Reprinted with permission from Litigation, Summer 2018 (44:4) at 33-38. ©2018 by the American Bar Association. Reprinted with permission. All rights reserved. This information or any or portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
The day starts ordinarily enough. Coffee, email, a quick call, more (oh so much more) email. But then the receptionist calls you (let’s say you are in-house counsel), or the company’s chief executive calls you (let’s say you are outside counsel): “Um, the company just got served with a subpoena, and it’s from the U.S. Attorney’s Office (or the Securities and Exchange Commission).”
You scan the document and learn the government is demanding all kinds of information—internal financial data, communications, materials that you know the C suite would never want turned over to regulators or prosecutors. What do you do now?
Step 1: Preserve Documents and Pick Up the Phone
First, fight the impulse to hide under your desk in the fetal position—or, alternatively, to reflexively object and tell them to pound sand. Regardless of whether the subpoena portends trouble for your client or is just a nuisance, talking down the C-suite and taking reasonable and appropriate steps to address the subpoena are in your client’s best interest. Failure to do so can foreclose what may be your best options to protect the company from a fatal criminal prosecution.
Second, take action immediately to preserve the documents that the government has requested. This does not mean you’re going to blindly turn over everything, but you will not be able to assess the situation without access to the documents. And if you’re careless—or worse—with responsive documents after being served with a subpoena (even if nothing damning is in them), the situation can only get worse. You give the government reason to be suspicious, you annoy the judge who might otherwise be your ally against obtrusive and overly broad demands, and, worst-case scenario, you invite an obstruction of justice charge. (Think Arthur Andersen’s document shredding in the Enron scandal.)
So determine who might have the target documents, whether on paper or in their ever-expanding email folders, and issue a preservation order. Explain to the relevant individuals that they cannot destroy, accidentally or intentionally, documents that have been subpoenaed. Remind them to take care of documents that they might have on personal computers or devices. Put the document preservation order in writing and ask that recipients acknowledge that they understand and will comply with the order. Also, talk to your information technology department and make sure that the usual destruction and deletion policies are suspended for individuals with subpoenaed documents. If you are unsure whether that department is equipped to ensure preservation, consider contracting with a qualified e-discovery vendor. Regardless, make sure that if push comes to shove, the company cannot be accused of failing to comply with a subpoena.
Once you’ve taken steps to preserve the status quo, you can begin to better assess what the government might be after. And you do that by picking up the phone. Call the assistant U.S. attorney (AUSA), introduce yourself, and ask what the investigation is about and how your client fits into the investigation. Is your client a witness, a subject, or a target in the investigation? Although not required to answer your question, more times than not, the AUSA will give you an answer to help move the matter along.
Determining whether your client is a witness, a subject (someone the government believes was involved in the scheme but is not targeting), or a target can both limit the burden of responding to the subpoena and help inform your internal investigation. If the government’s requests are overly broad, there is likely to be a significant cost associated with gathering the documents. (Even more limited requests can become expensive because of the volume of electronic discovery, but that is why thinking carefully about scope is important.) Particularly if your client is considered a witness, negotiate with the AUSA to limit the scope of the subpoena. Express a willingness to respond, but try to get an agreement on keyword searches for electronically stored information, timing, rolling productions—the types of things that make any document production more manageable. If the government refuses to limit the scope of the subpoena or your investigation reveals other reasons to resist production, go to step 5, below—cooperate or fight.
Regardless, the most important thing you can do at this stage is conduct your search and investigation under privilege and as attorney work product to best protect the company in case litigation from shareholders or investors follows. Make sure that you give any employee you interview an Upjohn warning. For former employees and other witnesses, request that they keep everything that you have asked them and what they have told you confidential. You and any corporate employee who participates in the investigation should keep the information as confidential as possible while still allowing the company to seek legal advice. Interview memoranda and documents memorializing your investigation, even in the preliminary stages, should reflect your thoughts and impressions. Do not merely transcribe what you are told.
You should seek an agreement with the government that the subpoena, the company’s response, and any documents that are produced will remain confidential to the extent possible. If the information relates to a trade secret, you should designate that specific information and request the specific exception from Freedom of Information Act disclosure for trade secret information. At all times, you need to keep in mind the business risk that your client will be punished by the market, investors, or lenders even if it has done nothing wrong.
Witness. If your client is merely a witness, your job is easier, but do not let your guard down. Being a witness today does not preclude being a target tomorrow. Gather the responsive documents. Talk to the relevant individuals after giving them written Upjohn warnings with acknowledgements that they understand that you represent the company and that the attorney-client privilege belongs to the company. (The practice of Upjohn warnings comes from Upjohn Co. v. United States, 449 U.S. 393 (1981)). In a standard warning, the employee is told that the interview or investigation is being conducted under the attorney-client privilege, meaning that the information must be kept confidential. The privilege belongs to the company and the company alone. Finally, the employee is told that the company may choose to waive the privilege and disclose what the employee said to the government or any other third party without seeking permission for disclosure from the employee.
