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Responding to Government Investigations:p g gLegal and Ethical Considerations Strategies for In‐House Counsel to Meet Corporate Obligations and Avoid Individual Liability

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, MARCH 10, 2011

Today’s faculty features:

Jonathan S. Sack, Principal, Morvillo Abramowitz Grand Iason Anello & Bohrer, New York

Eric Corngold, Partner, Friedman Kaplan Seiler & Adelman, New York

The audio portion of the conference may be accessed via the

Thomas M. Merritt, Deputy General Counsel, Knight Capital Group, Jersey City, N.J.

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Responding to Government Responding to Government p gp gInvestigations: Legal and Ethical Investigations: Legal and Ethical ConsiderationsConsiderationsConsiderationsConsiderations

March 10, 2011

Jonathan S. Sack M ill Ab i G d I Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C.

Jonathan S. Sack is a principal of Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C. His practice includes the representation of corporations and individuals in federal and state investigations and prosecutions civil and criminaland state investigations and prosecutions, civil and criminal enforcement actions, regulatory proceedings and internal investigations. Before joining Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C., Mr. Sack served for more than 12 years as an Assistant U.S. Attorney for the Eastern District of New York, where he held a number of supervisory positions, including Chief of the Criminal Division. Mr. Sack has written and spoken on issues relating to attorney-client privilege, work product protection and internal investigations. He is also an adjunct professor at St. John's University School of Law, where he teaches a course in White Collar Crime He is also co author with the(212) 880 9410 course in White-Collar Crime. He is also co-author with the Hon. Jed S. Rakoff, of Federal Corporate Sentencing: Compliance and Mitigation, published by Law Journal Press.

(212) 880-9410jsack@maglaw.com

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Eric CorngoldF i d K l S il & Ad l LLPFriedman, Kaplan, Seiler & Adelman LLP

Eric Corngold is at partner at Friedman, Kaplan, Seiler & Adelman, LLP, where he leads the firm's white-collar criminal defense and investigations practice He represents businesses their executives and theirpractice. He represents businesses, their executives, and their employees during federal and state criminal investigations, as well as in regulatory matters involving the Securities and Exchange Commission and other federal and state government agencies. He also conducts internal investigations for corporations and other institutions on behalf of officers, boards of directors, and audit committees. Before joining j gFriedman, Kaplan, Mr. Corngold served as New York State's Executive Deputy Attorney General for Economic Justice from 2007 to 2009, where he was the principal advisor to the New York Attorney General on litigation and policy concerning financial markets, antitrust matters, corporate and consumer fraud, and housing. Prior to his time in the New Y k Att G l' Offi M C ld A i t t U it dYork Attorney General's Office, Mr. Corngold was an Assistant United States Attorney in the Eastern District of New York for more than a decade. In that office, Mr. Corngold had a number of different positions, including serving as the office's Chief Assistant United States Attorney from 2005 to 2007, and the Chief of the office's Business and Securities Frauds Unit from 1999 to 2005 Mr Corngold frequently lectures on

(212) 833-1114ecorngold@fklaw.com

Frauds Unit from 1999 to 2005. Mr. Corngold frequently lectures on white-collar crime, securities law, and criminal procedure topics, and is currently an adjunct Professor of Law at St. John's University School of Law, where he teaches that school's course on White Collar Crime.

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Thomas M. MerrittD G l C l K i h Deputy General Counsel, Knight Capital Group, Inc.

Thomas M. Merritt is Senior Managing Director and Deputy General Counsel of Knight Capital Group, Inc. He has over 15 f i i th iti i d t d h15 years of experience in the securities industry and has been with Knight Capital Group, Inc. since June 2000. 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 practicein 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.

tmerrritt@knight.com

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AgendaAgenda1:00-1:05 Introduction: Why Discuss In-House Lawyers’

Role in Government Investigations and RelatedRole in Government Investigations and Related Ethical Issues?

