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August 6, 2005

Computer Associates, Obstruction of Justice, and the Problem for Compliance Counsel

Attended a great CLE this morning (that’s right – I went to a CLE on a SATURDAY MORNING) that was co-sponsored by the Corporate Compliance and Criminal Justice Committees of the ABA’s Business Law Section. To give you an idea of how well done the panel was, the program was two hours, and was held at 8 am on a Saturday morning, and yet I was both awake and engaged (and never once looked at my watch) during the entire program.

The program was entitled “Regulatory Inquiries: Is There an Alternative to Cooperation?,” and the panel was populated by attorneys from the SEC, DOJ, and the NASD, as well as an in-house compliance lawyer and outside white collar defense lawyer. There were many topics that were discussed, and I will try to cover them over the next few days.

The first topic I will mention is one that touches on compliance investigations and the recent Computer Associates case. The DOJ brought obstruction of justice charges against individuals based on their false statements to private attorneys conducting the organization’s internal investigation. Consider the following excerpt from an Indictment in the case:

53. Shortly after being retained in February 2002, the Company’s Law Firm met with the defendant SANJAY KUMAR and other CA executives in order to inquire into their knowledge of the practices that were the subject of the Government Investigations. During these meetings, KUMAR and others did not disclose, falsely denied and otherwise concealed the existence of the 35-day month practice. Moreover, KUMAR and others concocted and presented to the Company’s Law Firm an assortment of false justifications, the purpose of which was to support their false denials of the 35-day month practice. KUMAR and others knew, and in fact intended, that the Company’s Law Firm would present these false justifications to the United States Attorney’s Office, the SEC and the FBI so as to obstruct and impeded the Government Investigations.

54. For example, during a meeting with attorneys from the Company’s Law Firm, the defendant SANJAY KUMAR and Ira Zar discussed the fact that former CA salespeople had accused CA of engaging in the 35-day month practice. KUMAR falsely denied that
CA had engaged in such a practice and suggested to the attorneys from the Company’s Law Firm that because quarterly commissions paid to CA salespeople regularly included commissions on license agreements not finalized until after end of the quarter, the salespeople might assume, incorrectly, that revenue associated with those agreements was recognized by CA within the quarter. KUMAR knew that this explanation was false and intended that the Company’s Law Firm would present this false explanation to the United States Attorney’s Office, the SEC and the FBI as part of an effort to persuade those entities that the accusations of the former salespeople were unfounded and that the 35-day month practice never existed.

 . . . .

58. On or about October 6, 2003, January 14, 2004, January 22, 2004, and April 6, 2004, the defendant SANJAY KUMAR was interviewed by attorneys from the Audit Committee’s Law Firm. During these interviews, KUMAR did not disclose, but instead falsely denied and otherwise concealed, the existence of the 35-day month practice. For example, KUMAR falsely stated that he had never monitored end-of-quarter contracting activity to determine whether CA would meet analyst earnings estimates. KUMAR admitted that he occasionally encouraged salespeople to close deals after the end of quarters, but stated falsely that these efforts were unrelated to revenue recognition.


59. The defendant SANJAY KUMAR well knew and believed, at the time of the October 6, 2003, January 14, 2004, January 22, 2004, and April 6, 2004 interviews, that certain of the statements he made during the interviews were false and that he otherwise concealed during the interviews information which he knew to be material to the Government Investigations. KUMAR further well knew, and in fact intended, that his false statements and concealment of material information would have the effect of obstructing and impeding the Government Investigations.

 The government charged that these facts were a crime under the following statute:

 18 U.S.C. sec. 1512:

 (c) Whoever corruptly—

 . . .

 (2) . . . obstructs, influences, or impedes any official proceeding, or attempts to do so, shall be fined under this title or imprisoned not more than 20 years, or both.

So, here is the chain of the government’s reasoning: (1) organizations know that to minimize the legal consequences of criminal wrongdoing, they must cooperate with any ensuing government investigation, (2) cooperation currently means conducting an internal investigation and then self-reporting the results, including any needed waiver of attorney-client privilege, (3) the organization’s management knows that the fruits of the internal investigation are likely destined for the government’s eyes and ears, and so (4) management knows that any effort to obstruct, influence, or impede the organization’s internal investigation will, in turn, have the same effect on the government’s investigation. As one member of the audience put it, in posing a question to the panel, this reasoning effectively deputizes private counsel for the internal investigation as a government agent for obstruction of justice purposes. And as the Martha Stewart case illustrated, obstruction of justice can be prosecuted even though no other crime has been committed. And this theory makes internal investigation counsel a material witness to the crime. Let’s just say that that ups the ante quite a bit for in-house compliance attorneys who routinely conduct such interviews.

In future posts, I will cover some issues raised about this theory. Until then, I am opening comments.

August 6, 2005 in Cases, Enforcement Actions, Monitoring, Auditing, and Evaluating, The Compliance Office | Permalink


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