navigating parallel agency investigations and civil litigation:...

Navigating Parallel Agency

Investigations and Civil Litigation:

Discovery and Disclosure Challenges Cooperating With Investigations While Protecting Corporate Interests in Parallel and Potential Civil Suits

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WEDNESDAY, NOVEMBER 19, 2014

Presenting a live 90-minute webinar with interactive Q&A

Michael M. Farhang, Partner, Gibson Dunn & Crutcher, Los Angeles

Douglas Fuchs, Partner, Gibson Dunn & Crutcher, Los Angeles

Matthew Hoffman, Partner, Gibson Dunn & Crutcher, Los Angeles

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Navigating Parallel Agency Investigations and Civil Litigation

November 19, 2014

Strafford Publications Webcast

<Presentation Title/Client Name>

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Introduction

• This presentation addresses some of the procedural and substantive effects of parallel proceedings

Government investigations are often linked to related civil suits, including shareholder derivative and class action lawsuits


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• The self-reporting decision

• Disclosure of government investigations

• Factors to consider while cooperating with government investigations

• Privilege and work product considerations

• E-discovery issues

• Considerations in staying civil litigation

• The role of the Board of Directors

• 5th Amendment issues

Agenda


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There is no general obligation to disclose any and all wrongdoing to the government

However, the government provides incentives for companies to self-report

• “[C]ompanies that self-disclose conduct are in a much better position than those that don’t. They are much more likely to be given deference by us than those that are receiving a phone call from us telling them about the conduct.” Former DOJ Fraud Chief Jeffrey Knox (interview with Just Anti-Corruption)

The Self-Reporting Decision

In the end, a company must make the decision on a case-by-case basis, weighing many important factors


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Cooperation can affect whether and how the government makes a decision to bring a criminal or civil charge against a company

• DOJ: The DOJ emphasizes “timely and thorough“ cooperation as a significant factor in its charging decisions

• SEC: The SEC has demonstrated that proactive self-examination and self-reporting by companies can potentially carry significant benefits



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Layne Christensen (2014)

• Layne Christensen, a water management and oil drilling company, self-reported an internal investigation regarding payments go African government officials.

• DOJ declined to prosecute.

• Total fine of $5.1 million to SEC was less than half of what Company originally expected to pay.

• The SEC cited Layne’s self-reporting of the violations, remedial measures, investigation, and public disclosure in agreeing to the settlement offer.

Ralph Lauren Company (2013)

• Ralph Lauren entered into NPAs with the DOJ and SEC after self-reporting violations identified by an internal investigation into bribery conduct.

• Both the DOJ and SEC cited Ralph Lauren’s cooperation in self-reporting in their charging determination.


Examples of Self-Reporting Credit


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The self-reporting decision has an impact on both a potential government investigation and possible civil litigation

Factors that impact on government investigation

• Companies may not and often do not completely avoid any penalty when they self-report.

• What is the likelihood that government becomes aware of allegations in absence of self-reporting?

• Potential whistleblowers

• Common practices in industry (government industry sweeps)

• Business partners with perceived grievances

• Personality disputes

• Competitors

• The press



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Factors that impact on government investigation (cont’d)

• How egregious was the violation?

• Smaller violations may not need to be disclosed.

• Violations that trigger additional disclosure obligations will have to be reported

• Does the company have a good story to tell?

• Was the issue discovered through company’s internal controls?

• Did the company quickly respond to and remediate the conduct?

• Were wrongdoers disciplined?

• Was the conduct confined (rather than systemic)?

• Does the company have an otherwise strong compliance record?



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Factors that impact on government investigation (cont’d)

• Do individuals have exposure?

• If yes, might deflect from a large company

• If yes, might cripple a smaller company

Regardless, the company should do a thorough review, investigation, and risk assessment, and remediate compliance weaknesses



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Factors that impact on possible civil litigation

• Will government investigation bring about civil litigation that might otherwise not happen?

