Category: Complaint Handling

Attorney-Client Privilege and Internal Investigations

Two cases illustrate some of the problems with the use of outside counsel for internal investigations. The possibility that a conflict of interest could arise when an attorney or law firm simultaneously represents an organization and one or more of its officers or directors is a recurring issue.

A ruling earlier this month by U.S. District Judge Cormac Carney made a stark warning to lawyers that they need to warn a company’s employees in internal company investigations that they represent the company, not the employee. Judge Carney dismissed portions of the government’s criminal case against William J. Ruehle, the former CFO of Broadcom Corp. after finding that the law firm hired by Broadcom to review possibly illegal stock-option grants failed to explain clearly to the executive that it wasn’t representing him. Irell & Manella was involved in three separate but related representation of Broadcom and Mr. Ruehle.

Judge Carney ruled that Mr. Ruehls’s statements are privileged because he “reasonably believed that the lawyers were meeting with him as his personal lawyers, not just Broadcom’s lawyers. Mr. Ruehle has a reasonable expectation that whatever he said to the Irell lawyers would be maintained in confidence.”

Judge Carney mentioned an Upjohn warning or “corporate miranda” to inform a constituent member or an organization that the the attorney represent the organization and not the constituent member. The Judge ruled that the Upjohn warning would not be sufficient because Mr. Ruehle was already a client of Irell. The judge threw the statements of Mr. Ruehle out of evidence and also referred the law firm to the California state bar for disciplinary action.

A similar issue recently arose during the government investigation of R. Allen Stanford. Proskauer Rose lawyer Thomas Sjoblom accompanied Stanford Financial Group’ Chief Investment Officer Laura Pendergest-Holt to an SEC investigation. According to the Wall Street Journal, he said during the testimony that he represented Mr. Stanford and officers and directors of his affiliated entities. Ms. Pendergest-Holt believed he was representing her. She got indicted and is now suing Sjoblom for malpractice. She alleges that Sjoblom caused her to speak to the SEC without informing her of her Fifth Amendment rights against self-incrimination, that she was not required to testify, that she had no attorney-client privilege with him and that the interests of her employer were adverse to her interests

If you hire an outside law firm as part of an investigation, you need to make it clear that the lawyers represent the company and not the employee or executive. The lawyers need to be clear as well since they are likely to be subject to an ethics complaint or malpractice suit if they are not clear.

See:

Conducting Investigations of Wrongful Workplace Conduct

ginsburg_roy

Roy A. Ginsburg, of Dorsey & Whitney LLP and the blog Quirky Employment Questions, penned an article in the May/June 2008 edition of Business Law Today: Conducting Investigations of Wrongful Workplace Conduct.

The first issue he tackles is whether employees are obligated to participate in a company investigation. He says the answer is yes.

That leads to the next question of whether you can fire the employee who refuses to participate. He says the answer is also yes.

Of course it is best to have a policy that clearly states that employees are are expected to participate in a company investigation and that refusing to participate is grounds for dismissal. (Check your policies.) Of course you do not need to jump directly to dismissal. You can suspend them, demote them or take other action. Again, it is best to have this in the policy.

Ginsburg ends the article with 10 general guidelines  for the investigative process:

  1. Define clearly the investigator’s role.
  2. Retain the right investigator.
  3. Act promptly.
  4. Conduct a thorough investigation.
  5. Do not promise complete confidentiality.
  6. Be nimble.
  7. Get help when needed.
  8. Respond proportionally.
  9. Respond consistently.
  10. Communicate the outcome when possible.

Yes, I realize this article is little old, but one of my reading stacks collapsed and this issue sprung to the top. I took it as a sign that I should read it.

Lawyer’s Noisy Withdrawal from Stanford Case

sjoblomLawyers must protect their clients’ confidence, but they can’t aid in the commission of a potential crime. The Wall Street Journal covered some of the facts leading up to the “noisy withdrawal” of Thomas Sjoblom of Proskauer Rose LLP from their representation of the Stanford Financial Group: Top Lawyer’s Withdrawal From Stanford Case Waves a Flag.

There was much consternation over the idea of an attorney whistle-blowing on her client back when Sarbanes-Oxley was adopted. Legal ethics, business ethics and ethics were at odds. An attorney is divided between doing what is right for society at large, for her client and her own income.

Lawyers represent guilty people. They are there to help them through the legal system and ensure the government did not overstep its constitutional limitations. Stanford was in trouble and needed the help of lawyers. In this time of crisis Stanford’s lawyer ended his representation.

Charlie Green finds much fault with the approach and found the use of “disaffirm” to be a bit trivial for the magnitude of the underlying scandal.  Stephen Gillers in his comment points out that “the word ‘disaffirm’ is actually a term of art in New York legal ethics.”

I am giving Mr. Sjoblom the benefit of the doubt that he did not find out about the fraud at Stanford until sometime in late January or early February when they had to respond to the SEC subpoena. It certainly sounds like the February 10 testimony of Laura Pendergest-Holt, a Stanford executive, in front SEC investigators did not go well. She got arrested and Mr. Sjoblom made his noisy withdrawal.

There is a lot of work ahead for Stanford’s lawyers in sorting out the facts, defending the company and defending the executives. Sjoblom stepped away from this representation and turned down hundreds of thousands if not millions of dollars or revenue to be made from the representation.

There is a big difference between defending a criminal and being a witness to a crime. It sounds like Mr. Sjoblom realized that he had become a witness to a crime and incapable of defense.

