Four Recent White-Collar Developments For In-House Counsel

November 7, 2017Articles The Legal Intelligencer

As anticipated, the new administration has spurred a number of changes to the legal landscape, particularly in the white-collar arena. Below are four recent white-collar developments that in-house counsel should know about.

Signals of Change to the Corporate Misconduct Policy

It has been more than two years since the Yates memo ushered in an era of increased individual accountability for corporate wrongdoing. While the results of the memo have been mixed, both critics and supporters expected the issue of individual culpability to be among the first issues addressed by the new regime.

While formal guidance has yet to come, most signals indicate the DOJ will continue to prioritize individual accountability.  At an Oct. 25, speech to the U.S. Chamber Institute for Legal Reform, Deputy Attorney General Rod Rosenstein reaffirmed the government’s commitment to pursuing individual wrongdoers. Rosenstein’s comments echoed those from May 2017, in which Rosenstein pledged to prosecute those directly responsible for making the decisions that result in corporate wrongdoing.

At the same time, Rosenstein also acknowledged the need for increased guidance. This is welcome news to in-house counsel who have been left to formulate internal policies based on a memo that leaves a number of issues open for interpretation. Chief among these issues is the mental culpability necessary for individual liability. In particular, when, if ever, do negligence-based actions rise to the level of criminality? In an April 2017 speech, Attorney General Jeffrey Sessions indicated that the DOJ would distinguish between honest mistakes and willful misconduct.

In short, the DOJ remains committed to punishing individuals for corporate wrongdoing, but the particular means and methods by which it will accomplish that goal remain to be seen.

Continuing International Cooperation in Foreign Corrupt Practices Act Investigations

In September, the DOJ and the SEC entered into the largest FCPA settlement to date with Swedish-based Telia Company AB (Telia). The settlement arose from an investigation into payments that Telia made when trying to enter the telecommunications market in Uzbekistan.

The Telia investigation continues the general trend of increased cooperation between foreign authorities, particularly in corruption investigations. The case was opened by Swedish authorities in 2012 before the U.S. and Dutch enforcement authorities entered the fray. The three countries cooperated throughout the investigation, and all three will receive a share of the settlement proceeds. Perhaps even more impressive is the number of additional countries that assisted, including: Austria, Belgium, Cyprus, France, Ireland, the Isle of Man, Latvia, Luxembourg, Norway, Switzerland and the United Kingdom.

The case also exemplifies the DOJ’s continued efforts to incentivize cooperation. While Telia did not voluntarily disclose its conduct, it did cooperate throughout the investigation. In addition, Telia implemented a number of remedial efforts, including a complete overhaul of its corporate governance and compliance policies. Consistent with the teachings of the Yates memo, the DOJ also credited Telia with terminating the individual employees responsible for the scheme. Notably, Telia terminated both active wrongdoers and those who had supervisory responsibility. For in-house counsel, the Telia matter reiterates the importance of active supervision in FCPA compliance.

Clarification of District Court’s Role in Deferred Prosecution Agreements

Over the past several years, the DOJ has increasingly utilized deferred prosecution agreements (DPAs) to settle corporate investigations. In the typical DPA, the DOJ files a criminal information with the court but defers prosecution. In return, the corporate defendant agrees to fulfill certain conditions (i.e., monetary penalties). Most DPAs are filed in conjunction with a “corporate monitor agreement” that requires the corporation to retain an independent monitor to supervise its compliance with the DPA. To that end, corporate monitors prepare regular reports for the government by reviewing, inter alia, a wealth of confidential internal documentation.

District courts usually have a minimal role in implementing a DPA unless it is breached.  However, some district courts—citing their inherent authority and/or the Speedy Trial Act—have exercised a substantive role in monitoring the implementation of DPAs.  In United States v. HSBC Bank USA, No. 16-308 (2d Cir. 2017), the district court did just that, purporting to oversee the implementation of a DPA by requiring the government to submit regular reports. In exercising that authority, the district court eventually unsealed a corporate monitor’s report. On appeal, the Second Circuit reversed the district court’s unsealing order, finding that it was not a “judicial document” subject to the presumption of public access.  In so holding, the Second Circuit rejected the notion that a district court has the authority to broadly oversee the implementation of a DPA in the absence of impropriety.

For in-house counsel, the HSBC decision reaffirms the limited role of district courts in the DPA context. More importantly, the decision reassures in-house counsel that any sensitive information turned over to a corporate monitor will not be made public absent exceptional circumstances.

Privilege Issues Implicated by Interactions With Prosecutors

The aforementioned Yates memo bars corporations from receiving cooperation credit unless they disclose “all relevant facts relating to the individuals responsible for the misconduct.” Several commentators have suggested that this provision creates an inherent conflict between corporations and their employees by essentially enlisting corporations as agents of the DOJ. If true, such a requirement would only serve to exacerbate the already-complex privilege issues permeating internal investigations.

The recent California case of IAR Systems Software v. Superior Court of San Mateo County, 218 Cal. Rptr. 3d 852, 854 (Cal. Ct. App. 2017) illustrates the type of privilege issue that can arise from too much cooperation. In IAR Systems, the court was faced with parallel civil and criminal cases against the CEO of IAR. In the criminal case, the CEO filed a motion to determine whether the law firm representing the corporation should be considered part of the prosecution team. If, as the CEO argued, the law firm was part of the prosecution team, then it would be bound by Bradyto turn over any and all material and exculpatory evidence. The broad array of evidence falling under Brady could potentially require the disclosure of information otherwise protected by the attorney-client privilege. The trial court found that the law firm was part of the prosecution team because: the law firm forwarded a request from the DA to provide information from a forensic accountant, the DA provided the law firm with criminal citations for use in a deposition, and the law firm provided the DA with pre-existing research on the CEO’s ratification defense.

On appeal, the California First District Court of Appeal overruled the trial court, framing the salient inquiry as “whether the prosecution has exercised such a degree of control over the non-governmental actor or witness that the actor or witness’s actions should be deemed to be those of the prosecution for purposes of Brady compliance.” In its analysis, the court reasoned that the three interactions cited above did not meet the requisite level of “control” necessary to bring the law firm under the scope of Brady.

While the law firm in IAR Systems was able to avoid Brady, law firms and in-house counsel must remain cognizant of the privilege issues inherent in cooperating with the prosecution.

Reprinted with permission from the November 7 issue of The Legal Intelligencer. (c) 2017 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.