1:05-1:30 Preparing for Investigations

1:30-2:00 Conducting Investigations

2:00 2:15 Post Investigative Best Practices2:00-2:15 Post-Investigative Best Practices

2:15-2:30 Questions and Concluding Remarks

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Program Scope

I Preparing for investigationsI. Preparing for investigations

II. Conducting investigations

III. Post-investigative best practicesg p

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I. Preparing for investigations

A Determining whether to investigateA. Determining whether to investigate

B. Determining who should conduct the investigation –

in house or outside counselin-house or outside counsel

C. Determining whether to self-report investigation to the

governmentgovernment

D. Determining scope of investigation

E. Clarifying role of in-house counsel

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A. Determining whether to investigate

1. Under what circumstances should a company commence an internal investigation on

its own initiative?

a. Internal company information

b. News stories

b. Government inquiry q y

2. What considerations should be kept in mind when responding to whistleblower

complaints?

a Seriousness of offensea. Seriousness of offense

b. Source of allegation

c. Specificity of information

d. Affected individuals

e. Regulatory requirements

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A. Determining whether to investigate ( ’d)(cont’d)3. Whistleblower issues

a. Section 922 of the Dodd-Frank Act requires the SEC to pay between 10% and 30% of any recovery over $1 million to persons who voluntarily provide the SEC with originalvoluntarily provide the SEC with original information regarding a violation of the securities laws that leads to a successful enforcement action by the SEC.

i. Except when the entity does not act within a reasonable time period or conducts itself in bad faith, information from certain sources (including attorney-clientsources (including attorney client communications; information obtained by auditors; and information obtained in violation of the criminal laws) will not be considered original

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considered original.

A. Determining whether to investigate ( ’d)(cont’d)3. Whistleblower issues (cont’d)( )

b. SEC proposed rules were released in November 2010 and can be found atNovember 2010, and can be found at www.sec.gov/rules/proposed/2010/34-63237.htm

c. Concern that proposed rules undermine corporate compliance programs.

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A. Determining whether to investigate ( ’d)(cont’d)

4 Would a shareholder demand letter typically trigger the need4. Would a shareholder demand letter typically trigger the need

for an internal investigation?

5 Ethical and statutory obligations of in house counsel5. Ethical and statutory obligations of in-house counsel.

a. Rules of Professional Conduct

b Sarbanes Oxley Act Section 307b. Sarbanes-Oxley Act, Section 307

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Rule 1.13 of the Model Rules of Professional Conduct(a) A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.

(b) If a lawyer for an organization knows that an officer, employee or other person associated with the organization is engaged in action, intends to act or refuses to act in a matter related to the representation that is a violation of a legal obligation to the organization or a violation of law that reasonably might be imputed tois a violation of a legal obligation to the organization, or a violation of law that reasonably might be imputed to the organization, and that is likely to result in substantial injury to the organization, then the lawyer shall proceed as is reasonably necessary in the best interest of the organization. Unless the lawyer reasonably believes that it is not necessary in the best interest of the organization to do so, the lawyer shall refer the matter to higher authority in the organization, including, if warranted by the circumstances to the highest authority that can act on behalf of the organization as determined by applicable law.

(c) Except as provided in paragraph (d), if

(1) despite the lawyer's efforts in accordance with paragraph (b) the highest authority that can act on behalf of the organization insists upon or fails to address in a timely and appropriate manner an action, or a refusal to act, that is clearly a violation of law, andact, that is clearly a violation of law, and

(2) the lawyer reasonably believes that the violation is reasonably certain to result in substantial injury to the organization,

then the lawyer may reveal information relating to the representation whether or not Rule 1.6 [which sets forth y y g p [circumstances under which lawyers may reveal confidential information] permits such disclosure, but only if and to the extent the lawyer reasonably believes necessary to prevent substantial injury to the organization.

(d) Paragraph (c) shall not apply with respect to information relating to a lawyer's representation of an organization to investigate an alleged violation of law, or to defend the organization or an officer, employee or other constituent associated with the organization against a claim arising out of an alleged violation of law

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other constituent associated with the organization against a claim arising out of an alleged violation of law.

Rule 1.13 of the New York Rules of Professional ConductConduct

(a) . . . .

