An Old Dog Gets New Tricks: Update on Corporate Internal ... · • Makes recommendation or retains decision making authority. ... Nicholas, 606 F. Supp.2d 1109 (C.D. Cal. 2009)

4th Annual Significant Legal Developments Affecting the Chemical, Oil & Gas Industries

© Blank Rome LLP 2012. All Rights Reserved1

An Old Dog Gets New Tricks:

Update on Corporate Internal

PRESENTED BY

Investigations

Gregory F. Linsin, Blank Rome LLPHon. Edward N. Cahn, Blank Rome LLPJosh M. McMorrow, PSC

• Does your organization have written policies and procedures for the initiation and conduct of a

t i t l i ti ti ?

Quick Self-Evaluation

corporate internal investigation?

• Are there written policies and procedures for the receipt and handling of whistleblower reports and the management of relations with the whistleblower?

• Do key management personnel and in-house legal t ff i i di t i i i thstaff receive periodic training concerning these

policies and procedures?

• Are the policies and procedures periodically reviewed and revised?



Common Triggers for Internal Investigations

• Shareholder demand alleging misconduct by corporate officers or agents“Whi tl bl ” ll ti• “Whistleblower” allegations of unlawful conduct

• Regulatory inspections and/or requests for information

• Criminal search warrants or subpoenas E l t• Employee, customer, or vendor complaints

• Auditor’s concerns• Data security breaches• Allegations in civil litigation

Image Credit: Mike Shapiro8

Triggers For Internal Investigations . . .



Response to Triggers

Key Preliminary Issues• What is the purpose of

the investigation?• Who is the client?

Private Customer

• Who is in charge of the investigation?

• Should independent outside counsel be engaged?– Who makes the decision?

What are the criteria?

Customer Data

Public Opinion

&Reputation

– What are the criteria?• Is there a reasonable

anticipation of litigation?• What is the desired end

product?

Reporting Obligations



• Defining the scope of the investigation• Identifying procedures for internal coordination

– IT Dept

Planning the Investigation

– Regulatory Dept– Law Dept– Auditing– Corporate Security– PR Dept– HR Dept

• Developing standards for witness advisements• Developing procedures for whistleblower management• Maintaining confidentiality• Determining procedures for submitting interim findings and the

final report

• What is the goal of the investigation?

• What needs to be investigated?

Defining an Investigation …What is the Scope?

– Define the scope of what is/is not the subject of the investigation

– Be careful of scope creep

• Who is involved in the alleged wrongdoing?

• Is there a need to interview former employees?

• Is there a need to interview consultants or vendors?

• What is the volume of electronic files that must be collected and reviewed?



• Senior Management

Defining an Investigation …Who is in Charge (i.e., the Decision Maker)?

• General Counsel

• Audit Committee of Board

• Special Litigation Committee (“SLC”)• Special Litigation Committee ( SLC )

• Controls investigation– Defines scope

Defining an Investigation …Role of Decision Maker

– Directs investigation

– Receives reports

• Retains counsel– Counsel may do majority of work, but Decision Maker is still

i hin charge

• Makes recommendation or retains decision making authority



• Counsel should be independent from: – The Company,

Di t d Offi d

Selecting and Retaining Independent Counsel

– Directors and Officers, and

– The Company’s counsel.

• Independent counsel will increase the likelihood that the Decision Maker and investigation will be found to be independent, entitled to the protections of the business judgment rule, and given credibility by regulator.j g , g y y g– Lemenestrel v. Warden, 2008 Pa. Super. LEXIS 4377 (Dec. 31,

2008).

• The Decision Maker should execute the engagement letter.

What Does Independent Mean?• Minimal or no prior (or

concurrent) t ti f threpresentation of the

Company.

• Minimal or no business or social relationships with the Company, Directors Officers orDirectors, Officers, or Company counsel.

Image Credit: stus.com



• Designate one in-house lawyer to assist in accessing documents and interviewing personnel.

Relationship between Independent Counsel, In-House Counsel and Other Outside Counsel

• Coordination with the company’s other counsel, without waiving privilege, is permissible.

• But neither in-house counsel nor any other outside counsel may direct or limit the investigation.

• The DOJ and other federal agencies encourage companies to cooperate and disclose the results of internal investigations.

Whose Side Are You On, Anyway?

internal investigations. • As a result, company counsel may become de facto

“deputies” of law enforcement.• Counsel’s dual role highlights the risk of conflict between

the company and its executives and employees. U.S. v. Nicholas, 606 F. Supp.2d 1109 (C.D. Cal. 2009).