• Public disclosures of investigation and/or settlement could make others aware of issue

• If the government finds out without self-disclosure, potential larger fine could provide fodder for plaintiffs’ lawyers

• Creation of additional documents that could be discoverable

• More on that later!

• Facts laid out in eventual charging and/or settlement documents

• Document productions to government will be the subject of a civil discovery request



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Civil litigation may result from disclosure

In 2010, for example, after Parker Drilling Company, a global contract drilling and drilling services company, disclosed in its 2009 annual report that it was under investigation by both the DOJ and SEC for potential violations of the Foreign Corrupt Practices Act, four different plaintiffs filed derivative suits in federal and state courts based upon allegations derived from the government investigations

Disclosures of Government Investigations


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1. Responses to the market or general public about the investigation or underlying allegations:

• Material misstatements or omissions in public disclosures

• Strong public statements denying wrongdoing before all facts are known

2. Disclosures required by the government as part of a criminal or civil resolution:

• Public statements in an NPA or DPA



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While there is no general obligation to disclose wrongdoing to the government, there may be an obligation to report a government investigation to the public

• Counsel must keep in mind when next periodic filing is due

• Counsel must determine whether the fact of the investigation or anything that has been learned in the course of the investigation is material

• Materiality is a flexible standard: information that a reasonable investor would view as significantly altering the total mix of public information

• The company may not have enough information to make the assessment

• Consult with disclosure counsel

• Qualitative and quantitative aspects



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• Counsel must determine whether the fact of the investigation or anything that has been learned in the course of the investigation is material (cont’d)

• Impact on company’s financial statements

• Accounting fraud more likely to necessitate disclosure than insider trading

• Individuals involved in possible wrongdoing

• Senior management v. lower level employees

• Ability to conduct certain business in future

• Government contracts



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• Reputational effects (e.g. for safety) that could impact future sales

• There may be certain SEC or stock exchange rules that require disclosure of certain events related to an investigation

• Resignation of key officer or director

• Resignation of auditor

• Errors in (or corrections needed to) previously issued financial statements



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Disclosure of an investigation that results in no criminal penalty can still bring about damaging civil litigation

• In 2013, for example, Groeb Farms, one of the country’s largest suppliers of honey, averted criminal liability for its role in illegally buying Chinese-origin honey by reaching a settlement agreement with the DOJ in February 2013.

• However, by July 2013, two class actions were filed against the company that quoted extensively from facts to which Groeb Farms admitted in its settlement agreement with the DOJ.

• By October 2013, the company was forced to file for bankruptcy due at least in part to the threat of treble damages liability in the subsequent litigation.



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• Reports of Investigation

• Used to be typical

• Can be disfavored because could serve as a road map in litigation

• They can serve important purpose in certain circumstances, usually when matter is public and public faith/reputation must be restored

• Freeh Report on Penn State

Factors to Consider While Cooperating

Communications


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• Presentations

• When to provide presentation materials (PowerPoint slide decks)

• Allowing government to keep presentation materials

• The government cannot produce to a civil litigant a document it does not have

• Documents

• Use only documents created in real-time

• Avoid production to government of other work product or parts of investigation


Communications (cont’d)


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• Witness interview memos

• Handwritten notes

• Typed interview memos

• In either case, make sure they reflect mental impressions and are not verbatim transcriptions


Communications (cont’d)


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Overall Considerations

Attorney-client privilege and attorney work-product waivers

Both statements to the government as well as statements regarding the government investigation are relevant

Benefits of disclosure and potential prosecutorial leniency and effects on defense of civil suits

Attorney-Client Privilege and Work-Product Protection


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Attorney-Client Privilege

• The privilege will usually be deemed waived where a corporation produces privileged materials to the government during an investigation. Most courts do not recognize the concept of “selective waiver,” even if there is a confidentiality agreement with the government regulators. But see Diversified Industries (8th Cir).

