INTERNAL INVESTIGATIONS: HOT TOPICS AND RED FLAGS

Transcription

1 INTERNAL INVESTIGATIONS: HOT TOPICS AND RED FLAGS Jonathan S. Sack, Morvillo Abramowitz Grand Iason & Anello PC David Goldberg, Katten Muchin Rosenman LLP Thomas M. Merritt, KCG Holdings, Inc.

2 JONATHAN S. SACK MORVILLO ABRAMOWITZ GRAND IASON & ANELLO PC Jonathan S. Sack has extensive experience litigating complex civil and criminal cases. He represents individuals and companies in federal and state criminal, civil and regulatory matters and conducts internal investigations. He served for thirteen years as an Assistant U.S. Attorney for the Eastern District of New York, where he handled significant prosecutions in the areas of securities and financial institution fraud, RICO violations, export control offenses, money laundering, and drug trafficking. While Chief of the Criminal Division there, he oversaw investigations and prosecutions conducted by more than one hundred Criminal Division Assistant U.S. Attorneys in all areas of federal criminal law. Jonathan has been recommended by the Legal 500 United States 2012 as a leading Lawyer in White Collar Criminal Defense. 1

3 DAVID L. GOLDBERG KATTEN MUCHIN ROSENMAN LLP David L. Goldberg represents corporate and individual clients in a wide range of securities litigation and regulatory enforcement matters, including class actions; broker dealer litigation/arbitration; commercial litigation involving contract, fraud and fiduciary duty claims; raiding/recruiting litigation; employment disputes; regulatory enforcement investigations and inquiries; and internal investigations. His professional experience includes in house, government and law firm service, providing him with a deep knowledge of the litigation and regulatory challenges facing major financial institutions, experience dealing with government regulators and trial practice expertise. Most recently, he served as executive director/senior associate general counsel within the Litigation and Investigations Group at UBS Securities LLC. Before joining UBS, he served as an Assistant US Attorney in the US Attorney s Office for the Eastern District of New York, where he was presented with the John Marshall Award, among the highest honors given by the US Department of Justice, by US Attorney General Janet Reno. 2

4 THOMAS M. MERRITT DEPUTY GENERAL COUNSEL, KCG HOLDINGS, INC. Thomas M. Merritt has over 16 years of experience in the securities industry. He has been with Knight Capital Group, Inc. (now KCG Holdings, Inc.) since June From December 1996 to June 2000, Tom served as an enforcement attorney with NASD (now FINRA) in New York. Prior thereto, Tom was an Assistant County Attorney in Suffolk County, New York and was in private practice. Tom received a B.S. degree in Business Administration in 1986 from SUNY Albany and a J.D. in 1989 from Hofstra University School of Law. 3

5 TABLE OF CONTENTS Internal Investigations: The Basics...5 Internal Investigation Triggers..6 Who is the Client?.8 Who Should Conduct the Investigation..9 Whistleblower Allegations..13 Ethical Duty of In-House Counsel to Inquire Whether a Violation of Law May Have Occurred 20 Interviewing Employees..21 Responding to the Investigation s Findings.24 4

6 INTERNAL INVESTIGATIONS: THE BASICS What is an internal investigation? Essential goal: The investigation must be credible and reliable Key issues to consider upfront: Nature and scope of investigation Who is the client? Who should conduct the investigation? 5

7 INTERNAL INVESTIGATION TRIGGERS To determine the initial scope of an internal investigation, evaluate the allegation carefully. Some determinative factors are: Level of specificity Source Type of Information Location of incident/potential jurisdiction Regulatory requirements/priorities 6

8 INTERNAL INVESTIGATION TRIGGERS The credibility of an allegation often depends on its source. Government investigations Civil lawsuits Reports by customers and vendors, employees, internal or external auditors, media and/or shareholders Whistleblower allegations Other triggers? 7

9 WHO IS THE CLIENT? Internal investigations generally are overseen by management; the Board; or a special committee of the Board. Considerations: The nature of the alleged misconduct; Whether the issues being reviewed encompass the actions of senior management or are confined to midand lower-level employees; and Whether there is pressure for an independent review. 8

