Part II of this article will appear in the February 2005 Issue of The Metropolitan Corporate Counsel.
Corporate conduct has never been more in the spotlight or fraught with legal hazards. Names like "Tyco," "WorldCom" and "Enron" have become synonymous with corporate fraud and onerous government investigations. Both government scrutiny and the civil and criminal penalties for corporate non-compliance are at historically high levels and are likely to be so for years to come.
Just consider the following statistics:
- In 2002, the Federal Bureau of Investigation collected more than $9.8 billion in recoveries and restitution from their investigation and prosecution of U.S. corporations (not counting the additional half a billion dollars it collected in corporate fines).1 That figure is almost double the amount the FBI collected in 2001, and there is every reason to believe that once released. the 2003 figures may exceed even that staggering sum.
- Also in 2002, the Securities and Exchange Commission, forced "securities law violators" to disgorge approximately $1.293 billion.2
The government's obvious financial incentive to dramatically turn the heat up on corporate fraud investigations, fueled by the post Sarbanes-Oxley political climate, means that all companies, public and private alike, now face an increased likelihood of finding the government's investigators at their doorstep. Even if the government is not investigating your company directly, you could become drawn into a government inquiry of one of your employees, customers, clients, joint-venture partners, or competitors. Not so distant headlines involving Arthur Andersen demonstrate that how your company responds to the government's "knock" might even dictate its very survival.
The purpose of this article is to provide management with a practical guide on how to properly respond to a government fraud investigation. We will start with how the investigators might first approach your company. This will be followed by a discussion of how the government might have gotten there and ways your counsel can determine whom they are really investigating. The article will conclude with some suggestions on what instructions your company can give its employees and whether your attorney should begin an internal investigation.
The First Step: Call Your Company's Counsel
When the government calls, a company's first response should always be to immediately contact its attorney for advice. No exceptions! Whether you have in-house counsel or outside attorneys, your legal representative has the best chance to accurately learn what the investigation is about and to discover specifically what prompted the government's focus on your company.
Don't fall into the surprisingly common trap (and in my 25 years' experience, old wives' tale) of believing that if you bring in your counsel too soon it will look like you have something to hide. Trying to talk to an experienced fraud investigator without the advice and protection of equally experienced legal counsel, will almost always introduce incomplete statements or what might unintentionally turn into what the government will later view as harmful admissions or the basis for a formal criminal charge.
Take, for example, the case of a mid-level manager at a successful, privately held corporation. Several years ago, federal agents arrived unannounced at the company. The mid-level manager went without counsel to speak with the agents and attempted to answer all their questions truthfully and the best of his ability. Based on that recent meeting, the government indicted the mid-level manager for allegedly lying to those federal agents.
Don't make this mistake. Your counsel will know the best way to cooperate with the government's investigation while at the same time protecting your rights.
How Will The Government Approach Your Company?
Companies may first become aware of a government investigation in several ways, ranging from a simple telephone call to the unannounced execution of a search warrant.
Telephone Calls and Letter Requests
Seemingly informal telephone calls or written inquiries that seek information on behalf of a government agency are often the first indication that an investigation is under way. In some cases, to gain potentially useful information, government agents will contact a corporation's employees, often at their homes and frequently at odd hours. Such visits can be incredibly intimidating and are designed to catch the employee off guard. Employees are often warned by investigators not to disclose the visit to their employers.
Inquiries from government agencies that appear to be informal or even benign should not be treated lightly, especially in today's climate of tough enforcement.
The government agency requesting information should be clearly identified, regardless of the means of communication. Once it is known that government investigators are making such calls, counsel will advise what if anything to say to the company's employees or otherwise respond. Regardless of how casual the inquiry appears or how harmless the answer may seem. the government's questions are often very focused and an answer given too quickly without the benefit of legal counsel may prove disastrous.
Subpoenas
Subpoenas are another frequently used investigational device of the government. These legal documents are served on a company to require the production of records and/or to compel testimony in connection with a government investigation. Unlike a search warrant (see below), a subpoena generally allows for some time to make a detailed and complete response. Your attorney can often negotiate an extension to the original deadline contained within the subpoena.
