SARBANES-OXLEY’S NEW CRIMES, ENHANCED PENALTIES AND WAYS TO AVOID THEM

Mark A. Rush, Esquire Kirkpatrick & Lockhart LLP

I. INTRODUCTION

The Sarbanes-Oxley Act of 2002 (the “Act”) is the Congressional response to the highly publicized corporate failures of 2001. The Act created a number of new criminal offenses and increased penalties for existing offenses. For forward-thinking corporations, these developments present corporations the opportunity to re-examine their business ethics, compliance procedures and safeguards against fraud.

Many of the “new” crimes created by the Act could have been prosecuted under existing federal law. However, both the language and requirements of the Act indicate that its purpose is to create an environment where good corporate governance is the standard from the CEO down. The Act facilitates that standard by requiring the corporate control group to “know” the details of its business and to certify compliance with the law. The Act provides for criminal citations and severe sanctions for failing that standard and knowledge.

Broadly stated, the new crimes under the Act impose a requirement of truthfulness, accuracy and responsiveness in an effort to make corporate governance more transparent. In the new world created by the Act, knowledge by the control group and effective corporate compliance programs are crucial. Thus, perhaps the most important preventative actions a corporation can take in response to the Act is to: (i) ensure that its control group is informed through appropriate audits and/or internal investigations and (ii) then create or continue its compliance and training programs, demanding and facilitating an ethical and lawful work environment.

This article reviews the new statute and significant changes in the enforcement regime and sentencing issues. It highlights the benefits of corporate reform through the institution or further development of compliance programs and internal investigations. It also discusses pragmatic approaches and considerations when drafting a corporate policy and guide to employees who may be contacted by law enforcement officials.

II. THE NEW OFFENSES, EXPANDED PENALTIES, AND SENTENCING GUIDELINES UNDER SARBANES-OXLEY1

A. The New Offenses

The Sarbanes-Oxley Act of 2002 created what has been characterized as “the new crime of corporate securities fraud.” While most, if not all, of the conduct the act penalizes was already punishable through existing criminal statutes covering mail fraud, wire fraud, aiding and abetting, conspiracy and obstruction of justice, in passing the Act, Congress intended to make clear that all offenses involving publicly traded companies now may — and should — be prosecuted under federal criminal law. As a result, it is likely that more law enforcement resources will be dedicated to investigating and prosecuting suspected violations.

1. Securities fraud

Section 807 of the Act creates the new federal criminal offense of securities fraud. It provides:

Whoever knowingly executes, or attempts to execute, a scheme or artifice— (1) to defraud any person in connection with

any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 781) or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 780(d)); or

(2) to obtain, by means of false or fraudulent pretenses, representations, or promises, money or property in connection with the purchase or sale of any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 781) or that is required to

1 For a more thorough discussion of the Sarbanes-Oxley Act and Compliance, See SARBANES-OXLEY PLANNING & COMPLIANCE, KIRKPATRICK & LOCKHART LLP (Thompson Publishing Group, 2003). Contact Mark A. Rush, Esq. at mrush@kl.com if you are interested in receiving a copy of the publication.

file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 780(d));

shall be fined under this title, or imprisoned not more than 25 years, or both.

a. General principles

Most of the conduct criminalized under this section could have been prosecuted prior to enactment of the Act under the more generic mail or wire fraud statutes. However, Congress felt that the corporate climate in publicly traded companies demanded a more specific statute, with a threat of more substantial punishment, to stress the importance of strict compliance with the securities laws. Actual periods of incarceration are calculated through application of the Sentencing Guidelines, which have been amended pursuant to the Act.

b. “Knowingly” and “Willfully”

This new crime punishes conduct that is committed “knowingly,” even if it is not committed “willfully.” The distinction between these terms is extremely important in criminal law, as “knowingly” generally denotes a lower level of intent, meaning only that the offender knows he or she is taking the proscribed action, even if he or she does not know that doing so is a crime. “Willfully,” by contrast, indicates that the offender is aware that what he or she is doing constitutes fraud, but does it anyway.

