If your company — like so many these days — is conducting an internal investigation, beware. Your interrogators may work for the same company you do, but they’re essentially government deputies, legal experts say.
In 2004, executives of CA (previously known as Computer Associates), including former finance chief Ira Zar, pleaded guilty to obstruction of justice charges because they had lied — not directly to government investigators, but to the outside law firm the company had hired to conduct an investigation into accounting fraud charges. Prosecutors claimed Zar and others were aware that Computer Associates would turn over the results of the internal investigation to the government, and thus were lying to the government.
“The government viewed statements made to [Computer Associates's] internal investigators to be equivalent to statements made to the government itself,” says Michael Levy, an attorney at law firm McKee Nelson.
A survey last October showed that 63 percent of companies had hired outside counsel to conduct internal investigations in 2006. And since companies frequently turn over the results of internal investigations to prosecutors in the hope of more-lenient treatment, legal experts say, executives must realize that speaking with internal investigators can open the door to civil or criminal proceedings.
Of course, not speaking to them is likely to get an executive fired.
To be sure, the idea that lying to your company is the equivalent of lying to the government has not been tested in court: the Computer Associates executives pleaded guilty rather than test their chances. But Levy says the issue is so prevalent that courts will have to address it “in the near future.” At the same time, the U.S. Senate is considering legislation that might restrict prosecutors’ ability to demand the results of corporate investigations. But until the courts or Congress take action, internal investigations still present executives with a Hobson’s choice.
With the backdating scandal driving an unprecedented number of internal investigations, some executives apparently have made that choice already. In October 2006, Andrew McKelvey, the founder of Monster Worldwide, resigned from his chief executive spot and the board after declining to be reinterviewed by lawyers conducting an internal probe of the firm’s stock-option-granting practices, even though he did not receive options himself. Since then, Monster has admitted it had intentionally backdated stock-option grants for six years, and a criminal investigation has begun.
Critics say the government’s tactic of using company investigations to gather information steps around the Fifth Amendment, the right to remain silent. “Most companies, in order to try to get credit for cooperating with the [government] investigation, will use the threat of termination of employment for failing to cooperate with the internal investigationÂ when they might otherwise have a constitutional right to remain silent,” observes Levy. (Ironically, he adds, a 1968 Supreme Court decision notes the government can’t put its own employees in that same predicament.)
For companies, however, the decision is an easy one: its cooperation is one of many factors evaluated when prosecutors weigh whether to pursue criminal punishment for a company or settle. “It’s the threat of criminal [punishment] that makes most companies roll over,” says Susan Hackett, general counsel at the Association of Corporate Counsel. The last company that was criminally indicted, Arthur Andersen, didn’t fare well, she notes.
The criteria that federal government agencies use to assess a company’s cooperation are spelled out in agency-specific memos: the Seaboard Report at the Securities and Exchange Commission and the Thompson Memo at the Department of Justice.
A number of business and legal groups have assailed the Thompson Memo, which lists a company’s decision to waive its attorney-client privilege as a sign of cooperation. Prosecutors must ask for such a waiver because most internal investigations are conducted by lawyers hired by the company. The memo, issued in January 2003, was revised in December 2006 as the McNulty Memo, named after current U.S. Deputy Attorney General Paul McNulty.
The new guidelines add restrictions for prosecutors seeking privileged information from companies, according to a DoJ release. Now, prosecutors must prove a legitimate need for that information and ask for approval before they can request the information. The guidelines also say that attorney-client communications should be sought only rarely.
Still, given the legal environment, what should executives do if asked to speak to internal investigators?
“The first thing an executive should do is get his or her own lawyer,” says James Meyers, a partner at law firm Orrick, Herrington & Sutcliffe. Depending upon an employer’s insurance policies, a firm could let the executive choose an attorney at the company’s expense.
In addition, it’s unlikely that a company will plan a defense with the employee: companies no longer offer an executive the chance to create a joint-defense agreement because doing so counts against companies under the Thompson Memo, explains Hackett. This is particularly true as regulators and prosecutors shift their focus from blaming companies to blaming individuals for wrongdoing. “It is fair to say the [SEC] is looking more closely at individuals than at companies to hold someone responsible,” observes Meyers.
Deciding whether to cooperate with an internal investigation is a difficult call, one that depends on the circumstances, according to Meyers. Executives should consider such factors as the duration of the behavior in question, the existence of personal profits, and any probes by the SEC and the DOJ, he says. “The lesson one draws from the resignations you see now — people are balancing relative risks,” says Meyers.
Others have an unequivocal perspective on what employees in the crosshairs should do: they should “either cooperate fully with the board or they can’t continue to perform their functions at the company,” says Daniel Kramer, a partner at law firm Paul, Weiss, Rifkind, Wharton & Garrison. “It’s inconsistent for the employee” to refuse to communicate and want to remain in the job and in the trust of a public company, he explains. “If one of your choices is not to communicate because you don’t want to incriminate yourself, that’s fine, but that doesn’t mean all your options are open,” he says.
Still, those options may expand. For some, including Sen. Arlen Specter (R-Pa.), the McNulty Memo doesn’t go far enough. Specter recently reintroduced a bill to protect the confidentiality of attorney-client communications; he initially introduced the bill in December as the last Congress was preparing to end.
“It would be a good idea if companies were able to communicate with regulators and the DoJ without fear that those communications would waive privilege in other contexts,” says Kramer, who views the bill as a step in the right direction.