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REPRINT FINANCIER WORLDWIDE JULY 2018 FINANCIERWORLDWIDE corporatefinanceintelligence WHITE-COLLAR CRIME Cooperation and the risk of privilege waiver in government investigations JOCELYN E. STRAUBER AND DANIEL MERZEL SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP corporation facing a government investigation – or merely aware of potential wrongdoing – stands to gain substantial benefi ts from cooperation. Cooperation with an existing inquiry, or voluntary disclosure of misconduct as yet unknown to the government, may Aresult in a favourable resolution (or even a declination), reduced fi nes and penalties, and the ability to limit or shape the government’s investigation, among other benefi ts. But cooperation often calls for disclosures to government authorities that may jeopardise an entity’s ability to assert the attorney-client privilege or work-product protection over aspects of counsel’s internal investigation in the context of parallel civil litigation or other requests for disclosure of company materials. A December 2017 ruling in Securities and Exchange Commission v. Sandoval Jocelyn Strauber is a partner and Daniel Merzel is an Herrera, a fraud case in the US District Court for the Southern District of Florida, associate at Skadden, Arps, Slate, Meagher & Flom highlights the challenges facing companies that seek to balance preservation LLP. Ms Strauber can be contacted on +1 (212) 735 2995 or by email: [email protected]. of legal privileges with complete cooperation with government authorities. Mr Merzel can be contacted on +1 (212) 735 2435 In Sandoval, a federal magistrate judge concluded that company counsel, in or by email: [email protected]. 8 © 2018 Financier Worldwide Limited. REPRINT | www.fi nancierworldwide.com Permission to use this reprint has been granted by the publisher. Page 1 FINANCIERWORLDWIDEcorporatefinanceintelligence providing detailed oral summaries of weighed against various other factors, eff ect treated a company’s willingness witness interviews to the Securities including the nature and seriousness to waive privilege as a measure of the and Exchange Commission (SEC), had of the off ence, the pervasiveness of authenticity of its cooperation. waived work-product protection with wrongdoing within the company Under the Thompson memo, respect to the notes and memos on and the company’s history of similar the DoJ routinely sought privilege which those summaries were based. conduct, if any. The memo noted that waivers and other demonstrations The Sandoval decision follows over privilege waivers “are often critical in of ‘authentic’ corporate cooperation. a decade of shifting government enabling the government to evaluate Notably, in a 2004 investigation guidance on the requirements for the completeness of a corporation’s concerning KPMG, KPMG not only corporate cooperation credit, and voluntary disclosure and cooperation”, waived privilege but also, at the DoJ’s shows that while the Department and that prosecutors could therefore, urging, withheld payment of legal of Justice (DoJ) and SEC will not “in appropriate circumstances”, fees for employees who refused to seek privilege waivers as a condition request privilege waivers as to “the cooperate. The government ultimately of cooperation, they do defi ne full factual internal investigation and any indicted 13 KPMG employees. But in cooperation in a manner that, at a contemporaneous advice given to the June 2006, in United States v. Stein, minimum, risks a judicial fi nding of corporation concerning the conduct Judge Lewis Kaplan of the Southern waiver. at issue”. District of New York dismissed the In January 2003, against the indictment as to all 13 employees, Cooperation credit: a brief history backdrop of the Enron and WorldCom on the basis that the government’s Since 1999, the DoJ has issued scandals, Larry Thompson issued a tactics with respect to legal fees and then repeatedly revised and slightly revised set of principles for eff ectively deprived the employees of refi ned a list of factors governing the prosecution of corporations, their constitutional rights to counsel the decision whether to criminally with an “increased emphasis on... and due process. charge a corporate entity. The the authenticity of a corporation’s Later that year, amid growing so-called Holder memo, issued in cooperation”. The Thompson concern about the ‘culture of waiver’ June 1999 by then deputy attorney memo took the view that, “[t]oo in the DoJ and other government general Eric Holder, provided that “[a] often”, corporations “purport[] to agencies, legislation was introduced corporation’s timely and voluntary cooperate with a [government] in the US Senate to prohibit federal disclosure of wrongdoing[,] and investigation” while