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Representing directors, officers and employees in SEC investigations

In the post-Enron, regulatory environment in which we live, Securities and Exchange Commission and related state and criminal investigations have become a fact of life.

Whether it is financial statement disclosure, mutual fund operations or unusual trading activity in a company’s stock, there seems to be plenty for the SEC and other regulators to investigate.

The complexity of such investigations poses a challenge for corporations and their current or former officers, directors and employees. This article highlights issues counsel should consider in representing those individuals involved in a governmental investigation.

1. It’s never too soon to retain counsel. When a corporation or individual officer, director or employee learns of an investigation, it is time to start thinking about legal representation, even at the initial, informal stages. Naturally, the earlier and less potentially threatening an investigation appears, the less likely it is that a company and individuals would to want to pay for separate outside counsel or to proceed with anything less than a united front.

Even as an investigation develops, a corporation may want to maintain tighter control and save money by having its counsel represent all or most of the individuals involved, particularly current officers, directors and employees. However, counsel needs to be sensitive to actual and potential conflicts when representing multiple clients.

The goals and objectives of the multiple clients must be consistent if they are to share counsel. Frequently, although that appears to be the case on the surface, upon closer examination the potential outcomes of various strategies or responses to an investigation may further the interests of one client – for example the corporation in obtaining a quick resolution – at the expense of certain individuals, who may be more at risk for their careers, pocketbooks or even freedom.

2. Advancement of legal fees. At the outset, it is important to clarify that the corporation will advance legal fees relating to the investigation and any related proceedings. Depending on the state of incorporation and the corporation’s articles of incorporation and bylaws, current and former directors and officers are generally entitled to advancement of their legal costs, subject to certain conditions.

In contrast, corporations generally have discretion in determining whether to advance the legal fees of non-director, non-officer employees, though corporations often have good reason for doing so, whether out of fairness, business considerations or legal strategy.

In today’s regulatory environment, an individual’s ability to obtain advancement of legal fees may be complicated by the controversial trend of prosecutors (in particular the Department of Justice) actively to discourage corporations from indemnifying individuals who may be targets or persons of interest to the prosecutor.

3. Make sure the client does not make the problem worse. It is important to make clear to the client that he should not be destroying or altering evidence (including deletion of e-mails), or cooking up any stories or lying to any government or corporate investigators. Whatever the risks of the underlying investigation, he does not want to make matters worse and face potential charges of obstruction of justice, lying to government officials or perjury.

4. Arm yourself with information. While all of the information in the world may not ultimately prove to be successful in fending off an investigation or civil or criminal changes, it certainly may help.

However, information is not always easy to come by. Counsel may feel that he is on the outside looking in. The government will likely gather information from various sources and by various means, including interviews and depositions of potential witnesses and documents obtained via subpoenas and self-reporting or cooperation by corporations.

When contacted by a government attorney, counsel should certainly inquire into the nature of the investigation, but the government attorney will typically share little beyond generalities.

It is generally advisable to coordinate with all defense counsel to determine the key documents the government has obtained, and who has spoken to or testified before the government and what they are saying.

Counsel should enter into a joint defense agreement for the express purpose of sharing attorney-client privileged communications and attorney work product without waiving such protections by reason of the sharing of information. However, current investigatory trends may complicate such agreements, as the SEC and other regulators actively encourage the cooperation of corporations in investigations in return for more lenient treatment, and the waiver of these privileges by corporations may be viewed as an important factor in a weighing corporation’s cooperation.

5. Related investigations. Where parallel civil and criminal investigations exist, the stakes become higher. An individual may not be looking at merely the consequences of civil judicial or administrative proceedings; rather in the most serious cases raising often murky issues of criminal intent, much more may be at stake. This possibility should be factored into any analysis of whether an individual should cooperate with an investigation, civil or criminal, and, if so, to what extent.

While cooperation is generally desirable, it has its limits. Counsel should consider in an appropriate case whether to advise his client to assert the Fifth Amendment privilege against self-incrimination.

Of course, asserting the privilege may carry a heavy cost. It may lead to immediate loss of employment. The SEC may be more likely to view the individual in a negative light and the assertion of the privilege will likely support an adverse inference in a civil judicial case or administrative proceeding.

However, an individual who was in the middle of a transaction that is the subject of an existing or potential criminal investigation puts himself at risk by testifying without an immunity agreement with the prosecutor, particularly when the full scope of the investigation is not yet clear.

6. Testimony – be prepared. A witness should never testify before the SEC or in any other government investigation without being thoroughly prepared. First, the witness must understand that, above all, he must tell the truth. The consequences of lying to the SEC are potentially disastrous.

Government lawyers are quite prepared to refer a perjury investigation to the U.S. Attorney if they feel that a witness is lying to them. Needless to say, that also does not help the government lawyer’s view of where the witness fits in the context of the overall investigation.

Second, demeanor plays a more important role than in the average deposition in private civil litigation. SEC staff present at the examination are the same lawyers making the recommendation to the senior lawyers in the SEC’s Enforcement Division, and ultimately to the Commission, concerning the filing of any charges.

Third, a less than stellar performance can lead to SEC civil or administrative charges, or worse. To avoid leaving the wrong impression after the government’s examination, a lawyer for a witness should strongly consider asking clarifying questions of his witness, as is his right, where appropriate.

7. Keep channels of communication open. If counsel represents an individual who played a prominent role in transactions under investigation and cannot duck beneath the radar screen, he should establish a dialogue with the government attorney.

Although it may sometimes seem like the government attorney has a preconceived notion of the matter and of a client’s role that is not always the case. Often, the government attorney may be suspicious of certain transactions in which the client was involved but uncertain of where he fits in.

The government may be open to persuasion concerning your client’s role. Once again, information is powerful. The more you can find out about what others are saying about your client and what the key documents reveal, the better position you will be in to advocate for your client.

Sanford F. Remz is a shareholder in the Boston business litigation boutique of Yurko, Salvesen & Remz, P.C. He has been involved in a wide range of securities, litigation and investigations, shareholder suits and other corporate litigation in Massachusetts and other states.

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