Whistleblowers & Corporate Fraud Investigations

Whistleblowers & Corporate Fraud Investigations Tuesday, May 10, 2011 McGuireWoods LLP 201 N. Tryon Street, Suite 3000 Charlotte, North Carolina www.mcguirewoods.com Whistleblower Provisions of the Dodd-Frank Act and the False Claims Act www.mcguirewoods.com 1

Whistleblower Provisions Dodd-Frank Wall Street Reform and Consumer Protection Act False Claims Act / Qui Tam Sarbanes-Oxley IRS McGuireWoods LLP 3 Dodd-Frank Act Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act provides that the SEC shall pay awards to eligible whistleblowers who voluntarily provide the SEC with original information that leads to a successful enforcement action yielding monetary sanctions of over $1 million. The award amount is required to be between 10% and 30% of the total monetary sanctions collected. McGuireWoods LLP 4 2

Dodd-Frank Act Continued The Dodd-Frank Act expressly prohibits retaliation by employers against whistleblowers. Whistleblowers are provided with a private cause of action in the event that they are discharged or discriminated against by their employers in violation of the Act. McGuireWoods LLP 5 Implementation of Dodd-Frank Act Whistleblower Provisions July 2010 -- Dodd-Frank Act signed into law August 2010 -- SEC announced eligibility for award before final rule becomes effective November 2010 -- SEC proposed new whistleblower program December 2010 -- Public comments period closed 2011 (TBD) -- Final SEC rule to be released McGuireWoods LLP 6 3

The SEC s Proposed Rules November 2010 [The] proposed rule maps out a simple, straightforward procedure for would-be whistleblowers to provide us critical information. Chairwoman Schapiro McGuireWoods LLP 7 The Basics The proposed whistleblower program authorizes the SEC to pay monetary awards to whistleblowers who: 1. voluntarily come forward 2. with original information about a violation of federal securities laws 3. that leads to successful enforcement actions 4. resulting in monetary sanctions exceeding $1 million Whistleblowers are entitled to 10-30% of the amount recovered McGuireWoods LLP 8 4

Who can be a whistleblower under the proposed rule? Whistleblower must be a natural person Whistleblower cannot be any of the following: Someone obligated to report infractions Attorneys and accountants making use of client information Foreign government officials Internal compliance personnel Anyone culpable for the underlying violation McGuireWoods LLP 9 The Bounty Provisions of the Proposed Rule What s at stake? 10-30% of the total monetary sanctions collected in the Commission s action or any related action such as in a criminal case The claims process Criteria for determining amount of award McGuireWoods LLP 10 5

False Claims Act Under the False Claims Act, those who knowingly submit, or cause another person or entity to submit, false claims for payment of government funds are liable for three times the government s damages plus civil penalties of $5,500 to $11,000 per false claim. The False Claims Act explicitly excludes tax fraud. McGuireWoods LLP 11 False Claims Act Qui Tam Provisions Qui tam, or whistleblower, provisions allow citizens with evidence of fraud against government contracts and programs to sue, on behalf of the government, in order to recover the stolen funds. Whistleblowers are entitled to receive between 15% and 30% of the government s total recovery, plus potential reimbursement for fees, costs and expenses. McGuireWoods LLP 12 6

Sarbanes-Oxley Act of 2002 SOX s applicability is limited to certain companies. SOX is limited to certain conduct; e.g. accounting and internal controls. Required creation of mechanisms to receive anonymous employee concerns about financial improprieties. McGuireWoods LLP 13 SOX Whistleblower Provisions Attorneys are required to report material violations of federal securities law to the company s executive management. Employees who report concerns have civil protections. Criminal penalties for retaliation against whistleblowers. McGuireWoods LLP 14 7

IRS Whistleblower Law Tax, penalties, interest and additions in dispute must total a sum in excess of $2,000,000. Provides for whistleblower awards of 15% to 30% of the amount recovered. McGuireWoods LLP 15 Questions or Comments? www.mcguirewoods.com 2011 McGuireWoods LLP McGuireWoods LLP 16 8

Establishing and Implementing a Corporate Compliance Program www.mcguirewoods.com 9

