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January 01, 2012

MedaStar—Initial Thoughts and Plan

John Irving

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To:          Firm MedaStar Working Group

From:     John Irving

Re:          MedaStar—Initial Thoughts and Plan

How does one go about convincing a corporate client to extricate itself quickly from the rehiring of a competitor’s radioactive former employee and executive who not only is the likely target of a federal criminal investigation involving health-care fraud, false statements, and obstruction of justice, but also the possible target of a state-level murder investigation? How does one convince the client to distance itself from someone who had the foresight to file a civil breach-of-contract action against his former employer—a lawsuit that already has resulted in a counterclaim against the client? How does one convince the client that it wants no part of—let alone control over—its soon-to-be-bankrupt competitor because that control will attract the U.S. Attorney’s attention, poor publicity, and potential successor liability issues if the client’s takeover efforts are successful? In short, how does one convince MedaStar to throw Michael Bass to the wind and steer clear of the obvious implosion that is coming to both him and GyneTech?

Before even trying to analyze the facts of this situation logically, we must first understand MedaStar’s internal politics. Who are Bass’s allies within MedaStar’s executive management and board of directors? Who are his enemies? Who decided to hire Bass in light of the current situation? Why in heaven’s name did they think that was a good idea? What did they know about the recent events at the time? What did Bass tell them? Is there any evidence suggesting that there was a plan all along to have Bass return to MedaStar after serving as a GyneTech executive? If so, who was involved in that plan? Who has reason to protect Bass? Whose emotions might interfere with their willingness or ability to consider facts objectively? Who can be trusted to provide accurate information and to act in the company’s best interest, rather than their own?

We need to quickly gather and analyze the facts in this case in the context of an internal investigation under the company’s attorney-client privilege. So far, MedaStar does not share GyneTech’s problems: It was not involved in the allegedly fraudulent clinical study; Bass’s actions that are under scrutiny occurred only while he was employed by GyneTech, and there is nothing to suggest that MedaStar had anything to do with Diana Gray’s untimely demise. It might be tempting for MedaStar to avoid the expense and disruption of an internal investigation. Unfortunately, however, there are some issues that need to be explored so that MedaStar can avoid unpleasant surprises and not become the focus of attention. What is more, the civil litigation already filed requires data preservation. MedaStar would be wise to gather facts methodically and under privilege; otherwise, it risks wasting time, having to initiate a proper investigation if it becomes aware of harmful facts later, and uncovering such facts in an unprivileged manner that would make them available to the government and civil litigants.

The internal investigation should be undertaken by outside counsel for two primary reasons: to insulate the investigation from internal pressure and maintain its credibility for any necessary disclosures to the government—especially if the situation evolves into a government investigation of MedaStar; and to avoid any argument that the investigation was not privileged because it was undertaken by a nonlawyer compliance official or by in-house counsel with a business title who provides corporate management with a mix of legal and business advice. In fact, outside counsel should be retained, and the investigation should be initiated, authorized, and overseen by as disinterested a group of individuals as possible, such as the company’s audit committee or a special committee of outside board members.

The relevant documentation must be properly secured so that we can understand the facts, avoid allegations of spoliation in the civil suit, and preclude any suspicion of obstruction of justice in the unlikely (but always possible) event that the government comes to view MedaStar as a witness, subject, or target of the grand jury’s investigation. We should identify possible custodians of relevant information as well as the locations where relevant data resides—company servers, personal computers, BlackBerrys, iPhones, and so on. We need to understand the company’s IT infrastructure, along with its data-management and preservation policies. We should immediately issue litigation-hold notices to the IT department and then to the users who might have relevant paper or electronic information. We will need to collect that information in a forensically sound manner. The goal should be to secure information not only about Bass’s recent rehiring by MedaStar, but also about the circumstances surrounding his earlier departure. The process of identifying and securing relevant documents and electronic data should be well documented.