taking steps to prosecutors and regulators from its willingness to cooperate” with prevent exposure of the full scope of requesting privilege waivers. The the government’s investigation misconduct. The memo incorporated bill stalled in the Senate, but within – “including, if necessary, the waiver much of the text of the Holder memo a week of its introduction, deputy of the corporate attorney–client and verbatim, including the passages attorney general Paul McNulty issued work product privileges” – should be concerning privilege waiver, but in a revised set of guidelines, requiring 8 © 2018 Financier Worldwide Limited. REPRINT | www.fi nancierworldwide.com Permission to use this reprint has been granted by the publisher. Page 2 FINANCIERWORLDWIDEcorporatefinanceintelligence senior-level preapproval for all waiver Today, the DoJ continues to follow to the SEC. The SEC launched its requests, and limiting such requests this framework, and other federal own investigation and requested to situations of “legitimate need”. Two agencies take a functionally similar documents and information from years later, addressing concerns that approach. For instance, the SEC’s GCC. In 2013, GCC’s outside counsel the McNulty memo had not gone far Enforcement Manual provides met with the SEC staff and provided enough in removing the pressure to that “a party’s decision to assert a ‘oral downloads’ of 12 interviews that waive privilege, Mark Filip, McNulty’s legitimate claim of privilege will not counsel had conducted – in essence, successor, revised the DOJ guidelines negatively aff ect [its] claim to credit bare recitations of the substance of yet again. The Filip memo shifted the for cooperation”, and that the critical the interview notes and memos. focus to whether the cooperating factor is the party’s disclosure of “all In December 2016, GCC agreed to corporation had disclosed “the [relevant] facts within [its] knowledge”. pay a penalty of $6.5m to the SEC relevant facts”. It expressly instructed to resolve the matter. Separately, prosecutors not to request privilege SEC v. Sandoval Herrera the SEC pursued charges against waivers, and noted that “[e]ligibility for Despite the DoJ’s suggestion that GCC executives, including Mathias cooperation credit is not predicated non-privileged ‘facts’ may easily be Francisco Sandoval Herrera and Maria upon the waiver of attorney-client separated from privileged materials Cidre, who allegedly took steps to privilege or work product protection”. and thus may be requested as part conceal the accounting errors when In a footnote, the Filip memo of a company’s cooperation, the they became aware of them in 2012. glossed over the challenge of 5 December 2017 ruling in SEC v. The executives’ lawyers served a providing non-privileged ‘facts’ Sandoval Herrera illustrates the risk subpoena on the company’s outside obtained in a privileged context of waiver in such cases. In Sandoval, counsel, seeking production of the and memorialised in privileged General Cable Corporation (GCC), interview notes and memos. Counsel materials. With respect to interviews a manufacturer of industrial cable objected on grounds of work-product of corporate employees (which and wire, conducted an internal protection, and the executives fi led a are a standard fact-gathering tool investigation, with the assistance motion to compel the fi rm to produce in internal investigations), the Filip of outside counsel, into certain the materials. memo acknowledged that notes and accounting irregularities at its Brazilian In adjudicating the motion, memos may be protected by the subsidiary. Counsel interviewed Magistrate Judge Jonathan Goodman attorney-client privilege and work- dozens of GCC employees, many determined that counsel’s ‘oral product doctrine, and that companies on site in Brazil. The lawyers took downloads’ to the SEC operated as need not produce those notes and notes at the interviews and later a waiver of work-product protection memos, but that they do “need prepared memos summarising the as to the underlying notes and to produce, and prosecutors may relevant facts. In November 2012, GCC memos. (The judge did not address request, relevant factual information”. voluntarily disclosed its investigation the attorney-client privilege, as 8 © 2018 Financier Worldwide Limited. REPRINT | www.fi nancierworldwide.com Permission to use this reprint has been granted by the publisher. Page 3 FINANCIERWORLDWIDEcorporatefinanceintelligence counsel apparently did not assert presentations in a witness-specifi c When preparing for oral that the materials were subject to fashion”. presentations, corporations and their the privilege.) He explained that he After the Sandoval ruling, counsel counsel should consider drafting was “not convinced... [that] there is fi led a