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When a company learns that it probably has committed a significant violation of law, i.e., one that may expose it to significant sanctions, including adverse publicity, an appropriate course of action is to go through the following systematic seven-step drill: (1) Stop the violation; (2) stop all ongoing wrongful effects, and prevent other potential wrongful effects, of the violation; (3) prevent obstruction of justice and other acts of panic; (4) make all necessary internal disclosures and consider whether it is necessary or, even if not necessary, prudent, to notify a government agency or other outsiders of the violation; (5) investigate whether other similar or related violations by the company may have occurred; if so, stop them and prevent or stop their wrongful effects; (6) determine why the violation(s) occurred; and (7) take whatever permanent disciplinary, corrective, and preventive actions are necessary to make a recurrence highly unlikely. None of these steps is risk free-but take them Commonly, these steps are not simple or risk free. Nevertheless, they should be carried out promptly and energetically, with direction from senior management. 1. Stopping the violation may involve withdrawal from a transaction (e.g., a rigged bidding process), temporarily shutting down an operation or activity (e.g., a manufacturing process that releases a toxic substance, or the shipment of an unlawfully defective product), terminating and possibly having to disclose a fraudulent course of dealing (e.g., where a material representation previously made is discovered to have been fraudulent), or immediate suspension of an individual suspected of wrongdoing. Failure to stop a known continuing violation aggravates the company’s exposure to adverse consequences, and itself may be criminal. 2. Stopping or preventing the wrongful effects of a violation may necessitate affirmative steps to prevent or reduce harm to victims: e.g., an immediate environmental cleanup, recall of a product, withdrawal of a financial statement or issuance of notices to enable potential victims to protect themselves. Such actions may well involve the risk of creating awareness of the violation among potential claimants against the company. Yet failure to take such actions may aggravate the company’s exposure to liability, including punitive liability, and to long-term loss of credibility. 3. Preventing obstruction and other acts of panic involves actively warning individuals who may have reason to fear the consequences of an investigation against seeking to thwart it by destroying or altering documents or other physical evidence, or by conspiring to conceal information from-or to provide false information to-investigators. It may be necessary to secure documents or other evidence against destruction or tampering. Prevention may also include detailed controls to ensure the adequacy, accuracy and appropriateness of relevant statements to the press, customers, suppliers, joint venturers, insurers, banks, employees, government agencies and securities holders. Professional advice on crisis management may be needed. Company counsel may also need to be watchful for confidentiality provisions in severance agreements that may later be interpreted as attempts to prevent former employees from disclosing incriminating information to law enforcement officials. 4. Generally, a discovery of a significant violation of law warrants disclosure up the corporate hierarchy, in some instances to the chief legal officer and/or chief executive officer, to particularly relevant committees of the board of directors, or to the full board. Lawyers and other professionals, in particular, should consider their obligation to report apparent wrongdoing to the appropriate level of the company’s hierarchy. For all entity clients, lawyers need to take into account Professional Responsibility Rule 1.13 or its analogue in the applicable code. For publicly traded companies, Sarbanes-Oxley reports may be required. Where the company learns of the violation from a government agency (e.g., after a governmental inspection or audit, or after a disgruntled former employee has revealed incriminating information to law enforcement officials), the issue of disclosure to that agency is, of course, moot. Issues may remain, however, as to disclosure to other interested agencies. In these and other circumstances, there may be a statutory or regulatory duty to disclose the violation. In some circumstances, disclosure may be necessary to avoid complicity in the violation or in a cover-up. Entities covered by securities law should consider possible reporting to investors, lenders and/or accountants. Even without a legal duty, it may be prudent to report in an effort to minimize the ultimate harm to the company by maintaining credibility with a regulatory agency or others, by benefiting from an agency’s self-reporting program, by cooperating with law enforcement officials (in the hope of reduced charges) and by qualifying for a reduced sentence under the Organizational Sentencing Guidelines, in whatever form they may survive after Blakely v. Washington, 72 U.S.L.W. 4546 (U.S. June 24, 2004). Disclosure to the government also has obvious costs and risks: it may alert the government to a violation it would not have discovered; it may lead to disclosure to private parties who may make claims against the company; it may lead to harmful leaks to the press. In deciding how to approach a government agency, attention should be given to how to minimize collateral harm while making a proper report. In some circumstances, termination of the wrongful conduct and actions to stop or prevent its wrongful effects may, as a practical matter, involve disclosures that make these costs and risks unavoidable. Where disclosure remains an open issue, however, the necessary analysis needs to be done promptly. A company’s disclosure may become worthless if the government first learns of the violation(s) from another source or if the company’s disclosure is so belated that it appears grudging. Disclosures to other constituencies (e.g., employees, customers, suppliers ) should also be considered. 5. Discovery of a violation in one part of a company raises a question as to whether similar or related violations have occurred there or elsewhere in the company. The company should act promptly and effectively to discover all such violations, stop them and prevent or stop their wrongful effects. Discovery of fraudulent recognition of sales in one regional office invites scrutiny of other such offices. Discovery of falsification of production records by one shift in one factory raises questions about other shifts at that factory and others. Discovery that some employees have been dishonest in one aspect of their work raises a question of whether they have been dishonest in other aspects. Even before the cause or causes of the violation(s) have been definitively determined (step 6 below), the company, guided by common sense, should investigate in a focused way to determine whether additional similar or related violations have occurred. Once the cause or causes have become known, the adequacy of the investigation should be reassessed in light of the known cause(s). 6. Understanding the cause(s) of a violation is critical to ensuring that all similar or related violations have been discovered, and that adequate disciplinary, corrective and preventive actions have been taken. A priori, the potential causes of a violation are manifold: e.g., inadequate articulation and transmission of standards of conduct; inadequate hiring, training or supervision of employees; inappropriate incentive structures; inadequate standard operating procedures; inadequate budget or other resources for compliance (e.g., head count, facilities, equipment); a culture that tolerates or encourages wrongdoing or that intimidates or stifles those who would object to it; inadequate internal or external auditing or other controls; inadequate discipline; undue pressure on employees to sacrifice compliance to other objectives; marginalization of the corporate consciences (e.g., in-house lawyers, auditors, and regulatory affairs and quality-control personnel). Protect probe with attorney-client privilege Where wrongdoing has been discovered, an investigation is needed to determine what happened (including any mitigating or aggravating circumstances) and its cause(s). The investigation should be structured to be independent, of proper scope and thoroughness, supported by relevant expertise, and therefore credible. Attention should also be given to protecting the investigation under the attorney-client privilege and the work-product doctrine, though those protections may later be waived. The investigation may involve reviewing relevant records and other physical evidence, interviewing employees and others, and obtaining opinions from in-house or outside experts. So it may take considerable time. Any necessary interim remedial measures should be implemented without awaiting the outcome of the investigation, but should be reassessed once it has been completed. The purpose of the investigation is less to assign individual culpability than to identify failures of company systems that should have prevented the violation(s). If a corrupt culture existed in a particular office, why was it not discovered and corrected by the responsible management? If a factory had inadequate resources to comply with environmental requirements, why? 7. Once the cause(s) of the violation(s) have been identified, final disciplinary, corrective and/or preventive actions-responsive to the identified cause(s)-should be taken, documented and monitored to assess continuing adequacy. In taking these actions, a company should be mindful of their potential effects on collateral proceedings: federal and state; civil, criminal and administrative. Generally, however, prompt, thorough and effective remedial actions put a company in the best position to face those proceedings. Richard Cooper is a partner at Williams & Connolly in Washington. He can be reached via e-mail at [email protected].

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