Being Ready for Government Investigations in a Time of Financial Crisis

Document Preservation

Any document that is destroyed after a company has notice of a potential government investigation will be assumed to have been intentionally destroyed to hide its inculpatory content. To avoid this devastating assumption, one of the most important steps to take as soon as a company has notice of an investigation is to ensure that the relevant documents are preserved, and to suspend any automatic destruction protocols. To achieve this, counsel must issue an effective document preservation order and ensure that it is received, read, and acted upon. This requires coordination with the applicable business units and IT personnel. Investigations tend to expand over time, so it's wise to make the initial document recovery broad enough to assure that the company is prepared for future requests from the government. Though a company with offices all over the world can't suspend document destruction practices company-wide indefinitely, it's always easier to start with a broader group of employees responsible for retaining documents (“custodians”) and trim them later than to add custodians after the preservation memo is already in place.

Effective document preservation requires more than simply sending out directives to preserve documents with the expectation of full compliance. Counsel cannot be passive. Rather, you must “take affirmative steps to monitor compliance so that all sources of discoverable information are identified and searched.” Zubulake v. UBS Warburg, LLC, 229 F.R.D. 422, 432 (S.D.N.Y. 2004). Affirmative steps include personal meetings, reminder memos, and expansion of the directive as new information becomes available.

Destruction of relevant documents after a company has notice of an investigation will cause the government to question whether they were destroyed to obstruct the government's investigation. Even when this does not lead to obstruction of justice charges, document destruction will inevitably sour future interactions with the government, with effects ranging from an unwillingness to negotiate the timing or scope of subpoenas to suspiciousness of all representations regarding corporate affairs. The government may question the sincerity of the company's stated desire to cooperate and may even get a search warrant. Even if the government doesn't bring an enforcement action, document destruction can lead to jury instructions allowing an adverse inference against the company in companion civil litigation.

Critical to document preservation is an organized and comprehensive plan with clear requirements and leadership. Beyond an initial collection letter, have direct contact with custodians to explain what they need to do. All potentially relevant hard-copy documents should be collected from every custodian so that review teams can identify those which are responsive. The relevant custodians must also be identified to the IT Department to assure that their electronic documents are not deleted and that responsive archived documents may be collected. As the government may seek to have a single records custodian certify compliance with its subpoena, it is wise to obtain sub-certifications from the people who have everyday custody of the relevant documents.

Internal Investigation

After issuing a document preservation order, counsel must determine the scope and protocol for the internal investigation to conduct. Learning the facts which will determine company's potential exposure is the only way to establish defenses and position the company favorably with enforcement authorities.

The first question is, Who should conduct the internal investigation? In order to retain privilege, it must be directed and conducted by counsel. Can it be done in-house or must the company get outside counsel? Or should a combination of inside and outside counsel be responsible? This decision frequently hinges on the seriousness of the allegations and potential consequences. When the DOJ and the SEC are investigating the company and its senior executives, the stakes are extremely high. Some enforcement lawyers will be inherently suspicious of an investigation of potential misconduct by senior executives that was run by the general counsel, who is, by definition, a senior executive too. Selection of well-regarded outside counsel can begin the process of establishing credibility with the government lawyers investigating the company and assure that all necessary steps are taken to provide a conduit for information on the investigation.

When conducting the investigation, counsel should tell employees that they represent the company and not the employee, that the conversation is covered by the company's attorney-client privilege, that the employee is not free to disclose the contents of the interview without the consent of the company, and that the company has the exclusive right to waive the privilege and disclose the contents of the interview to third parties, including the government. Interview notes should memorialize that these warnings were given and understood by the employee. If the company intends to disclose the fruits of its internal investigation to the government, counsel should consider warning interviewees that a false statement could result in their prosecution for violating of 18 U.S.C. ' 1001.

Privilege

Counsel conducting an internal investigation must be diligent to preserve privilege throughout the investigation and should assume that everything they write down may eventually be provided to regulators and/or plaintiffs' lawyers. While privilege concerns permeate the internal investigation, they come to a head at its conclusion. Counsel must weigh the costs and benefits of generating a final report on the investigation and think carefully about the level of detail necessary.

Counsel is frequently required to disclose the findings of any internal investigation to others related to the company. As the Board of Directors or its Audit Committee is part of the client, disclosure to them should not entail a waiver of privilege. However, counsel must exercise special care when an individual whose conduct may be within the scope of the investigation sits on the Board or its Audit Committee.

