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In an age of more aggressive investigatory agencies and heightened scrutiny of corporate activity, the decisions made during the first minutes and hours after a company learns that it is under investigation are crucial. The goal of the targeted company should be to respond as quickly and candidly as possible with minimal business disruption. Often, regulators’ perception of cooperation and responsiveness will govern the potential range of penalties, if any, that a publicly traded company may face in an enforcement investigation. Responding quickly and volunteering to help investigators are only the first two things a company should do when learning it has been targeted by regulators. Although no two investigations are exactly alike, the following is an analysis of what a company might expect during the first 12 hours after the inquiry is launched. DAY ONE: 9 A.M. News that a company is the target of an investigation typically comes in one of two ways: either the Securities and Exchange Commission sends representatives directly to the general counsel’s office, or the GC will receive a “come hither” letter that advises the company that the commission is conducting an investigation. This letter, which contains sobering references such as “Re: In the Matter of [insert company name],” also asks that the company not destroy any documents or other records, and to provide certain requested documents. Once the GC becomes aware of the investigation, the clock literally and figuratively begins ticking for the company’s future. In many instances, businesses lose valuable hours in the beginning of an investigation by spending too much time reviewing and discussing the investigation notice itself. There will be plenty of time to reflect on the merits of the investigation later. DAY ONE: 10 A.M. One of the first things the GC of a targeted company will need is a copy of the Seaboard 21(a) Report, which outlines specific factors that the commission deems relevant in evaluating what credit, if any, a company may be given for cooperating with investigators. Some companies that have admitted to certain wrongdoing have received no punishment based upon their internal investigations, self-reporting and cooperation with the commission. As highlighted in the Seaboard 21(a) Report, the commission places great emphasis on the targeted company’s reactions when it’s notified of a problem, including the steps the company takes after being notified of misconduct. Important factors include whether the company immediately stops the misconduct; whether the people responsible for the misconduct are still with the company; whether these people are still in the same positions; whether the company promptly, completely and effectively disclosed the existence of the misconduct to the public; whether the company cooperated completely with the investigators; whether the company identified any related misconduct that may have occurred; what processes the company followed to resolve issues and discover information, including informing and involving the board of directors and the audit committee; and whether the company committed to learning the truth, fully and expeditiously. DAY ONE: 10:45 A.M. In addition to limiting business disruption and being proactive and cooperating with investigators, it is essential that a targeted company take immediate steps to preserve all documents relevant to the investigation, including all electronic records. After locating the requested records, the GC should issue instructions for preserving and segregating those documents, as well as any other relevant paperwork. The GC also should obtain and review all relevant public filings, press releases, analyst presentations and other public documents that could be even remotely linked to the investigation. It’s a safe bet that the regulators have already done so. DAY ONE: 11 A.M. Where applicable, it is now time to involve the board of directors and the audit committee by calling for a meeting later in the day of relevant individuals. One caveat: If these communications are made via e-mail, text messaging or other written format, then the company may have to decide later whether production of such communication is necessary. In other words, be cautious about the content of written communications, as they may be discoverable in other proceedings. DAY ONE: 11:30 A.M. Now that the company has the people and procedures in place to collect, segregate and preserve the requested documents, the next agenda item is witnesses. The first step is to determine which individuals know about the facts and circumstances referenced by the commission. It is essential to determine whether current or former employees are whistleblowers or commission sources. More important than identifying accusers is making sure that the company does not take any steps that could be viewed as retaliatory, threatening or obstructive to the commission’s investigation. REPRESENTATION ISSUES During this time, it is also important to consider representation issues for individual witnesses. Is there a potential conflict of interest between the witnesses and the company that would cause the witnesses to need separate representation? Obviously, it is better to err on the side of caution and obtain individual representation for each witness. At this point, the company also will have to decide under what circumstances it might pay for separate representation for a witness, and whether there is a contractual or statutory obligation to do so. DAY ONE: NOON By noon, the GC should be scheduling a 5 p.m. meeting with the board of directors, to be followed by an audit committee meeting, if necessary. Now is the time to focus on outside securities counsel. Aside from the obvious factors — experience, knowledge, reputation, credibility, etc. — it is important for the GC to consider whether outside counsel is available and otherwise able to handle the investigation. The