Today the investigator appointed by Judge Sullivan issued in camera a 500 page report.  Although the report will remain under seal pending review by the Department of Justice and the lawyers for the late Senator, Judge Sullivan disclosed the gist:  “the investigation and prosecution of Senator Stevens were ‘permeated by the systematic concealment of significant exculpatory evidence which would have independently corroborated his defense and his testimony, and seriously damaged the testimony and credibility of the government’s key witness.’”  The investigators further concluded that “ at least some of the concealment was willful and intentional” and found evidence of concealment and the investigators found “serious misconduct that was previously unknown and almost certainly would never have been revealed – at least to the Court and to the public – but for their exhaustive investigation.” 

Judge Sullivan’s order can be found here.  See also White Collar Crime Prof Blog.    

The accusations against Tenaris, a manufacturer and supplier of steel pipe products and related services to the oil and gas industry, arise out of transactions in which one of its subsidiaries made payments to an Agent who was hired to secure government contracts with Uzbekistan for pipelines.  The DOJ and SEC allege that Tenaris knew that part of the money it paid to the Agent was going to Uzbekistani officials in order to obtain the bids of competitors so that Tenaris could revise its bids and thereby secure contracts.  In 2009, Tenaris disclosed a customer’s allegations regarding this bribery and the results of the company’s internal investigation to the DOJ and SEC. 

As this case shows, violations of international bribery can be punished by multiple U.S. agencies, and even when attempting to coordinate a defense, civil and criminal sanctions can result.  On its face, this type of bribery is most directly covered under the FCPA, which prohibits issuers such as Tenaris from making payments to foreign government officials to assist in obtaining or retaining business.  15 USC § 78dd-1 et seq. However, the FCPA also amended the Securities Exchange Act of 1934, requiring companies that are listed in the United States to meet its accounting provisions.  These accounting provisions require corporations to 1) keep books and records that fairly reflect the transactions of the corporation and 2) devise and maintain an adequate system of internal accounting controls. 

In this case, it appears that both the SEC and the DOJ wanted a piece of the pie, and the agencies each announced a separate resolution and fines on the very same day.  For the SEC, this resulted in a Deferred Prosecution Agreement, requiring the company for two years to continue its assistance with the SEC investigation, step up compliance, and pay disgorgement in the amount of $5,428,338.  The SEC promises, in turn, to not bring any enforcement action arising from the investigation.  As the SEC noted in its press release, this deferred sentencing agreement was the first of its kind, the result of its attempt to encourage companies to voluntarily disclose violations. 

The DOJ, which historically has had a difficult time bringing enforcement actions under the FCPA, particularly when targets must be extradited, got a sizeable concession from Tenaris.  For its part, it executed a Non-Prosecution Agreement with Tenaris, requiring that the company continue to cooperate with the DOJ, step up compliance, and pay a “substantially reduced monetary penalty” of $3,500,000. 

The timing of these agreements was essential.  It’s not clear how it turned out that both the SEC and DOJ entered into agreements with the company (whether the company insisted on it, or whether each agency wanted to take credit for the enforcement), but we do know that from the company’s perspective, it was absolutely necessary.  While it is difficult to resolve a case with two agencies at once, it is important that all parties are in accord, so that the penalties can be minimized and obligations streamlined.

In 2009, such appellate review got more difficult to obtain.  On December 8, 2009, the Supreme Court resolved a circuit split in Mohawk Industries, Inc. v. Carpenter, __ S. Ct. __ 2009 WL 4573276 (Dec. 8, 2009), holding that attorney-client privilege rulings could not be the subject of “collateral order appeals.”  Therefore, the challenge to orders to disclose potentially privileged documents must rely other mechanisms for appellate jurisdiction or wait until the underlying action is final.  Until Mohawk was decided, three circuits (the 9^th, 3^rd and DC) permitted collateral order appeals of attorney-client privilege rulings under 28 USC § 1291.  The First Circuit, where the privileged matter in the Stevens case was ordered disclosed, had never considered the issue. 

However, as noted in Mohawk, the pharmaceutical company facing disclosure had other options before disclosing such sensitive material, even if not relying on collateral order appeal under § 1291.  Indeed, had the company subjected itself to criminal contempt for refusing to disclose, it would be allowed to appeal directly from that contempt ruling and have the discovery decision reviewed as well.  See XYZ Corp. v. U.S., 348 F.3d 16 (1st Cir. 2003) (appellate review of contempt and discovery orders, requiring disclosure of privileged material in response to investigatory subpoena).  Other options pointed out by Mohawk were to 1) ask the district court to certify, and the court of appeals to accept, an interlocutory appeal under 28 U.S.C. § 1292(b); or 2) petition the court of appeals for a writ of mandamus.  “While these discretionary review mechanisms do not provide relief in every case, they serve as useful safety valves for promptly correcting serious errors.”  Mohawk, 2009 WL (2009). 

