April 26, 2006
Counsel Caught Between a Rock and a Hard Place
The role of lawyers involved in corporate crime investigations just keeps getting more treacherous. The Thompson Memo puts the issue of waiver of the attorney-client privilege and work product protection front and center in every investigation, and raises questions about whether the company should pay for outside counsel to represent employees and directors involved in the investigation. Counsel for the corporation must deal with how to best represent the client while considering the status of individuals who often have worked for the company for years. Similarly, the lawyer retained to represent an individual in the investigation clearly owes a duty to represent the client, but if the fees are paid by the company, then there will be at least some tension in the attorney's representation. To make matters even more complicated now for the employee's attorney, a New York Law Journal article (here) discusses a malpractice suit against Kaye Scholer related to its representation of a former vice president of Computer Associates Inc. who was terminated from her position shortly after answering questions in an internal investigation.
Computer Associates was involved in an accounting fraud investigation that resulted in the company entering into a deferred prosecution agreement and its former CEO pleading guilty to securities fraud and obstruction of justice charges. Irene Salvatore was represented by Kaye Scholer in 2004 in the internal investigation, and her malpractice suit claims that the firm did not advise her that she could have refused to cooperate. In denying summary judgment to the firm, the trial court found that the payment of Salvatore's attorney's fees by Computer Associates was sufficient to raise an issue of fact whether Kaye Scholer had a conflict of interest. The trial court did dismiss wrongful termination, conspiracy, and defamation claims filed by Salvatore. The malpractice claim is premised on the assertion that the investigation sought to make scapegoats of lower-level employees to protect senior management, so that by not advising her to refuse to cooperate Kaye Scholer assisted the company to her detriment. The law firm responded that because Salvatore was an at-will employee, she could be terminated at any time and if she had failed to cooperate then she would have lost her job anyway.
We have seen other instances of company's firing employees or terminated the benefits of retired employees who asserted their Fifth Amendment privilege in responding to a subpoena or refused to cooperate with lawyers conducting an internal investigation, for example in the AIG-General Re investigation. Former employees in particular have a strong interest in having the company pay their attorney's fees, and the KPMG tax shelter prosecution involves a claim that the firm's decision to terminate the payment of fees violates their Sixth Amendment right due to improper government pressure on KPMG. If lawyers who have their fees paid by the corporation could also face malpractice claims for advising their clients in a way that is helpful to the company, then that may discourage law firms from undertaking such representation. No attorney wants to be in a "damned if you do, damned if you don't" situation, and the malpractice claim against Kaye Scholer certainly seems to put the firm in just that position. If successful, this type of claim will be another factor lawyers have to consider in undertaking representation in an internal investigation. (ph)
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