commission has little sympathy for those companies that attempt to slow or postpone an investigation because their outside counsel is “too busy” or not available. DAY ONE: 1 P.M. The GC should meet with outside counsel to discuss the scope of the investigation as outlined by the commission, including identifying potential witnesses, noting the relevant documents and confirming that they have been secured. It’s also time to limit the involvement of unnecessary people. Anyone who gains knowledge of the investigation may be a potential witness. That means the control group should be narrow and focused. To the extent possible, the GC and outside counsel should begin making some preliminary assessments at this point. Does the evidence indicate that a material violation has occurred? Is the commission’s investigation based in reality, is it the tip of the iceberg or is it making a mountain out of a molehill? MAKE A REALISTIC ASSESSMENT If it appears that there has been a potential material violation, every effort should be made to prevent an ongoing or future violation. The GC should determine whether the individuals responsible for the violation are still employed in the same position or another position. It may be necessary to consult with or bring in employment counsel if suspensions or terminations are necessary or advisable. The company must balance the need to develop the proactive perception with the reality of employee rights and the potential of future employment claims. It may be that a suspension and/or special supervision would be more prudent than a quick termination. It is also important to consider what action the company will take if a current employee asserts his or her Fifth Amendment privilege against self-incrimination. Many companies have issued immediate terminations to employees who invoked the privilege, saying the employees were “not cooperating” with investigators. This sometimes creates the “lose-lose” scenario, where the individual and company may be subject to disciplinary proceedings for failing to cooperate with investigators, while, at the same time, the investigators draw a negative conclusion about what the employees’ potential testimony might have been, and ask the courts to do likewise. DAY ONE: 2 P.M. To the extent that the preliminary investigation indicates the presence of a material violation, the company should begin to consider what, if any, corrective action is necessary. In addition to employment considerations, the company should determine whether it is necessary to amend pending disclosure or registration documents. Also, the company needs to determine whether any reporting obligations have been created by the investigation. Remember, the chief executive officer, chief operating officer, chief financial officer and/or audit committee may have certification obligations that are triggered under the Sarbanes-Oxley Act or other regulations. DAY ONE: 3 P.M. With the board meeting scheduled for 5 p.m., the next two hours should be devoted to meeting with outside counsel and interviewing key witnesses identified in the preliminary investigation. Extreme caution should be exercised when interviewing the key witnesses. The employment, representation and privilege issues are crucial. Copious notes should be taken during any interview, especially since it may be the last voluntary interview the company obtains. The company and those conducting the investigation must emphasize at every step that this is a confidential process and that leaking information may lead to adverse consequences for those involved. The GC should advise investigation subjects of their Fifth Amendment and right-to-counsel privileges. The subjects also should be told that they likely will be interviewed at a later date by the commission, and that the company expects them to cooperate fully. The investigation should not be discussed with anyone other than counsel, or those acting at counsel’s direction. During the investigation, extreme caution should be used in deciding what information or documents to share with witnesses and employees. Employees should be informed that all inquiries, press or otherwise, should be directed to the appointed company spokesperson, whose comments should be developed in conjunction with the GC and the company public relations department. DAY ONE: 5 P.M. The board meeting commences. The board should be fully informed of the commission’s investigation, as well as the status and preliminary results of the internal investigation. The GC should identify any corrective measures that have been taken since receiving notification of the investigation, as well as any corrective actions that have not yet been implemented but are recommended by the GC or outside counsel, including the potential timetable. Depending on the issues raised by the board and the scope of the investigation, an initial determination may be made regarding whether the board and/or audit committee need separate representation. Also, the board and audit committee may determine that they need to conduct their own independent investigations. In the event this determination is made, the board and/or committee should convene separately and discuss how to proceed. DAY ONE: 8 P.M. The board meeting has adjourned. This is followed by a more substantive meeting between the GC and outside counsel to discuss the ongoing strategy and timetable for the next steps in the investigation. DAY ONE: 10:30 P.M. The general counsel’s meeting with the company’s outside counsel concludes. The real work will begin tomorrow. Cheryl Jerome Moore and David Clouston are securities litigation partners in the Dallas office of Washington’s Patton Boggs. Both attorneys regularly represent clients in regulatory and enforcement proceedings before state securities boards, the National Association of Securities Dealers Inc., the New York Stock Exchange and the Securities and Exchange Commission.

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