(b) If a lawyer for an organization knows that an officer, employee or the person associated with the organization is engaged in action or intends to act or refuses to act in a matter related to the representation that (i) is a violation of a legal obligation to the organization or a violation of law thatrepresentation that (i) is a violation of a legal obligation to the organization or a violation of law that reasonably might be imputed to the organization, and (ii) is likely to result in substantial injury to the organization, then the lawyer shall proceed as is reasonably necessary in the best interest of the organization. In determining how to proceed, the lawyer shall give due consideration to the seriousness of the violation and its consequences, the scope and nature of the lawyer’s representation, the responsibility in the organization and the apparent motivation of the person i l d th li i f th i ti i h tt d th l tinvolved, the policies of the organization concerning such matters and any other relevant considerations. Any measures taken shall be designed to minimize disruption of the organization and the risk of revealing information relating to the representation to persons outside the organization. Such measures may include, among others:

(1) asking reconsideration of the matter;(2) advising that a separate legal opinion on the matter be sought for presentation to an(2) advising that a separate legal opinion on the matter be sought for presentation to an

appropriate authority in the organization; and(3) referring the matter to higher authority in the organization, including, if warranted by the

seriousness of the matter, referral to the highest authority that can act in behalf of the organization as determined by applicable law.

(c) If, despite the lawyer’s efforts in accordance with paragraph (b), the highest authority that can act(c) If, despite the lawyer s efforts in accordance with paragraph (b), the highest authority that can act on behalf of the organization insists upon action, or a refusal to act, that is clearly in violation of law and is likely to result in a substantial injury to the organization, the lawyer may reveal confidential information only if permitted by Rule 1.6, and may resign in accordance with Rule 1.16.

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Section 307 of the Sarbanes-Oxley Act of 2002Section 307 directed the SEC to, within 180 days, issue rules “setting forth minimum standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers,” including a rule –“(1) requiring an attorney to report evidence of a material violation of securities law or breach of fiduciary duty or similar violation by h h f h hi f l l lthe company or any agent thereof, to the chief legal counselor or

the chief executive officer of the company (or the equivalent thereof); and (2) if the counsel or officer does not appropriately respond to the evidence (adopting, as necessary, appropriate remedialrespond to the evidence (adopting, as necessary, appropriate remedial measures or sanctions with respect to the violation), requiring the attorney to report the evidence to the audit committee of the board of directors of the issuer or to another committee of the board of directors

i d l l f di t t l d di tl i di tl b thcomprised solely of directors not employed directly or indirectly by the issuer, or to the board of directors.”

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17 C.F.R. Section 205

• In response to Section 307 of the Sarbanes-Oxley Act, the SEC l t d 17 C F R S ti 205 hi h b f d tpromulgated 17 C.F.R. Section 205, which can be found at

http://www.sec.gov/rules/final/33-8185.htm

17 C F R Section 205 includes rigorous up-the-ladder reporting• 17 C.F.R. Section 205, includes rigorous up-the-ladder reporting requirements and requires that a chief legal officer inquire into the “evidence of a material violation” of the securities laws.

• Section 205.2(e) defines “evidence of a material violation” as “credible evidence, based upon which it would be unreasonable, under the circumstances, for a prudent and competent attorney not to conclude that it is reasonably likely that a material violation hasto conclude that it is reasonably likely that a material violation has occurred, is ongoing, or is about to occur.”

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B. Determining who should conduct the i i i i h id investigation – in-house or outside

counsel1. Who is the client – management or the board (or a

b d i )?board committee)?

2. When can in-house counsel conduct the investigation?

3. When should outside counsel conduct the investigation?

a. When should a company’s regular outside corporate counsel conduct the investigation?

b. When should independent outside counsel conduct the investigation?

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B. Determining who should conduct the i i i i h id investigation – in-house or outside

counsel4. Foreign privilege issues

a. Akzo Nobel Chemicals, Ltd. and Akcros Chemicals, Ltd. v. Comm’n, Case-550/07 P (September 14, 2010), reaffirmed a 1982 case(September 14, 2010), reaffirmed a 1982 case AM&S Europe Ltd. v. Commission, Case 155/79 (1982), which held that legal advice is privileged only if it relates to the “client’s right of defence” (meaning that the client affirmatively is seeking legal advice) and is imparted by an independent lawyer who is a member of an EU Bar Association The Akzo Nobel court heldAssociation. The Akzo Nobel court held that because of their economic dependence on their employers, in-house lawyers are not sufficiently independent to warrant privilege

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y p p gprotection.