Someday we may hear the true story of what happened. As with the Madoff scandal, I am very interested in finding out the underlying facts. Did they start out bad? If they originally had good intentions, what made these people go bad?

See also:

The Law:

17 CFR 205.3(b) provides:

Duty to report evidence of a material violation. (1) If an attorney, appearing and practicing before the [Securites and Exchange] Commission in the representation of an issuer, becomes aware of evidence of a material violation by the issuer or by any officer, director, employee, or agent of the issuer, the attorney shall report such evidence to the issuer’s chief legal officer (or the equivalent thereof) or to both the issuer’s chief legal officer and its chief executive officer (or the equivalents thereof) forthwith. By communicating such information to the issuer’s officers or directors, an attorney does not reveal client confidences or secrets or privileged or otherwise protected information related to the attorney’s representation of an issuer.

This regulation was promulgated under Section 307 of Sarbanes Oxley Act of 2002.

How Not To Fire Someone for Workplace Fraud

Staples fired sales director Alan S. Noonan was fired for padding his expense report. Executive Vice President Jay Baitler sent an e-mail to approximately 1,500 employees explaining the reason for the firing.

The e-mail contained no untruths, but Mr. Noonan sued for defamation anyhow.

Unfortunately for Staples, truth is not a defense in Massachusetts if the challenged statement was communicated with actual malice according to the 1st U.S. Circuit Court of Appeals in its recent decision Noonan v. Staples (posted at JD Supra).

The 1st U.S. Circuit Court of Appeals looked at G. L. c. 231, Section 92, which says that truth is a defense to libel “unless actual malice is proved.” However, in a 1998 case, Shaari v. Harvard Student Agencies, the Supreme Judicial Court ruled that statute unconstitutional as applied to matters of public concern.

See more:

Is Investor Protection the Top Priority of SEC Enforcement?

Stavros Gadinis a Post-Graduate Fellow at Harvard Law School has published a paper: Is Investor Protection the Top Priority of Sec Enforcement? Evidence from Actions Against Broker.

Abstract:
Recent financial collapses have focused policymakers’ attention on the financial industry. To date, empirical studies have concentrated on corporate issuer activity, such as securities offerings and class actions. This paper makes a first step in studying SEC enforcement against investment banks and brokerage houses. This study suggests that the SEC favors defendants associated with big (listed) firms compared to defendants associated with smaller firms through two channels. First, the SEC is more likely to choose administrative rather than court proceedings for big-firm defendants, controlling for types of violation and levels of harm to investors. Second, within administrative proceedings, big-firm employees are likely to receive lower sanctions, notably temporary or permanent bars from the industry. To explain this gap, the paper first investigates whether big-firm violations are qualitatively different from small firms’ violations, but finds no support for this. This paper instead finds tentative support for the hypothesis that SEC officials favor prospective employers, as big firms headquartered in desirable locations receive lower sanctions.

Unfortunately, he does find a correlation.

“The analysis shows that, for the same violation and comparable levels of harm to investors, a big-firm defendant is on average 75% less likely than a small-firm defendant to end up in court rather than in an administrative proceeding, facing a higher likelihood of being banned from the industry as a result. More importantly, among cases that the SEC assigns to administrative proceedings, big-firm defendants are 60% more likely than small-firm defendants to receive no industry ban, controlling for violation type and harm to investors. The gap between big and small firms persists when limiting the analysis to the individual employees of such firms, who should not be shielded by public policy considerations potentially prevalent when the SEC considers enforcement against a large broker-dealer firm.”

Stavros offers the “revolving door” theory as a tentative explanation for the difference. Although, he has no basis for offering this explanation.

There could be many reasons for the difference in treatment. Larger firms could be better represented, with their legal team steering them towards a better result.

I have not gotten deep in the data to see if there are weaknesses in the way he categorized harms and treatment. I encouraged you to take a look at the study and let me know what your thoughts are.

Thanks to David Zaring for pointing out this paper in The Conglomerate.

Federal Law to Protect Attorney Client Privilege

Senator Arlen Specter of Pennsylvania introduced Senate Bill 445: A bill to provide appropriate protection to attorney-client privileged communications and attorney work product. The bill:

“Prohibits federal prosecutors and investigators across the executive branch from requesting or conditioning charging decisions on an organization’s reasonable assertion of attorney-client privilege or decision to pay of attorneys fees for an employee. This bill emphasizes that the right to counsel is chilled unless the confidential communications between attorneys and their clients are protected by from compelled disclosure. The Department of Justice has changed its rules three times in the past few years, and attorneys and clients need clarity and an unchanging rule.”

The bill would reverse the Thompson Memo and the McNulty Memo which pressured companies to waive attorney-client privilege and disclose the results of internal investigations as part of federal prosecutions for wrong-doing.

The bill was just introduced so I have no idea whether it will be passed or whether it will change during the legislative process.

Thanks to Ellen S. Podgor of the White Collar Crime Professor Blog for pointing out the proposed legislation.

Establishing an Effective Complaint-Handling Process

Grant Thornton put together a comprehensive report: Hear that whistle blowing! Establishing an effective
complaint-handling process. (August 2006, .pdf)

They have developed the MACH process which consists of six basic steps:

  • Receive the complaint;
  • Analyze the complaint;
  • Investigate the complaint;
  • Resolve the complaint;
  • Report the resolution of the complaint; and
  • Retain the necessary documentation.