The legislative history surrounding the Act indicates that Congress specifically chose to eliminate the requirement under the mail and wire fraud statutes that the conduct at issue in this new statute be “willful.” Aggressive prosecutors may latch on to this distinction to prosecute CEOs or

CFOs for more technical violations of the rules than in the past, even if the officers do not have the level of willfulness previously required. However, in practice, the distinction may not have much effect, since the proof of “knowing” conduct and “willful” conduct tends to overlap. Moreover, in the long run, the courts will need to determine if such a prosecution can stand. Nonetheless, public companies — and their executives — must be aware that this distinction may permit a more aggressive criminal enforcement program.

2. Failure of corporate officers to certify financial reports

Section 906 of the Act requires CEOs and CFOs to certify financial reports for publicly traded companies. It provides:

Whoever: (1) certifies any statement as set forth in

subsections (a) and (b) of this section knowing that the periodic report accompanying the statement does not comport with all the requirements set forth in this section shall be fined not more than $1,000,000 or imprisoned not more than 10 years, or both;

or (2) willfully certifies any statement as set forth

in subsections (a) and (b) of this section knowing that the periodic report accompanying the statement does not comport with all the requirements in this section shall be fined not more than $5,000,000, or imprisoned not more than 20 years, or both.

a. General principles

Under this provision, codified at 18 U.S.C. § 1350, CEOs and CFOs are required to certify that their company’s financial statements fully comply with the reporting obligations of the securities laws and

that they fairly represent, in all material respects, the financial condition and operating results of the company.

Penalties for violating the provision vary depending on the level of intent. An officer who certifies a periodic report that he knows does not comport with the reporting requirements of the federal securities laws (§§ 13(a) and 15(d) of the Securities Exchange Act of 1934) may be fined not more than $1 million and imprisoned not more than 10 years. If the officer acts “willfully,” the penalty is a fine of not more than $5 million and imprisonment of not more than 20 years.

It is the first provision, which punishes “knowing” conduct, which poses the most risk for executives. For example, even if a CEO or CFO does not direct that a fraudulent report be made (which would be classified as willful conduct), he or she can now be prosecuted for making a certification if he or she knows the report is inaccurate. Aggressive federal prosecutors might even attempt to prosecute individuals who did not create or direct the creation of false financials, but who were deliberately indifferent to the truth or falsity of the reports or who failed to perform any due diligence to ensure they were correct. Accordingly, due diligence and good corporate compliance policies are essential to avoid such prosecutions.

3. Offenses relating to obstructing investigations2

2 These offenses do not directly implicate a corporation’s internal investigation. However, it is important to note that most recently the Department of Justice has increased the frequency of requests that corporations under investigation waive their work product privilege. Accordingly, an employee who obstructs an internal investigation beyond mere “silence” may not only find himself unemployed but may also become subject to charges of obstruction of justice in the event of a waiver.

The Act also created new offenses regarding obstruction of justice. Section 802 adds provisions relating to the destruction, alteration or falsification of records in federal investigations or bankruptcy, and destruction of corporate audit records (18 U.S.C. § 1520). Two other sections provide civil remedies for whistleblowers and criminal penalties for retaliation against informants. These are discussed in the next three sections.

a. Destruction, alteration or falsification of records

Section 802(a) adds a new Section 1519 to Title 18, which provides:

Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.

(1.) General principles

This provision of the Act broadens the scope of existing obstruction of justice crimes and imposes strict duties on subordinates. Prior to the Act, existing law criminalized the conduct only of the individual directing or authorizing an act of obstruction. The Act also covers those individuals who obstruct justice at the direction of others.

This provision applies regardless of whether an investigation is underway or bankruptcy proceedings have begun. The statute makes it a crime to alter, destroy or

falsify a document in relation to or in contemplation of a matter which may possibly come up in the jurisdiction of any department or agency of the United States or any bankruptcy case. Thus, it is likely that the statute will be used as an enhancement in cases where an investigation or a bankruptcy either is ongoing or has been completed and a person is found to have altered or destroyed documents.

b. Destruction of corporate audit records

Section 802(a) of the Act, codified in part at 18 U.S.C. § 1520, also creates the new crime of destroying audit records. This provision requires accountants to maintain for five years “audits or review workpapers,” and provides criminal penalties, including imprisonment of up to 10 years, for those who “knowingly and willfully” fail to do so. The five-year retention period was deemed necessary to permit authorities to discover any inappropriate auditing and financial statements.