• Individuals can be prosecuted for “anticipatory”• Individuals can be prosecuted for anticipatory obstruction of justice based on false statements to company counsel. See U.S. v. Ray, No. 2:08-cr-01443 (C.D. Cal. 2008); 18 U.S.C. § 1519.



INTERVIEWS and UPJOHN WARNINGS

* Reproduced with permission of the author and without waiver of copyright

• Upjohn v. United States, 449 U.S. 383 (1981):– Communications between corporate counsel and

l i il d

UPJOHN and The Corporate Privilege

employees are privileged.

– The privilege belongs to the Company.

– The Company can waive the privilege.



Purposes of UPJOHN WARNING• Encourage employees to cooperate with the

investigationClearly explain the nature of• Clearly explain the nature of the privilege and the potential conflict:– Ensure that the Decision Maker

controls the privilege;– Avoid a later claim that an

employee was “thrown underemployee was thrown under the bus”; and

– Avoid any appearance of dual representation

• We have been retained as counsel for the company to assist in the conduct of an investigation regarding [subject conduct].

Contents of the UPJOHN WARNING

• You are being interviewed in connection with the investigation.

• We represent the company only, not you individually.• This interview is privileged, but the company controls the

privilege and may decide to reveal the substance of the interview to regulatory authorities or other third parties.

• We request that you keep substance of the interview• We request that you keep substance of the interview confidential.

• Any questions? Are you willing to proceed on the basis we have described?



• Lack of proper Upjohn warnings can lead to:– Employees attempting to claim the privilege and/or the Company or the SLC losing

control of the privilege:

Cautionary Tales

• U.S. v. Norris, 722 F. Supp.2d 632 (E.D. Pa. 2010), aff’d, 2011 WL 1035723 (3d Cir. Mar. 23, 2011); and

• U.S. v. Ruehle, 583 F.3d 600 (9th Cir. 2009).

– Disciplinary violations:

• U.S. v. Nicholas, 606 F. Supp.2d 1109 (C.D. Cal. 2009).

– Malpractice/Breach of fiduciary duty claims:

• Pendergest-Holt v. Sjoblom, No. 3:09-cv-000578 (N.D. Tex. Mar. 27, 2009).

• Make sure witnesses understand the nature of the representation before proceeding.

• Make a written record of the Upjohn warnings given.

• Obtain written waiver where there is a conflict of interest.

• Determining whether the report should be oral or written:

The Investigation Report

– Consider the end-product at the outset of the internal investigation.

– Whether the report is written or oral has important implications for claims of privilege.

• Careful consideration must be given to decision to disclose or not to disclose the report to thedisclose or not to disclose the report to the appropriate regulatory agency or the Department of Justice.



Effect of Disclosure of the Report on Underlying Materials

• Interview notes, underlying data, and memoranda– If quoted or paraphrased in the

t i i lik lreport, waiver is likely.

– However, a disclosure will not affect a waiver of the privilege as to all information on the same subject matter, unless “fairness” requires further disclosure. F d R E id 502Fed. R. Evid. 502.

• Drafts of the report

• In-house counsel have increasingly become the subject of government investigations and prosecutions.

• Examples of recent cases include:

In-House Counsel as Targets

• Examples of recent cases include:– U.S. v. Stevens, No. 8:10-cr-00694 (D. Md.) (Glaxo-Smith-Kline

Associate GC indicted for allegedly making false statements, falsifying and/or concealing documents, and obstructing FDA investigation).

– U.S. v. Grass, No. 1:02-cr-00146-02 (M.D. Pa.) (former Rite-Aid VP and Chief Legal Counsel convicted of various charges, including conspiracy to obstruct justice obstructing grand juryincluding conspiracy to obstruct justice, obstructing grand jury and government agency proceedings, and witness tampering).

– U.S. v. Woghin, No. 1:04-cr-00847 (E.D.N.Y.) (former GC of Computer Associates International, Inc. pled guilty to conspiracy to commit securities fraud and obstruction of justice).



• During interview of an employee or former employee who may be potentially implicated in wrong-doing, there is a clear tension between:

Obli ti t dili tl t th i t t f li t (R l 1 3

Ethical Landmines

– Obligation to diligently represent the interests of your client (Rule 1.3 , ABA Model Rules of Professional Conduct); and

– Duty to avoid giving legal advice to unrepresented person, other than to secure legal representation, if the interests of such person has a reasonable possibility of being in conflict with the interests of the client (Rule 4.3, ABA Model Rules of Professional Conduct).

• Also, Model Rule 4.4, states that a lawyer may not use methods of obtaining evidence that violate the legal rights of third parties [the employees]third parties [the employees].

