Government Investigations REPORTER Summer 2004 A Newsletter on Recent Legal Developments

IN THIS ISSUE elcome to the first issue of the Government Investigations Reporter which will be published quarterly by Alston & Bird’s Government Investigation Practice. The Government Investigations Reporter, written by our experienced federal prosecution and defense A Roadmap for an Internal W Investigation...... 1 lawyers, will provide a summary of significant developments to our clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation. If you have Case Updates by Circuit ...... 6 any questions or would like additional information, please contact any member of the Alston & Bird Government Investigations Group or your Alston & Bird attorney. Alston & Bird’s Lawyers in the News ...... 10

A ROADMAP FOR AN INTERNAL INVESTIGATION By William H. Jordan and Catherine L. Hess

Introduction

In the post-Enron and post-Sarbanes-Oxley world, a corporation’s livelihood –indeed, its continued This Government Investigations Reporter existence – may rest upon whether it has properly instituted procedures for when potential problems is published periodically by the law firm of or fraud are reported and investigated. This is much easier said than done. Enron, for example, Alston & Bird LLP, and distributed to its had an excellent compliance plan but, one might say, lousy execution. A company – from the board, clients free of charge. It is intended solely CEO, general counsel, and on down – must work diligently to create a process that finds the “truth” to provide general information and is not regarding allegations of wrongdoing. If done successfully and with the aim of finding the truth, an intended to be legal advice applicable to internal investigation can allow a company to: (1) identify the conduct in question, (2) identify the specific matters. This material may also be person(s) responsible, (3) assess the legality and propriety of the conduct, (4) make an informed and considered advertising under the applicable proactive decision regarding whether and how to take corrective action, and (5) determine whether court rules. the conduct needs to be disclosed to governmental authorities.

If you would like to receive future issues The consequences of an incomplete, superficial, or improperly conducted internal investigation, of the Government Investigations Reporter however, can be potentially devastating and can actually place the corporation in a worse position than electronically, please forward you contact if no investigation had been conducted. A poorly conducted investigation can lead to the waiver of information including e-mail address to the attorney-client privilege, the destruction of or failure to retain relevant evidence, and the creation [email protected]. Be sure of an inaccurate or misleading record of events that portrays the corporation in an unnecessarily to put “subscribe” in the subject line. negative light or that calls into question the corporation’s motive in undertaking the investigation.

This article provides a broad overview of the necessary steps in an internal investigation. It is impossible to predict, let alone discuss, every conceivable issue that may arise in the context of an internal investigation. It is our hope, however, to present a roadmap of the critical junctures associated with an internal investigation. Finally, the state of the law discussed in this article is general in nature, and typically non-jurisdictional. As such, it should serve as a guide for exploring unique situations with an attorney and not as a guide for conducting an internal investigation without the assistance of experienced counsel.

www.alston.com Government Investigations Reporter

Preparation legal counsel to determine whether the substance of the complaint necessitates a legal duty to investigate. Deciding to Investigate • Are there other indicia of credibility? Has the corporation previously This article begins with the presumption that a company already has received similar complaints? Does the complaint reference designated an official (e.g., in-house counsel or compliance officer) confidential factual information that relatively few know? Were to serve as the person to whom claims of wrongdoing are directed. documents or files that support the allegations provided with the Sarbanes-Oxley Section 301 also imposes certain obligations on complaint? publicly-traded companies to involve the audit committee (composed of disinterested directors) of the company’s board directly in the review When weighing all of these factors, the most prudent practice is process of some allegations. Regardless of how the wrongdoing is to investigate any apparently material and credible complaint of brought to light, corporate decision-makers must decide whether a violation of law or corporate policy. The risks of foregoing an the corporation will investigate the matter and, if so, what they want investigation are, quite simply, not worth it. or need to learn from the investigation. An internal investigation is warranted to assess the criminal exposure and potential civil liability Determining the Scope and Purpose of the Investigation whenever a corporation believes that the illegal or improper actions of its employees, officers, directors or other agents can be imputed to the The defined scope and purpose of an investigation should be as specific as possible while allowing for developments in the investigation. corporation.1 This is particularly so when the suspected wrongdoers Important steps at this initial stage of an investigation include: are part of corporate management.2 • Identifying the reason(s) for the investigation. As an initial matter, The spectrum of possible complaints about corporate misconduct is the company should identify the allegations levied against its incredibly broad with respect to both the substance of the complaint employees. Additionally, if the corporation wishes to maintain and the amount of discretion that the corporation has regarding the attorney-client or work product privileges, as discussed in whether to conduct an investigation. On one end of the spectrum Section III below, it is important to identify anticipated litigation are relatively trivial matters for which the corporation has complete as another reason for the investigation. discretion regarding whether to investigate (e.g.., someone has stolen office supplies or mis-billed for certain travel reimbursements). • Identifying person(s) conducting the investigation. Will corporate On the other end are matters of great importance about which the personnel, such as in-house counsel, corporate security, HR, or a corporation has little choice but to conduct an investigation, such as a compliance officer, conduct the investigation or will the corporation complaint alleging securities fraud, accounting irregularities, or bribery retain outside counsel? This decision requires the corporation to of public officials. Between these two extremes is a wide range of look down the road to the possible outcome of the events under other complaints that may or may not warrant detailed review. Also a investigation. company might receive notice of a government investigation formally through receipt of a subpoena or a visit by an agent or informally • Specifying the scope and goal of the investigation. Is the investigation through a call or letter. limited to a particular department or a particular transaction? Will the investigative team be responsible for just identifying the source The following factors should guide a company in analyzing these of the alleged misconduct or should the team explore the legal cases: consequences and remedies? Will recommendations for corrective action be sought from the investigative team? • Who is the source of the complaint? The source can include a prosecutor or government agency, an auditor, outside counsel, a • Identifying the “client.” To whom should the investigative team customer, a competitor, an employee, or an anonymous source. report - the audit or compliance committee, in-house counsel, or the board of directors? Care should be taken in this decision to • What is the form of the complaint? Forms can include a public news avoid appointing anyone suspected of possible wrongdoing as a article or story, an inquiry from a reporter, a compliance helpline supervising authority over the investigative team. In particularly call, a letter from an attorney representing a third party (i.e., a egregious and significant cases, it is not unusual to have outside customer, competitor, or employee), or an anonymous voicemail counsel (who may be counsel that do not regularly perform legal message or letter. work for the company) report to a special committee of the board of directors, usually made up of the independent directors on the • What is the substance of the complaint? This includes the subject board. matter, scope and materiality of the complaint. “Materiality” will vary from case to case and may require a corporation to consult