Section 802(a) also instructs the Securities and Exchange Commission (SEC) to create necessary rules and regulations for the

“retention of relevant records such as workpapers, documents that form the basis of an audit or review, memoranda, correspondence, communications, other documents, and records (including electronic records) which are created, sent, or received in connection with an audit or review and contain conclusions, opinions, analyses, or financial data relating to such an audit or review, which is conducted by any accountant who conducts an audit of an issuer of securities....”

A person who knowingly and willfully fails to maintain these other papers as required by the SEC

regulations may be fined and imprisoned for up to 10 years.

c. Retaliation against informants

Section 1107 of the Act adds a new provision, codified at 18 U.S.C. § 1513(e), that provides penalties of up to 10 years for any person who “knowingly” takes any action harmful to any persons reporting or providing truthful information to a law enforcement officer relating to the commission or possible commission of any federal criminal offense. This provision is designed to protect whistleblowers from retaliation. The provision covers any type of retaliation, not merely actions related to employment, as long as the information provided to the law enforcement personnel was truthful. The Act also protects “whistleblowers” whose conditions of employment are affected in retaliation for providing information with respect to or otherwise cooperating with an investigation into securities fraud.

B. Expanded Criminal Penalties

The Act imposes severe maximum penalties on those who are convicted of any of the newly created offenses. Those who are convicted of securities fraud may be imprisoned for up to 25 years and fined. Those convicted of obstructing investigations by altering or destroying documents may be imprisoned for 20 years. Those convicted of destroying audit records or workpapers face imprisonment of up to 10 years.

Other provisions of the Act increase the maximum penalties for existing offenses to similar levels. Section 903 of the Act increases maximum penalties for mail and wire fraud from five years to 20 years in prison. That section, combined with section 1106, increased maximum penalties for criminal violations of the securities laws from 10 years and $2.5 million to 20 years and, in some cases, $25 million. Section 904 increases maximum penalties for willful violations of the reporting and disclosure

provisions of the Employee Retirement Income Security Act of 1974 from one to 10 years’ incarceration and fines from $1,000 for individuals to $100,000, and from $100,000 for organizations to $500,000.

1. Attempt and conspiracy

In addition to the increased maximum penalties for offenses, section 902 of the Act punishes any attempt or conspiracy to commit fraud — including bank, mail, wire or securities fraud — as severely as the actual offense. Section 902 of the Act increases the maximum possible sentences for conspiracies and attempts to commit fraud to imprisonment of 20 years. As a result, an individual who conspires (i.e., agrees with at least one other person) to commit securities fraud, or attempts to commit securities fraud, whether successful or not, now faces substantially increased maximum penalties. While the Sentencing Guidelines govern the actual sentence imposed, frequently at levels far below the legal maximums, the new statute contemplates far more severe sentences than were previously available.

C. Effect on the Sentencing Guidelines

Sections 805 and 905 of the Act direct the U.S. Sentencing Commission, which issues the Sentencing Guidelines, to review and amend the Sentencing Guidelines and related policy statements to ensure that the sentences prescribed in the Guidelines are sufficient to deter and punish the crimes addressed by the Act. These changes are likely to have a more significant impact than the increases in maximum penalties.

The Act required that these revisions be completed within 180 days of its enactment. To meet this deadline, the U.S. Sentencing Commission released an emergency amendment to the Sentencing Guidelines on Jan. 25, 2003, which expired on Nov. 1, 2003. The Commission submitted to Congress on May 1, 2003, its proposed amendments to the Guidelines, which became effective on Nov. 1, 2003. The discussion below is of the Commission’s amendments.

