BUSINESSES AND THE GOVERNMENT

WHAT TO DO WHEN THE GOVERNMENT COMES CALLING:

WITH A SUBPOENA

The service of a federal subpoena on a company or one of its personnel should be met with a defined reaction that starts with policies and structures already in place and then proceeds to follow a path designed to protect the company’s rights and interests while giving it flexibility to address the specific issues the subpoena raises.

The source of the subpoena usually gives an initial indication of the seriousness of the underlying matter. A grand jury subpoena indicates that a criminal investigation is already underway. A regulatory agency subpoena may, on the other hand, indicate a routine inquiry that does not suggest significant adverse exposure to the company.

Similarly, the place where the subpoena is served can be indicative of the company’s risk. Service by mail to the company or a routine request for documents delivered to its premises often indicates a routine government inquiry. Service on government personnel off-site indicates, to the contrary, a focused intention to gather evidence about the company without its knowledge or influence.

A. POLICIES, PROCEDURES AND STRUCTURES ALREADY IN PLACE

  1. Standing Advice to Personnel

There should be readily accessible standing advice to upper and lower level company personnel on how to respond to delivery of a subpoena. Because government investigatory contacts do not always come in the form of a subpoena, personnel should be advised concerning the methods most often used.

  1. Cooperation as a Condition of Employment

The company’s human relations and compliance policies should advise that cooperation with company inquiries and investigations is a condition of employment and membership on the Board.

  1. Single Point of Contact

The company should have in place an instruction to all personnel that when a person approaches any company location or personnel with a subpoena, or if a subpoena arrives by mail, the recipient should immediately communicate confidentially with a single person, typically the Chief Compliance Officer or the General Counsel. There should be a back-up contact in case the primary contact is not available at the time – as is often the case with an off-site government contact. The instruction should direct the recipient to say nothing to the person delivering the subpoena, even if that person tries to start a conversation.

Because the government may serve subpoenas off the company premises, the company’s standing policies should state that any individual contacted by government agents can discuss the matter with a designated company representative before responding to the agents serving the subpoena.

  1. Recording Receipt

The instruction concerning receipt of a subpoena should include a direction to record the place, time and actual recipient of the subpoena. If that has not been done when the subpoena is transmitted to the single responsible point of contact for the company, the recipient should be contacted to provide the information.

  1. Immediate Review

The company’s responsible point of contact should immediately review the substance of the subpoena for:

  • the subject matter of the demand,
  • the return date,
  • the prescribed manner of complying, and
  • the government official who signed the subpoena.
  1. Who Should Be Initially Consulted Within the Company

As part of its compliance policy, the company should have a standing instruction on which persons and/or committees should be immediately informed of the receipt of a subpoena. The instruction can vary according to the subject matter of the subpoena.

  1. Policy on Paying Individuals’ Legal Expenses

Advance consideration of a policy for paying an individual’s legal expenses can

substantially enhance a company’s flexibility when an internal or external

matter raises a demand for payment. Periodic review is important to assure adjustment of

the policy to developments in the company’s operations and culture, as well as the

government’s changing regulatory and law enforcement practices. Thoughtful

consideration of alternative conditions is necessary to tailor the policy most effectively to the company’s needs and culture.

  • Should there be an explicit policy?
  • If so, should it be in writing?
  • Who should be covered?
  • Advance payments or post-hoc reimbursement?
  • What conditions?

B. IMMEDIATE ACTIONS TO TAKE WHEN THE SUBPOENA ARRIVES

  1. Alert the Company’s P.R. and I.R. Personnel

Company public relations and investor relations personnel should be instructed not to discuss, confirm, or deny the subpoena, or whatever investigation may have generated it, or the company’s internal review with anyone outside the company. Any external inquiries should be received and passed without comment to the person overseeing the company’s review.

  1. Ascertaining Who Knows about Service of the Subpoena

In order to control internal rumors, those who are aware of the receipt of the subpoena should be immediately contacted and advised not to discuss the matter with anyone other than an identified company official.

  1. Who Has Relevant Information

Given the infinite variety of factual situations, the identity of personnel who have knowledge relevant to the subpoena will vary with every case. The company official responsible for overseeing the response to the subpoena should have sufficient authority to require anyone with relevant information to respond immediately and to take direction in gathering and preserving documents.