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While specific instructions as to the scope of the investigation are uniformly recognized and has been strongly criticized, thereby important, the corporation should also include some flexibility for diminishing its value. Corporations should also remember that they unexpected issues that arise in the course of the investigation. It is not may not be able to pick-and-choose if some information is disclosed usual in the process of investigating one set of allegations to uncover to the government since many courts have held that even privileged allegations of additional or different wrongdoing. information selectively disclosed to the government pursuant to a confidentiality agreement is discoverable by civil litigants.7 Designating the Investigative Team When structuring the investigative team, a company should consider Conducting the Investigation the possibility of eventual governmental involvement, whether it is in the form of an investigation by regulating agencies or prosecutors on the There is no mandatory guide to follow in conducting an investigation, federal, state or local level. In evaluating this possibility, the corporation although usually most begin with a review of the principal documents must assess whether government investigators will scrutinize the surrounding the transactions or decisions at issue. This allows the investigation in such a manner that, regardless of the competence investigation team to develop a basic understanding of the facts and level of in-house counsel, the simple fact that in-house investigated timeline, to identity the key players, and to plan for interviews. The the matter damages the credibility of the internal investigation because documents may also serve to refresh the recollection of some employees of perceived desired outcomes or lack of independence. during the interview process.

When an investigation concerns a matter that is less material or Document Preservation and Review significant in consequence, or involves an area of the business that is not heavily regulated, an investigation conducted by a compliance Ordinarily, absent a statutory or regulatory duty or notice of a pending officer, in-house counsel, or corporate security using the expertise or foreseeable proceeding, a company may generally dispose of its of corporate personnel may be sufficient. But where a complaint is property, including its documents, as it pleases or pursuant to an material or significant using an all in-house investigative team may risk established document retention policy.8 However, when a company the integrity of the investigation, especially if allegations of misconduct becomes aware that a civil or investigative proceeding is pending the involve management. An in-house investigative team may also limit company has a duty to preserve all materials relevant to the proceeding the privileges that might otherwise apply if outside counsel investigated in original form.9 Furthermore, document destruction with knowledge and it will place additional time demands on corporate personnel. Use of wrongdoing or in light of government investigations can raise the risk of outside counsel to conduct the investigation can provide enhanced of a potential obstruction of justice charge by prosecutors.10 Accordingly, protection of confidentiality under the attorney-client privilege and when conducting an internal investigation, a corporation should take the work product doctrine. appropriate steps, such as sending out a document preservation memo to targeted employees, to maintain all documents and materials that may be related to the matter under investigation despite the potential Maintaining Applicable Privileges for an added financial burden associated with gathering, sorting, and If disclosed publicly, or to government authorities,3 a company may retaining information. invite additional scrutiny of its investigation and, potentially, a request In addition to preservation, it is important to define the categories of to waive any applicable privileges. In some cases, a company may elect documents to be gathered for analysis. It is best to be over-inclusive but to disclose the results of its investigation,4 particularly if cooperating reasonable. This step requires involvement of someone knowledgeable with government investigators.5 This decision, however, should be a about the corporation and the matters under investigation, but, matter of choice and not a matter of compulsion because the corporation obviously, not a potential suspect in the investigation. The corporation inadvertently waived the confidential nature of the investigation. If will also need to develop a plan to gather the documents, including lost, the results of an internal investigation can provide a “roadmap” likely sources, locations, or custodians of the documents, as well as how to your adversaries. Accordingly, steps should be taken early on in the and where documents should be preserved, and when the gathering investigation to preserve applicable privileges. process should be completed. If electronically-maintained documents The three evidentiary privileges most likely to arise in an internal are involved, consultation with the company’s technology personnel investigation, depending on circumstances and the jurisdiction(s) is essential to understanding what is stored electronically, how it involved, are the attorney-client privilege, the work product doctrine is stored, and the costs and complications of electronic document retrieval. Finally, the corporation should strive to keep detailed records and the self-evaluative privilege.6 Of these, two are recognized in documenting the gathering and preservation of records. all jurisdictions – the attorney-client privilege and the work product doctrine. The third privilege, the self-evaluation privilege, is not

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Employee Interviews When the Employee is a Whistleblower When an attorney conducts an interview, the attorney should start As a general rule, “whistleblower” status does not shield an employee the interview with several “disclosures” to the employee (colloquially from the obligation to cooperate with the company’s investigation, called a “private” Miranda disclosure), which have their foundation including submitting to an interview or turning over company in the Model Rules of Professional Conduct, which most jurisdictions documents. As a practical matter, however, interviews may result in have adopted in some form. See ABA, Model Rules of Professional additional allegations of retaliation. Accordingly, a corporation should Responsibility, Rule 1.13(d); Rule 4.3. An example of these disclosures take care to place itself in a position to be able to defend against such is as follows: allegations.