1. Specific guideline enhancements The Act required the Sentencing Commission to adjust the enhancement levels of the base offense number for certain white-collar crimes by revising enhancements that would most likely apply to perpetrators of large-scale securities fraud. Each enhancement level increases the minimum and maximum sentence an offender can receive under the Guidelines. For example, an enhancement of just three levels can move a defendant facing a possible sentence of between 51 and 63 months in jail to facing a sentence of between 71 and 87 months. The revised enhancements include:

• number of victims;

• number of employees and soundness of financial institutions;

• officers’ and/or directors’ involvement; and

• increased loss categories.

As described below, the application of these enhancements in the context of large securities fraud cases can produce substantially longer sentences and higher fines.

a. Number of victims

The amendments to the Sentencing Guidelines increased the enhancements as follows:

● 10 to 49 victims, the court must add a two-level enhancement;

● 50 to 249 victims, the court must add a four-level enhancement; and

● 250 or more victims, the court must add a six-level enhancement.

In practice, a corporation or individual who defrauds stockholders will almost always be subject to a six-level enhancement because the number of victims is almost always going to be greater than 250. Executives of large publicly traded corporations found guilty of violating the

criminal provisions of the Act or related federal criminal laws would almost certainly incur the six-level enhancement.

b. Number of employees; soundness of financial institutions

In addition, the amendment also provides a four-level enhancement to the base offense level if, among other things:

● the offense substantially jeopardized the safety and soundness of a financial institution;

● the offense substantially endangered the solvency or financial security of an organization;

● the offender was a publicly traded company or had 1,000 or more employees; or

● the offender substantially endangered the solvency or financial security of 100 or more victims.

These increases are to be applied cumulatively with the enhancements for the number of victims listed above.

c. Officers and directors of publicly traded companies

The Sentencing Commission amended the Guidelines to enhance by four levels the base offense level of a crime committed by an officer or director of a publicly traded company if that officer or director was found guilty of a separate offense that involved a violation of securities law. If this enhancement applies, it replaces the existing two-level enhancement for abuse of a position of trust.

d. Loss categories

The largest enhancement factor in most fraud cases is based on the amount of loss resulting from the fraud. Because the financial loss in several recent cases has well exceeded the maximum loss contemplated by the Guidelines, the amendments are a response to Congress’ directive to re-examine the amounts. Prior to the amendment, the loss table provided enhancements of up to 26 levels for offenses in which the loss exceeded $100 million. The amendments capped the 26-level enhancement at losses of up to $200 million and added two additional categories:

● for a loss between $200,000,001 and $400 million, the court must add a 28-level enhancement; and

● for a loss greater than $400 million, the court must add a 30-level enhancement.

The Sentencing Commission concedes in its commentary that the new categories will affect relatively few cases however, it noted that the change would allow for greater sentences should the need arise. These enhancements represent an increase of more than five years to a prison sentence.

2. Increased fines and sentences for traditional white-

collar crimes

In response to the Act’s direction to review, revise and modify the fines and sentences detailed in the Sentencing Guidelines to deter, prevent and punish offenses in ways that reflect the serious nature of the offenses, the Sentencing Commission’s amendments also changed the Guidelines’ treatment of several additional white-collar crimes.

a. Fraud (U.S. Sentencing Guideline §2B1.1)

New Sentencing Guideline §2B1.1 covers a variety of forms of fraud, including larceny, embezzlement and other forms of theft; offenses involving stolen property; property damage or destruction; fraud and deceit; forgery; and offenses involving altered or counterfeit instruments other than counterfeit bearer obligations of the U.S. government. The Sentencing Commission’s amendments did not treat all types of fraud equally, however, and Congress dealt with some types, such as mail and wire fraud, directly in the Act.

b. Mail and wire fraud

The Act specifically increases the maximum incarceration time for a person convicted of mail or wire fraud from five years to 20 years. Mail fraud, 18 U.S.C. § 1341, makes it a crime to make use of the U.S. Postal Service or other private or commercial interstate carrier in executing a scheme to defraud others. Similarly, wire fraud, 18 U.S.C. § 1343, makes it a crime to make use of wire communications (including telephone calls, e-mails or wire transfers) in executing a scheme to defraud others. The size of the scheme and the briefness or relevancy of the use of the mail or wire system is generally not an issue under these statutes. Indeed, the use of the mail or wire system need not have been extensive or even the focus of the crime, so long as its function was to further the fraud. Since most fraudulent schemes make some use of at least one of these means, those crimes can either be added on to other charges or stand on their own, regardless of whether the actual scheme was carried through to completion.

