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In the government’s well-publicized effort to rein in corporate fraud, internal investigations launched by the corporations themselves have become a chief crime-fighting tool. But when the government begins to prosecute employees for lying to internal investigators, a host of controversial new issues arise. In at least two recent high-profile prosecutions, the government has accused individuals of conspiring to obstruct justice for, among other reasons, allegedly lying to or otherwise misleading internal investigators. One prosecution focused on Rite Aid Inc.’s former CEO Martin Grass and other former Rite Aid executives, and the other was against Computer Associates’ former Chief Financial Officer Ira Zar. Both Grass and Zar pleaded guilty to conspiracy to commit securities fraud and conspiracy to obstruct justice. Zar also pleaded to misleading internal investigators. Such prosecutions — especially in the context of the government pressuring companies to conduct internal investigations in the first place — raise challenging questions about disclosures to employees and potential Fifth Amendment protections. PRESSURE TO COOPERATE Corporate internal investigations are now one of the Justice Department’s main crime-fighting tools. In fact, the government directly encourages corporations to turn over privileged internal investigation materials as a way of helping to avoid prosecution or as a way to receive a lesser sentence. On Jan. 20, 2003, then-Deputy Attorney General Larry Thompson issued an internal Justice Department memorandum with a revised set of principles to guide prosecutors as they decide whether to indict a corporation. The memo explained that “[i]n determining whether to charge a corporation, that corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate with the government’s investigation may be relevant factors.” Building on a memo issued in 1999 by then-Deputy Attorney General Eric Holder Jr., the Thompson memo further stated that “one factor the prosecutor may weigh in assessing the adequacy of a corporation’s cooperation is the completeness of its disclosure including, if necessary, a waiver of the attorney-client and work product protections.” Needless to say, this directive caused alarm for the defense bar. Such government pressure arguably undermines the traditional attorney-client privileges. In fact, on Aug. 10, 2004, the American Bar Association voted to contest proposed new federal sentencing guidelines that, if enacted, could reward companies for waiving their attorney-client privileges. Of far greater concern than mere pressure to cooperate, however, is the recent prosecutions for obstruction of justice for misleading internal investigators. Such prosecutions suggest that the government has now — in effect — deputized internal investigators in a way that gives those being investigated fewer rights. The government indicted former Rite Aid executives Grass, Franklin Brown, and Erik Sorkin for conspiring to obstruct justice when they allegedly (1) provided false and misleading information to Rite Aid’s internal investigators; (2) withheld and concealed material information from Rite Aid’s internal investigators; and (3) intimidated, threatened, misled, and corruptly persuaded others to provide false information to Rite Aid’s internal investigators. Similarly, the government recently charged former Computer Associates executive Zar with conspiracy to obstruct justice in violation of 18 U.S.C. §1512(c)(2) for allegedly falsely denying and concealing material information from the company’s internal investigators with the intent that such representations be turned over to the government. Grass and Zar pleaded guilty. So far, it appears that the government has not gone to trial with this argument. But it may only be a matter of time. What should lawyers do in the meantime? ETHICS OF DISCLOSURE One issue that lawyers conducting an internal investigation face is whether to disclose to the individual being interviewed that (1) the investigation findings and/or interview materials will or may be disclosed to the government and (2) the individual may be subject to prosecution if he or she lies or otherwise misleads the internal investigators. Doing so presents both strategic and ethical considerations. Strategically, disclosing such information to an employee may make that individual less likely to cooperate or more likely to engage an independent lawyer for representation. That could frustrate the goals of the investigation — gathering information as quickly and completely as possible to make a prompt voluntary disclosure of wrongdoing to the government and gain “cooperation” credit. In addition, the Justice Department could view such expansive disclosures as encouragement by the corporation to the employee not to cooperate, thereby undermining the corporation’s efforts to avoid prosecution. Then again, disclosing such information could underscore the importance of the investigation to employees. An investigator may be more likely to receive truthful and complete information from those who still choose to cooperate. Indeed, the fear of criminal prosecution may deter those who cooperate from providing false or misleading information to the internal investigator. Beyond strategic considerations, the internal investigator also must determine if he or she has an ethical obligation to make such disclosures. Most jurisdictions, including the District, base their professional responsibility rules on the ABA’s Model Rules of Professional Conduct. Although the Model Rules contain general principles that may govern a lawyer’s conduct during an internal investigation, they do not specifically address this issue. Rule 4.3 is perhaps the most applicable and states in relevant part: “In dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer’s role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding.” The D.C. Ethics Commission has interpreted this rule to require a lawyer conducting internal investigations to “advise [corporate constituents] of his position as counsel to the corporation in the event of any ambiguity in his role.” At this point, we are unaware of an ethics opinion that requires an internal investigator to disclose that an employee’s information will or may be disclosed to