10 WHO SHOULD CONDUCT THE INVESTIGATION? When can in-house counsel conduct the investigation? It is appropriate in many investigations for inhouse lawyers, taking care that privilege is protected, to undertake targeted initial inquiries. Once in-house counsel gathers basic facts and assesses the problem, the company can determine whether to retain outside counsel and can choose outside counsel with expertise in the issues being examined. 9

11 WHO SHOULD CONDUCT THE INVESTIGATION? The role of compliance and internal audit personnel. Structure/manage compliance efforts to increase the chances that sensitive material is protected from disclosure by applicable privileges. Compliance and internal audit personnel can be very helpful in initial targeted inquiries. Compliance and internal audit personnel should work at the direction of and report to attorneys. 10

12 WHO SHOULD CONDUCT THE INVESTIGATION? When should outside counsel conduct the investigation? When resources do not permit a thorough inquiry by in-house counsel. When outside counsel can give an investigation greater credibility. When there are privilege concerns, such as in investigations with international aspects. 11

13 WHO SHOULD CONDUCT THE INVESTIGATION? When should independent outside counsel conduct the investigation? When the credibility of the investigation is a great concern. It is important to retain independent outside counsel when an investigation may touch directly or indirectly on the conduct of senior management, and when the results of the investigation are likely to be disclosed outside of the company. Independence here means counsel that does not routinely represent the client and/or derive from the client substantial fee income on a regular basis. 12

14 WHISTLEBLOWER ALLEGATIONS: SEC BOUNTY PROGRAM Under the Dodd Frank Act, the SEC bounty program has resulted in a massive influx of whistleblower tips. The bounty program offers awards to eligible whistleblowers of between 10% and 30% of monetary sanctions collected. Eligible whistleblower An individual who voluntarily provides the SEC with original information that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtain monetary sanctions totaling more than $1 million. 13

15 WHISTLEBLOWER ALLEGATIONS: SEC BOUNTY PROGRAM SEC rules do not require internal reporting. A whistleblower who reports internally may be eligible for an award if he/she reports to the SEC within 120 days of reporting internally. Place in line is the date the information was reported internally. When the SEC considers whether the whistleblower should receive an award and where it falls in the 10% 30% range, the whistleblower will benefit from information the company uncovers and reports. 14

16 WHISTLEBLOWER ALLEGATIONS: OTHER LUCRATIVE WHISTLEBLOWER PROGRAMS False Claims Act In 2012, more than 780 new suits were filed and the DOJ recovered approximately $5 billion in settlements and judgments. IRS whistleblower program In FY 2012, the IRS received 332 whistleblower submissions and paid out $125.4 in awards ($104 million of which was paid to the whistleblower associated with the UBS foreign bank account investigation). 15

17 WHISTLEBLOWER ALLEGATIONS: ANTI RETALIATION PROTECTIONS Dodd Frank Act civil and criminal penalties Permits a whistleblower alleging retaliation to bring an action in federal court for reinstatement, two times back pay, compensation for litigation costs, expert witness fees and reasonable attorneys fees. Protect all whistleblowers not just those eligible for a bounty. Sarbanes Oxley civil and criminal penalties False Claims Act Other anti retaliation statutes? 16

18 WHISTLEBLOWER ALLEGATIONS: ANTI RETALIATION PROTECTIONS In recent years, courts and lawmakers have broadened the definition of protected whistleblower activity. Wiest v. Lynch, No (3 rd Cir. Mar. 19, 2013) Most expansive definition of whistleblower activity to date. An employee who expresses a reasonable belief of an accounting irregularity is a whistleblower under the securities laws, even if his statement lacks any clear connection between the accounting error and the shareholder fraud. Brown v. Lockheed Martin, No (10 th Cir. June 4, 2013) SOX whistleblower protection extends beyond employees reporting of fraud on shareholders. 17

19 WHISTLEBLOWER ALLEGATIONS: ANTI RETALIATION PROVISIONS Anti retaliation protections make it difficult to take even the most reasonable personnel actions against whistleblowers during investigations. To avoid liability for retaliation, companies should maintain a system of carefully documenting problems with or misconduct by whistleblowers. See Hemphill v. Celanese, No. 10 cv (5 th Cir. June 23, 2011). Pre whistleblowing documentation is critical. Avoid taking action that can seem retaliatory. Proceed so as to avoid falling behind any concurrent government investigation. 18

