Sunday, August 31, 2014

Privilege, Corporate Wrongdoing, and the Wal-Mart FCPA Investigation

The New York Times had an interesting article this week by Steven Davidoff Solomon entitled “Keeping Corporate Lawyers Silent Can Shelter Wrongdoing.”  The piece centers on the recent decision out of the Delaware Supreme Court in the case of Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW,Del. Supr., No. 614, 2013 (July 23, 2014), and notes that the attorney-client privilege can be used to “shelter potential wrongdoing, perhaps to the detriment of many people, including shareholders.”  As discussed at length in the article, the IBEW case permits stockholders to unilaterally breach the attorney-client privilege when there is suspected wrongdoing at a corporation. 

The IBEW case is one many have followed in recent years.  The controversy began after the New York Times broke the story of potential Foreign Corrupt Practices Act violations by Mar-Mart in April 2012.  In response to that initial article, the IBEW, a Wal-Mart stockholder, sent a letter to the company demanding inspection of a number of documents related to the potential FCPA matter, including documents regarding the corporation’s initial internal review of the situation.  Wal-Mart declined to provide certain of the documents and, with regard to some of those materials, claimed they were protected by the attorney-client privilege.  The issue of whether Wal-Mart could properly withhold these materials from shareholders was litigated at length and finally made its way to the Delaware Supreme Court.  In the ruling from last month, the Delaware Supreme Court sided with the IBEW and ordered Wal-Mart to produce the materials.  Referring to the Fifth Circuit Court of Appeals case of Garner v. Wolfinbarger (1970), which recognized a fiduciary exception to the attorney-client privilege, the court in IBEW said:

With regard to the other Garner good cause factors, the record reflects that disclosure of the material would not risk the revelation of trade secrets (at least it has not been argued by Wal-Mart); the allegations at issue implicate criminal conduct under the FCPA; and IBEW is a legitimate stockholder as a pension fund. Accordingly, the record supports the Court of Chancery's conclusion that the documentary information sought in the Demand should be produced by Wal-Mart pursuant to the Garner fiduciary exception to the attorney-client privilege.

It is important to note, of course, that the shareholders are meant to keep the information they receive confidential and use it only to decide whether to file a claim against Wal-Mart directors related to the FCPA matter. 

In reading the most recent New York Times article, I kept coming back to Upjohn v. United States and the ever present debate regarding the proper role of privilege in the world of internal investigations and potential corporate wrongdoing.  In particular, I was drawn to the important language in Upjohn regarding the reasons for applying the privilege: “The privilege recognizes that sound legal advice or advocacy serves public ends and that such advice or advocacy depends upon the lawyers being fully informed by the client.”  As the New York Times states in its piece from this week, “the attorney-client privilege for companies is increasingly under attack.”  I wonder now what impact the IBEW decision and related issues regarding lawyer whistleblowers, such as in the ongoing Vanguard case, will have on the future of internal investigation strategy and, in particular, the role of internal counsel in such situations.

(LED)

August 31, 2014 in Civil Litigation, FCPA, Investigations, Judicial Opinions, Privileges | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 27, 2014

Article About Former Penn State President Raises Issues Concerning Independent Investigative Reports and Role of Corporate Counsel

The New York Times Magazine several weeks ago published a lengthy, largely sympathetic article about Graham Spanier, the former Penn State president (Sokolove, "The Shadow of the Valley"), see here, who is awaiting trial on charges of perjury and other crimes in connection with the Pennsylvania grand jury investigation of his alleged complicity or nonfeasance concerning the actions of now-convicted (and affirmed on appeal) former assistant football coach Jerry Sandusky.