C. Determining Whether to Self-Report the I i i h GInvestigation to the Government

1 Wh h ld i ti ti b t d t1. When should an investigation be reported to the government and which government agency should be notified?

a. Reporting obligations in regulated industries

2. If the government commences a separate investigation, how should counsel respond to the government’s requests to interview employees g q p yand subpoenas for documentary evidence?

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D. Determining Scope of Investigation

1. How does the client determine the appropriate scope of the investigation?

2. When should the scope of the investigation change?p g g

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E. Clarifying Role of In-House Counsel

1. Competing pressures on in-house counsel

a. Criminal prosecution – Indictment in United States v. Stevens, Case No. 10-CR-694 (D. Md. Nov. 8, 2010)

b. Sarbanes-Oxley/ethical obligations

c. In-house counsel as advocate for companyc. In house counsel as advocate for company client

d. In-house counsel and legal compliance

e. In-house counsel as gatekeepers

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E. Clarifying Role of In-House Counsel

2. Role of in-house counsel in investigations conducted by outside counsel?

a. Joint responsibility with outside counsel?p y

i. Active role at interviews?

b. Assist with obtaining and analyzing information?

c. Alternatives to in-house counsel support: internal audit, business unit?

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II. Conducting Investigations

A Document retention strategiesA. Document retention strategies

B Interviewing employeesB. Interviewing employees

C. Preserving privileges

D. Selecting experts

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A. Document retention strategies

1. Document holds

a. How much information to retain?

i. Predicting scope of internal investigation and possible civilinvestigation and possible civil litigations and government investigations.

b. For how long?

c. To whom is document hold directed?

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A. Document retention strategies cont'd3 I l t ti i l t i d t3. Implementation issues – electronic data

4. Subpoenas – negotiations with government

5. Obstruction of justice -- 18 U.S.C. § 1519 -- Destruction, alteration, or falsification of records in Federal investigations and bankruptcy: “Whoever knowingly alters destroys mutilates conceals covers up falsifiesalters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agencymatter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.”y

a. Investigation need not have been commenced

b D t i illf l t t t f i d

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b. Does not require a willful or corrupt state of mind

A. Document retention strategies cont'd

6. Civil litigation/spoliation issues

a. Duty to preserve precedes filing of a complaint and attaches where party is on notice that litigation is likely to be commenced or

bl ti i t liti tireasonably anticipates litigation

b. In a series of decisions in 2003 and 2004, in the Zubulake v. UBS Warburg case, Judge Shira g , gScheindlin of the SDNY addressed a number of issues relating to the preservation of electronic evidence including: i) the scope of a party's duty to preserve electronic evidence; ii) a lawyer's d i li ’ li i hduty to monitor a client’s compliance with electronic data preservation and production; iii) data sampling; iv) cost shifting; and v) the imposition of sanctions for the spoliation (or destruction) of electronic evidence

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destruction) of electronic evidence

B. Interviewing Employees

1. Upjohn v. United States, 449 U.S. 383 (1981) –Supreme Court held that a corporation can assert the attorney-client privilege

2. The privilege generally applies to communications between attorneys for a corporation and the corporation’s employees if:

a. Communication was made on orders of superiors to get legal advice for the company;

b. Required information was not available to management;g ;

c. Communication related to the employees’ corporate duties;

d. Employees were made aware that the reason for the communication was so that the corporation could

l l d i dsecure legal advice; ande. Communication was ordered to be kept confidential

and did remain confidential.

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B. Interviewing Employees (cont’d)3. Ethical rules -- Rule 1.13(a) of the NY Rules of

Professional Conduct – “(a) When a lawyer employed or retained by an organization is dealing with the organization’s directors officers employeeswith the organization s directors, officers, employees, members, shareholders or other constituents, and it appears that the organization’s interests may differ from those of the constituents with whom the lawyer is dealing, the lawyer shall explain that the lawyer is the lawyer forthe lawyer shall explain that the lawyer is the lawyer for the organization.”