We are attorneys representing the company in connection Consultation with an experienced employment lawyer may be with an internal investigation relating to [the general matters prudent before conducting an interview with a known or suspected at issue]. As an employee of our client, your statements to us whistleblower because there are many federal and state statutes that are covered by the company’s attorney-client privilege. This protect employees who report illegal conduct by the employer or its privilege protects from disclosure confidential communications, employees. The statutes vary in responsibilities and penalties but all exchanged between an attorney and client that are made for the generally prohibit retaliatory conduct against the employee for alerting purpose of seeking or rendering legal advice. In this case, our authorities to corporate malfeasance. Examples of federal statutes client is the company, not its employees, such as yourself. Thus, include the Sarbanes-Oxley Act of 2002, Public Law No. 107-204, the the privilege belongs to the company and the company may Civil False Claims Act retaliation provision,12 Protection from Reprisal choose to waive it. That means that should the company choose for Disclosure of Certain Information (for contractor employees),13 the to waive the privilege, our conversation may be disclosed to other Department of Energy’s whistleblower protection program,14 and the parties. Again, we represent the company, and we are not your whistleblower protection provision of the Major Fraud Against the lawyers. It is important, however, that in order to maintain the United States offense.15 company’s privilege you keep our conversation confidential. Do you have any questions or concerns about this? Memorializing Findings and Presenting Results In the absence of these warnings, an employee could later contend that he or she believed that the corporation’s counsel was acting as The decision of how to prepare and present the investigative findings his or her individual lawyer and that the employee’s communications and recommendations, as well as to whom this information should be with counsel would therefore be subject to a claim of privilege that presented, should ideally be addressed at the outset of the investigation. the employee controls. Courts have split on whether such claims are The investigative team could report to senior management, the proper.11 But to ensure there is no misunderstanding, and to be fair to corporation’s in-house legal department, an audit committee of the the company’s employees, the better practice is to give the basic “private board of directors, or a special litigation committee. In identifying Miranda” disclosures to employees during interviews. this person or group, a decision should be made to ensure that no one receiving information or having authority over the investigative team At the conclusion of the interview, the employee should be directed is suspected in the alleged wrongdoing and that the ultimate authority not to discuss the interview with anyone else (except their own has the power to evaluate and implement recommendations from the attorney), including other employees. Such discussions could impact investigative team. the company’s attorney-client privilege and could be viewed as an attempt by employees to coordinate their “recall” of the facts. If a Some internal investigations warrant final written reports while government investigation occurs, and the employee is interviewed, others do not. Although a report can be a valuable tool for corporate prosecutors will almost certainly ask the employee with whom, other management in planning its response to allegations of wrongdoing, than his own attorney or the company’s attorney, he or she discussed a company should keep in mind that such reports will discuss the matter. questionable legal conduct and that the report could provide a roadmap to future litigants. Failure to prepare a written report, however, may In addition, the employee should be told of his or her continuing duty to leave the company without a documented record that memorializes the cooperate and preserve documents. Importantly, the employee should investigative findings and relegate a “record” of the investigation to the be instructed that retaliation against any witness or “whistleblower’ fading recollection of those involved. But, the company and counsel is a violation of company policy and state and federal law. Such should carefully consider the form of the ultimate report – bullet-point admonitions also serve to further protect the company against an summary, a detailed final report, or a report with recommendations. allegation that it condoned document destruction and retaliation against whistleblowers.