The article rather gently criticized the Freeh report, commissioned by the university, as I too did (see here), and asserts that it "probably led to [Spanier's] indictment."  Commissioning an independent investigative report -- generally either by a former prosecutor or judge, or a large law firm -- is the de rigueur response of institutions or corporations accused of wrongdoing.  An independent investigative report, especially by a respected authority, has the weight of apparent impartiality and fairness and thus the appearance of accuracy.  However, the investigative report -- frequently done with no input from the accused or presumed wrongdoers (since, fearful of prosecution, they choose not to be interviewed) -- is often based on an incomplete investigation.  Further, since the investigator is expected to reach conclusions and not leave unanswered questions, but unlike a prosecutor may not be required to have those conclusions tested by an adversary in an open forum, such investigations, like the Freeh investigation, are often based on probability, and sometimes even speculation, more than hard evidence.  Lastly, the "independent" report, like the report concerning Gov. Christopher Christie's alleged involvement in Bridgegate, may be less than independent.

*                    *                    *

The article also discusses an interesting pretrial motion in Spanier's case concerning a question that had puzzled me since the Penn State indictments were announced over two years ago -- what was Penn State's counsel doing in the grand jury?  Sub judice for six months is a motion for dismissal of the indictment and other relief related to the role of the Penn State general counsel ("GC") who appeared in the grand jury with Spanier, and also earlier with two other officials who were indicted, Tim Curley, the former athletic director, and Gary Schultz, a vice president.

According to the submitted motions (see herehere and here ), largely supported by transcripts and affidavits, the GC appeared before the grand jury with Spanier (and also separately with Curley and Schultz) and Spanier referred to her as his counsel (as also did Curley and Schultz).  According to what has been stated, neither she, who had previously told the supervising judge -- in the presence of the prosecutor but not Spanier -- that she represented only Penn State, nor the prosecutor corrected Spanier.  Nor did the judge who advised Spanier of his right to confer with counsel advise Spanier that the GC was actually not representing him or had a potential conflict.

Later, after Spanier's grand jury testimony, according to the defense motion, the GC -- represented by Penn State outside counsel -- was called to testify before the grand jury.  Curley and Schultz -- both of whom had by then been charged -- objected in writing to the GC's revealing what they asserted were her privileged attorney-client communications with them.  Spanier apparently was not notified of the GC's grand jury appearance  and therefore submitted no objection.

Prior to the GC's testimony, Penn State's outside counsel asked the court essentially to rule on those objections and determine whether the GC was deemed to have had an attorney-client relationship with the individuals, as they claimed, before Penn State decided whether to waive its privilege (if any) as to the confidentiality of the conversations.  Upon the prosecutor's representation "that he would put the matter of her representation on hold" and not "address . . . conversations she had with Schultz and Curley about [their] testimony," the judge chose not to rule at that time on the issue of representation, which he noted "perhaps" also concerned Spanier, and allowed her to testify, as limited by the prosecutor's carve-out.

Nonetheless, despite the specific carve-out to conversations with Schultz and Curley analogous to those she had with Spanier and the judge's mention that the issue might also apply to Spanier, the prosecutor questioned the GC about her conversations with Spanier in preparation for his testimony.  Her testimony was reportedly harmful to Spanier (see here).  At no time did the GC raise the issue of whether her communications with Spanier were privileged. 

Whether the motion will lead to dismissal, suppression of Spanier's testimony or preclusion or limitation of the GC's testimony, or none of the above, will be determined, presumably soon, by the judge.  Whatever the court's ruling(s), I have little hesitation in saying that is not how things should be done by corporate or institutional counsel.   At the least, even if the GC were, as she no doubt believed, representing the university and not the individuals, in my opinion, the GC (and also the prosecutor and the judge) had an obligation to make clear to Spanier (and Schultz and Curley) that the GC was not their counsel.  Additionally, the GC had, in my view, an obligation to make clear to Spanier that the confidentiality of his communications with her could be waived by the university if it (and not he) later chose to do so.  Further, the GC, once she was called to testify before the grand jury, had in my opinion an obligation to notify Spanier that she might be questioned as to her conversations with him in order to give him the opportunity to argue that they were privileged.  And, lastly, the GC had, I believe, an obligation to ask for a judicial ruling when the prosecutor went beyond at least the spirit of the limit set by the judge and sought from her testimony about her communications with Spanier.