4. Attorneys interviewing corporate employees should give corporate Miranda warnings See United States vcorporate Miranda warnings. See United States v. Ruehle, 583 F.3d 600 (9th Cir. 2010) (reversing the district court’s holding that suppressed statements obtained by company counsel from an employee and subsequently disclosed to the government) The Ninthsubsequently disclosed to the government). The Ninth Circuit held that because the employee knew that the company intended to disclose the statement to the government before he made them, he did not intend the statements to be confidential.

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statements to be confidential.

B. Interviewing Employees (cont’d)4. Corporate Miranda warnings (cont’d):• The interviewing attorney is counsel to the company;• The interview is being conducted to assist 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 privilege belongs to

the company;• The company will determine whether to waive or assert the

privilege; and• The company may share information with the governmentThe company may share information with the government.

5. Optional warnings:• The employee can retain separate counsel if he or she wishes;p y p ;• 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 (See e g U S v Kumar)

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government (See e.g., U.S. v. Kumar).

B. Interviewing Employees (cont’d)

6. Counsel for employees

a. When appropriate?

b. Pool or individual counsel?

c Indemnification/advancement ofc. Indemnification/advancement of legal fees

i Permitted by the laws of most statesi. Permitted by the laws of most states and in some circumstances required by state law.

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B. Interviewing Employees (cont'd)I d ifi ti / d t f l l f ( t’d)c. Indemnification/advancement of legal fees (cont’d)

ii. The right to indemnification or advancement may be derived from a company’s bylaws, an agreement or an understanding based on prioragreement, or an understanding based on prior practices.

iii. An undertaking may be required in the case of advancement.

iv. United States v. Stein, 541 F.3d 130 (2d Cir. 2008) – KPMG had a practice of advancing and indemnifying legal fees and costs of partners and employees (and an agreement to finance the legalemployees (and an agreement to finance the legal representation of one defendant). Government coerced KPMG to withhold payment of legal fees and expenses from indicted employees. The Second Circuit affirmed that the government gunconstitutionally interfered with the employees’ Sixth Amendment right to counsel and to present a complete defense. The indictment ultimately was dismissed as to many defendants.

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B. Interviewing Employees (cont'd)c. Indemnification/advancement of legal fees (cont'd)

v In response in 2008 the DOJ released a newv. In response, in 2008, the DOJ released a new version of “Principles of Federal Prosecution of Business Organizations” (the “Filip Memo”), which prohibits prosecutors when evaluating awhich prohibits prosecutors, when evaluating a company’s cooperation, from considering, among other things, whether the company is advancing or reimbursing attorneys fees to its g g yemployees.

d Directors and Officers Liability Insuranced. Directors and Officers Liability Insurance

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B. Interviewing Employees (cont’d)7. Representation of company and employees: conflicts

analysis

a. In government investigations, attorneys ethically may represent both a corporation and its “constituents” if their interests actually or potentially differ if:p y

i. the attorney concludes that in the view of a disinterested lawyer, the

t ti ld i threpresentation would services the interests of both the corporation and its constituents; and

ii. Both clients give knowledgeable andii. Both clients give knowledgeable and informed consent.

See Assoc. of the Bar of the City of New York Comm. on

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Prof’l & Judicial Ethics, Formal Op. 2004-02 (June 2004)

B. Interviewing Employees (cont’d)

b. Must be mindful of changes in circumstances to be sure the “disinterested lawyers” test continues to be met over the course of the representation.

c. Structure representation to minimize adverse effects if an actual conflict develops.

i. Prospective waivers that permit an attorney to continue to represent the company if a conflict arises.

ii. Explicit agreements with individuals on the scope of the attorney-client privilege and the permissible use of information obtainedobtained.

iii. Shadow counsel for employees.

