RESPONDING TO SEC AND DOJ INVESTIGATIONS

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1 RESPONDING TO SEC AND DOJ INVESTIGATIONS Charles R. Parker Gregory C. Hill INTERNAL AND GOVERNMENT INVESTIGATIONS LOCKE LIDDELL & SAPP LLP Houston, Texas 1

2 What Triggers an SEC Investigation? Whistle-Blower Risk Based Investigations SEC Wildcatting for Fraud Industry Wide Investigations Affiliation with Executives, Shareholders, or Corporations under Investigation Insider Trading Self Reporting 2

3 The New Cooperation Thompson Memorandum SEC Enforcement 3

4 Cooperation What s s Required? Audit Committee Independent Internal Investigations SEC and DOJ Want Immediate, Accurate Reporting of Misconduct Terminate Responsible Wrongdoers Remedial Measures (Monitor) Compliance 4

5 Cooperation What s s Required? Providing results of Independent Investigation to the SEC and DOJ Written Report vs. Powerpoint Request for Notes and Witness Interviews Waiver of Attorney Client Privilege 5

6 Fired CFO Wins Early Sarbanes Claim Whistle-Blower Wanted His Own Lawyer at Internal Hearing 6

7 PCC Flow Technologies (2006) Whistleblower is protected Even if they are not the first to raise issue about potential wrongdoing; or They do not believe they are reporting fraud under the Securities and Exchange Act SOX Protection applies to the provision of any violation of any rule or regulation of the Securities and Exchange Commission. 7

8 TONE AT THE TOP COMPLIANCE PROCEDURES 8

9 Why Cooperate? FCPA cases Number of Reported Cases by DOJ As many in as the previous six years Penalties from equal $56MM Legal Costs are 4 to 5 times the Penalties 9

10 SEC FINES LUCENT $25 MILLION FOR FAILING TO COOPERATE Non-Cooperative Actions: Incomplete and untimely document production; Comments from outside counsel that undermined the settlement; and Expanding the scope of employees that could be indemnified. 10

11 CORPORATIONS FACE THREE SEC DOJ Civil Suits PRONG ATTACK Aiding and Abetting Creator Test Manipulative or deceptive device or contrivance 11

12 Process Knowledge of Investigation, Informal Inquiry by SEC, or Receipt of Subpoena Provide Prompt Notice to All Employees to Retain Relevant Documents This Notice Should Require the Retention of All Relevant Electronic Data Document Management Policies, such as Routine Destruction, Should be Suspended. 12

13 Determine Scope Of Paper and Electronic Documents Available Subpoena might require that information from blackberry and home computer be retrieved. 13

14 SEC SUPBOENA Review Order of Investigation, if available Contact SEC office regarding subpoena Rolling Production Costs D & O Coverage Issues 14

15 CHARGES BY THE SEC and DOJ Who can Represent the Corporation Officers Directors 15

16 Disclosure in SEC Reports Q: When is Disclosure Required or Otherwise Appropriate? A: Disclosure is necessary or appropriate when the results of an investigation are material to the company. Examples of Matters Requiring Disclosure? Underlying facts require a restatement of financials Investigation discovers a material weakness in internal controls Misconduct by senior management or directors Violation of laws Formal Investigation by SEC or DOJ 16

17 Disclosure in SEC Reports (cont.) Appropriate Form of Disclosure Press Release Form 8-K8 Form 10-Q Q or 10-K 17

18 Disclosure to Auditors Importance of Prompt and Full Disclosure Principal Areas of Concern Impact on financial statements restatement Fraud Credibility of Management Internal controls over financial reporting Attorney-Client Privilege 18

19 The Foreign Corrupt Practices Act It is a crime to give anything of value to a foreign official To obtain or retain business for the purpose of obtaining an improper advantage Primary components Anti-bribery provisions Books and records Unlike SOX, there is no materiality requirement 19

20 FCPA (cont.) FCPA Applies to: Issuer essentially any company whose stock is traded in the U.S. Domestic concern U.S. citizen, national, resident, or a U.S. company or a company with its principal place of business in the U.S. or officers, directors, stockholders, employees, and agents of such an entity Any person, if acting in U.S. territory Any U.S. national or U.S. company acting outside the U.S. does not require use of interstate commerce 20

21 FCPA Compliance FCPA Compliance Program Training Representations and warranties Certifications Due Diligence 21

22 Not Prohibited by FCPA Payments permitted by local law Facilitating Payments Gifts/promotional expenses but must be: Customary and reasonable Not directly tied to obtaining/retaining business 22