(goldman)

August 27, 2014 in Current Affairs, Defense Counsel, Grand Jury, Investigations, Legal Ethics, News, Perjury, Privileges, Prosecutors, Sports | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 20, 2014

Memo to Rick Perry: Curb Your Inner Bully

My favorite statement so far on the Rick Perry indictment comes from Senator Ted Cruz: "Unfortunately there has been a sad history of the Travis County District Atttorney's Office engaging in politically-motivated prosecutions, and this latest indictment of the governor is extremely questionable." The second part of the statement is yet to be proved. The first part is true but misleading. As Cruz certainly knows, Special Prosecutor Michael McCrum (a good friend of mine) has no affiliation whatsoever with the Travis County District Attoney's Office or its pathetic Public Integrity Unit.

The Wall Street Journal runs a close second, with its Texas Chainsaw Prosecution editorial falsely claiming that McCrum is "a Travis County prosecutor," and bemoaning "the tactic of using a special prosecutor to disguise political motives." As the Journal undoubtedly knows, McCrum is a Special Prosecutor appointed by a Republican judge after Travis County DA Rosemary Lehmberg recused herself and her office from the investigation.  Perhaps the WSJ can enlighten us as to how Ms. Lehmberg manuevered McCrum's appointment and controls him to this day. I'll look for the editorial staffers to run that story right after they find Saddam Hussein's Weapons of Mass Destruction.

The real danger comes from the Journal's suggestion that Perry file a federal civil rights action against McCrum in McCrum's personal capacity. This invites the kind of personal and institutional attack on a public servant (which is excactly what McCrum is) that the Journal rightly bemoaned during Ken Starr's tenure as Independent Counsel. There is an explanation for the Journal's turnaround on this issue. Blatant partisan hypocrisy.

The Journal's bully-boy editorial plays right into the vigilante component in Perry's persona. Let's not forget the Governor's infamous threat to former Fed Chairman Ben Bernanke during the 2012 primary campaign: "If this guy prints more money between now and the election, I dunno what y'all would do to him in Iowa, but we would treat him pretty ugly down in Texas." And in his first public statement after the indictment, Perry, true to form, threatened that "those responsible" for his prosecution "will be held accountable." That's a threat, pure and simple, against the public servant McCrum, the Republican judge who appointed him, and, last but not least, the citizens who served as grand jurors. I am reminded of another infamous comment, from James Carville in 1996, that Judge Starr was "one mistake away from not having any kneecaps."

So here is my unsolicited advice to Governor Rick Perry. Attack the indictment all you want. Attack the theory behind it. Attack the wisdom, judgment and prudence of the prosecutor who brought it. Attack the overcriminalization of political acts. All of this is fair game and nobody, least of all a prosecutor, should be immune from public criticism. But try to remember that you are the "new" Rick Perry. Put on your glasses and your big boy pants and stop making threats, or I'll have to come back home. And hold you accountable.

(wisenberg)

August 20, 2014 | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 12, 2014

Future Trends Regarding White Collar Crime and China

As I mentioned in my post last week, I moderated a roundtable discussion at this year's ABA annual meeting entitled Navigating the White Collar Crime Landscape in China.  While the discussion included many unique and interesting insights into current trends and challenges in the field of white collar crime in China, I thought I might share just a few of the themes we heard from participants.

First, according to our participants, we should expect to see a continued focus on anti-corruption enforcement actions by both the United States and China.  Second, it is important to note that China has begun focusing on the prosecution of high-level corporate employees, not just low-level employees and the corporation.  Third, we should anticipate that China will continue to expand its anti-corruption mission, including directing more attention towards U.S. entities.  In this regarding, it was also predicted that China may soon explore the adoption of an anti-corruption statute with extraterritorial jurisdiction to assist it in undertaking a broader anti-corruption mission similar to the U.S.  This might mean we will soon see a Chinese version of the FCPA.  Finally, several of our panelists noted that China is increasing its focus on data privacy and state secrets laws, including enforcing such laws against foreigners more vigorously.