• When a whistleblower has alleged wrong-doing, actual conflicts of interest and risks of claims of retaliation warrant specialized advisements, procedures and documentation for all interactions with whistleblower.

• Preservation memoranda to all relevant employees halting the deletion/destruction of documents and electronic data.

• “Mirroring” of personal computers and company laptops.

Some Steps to Minimize Your Risk

• When responding to a government subpoena/document request, communicate and document the scope and meaning of the requests with the issuing agency.

• Seek agency approval of search terms and protocols for production of electronic documents/data.

• Document efforts to ensure compliance with production/preservation obligations.

• Consider segregating employees, including in-house counsel, who may be targets of a probe from the document preservation/production process.

Wh i i i i id d ( hi ) h ld b• When interviewing witnesses, avoid any conduct (e.g., coaching) that could be construed as influencing the witness’ statement.

• Avoid making unequivocal or absolute statements to the government concerning the company’s conduct or compliance with an investigation.



• Internal investigation conducted at request of Pennsylvania State University (“PSU”) into allegations of sexual misconduct by personnel in football program

Freeh Report

by personnel in football program.

• PSU decided to release publically the results of the internal investigation.

• PSU has engaged Kenneth Feinberg to attempt to settle the civil lawsuits filed in the wake of the disclosures and the

i i l i ticriminal conviction.

• Sandra T.E. v. S. Berwyn Sch. Dist. 100, 600 F. 3d 612 (7th Cir. 2010)– Law firm’s documents related to internal investigation conducted on

behalf of school district held to be protected by attorney client privilege

Legal Update

behalf of school district held to be protected by attorney client privilege and work product doctrine

– Court focused on engagement letter to determine the nature of the investigation

– How a company communicated to others about the internal investigation will be reviewed to determine the nature of the engagement and to evaluate the availability of the privilege

– Law firm hired in their capacity as lawyers to provide legal services, including a factual investigationincluding a factual investigation

• Upjohn warnings given• No third parties attended interviews• School Board received report at executive session• Written summary marked “privileged and confidential”



• Woodmen of the World Life Ins. Socy. V. U.S. Bank Nat’l Assoc., No. 09-CV-407, 2012 U.S. Dist. LEXIS 12462 (D. Neb. Feb. 2, 2012)

Bank’s SEC compliance reports and related documents prepared by law

Legal Update

– Bank s SEC compliance reports and related documents prepared by law firm and accounting firm held not privileged because bank failed to demonstrate a reasonable anticipation of litigation

• In re REFCO, Inc. Securities Litigation, 08 Civ. 3065 and 08 Civ. 3086, 2012 U.S. Dist. LEXIS 27480 (S.D.N.Y. Feb. 28, 2012)– Defendants deposed a former director of one of the entities involved in the

alleged securities fraud the former director stated that he had spoken with the Plaintiff’s attorneys beforehand

– Plaintiffs objected on privilege grounds to questions regarding substance j g g g gof discussion with Plaintiff’s attorney

– Held conversations not covered by attorney client privilege, even though they occurred during an internal investigation, because they were not conversations with an employee intended to provide legal advice to the company

• SEC v. Obus, 10-4749-cv, 2012 U.S. App. LEXIS 18794 (2nd Cir. Sept. 6, 2012)

S d Ci it t d di t i t t’ t f

Legal Update

– Second Circuit vacated district court’s grant of summary judgment in favor of Defendants.

– In finding that one of the Defendants did not have a duty to his employer to keep confidential certain information about an acquisition, district court relied heavily on conclusions of an internal investigation conducted by the company.

– Second Circuit held that the internal investigation was notSecond Circuit held that the internal investigation was not indisputably reliable, was based only on interview without the benefit of outside sources, was motivated by corporate interests that did not necessarily coincide with the public interest.

– Results of an internal investigation cannot bind a jury.



• Townsend v. Benjamin Enterprises, Inc., 679 F. 3d 41 (2nd Cir. 2012)

Legal Update

– Civil suit by Townsend for sexual harassment; and Title VII retaliation claim by former HR Director alleging that she was wrongfully terminated for initiation of an internal investigation into claim of sexual harassment

– Participation in an internal investigation not connected to a formal EEOC proceeding does not qualify as protected activity under the participation clause.

– Summary judgment dismissing Title VII retaliation claim is affirmed

Documents

An Old Dog Gets New Tricks: Update on Corporate Internal ... · • Makes recommendation or retains decision making authority. ... Nicholas, 606 F. Supp.2d 1109 (C.D. Cal. 2009)