20 WHISTLEBLOWER ALLEGATIONS: CLOSING INVESTIGATIONS Pitfalls in closing whistleblower investigations: Pros and cons of notifying a whistleblower that an investigation has been completed? In Gibney v. Fitzgibbon, No. 2:13 cv (E.D. Pa. Mar. 22, 2013), a close out letter was neutral but gave rise to a defamation case against Merck and an in house attorney. The whistleblower argued that the characterization in the letter of his allegations as unfounded was defamatory. The judge dismissed the defamation case commenting that Merck s in house counsel handled the investigation and response in a thoughtful and temperate manner. 19

21 ETHICAL DUTY OF IN HOUSE COUNSEL TO INQUIRE WHETHER A VIOLATION OF LAW MAY HAVE OCCURRED Rule 1.13 of the NY Rules of Professional Conduct Permits, but does not require, up-the-ladder reporting and only allows lawyers to reveal confidential information as permitted by Rule 1.6. Model Rule 1.13(b) requires up-the-ladder reporting. Section 307 of the Sarbanes-Oxley Act (and the rules promulgated thereunder) requires up-the-ladder reporting. 20

22 INTERVIEWING EMPLOYEES Corporate Upjohn warnings: The interviewing attorney is counsel to the company; The interview is being conducted to assist the company; The employee is expected to keep the substance of the interview confidential; The communications are privileged and the privileged belongs to the company; The company will determine whether to waive or assert the privilege; and The company may share the information with the government. 21

23 INTERVIEWING EMPLOYEES Additional Corporate Upjohn warnings: The employee can retain separate counsel if he or she wishes; The employee must tell the truth; and The employee may be criminally prosecuted if he or she is not truthful and the company conveys the false information to the government. U.S. v. Kumar, 04 CR 846 (E.D.N.Y) U.S. v. Singleton, No. 4:06-cr-00080, 2006 WL , at (S.D. Tex. July 14, 2006) 22

24 INTERVIEWING EMPLOYEES Joint representation of a company and its employees. When appropriate? N.Y. and Model Rules of Professional Conduct 1.7 Assoc. of the Bar of the City of New York Comm. on Prof l & Judicial Ethics, Formal Op , Representing Corporations and Their Constituents in the Context of Governmental Investigations (June 2004) (decided under former Code of Professional Responsibility 5 10) Independent representation for employees When appropriate? Pool or individual counsel? Indemnification/advancement of legal fees Permitted by the laws of most states and in some circumstances required by state law, company by laws or employment agreements. 23

25 RESPONDING TO THE INVESTIGATION S FINDINGS When and how should the findings of the investigation be disclosed? The pros and cons of self-reporting DOJ and NY County District Attorney s Office Policies regarding privilege waivers. Disclosing relevant facts See U.S. Attorney s Manual, Principles of Prosecution of Business Organizations, Manhattan DA s policy - memo entitled Considerations in Charging Organizations. 24

26 RESPONDING TO THE INVESTIGATION S FINDINGS In determining whether to prepare a written report, beware of privilege exceptions. Fiduciary exception permits shareholders to obtain privileged materials upon a showing of good cause for setting the attorney-client privilege aside. Cautionary tale: Shareholder sued Hewlett-Packard Company for an internal investigation report concerning sexual harassment allegations against CEO Mark Hurd. Without reaching the privilege issue, the Delaware Supreme Court held that HP was not required to produce the report. Ruling gives limited comfort, but makes clear that the attorneyclient privilege is not absolute. 25

27 RESPONDING TO THE INVESTIGATION S FINDINGS Other considerations when wrongdoing is reported to the government: Deferred Prosecution Agreements and Non- Prosecution Agreements Benefits? Collateral consequences? Supervisory power of courts over the implementation of DPAs? Judge Gleeson s recent opinion in U.S. v. HSBC Bank USA, N.A. SEC policy 26

28 RESPONDING TO THE INVESTIGATION S FINDINGS Other considerations when wrongdoing is reported to the government: Monitorships Cooperation Agreements SEC Cooperation Initiative SEC requirement of admission of wrongdoing 27