Balancing the interests of the client (the company in this case), it may well have been in the company’s best interest to comply with the order of disclosure in order to avoid sanctions or an order of contempt in the face of rising costs of government investigation.  However, the disclosure certainly had dire consequences for Ms. Stevens, who faced the brunt of the government’s prosecutorial power.  On the heels of Mohawk, then, targets of investigatory subpoenas will have to become comfortable challenging contempt orders or applying for discretionary review in order to protect the fruits of the “sine qua non of a meaningful attorney-client relationship.”

Stevens, as GlaxoSmithKline (GSK) vice president and associate general counsel, was indicted for obstruction of a proceeding, falsification/concealment of documents and false statements arising out of an FDA investigation into the off-label marketing of Wellbutrin.  In 2002, the FDA began to investigate certain off-label marketing practices wherein GSK and physicians provided information on Wellbutrin as a weight-loss drug, when it had not been approved by the FDA for such use.  In response to the FDA’s inquiry, the government argued, Stevens signed and submitted letters from the company in 2003 that falsely denied that the company had promoted the drug for off-label use, and further failed to produce the FDA with slide sets used by physicians to promote the drug for this use. 

In one of several procedural twists and turns in the course of this litigation, a magistrate judge in the District of Massachusetts ordered Stevens and GSK to produce a large volume of documents that would otherwise be covered by the attorney-client privilege.  The Magistrate Judge held that these documents were to be produced under the Crime-Fraud Exception because evidence established that GSK intended to perpetrate a crime or fraud and the communications at issue between attorney and client were made in furtherance of such crime or fraud.   

A trial was held this month in Maryland, and the government put on a large amount of documentary evidence related to the off-label marketing, including communications between GSK and counsel related to the FDA inquiry.  In granting Stevens’ motion for a directed verdict, Judge Titus held that the communications should never have been disclosed to the government, and in hindsight, were squarely within the attorney-client privilege.  “Instead, the privileged documents in this case show a studied, thoughtful analysis of an extremely broad request from the Food and Drug Administration and an enormous effort to assemble information and respond on behalf of the client.”  Even though there were certainly misstatements made by Stevens and GSK, the responses were made in good faith reliance on both external and internal counsel.  18 U.S.C. § 1515(c), in turn, specifically provides a safe harbor for Stevens’ advocacy: “This chapter does not prohibit or punish the providing of lawful, bona fide, legal representation services in connection with or anticipation of an official proceeding.”  Based on this statute and the facts put on by the government, Judge Titus dismissed the Chapter 15 obstruction and falsification/concealment counts.

Stevens’ good faith, shown by the same documentary evidence, negated all six of the charges against her, including false statements under 18 U.S.C. § 1001.  Judge Titus said, “as to all counts relating to the question of advice of counsel, the evidence in this case can only support one conclusion, and that is that the defendant sought and obtained the advice and counsel of numerous lawyers.  She made full disclosure to them.  Every decision that she made and every letter she wrote was done by a consensus.  Now, even if some of these statements were not literally true, it is clear that they were made in good faith. . . .”    In this situation, as with other federal white collar indictments, good faith is a defense that remains difficult for the government to overcome.   

For lawyers, both in-house and outside (the international firm King & Spalding represented GSK in responding to the FDA’s request), the Stevens indictment and discovery rulings amounted to a scary invasion into the lawyer’s role and potentially made lawyers directly liable for the advice given to clients facing government investigations.  Judge Titus, after noting his comfort with punishing lawyers who assist clients in the commission of crimes, acknowledged the importance of protecting legal advice and preserving privilege: “a lawyer should never fear prosecution because of advice that he or she has given to a client who consults him or her, and a client should never fear that its confidences will be divulged unless its purpose in consulting the lawyer was for the purpose of committing a crime or a fraud.”