  1. Initial Communications with Company Personnel

Communications with company personnel should consider:

  • Location and custody of subpoenaed materials;
  • Preservation of those materials [See Attachment D];
  • Company personnel familiar with those materials and their subject matter;
  • Rumors caused by receipt of the subpoena and follow-up interviews and investigations. A general letter is often useful – the simpler and shorter, the better.
  1. Additional Concerns Where the Subpoena Is Served Off-Site

The government serves subpoenas off-site in order to separate an individual from the protection and influence of his company. Typically, two agents visit the person’s home after hours and ask to interview him, using the subpoena as leverage and relying on the natural reaction to ask what the investigation is about. That starts an interview which the agents are trained to extend into substance. The person is under no obligation to say anything to the agents. The company’s standing policies should state that any individual contacted by government agents can discuss the matter with a designated company representative.

  1. Initial Determination of the Location and Volume of Subpoenaed Material

The responsible company official, with assistance of the General Counsel, the Chief Compliance Officer and any engaged outside counsel, should immediately ascertain the location and volume of the subpoenaed material. This process should include:

  • Personnel who have responsibilities and have acted in the subject matter of the subpoena;
  • Document custodians and company archivists;
  • Responsible data technicians;
  • Company security; and
  • Human Relations.
  1. Preservation of Documents and Data

As soon as possible, all personnel having control over or contact with the material subject to the subpoena should be instructed in writing to preserve it and to cooperate with an identified official of the company in gathering the material. The subpoenaed material may be in the custody of people or entities outside the company who are subject to the company’s direction. The preservation notice should be directed to all custodians and handlers of the materials and should be periodically reissued. The notice should also clearly state that it includes all material, whether filed in the ordinary course or kept in personal or notes files. See Attachment [D].

Recent federal decisions have imposed a legal obligation on all people and entities to preserve hard copy and electronic data as soon as there is any probability that litigation will ensue. (See the Zubulake litigation in the SDNY.) Receipt of a government subpoena clearly raises a probability of litigation. Federal law enforcement will apply those preservation obligations.

C. DESIGNING AND INITIATING THE INTERNAL INVESTIGATION

  1. Overarching Considerations

If the company decides to conduct an internal investigation – as opposed to a simple or routine inquiry – the critical issues in designing and conducting the investigation are:

  • What are the time constraints in gathering sufficient information to make responsible judgments on how to respond to the subpoena and the surrounding government investigation?
  • Who should oversee the investigation?
  • What actions should be taken to assure the most accurate and complete information?
  • Who should conduct the investigation?
  • What should the investigation deliver?
  1. Chief Compliance Officer’s Initial Review

The Chief Compliance Officer, with assistance of the General Counsel and any engaged outside counsel, should undertake an immediate initial review:

  • Can the subpoena be answered with a routine inquiry and production?
  • Does the subpoena raise issues that should be investigated immediately?
  • If so, who should be interviewed and who should gather the documents?
  • If so, what timeline should be imposed on the investigation?
  • If so, are their company actions or operations that should be suspended pending the investigation?
  • Should outside counsel be immediately engaged to conduct the investigation?
  1. Consultation with the General Counsel

Company General Counsel should be consulted on any legal exposure suggested by the subpoena. Matters of disclosure for public companies should be an ongoing topic.

  1. Designate the Responsible Company Overseer

Because the variations of facts and circumstances subject to an internal investigation are infinite, selection of the person who acts for the company in overseeing the investigation should depend on the particular matters involved. Unless the General Counsel has involvement in the underlying facts and circumstances, he would be the best choice, unless the investigation is being overseen directly by the Board. In that event, the Board as a whole should select the person or committee overseeing the investigation.

  1. Document the Initiation of an Internal Investigation

Once the company overseer has been chosen, the Chief Executive, or the Audit Committee, or the full Board – depending on the nature of the subject matter and the provisions of the company’s compliance policy – should document the authority given to the person selected to oversee the investigation and state that the purpose of the investigation is to provide advice to the company.

  1. Prepare a Flexible Scope of the Investigation

If an investigation is indicated, its scope should be initially and specifically designed; but the scope should be flexible, particularly at the early stages in order to allow for modifications in light of new information. It is often useful to document the initial scope of the investigation and its flexibility, recognizing that all investigatory documents may be subject to later review.

  1. Dealing with the Government Person In Charge of the Investigation

The government person in charge of the investigation may not be the one who signed the subpoena. Counsel should determine as soon as possible who is running the investigation and establish direct contact with her or him.

