New England Biz Law Update
Recently, four former executives of a giant software company under investigation for accounting fraud pled guilty to obstruction of justice-related charges. What is unusual about this case is that the employees did not lie to prosecutors. Rather, they were charged and pled guilty based on lies told to their company’s own counsel during an internal investigation.
Corporate counsel are increasingly being asked to conduct internal investigations into alleged wrongful conduct in the wake of corporate scandals, new requirements under the Sarbanes-Oxley Act and related laws, as well as directives from law enforcement agencies and audit committees. Internal investigations range from examining company-wide accounting fraud to following up on a single allegation of workplace harassment.
Virtually every investigation, however, requires that corporate counsel interview employees. While law enforcement "Miranda" warnings are known to almost every American, "Corporate Miranda" warnings, though different in content, should be equally known to corporate counsel.
Corporate counsel – both in-house and outside counsel – have long had an ethical duty to advise employee interviewees of counsel’s role as counsel to the company and not the individual employee. The obligation to provide these "Corporate Miranda" warnings stems from the Rules of Professional Conduct and is supported by case law.
‘Model’ Warning
What do you need to say when interviewing an employee? Any warning should include the following:
If the company may want to use information gathered in the interview for internal disciplinary purposes, counsel should consider providing that additional, explicit warning to the interviewee.
These warnings may convince some employees not to provide information to corporate counsel. It is far better to obtain less information from employees than to obtain information that proves to be false, or that the corporation is legally hamstrung from using.
Consequences
Failure to comply with these ethical obligations can result in harsh consequences for counsel and for the corporation – including the disqualification of corporate counsel and loss of the corporation’s privilege. Moreover, corporations are now regularly asked by prosecutors to share the results of internal investigations and memoranda of employee interviews with investigators, in exchange for more lenient treatment by the government. Failure to adequately warn employees that the corporation may disclose interview reports to the government can result in disastrous consequences for the employees.
A strict reading of the Massachusetts rules limits counsel’s responsibility to provide warnings in only those circumstances where it is apparent that the corporation’s and the individual’s interests are adverse, and counsel knows, or reasonably should know, that the employee misunderstands the lawyer’s role. (E.g., Mass. R. Prof. Conduct 1.13, 4.3.)
In practice, however, the warning should almost always be given. The corporation’s and the employee’s interests can become potentially adverse during any investigation. Indeed, in these circumstances, corporate counsel is likely interviewing employees who are accused of participating in, or, at the very least, having knowledge of, wrongful conduct.
Further, especially when an in-house lawyer is involved in the interview, there is great potential for misunderstanding about the role of corporate counsel. In-house counsel often develop close relationships with business people throughout a corporation.
It is natural, therefore, for employees to think of in-house counsel as "their" lawyer and to misunderstand the role of corporate counsel in an interview situation. Employees of a smaller corporation are even more likely to equate the interests of the corporation with their own and to believe that the corporation’s lawyers represent them too.
Accordingly, only rarely should the corporate Miranda warning not be given.
Failing to fulfill the duty to warn is a breach of an attorney’s ethical obligations and could give rise to an imputed attorney-client relationship between the counsel and the employee. In determining whether to impute such a relationship, the courts look to the reasonable expectations of the potential client, that is, was it reasonable for the employee to believe that corporate counsel represented his interests as opposed to those of the corporation? Other criteria for determining whether an attorney-client relationship exists include whether the employee sought and received legal advice from the attorney.
If an attorney-client relationship is established between corporate counsel and an employee, the lawyer could be disqualified from representing the corporation in any matter adverse to the employee, including the very matter relating to the employee interview. Moreover, the corporation’s attorney-client and work product privileges could be waived, thus giving adversaries access to documents and other information that might otherwise have been protected.
The employee, however, perhaps has the most to lose from such misunderstandings. Increasingly, corporations are being pressured by government investigators to waive the attorney-client and work product privileges and share the results of their internal investigation.
What the prosecutors really want is the interview memoranda memorializing employee interviews because they can be a roadmap for prosecutors; identifying whom they want to talk to and target. If the employee, at the interview, does not understand that the corporation controls the privilege and may decide to share the interview with the government, the employee may face real jeopardy.
The far-reaching consequences of this were made very clear in the case of the four software company executives mentioned above. See United States v. Silverstein, No. 1:04-cr-0024-ILG (E.D.N.Y.); United States v. Rivard, 1:04-cr-00329-ILG (E.D.N.Y.); United States v. Kaplan, No. 1:04-cr-00339-ILG (E.D.N.Y.); United States v. Zar, 1:04-cr-00331-ILG (E.D.N.Y.).
The executives were interviewed as part of an internal investigation. Later the corporation waived the privilege and produced to the government memoranda summarizing those interviews. The memoranda contained lies.
The propriety of a prosecution based on lies told to corporate counsel as opposed to lies told to government investigators is debatable. Regardless of any legal arguments, however, this case serves as a frightening reminder of how the interests of the corporation and its employees can appear to be consistent and then suddenly diverge. It also demonstrates how high the stakes have become in the world of internal investigations.
Robert Ullmann is a partner in the Boston law firm of Nutter McClennen & Fish LLP where he maintains one of New England’s most extensive practices in defending white-collar criminal and government enforcement cases. Sarah Walters is an associate at Nutter, where she specializes in white-collar criminal defense and securities, including all types of criminal and civil enforcement actions, internal corporate investigations concerning compliance with federal securities and other regulatory laws, securities class actions, and shareholder derivative suits. For more information about the firm, visit www.nutter.com.