c. Obstruction of justice (U.S. Sentencing Guideline §2J1.2)

In order to respond to the directives contained in the Act relating to obstruction of justice, the Sentencing Commission increased the base offense level applicable to all defendants by two levels, from level 12 to level 14. Because incarceration is mandatory beginning at offense level 12, and many offenders receive a two-level downward departure for acceptance of responsibility, this change substantially increases the likelihood of incarceration for these offenders. The Commission also added a two-level enhancement if the offense:

● involved the destruction, alteration or fabrication of a substantial number of records, documents or tangible objects;

● involved the selection of any essential or especially probative record, document or tangible object to destroy or alter; or

● was otherwise extensive in scope, planning or preparation.

d. Employee Retirement Income Security Act (“ERISA”) violations (§2E5.3)

The U.S. Sentencing Commission also concluded, in light of the substantially increased penalties Congress imposed on certain violations of ERISA in the Act, that criminal violations of ERISA that facilitate fraud were more appropriately sentenced under the harsher fraud penalties described above. To effectuate this change, the Commission provides a cross-reference to the fraud guidelines directing the sentencing court to use Guideline §2B1.1 (discussed above) to determine the appropriate sentence.

III. COMPLIANCE PROGRAMS AND INTERNAL INVESTIGATIONS

A. General Principles There are several actions executives and corporations can implement to reduce the risks of a federal prosecution or to mitigate its effects if an investigation turns up evidence of criminal conduct. Perhaps the most important preventative action is to create and implement an effective compliance program. Compliance programs are designed to prevent and to detect misconduct and to ensure that corporate activities are conducted in accordance with all applicable criminal and civil laws, regulations, and rules.

B. Advantages of a Compliance Program

A compliance program has several advantages for a corporation. First, it can provide a deterrent for employees who are faced with the decision of acting illegally on behalf of the corporation. Second, the addition of a self-reporting mechanism as part of the compliance program can pre-empt the opportunity for a whistleblower to bring misconduct to the attention of law enforcement. Third, having an effective compliance program may persuade the prosecution to exercise its discretion not to seek an indictment. Finally, should the government proceed with a prosecution, an effective compliance program qualifies a corporation for a reduction in the range of possible penalties as calculated by the Sentencing Guidelines — a reduction with significant benefits should the corporation be convicted (U.S.S.G. §8C2.5(f) & (g)).

C. Relevant Factors to Consider

In determining whether a compliance program is effective, it is critical that one consider the organizational due diligence taken to detect and curtail criminal conduct. Several factors are used to determine the effectiveness of a compliance program:

(1) The compliance program must reasonably be capable of reducing the prospect of criminal conduct;

(2) High-level personnel must be assigned overall responsibility to oversee the compliance program;

(3) The corporation must use due care not to delegate substantial discretionary authority to individuals whom the

organization knew, or should have known, had a propensity to engage in illegal activities;

(4) The corporation must effectively communicate its compliance program to all employees and other agents;

(5) The corporation must take reasonable steps to achieve compliance with its program by utilizing monitoring, auditing and reporting systems;

(6) The compliance program must consistently be enforced through appropriate disciplinary mechanisms;

(7) After an offense has been detected, the organization must take all reasonable steps to respond appropriately to the offense and to prevent further similar offenses.

D. Other Considerations

In determining whether it is appropriate to pursue criminal charges, law enforcement officials will consider whether the corporation has provided sufficient staff to audit, document, analyze and utilize the results of the corporation’s compliance efforts.

An effective compliance program can significantly reduce a corporation’s fine, by as much as 60 percent as calculated by the Sentencing Guidelines, subject to certain qualifications and exclusions. One such qualification is that, even with a compliance program, a corporation will not qualify for a sentencing reduction if “high-level personnel ... or an individual responsible for the administration or enforcement of [the compliance] program ... participated in, condoned or was willfully ignorant of the offense” (U.S.S.G. §8C2.5(f)). In addition, the corporation must not have unreasonably delayed reporting the violation if it hopes to receive credit for having a compliance program.