  1. Initial Contact with Personnel Having Relevant Information

There are ethical, legal and evidentiary matters inherent in any investigation within a business organization. Following are the most prominent:

  • Initial interviews should be conducted as soon as possible.
  • “Warnings:” The investigating person, whether counsel or not, should begin by advising the interviewee.
  • The “Upjohn” warning:
  • The interviewer represents only the company;
  • The interviewer is assisting a company investigation concerning certain matters;
  • The interview is privileged information of the company;
  • The company may decide to waive the privilege and disclose the information to third parties.
  • If applicable, the interviewer should remind the interviewee that cooperation with the investigation is a condition of employment.
  • The interviewee should be asked to keep the interview confidential.
  • Warnings to interviewees should be given carefully, balancing fairness to the interviewee with the need for prompt and reliable information.
  • Counsel questions:
  • If the interviewee asks whether she needs a lawyer, the interviewer should not give an opinion;
  • If the interviewee asks whether the company will provide counsel, the interviewer should state the company policy on the matter; or, if there is no policy, refer the question to the person overseeing the matter for the company.
  • The interviews should be promptly documented in memoranda. If outside counsel is conducting the investigation, those memoranda should remain in the law firm’s files, unless they are specifically required by the company.
  1. When to Engage Outside Counsel for an Independent Investigation

Outside counsel should be engaged to conduct an investigation related to a subpoena as soon as any of the following appears:

  • Where there is a reasonable apprehension that there is a criminal investigation underway. While a grand jury subpoena certainly indicates a criminal investigation, agency subpoenas may raise a reasonable apprehension of criminal exposure. (E.g. the FERC investigation arising from the 2000-2001 California energy crisis.)
  • Where there is a reasonable apprehension of an investigation by the law enforcement unit of a federal agency. (E.g. by CFTC)
  • Where a senior manager, executive or Board member’s conduct is subject to investigation.
  • Where allegations of fraud or violence are implicated.
  • Where the facts indicate a possible material effect on the company’s financial statements.
  • Where the company wants the assurance of a full and independent investigation and report.
  1. Determine Deliverables

The deliverables of an internal investigation often include a written report, but the process and progress of the investigation usually require more. Here is a list of typical deliverables:

  • Determine initial deliverables consisting of a program and schedule for initial fact-gathering;
  • Oral report to the overseeing person of initial information with advice on further investigation and the appearance of any new issues;
  • A revision of the initial deliverables;
  • Periodic oral reports on progress and review of scope and deliverables;
  • Oral report of tentative factual conclusions and observations about their effect;
  • Decision whether to prepare a written report, and, if so, to whom and with what topics;
  • Presentation of agreed deliverables.
  1. Forensic Experts

If the matter under investigation is sufficiently important and complex, the person overseeing the investigation should consider engaging forensic assistance (e.g. accounting, engineering, computer technology) at an early stage to avoid complication and wasted time in the gathering of relevant documents and information.

  1. Consider any Requirement to Advise Third Parties

The pendency of an investigation involving a company may implicate immediate or eventual requirements to provide notice to third parties, including outside auditors, insurers and lenders.

  1. Address Individual Requests for Counsel

Assuming that the company has an articulated policy addressing to whom and under what conditions it will pay legal expenses requested by personnel involved in government or internal investigations, the policy should be followed carefully. If the policy follows state law, there should be no adverse impact in the investigation.

If the company does not have a legal-expenses reimbursement policy or wants to diverge from it, different federal agencies react differently. The Department of Justice and the U.S. Attorneys may consider such payments as non-cooperation. The SEC, by comparison, has said it does not consider payment of legal expenses as indicative of non-cooperation.

  1. Preserving Privileges

The company holds counsel privileges (attorney-client and work-product), as well as trade secrets and other proprietary privileges. It should take care to preserve its option to assert those privileges throughout the investigation and in its later uses of the deliverables of the investigation.

Particularly with respect to counsel privileges, government investigators have routinely required waiver of them as an element of cooperation. Even if this practice is modified, the company should recognize that voluntary waiver of counsel privileges can provide the benefit of confirming there is no basis to consider adverse action against the company.

Where the responsible segment of the company concludes it is in the company’s interest to enter into a confidentiality or “joint defense” agreement to allow cooperation with individuals or other business entities in responding to a government investigation, such an agreement should be carefully considered. Documentation of the agreement is usually the better course.

Stu Pierson

1