Responding to a government subpoena can also be incredibly disruptive to normal company operations. Particularly if your company is a "subject" or "target" of the investigation (see below), counsel must guide you through all steps of the process.
Subpoenas come in many forms. the most common of which are:
- Administrative subpoenas (from the Securities and Exchange Commission or Health and Human Services, for example);
- Grand jury subpoenas; and
- Trial subpoenas.
Receipt of a grand jury subpoena is a clear indication that a criminal investigation is under way.
As soon as a subpoena has been served on your company, counsel should immediately confer with management and select an appropriate employee to become a "document custodian." Together, the attorney and a document custodian will determine the best and most efficient means of gathering those documents deemed responsive to the subpoena. Additionally, they will determine how to review the company's electronic files and e-mail servers for responsive material, as well. Depending on the scope of the subpoena and the amount of information your company has stored in electronic format, it may be necessary to retain an independent contractor experienced in searching hard drives, backup tapes, and e-mail servers for potentially responsive material.
Most important, no subpoenaed documents should ever be hidden, destroyed or altered in any way, and company employees should not create "new" documents related to the focus of the government's investigation. As a general rule of thumb, seek counsel's advice on any on-going document destruction programs that your company may have in place once a subpoena has been served. Corporations can face serious consequences for not stopping the routine destruction of their older documents should any material later considered "responsive" be deemed "lost" or "destroyed."
All potentially responsive documents that company employees gather should be returned to the designated document custodian as soon as possible. At that point, forward the materials gathered to counsel who will review the documents and determine whether any are responsive to the subpoena or whether he may assert any privilege (such as the attorney-client privilege or attorney work product doctrine) to legally prevent their disclosure. Depending on the circumstances, documents that are physically located outside of the United States may or may not be reachable by subpoena, and counsel must carefully review such issues.
If an employee is subpoenaed for testimony, outside counsel should communicate with the government lawyers as to whether, and under what circumstances, the person will testify. Counsel will also determine whether the circumstances warrant engaging separate counsel for the employee, as is sometimes required when there is a perceived conflict of interest between the company and that employee. Again, depending upon the circumstances, employees located outside the United States may or may not be initially required to give testimony.
Search Warrants
Likely to be the most frightening and disruptive of the investigation tactics, government investigators will arrive unannounced and en masse, to serve a search warrant. They will then proceed to conduct a search for "evidence" in probably every corner of your facilities. In today's world, these searches will almost always include the physical seizure of computers, databases and servers containing e-mails and electronic versions of corporate documents.
In the event a search warrant is executed, the company should immediately contact its regular or outside counsel experienced in criminal investigations.
A member of management should also request that agents delay the search until counsel can be contacted. Although such a request is not likely to be granted, it occasionally works and is certainly worth a try. In the temporary absence of counsel, a manager should try to do the following:
- Identify and record the name of the government agent in charge;
- Ask for a copy of the search warrant and note the specific areas of the company designated for the search;
- Ask the agent in charge for the name and telephone number of the supervising prosecuting attorney; and
- At the close of the search. ask for an inventory of any documents or items taken.
Once your counsel is notified, he will communicate with the government's attorneys to learn more about the reasons for the search and will negotiate arrangements for immediate access to seized documents and files. Many companies have watched in utter disbelief as government agents removed the very computers, files and charts required to continue even the most basic daily operations. Counsel will advise you of your rights in this area, and start the negotiations for the prompt return of this critical equipment and information.
1 United States Department of Justice, Fiscal Year 2002 Performance Report, p.47. The entire report can be downloaded at http://www.usdoj.gov/ag/annualreports/pr2002/pdf/FullReport.pdf.
2 Securities and Exchange Commission, Annual Report for 2002, p. 1. The entire report can be downloaded at http://www.sec.gov/pdf/annrep02/ar02full.pdf.
Published January 1, 2005.