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B. Interviewing Employees (cont'd)

8. Coordination with Employees’ Counsel

a. Joint Defense Agreements

i. Written or verbal?

ii. Formal or informal?

b. Information sharing between company and employees

c. Confidentiality agreement

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B. Interviewing Employees (cont'd)9. Interviewing unrepresented employees

a. No contact rule – Rule 4.2(a) of the Model Rules of Professional Conduct prohibits anRules of Professional Conduct prohibits an attorney from communicating with a “person” the attorney knows to be represented by counsel in that “matter” without prior consent from counsel for that personfrom counsel for that person.

b. The New York rule uses the word “party” rather than “person,” which suggests that p , ggattorneys representing corporations in New York may be permitted to interview represented persons who are not parties to the litigation without their lawyers’ permission. g y pBut, in practice, most NY lawyers do not interview represented persons outside the presence of their lawyers.

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B. Interviewing Employees (cont'd)

10. Interviewing unrepresented employees cont'd

c. Rule 4.3 of the Model Rules of Professional Conduct prohibits a lawyer from giving advice to an unrepresented person, “other than the advice to secure counsel, if the lawyer knows or reasonably should know that the interests of such a person are or have a reasonable possibility of being in conflict with the interests of the client.”

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C. Preserving privileges

1. The corporate attorney-client privilege is well-developed in the U.S. but has been under attack in government investigations.

a. In 2003, the DOJ issued the Thompson memo which permitted federal prosecutors to seek waivers by corporations of their attorney-client privilege as a quid-pro-quo for favorable treatment by thequid-pro-quo for favorable treatment by the prosecutor in considering whether to indict the corporation.

i Prosecutors are widely seen to have beeni. Prosecutors are widely seen to have been overly aggressive in demanding such waives and other concessions from companies.

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C. Preserving privileges (cont’d)

b. The McNulty memo (2006) restricted waiver demands but still permittedwaiver demands but still permitted prosecutors to be able to offer cooperation credit in exchange for a corporation’s agreement to waive privilege at the government’s requestgovernment s request.

c. The Filip memo (2008) shifts the focus from disclosure of privilege to the disclosure of p g“relevant facts” and prohibits prosecutors from requesting waivers of “core” attorney-client communications of work product or from crediting corporations who do waive privilege g p p gwith respect to this information.

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C. Preserving privileges (cont'd)2. Civil Regulatory Authorities

a. 2001 SEC Seaboard Report set forth the factors the SEC considers in determining whether to bring

f t ti Th t it d thenforcement actions. The report cited the corporation’s willingness to waive privilege as a reason that action was not taken against the company.

b. NYSE Information Memorandum No. 05-65 (2005)

c. FINRA Regulatory Notice 08-70 (Nov. 2008)

3. 2004 Amendments to the Corporate Sentencing G id li ( i l d i 2006)Guidelines (unanimously reversed in 2006)

a. In April 2006 the Sentencing Commission voted unanimously to reverse a November 2004 amendment to the Guidelines that added commentaryamendment to the Guidelines that added commentary stating that an organization’s willingness to waive the privilege and/or work product doctrine could be relevant to a determination that the entity was cooperating with the government and therefore

li ibl f d d lt

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eligible for a reduced penalty.

C. Preserving privileges (cont'd)

4. The government’s policies and practices prompted Congressional and Judicial opposition.

a. United States v. Stein decisions focused primarily on advancement but were p y

highly critical of the DOJ policies regarding privilege waiver.

b. Attorney-Client Privilege Protection Act, introduced by Senator Arlen Specter in 2006, 2007, 2008 and 2009, provides that , , , p

the government may not request that an organization waive privilege.

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C. Preserving privileges (cont'd)5. In response to pressure from the judiciary and Congress, in

2008 the DOJ revised the “Principles of Federal Prosecution of Business Organizations” (The “Filip Memorandum”). The revision which is known as the Filip Memorandum:revision, which is known as the Filip Memorandum:

a. Requires that an assessment of a corporation’s cooperation be based on disclosure of relevant facts pconcerning the alleged misconduct, rather than the waiver of any privilege.

i Is this a distinction without a difference?i. Is this a distinction without a difference?

b. Prohibits federal prosecutors from requesting waivers of “core” attorney-client communications or work product or from crediting corporations that agree to waive privilege with respect to this information. “Core” material includes notes and memos generated by attorneys during internal

44

g y y ginvestigations.

