Breaking NewsLaw.com and associated brands will be offline for scheduled maintenance Saturday May 8 3 AM US EST to 12 PM EST. We apologize for the inconvenience.

 
X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
In the 1980s and early 1990s, federal prosecutors went after companies, not senior executives. Back then, the standard corporate response to a government probe was to negotiate a civil resolution in return for an agreement not to prosecute employees implicated in the suspected activity. That changed in the post-Enron era. Top executives, and not the businesses themselves, are now the targets. In going after these executives, the government expects an unprecedented level of cooperation from companies suspected of financial fraud. The Corporate Fraud Task Force, a U.S. Department of Justice unit created by President George Bush in 2002 to investigate financial fraud, has also established “real-time enforcement.” As a result, cases that used to take several years to investigate are now being prosecuted within months. In its first year, the task force was involved in over 320 criminal investigations implicating more than 500 individuals. As a result, directors and officers must make critical decisions almost immediately upon learning of a government probe. They must make sure that their company wastes no time in responding to it. And they must understand that the standard responses are no longer safe: Such routine practices as asserting attorney-client privilege and indemnifying employees can produce heavy fines for businesses that are deemed insufficiently cooperative as a result. The prosecutors’ new approach is playing out in a number of ways. Most significantly, the government is restricting a company’s ability to coordinate its defense with its employees. Corporations are now expected to dismiss employees — including officers — who refuse to cooperate with the government, even when their refusal is based on the legitimate invocation of the privilege against self-incrimination. As a result, an employee’s decision whether to “plead the Fifth” presents a dilemma for corporation and employee alike. If the employee asserts the privilege, the corporation may be constrained to dismiss the employee and stop paying legal fees to avoid being fined for failing to cooperate with the government. If the employee does not assert the privilege, he and the corporation could face indictment. It is a Hobson’s choice. Nevertheless, in three recent cases, Tyco International Ltd., Merrill Lynch & Co., Inc., and KMPG International all fired employees who refused to submit to questioning. Lest one thinks that these firms overreacted, in May 2004 Lucent Technologies Inc. was fined a record $25 million for failing to cooperate with a Securities and Exchange Commission probe. Why? In large part because it indemnified the employees under investigation. The SEC stated that it was particularly ticked off that Lucent voluntarily expanded the scope of indemnified employees after it had reached an agreement in principle to settle the probe. Whatever one may think of the SEC’s stance, this much is clear: The standard for “cooperation” has been raised to startlingly new heights. ATTACKS FROM ALL SIDES Corporations today are also facing intense pressure from federal investigators to disclose the complete results of their internal investigations and to waive their attorney-client and work-product privileges, two practices that originated with the Manhattan district attorney’s office. The “Thompson Memo,” an internal memorandum issued earlier this year that is named for its author, former Justice Department deputy attorney general Larry Thompson, urges prosecutors to consider both disclosures and waivers in gauging the level of corporate cooperation. In response, many companies under scrutiny are cutting back on or forgoing internal investigations altogether to avoid having to turn their findings over to the government. At the same time, new rules by the U.S. Sentencing Commission could result in devastating consequences for a company that the government deems “uncooperative.” The revised sentencing guidelines for corporations, which are scheduled to go into effect in November of this year, not only increase the term of imprisonment for individuals and the fines for convicted corporations, but, like the Thompson Memo, also place a premium on the extent of the corporation’s cooperation with law enforcement. Finally, prosecution of white-collar offenses has recently become the subject of intense competition among state and federal prosecutors and regulators. Increasingly, aggressive state prosecutors such as New York State attorney general Eliot Spitzer have achieved high-profile victories and hefty fines in cases that have historically been the sole province of federal law enforcement. Not to be outdone, the SEC — whose resources have been significantly bolstered by Congress in the wake of Enron — is even more aggressive than in the past. SHOULD I STAY OR SHOULD ID GO? At the same time, the plaintiffs bar has ratcheted up its aggressive pursuit of shareholder suits in cases that allege financial fraud. The best way to handle these suits hasn’t changed: The corporation will typically want to seek some form of stay in the civil action. In some cases, it may be reasonable to ask for a stay of either the entire civil proceeding or of all discovery; in other cases, and particularly in preindictment situations, it may be more prudent to seek a more limited stay. Although a litigant is not entitled to a stay as a matter of law, courts have the discretion to grant a request for a stay “when the interests of justice so require.” Of the many factors that enter into this calculus, the most important is the degree to which the civil and criminal issues overlap, since self-incrimination is more likely if there is a significant overlap. (Other factors include the interests of the plaintiffs in proceeding expeditiously with the action weighed against the prejudice to plaintiffs caused by the delay; the private interests of, and burden on, the defendants; the interests of the courts; and the public interest.) Similarly, courts are generally loath to stay a civil proceeding when the defendant has not been indicted but is merely under criminal investigation. When a defendant has been indicted, his situation takes a certain priority, for the risk to his liberty, and the importance of safeguarding his constitutional rights, all weigh in favor of his interest. However, even at the preindictment stage, courts do have discretion to stay a civil litigation that is pending against a defendant under investigation. This happens most often when the government is the plaintiff in the civil proceeding. Courts are more likely to grant the stay when the motion is made by the prosecutors, which is what happened, for example, in In re WorldCom Inc. Securities Litigation. Thus, it may be useful to enlist the government’s help in seeking a stay. This will be particularly likely where the prosecutor has an interest in preserving the usefulness of cooperating defendants or witnesses. Keep in mind that a general stay of the civil proceedings is just one of several procedures available to a white-collar defendant caught in the crossfire. Additional strategies include the imposition of protective orders, sealed interrogatories, a stay for a finite period of time, or a stay limited to a specific subject matter. In some cases, it may be reasonable to ask for a stay of either the entire civil proceeding or of all discovery; in other cases, and particularly preindictment situations, it may be more prudent to seek a more limited stay. Because corporations do not possess a Fifth Amendment privilege against self-incrimination, courts will more readily grant a stay that bars discovery only of the issues in the civil case that overlap with those in the criminal matter. Stanley Twardy, Jr., is a former U.S. attorney for Connecticut and a partner at Hartford’s Day, Berry & Howard. Day, Berry partner Edgardo Ramos also contributed to this article.

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]

 
Reprints & Licensing
Mentioned in a Law.com story?

License our industry-leading legal content to extend your thought leadership and build your brand.

 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.