The U.S. Department of Justice, the Securities and Exchange Commission and the Office of Foreign Asset Control have increasingly focused on international investigations. In the last few years, the DOJ and SEC have exacted hefty penalties for violations of the Foreign Corrupt Practices Act (FCPA), antitrust regulations, export controls and other laws governing international conduct. For example, in a recent case, Weatherford International, an oil and natural gas company, paid $253 million in criminal and civil penalties for allegedly violating the FCPA and export laws by authorizing bribes, travel and entertainment for foreign officials in the Middle East and Africa.
The first steps in responding to a government investigation are crucial; seemingly small decisions at the initial stages of an investigation can have huge repercussions down the road.
Because the issues are nuanced and the laws complex, international investigations present multiple opportunities for early missteps. Here are the three key first steps—and some key pitfalls to avoid—during the early days of an investigation.
Step 1: Speak with the Government Enforcement Attorney
You can learn a lot by speaking to the government. Surprisingly, many defense counsel skip this step. When talking with the government, the first thing you want to ask is whether there is a parallel investigation. Often the DOJ and SEC work in tandem. Thus, the SEC may give the documents you provided it in response to a civil subpoena to the DOJ to use in its criminal investigation. The SEC or DOJ may also be working with state or foreign authorities. Unless you ask, the SEC won’t normally volunteer that there is a parallel criminal investigation and it is sharing documents. Similarly, unless you ask, the DOJ won’t normally share whether a corporation is the target of the investigation.
The answer to these basic questions—Are there any parallel investigations? Is my client a target of the investigation?—can guide how you conduct your internal investigation.
In addition, an initial conversation with the government can often shed light on how the government views the case, what information it already has and where it is heading. Attentive counsel can also pick up clues about whether the investigation is just starting or is close to concluding, whether the subpoena is part of an industry sweep, and whether there is a whistleblower or cooperator.
Though at this stage in the investigation it is too early to know if cooperation is appropriate, it makes sense to keep that option open. The U.S. Sentencing Guidelines, as well as DOJ and SEC policies, grant significant benefits to cooperative defendants. Whether or not cooperation makes sense, it is always helpful to have a good working relationship with the government and to keep the lines of communication open. Thus, in your initial conversations with the government, you want to lay the groundwork for a positive relationship.
Step 2: Collect and Preserve Documents
Document preservation and production are tricky in international investigations. The loss or destruction of documents will, at the very least, damage trust with the government and, at the very worst, lead to criminal obstruction charges. But the preservation and production of foreign documents can lead to liability in foreign jurisdictions for breaches of data privacy and secrecy laws. Thus, developing a plan for the collection and preservation of documents is essential at the outset of an international investigation.
The first step is to talk to the company’s IT department and ensure that all documents and electronic data are preserved. Next, before collecting and exporting documents from foreign countries, determine whether the laws of those jurisdictions prohibit the export of personal data, state secrets, bank records or other data. If so, speak to the government. Many government attorneys are unaware of the obstacles corporations face in producing foreign documents.
Once educated, government attorneys may make an accommodation. If an accommodation cannot be worked out, the issue may have to be litigated. When the production of documents would violate foreign laws, U.S. courts use a balancing test to determine whether to enforce a government subpoena. Generally, the government’s need for the documents prevails. Thus, you must also understand the exceptions to foreign data privacy laws and other ways to mitigate the risk posed by such laws, and you should consider engaging counsel experienced in international discovery.
Step 3: Consider Disclosure in Public Filings
Whether to disclose an investigation in a company’s securities filings, when to disclose the investigation and how to phrase the disclosure are difficult, nuanced questions without easy answers. Neither the courts nor the SEC regulations give clear guidance about whether disclosure is necessary in the early stages of an investigation. The SEC requires disclosure of pending legal proceedings and proceedings known to be contemplated. In general, courts have held that the mere fact that an investigation is occurring is not sufficient to require disclosure. For example, in Richman v. Goldman Sachs Grp., 868 F.Supp.2d 261, 272 (S.D.N.Y.2012) the district court found that an SEC Wells Notice did not necessarily trigger a duty to disclose.
However, even where an investigation need not be disclosed as a pending legal proceeding, disclosure may be necessary where the investigation may have significant financial consequences for the company. For example, in a recent case, City of Westland Police and Fire Retirement System v. Metlife, Inc., 928 F. Supp. 2d 705 (S.D.N.Y. 2013), the district court denied a motion to dismiss, in part finding that plaintiffs adequately alleged that Metlife had a duty to disclose multiple state investigations because the uncertainty of the investigations could reasonably be expected to impact revenue.
Though not necessarily required, early disclosure may be beneficial. If the investigation ends badly with civil or criminal charges and substantial fines, early disclosure protects the company from future shareholder suits for failure to disclose or delayed disclosure. If the investigation is part of an industry-wide sweep, then early disclosure is possibly an opportunity to disclose with little impact. If the government is paying attention, which it usually is, early disclosure could win trust points with them. The calculus whether or not to disclose should be the same whether the conduct being investigated occurred here or abroad.
Ultimately, a company may decide not to disclose at the onset of an investigation, but a company should consider the question at the outset and revisit this issue as the investigation progresses.
Of course, if a company does disclose the investigation in a filing, any disclosure must be complete and accurate. Courts have found disclosures that minimize the investigation or describe only isolated aspects to be potentially misleading.
Every investigation is unique. But following these initial steps, and anticipating issues that frequently arise at the outset of an investigation, can put companies on the path to successful resolution.
Jonathan Schmidt is a member of Ropes & Gray’s government enforcement practice group. He focuses on white-collar criminal matters, internal corporate investigations and complex civil litigation. Prior to joining the firm, Schmidt worked as an assistant United States attorney for the Northern District of California, where he tried dozens of white-collar and violent crime cases and argued multiple appeals. Kevin Daly and Paul Cohen are litigation associates at Ropes & Gray.