Why Establish a Corporate Compliance Program? To promote a corporate culture that encourages ethical behavior and compliance with the law. To exercise the due diligence necessary to prevent, detect, mitigate, and remediate misconduct. To create a mitigating factor in the consideration of whether to charge the corporation with a crime and in negotiating a plea or deferred prosecution agreement. To obtain credit in the calculation of the culpability score that determines the fine amount at sentencing. McGuireWoods LLP 19 Sources for Guidance in Designing a Corporate Compliance Program United States Sentencing Guidelines, Chapter Eight 8B2.1 Effective Compliance and Ethics Program 8C2.5 Culpability Score United States Attorneys Manual, Title 9 9-28.800 Corporate Compliance Programs Deferred and Non-Prosecution Agreements Sarbanes-Oxley Act of 2002, 406, 15 U.S.C. 7264 17 C.F.R. 229.406 Code of Ethics (Item 406) McGuireWoods LLP 20 10

USSG 8B2.1 Effective Compliance and Ethics Program 1. Establish standards and procedures to prevent and detect criminal conduct. 2. Assign operational responsibility and ensure oversight by board of directors 3. Use reasonable efforts to exclude individuals who have engaged in illegal activities or conduct otherwise inconsistent with the compliance program. McGuireWoods LLP 21 USSG 8B2.1 Effective Compliance and Ethics Program Continued 4. Take reasonable steps to communicate periodically the standards and procedures and other aspects of the compliance program. 5. Take reasonable steps to ensure that the compliance program is followed and is effective. 6. Consistently promote and enforce the program with incentives and appropriate disciplinary measures 7. Take reasonable steps to respond appropriately to misconduct McGuireWoods LLP 22 11

USSG 8C2.5(f)(3)(C) Amendment Effective Nov. 1, 2010 (i) The individual with operational (i.e., day-to-day) responsibility for the program has direct reporting obligations to the board of directors or an appropriate subgroup thereof (ii) The program detected the offense before it was discovered outside of the organization (iii)the organization promptly reported the offense to appropriate governmental authorities (iv)no individual with operational responsibility for the program was involved in the offense McGuireWoods LLP 23 USAM 9-28.800 Critical Factors in Evaluating the Program Is the program designed for maximum effectiveness in preventing and detecting wrongdoing? Are there corporate governance mechanisms designed to prevent and detect misconduct? Does senior management enforce the program or tacitly encourage or pressure employees to engage in misconduct to achieve business objectives? What is the extent and pervasiveness of the misconduct? What remedial actions were taken, including disciplinary action against past violators and revisions made to the program in light of lessons learned? McGuireWoods LLP 24 12

Deferred and Non-Prosecution Agreements General Re has instituted training and ethical compliance across its U.S. and worldwide subsidiaries regarding, among other things, risk-transfer protocols applicable to reinsurance contracts. [Louis Berger Group] [r]eegineer[ed] the internal controls with respect to financial reporting, fixed assets, human resources and payroll, procurement, revenue recognition, treasure and field cash reporting. The Compliance Officer has implemented a compliance and ethics program at SCHIAVONE modeled after the Federal Sentencing Guidelines recommendations that includes training and education to all SCHIAVONE employees regarding SCHIAVONE s Code of Ethics, anonymous reporting mechanisms within SCHIAVONE for employees to report fraud or misconduct, internal controls, audit and monitoring, discipline and incentives, risk analysis and corrective action. McGuireWoods LLP 25 SOX Item 406 - Code of Ethics Requirements A code of ethics contains written standards that are reasonably designed to deter wrongdoing and to promote: Honest and ethical conduct Full, fair, accurate, timely and understandable disclosure Compliance with applicable laws, rules, and regulations Prompt internal reporting of violations of the code Accountability for adherence to the code McGuireWoods LLP 26 13

Initial Steps to Establish (or Review) an Effective Compliance Program Identify the organization s business units and the areas requiring legal compliance Research the legal requirements, including industry practice and governmental regulations and priorities Conduct a risk assessment Create a code of ethical conduct Establish standards and procedures to address the risks McGuireWoods LLP 27 Questions or Comments? www.mcguirewoods.com 2011 McGuireWoods LLP McGuireWoods LLP 28 14

