Expert Guide

Fraud & White Collar Crime August 2013

Arnold & Porter LLP - Gibson, Dunn & Crutcher LLP - Kirkland & Ellis LLP - Covington & Burling LLP Payback: Criminal or Civil? By Luke McGrath

he reaction is visceral: “That [insert exple- • Law enforcement is busy. time and more information, you can revisit the • Discuss media strategy with law enforcement – tive/executive/employee/fiduciary name• Law enforcement is a blunt instrument not a pre- question of whether law enforcement is the cor- decide whether or not to talk to media and how to here] stole our money. He/she lied to our cision instrument. rect option. Remember: do so faces. Now we are left holding the bag and • Law enforcement may not be the best way to re- • Consider hiring a private investigator – be sure T cleaning up his/her mess. It is time for pay- solve your specific needs. • Whatever you do, make a choice – don’t let oth- to consider this carefully because it may or may back, let’s call the cops.” ers make it for you. not be appropriate depending on timing, law en- • The running of limitations periods for civil rem- forcement preference and the facts. As General Counsel or Chairmen of the Board, edies becomes important for a financial crime be- you must fight against this normal reaction. Sure, cause the limitations period may start before the Don’t: notifying law enforcement may be advisable and, fraud is actually discovered. indeed, necessary, but before doing so, it is im- • Decide which goes first: (a) a civil investigation • Threaten an executive or employee with criminal portant for a company and its managers to know and claim; or (b) a criminal complaint? prosecution. all the facts, conduct an analysis of the risks, and PRACTICE NOTE: pursuing a criminal com- • Blab: whether it is internally or outside the com- prepare the proper presentation for law enforce- plaint may hinder your ability to investigate and pany, a prosecution (and a reputation) could be ment. Equally important is evaluating you obli- bring a civil claim (since prosecutors may even ruined if you or anyone in management talks to gations under any relevant insurance policies and seek to stay your civil case). others about the subject of the case and that con- notifying your insurer. The difference between • Not every criminal goes to prison, but if a person versation aids the defense. acting on instinct and taking measured steps to is in prison, they cannot make money to pay you The Do’s and Don’ts: Working with • Assume your case will be a priority – follow up. assess the situation, pursue the appropriate course back Law Enforcement • Resist inquiry – law enforcement will not assist if of conduct, and package your case may be the dif- • You may wish to pursue a prosecution to make they are not given access. ference between writing off the costs arising out of an example of a fiduciary or to reassure investors Once you have decided that working with law en- criminal conduct (and exposing the company to (in addition or in lieu of payback) – be sure to forcement is the right choice, remember: Restitution – Do you really get “paid-back” or claims of negligence) and getting both PAYBACK clearly define these goals in advance and get “buy- is it just payback? and PAID-BACK. in” from all relevant stakeholders. Do: The most frustrating aspect of any civil investiga- Do You Or Do You Not Notify Law Is It Always An Either/Or? • Determine whether you should approach State tion or criminal prosecution is coming to the re- Enforcement? or Federal law enforcement – calling “the Feds” is alisation that the responsible party no longer has In addition, the option of whether or not to con- tempting, but a State prosecutor may be the right assets sufficient to cover the damages they have Law Enforcement Does Not Always Recognise tact law enforcement is not an either/or decision. choice depending on the facts. caused. Remember to: Your Case As A Crime To Be Prosecuted The major issue is TIMING - when is it appropriate • Package your case – make it simple and provide to notify law enforcement and for what purpose? the tools a busy law enforcement representative • Conduct a cost/benefit analysis –a civil investi- Every victim believes the crime he or she is report- Remember, the failure to report a known crime is will need to immediately see that a crime has been gation may be more costly than assisting law en- ing is important – and rightly so. However, the a misdemeanor when you have actual knowledge committed and can be proven. This is extremely forcement (if they will take the case). truth is that even for corporate crime, law enforce- of its commission and your silence could be con- important – you will want to present the case on a • Manage expectations – criminals don’t usually ment personnel may not prioritise your complaint. strued as concealing that crime. See 18 USC § 4. silver platter. save their money, so get “buy-in” on the goals to In fact, they may not consider a reported crime Accordingly, careful evaluation and understand- • Prosecute for the prosecutor – investigate and be achieved: payback vs. getting paid-back. to be within their scope of authority, and disputes ing of all the facts may result in an obligation to provide updates to law enforcement. Remember • Chase assets offshore – don’t overlook that “busi- that hinge upon potentially criminal activity may contact law enforcement – but you must know the documents are usually key to packaging and refin- ness” trip to Nevis on an executive’s expense re- be viewed as private matters between two sophis- facts. ing your case – know your own documents and port. ticated parties. For example, a police department provide them, timelines and summaries of com- • A settlement/plea bargain is money in the bank may not consider activity arising out of a contract Notifying law enforcement and your insurer may plex issues. – striking a deal may save you money and get you dispute to be a crime. For that reason, actions that be best handled once you are confident that most • Keep informed and engaged with law enforce- paid-back, even if the responsible party gets only a may give rise to civil fraud liability may not be if not all of the relevant facts are known. Then, ment to avoid duplicative investigation and to en- slap on the wrist. prosecuted. Other things to remember: down the road when you have had the benefit of sure coordinated efforts, 16 - Expert Guide : Fraud & White Collar Crime 2013 Expert Guide : Fraud & White Collar Crime 2013 - 17 •Restitution – it works, or does it? Civil disgorgement, freezing of assets and other civil remedies may beat Conclusion: Don’t Let Crime Pay – Get State-imposed Restitution. Payback AND Get Paid-Back

This article provides a checklist of some basic top- ics to consider, but a company’s General Counsel must assess the need for outside assistance in ad- dition to the assessment discussed above. Out- side counsel with law enforcement experience (or experience working with law enforcement) may make the difference. In any event, in order to improve the odds that the responsible party is brought to justice and that the company is reim- bursed for the damages caused, it is imperative to manage the process and make the right decisions at the outset. Doing so will save time and money and can improve the chances of getting both pay- back and paid-back.

Luke McGrath is a partner at Dunnington Bartholow & Miller whose practice focuses on complex civil and criminal litigation, alternative dispute reso- lution and investigations. A former prosecutor, he served as an Assistant District Attorney in the offices of Robert M. Mor- genthau, District Attorney of New York County. After serving with Mr. Morgenthau, he taught as an Adjunct Professor at Fordham Law School and then clerked for the Honorable Nicholas G. Garaufis (USDJ). Before joining DBM, Mr. McGrath worked as an associate with the firms of Cadwalader, Wick- ersham & Taft LLP and White & Case LLP and as a partner at Bickel & Brewer LLP.

Luke McGrath can be contacted by phone on +1 212 682 8811 or alternatively via email at [email protected]

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