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Taking Corrective Action and Implementing In today’s business and regulatory environment, a properly conducted Recommendations internal investigation is essential. Numerous issues and pitfalls can arise even with the most well thought-out investigative plan. Failure One question that should be discussed in advance with the client is to properly plan an internal investigation, as well as failure to deal with whether any report should include recommendations for corrective critical issues that arise along the way, will result in numerous problems action. Before such recommendations are reduced to writing or that may be more difficult to address than the underlying substantive presented, it is important that those involved in the investigation conduct at issue. Furthermore, failure to properly undertake a complete understand the business processes of the corporation so that the advice and thorough investigation, including taking appropriate corrective that is given with respect to corrective action is practical and capable action warranted by the investigative findings, may leave the company of implementation. If the internal investigation comes under scrutiny in a worse position than when the investigation started. by government investigators, they will take a decidedly negative view if the company’s lawyers recommended corrective action that was not followed upon by the corporation, even if counsel’s recommendations were entirely impractical. At the very least, the company may be left to explain why it did not follow its own lawyers’ recommendations. Endnotes Therefore, counsel must become knowledgeable about their clients. 1 See, e.g., United States v. Automated Medical Laboratories, Inc., 770 F.2d Deciding what corrective measures are necessary, and implementing 399, 406 (4th Cir. 1985) (holding that “a corporation may be held criminally those measures, often involves another critical step in the process of an responsible for antitrust violations committed by its employees if they were internal investigation: whether the corporation will “self-disclose” the acting within the scope of their authority, or apparent authority, and for the wrongdoing to government regulators and whether it will cooperate benefit of the corporation even if ... such acts were against corporate policy or express instructions.”). with a government investigation.16 In the event of self-disclosure to government agents, or if government investigations are already 2 Department of Justice, Federal Prosecution of Business Organizations, Section underway, a corporation must decide whether it will cooperate with the I (Revised January 20, 2003) (hereinafter “Thompson Memo”). government. For most public companies, the natural decision, and the one the government will say is in the best interest of the shareholders, is 3 Increasingly, federal prosecutors are requesting companies to waive the to cooperate. In today’s environment, understanding what cooperation attorney-client privilege and work product protection. In fact, it is a significant really means is critically important. The “main focus” of the changes factor considered in deciding whether a company is truly cooperating. Waiving promulgated with the Department of Justice’s guidelines regarding the privileges to ward off potential criminal prosecutions, however, has potential prosecution of corporations, for example, was an “increased emphasis adverse consequences, primarily that it cannot be done selectively because courts have almost uniformly held that a party may not “selectively” refuse on and scrutiny of the authenticity of a corporation’s cooperation.” to disclose privileged information and documents in a proceeding when the The revised guidelines state that, when determining whether to bring party has provided the same information and documents to a governmental charges, a prosecutor should consider, among eight other factors: agency in an effort to gain favorable treatment in another proceeding. See In re Columbia/HCA Healthcare Corp. Billing Practices Litigation, 192 F.R.D. 575, the corporation’s timely and voluntary disclosure of wrongdoing 579, 580 (M.D.Tenn.2000) (reviewing case law). Accordingly, a careful risk/ and its willingness to cooperate in the investigation of its agents, benefit analysis should be done before the results of an internal investigation including, if necessary, the waiver of corporate attorney-client are disclosed to third parties. and work product protection[.] 4 The decision to waive privileges after the investigation should be considered Because of these significant waiver implications, experienced counsel is after the conclusion of the investigation for one primary reason. For the needed to guide a company through the benefits and risks of disclosure attorney-client privilege to apply, communications between an attorney and and cooperation. the client (or the client’s employee) must be made with the anticipation that the communication will remain confidential. If a corporation elects at the beginning of the investigation to waive the privilege, there is no anticipation Conclusion of confidentiality and the privilege will not apply. 5 See, e.g., Thompson Memo. What are the takeaway points? Create an environment that encourages honesty and candor. Promote an effective and well-implemented 6 The article does not address the scope of each potentially applicable compliance plan. Investigate allegations of wrongdoing. Take privilege. appropriate and measured steps to investigate correctly. Be ready to report wrongdoing. Utilize outside counsel to preserve applicable 7 See, e.g., In re Columbia/HCA Billing Practices Litg., 293 F.3d 289 (6th Cir. privileges and advise the company. 2002).

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8 See Telecom Int’l Am., Ltd. v. AT&T Corp., 189 F.R.D. 76, 81 (S.D.N.Y. and imposed a sentence nearly three years longer than the statutory 1999). maximum. The facts supporting that determination were neither admitted by petitioner nor found by a jury. In reversing the decision 9 See Mosel Vitelic Corp. v. Micron Tech., Inc., 162 F. Supp.2d 307, 310-11 of the Washington Court of Appeals, the Supreme Court noted that (D.Del. 2000). it was not finding determinate sentencing schemes unconstitutional, 10 See, e.g., 18 U.S.C. §§ 1503, 1505, 1510, 1512-1514, 1517, 1518 and 1519. but rather re-affirming Apprendi v. New Jersey, in which the Court held that every defendant has the right to insist that the prosecutor prove 11 Compare United States v. Hart, 1992 U.S. Dist. Lexis 17796 (E.D. La. Nov. to a jury all facts legally essential to the punishment. No. 02-1632 16, 1992); Rosman v. Shapiro, 653 F. Supp. 1441, 1445 (S.D.N.Y. 1987); United (2004). The Supreme Court has granted certiorari and will hear two States v. International Bhd. of Teamsters, 119 F.3d 210, 215 (2d Cir. 1997); cases in its first sitting in October on the application of this decision Securities and Exchange Commission v. Credit Bancorp Ltd., 96 F. Supp. 2d to the federal sentencing guidelines. 357 (S.D.N.Y. 2000).

12 31 U.S.C. § 3730(h). FIRST CIRCUIT (MAINE, MASSACHUSETTS, NEW HAMPSHIRE, PUERTO RICO, RHODE ISLAND) 13 41 U.S.C. § 265.

14 42 U.S.C. § 7239. Pharmaceutical Manufacturer Agrees to Pay $430 Million 15 18 U.S.C. § 1031(h). to Resolve Criminal and Civil Liability Relating to Off- Label Promotion 16 The statutory and administrative agency regulations mandating disclosure of possible corporate wrongdoing are too vast, varied and complex to address On May 13, 2004, the Department of Justice issued a press release in detail in this paper. A corporation should consider seeking advice from announcing that Warner-Lambert agreed to plead guilty and pay over counsel as to whether, and how, mandatory disclosure applies. In addition, $430 million, including $240 million in a criminal fine, to resolve other obligations may arise in the course of mergers and acquisitions which criminal charges and civil liability resulting from the illegal and require disclosure or in matters of corporate governance under company fraudulent promotion of unapproved uses for its drug Neurontin. by-laws. Warner-Lambert marketed and promoted Neurontin for a variety of “off-label” uses, i.e., uses either rejected or not approved by the FDA, even when scientific studies had shown that Neurontin was not effective for treating some of the disorders for which Warner-Lambert was promoting the drug. Some of the tactics used by Warner-Lambert CASE UPDATES BY CIRCUIT to market Neurontin included: encouraging sales representatives to (The following federal and state trial and appellate court decisions or provide unsolicited, individual sales pitches to physicians about off- public announcements involve significant criminal or civil matters for the label uses of Neurontin; paying doctors to attend consultants meetings corporate client, and are organized by federal appellate circuit) where presentations regarding off-label uses of Neurontin were made; implementing teleconferences where physicians were urged by sales representations to call pre-arranged numbers and listen to a doctor or Warner-Lambert employee speak about off-label uses of Neurontin; UNITED STATES SUPREME COURT sponsored “independent medical education” events on off-label U.S. Supreme Court Finds State Sentencing Guideline Neurontin uses; and paying physicians to allow a sales representative Denying Jury Trial on Facts Affecting Length of Sentence to accompany the physician while he or she saw patients where the representative would offer advice biased toward the use of Neurontin. to Be Unconstitutional A former medical liaison for Warner-Lambert who filed a qui tam suit under the False Claims Act (FCA) is expected to receive nearly In Blakely v. Washington, the United States Supreme Court reviewed a $25 million for uncovering the conduct, which cost the Veterans decision of the Washington Court of Appeals and found that the state Administration $83.6 million in sales of Neurontin for off-label uses. trial court’s sentencing procedure deprived the petitioner of his Sixth This investigation was commenced in the District of Massachusetts Amendment right to have a jury determine beyond a reasonable doubt and involved many states and federal agencies. all facts legally essential to his sentence. In the underlying case before the trial court, the petitioner pled guilty to kidnapping his estranged wife. Due to the circumstances surrounding the kidnapping, the trial court judge found that the petitioner acted with deliberate cruelty