the government. Yet other rules may also implicate the decision of what to disclose. Rule 4.1(a) states that a lawyer shall not knowingly “make a false statement of material fact or law to a third person.” Rule 8.4(c) states that it is professional misconduct to “engage in conduct involving dishonesty, fraud, deceit or misrepresentation.” At the least, attorneys should consider whether interviewing their client’s employees without informing them of the risk of criminal prosecution is fully consistent with not only the letter but also the spirit of these ethical rules. STATE ACTION? On the other side of the table from the attorney investigators, lawyers representing individuals being interviewed must consider, more than ever before, whether to recommend that their clients not agree to an interview or otherwise to cooperate with the internal investigation. Traditionally, if an employee did not cooperate with internal investigators, the corporation could terminate that employee for insubordination, could refuse to pay for a lawyer to represent the employee, and could deny the employee other benefits such as severance pay. However, in light of the government’s recent charges against Grass, the other former Rite Aid executives, and Zar, it is possible that such an employee may have a Fifth Amendment right against self-incrimination. Arguably, she may not be terminated or otherwise sanctioned for refusing to be interviewed. It is true that the Fifth Amendment restricts only governmental conduct. It will constrain a private entity only insofar as its actions are found to be “fairly attributable” to the government. Actions are “fairly attributable” to the government where, according to the Supreme Court in Jackson v. Metropolitan Edison Co. (1974), “there is a sufficiently close nexus between the State and the challenged action of the regulated entity.” As the Court has further elaborated, such a nexus exists either (1) where the state has exercised coercive power over a private decision or has provided such significant encouragement that the choice must be deemed to be that of the state or (2) where the private entity has exercised powers traditionally the exclusive prerogative of the state. An employee could argue, at least in some cases, that the corporation’s investigation is “fairly attributable” to the state. Indeed, because the government now prosecutes people for misleading internal investigators, the corporation in conducting the investigation may be exercising powers that belong to the state. An internal investigation often is geared primarily toward uncovering criminal conduct and cooperating with federal prosecutors. If so, the government may not be able to evade constitutional limitations by effectively deputizing corporate investigators. Despite these arguments, employees’ past attempts to claim Fifth Amendment protections in the context of internal investigations have proved unsuccessful. For example, in Nuzzo v. Northwest Airlines (1995), Joseph Nuzzo was the target of a grand jury investigation involving the theft of credit cards by Northwest Airlines employees. Northwest’s lawyers informed Nuzzo’s lawyer that they wanted to question Nuzzo. But he refused to cooperate on Fifth Amendment grounds and was fired. Nuzzo filed suit in the U.S. District Court for Massachusetts under a state law that made it unlawful to interfere or attempt to interfere “with any right secured by the Constitution or laws either of the United States or the Commonwealth.” At oral argument on Northwest’s motion for summary judgment, his lawyer argued that Nuzzo was entitled to invoke his Fifth Amendment rights because any statements that he made to the company would have been provided to the Federal Bureau of Investigation. The District Court found that “the fact that a private company investigation may result in assistance to a government investigation does not trigger the Fifth Amendment protections.” The court further stated that “[e]ven under the standards applicable to public employees, Nuzzo has no Fifth Amendment rights under the state or federal constitution to decline to answer questions about his job performance.” FIFTH AMENDMENT PROTECTION In light of Nuzzo and similar cases, successful invocation of the Fifth Amendment by an employee during an internal investigation is likely to be an uphill battle. On the other hand, in Nuzzo the internal investigation did not appear to occur, as is often the case today, at the request or the encouragement of the government. It also was decided before the new policies discussed in the Holder and Thompson memos regarding corporate cooperation were announced and enshrined in the federal sentencing guidelines. Moreover, to prosecute a person for obstruction of justice, the government must argue that he obstructed some form of state investigatory action. Thus, the nature of the potential prosecution itself is now evidence that internal investigations are “fairly attributable” to the state. Because of the government’s increased encouragement of, and reliance on, internal investigations and because it will now prosecute individuals for misleading internal investigators, a lawyer representing an employee under investigation should consider whether that employee has a Fifth Amendment right not to be interviewed or whether the employee may be punished for refusing to be interviewed. At the least, the lawyer may be able to argue that uncertainty now exists in this area of law and may therefore negotiate some other way for the client to assist the investigation without fear of self-incrimination or loss of employment. Ultimately, cooperation may be necessary. But those employees being investigated now have a stronger Fifth Amendment argument against being compelled to be interviewed during the internal investigation without being fired. James K. Robinson is a partner in the business fraud and complex litigation practice in the D.C. office of Cadwalader, Wickersham & Taft. From 1998 to 2001, he served as assistant attorney general for the Justice Department’s Criminal Division. Adam S. Lurie is an associate in the firm’s D.C. office, where his practice focuses on complex civil litigation and white collar criminal defense. Summer associate Geoff Gettinger helped prepare this article.

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