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As internal corporate investigations proliferate, a large number of issues seem to arise with some regularity. Outside counsel conducting the investigations need to recognize and know how to react to the issues. Inside litigation departments need to be aware of them as well. This article addresses four of the issues: special litigation committees, questioning witnesses, attorney-client privilege and reports. While special litigation committees relate solely to shareholder derivative suits, the other three issues relate to both criminal and civil matters. Special litigation committees. In the event of a shareholder derivative suit, Delaware law authorizes a corporation’s board of directors to appoint a committee consisting of one or more independent and disinterested directors who are charged with determining in good faith, after conducting a reasonable inquiry and based on a “balance of many factors,” whether continuing with the litigation on behalf of the corporation against the individuals and entities named as defendants is “in the best interests of the corporation.” Zapata Corp. v. Maldonado, 430 A.2d 779, 788 (Del. 1981). If the special litigation committee is found not to be sufficiently independent, the court will disregard its recommendation that the shareholder derivative litigation be dismissed. In that event, an extraordinary amount of effort and money will have been wasted. Johnson v. Hui, 811 F. Supp. 479, 486 (N.D. Calif. 1991), lists six factors courts will consider to determine the good faith and independence of a special litigation committee: “1. Status as a defendant, and potential liability.” It is obviously preferable that special litigation committee members not be named defendants in the derivative action the committee is investigating. “2. Participation in or approval of the alleged wrongdoing.” To be safe, there should be absolutely no participation or approval, substantial or otherwise. “3. Past or present business dealings with the corporation.” The best choice would be someone with no past or present business dealings with the corporation. “4. Past or present business or social dealings with individual defendants.” Any such relationships will be scrutinized to determine whether a committee member may be beholden to a defendant. “5. The number of directors on the [special litigation committee].” “The larger the number of directors, the less weight accorded to any disabling interest affecting only one director.” “6. The ‘structural bias’ of the [special litigation committee].” “The court will consider the manner in which the committee was selected.” In a recent decision, the Delaware Chancery Court denied a special litigation committee’s motion to dismiss a shareholder derivative suit because the committee was not sufficiently independent. In re Oracle Corp. Derivative Litigation, 824 A.2d 917 (Del. Ch. 2003). The committee consisted of two exceptionally distinguished and qualified Stanford University faculty members. One defendant was also a prominent member of Stanford’s faculty. Another defendant had pledged nearly $10 million to Stanford through his foundation. The court held: “[T]he ties among the SLC, the Trading Defendants, and Stanford are so substantial that they cause reasonable doubt about the SLC’s ability to impartially consider whether the Trading Defendants should face suit.” Id. at 942. The investigation itself Once a court has determined that a special litigation committee is sufficiently independent, it will turn its attention to the investigation conducted by the committee. The court will examine whether the investigation was reasonable and in good faith. The court will look at the length of the investigation, the number of witnesses interviewed, which witnesses were interviewed, the volume and importance of documents reviewed, memoranda of interviews, minutes of meetings, and, finally, the report itself and its exhibits. Strougo v. Padegs, 27 F. Supp. 2d 442, 453 (S.D.N.Y. 1998). There is one additional step that courts have the discretion to take or not. If the court has found that the special litigation committee is independent and that the investigation was reasonable and in good faith, the court can then determine whether the report satisfies the court’s business judgment. Id. at 454. Consequently, an internal investigation can cross every “t” and dot every “i” and still be rejected if its conclusions don’t satisfy the court’s business judgment. Questioning witnesses. It is not necessary for counsel to give witnesses Miranda warnings. It is legally and ethically imperative for counsel to identify his role in the investigation. If counsel represents the corporation or a special litigation committee, he must explain that to the witness. The lawyer must explain to the witness that he is not the witness’s lawyer. The corporation or the special litigation committee may choose to keep the interview confidential, or may make it public. There is another reason for warning a witness that the lawyer represents the corporation, and does not represent the witness. The corporation may want to include something from the interview in a report to law enforcement or a government agency. The lawyer would not want the witness to be able to move to suppress the statement as privileged because he reasonably believed that the lawyer was his lawyer. A lawyer who informs an employee/witness that he is the company’s lawyer and that, since the witnesses is an employee everything that employee tells the lawyer is privileged, is inviting such a challenge, not to mention a malpractice suit by the witness. If the lawyer wants to protect the interview from discovery, he should not use a court reporter or a tape recorder. He should take notes by hand, and include in the notes his thoughts, opinions and mental impressions regarding the witness or the witness’s testimony. That will greatly improve the chances that the notes will be found to be work product. Interviews should always be conducted by a team of at least two interviewers. One can ask questions while the other takes detailed notes. If a witness alleges some kind of wrongdoing by the interviewer, the other interviewer can be a witness to what actually happened. If outside experts, such as forensic accountants or fiscal examiners, are being used, it may be appropriate for one of them to attend certain interviews. ‘Good cause’ exceptions Attorney-client privilege. The Golden Rule concerning attorney-client privilege in internal corporate investigations is the following: Do everything to protect the privilege and assume it will be waived. In Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), the 5th U.S. Circuit Court of Appeals fashioned a “good cause” exception to the attorney-client privilege in shareholder suits. The court held that while the corporation could assert the attorney-client privilege, the shareholders who were accusing the corporation of acting inimically to their interests had the right to show good cause why the privilege “should not be invoked in the particular instance.” Id. at 1105. The 5th Circuit went on to list the factors to be considered in determining whether good cause had been shown: “number of shareholders and percentage of stock they represent”; “bona fides of the shareholders”; “nature of the shareholders’ claim and whether it is obviously colorable”; the apparent necessity or desirability of the shareholders having the information and the availability of it from other sources”; “whether, if the shareholders’ claim is of wrongful action by the corporation, it is of action criminal, or illegal but not criminal, or of doubtful legality”; “whether the communication related to past or prospective actions”; “whether the communication is of advice concerning the litigation itself”; “the extent to which the communication is identified vs. the extent to which the shareholders are blindly fishing”; and “the risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons.” Id. With a list of factors that long, it is almost impossible to predict an outcome; hence, the aforementioned Golden Rule. With the rule in mind, special litigation committees and their lawyers should remember while writing their reports who may end up reading them. The same rule applies with even greater strength in a criminal context. Reports. How public a report becomes depends primarily on what the corporation does with it. For example, if it is given to the trial judge in a shareholder suit in support of a motion to dismiss, the judge will likely provide copies of it to the shareholders’ counsel under a confidentiality order. There are, however, basic steps that can be taken to bolster the corporation’s claim of privilege if it chooses to make one. The report should expressly include the lawyers’ legal conclusions and mental impressions. Each page should be stamped confidential, attorney-client privileged and work-product privileged. There should be a printed prohibition on copying the report without written authorization from a designated corporate official. There should be a list of who received copies of the report. While each of these steps is evidence of an intention to keep the report privileged and confidential, none of them is a guarantee. The report should not simply state conclusions and recommendations. It should start by setting forth the allegations that are being investigated. Next, it should address the independence and qualifications of the investigator. The investigation itself should be described in detail listing interviewees (not necessarily by name), documents reviewed, participation by the special litigation committee or the head of the investigation and meetings of the investigative team. Only then should the report set forth its conclusions and recommendations. Dan Hedges is a partner in the litigation section of Houston’s Porter & Hedges. He is a former U.S. attorney for the Southern District of Texas. While in the Department of Justice, he worked with Rudolph Giuliani and Dan Webb to establish the Organized Crime Drug Enforcement Task Force. He can be contacted at [email protected].

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