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SECOND CIRCUIT (CONNECTICUT, NEW YORK, VERMONT) DISTRICT OF COLUMBIA (DC) AND FEDERAL (US COURT OF INTER- NATIONAL TRADE, US COURT OF FEDERAL CLAIMS) CIRCUITS Equitable Tolling is Appropriate in Forfeiture Actions While the Defendant Funds Are Held in a Pension Plan Qui Tam Suit Dismissed Under “First to File” Rule Where Second Suit Against Subsidiaries and Employees in Addi- In United States v. All Funds Distributed to, or on behalf of, Weiss, tion to Parent Corporation the Court of Appeals for the Second Circuit reversed a grant of summary judgment to retirement fund beneficiaries on a forfeiture In U.S. ex rel. Hampton v. Columbia/HCA Healthcare Corp., the Court action brought by the government. The action was brought against of Appeals for the D.C. Circuit held that the False Claim Act’s “first to monies disbursed from a pension fund established using fraudulent file” rule barred the suit at issue because another relator had filed suits Medicare proceeds. The district court granted summary judgment, alleging similar violations. The first-to-file rule bars qui tam actions finding the action untimely under 18 U.S.C. § 984’s one-year statute of incorporating the same material elements of fraud as an earlier qui tam limitations, because the government learned in 1996 that the pension suit. Ms. Hampton, the relator in this case, argued that her suit differed fund contained proceeds from fraudulent Medicare claims, but waited from the first relator’s suit in that her suit named different defendants -- until the pension funds were disbursed in 1999 to initiate the forfeiture while the first relator sued only the parent company, Ms. Hampton sued action. The Second Circuit vacated the judgment and remanded the the parent company but also a subsidiary and certain of the subsidiary’s case, holding that the limitations period was equitably tolled while the employees. Ms. Hampton further distinguished her suit from the first funds were held by the pension plan administrator. In reaching this relator’s suit by arguing that the subsidiaries perpetrated the fraud at decision, the Second Circuit explained that the government could not issue in her case and that the subsidiary’s fraud should be considered have successfully made its forfeiture claim prior to disbursement of the independently of fraud at the other affiliated companies. The court defendant funds, because ERISA’s anti-alienation provision prohibited found that despite these distinguishing factors between the two suits, seizure of the funds while they were in the possession of the pension the differences did not concern the material elements of the fraud. plan administrator. Stating that it would be “inequitable” to bar the The court found that there was not a substantial difference between government from proceeding against the defendant funds “simply the claims and that Ms. Hampton’s action was related to and based because the claimants invested their ill-gotten gains in a pension on the same underlying facts as the first relator’s suit. Therefore, Ms. plan,” the Second Circuit found that equitable tolling from the date Hampton’s qui tam suit fell under the first-to-file rule and was correctly of the underlying offense until disbursement of the pension funds was dismissed by the district court. 318 F.3d 214 (D.C. Cir. 2003). appropriate. 345 F.3d 49 (2d Cir. 2003).

FOURTH CIRCUIT (MARYLAND, NORTH CAROLINA, SOUTH CAROLINA, THIRD CIRCUIT (DELAWARE, NEW JERSEY, PENNSYLVANIA, VIRGINIA, WEST VIRGINIA) US VIRGIN ISLANDS) Court of Appeals Applies Six-Year Limitations Period to Court of Appeals Holds Attorney Responsible for Entire False Claims Act Retaliation Claims Conspiracy Despite Limited Involvement In U.S. ex rel. Wilson v. Graham County Soil & Water Conservation In United States v. Rennert, the Court of Appeals for the Third Circuit District, a former employee brought a civil qui tam action under the recently reiterated that a conspirator – regardless of the precise scope False Claims Act (FCA) against her former employer, alleging that she of his involvement – can be held criminally liable for the full amount was constructively discharged in retaliation for reporting a false claim. of loss caused by a conspiracy. The defendant, a lawyer, argued that The district court held that the six-year statute of limitations period the district court mistakenly failed to make particularized findings of the FCA, 31 U.S.C. § 3731(b)(1), did not apply to the retaliation as to the precise scope of his involvement in a conspiracy to commit claim brought under section 3730(h) of the FCA. Finding an absence fraud, and therefore, should not have punished him for the portion of of a congressionally-prescribed statute of limitations, the district court the monetary losses that arose independently from his actions. The applied the most analogous state limitations period, North Carolina’s court of appeals rejected that argument, concluding “that even absent three-year period for wrongful discharge claims, and dismissed the explicit findings on the precise scope of a defendant’s involvement, a relator’s claim as untimely. A divided court of appeals reversed, finding district court’s decision may be affirmed if it is adequately supported the district court erred in interpreting the six-year statute of limitations by the trial record.” Here, the court held, the record evidence sufficed period as limited to actions brought on behalf of the United States. The to support the conclusion that the attorney was part of the conspiracy court concluded that a shorter limitations period for retaliation claims and “should be held liable for the full amount of loss caused by the would counter the purpose of the FCA by discouraging whistleblower conspiracy.” No. 03-1511 (3d Cir. 2004). employees from seeking redress for retaliation against them in reporting