C. Preserving privileges (cont'd)6. 2010 revisions to SEC Enforcement Manual

a Focuses on voluntary disclosure of relevanta. Focuses on voluntary disclosure of relevant information by corporations seeking cooperation credit.

b. Section 4.3 does not prohibit SEC attorneys from seeking waivers but directs them not to do so without obtaining approval from the Director or Deputy DirectorDirector or Deputy Director.

c. Warns that although a corporation need not produce privileged notes and memos ggenerated by attorneys during the course of any internal investigation, the SEC staff may request relevant factual information acquired through those interviews.

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g

C. Preserving privileges (cont'd)

7. Selective waiver

V l di l ha. Voluntary disclosure to the government may waive the attorney client privilege and work product protection as to other adversaries.

b. Possible exceptions for work product:

i C i t t thi. Common interest theory

ii. Explicit confidentiality agreements with the government (Second Circuit)with the government (Second Circuit)

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C. Preserving privileges (cont'd)

7. Selective waiver (cont’d)

c. Federal Rule of Evidence 502 limits subject matter waivers

i. The drafters did not include proposal to allow for selective disclosure

8. Practical considerations concerning waiver

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C. Preserving privileges (cont'd)g p g ( )

9. Control over the privilege

a. Under Upjohn, the attorney-client privilege applies not only to the corporation but also to employees if they are considered “clients.”p y y

b. See CFTC v. Weintraub, 471 U.S. 343, 348 (1985) (holding that the trustee of a corporation in bankruptcy controls the privilegecorporation in bankruptcy controls the privilege and has the power to waive the corporation's attorney-client privilege with respect to pre-bankruptcy communications).

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C. Preserving privileges (cont'd)10. Assertion of privilege by employees

a. To determine when an employee may assert th i il t t t f di lthe privilege to protect from disclosure communications that the corporation seeks to reveal, cases have inquired into the particular communications between counsel and the employeeemployee.

b. See United States v. Int’l Bhd. of Teamsters, 119 F.3d 210 (2d Cir. 1997) -- to assert the privilege,

l t h th thi th temployees must show, among other things, that the employees were speaking with the attorney for the purpose of obtaining legal advice, and the employees “made it clear to the attorney that they were seeking legal advice in their individualthey were seeking legal advice in their individual rather than in their representative capacities.”

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C. Preserving privileges (cont'd)11. Assertion of privilege by employees (cont’d)

c In United States v Graf 610 F 3d 1148 (9thc. In United States v. Graf, 610 F.3d 1148 (9th Cir. 2010), the Ninth Circuit Court of Appeals adopted a five-part test, established by the Third Circuit in In re Bevill, Bresler & Schulman Asset Mgmt Corp 802 F 2d 120Schulman Asset Mgmt. Corp., 802 F.2d 120, 123 (3d Cir. 1986), to determine whether the attorney-client privilege belongs to a corporate officer or employee or to the corporation The Bevill test also has beencorporation. The Bevill test also has been adopted by the First, Second, and Tenth Circuits. See In re Grand Jury Subpoena (Newparent), 274 F.3d 563, 571-72 (1st Cir. 2001); In re Grand Jury Subpoenas (Roe and2001); In re Grand Jury Subpoenas (Roe and Doe), 144 F.3d 653, 659 (10th Cir. 1998); United States v. Int’l Bhd. of Teamsters, 199 F.3d 210, 214-15 (2d Cir. 1997).

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C. Preserving privileges (cont'd)11. Assertion of privilege by employees (cont’d)

a. Under the Bevill test, a corporate officer seeking to assert a personal privilege claim must demonstrate: (1) that he approached counsel for the purposes of seeking legal advice; (2) that when he approachedadvice; (2) that when he approached counsel, he made it clear that he was seeking legal advice in his individual rather than his representative capacity; (3) thatthan his representative capacity; (3) that counsel communicated with him in his individual capacity, knowing that a possible conflict could arise; (4) that his

ti ith lconversations with counsel were confidential; and (5) that the substance of the conversations did not concern the company

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company.