Counsel may also need to disclose the results of the investigation to external auditors and government officials. Since they are not the client, disclosure can mean a waiver of privilege. Sometimes, auditors or government officials will accept privileged information pursuant to a confidentiality agreement that recites a “common interest” to support an argument in potential parallel litigation that disclosing the documents did not waive the privilege. Typically, however, they resist such overtures as inconsistent with their obligation to disclose adverse information to the public. Counsel must use care in determining the nature and structure of any such disclosure, especially since courts in parallel litigation may compel disclosure despite a well drafted confidentiality agreement. One option is to make the disclosure orally, using a visual presentation (such as PowerPoint) or a bare-bones outline to guide the listener through the relevant areas of discussion. This allows for a meaningful disclosure without handing over a document that could eventually provide a litigation road map for plaintiff's attorneys.

Conclusion

Financial-service companies have always been highly regulated, but the current financial crisis will inevitably increase the scrutiny their conduct. In this environment, identifying the issues quickly is critical. Addressing document retention immediately, designing a considered and effective plan for an internal investigation, and taking steps to preserve privilege can put the company in the best position to defend itself against allegations of misconduct, whether they come from regulators or civil plaintiffs.

David Krakoff ([email protected]) and Peter White ([email protected]), both former federal prosecutors, are partners of Mayer Brown LLP in its Washington office. They wish to thank their associate, Clancy Galgay, who assisted in drafting the article.

The global credit crisis has already spawned numerous investigations seeking to determine whether wrongdoing at financial institutions caused any part of the financial meltdown. The press has reported ongoing investigations by the Department of Justice (DOJ) and the SEC of many of the most recognizable names in the financial world, including Bear Stearns, Lehman Brothers, Credit Suisse, UBS, AIG, Fannie Mae and Freddie Mac. With the public furious over corporate excesses, the Obama Administration is likely to devote significant enforcement resources to ensuring that none of the federal bailout money is used improperly. Task forces will be formed. More civil cases will be filed. The pressure on financial institutions from government regulators is certain to be intense.

In this heightened enforcement environment, it is more important than ever that corporate general counsel be ready and able to navigate a minefield of complex issues as soon as they become aware that their company is the focus of a government investigation. Upon learning of a subpoena for corporate records, counsel must quickly assemble the correct team, analyze the subpoena, and determine who may have responsive documents. Given the stress of this process, companies should strive to have proper controls in place well before becoming the target of an investigation. Regardless, counsel must be extremely organized from the beginning and must work effectively with both the business units and the IT department to establish an infrastructure which assures that everyone is working from the same playbook. At best, early mistakes will cause later headaches; at worst, they can be devastating.

Three issues require immediate focus early in the investigative process to get ahead of the enforcement curve: document preservation, internal investigation, and privilege.

Document Preservation

Any document that is destroyed after a company has notice of a potential government investigation will be assumed to have been intentionally destroyed to hide its inculpatory content. To avoid this devastating assumption, one of the most important steps to take as soon as a company has notice of an investigation is to ensure that the relevant documents are preserved, and to suspend any automatic destruction protocols. To achieve this, counsel must issue an effective document preservation order and ensure that it is received, read, and acted upon. This requires coordination with the applicable business units and IT personnel. Investigations tend to expand over time, so it's wise to make the initial document recovery broad enough to assure that the company is prepared for future requests from the government. Though a company with offices all over the world can't suspend document destruction practices company-wide indefinitely, it's always easier to start with a broader group of employees responsible for retaining documents (“custodians”) and trim them later than to add custodians after the preservation memo is already in place.

Effective document preservation requires more than simply sending out directives to preserve documents with the expectation of full compliance. Counsel cannot be passive. Rather, you must “take affirmative steps to monitor compliance so that all sources of discoverable information are identified and searched.” Zubulake v. UBS Warburg, LLC , 229 F.R.D. 422, 432 (S.D.N.Y. 2004). Affirmative steps include personal meetings, reminder memos, and expansion of the directive as new information becomes available.