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actual or potential false claims to the government, but recognized that pursuant to the HAP contract, the owners were entitled to federal its interpretation would “start the clock” upon the submission of the subsidies unless payments under the HAP contract were abated by alleged false claim rather than upon the alleged retaliatory conduct. “written notification to the [owners],” following failed inspections and The Fourth Circuit’s decision highlights a split in the circuits, with the inadequate improvements. In other words, the owners were authorized Fourth Circuit joining the Seventh Circuit in holding that the six-year to receive federal funding, despite their failure to maintain the property, limitations period applies to retaliation claims. The Ninth Circuit has until they were otherwise notified. According to the court, the owners’ found the limitations period in the statute not to apply to retaliation eligibility for payment was not facilitated by their false statements, claims. 367 F.3d 245 (4th Cir. 2004). but rather by HUD’s failure to pursue the proper contractual remedy to end the payments. The broader implications of Southland suggest that the Fifth Circuit has limited the government’s capacity to collect Grant Applicant Settles False Claims Act Suit Alleging damages for payments that it knew it was contractually authorized to Misleading Application stop. 326 F.3d 669 (5th Cir. 2003).

In U.S. ex rel. Grau v. John Hopkins University, the U. S. Attorney for the District of Maryland announced that Johns Hopkins Bayview SIXTH CIRCUIT (KENTUCKY, MICHIGAN, OHIO, TENNESSEE) Medical Center (University) agreed to settle allegations that it misled the government in its federal grant applications by overstating the Court of Appeals Finds Alternative Recovery By Govern- percentage of time that the University’s researchers would devote to the medical research projects financed by the federal government. The ment Entities Relator to FCA Statutory Share University also allegedly failed to disclose other federal sources of funds In United States ex rel. Bledsoe v. Community Health Systems, Inc., the for the same research, and overcharged costs for fringe benefits. The Court of Appeals for the Sixth Circuit held that a relator alleging research grants were sponsored by the National Institutes of Health violations of the False Claims Act is entitled to a share of proceeds and other federal agencies. The relator was a secretary of the University recovered by the government even where the government elects not who filed the qui tam action in 1999 and remains a University employee. to intervene in the suit and enters a separate settlement with the Subsequent to the Department of Justice joining the relator’s suit, the defendant. Pursuant to 31 U.S.C. § 3730(c)(5), if the government does University agreed to pay $2.6 million in settlement, with the relator’s not intervene in the qui tam action but elects to pursue an “alternate share consisting of approximately 17%. No. 99-1448 (D. Md. 2004) remedy,” the relator is entitled to the same rights in the alternate proceeding as if the government had intervened in the qui tam suit. In the case before the court, the government executed a settlement FIFTH CIRCUIT (LOUISIANA, MISSISSIPPI, TEXAS) agreement in which it excluded from recovery claims brought by the relator in the qui tam suit. The court of appeals nevertheless held that Court of Appeals Holds That Government Awareness of the FCA did not permit the government to avoid paying a relator the the Falsity of a Claim May Preclude Government Pursuit statutory share. 342 F.3d 634 (6th Cir. 2003). Under False Claims Act

In United States v. Southland Management Corp., the Court of Appeals SEVENTH CIRCUIT (ILLINOIS, INDIANA, WISCONSIN) for the Fifth Circuit held that there could be no liability under the False Claims Act for false statements by defendants who were otherwise Accountants and Lawyers Targeted for Promoting Illegal contractually entitled to the payments claimed. The defendants in Tax Shelters Required to Disclose Client Files Southland were owners of a Mississippi apartment complex who qualified for housing assistance payments (“HAP”) under the United States Housing Act, which subsidizes the rent of low-income tenants. The Tax Division of the Department of Justice has been cracking In exchange for federal funding, the owners agreed, pursuant to a “HAP down on what it believes are illegal tax shelters. In order to contract,” to keep their property “decent, safe, and sanitary.” Affirming identify the taxpayers who may have used these illegal tax shelters, a Southern District of Mississippi judgment, the Fifth Circuit ruled the Justice Department has been sending subpoenas to tax shelter that the owners had not acted in contravention of the False Claims promoters. In the Northern District of Illinois in United States Act by falsely certifying, in vouchers submitted to the Department of v. Sidley, Austin Brown & Wood LLP, the Justice Department Housing and Urban Development (HUD), that their property was recently issued a subpoena to Sidley, Austin Brown & Wood LLP, “decent, safe, and sanitary.” The court reached this decision despite a law firm whose former partner was alleged to have promoted the owners’ receipt of several notices from HUD indicating that their one or more illegal tax shelters, demanding that the firm identify property did not satisfy the contractual standard. The court held that clients who were using these tax shelters and turn over the firm’s