Regarding this last theme from the discussion, I'll note that on the morning of our program two corporate investigators in China, one from the UK and the other from the U.S., were found guilty of purchasing private information regarding Chinese citizens.  The pair, who are married, were well known in the internal investigation community in China and regularly performed work for large U.S. corporations, including GlaxoSmithKline.  According to the charges, the pair violated Chinese law by illegally acquiring personal information on Chinese citizens and then selling that information to their clients.  The first defendant, Peter Humphrey, was sentenced to two and a half years in prison.  The second defendant, Yu Yingzeng, was sentenced to two years in prison.  Those who perform due diligence and internal investigation work in China are keeping a close eye on this and related matters.  You can read more about the prosecution in The Wall Street Journal

(LED)

August 12, 2014 in Conferences, Corruption, FCPA, International, Investigations, Prosecutions, Sentencing | Permalink | Comments (0) | TrackBack (0)

Sunday, August 10, 2014

The 'Too Big to Jail' Effect and the Impact on the Justice Department's Corporate Charging Policy

Court E. Golumbic & Albert D. Lichy, The 'Too Big to Jail' Effect and the Impact on the Justice Department's Corporate Charging Policy, ssrn abstract -

In the wake of the 2008 financial crisis, the failure of the Department of Justice (“Justice Department” or “DOJ”) to bring criminal charges against any financial institutions prompted critics to question whether
the DOJ maintained a policy that certain corporations are “too big to jail.” The criticism piqued after the DOJ announced that it had entered into a deferred prosecution agreement (“DPA”) with HSBC to resolve a massive money laundering and government sanctions investigation.

This wave of criticism is the backdrop for what the Authors call the “too big to jail” effect — two related developments, each of which has the potential to impact the future of DPAs in the corporate crime context. The first is a willingness on the part of at least one federal district court to inject a level of judicial intervention into the process of structuring DPAs. In approving the HSBC, Judge John Gleeson issued a groundbreaking opinion articulating, for the first time, a standard for district court review of the terms of a DPA. The second is an emerging willingness on the part of the DOJ to pursue criminal charges over DPAs in high-profile cases involving financial institutions. In a strong departure from past practice, the DOJ recently secured guilty pleas from  the foreign subsidiaries of UBS and RBS, SAC Capital Advisors and three related entities, and the parent of Credit Suisse.

This Article examines the impact of the “too big to jail” effect on the Justice Department’s corporate charging practices. The Authors argue that DPAs should not be abandoned. Instead, Congress should amend the Speedy Trial  Act to require substantive, judicial review of the terms of DPAs. To
this end, the Authors propose a standard of review that is designed to maximize the benefits of DPAs, while minimizing the concerns that have historically accompanied their use.

(esp)

August 10, 2014 in Scholarship | Permalink | Comments (0) | TrackBack (0)

Monday, August 4, 2014

ABA Annual Meeting - Roundtable Discussion Regarding White Collar Crime and China

For those attending this year's ABA Annual Meeting in Boston, I wanted to alert you to a roundtable discussion occurring on Friday, August 8 from 3-5pm (Room 308, Level 3, Hynes Convention Center) entitled Navigating the White Collar Crime Landscape in China.

The event, which is co-sponsored by the Chinese Business Lawyers Association, will focus on emerging trends and challenges in the field of white collar crime in China.  The event will begin with short presentations by a host of experts in the area, each of whom will offer their own unique insights.  Following these brief introductory remarks, everyone in attendance will participate in an open dialogue.  During the discussion portion of the program, panelists and audience members are encouraged to ask questions and share insights and experiences.  It is anticipated that a wide variety of topics will be discussed and analyzed during this roundtable discussion, including strategies for conducting corporate internal investigations, advice for dealing with government agencies, best practices for corporate compliance, and current trends regarding cybercrime and corporate espionage, whistle-blower programs, anti-corruption enforcement, money laundering, and trade violations.  

I will be moderating the program and will be joined by the following featured discussants:

Ronald Cheng - USAO, Central District of California

William McGovern - Kobre & Kim LLP, Hong Kong

Karen Popp - Sidley Austin LLP, Washington DC

Zaldwaynaka (Z) Scott - Kaye Scholer LLP, Chicago, Illinois

Philip Urofsky - Shearman & Sterling LLP, Washington, DC

Keith Williamson - Alvarez & Marsal, Hong Kong

Debra Yang - Gibson Dunn, Los Angeles, California

It should be a wonderful event.  I hope to see some of our readers there. 