Even if you are certain that your client is only (and will only ever be) a witness, work with the appropriate executives to think through other risks. If your client’s status as a witness becomes public or if the underlying information goes public, are there significant business risks? Are there significant risks to shareholders? Use the time that you have (because you have negotiated for a reasonable, rolling production) to get ahead of those issues.
Subject. This is a bit of a no-man’s-land. Do not get lulled into a false sense of security by the label. You may think you can act like a witness, but you should proceed as if you are a target (see below).
Target. If your client is the target, there are more concerns. The current administration’s approach to business malfeasance may eventually prove different, but federal prosecutors have shown increasing willingness in recent years to turn what might have been a regulatory enforcement action into criminal charges. In just the past several years, several large companies—not just individual bad actors but the companies themselves—have been hit with criminal charges. Following the massive emissions-test-cheating scandal, Volkswagen AG pled guilty to violations of the Clean Air Act and conspiracy to defraud the United States and U.S. customers. Volkswagen paid $2.8 billion in criminal fines in addition to $1.5 billion in civil penalties. Meanwhile, six executives were also indicted. Similarly, Takata Corporation, one of the world’s largest suppliers of automotive safety-related equipment, pled guilty to one count of wire fraud after allegedly fabricating test data to mask a fatal defect in its airbags. It agreed to pay $1 billion in criminal fines. Three Takata executives were also indicted. And it is not just automobile-related companies that have been hit. In 2016, ConAgra Grocery Products LLC pled guilty to a criminal misdemeanor charge stemming from the shipment of peanut butter contaminated with salmonella. The company was sentenced to pay an $8 million criminal fine and to forfeit an additional $3.2 million in assets.
Step 2: Figure Out Who Needs to Lawyer Up
As the Volkswagen and Takata cases demonstrate, there can be both corporate criminal liability and individual criminal liability in these cases. This can create a substantial conflict that makes common representation impossible, leading to a need for separate counsel for executives or other employees. If your company has a directors and officers liability insurance policy, a claim should be tendered immediately to avoid the risk of inadvertently waiving coverage or creating ethical issues for you as an attorney.
Once separate counsel is retained, a joint defense agreement may make sense to share costs and information. But that is not always true. If you have information or believe that an individual is a true bad actor, who did not act with the company’s best interests in mind, do not—we repeat—do not enter into a joint defense agreement.
Even if you decide initially that separate counsel is not necessary or a joint defense agreement makes sense, you should periodically reassess as new facts are discovered.
Step 3: Conduct an Internal Investigation
Whatever the issue is, you want to figure out what the evidence shows. There is too much risk to the company to bury your head in the sand and wait to see how it plays out. You will want an internal investigation, but you will also want to be able to seek legal advice based on what you find. You should hire outside counsel (or separate outside counsel if you have an ongoing advisement relationship with the company) to conduct the investigation—believe us, this is not just self-serving advice. Given the many hats worn by general counsel in today’s business world, courts have sometimes determined that the general counsel was not acting for the purpose of giving legal advice—but for business reasons—in conducting an internal investigation, so the investigation is not privileged and its work product is not protected. Meanwhile, the hiring of outside counsel has been used as a factor in favor of protecting the privilege. The internal investigation team should be made up of outside counsel and in-house counsel, as well as employees necessary to navigate the system and gather information. But all actions will be directed by outside counsel for the purpose of giving legal advice.
The team will then review the documentary evidence (at a minimum, the documents requested by the subpoena) and interview employees (after Upjohn warnings). If you determine that you want to memorialize an interview in a memorandum, make sure to include your mental impressions and potential legal analysis to protect the memorandum as attorney work product.
The internal investigation team will take that evidence along with other information they develop and assess the legal ramifications for your client. They’ll offer advice regarding corrective steps, new controls, shareholder disclosures, and whether it makes sense to tell the government some or all of what your investigation uncovered. All of these decisions must be navigated in a way to continue to protect the privilege so that you are not later determined to have inadvertently waived the privilege by providing information to one entity (say, the government), and not another (maybe the plaintiffs in a shareholder lawsuit).
Step 4: Determine If Your Client Is a Guppy or a Whale
Not all targets are created equal, and it may turn out after careful investigation that your client is a small fish in whatever scheme the government suspects. It might also turn out that you are 100 percent certain that your client did not do anything wrong, despite what the government suspects or what some putative whistleblower alleges. Of course, it is unlikely that you will be able to make that assessment without conversations with the government, which is another reason to pick up the phone in the first place. Express an interest in cooperating if you can get a sufficient understanding of what the government is looking for. If your client is a guppy or a completely innocent actor, you may want to ask the government for the opportunity to make a proffer in hopes that it ends your client’s need to be involved in the investigation. A proffer agreement will permit your client to give the government information with some assurance that it will not be prosecuted. Note, though, that a proffer agreement is not an immunity agreement. While the proffer statement cannot be used in a case-in-chief, it can usually be used for other purposes like impeachment or to give the government other leads that it may follow up on. So proffer with care.
