Helping Clients Defend Against SEC Actions
Not infrequently, in the context of an internal investigation, a company executive will be asked to sit for an interview by company counsel (either in-house counsel or an external law firm retained by the company). The interview is usually geared to establish whether, and if so what, the employee knows about the company’s potential securities fraud or other misconduct. Such interviews usually begin with a discussion of who the lawyer asking questions represents. Many employees, upon hearing that the lawyers represent the company, start out believing that because the attorneys represent the company, they are there to look after the employee's interests, too. This would be a mistake.
In fact, when interviewed as part of an internal investigation (whether one led by the Board or one led by the company’s management), company executives should receive an “Upjohn warning,” based upon the seminal U.S. Supreme Court case, Upjohn Co. v. United States, 449 U.S. 383 (1981), where the Supreme Court held that communications between employees and counsel retained to conduct the investigation are privileged, and that the privilege belongs to the company and not the individual employees. In Upjohn, because the interviews and answers provided by employees were privileged, the Court found that the company was not required to turn over the communications to the government pursuant to a subpoena absent a waiver of the privilege by the company.
Since that case, attorneys in an internal investigation have found it necessary to make it very clear to executives that their client is the company, not the executive or employee, and that although the conversation is privileged, the privilege belongs to the company and not the executive/employee, and may later be waived at the company’s discretion. As one might imagine, this can have a certain chilling effect on the progress of the conversation.
Although the “Upjohn warning” is salutary because it makes clear to employees that the attorney neither represents them nor are their statements protected from later disclosure by the company, this presents a fundamental problem for the company. If they are to get to the bottom of the issues under investigation, the company’s investigators (usually outside counsel retained by the company) need the cooperation of employees who were involved in the underlying issues. Although the company can (and should) make cooperation with an internal investigation a condition of continued employment (this should actually be part of the company’s preexisting internal corporate policies), those employees most likely to have been involved in an actual fraud may be unwilling to cooperate, even if it means losing their job, because their statements may be incriminating and may be revealed to the government. This situation places both the company and the employee on the horns of a dilemma. And that dilemma cannot be resolved by giving unclear or incomplete Upjohn warnings, because the courts have held those to be ineffective.
This is an area where retaining independent counsel for an executive or an employee may be helpful. An independent attorney knowledgeable in these matters can make their own assessment about whether or not the employee actually does have exposure. Although the advice to the employee might be to not cooperate and not to submit to an interview, for employees who may have knowledge but no real exposure, hiring independent counsel can provide the employee with the comfort they need to go ahead and provide information about what they know in a way that will assist the investigation.
An additional wrinkle has appeared in recent years, as outside counsel retained by companies have gone further and further down the road of actually performing the government’s investigation on the government’s behalf. It has long been a practice of certain law firms to perform an independent investigation and to then provide the government with a “road map” highlighting what the company represents as the totality of the wrongful conduct, complete with suggestions about which (now-former) employees and executives were “at fault” and absolving the Board and giving retained executives a clean bill of health. The hope is that the SEC and DOJ will agree with the findings of the internal investigation and leave the company alone (or with a Non-Prosecution Agreement, or at least a Deferred Prosecution Agreement, and lessened penalties as a reward for “cooperation”) as it goes on to pursue the “real” bad actors. But what if the independent investigation by the law firm is actually performed at the “direction” of the government?
This was the case in a 2019 case in the U.S. District Court for the Southern District of New York, U.S. v. Connolly, et al., Case No. 16-CR-370 (SDNY May 2, 2019). In that case, the judge declared that she was “deeply troubled” by the “profound implications if the Government, as has been suggested elsewhere, is routinely outsourcing its investigations into complex financial matters to the targets of those investigations, who are in a uniquely coercive position vis-à-vis potential targets of criminal activity.” The judge evaluated whether, in that case, the company employees who were ultimately subjected to criminal prosecution had had their Fifth Amendment right to remain silent violated because the company’s outside counsel coerced them into giving statements and inquired into specific areas at the direction of the Department of Justice. Because the judge ultimately found that the government had not used the statement of the employee who sought to overturn his conviction on that basis and had developed evidence independent of the employee’s statements to the investigators, she did not overturn the conviction.
Nevertheless, Connolly involved a close call and in the right (or wrong) circumstance, a future court might not hesitate to invalidate a conviction based on evidence obtained through a coerced employee statement, particularly if the investigation is conducted by a law firm in close consultation with the government.