Conducting Internal Investigations www.mcguirewoods.com What is an Internal Investigation? Internal Conducted within the organization May be conducted with assistance of outside counsel investigators and consultants Investigation What are the facts? How do you find them? Interviews Document gathering What are the relevant statutes, rules, regulations, etc.? McGuireWoods LLP 30 15

Why Conduct an Internal Investigation? Why Conduct an Internal Investigation? Pro-active: before involvement of government or existence of litigation For example information obtained by compliance officer; information uncovered during internal or external audit confirm business practices and employee conduct are consistent with regulatory requirements confirm employees are aware of and following company policies and procedures Stay out in front of whistleblower claims that may go directly to government McGuireWoods LLP 31 Why Conduct an Internal Investigation? Reactive: Why In Conduct response to an governmental Internal Investigation? investigation or threatened or pending litigation For example False Claims Act case filed by government or by qui tam relator; Criminal investigation Inquiry by State AG s Office pertaining to consumer protection issues Whistleblower Complaints McGuireWoods LLP 32 16

United States Sentencing Guidelines Means by which corporations can be found criminally liable and sanctioned Provides incentives for corporations to take preventive measures to avoid and detect criminal activity on the front end Provides incentives for corporations to respond properly to investigators on the back end McGuireWoods LLP 33 United States Sentencing Guidelines Introductory Commentary: These guidelines offer incentives to organizations to reduce and ultimately eliminate criminal conduct by providing a structural foundation from which an organization may self-police its own conduct through an effective compliance and ethics program. McGuireWoods LLP 34 17

United States Sentencing Guidelines Preventive measures that should be taken before a problem arises: Written policies and procedures Employee training and education (i.e. insider trading) Document retention and preservation plan A chain of command/plan of response Appropriate responses to wrongdoing (i.e. termination of rogue employee) McGuireWoods LLP 35 United States Sentencing Guidelines Responsive measures that should be taken after problem arises: Stop conduct Compensate victims Self-report Cooperation with authorities McGuireWoods LLP 36 18

Internal Investigations: Initial Considerations/Road Map Immediately stop activity or conduct in question Screen off individuals involved in conduct Report matter internally per chain of command Consider internal v. external investigation (i.e. need for outside law firm or consultant Role of Inside Counsel Determine scope of issue and relevant individuals Document hold/preservation notice Document review Interviews/Upjohn issues Privilege/work product issues Verbal v. written report Report to/cooperate with law enforcement McGuireWoods LLP 37 What is the Role of Inside Counsel? Coordinate Interviews Assist with document collection Participate in interviews, as requested Support special committee/independent counsel Focus on ethical responsibility act in the best interests of the company McGuireWoods LLP 38 19

Scope of Issue and Relevant Individuals Scope of Issue and Relevant Individuals What is the nature of the alleged wrongdoing? Who is involved in alleged wrongdoing? If allegations involve senior officers, corporate entity as a whole, or serious wrongdoing by employees, management should not be in charge of investigation. Rather, Board should delegate oversight of investigation and retention of outside counsel to independent committee. McGuireWoods LLP 39 Scope of Issue and Relevant Individuals Separate counsel for certain employees Potential/actual Scope of Issue adversity and Relevant to company Individuals Advancement of legal fees/joint defense agreements Prosecutors may not consider advancement of legal fees or joint defense agreements when determining whether company cooperated (Filip memo/stein) May consider joint defense agreements that limit company s ability to disclose relevant factual information (Filip memo) Consideration as to how much information should be shared with counsel for individual employees McGuireWoods LLP 40 20

Document Hold/Preservation Identify universe of documents to be preserved Suspend document destruction protocol Destruction of documents in anticipation of a subpoena can constitute obstruction Government does not have to prove that the documents are material McGuireWoods LLP 41 Document Review Establish factual background/search terms Determine whether further collection is necessary Identify witnesses and additional key employees Identify/remove privileged documents Privilege log McGuireWoods LLP 42 21