Additionally, it is important to note that a corporate compliance program, even one specifically prohibiting the conduct in question, does not necessarily release the corporation from criminal liability. See United States v. Beusch, 596 F.2d 871, 878 (9th Cir. 1979) (“[A] corporation may be liable for the acts of its employees done contrary to express instructions and policies, but…the existence of such instructions and policies may be considered in determining whether the employee in fact acted to

the benefit of the corporation.”); see also United States v. American Radiator & Standard Sanitary Corp., 433 F.2d 174, 204-205 (3rd Cir. 1970) (same).

E. Internal Investigations upon Discovery of a Violation

1. General guidelines Upon the discovery of an illegal act committed by an employee for the benefit of the corporation, the following actions must be taken.

• The corporation should immediately contact legal counsel and explain the situation. The attorney will most likely recommend that the corporation instigate an internal investigation undertaken by outside counsel.

• Outside counsel should conduct and orchestrate the investigation and report the results to high-level management, or, if management is believed to be compromised, to independent directors.

• The corporation should ensure that outside counsel is independent of the company’s officers, as that independence will give the ultimate report and findings more credibility. Such limited reporting also will help protect the attorney-client privilege and work product doctrine (entitling the outside counsel’s work to be protected from discovery in the event of prosecution) should the company choose not to waive those privileges.

• Outside counsel should undertake to determine the scope and procedure of the investigation and then retain the appropriate forensic accountants, investigators or other experts.

• Outside counsel should then prepare a memorandum recording the issues, creating a work plan and defining areas of responsibility. From there, the actual investigation may begin with both document collection and review as well as employee interviews. The interviews and compilation of documents should be thorough and should address all issues that could be raised in a government investigation. Access to interview

memoranda and documents selected in this process should be strictly limited. All memos should clearly be marked “Confidential: Attorney-Client Communications and/or Work Product.” Outside counsel must consider what, if any, mental impressions to include in interview memoranda (as opposed to simply reporting what the interviewee says).

2. The role of the board of directors

The company’s board of directors has the ultimate responsibility to determine what action to take in response to a violation of law affecting the corporation. Often, if senior management’s conduct is under investigation, a board will form a committee of independent or outside directors to oversee the investigation and take appropriate action. The board or committee is likely to rely heavily on outside counsel’s investigation, the findings of which should be summarized in a report that is presented to the board or the committee of independent directors. In most cases, the report should contain:

(1) a historical analysis of the events that led up to the investigation;

(2) a summary of the investigative process;

(3) a summary of the relevant facts revealed by the process;

(4) an analysis of the applicable law;

(5) an analysis of possible corporate criminal liability;

(6) recommended preventative measures; and

(7) possible remedial measures the corporation can take to remedy any harm.

Based on this report, the seriousness of the situation and advice from counsel, the board may decide to report the violation to the appropriate authority. In most cases, self-reporting, coupled with remedial and preventative measures, will drastically reduce the amount of time, energy and funds expended by the corporation as compared with investigations undertaken by the FBI or another law enforcement agency without cooperation from

the corporation. Additionally, and perhaps most importantly, the corporation may not be prosecuted at all as a result of the cooperation or, if prosecuted, will likely receive a considerably lighter punishment if the crime is revealed due to its own voluntary disclosure. The U.S. Department of Justice tends to focus first on the individuals who committed the crime, and not the company. Exposure of the company tends to increase if the conduct is pervasive, recidivistic, reaches the highest level of the company or if the company attempts a cover-up.

3. Remediation

Upon the discovery, investigation and conclusion that a corporate crime was committed, the responsible officers or directors within the corporation immediately should begin to plan remediation efforts with counsel. The options will vary depending on the violation that has occurred, but may include repayment to the victims, self-reporting to the government, and implementing monitoring, training and reporting requirements from the corporation. In addition, the corporation may choose to terminate those employees involved in the crime. All of these actions can help the corporation’s position in a possible federal investigation.