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files relating to clients who had participated in the tax shelters. Fines Clause of the Eighth Amendment in False Claims Act cases. The intervening clients opposed enforcement of the subpoena, Following a bench trial where Mackby was found guilty of submitting asserting that both the identities of and services provided to the false claims, the district court entered a judgment of $729,454.92 for firm’s clients were protected by the attorney-client privilege. The the government, based on a $5,000 penalty for each of 111 claims Court rejected the intervenors’ motion and ordered the firm to submitted and treble damages in the amount of $174,454.92. The turn over client files. No. 03 C 9355 (N. D. Ill. 2004). court of appeals affirmed the district court’s finding of liability, but ruled that the award of damages and civil penalties was subject to review under the Excessive Fines Clause, and remanded to the district EIGHTH CIRCUIT (ARKANSAS, IOWA, MINNESOTA, MISSOURI, NEBRASKA, court to determine whether the judgment was grossly disproportionate NORTH DAKOTA, SOUTH DAKOTA) to the gravity of the offense. On remand, the district court ruled that judgment was not constitutionally excessive, noting that it was far less Corporation and Executives Plead Guilty For Bribery, than the maximum recovery of nearly $86 million that could have Kickbacks, and Other Fraudulent Airline Ticketing Practices been sought, and that a sizable deterrent was appropriate, especially since the defendant refused to accept responsibility for his wrongdoing. In United States of America v. Katun Corporation, Minnesota based The Ninth Circuit affirmed the district court’s ruling, stressing that Katun Corporation, a worldwide seller of parts and supplies for the judgment actually imposed was far less than the potential civil copiers and office equipment, pled guilty to allegations involving and criminal penalties that could have been imposed. The court also several fraudulent schemes within the marketing, accounting and observed that at least some part of the judgment against Mackby was administration functions within the corporation. The schemes purely remedial. 339 F.3d 1013 (9th Cir. 2003). involved, among other things, the unauthorized access of competitors’ confidential websites and the defrauding of airlines through deceptive ticket purchasing. As a part of its sentence, Katun was ordered to TENTH CIRCUIT (COLORADO, KANSAS, NEW MEXICO, OKLAHOMA, pay more than $11 million in financial sanctions including a $5 UTAH, WYOMING) million criminal fine and $6 million in restitution, forfeiture, special assessments, and costs of the investigation. Katun was also placed on District Court Applies Blakely Holding on State Sentenc- a two-year probation and ordered to implement an effective corporate ing Guideline to Invalidate Federal Sentencing Guidelines compliance program. Notably, the company has pledged to cooperate fully in the government’s ongoing prosecution of high level corporate In United States v. Croxford, a Utah district court has ruled that the entire executives. Katun admitted in court that its employees routinely system of federal criminal sentencing guidelines is unconstitutional, obtained confidential information including pricing, marketing and following on the heels of the U.S. Supreme Court’s Blakely v. Washington technical data about its competitors directly from authorized dealers opinion (see above) that Washington state’s similar criminal sentencing and distributors of those companies. Initially the company used guidelines were unconstitutional. In Croxford, the court followed kickbacks disguised as “consulting fees” to purchase the information Blakely in stating that the Sixth Amendment guarantee of a trial by from its competitors’ employees. When Katun’s competitors began jury is violated whenever a judge imposes a sentence based on facts not communicating with their dealers through secured internet websites, reflected in the jury verdict admitted by the defendant. Because the Katun executives bribed the competitors’ employees in order to Croxford jury had not ruled on facts used by the guidelines to lengthen obtain the passwords for these confidential websites and then used sentences, and because Mr. Croxford did not admit to those facts, the the information on the secure sites to obtain a commercial advantage judge ruled that use of the sentencing guidelines for upward departures for Katun. No. 0:04-CR-00025 (D. Minn. 2004). was unconstitutional, regardless of whether the upward departures, if applied, would exceed the statutory maximum for the specific offense. No. 2:02-CR-00302PGC (D. Utah 2004). NINTH CIRCUIT (ALASKA, ARIZONA, CALIFORNIA, GUAM, HAWAII, IDAHO, NORTHERN MARIANA ISLANDS, NEVADA, OREGON, WASHINGTON) ELEVENTH CIRCUIT (ALABAMA, FLORIDA, GEORGIA) Court of Appeals Holds False Claims Act Penalty Three Sentence Enhancement Upheld on Wire Fraud Convic- Times Greater than Single Damages Does Not Violate tion for Breach of Fiduciary Duty Excessive Fines Clause In Unites States v. Bracciale, defendant appealed his 15-month sentence In United States v. Mackby, the Court of Appeals for the Ninth Circuit for wire fraud, arguing that the breach-of trust sentencing enhancement issued a significant opinion regarding the application of the Excessive was improperly applied. The defendant was a senior executive at