C. Preserving privileges (cont'd)12. Waiver of privilege by employees

a. "[O]rdinarily the authority to assert and waive the corporation's privileges 'rests with thethe corporation s privileges rests with the corporation's management and is normally exercised by its officers and directors." In re Grand Jury Proceedings, 219 F.3d 175, 183-84 (2d Cir 2000) (quoting CFTC v Weintraub84 (2d Cir. 2000) (quoting CFTC v. Weintraub, 471 U.S. 343, 348 (1985).

b. However, the Second Circuit has suggested that, under certain circumstances, anthat, under certain circumstances, an employee might have the power to waive a corporation's attorney-client privilege notwithstanding the corporation's intention not to do so. See In re Grand Jury ot to do so See e G a d Ju yProceedings, 219 F.3d at 185 (rejecting "per se rule that a corporate officer's waiver in testimony should not be' attributed to the corporation when it has asserted its privilege

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p p gand has not otherwise lost it").

C. Preserving privileges (cont'd)13. Crime fraud exception

a Documents and communications over which aa. Documents and communications over which a corporation seeks to assert the privilege may be discoverable or admissible in a proceeding pursuant to the crime fraud exception to the p pattorney-client privilege. See Posting of Jason Beahm to In House The Findlaw Corporate Counsel Blog, http://blogs.findlaw.com/in house/010/09/toyotas battle with former inin_house/010/09/toyotas-battle-with-former-in-house-counsel-continues.html (Sept. 28, 2010) (In Biller v. Toyota Motor Corp., arbitrator ruled that pursuant to the crime-fraud exception to the attorney-client privilege, a whistleblowing former in-house counsel could introduce into evidence internal Toyota documents over which Toyota claimed privilege )

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which Toyota claimed privilege.)

D. Selecting experts

1. Forensic accountants

2. Public relations firms

3. Privilege considerations

a. Kovel letters to protect privilege

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III. Post investigative best practices

A Reporting results ofA. Reporting results of investigations/determining whether to cooperate with government

B. Remediation measures

C. Dealing with parallel civil proceedings

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A. Reporting results of investigation/determining whether to cooperate with the governmentwhether to cooperate with the government

1. Written or oral reportp

2. Level of detail

3. Practical considerations

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A. Reporting results of investigation/determining whether to cooperate with the government whether to cooperate with the government

(cont’d)4. What disclosure obligations does a public company

have for an internal investigation? For a government investigation? For a Wells notice?

a. “Materiality” test

b Reg S-K which applies to quarterly and annualb. Reg S K, which applies to quarterly and annual reports, requires public companies to “[d]escribe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to y gthe business, to which the registrant or any of its subsidiaries is a party or of which any of their property is the subject.”

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A. Reporting results of investigation/determining whether to cooperate with the government whether to cooperate with the government

(cont’d)c. Goldman Sachs fined by FINRA for failing to

disclose receipt of Wells Notices by employees

d. Is disclosure required by Reg FD?

i. Reg FD requires that when an issuer discloses material nonpublic information to certain individuals or entities generallycertain individuals or entities -- generally, securities market professionals, such as stock analysts, or holders of the issuer's securities who may well trade on the basis of the information -- the issuer also must make public disclosure of that information.

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B. Remediation measures

1. Terminate or discipline affected executives and employees

2. Revamp ethics and compliance program

3. Deferred prosecution agreements and non-prosecution agreements

4 Monitorships

5. Governance reforms

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C. Dealing with parallel civil proceedings

1 Civil Litigation (private actions and government1. Civil Litigation (private actions and government

enforcement proceedings)

2. 5th Amendment Considerations

3. Stays – Complete or Partial

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Additional ResourcesJonathan S. Sack, “Internal Investigations: Start Off On the Right Foot, Key Structural Decisions Will Determine Reliability and Credibility”, New York Law Journal, October 12, 2010http://www.maglaw.com/publications/data/00232/_res/id=sa_File1/070101026Morvillo.pdf

Jonathan S. Sack and Barbara L. Trencher, “Whistleblower Laws: Protections For Employees, Risks to Corporations?,” International Comparative Legal Guide to: Business Crime 2011http://www.maglaw.com/publications/data/00233/_res/id=sa_File1/BC11_Chapter-2_Morvillo.pdf

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