Question 1

An Employee May Have Violated the Law

Accepted Answer

Preserve Information Does the company have an internal investigative function? Is there a process to engage with in-house legal and conduct a privileged investigation? Does the company have a process for collecting and preserving emails, electronic data, and other information? Should the company institute a legal hold to notify holders of relevant information to preserve it? Should the company immediately suspend the normal deletion of emails and other data for custodians with potentially relevant knowledge? Investigate Whether it's clear that something illegal has taken place or not, the company will want to make sure it has all the facts. Figure out what happened and why. In doing so, the company needs to plan for the potential that at some point, the government may come knocking and will want to review how the company handled the issue when it learned of it. It's not too early to think about whether outside counsel should assist. Notify Once the company knows the outlines of what happened, who needs to be informed? What format should that notification take? How does the company determine whether or not the event constitutes something that would be "material" under the securities laws? Should the company disclose what it has learned to the government? To investors? Who is going to make that decision? All of these questions should be answered with the assistance of competent counsel. Engaging Counsel If the SEC or DOJ (or, not infrequently, both agencies) begin an investigation, the lawyers and firms who usually handle a company’s legal affairs may or may not be who should handle such an investigation. Find out more about engaging counsel.

Question 2

How to Determine the &#8220;Right&#8221; Lawyer for Companies

Accepted Answer

Audit Committee/Board-led Independent Investigation Where a company’s audit committee wishes to conduct an investigation into potential violations (this may happen before any government investigation starts), they should probably not use a law firm that regularly does work for the company. There are a few, related reasons for this.      First, any such investigation should be independent in order to be credible. It’s not independent if the firm conducting the investigation has other ongoing work for the company or frequently does work for the company and expects to continue doing work for the company.      Second, it may represent an actual conflict of interest for the law firm if issues the company consulted with the firm on in earlier periods become (or should become) subjects of the investigation.      Third, after the investigation concludes, the audit committee or the company may wish to present the results of the investigation to government regulators such as the SEC or DOJ; if the law firm that conducted the investigation is found to have a prior or ongoing relationship with the company, the government may worry that the investigation “pulled punches” as to the issues it covered or the involvement of company officers or directors in a position to award legal work to the firm.      Fourth, the audit committee and the Board have duties to the shareholders to ensure that any members of company management that were involved in directing or allowing violations to take place are properly dealt with, which might be more difficult to ascertain if the lawyer or firm making recommendations about company managers has had extensive, friendly relationships with the individuals being evaluated.   Finally, and we’ve seen this principle violated in the past with not-so-great results, the law firm that represents the company in the government investigation should not be the same firm that conducted the investigation. This is because the law firm would be put in the position of urging the government to rely on the firm’s own work (the “independent” investigation that the same firm just completed) at a time when the firm is charged with defending the company’s interests. This puts the law firm in the position of vouching for the integrity of its own investigation at a time when the government knows that the firm’s actual job is to minimize liability and protect the company’s interests—which could (and probably should) cause the government to question the impartiality and reliability of the investigation the law firm (and company) wants the government to take seriously.     Company Representation When it comes to representing the company’s interests in an SEC or DOJ investigation, it may be entirely appropriate that the lawyer or law firm that has previously represented the company in other contexts also defend the company’s interests in what may be a protracted, years-long investigative process with potential litigation at the end.      Choosing a law firm that has done work for the company, is familiar with the business model, and has developed a solid rapport with the business executives and in-house counsel is often a very good idea and can cut down on the costs associated with bringing in lawyers who know nothing of the company or its industry. This must always be subject, however, to making sure that the law firm has the necessary expertise with the relevant agencies. It seldom makes sense to use the lawyer who regularly assists the company in its FDA labeling and advertising issues in an SEC enforcement investigation into whether the company’s financial statements were intentionally misstated. If the FDA lawyer doesn’t have colleagues at the firm with the SEC or DOJ backgrounds necessary to handle such an investigation, the company needs to find a new firm that does have such expertise; this is no time for on-the-job learning.     If a different law firm has completed an independent investigation, the law firm charged with the company’s defense will want to point to the findings and recommendations of the internal investigation and persuade the government that the company has figured out what went wrong, taken appropriate remedial action in reliance on the investigation conducted by an independent firm, and should therefore not be excessively penalized for problems that have already been exposed, investigated, and properly addressed.    Insurance—Directors & Officers (“D&O”) Insurance Most companies of any size will have considered purchasing a D&O insurance policy and most corporate insurers will suggest such a policy as a prudent investment. As discussed further below, most corporate by-laws require the company to indemnify and advance to its directors and officers legal costs incurred in a lawsuit or investigation related to their service as corporate board members or executives. A D&O policy is one way for the company to offset or mitigate its liability for the costs of defense of these individuals if and when a lawsuit is filed or an investigation commenced.     General Counsel and those responsible with dealing with the company’s risks should consider retaining counsel with expertise in coverage issues in evaluating D&O policies and should also make sure the insurance company has the necessary depth and experience in D&O coverage to adequately address the company’s needs. In our experience, this is not an area in which it pays to have taken out “bare bones” coverage.      The costs of defending against a securities class action lawsuit or a government investigation into potential securities fraud at the company escalate very quickly. Adequate coverage can save tens of millions of dollars in the long run.      As with most insurance, a company with a D&O policy must pay careful attention to its notice obligations under the policy. Insurance companies are very happy to take premiums in on the front end, but each and every excuse to delay payment or to invoke an exclusion can and will be exercised. Accordingly, at the first indication of a potential issue where D&O coverage may be needed (for example, a subpoena received from a government agency), the company must notify its insurance carrier in accordance with the policy’s requirements.      Employee Representation One fraught area can be the decision whether and when to secure separate counsel for individual company employees. Separate counsel is required when the company’s and the individual’s interests materially diverge and the firm representing the company cannot ethically represent the employee as well. Sometimes this is apparent right away and at other times this only becomes apparent later during the course of an investigation. In either event, the lawyer that ends up representing an employee (or, sometimes, a group of employees) must be as qualified and well-versed in the relevant legal issues and have experience with investigations of the same type, or there could be serious missteps, to the detriment of both the individual employee and the company. No one is well-served if the lawyer taking on the representation is not qualified to do it.

Question 3

You have noticed something potentially illegal.

Accepted Answer

First steps Before you report anything, you need to assess whether what you have observed is actually unlawful. Sometimes, someone may have done something that appears to be illegal or unethical but, upon investigation, it is not in fact a legal violation. You should engage with someone who is an expert in assessing such issues to help you understand whether this is a real issue and, if so, what to do about it. Basically, you should talk to a lawyer. Where do I start? You can contact one of us, of course. Another option would be to contact an organization such as Ethic Alliance (here's a link to the Ethic Alliance website). In either event, you should speak to a lawyer immediately so that they can analyze the issues, tell you about how to obtain and preserve information and assist you in getting the proper authorities involved, as appropriate. Why talk to a lawyer? In our experience, people in your situation are just trying to do the right thing. And often they are interested in making their employer or organization do the right thing, too. Unfortunately, such employees are often viewed as troublemakers or as disloyal to the organization. When that happens, the employer (or even fellow employees) can turn on the employee and seek to discredit them or negatively affect their employment status. A lawyer can help address this reaction. Learn more about our Whistleblower practice here.

Compliance, Risk and Corporate Integrity

Clients Call Us When

How We Help

Clients Choose SECIL Because we Bring:

Building Strong Compliance from the Inside Out.

Who We've Helped

C-Suite executives

Corporations with remedial measures

Anti-corruption policies for global companies

How We Can Help You?