Because Pelisamen did not object to the jury instruction (Skillingwas decided after the trial), the Court engaged in a plain error analysis.  The panel concluded that because there were no bribes or kickbacks alleged, the incorporation of honest-services fraud into the jury instructions and jury verdict form was plainly erroneous under Skilling. However, the Court held that Pelisman was not prejudiced by the error because the jury had convicted on both of the government’s alternative theories. Therefore, the conviction was based on a valid “money or property” theory of wire fraud.

New Requirements for an Effective Compliance and Ethics Program

1.         Response to Criminal Conduct

 First, the USSC amended the Commentary to §8B2.1 (Effective Compliance and Ethics Program) by adding an application note that clarifies the remediation efforts required to satisfy the seventh minimal requirement for an effective compliance and ethics program under subsection (b)(7). Pursuant to Application Note 6, organizations will now be required to do two things after discovery of criminal conduct.  First, the organization must take reasonable steps to remedy the harm caused.  Examples of these steps include providing restitution to identifiable victims, self-reporting and cooperation with authorities.  Second, the organization must take appropriate steps to prevent similar misconduct; including making changes to its compliance and ethics program to ensure it is effective.  The comment suggests hiring an outside professional to ensure the necessary steps have been taken to assess and implement any needed modifications.

2.         Corporations Can Still Receive Credit on Effective Compliance and Ethics Programs even if the Bad Actor is a High Level Person

Prior to the recent amendments, the sentencing guidelines for organizations did not allow credit for having a compliance program if high level personnel participated in the misconduct.  That prohibition has now been removed, provided the following facts can be established:

          a.          The person with operational responsibility for the company’s compliance program reports directly to the Board of Directors, Audit Committee or other appropriate subdivision of the governing authority.

          b.         The compliance program was implemented and likely to have discovered the violation before someone the outside the company would have.

          c.         The organization promptly reported the misconduct to appropriate governmental authorities.

          d.         Persons with operational responsibility for the compliance program did not  participate in, condone or ignore the misconduct.

Accordingly, companies are encouraged to review their existing compliance programs and policies and make any changes needed to reflect the amendments to the applicable sentencing guidelines.

In Berghuis v. Thompkins, 560 U.S. ___ 2010 (No. 08-1470, June Term, 2010), the court considered the common situation where law enforcement officers have advised the suspect of his/her right to maintain silent (the Miranda warnings), the suspect is aware of their right to remain silent, but does not explicitly state she/he will either invoke or waive these rights.  The Supreme Court held suspects must unambiguously invoke Miranda to prevent subsequent statements from being offered as evidence in court proceedings.  This means passively listening to Miranda warnings without explicitly claiming the right to remain silent or demanding to speak to lawyer before making a statement would allow law enforcement officers to later testify at trial concerning statements made during the custodial interview. 

Miranda was intended to protect individuals from the coercive effects of law enforcement interrogations.  This ruling makes the failure to invoke Miranda essentially an explicit waiver of the right to remain silent and/or have the assistance of counsel during an interview.

The disputed expenses, which Mr. Hurd claims were mistakes filed by his staff rather than by him personally, amounted to about $20,000 (all of which he paid back)—a trivial amount for a man who in 2008 made $43 million. 

H-P stock dropped significantly following Mr. Hurd’s departure and on Friday, August 13, the first shareholder lawsuit was filed against H-P, alleging that the board of directors breached its fiduciary duties in how it handled Mr. Hurd’s resignation.

The actress, whose credits include bit parts as a barmaid, a housewife and a nurse in assorted B-list movies, retained Gloria Allred, who is best known for representing Nicole Brown Simpson’s family.  The actress’s claims have been resolved “privately.”

Mr. Hurd’s resignation highlights the pivotal role internal investigations play in today’s business climate.  An allegation of wrong-doing prompted an investigation.  The findings of the investigation resulted in the ouster of an acclaimed CEO.  There has now been a “private” resolution of claims by the alleged victim and a very public lawsuit against the company’s board for the way it has handled everything.  Stockholders have lost billions.

Whether an internal corporate investigation involves criminal allegations, civil claims or both, the quality and integrity of the investigation are critical.   Prompt and thorough action is crucial, as it demonstrates the company’s good faith and desire to correct possible mistakes or wrongdoing by employees and, should the company decide to cooperate with the government, often results in lower fines, fewer targeted employees and reduced sentences for those who are targeted. 

While it may be too early to evaluate H-P’s internal investigation process, the investigation itself has been and will be the subject of much scrutiny.  If H-P is to prevail on the claims brought by shareholders last week, it may need to establish that the investigation was handled fairly, effectively and consistent with the board’s obligations to shareholders.