Destruction of relevant documents after a company has notice of an investigation will cause the government to question whether they were destroyed to obstruct the government's investigation. Even when this does not lead to obstruction of justice charges, document destruction will inevitably sour future interactions with the government, with effects ranging from an unwillingness to negotiate the timing or scope of subpoenas to suspiciousness of all representations regarding corporate affairs. The government may question the sincerity of the company's stated desire to cooperate and may even get a search warrant. Even if the government doesn't bring an enforcement action, document destruction can lead to jury instructions allowing an adverse inference against the company in companion civil litigation.

Critical to document preservation is an organized and comprehensive plan with clear requirements and leadership. Beyond an initial collection letter, have direct contact with custodians to explain what they need to do. All potentially relevant hard-copy documents should be collected from every custodian so that review teams can identify those which are responsive. The relevant custodians must also be identified to the IT Department to assure that their electronic documents are not deleted and that responsive archived documents may be collected. As the government may seek to have a single records custodian certify compliance with its subpoena, it is wise to obtain sub-certifications from the people who have everyday custody of the relevant documents.

Internal Investigation

After issuing a document preservation order, counsel must determine the scope and protocol for the internal investigation to conduct. Learning the facts which will determine company's potential exposure is the only way to establish defenses and position the company favorably with enforcement authorities.

The first question is, Who should conduct the internal investigation? In order to retain privilege, it must be directed and conducted by counsel. Can it be done in-house or must the company get outside counsel? Or should a combination of inside and outside counsel be responsible? This decision frequently hinges on the seriousness of the allegations and potential consequences. When the DOJ and the SEC are investigating the company and its senior executives, the stakes are extremely high. Some enforcement lawyers will be inherently suspicious of an investigation of potential misconduct by senior executives that was run by the general counsel, who is, by definition, a senior executive too. Selection of well-regarded outside counsel can begin the process of establishing credibility with the government lawyers investigating the company and assure that all necessary steps are taken to provide a conduit for information on the investigation.

When conducting the investigation, counsel should tell employees that they represent the company and not the employee, that the conversation is covered by the company's attorney-client privilege, that the employee is not free to disclose the contents of the interview without the consent of the company, and that the company has the exclusive right to waive the privilege and disclose the contents of the interview to third parties, including the government. Interview notes should memorialize that these warnings were given and understood by the employee. If the company intends to disclose the fruits of its internal investigation to the government, counsel should consider warning interviewees that a false statement could result in their prosecution for violating of 18 U.S.C. ' 1001.

Privilege

Counsel conducting an internal investigation must be diligent to preserve privilege throughout the investigation and should assume that everything they write down may eventually be provided to regulators and/or plaintiffs' lawyers. While privilege concerns permeate the internal investigation, they come to a head at its conclusion. Counsel must weigh the costs and benefits of generating a final report on the investigation and think carefully about the level of detail necessary.

Counsel is frequently required to disclose the findings of any internal investigation to others related to the company. As the Board of Directors or its Audit Committee is part of the client, disclosure to them should not entail a waiver of privilege. However, counsel must exercise special care when an individual whose conduct may be within the scope of the investigation sits on the Board or its Audit Committee.

Counsel may also need to disclose the results of the investigation to external auditors and government officials. Since they are not the client, disclosure can mean a waiver of privilege. Sometimes, auditors or government officials will accept privileged information pursuant to a confidentiality agreement that recites a “common interest” to support an argument in potential parallel litigation that disclosing the documents did not waive the privilege. Typically, however, they resist such overtures as inconsistent with their obligation to disclose adverse information to the public. Counsel must use care in determining the nature and structure of any such disclosure, especially since courts in parallel litigation may compel disclosure despite a well drafted confidentiality agreement. One option is to make the disclosure orally, using a visual presentation (such as PowerPoint) or a bare-bones outline to guide the listener through the relevant areas of discussion. This allows for a meaningful disclosure without handing over a document that could eventually provide a litigation road map for plaintiff's attorneys.

Conclusion

Financial-service companies have always been highly regulated, but the current financial crisis will inevitably increase the scrutiny their conduct. In this environment, identifying the issues quickly is critical. Addressing document retention immediately, designing a considered and effective plan for an internal investigation, and taking steps to preserve privilege can put the company in the best position to defend itself against allegations of misconduct, whether they come from regulators or civil plaintiffs.

David Krakoff ([email protected]) and Peter White ([email protected]), both former federal prosecutors, are partners of Mayer Brown LLP in its Washington office. They wish to thank their associate, Clancy Galgay, who assisted in drafting the article.