8 9 Kraft who engaged in a scheme whereby a certain company received May 19, 2004: Mark Calloway (Charlotte) spoke and facilitated a discounts on Kraft products to which it was not entitled. The company discussion on the proposed amendments to the Federal Sentencing then shared its profits on the Kraft products with the defendant. The Guidelines at the roundtable discussion for the Atlanta Compliance defendant pleaded guilty to wire fraud. His plea agreement contained and Ethics Group. a statement concerning his breach of fiduciary duty to Kraft. The district court enhanced defendant’s sentence by two levels according May 2004: Mark Calloway, along with Brian Edwards (Atlanta) to the “breach of trust” provision contained in Sentencing Guidelines. and Deborah Edwards (Assistant General Counsel Duke Energy), The defendant argued that the “breach of trust” was already embodied authored the article “What To Do When The Whistle Blows: Do’s And in the base offense of wire fraud and that the two level enhancement Don’ts of Internal Investigations “ in the ACC Docket (The Journal of constituted an improper double counting. The Court of Appeals for the Association of Corporate Counsel). the Eleventh Circuit upheld the enhancement, finding that the base offense of wire fraud did not encompass the breach of trust issue June 28, 2004: Robb Hellwig (Atlanta), Matt Richardson (Atlanta) and and that the breach of trust enhancement was created especially for David Givelber (Atlanta) made a presentation and mock deposition situations of this kind where a senior executive abuses his position to to the Georgia Medical Group Management Association on the Anti- his company’s detriment. No. 03-12838 (11th Cir. 2004). Kickback Statute and Stark Act. July 10, 2004: Thomas Walker (Charlotte) spoke at the swearing-in Government Must Consent to Voluntary Dismissal of Qui ceremony of United States Magistrate Judge David Keesler in Charlotte. Tam Action under False Claims Act Even After Declining Judge Keesler is a friend and former colleague of Thomas’ at the United States Attorney’s Office for the Western District of North Carolina. to Intervene July 26, 2004: Doug Arnold (Atlanta) and Bill Jordan (Atlanta) were In United States v. Intelligence Decisions, Inc., the government declined on a panel at the American Trucking Association’s general counsels’ to intervene in a False Claims Act (FCA) suit. Shortly thereafter, conference in Vail, Colorado, speaking on “Current Trends in Criminal the relator entered into a memorandum of understanding with the Enforcement Against Corporations.” defendant purporting to release only the relator’s and counsel’s claims, August 2004: The cable television network A&E is airing a program in return for $500,000 and a notice of voluntary dismissal. After the case examining cases involving defendants who murdered women where the was dismissed, the government learned of the agreement and sought apparent motive included killing an unborn fetus. In one of the cases to set aside the dismissal for failing to obtain the attorney general’s examined by the program, Thomas Walker was the lead prosecutor of consent as required by 31 U.S.C. § 3730(b) before dismissal. The a defendant charged with interstate domestic violence murder. district court held that the failure to receive the attorney general’s approval prior the dismissal of a declined case was not only contrary August 26-27, 2004: Alston & Bird is hosting the American Electronics to the plain language of the statute, but was inconsistent with the Association seminars on “Gaining Government Customers: Challenges fact that the government is the real party at interest in FCA cases, & Opportunities” and “Realities of Marketing to the Federal and State regardless of whether the Department of Justice intervenes. The court Government.” Jeff Belkin (Atlanta) will be a panelist and presenter noted that the alternative result would leave courts with no power to on the topic of compliance with and challenges presented by unique deal with relators who manipulate settlement agreements to unfairly federal and state government procurement statutes and regulations. enrich themselves and reduce the benefits to the government. 308 F. Supp.2d 1318 (M.D. Fla. 2004). September 2004: The treatise White Collar Crime, Business and Regulatory Offenses (Law Journal Press), is scheduled for publication of a new edition. Bill Jordan and Debra Bernstein (Atlanta) have substantially updated their Chapter 21 entitled “Computer Crime,” ALSTON & BIRD’S LAWYERS IN THE NEWS which they originally co-authored with former Alston & Bird partner and current General Counsel to the United States Department of March 26, 2004: William (Mitch) R. Mitchelson, Jr. (Atlanta) spoke Homeland Security, Joe Whitley. and served as Program Chair for the Health Care Compliance Association’s Atlanta Regional Conference. October 19-22, 2004: Mark Calloway will make a presentation to the Ethics Officer Association (EOA) Annual Conference in Scottsdale, April 2004: Mitch Mitchelson, Leader of the Government Investigations Arizona. The EOA is the professional association exclusively for and Compliance Team and Chair of the Firm’s False Claims Act managers of ethics, compliance and business conduct programs. The Working Group, was named a “leading white collar crime lawyer” by EOA provides ethics officers with training and a variety of conferences Chambers USA in its 2004 The Client’s Guide. and meetings for exchanging best practices in a frank, candid manner.

10 Government Investigations

William (Mitch) R. Mitchelson, Jr., Shannon Thyme Klinger, Partner Michael D’Antignac, Associate Jenna L. Moore, Associate Leader 202-756-5855 404-881-7453 404-881-4483 404-881-7661 [email protected] [email protected] [email protected] [email protected] Thomas G. Walker, Counsel Timothy J. Fete, Jr., Associate Heather Munday, Associate Randall L. Allen, Partner 704-444-1055 404-881-7820 404-881-7932 404-881-7196 [email protected] [email protected] [email protected] [email protected] Stewart F. Alford IV, Associate Joseph J. Gleason, Associate Wade W. Pearson, Associate Douglas S. Arnold, Partner 404-881-4960 404-881-4966 404-881-4971 404-881-7637 [email protected] [email protected] [email protected] [email protected] Jeffrey A. Belkin, Associate Courtney Guyton, Associate Susannah J. Stroud, Associate Mark T. Calloway, Partner 404-881-7388 404-881-7938 404-881-4973 704-444-1089 [email protected] [email protected] [email protected] [email protected] Debra D. Bernstein, Associate Catherine L. Hess, Associate M. Lynn Sykes, Associate Robert N. Driscoll, Partner 404-881-4476 704-444-1084 202-756-3444 202-756-3470 [email protected] [email protected] [email protected] [email protected] Rebecca B. Crawford, Associate Samantha L. Hill, Associate Jason M. Waite, Associate Brian D. Edwards, Partner 404-881-4824 404-881-7948 202-756-3455 404-881-7136 [email protected] [email protected] [email protected] [email protected] Marianne Casserly, Associate Robert P. Hostetter, Associate David S. Givelber, Partner 202-756-3379 404-881-4724 404-881-7897 [email protected] [email protected] [email protected] Karen M. Cross, Associate Gregory B. Mauldin, Associate William H. Jordan, Partner 404-881-4963 404-881-4823 202-756-3494 [email protected] [email protected] 404-881-7850 [email protected]

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