• Risk of subject-matter waiver under FRE 502(a)

• Protections in the form of court orders under FRE 502(d)

• Disclosure responsibilities to other third parties, such as outside auditors and lenders



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• Work-product protection is waived when the work is disclosed in a way that “substantially increases the opportunity for a potential adversary to obtain the information”

• Production to government in cooperation with an investigation

• External auditors and waiver issues


Work-Product Protection


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• What you say to them verbally is not protected

• Materials given to the government, including PowerPoint presentations, reports of investigation, and interview memoranda, are not protected

– FOIA confidentiality requests for SEC presentations

• Remember, there is no selective waiver

• Risks of subject matter waiver

• Production of privileged documents waives the privilege

• Many underlying documents in productions to government regulators are contemporaneous business documents drafted by non-lawyers regarding the topics under investigation, and may not be protected by the attorney work-product protection or attorney-client privilege


Presentations to DOJ and SEC


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• Be proactive

– Try to dictate the terms of the preservation, collection and production of data

• The company will be given more leeway to conduct all aspects of e-discovery with minimal interference if:

– Investigators and plaintiffs sense that the company, or its outside counsel, is more knowledgeable

– The company and outside counsel have empirical evidence to support the assertions

– The company and counsel are transparent about what steps are being taken to identify, preserve, collect and produce such information

E-Discovery: Best Practices for Managing ESI in Multiple Related Investigations and Litigations


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• Duty to preserve electronically stored information (ESI) arises when a government investigation is contemplated, threatened, pending or can be reasonably anticipated

• Potential triggers

– Subpoena

– Document preservation letter

– Cooperation/self-reporting

– Industry wide investigation?

• BUT, a government investigation need not have commenced and subpoena need not have been issued for duty to preserve to arise

– 18 U.S.C. 1519 (punishing document destruction in “contemplation” of federal investigation)

E-Discovery: The Duty to Preserve ESI


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• Consequences of failing to preserve ESI in criminal investigations

– Influence views of prosecutors at outset of case

– Shape judgments about culpability and cooperation, which may in turn impact charging decisions and plea negotiations

– Increase culpability score under Sentencing Guidelines

• Preservation failure can also expose defendant to additional investigation for obstruction of justice

• Government also has duty to preserve ESI

E-Discovery: Failure to Preserve ESI


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• Develop a realistic ESI plan to present to the investigators

– Subject matter of the investigation should define the ESI that needs to be searched

• Determine early on what information will be shared with which regulators and government agencies

– Assume state and federal agencies will share key documents with other investigating agencies

– Be prepared for a request by plaintiffs to produce any documents that have been produced in any government investigations

• Collections done by custodians can be dangerous

E-Discovery: Developing a Plan


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• No formal requirement, but should immediately engage in dialogue with investigators about steps the company is taking to preserve, collect and produce ESI

– Consider sharing and agreeing to search terms

– Consider sharing key custodian list and speaking to prioritization of custodians

– Raise any burdens or impediments as soon as possible, if for no other reason than to demonstrate that the company intends to cooperate

– Discuss deadlines, accessibility of ESI sources, and costs

• Handling disagreements with investigators

– Respectfully push back and explain your client’s position

– Go up the chain to supervisor if necessary

– Move to quash subpoena as last resort

E-Discovery: Meet and Confer with Investigators


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• Key decision is whether to track the scope of the productions to investigators

– Unlike investigation, court supervision in civil litigation may help limit costs and burdens

• May be important reasons why certain documents produced in an investigation should not be produced to plaintiffs

– Privileged documents (but remember, generally no selective waiver)

– Documents with data subject to privacy laws

– Documents outside parameters of a case (e.g., different subsidiaries outside jurisdiction of court, time periods due to statute of limitations, etc.)