Witness Interviews/Upjohn Warnings Purpose of interview Company is attempting to discover facts and obtain legal advice Counsel represents company, not individual Interview is privileged, but privilege belongs to company, which can waive it Employee must keep interview confidential to preserve privilege McGuireWoods LLP 43 Witness Interviews/Upjohn Warnings Employee under a duty to cooperate as a condition of continued employment Must also be truthful Employee can be indicted for obstruction of justice under 18 U.S.C. 1512 if lies to private counsel knowing it may/will be disclosed to government DOJ has indicted several executives on these grounds McGuireWoods LLP 44 22

Privilege/Work Product Issues Independent counsel engagement letter should state purpose is to obtain legal advice in anticipation of litigation If additional consultants such as forensic accounting firm, is needed, consider having law firm engage that consultant to better ensure privilege is protected If proper Upjohn warnings given, privilege will usually apply to interviews of non-managerial employees McGuireWoods LLP 45 Privilege/Work Product Issues Voluntary disclosure of communications to government usually results in waiver of privilege (i.e. no selective waiver) Confidential material can then become a roadmap for opposing counsel in subsequent litigation Difficult for company to both demonstrate thorough investigation through sharing documents and assert confidentiality/privilege when convenient McGuireWoods LLP 46 23

Privilege/Work Product Issues Department of Justice s position has evolved over time Holder Memorandum Drafted June 1999 by then U.S. Deputy Attorney General (now U.S. Attorney General) Eric Holder When determining whether to indict corporation, federal prosecutor should consider: The corporation s timely and voluntary disclosure of wrongdoing and its willingness to cooperate including, if necessary, the waiver of the corporate attorney-client and work product protection McGuireWoods LLP 47 Privilege/Work Product Issues Filip Memorandum August 2008 by then U.S. Deputy Attorney General Mark Filip Eligibility for cooperation no longer predicated on waiver of attorney-client privilege on work product protection Focus is on disclosure of relevant facts Corporation often gathers facts via internal investigation Corporations need not produce, and prosecutors may not request protected notes and memoranda of lawyer interviews Corporation must produce, and prosecutors may request relevant factual information obtained in interviews McGuireWoods LLP 48 24

Privilege/Work Product Issues SEC Enforcement Manual 2008 Both individuals and entities may provide significant cooperation by voluntarily disclosing information Certain memoranda and notes may be covered by attorneyclient privilege or work product protection Underlying information disclosed during interviews is not protected The staff should not ask a party to waive the attorneyclient or work product privileges and is directed not to do so Waiver of privilege is not a pre-requisite to obtaining cooperation credit McGuireWoods LLP 49 Written or Oral Report? How should independent counsel communicate its findings to its client? Written report may find its way to future litigants or government But, written report can be helpful later should company want or need proof of its investigation Oral report to company by independent counsel may be safer However, complexity of issues may warrant against oral report May also be more difficult to show government that investigation was thorough if no written findings McGuireWoods LLP 50 25

Report to/cooperate with Government? Report to/cooperate with Government? Investigation should be complete before decision is made so that client knows all relevant facts/legal ramifications Decision is client s, not counsel s Voluntary cooperation is all or nothing proposition May never obstruct, impede or hinder investigation or advise others to do so Impact of Dodd-Frank on self-reporting McGuireWoods LLP 51 Risks of Voluntary Disclosure Disclosure exceeds scope of whistleblower complaint Referral for criminal prosecution Significant monetary and non-monetary penalties Increase exposure to litigation by private litigants Class Actions False Claims Act Qui Tam Suits Adversary s use of Attorney-Client communications and Work Product as road map McGuireWoods LLP 52 26

Benefits to Voluntary Disclosure Reduced likelihood of criminal prosecution Reduced likelihood of substantial civil monetary and nonmonetary penalties (e.g. False Claims Act, 31 U.S.C. 3729(a) Reduction in potential criminal fine under Federal Sentencing Guidelines ( 8C2.5(f) and (g)) Opportunity to cast circumstances in most favorable light McGuireWoods LLP 53 Questions or Comments? www.mcguirewoods.com 2011 McGuireWoods LLP McGuireWoods LLP 54 27