Neil M. Barofsky, a partner at Jenner & Block, is a former federal prosecutor who was also the first special inspector general of the $700 billion Troubled Asset Relief Program. He talks about the challenges companies and their lawyers face when Justice Department investigators come knocking. The interview has been edited for length and style.
What do general counsel or other C-level executives and directors need to understand about the risk of criminal liability?
Neil Barofsky: The Department of Justice’s (DOJ) attention on corporate crime in the last 10, 15, 20 years means that any criminal investigation can turn into an existential threat to a company. It depends on the industry and the type of company, but for many of them, the risk of an indictment or unresolved criminal case is as high a risk as one could imagine.
There’s also individual criminal liability. Since the aftermath of the financial crisis, when the DOJ was pretty roundly criticized for not securing convictions or even indictments of senior executives at the biggest financial institutions, there has been a reaction by the department. A couple of years ago, the deputy attorney general, Sally Yates, issued the so-called Yates memo, which made it a priority for the department to seek indictments of individuals when investigating corporate crime, in particular, senior individuals, under the theory that crimes are not committed just by companies but by individuals within companies. Historically, the department was viewed as taking the approach of getting a good settlement and moving on, but the Yates memo signaled the intent to pursue individual executive accountability.
Any criminal investigation has the potential to reach all the way up into the C-suite, of course, depending on the conduct. But even if the conduct is not there, we can often expect that the investigation is going to look as high up into the corporate hierarchy as possible as the DOJ tries to fulfill the mission set forth in the Yates memo.
If a company does find itself the subject of criminal investigation, where should it start?
Barofsky: It’s got to learn the facts. From an executive’s point of view, a general counsel’s point of view, it’s almost impossible to successfully navigate an investigation if you don’t know, to the greatest degree possible, what happened within the company that may have given rise to this investigation.
The worst-case scenario is misconduct by individual employees, but that’s not always the case. Sometimes a company involved in an investigation is the victim or an unknowing accomplice or accessory. There’s a full range of different things that can happen when a company gets the call from the DOJ. “Hey, here’s a subpoena,” or “We want to talk to you.” That’s why getting a handle on the facts, and understanding where the exposure and potential liability are, is the most important thing that has to happen. Then you can navigate what could be a very painful process. Knowing what decisions to make is going to be fueled by your knowledge of the conduct.
How you go about getting those facts depends on the circumstances. Outside counsel almost certainly has to be a part of it. Something very small and low-level, inside counsel can do or the normal compliance function can handle. But on the significant issues, more likely than not it makes sense to bring in independent counsel that has experience in these matters to conduct that investigation, so you have someone who’s more independent and will have more credibility in dealing with the government than the company’s own lawyers.
To go back a step, companies can really get in front of a criminal investigation by having a strong and robust compliance function that has the right policies, the right framework and the right monitoring, and is installing the right culture in the company. If you have a really good company culture and you have a good compliance function that is both enforcing and incentivizing that positive culture, you’re far less likely to end up the target of a criminal investigation.
Just as important, when your company gets to a certain size, even if you have the best culture and the best compliance function imaginable, there are still inevitably going to be some bad apples that put the company at risk. The difference is, when you can go to the DOJ and demonstrate your compliance function, what you’ve invested in it, how your culture of compliance has been spread throughout the organization, what the monitoring has done and what the training has looked like, that carries a lot of weight when negotiating a resolution.
Forward-looking investment and compliance yield results beyond just stalling, preventing an investigation or ending up with a better deal. It will improve a company in every way imaginable. It is such an important preventative measure.
At a recent event, you said that cooperation is a term of art. Could you please elaborate on that?
Barofsky: When confronted with a criminal investigation, across the board but particularly with the DOJ, the decision of whether to cooperate is particularly important. In most cases, the company cooperates.
I say cooperation is a term of art because the government is going to expect very specific aspects of cooperation in order to reward a company for cooperating with its inquiry. That will include checking in on a very regular basis and sharing information with the government in real time, as opposed to waiting until the end of the investigation. It may involve paying for and arranging for counsel for individual employees so that the government can have access to those employees without issue or concern. It could be sharing the results of interviews that the company or its counsel are having with employees. It’s really about doing everything that the company can to get information to the government so the government can do its job.
The real focus these days is on helping the government gather evidence and build a case against culpable employees, if they are in fact guilty of wrongdoing. From time to time, a company does extraordinary, remarkable things, and it would appear to try to cooperate with the government, yet at the end, it is denied credit because it didn’t provide the level of cooperation expected by the DOJ. It’s not just what you would normally think of. The demands are far more extraordinary than that.