We should interview everyone in the company with any knowledge of the relevant facts—starting with those who have information about Bass’s departure from MedaStar, his hiring by GyneTech, and his subsequent return to MedaStar. Eventually, we should talk to Bass himself. Ideally, we should review each employee’s emails and other documents before the interview, because there might not be a second one. At the same time, we need to conduct the interviews quickly so that the company can get the facts it needs to communicate with the government and, in some cases, so that the employee has less time to fabricate responses or become unavailable.

Prior to conducting interviews, we should think about, analyze, and anticipate a few questions that occur frequently in such situations:

Question: What should MedaStar do if an employee refuses to cooperate with the investigation?

Answer: The answer should be “fire the employee,” but there might be business reasons that make this difficult or impossible. Either way, this should be factored into how a witness is approached, and whoever conducts the investigation should be careful not to make threats that he or she will not be able to deliver on.

Question: Will MedaStar agree to pay for independent counsel for any of the witnesses who demand counsel?

Answer: Weigh the added expense against the benefit of having competent counsel who will work with the company to the extent possible. Also consider whether the company wants to be viewed as aligned with a given employee.

Question: Should MedaStar enter into joint defense agreements with any employees?

Answer: A joint defense agreement will greatly facilitate the exchange of information between the company and a represented employee, and it will further protect the attorney-client privilege. For example, having a witness’s attorney present in an interview conducted without a joint defense agreement at least arguably presents a third-party waiver issue. On the other hand, as with paying attorney fees for a witness, the company should consider whether it wants to align itself with the employee.

When we conduct our employee interviews on the company’s behalf, we must be sure to give each employee “Upjohn warnings,” also known as “corporate Miranda warnings.” That is the only way to avoid later claims by employees that they made statements because they thought the interviewer was their lawyer and that their disclosures are therefore privileged. Needless to say, that situation not only presents ethical problems for counsel, but it also complicates the government’s investigation and the company’s cooperation. Lawyers may disagree about exactly how to phrase the warning and whether it needs to be written, but the gist of it is as follows:


The interviewer is an attorney for the company—not the witness personally;

the interview is protected by the attorney-client privilege;

but it is the company’s privilege—not the witness’s;

which means that the employee must maintain the confidentiality of the interview;

but the company is free to waive the privilege and disclose anything the employee says to third parties, including the government, if it is in the company’s best interest to do so.


Understandably, some employees will seek counsel or be less willing to cooperate with the internal investigation after hearing such a warning. That may make our investigation more difficult, but the alternatives are even more problematic.

We should urge MedaStar to place Bass on leave (with or without pay), and deny him access to the building, until the internal investigation has concluded. MedaStar should seriously consider searching his office, provided that Bass has been adequately warned that he has no expectation of privacy in company facilities and systems. For now, at a minimum, the lock on his office door should be changed with keys provided only to a limited group of people.

This also would be a good time for the company to consider what it will do if a search warrant is issued. That is a long shot right now, but it likely will be impossible to address the necessary issues if the agents show up at the door. In addition, trying to put these pieces in place when a search warrant is imminent or during its execution might be viewed by some government agents and prosecutors as obstruction of justice. So, now is the time to think about the following:


How is attorney-client privileged information kept secure and separate from nonprivileged information?

Does the company properly balance the need to preserve information with the need to get rid of old data that it no longer needs? Too far to the left, and the company risks losing data and operations in the event of a disaster (or government agents taking the only copy from company offices with the promise to return it “as soon as they can”). Too far to the right, and the company ends up with massive amounts of redundant backup data that will be expensive to process and review.

What should employees do if government agents do show up with a warrant? Should they assist the agents in locating documents? Should they agree to be interviewed? Should they advise those who work for them to agree to be interviewed (or not)? How should they contact management to report what is happening, and who should they contact?

What should management do? What should it say to the employees at the facility where the warrant is executed? What should it say to other company employees?

How will a media response be coordinated? Who will be the point person?

Who calls us? How do we get to the scene as quickly as possible?


So much for preliminary procedural questions. The substantive analysis of MedaStar’s risks should focus on three broad categories: civil exposure, criminal exposure, and public-relations issues.