IV. RESPONDING TO A GOVERNMENT INVESTIGATION

In many circumstances, the first notice of potential wrongdoing comes in the form of an inquiry from the government. In drafting or revising a corporate policy for employees who are faced with contact from the FBI or some other law enforcement agency, the following are suggestions for employee conduct until counsel is able to address the situation with the government.

A. Interviews

Employees are not required to speak with law enforcement agents; it is their choice. Neither corporate policy nor corporate counsel can instruct employees not to speak. However, an employee’s decision whether to speak with a law enforcement agent should be an informed choice. The government, through its agents, can

subpoena the employee to testify at a future time and place, but the agents cannot command the employee to speak with them immediately; nor does the employee have to talk with the agents at the time they serve a subpoena. Employees need to be aware of these rights if they are to exercise them. Of course, an employee can agree to be interviewed immediately or at a future time, with or without counsel present. It is important that employees know that.

Written company policy should advise that employees may consult with corporate counsel, even if they do not believe they have done anything wrong. Additionally, the policy should advise that counsel may be made available to coordinate and attend any interview sessions with government agents, although it must be made clear to the employee that corporate counsel represents the company, not the employee. The mere presence of an attorney during the questioning will likely keep the interview focused and will assist with any follow-up inquiries. Additionally, counsel can assist in rephrasing questions and, if necessary, restating answers to ensure that claims of false statement by the agents are minimized or avoided. The attorney also can analyze the facts, circumstances and law to determine if it is in the employee’s best interest to retain separate counsel, consider invoking his or her Fifth Amendment rights or seek immunity. It should be noted that the government will likely resist having corporate counsel present during these interviews.

B. Searches

The FBI, or other law enforcement agency, does not have the authority to conduct a search of a business’ premises without a search warrant or permission. In addition, an employee is not compelled to turn over documents (including e-mail or other electronically stored information) or other tangible items unless the law enforcement agents have a duly issued search warrant.

Thus, to best protect the corporation’s interests, including the attorney-client privilege, work product doctrine, proprietary material, trade secrets and the privacy rights of employees and/or customers, the company’s policies should instruct employees to inform the agents that counsel will coordinate any responses to their requests. Employees should ask for the agents’ business cards and let them know that the corporation’s attorney will

contact them as soon as possible in order to assist them and answer any questions they may have. The employee should then immediately contact both their supervisor and corporate counsel. This will enable the corporation’s attorney to be the first to talk to the agents, and the employee will not provide any information that is protected.

If the agents have a search warrant to search the premises, the corporate counsel or a senior manager should read the warrant carefully and request a copy but should not impede the search. The agents should be advised where the relevant documents may be found, but the corporate representative handling the situation should advise the agents if the area to be searched may contain privileged, private or proprietary information and that neither the company nor any employee is waiving any privilege. In the event of a search, the responsible employee should notify counsel as soon as possible. Failure to allow the agents to search the premises can result in charges brought against the employee for obstruction of justice. Please note that, even if an employee is in this situation, neither the employee nor the company is under an obligation to submit to an interview. Although the company cannot and should not direct an employee to refuse to cooperate with the agents, legal counsel can advise employees of their rights, including the right not to be interviewed. The company can also choose to permit employees to go home for the day in such circumstances.

APPENDIX Form – Board of Directors’ Resolution for Internal Investigation

RESOLUTION

The Board of Directors of ___________________________________ has

passed the following resolution.

IT IS RESOLVED that an investigation should be conducted by

Kirkpatrick & Lockhart LLP, outside counsel, for the purpose of rendering legal

advice to the corporation. It is apparent to the Board that during the course of this

investigation, confidential communications between the attorneys, their retained

experts and the corporation are required.

IT IS FURTHER RESOLVED that this investigation should cover all

areas pertaining to or related to [describe investigation] _____________________

_________________________________________________________________.

The Board recognizes that there is the potential for litigation into matters relating

to such matters.

IT IS FURTHER RESOLVED that all materials and communications

generated during the course of this investigation shall be kept in confidence and

only disclosed as counsel and the corporation deem appropriate.

_____________________________ ______________________________ Date Secretary (Corporate Seal)