E-Discovery: Meet and Confer with Plaintiffs


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• Many regulators have specific guidelines for productions

– Read carefully to make sure requirements can be met

– Challenges to production guidelines should be raised during meet and confer

– Attempt to make guidelines consistent from one investigating agency to the next

• Leverage production guidelines with plaintiffs so that productions can be consistent across litigations

E-Discovery: Production


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• Regulators often have staffing or budgetary limitations, as well as time constraints, that impact their ability to review large amounts of ESI

• Counsel should attempt to limit scope of production to the most relevant ESI

– Prioritize custodians

– Limit time period

– Offer to broaden scope if data not found in the more narrow search

• Generate empirical evidence to support any assertions as to ESI burdens and costs

E-Discovery: Managing Costs


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• The government may request a stay of the civil litigation while a criminal or regulatory action is pending

• Factors in deciding whether to oppose, agree, or remain neutral

– Fighting only one front at a time vs. dragging out total timeline

– Civil litigants might receive the benefit of all results of a government investigation, including document productions and findings in plea agreement / government press releases

– Distraction / attention of company personnel and resources

– Risks of loss of institutional knowledge

Considerations in Staying Civil Litigation


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• Factors in deciding whether to oppose, agree, or remain neutral (cont’d)

– Final resolution of government investigation could have positive or negative impact on civil litigation, depending on result

– Possible ability to use civil discovery to company’s benefit in government investigation

– Government access to civil discovery, including depositions of management, directors, and other key individuals

Considerations in Staying Civil Litigation


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Who leads and oversees the corporation’s internal investigation can be critical:

1. Management

2. Independent Directors or Committees of the Board

The Role of the Board of Directors

Overview


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• Board leadership:

1. Indication that company is taking investigation seriously

2. Dealing with allegations of lack of independence or self-interest

• Examples:

• Putnam Fiduciary Trust Company (2006): SEC declined to bring an action because of company’s extensive cooperation, including independent internal investigation

• Computer Associates International, Inc. (2004): DOJ entered DPA in part because company empowered its audit committee to conduct wide-ranging investigation


The Board’s Role in a Government Investigation


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Waiver issues in independent board- or committee-led investigations:

• Ryan v. Gifford, 2007 WL 4259557 (Del. Ch. Nov. 30, 2007) - participation by potentially implicated directors in a special committee’s privileged communications about investigation resulted in waiver of attorney-client privilege

The Board’s Role in a Government Investigation


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• Independence and disinterestedness of board of directors as a threshold inquiry

• Failure-of-oversight pleadings in derivative suits

• Use of special litigation committee investigations into whether board should bring suit on behalf of corporation

The Board’s Role in a Derivative Suit



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• Materially false statements to the market before, during, and after a government investigation

• Key inquiry will be whether board or individual director is in fact a “maker” of the statements at issue

• Procedural hurdles:

1. Heightened pleading standards under PSLRA

2. Discovery stay in private actions brought under federal securities law where motion to dismiss filed


The Board’s Role in a Securities Class Action


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5th Amendment Issues

• Corporations do not have a 5th Amendment privilege

• Individuals can assert 5th Amendment privilege in response to document requests where the act of production could be incriminating

• Individuals can also assert 5th Amendment privilege in connection with both government investigations and civil litigation

• Invocation could have negative repercussions in press

• Invocation can also have negative impact in civil proceedings where a fact-finder is allowed to draw negative inference


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1. Mutual impact between government investigations and related private civil suits

2. Effects of actions taken in response to investigation on corporation’s privileges or civil liability

3. Leadership by disinterested outside directors in addressing and remediating corporate misconduct

4. Potential effects of civil litigation strategies on the outcome of government investigations, including government perception of the corporation’s acceptance of responsibility

Conclusions


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Michael Farhang

Partner

Los Angeles Office

Tel: 213.229.7005

Fax: 213.229.6005

[email protected]

Partner

Los Angeles Office

Tel: 213.229.7605

Fax: 213.229.6605

[email protected]

Partner

Los Angeles Office

Tel: 213.229.7584

Fax: 213.229.6584

[email protected]

Doug Fuchs Matthew Hoffman


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