If your client is a bigger fish and there is a sizable risk of prosecution, you may want to consider seeking cooperation credit. In September 2015, then Deputy Attorney General Sally Q. Yates issued a memorandum with guidelines for cooperation credit in corporate wrongdoing cases. The so-called “Yates memo” lays out specific criteria for cooperation credit, intended to ensure consistency. To qualify for any credit, corporations must provide all relevant facts about individuals responsible for the misconduct. The extent of the credit will depend on such factors as timeliness of cooperation, the proactiveness of the cooperation, and the diligence and thoroughness of the investigation. This is one of the reasons separate counsel and careful Upjohn warnings are important. In the event of serious misconduct, the interests of the company and individual employees are likely to diverge.
This may be true even outside the criminal context. The principles of the Yates memo apply to civil cases also. The memo specifically directs prosecutors to work with the Department of Justice’s civil lawyers when they do not believe there is quite enough evidence for a criminal charge. So, even if you believe your client may avoid criminal liability but faces a substantial risk of civil liability, seeking cooperation credit may be advisable.
The one caveat on all of this is that the current administration has suggested that the Yates memo may be modified and is under review. So before approaching the government seeking any cooperation credit, make sure that you understand the current guidelines. For example, in the realm of the Foreign Corrupt Practices Act (FCPA), the current administration made the FCPA Pilot Program permanent by announcing and issuing its FPCA Corporate Enforcement Policy in November 2017. It sets out a presumption of declination of prosecution for companies that self-disclose and satisfy the cooperation standard. This is a change for the better for companies, and we could spend a whole article on FCPA enforcement, but we need to move on to the next step of your response to a subpoena.
Step 5: Cooperate or Fight
Suppose it turns out you’re concerned that your client is a whale and has serious potential criminal liability. You will now have to make the decision about whether to cooperate or fight.
If you decide to cooperate, you will have to review the guidance of the Yates memo (see above). The Department of Justice has stated that you do not have to waive the attorney-client privilege to cooperate—but be prepared to provide all relevant facts. In addition, you must be able to demonstrate that you conducted an assessment as to how the violation occurred and that you have taken steps to remediate the problem to make sure that it won’t happen again (fixed the system by adding controls, discharged wrongdoers). You should also make sure that your compliance program is in tip-top shape. To do this, you should review the Department of Justice’s Evaluation of Corporate Compliance Programs and be prepared to answer every question listed with detailed responses supported by documentary evidence. So good luck; you will be praying for a declination with disgorgement—but will accept a deferred prosecution agreement or non-prosecution agreement with or without a monitor—and will be dreading a guilty plea.
Sadly, if you decide to fight, the company will still have to respond to the subpoena and produce many of the records. But you may be able to file a motion to quash the subpoena as overly burdensome or overly broad (or both)—especially if the government refused to discuss limiting the scope of the subpoena in step 1. And you will be able to withhold your investigation materials as privileged.
If there is a civil action and a criminal proceeding, your client, as the target, should resist a motion to stay the civil action even though parallel proceedings can be burdensome. Obviously, you do not want to make it easier for the government to prove up liability with a lower burden of proof in the civil action than in the criminal proceeding. But civil litigation provides the opportunity to engage in discovery, potentially providing an earlier window into the case against your client, rather than waiting for the government to produce discovery on its own timetable.
For purposes of this article, we have assumed two things: (1) your client is the company, and (2) your client is U.S.-based. But there are some other considerations if those things are not true.
If your client is an individual and is the target, it may be time to consider whether your client should invoke his or her Fifth Amendment right against self-incrimination. Besides the obvious reputation risks that invoking Fifth Amendment rights are likely to bring about, invoking the Fifth Amendment can be used as evidence against your client in a civil case. The kind of limiting instructions that preclude a jury from using a Fifth Amendment plea as evidence of wrongdoing in the criminal context do not apply in the civil context. That is why the government will generally seek to stay a Securities and Exchange Commission lawsuit during the pendency of the criminal case. Whether the end result of the criminal case is a conviction or even just the invocation of the Fifth Amendment, the evidence can be used to win a civil action.
If your client is a company with an international component, there is an entirely different set of considerations. If the investigator is a foreign authority, hire local outside counsel immediately. Many countries, including those in Europe, do not recognize attorney-client privilege for in-house counsel. Moreover, the so-called “legal professional privilege” applies only if the outside lawyer is providing advice in writing and the lawyer is admitted to the bar of a European Union nation. (Your state bar card is no good there!) There are also additional regulatory concerns when it comes to information that implicates privacy rights in Europe, and changes to those regulations became effective in May 2018 with the General Data Protection Regulation.
Whether your client is a witness, subject, or target—foreign or domestic—it pays to be proactive. Take steps to preserve data. Negotiate with the government regarding the scope of document production and any other information or cooperation it wants you to provide. Do not waste time in launching a privileged internal investigation to ensure you and your client understand the scope and seriousness of the government’s interest in your client. When the government calls, you don’t have to hide—you have to get to work!