. If the interview occurs, the independently represented employee is likely to be better prepared for questioning and more guarded in responding than he or she would otherwise have been. This tension between the company's interest in quickly learning the truth and the individual's interests in avoiding potential self-incrimination is present in almost every corporate investigation.

Let's assume that the next interview to be conducted by the investigating counsel is of the division CFO, who has been identified by several witnesses as a central player in the scheme. The CFO asks at the outset whether he should have a lawyer during the interview. At this point, company counsel has a reasonable basis to believe that the corporation may have interests adverse to the CFO's and knows that (if there is any truth to the allegations) it is unlikely counsel could represent both the corporation and the individual as the investigation proceeds. See DR 5-105 (precluding representation of multiple clients where their interests may be adverse). If the attorney advises the CFO that he would be prudent to have separate counsel, although that advice is permitted by the disciplinary rules, one could argue that the attorney has failed zealously to represent the corporation by delaying the interview until the employee is represented. Thus, an investigating attorney may be placed in the uncomfortable position of trying to cajole an employee to be interviewed without his own lawyer, even where the attorney knows the employee's testimony (whether truthfully incriminating or falsely exculpatory) may well work to the employee's eventual detriment when it is provided to the government or used as a basis for termination of employment.

Some corporations avoid this dilemma by instructing outside counsel to recommend independent counsel for its employees whenever potentially adverse interests exist. This decision comports with fundamental fairness to the employee. Indeed, while there will almost certainly be some delay and a lessened likelihood that employee will blurt out an unthinking admission, separate counsel may often assist the corporation by transmitting information to the company in a cogent and comprehensive way. This process also insures that employees are aware of their rights and not maneuvered into a game of 'gotcha.' Although a company might fear that government would consider the presence of a separate lawyer for employees to be a hindrance to eventual prosecution, a company's good-faith decision to recommend separate counsel should not be viewed negatively by the government, particularly in light of Judge Lewis Kaplan's criticism of the government's alleged efforts to discourage KPMG from advancing attorneys' fees for separately represented employees. See United States v. Stein, 435 F. Supp. 2d 330 (S.D.N.Y. 2006). In our view, justice is best served if the company recommends separate counsel when the employee appears to be at serious personal risk.

Marjorie J. Peerce ([email protected]), a member of this newsletter's Board of Editors, and John B. Harris are partners at Stillman, Friedman & Shechtman, P.C., in New York, NY.