Our analysis of civil exposure should focus on the civil suit between Bass and GyneTech, as well as MedaStar’s ownership of GyneTech through shell corporations and its plans to seek control of GyneTech. At first glance—and depending, of course, on what the document review and employee interviews might find—GyneTech’s counterclaims against MedaStar for fraud, breach of fiduciary duty, breach of contract, and theft of trade secrets seem weak. None of the facts suggest that MedaStar was involved in any fraud committed by Bass while he was employed by GyneTech or by others at his direction in the context of the clinical study. The breach of fiduciary duty claim presumably addresses Bass’s duty to GyneTech; there is no fiduciary relationship between MedaStar and GyneTech. And there are no facts suggesting that Bass stole trade secrets, let alone disclosed them to MedaStar.

If a civil suit survives a motion to dismiss, however, MedaStar will be exposed to the usual risks involved in civil discovery, including document production and depositions. That might lead to the disclosure of additional facts to support not only GyneTech’s civil suit but also potential involvement in a criminal investigation. Discovery would focus on communications between Bass and MedaStar before, during, and after his time at GyneTech. It also would focus on the reasons for Bass’s departure from MedaStar and his later return to that company, including any due diligence that MedaStar performed before rehiring Bass. Needless to say, a continuing civil suit and the discovery in that suit also would lead to unhelpful publicity for MedaStar and to concerns among MedaStar’s own investors. So, we will want to make every effort to terminate that lawsuit—by motion or, if that fails, by settlement—as quickly as possible.

The implications of MedaStar’s ownership of GyneTech through shell corporations, and its plans to seek control of GyneTech, will require further development that will exceed the amount of MedaStar’s current retainer with us; addressing those issues also will require specialized expertise from my learned colleagues at the firm. These facts might well present antitrust issues as well as Food and Drug Administration (FDA) or Securities Exchange Commission (SEC) regulatory issues. For example, MedaStar could be accused of anti-competitive behavior by the “absorption” of a competitor. Owning a percentage of GyneTech also might run afoul of FDA disclosure requirements. Assuming that MedaStar is a publicly traded company, any statements made to the SEC also should be examined for materially false information or omissions that might have misled investors. MedaStar’s efforts to gain control of GyneTech also should be considered in this context. But I will leave all that to my colleagues who understand these issues better than I.

In the absence of facts that suggest some involvement by MedaStar in the possible fraud surrounding GyneTech’s drug trial or in the alleged retaliation against Diana Gray, MedaStar should not be a target of a criminal investigation into those matters. Of course, MedaStar’s internal investigation should look for any and all facts to the contrary.

MedaStar might well be viewed as a witness in a criminal investigation, however, because it might have documents and information relevant to the government’s investigation. MedaStar’s most significant risk of attracting the attention of criminal prosecutors is therefore in obstructing justice or making false statements to government investigators; for that reason, it must be careful and diligent in handling document preservation, conducting interviews, and communicating with the government. We also should consider criminal law implications of antitrust or FDA/SEC regulatory issues stemming from MedaStar’s ownership and plans to control GyneTech, especially because the few facts we currently know hint at a conscious effort to conceal MedaStar’s interest in GyneTech.

From a public-relations perspective, MedaStar’s actions so far make little sense. Rehiring Bass in the midst of his professional (and perhaps personal) demise communicates to the world that MedaStar places little value on ethical conduct. It also infects MedaStar’s clinical research with the allegations of fraud at GyneTech, making the FDA, the medical community, and patients less likely to trust MedaStar’s claims about the effectiveness of its own products. None of that improves if MedaStar’s minority ownership or efforts to gain control of GyneTech come to light. Those may not be legal problems per se, but they most certainly will affect our work as we move forward.

Unless facts surface quickly to demonstrate that there was no fraud in GyneTech’s clinical trials and that Bass has been wrongly accused, MedaStar should strongly consider parting ways with Bass and carefully extracting itself from ownership of GyneTech. We should raise that issue with our client as soon as possible.


John Irving

The author is senior counsel with Holland & Knight LLP, Washington, DC.