(LED) 

August 4, 2014 in Conferences, International | Permalink | Comments (0) | TrackBack (0)

Sunday, August 3, 2014

The Development and Evolution of the U.S. Law of Corporate Criminal Liability

Article by Sara Sun Beale (Duke) - The Development and Evolution of the U.S. Law of Corporate Criminal Liability (SSRN)-

In the United States, corporate criminal liability developed in response to the industrial revolution and the rise in the scope and importance of corporate activities. This article focuses principally on federal law, which bases corporate criminal liability on the respondeat superior doctrine developed in tort law. In the federal system, the formative period for the doctrine of corporate criminal liability was the early Twentieth Century, when Congress dramatically expanded the reach of federal law, responding to the unprecedented concentration of economic power in corporations and combinations of business concerns as well as new hazards to public health and safety. Both the initial development of the doctrine and the evolution in its use reflect a utilitarian and pragmatic view of criminal law.

This article describes the evolution of the practice of corporate criminal liability and sentencing, arguing that administrative responses by the Department of Justice and the U.S. Sentencing Commission have responded to widespread criticism of the existence of corporate liability as well as the breadth of the respondeat superior standard of liability. As a result of this evolution in enforcement, only a very small number of corporations are convicted, and the penalties imposed on those that are convicted are adjusted to reflect corporate culpability. Nevertheless, the broad potential for criminal liability has significant consequences for a wide range of corporate behavior. Corporations have powerful incentives to perform internal investigations, cooperate with both regulators and prosecutors, and actively pursue settlement of claims of misconduct. To avoid criminal liability, corporations also enter into deferred prosecution agreements that often require changes in corporate business practices and governance as well as monitoring to ensure compliance. The purpose of these administrative responses attempt is to reduce or eliminate the negative effects of imposing criminal liability while exploiting the law’s power to deter criminal behavior, improve corporate citizenship, and bring about beneficial structural reforms.

The persistence of the doctrine of respondeat-superior-based corporate criminal liability and its limitation in practice shed light on three key aspects federal criminal law. First, the Sentencing Guidelines have served as a more limited substitute for comprehensive criminal code reform. Second, the federal justice system lacks the resources to process the vast majority of cases falling under the criminal code, and prosecutorial discretion is relied upon to select a small fraction of cases for prosecution. Finally, like corporations, all defendants receive incentives for cooperation that may effectively compel them to plead guilty and/or assist in the investigation and prosecution of others.

(esp)

August 3, 2014 in Scholarship | Permalink | Comments (0) | TrackBack (0)

Friday, August 1, 2014

White Collar Over-Criminalization: Deterrence, Plea Bargaining, and the Loss of Innocence

New Article by Professor Lucian Dervan - White Collar Over-Criminalization: Deterrence, Plea Bargaining, and the Loss of Innocence published in 101 Kentucky Law Journal.  The abstract states:

Overcriminalization takes many forms and impacts the American criminal justice system in varying ways. This article focuses on a select portion of this phenomenon by examining two types of overcriminalization prevalent in white collar criminal law. The first type of over criminalization discussed in this article is Congress’s propensity for increasing the maximum criminal penalties for white collar offenses in an effort to punish financial criminals more harshly while simultaneously deterring others. The second type of overcriminalization addressed is Congress’s tendency to create vague and overlapping criminal provisions in areas already criminalized in an effort to expand the tools available to prosecutors, increase the number of financial criminals prosecuted each year, and deter potential offenders. While these new provisions are not the most egregious examples of the overcriminalization phenomenon, they are important to consider due to their impact on significant statutes. In fact, they typically represent some of the most commonly charged offenses in the federal system.

Through examination of the Sarbanes-Oxley Act of 2002 and examples of these two types of over criminalization within that law, this article seeks to understand whether new crimes and punishments really achieve their intended goals and, if not, what this tells us about and means for the over criminalization debate and the criminal justice system as a whole.

(esp)

August 1, 2014 in Scholarship, Sentencing | Permalink | Comments (0) | TrackBack (0)