How does privilege work within the framework of a criminal investigation, and what special consideration should law department leaders make regarding individual wrongdoers?
Barofsky: Different levels of privilege and concerns about privilege come in. The first is obviously the company’s privilege and how it conducts the internal investigation. But there’s also a balancing act of how the company maintains its privilege, especially when external counsel is conducting an investigation and there’s a need to share as much information as possible with the government.
Over the years, parties have engaged in a number of practices to try and meet those two goals. Some almost sound counterintuitive. For example, it would be unlikely for a law firm to share a memorandum of its interview of a particular employee, but it might have a conversation with the government in which it shares the facts of the memorandum, thereby informing the government of what happened during that interview.
The first one – sharing the memorandum – is arguably a waiver of work product privilege. The second – sharing the facts of the memorandum – is on the other side of the line, since you’re just conveying what’s been learned during the course of an investigation. But there are a lot of pitfalls and a lot of dangers out there. A company has to be really focused when it is cooperating with the government, making sure its counsel stays on the right side of that line while still providing the government with everything that it seeks.
The other issue is privilege internally within the company, between employees and the company. It’s always very important for employees to know that outside counsel represents the company, not the individual. Conversations, communications or interviews between employees and outside counsel – that is not the individual’s privilege. If there is privilege at all, it’s the company’s privilege, and if the company decides to waive that privilege by providing that information to the government, there’s not much the employee can do about it. Upjohn warnings lay out what to tell employees to make that very clear.
What are the ethical implications for both inside and outside counsel when dealing with criminal investigations and C-level executives and directors? Where do conflicts of interest come into play?
Barofsky: What we’re talking about is probably the biggest conflict of interest and potential ethical quagmire: when the interest of the company and the interest of the employees, including its executives, diverge. The simplest example, going back to the Yates memo, is that it is in the company’s interest, almost all of the time, to use its investigative process to provide evidence to the government against individual employees if they are in fact guilty of wrongdoing, even if that’s a high-level executive.
It is obviously not in that executive’s interest to get that information to the government, and that’s a potential area for conflicts for both internal and external counsel. If the client is the company, you have to act within the company’s interest, even if the company’s representative, somebody you’re dealing with on a daily basis, is affected. The same is true of internal counsel. If an investigation enters into the general counsel’s office – which doesn’t happen all that often – that’s an extraordinarily sensitive situation where you could even have lawyers within the general counsel’s office recusing themselves from the internal investigation.
Lawyers have a strong ethical obligation to make sure that employees and individuals know who they’re representing and who they’re not representing, and some of the tentative risks of talking to outside counsel. Of course, in any government investigation, there is a strong ethical need to be forthcoming and truthful to the government itself, and not engaging in practices that can be later viewed as misleading the government or hiding particularly harmful information. That has ethical considerations as well as criminal implications because lying to the government is a crime. It also has tactical implications. If the government ever perceives that the counsel, whether internal or external, is intentionally misleading it, that’s going to lead to bad consequences for the company.
What are the criminal resolution options, and what does a successful outcome look like?
Barofsky: The golden ticket is a declination, when the DOJ or investigative authority declines to prosecute. That could be because you successfully convinced them that no crime occurred, or it could be because a crime did occur but the company can show that it should not be held responsible, because it was the result of a rogue employee, it has a good compliance function in place, it self-reported or provided the necessary information, things of that type.
Going up the chain, there are then deferred prosecution agreements or nonprosecution agreements. In recent times, the difference between those two has collapsed. They both essentially give the company the opportunity to avoid criminal charges if it agrees to pay certain sums of money, adopt certain compliance changes, or take other obligations. That’s also a really good result, particularly if there has been significant activity that can be attributed to the company.
Then you get to a guilty plea and a plea agreement, and that’s not the most ideal in most instances. That involves the company becoming a convicted felon, and we’ve seen much more of that in the last 10 years. The consequences, frankly, are not necessarily all that different or more significant than some of the other resolutions. When you think about it, when a person is convicted of a felony and pleads guilty, they can’t vote and they may have other restrictions on their behavior. It’s the same with companies, but the government has worked very hard with companies that have pleaded guilty to limit collateral consequences.
What is successful totally depends on the facts. A guilty plea, as bad as it sounds, could be an extraordinarily successful resolution depending on the number associated with the fine, the impact on the company and the blunting of the collateral consequences. A $1 billion guilty plea could be far more successful in one instance than a $50 million nonprosecution agreement in another, depending on the size and scale of the misconduct that the government is investigating. Obviously nothing is better than a declination, but once you get into the more punitive resolutions, a lot of it comes down to the terms.
Published September 14, 2017.
