Come On Get Happy – The Partridge Family and GSK’s Internal Investigation

Today we celebrate an anniversary of one of the all-time lows in the American cultural milieu; for on this date in 1970, the television show The Partridge Family appeared on the ABC Television network. Symbiotically created from the ashes of the television show The Monkees and the real-life family pop group The Cowsills; The Partridge Family starred, as its TV-mom, Oscar winning actress Shirley Jones and as her eldest TV son, and teenaged girl heartthrob, her real-life stepson David Cassidy. Proving once again that 1960s and 1970s television really was largely a cultural wasteland, the family romped and sang their way across a never-ending sunny southern California in multi-colored converted school bus. While the episodes themselves were as close to putrid as one can get, they did have better success with their lip-synced music from each episode. One song, I Think I Love You, reached No. 1 on the Billboard Pop Charts that year.

I thought about this strange convergence of history and culture (or perhaps the lack of culture) when considering more lessons learned from the GlaxoSmithKline PLC (GSK) corruption scandal. I was particularly focused on GSK’s response to at least two separate reports from an anonymous whistleblower (brilliantly self-monikered as GSK Whistleblower) of allegations of bribery and corruption going on in the company’s China business unit. One of the clear lessons from the GSK matter is that serious allegations of bribery and corruption require a serious corporate response. Not, as GSK appears to have done, in their best Inspector Clouseau imitation, not being able to find the nose on their face.

Further, and more nefariously, was GSK’s documented treatment of and history with internal whistleblowers. One can certainly remember GSK whistleblower Cheryl Eckard. A 2010 article in The Guardian by Graeme Wearden, entitled “GlaxoSmithKline whistleblower awarded $96m payout”, where he reported that Eckard was fired by the company “after repeatedly complaining to GSK’s management that some drugs made at Cidra were being produced in a non-sterile environment, that the factory’s water system was contaminated with micro-organisms, and that other medicines were being made in the wrong doses.” She later was awarded $96MM as her share of the settlement of a Federal Claims Act whistleblower lawsuit. Eckard was quoted as saying, “It’s difficult to survive this financially, emotionally, you lose all your friends, because all your friends are people you have at work. You really do have to understand that it’s a very difficult process but very well worth it.” So to think that GSK may simply have been SHOCKED, SHOCKED, that allegations of corruption were brought by an internal whistleblower may well be within the realm of accurate.

There would have seemed to have been plenty of evidence to let the company know that something askance was going on in its Chinese operations. The international press was certainly able to make that connection early on in the scandal. An article in the Financial Times (FT), entitled “China accuses GSK of bribery” by Kathrin Hille and John Aglionby, reported “GSK said it had conducted an internal four-month investigation after a tip-off that staff had bribed doctors to issue prescriptions for its drugs. The internal inquiry found no evidence of wrongdoing, it said.” Indeed after the release of information from the Chinese government, GSK said it was the first it had heard of the investigation. In a prepared statement, quoted in the FT, GSK said ““We continuously monitor our businesses to ensure they meet our strict compliance procedures – we have done this in China and found no evidence of bribery or corruption of doctors or government officials.” However, if evidence of such activity is provided we will act swiftly on it.”

Laurie Burkitt, reporting in the Wall Street Journal (WSJ) in an article entitled “China Accuses Glaxo of Bribes”, wrote that “Emails and documents reviewed by the Journal discuss a marketing strategy for Botox that targeted 48 doctors and planned to reward them with either a percentage of the cash value of the prescription or educational credits, based on the number of prescriptions the doctors made. The strategy was called “Vasily,” borrowing its name from Vasily Zaytsev, a noted Russian sniper during World War II, according to a 2013 PowerPoint presentation reviewed by the Journal.” Burkitt reported in her article that “A Glaxo spokesman has said the company probed the Vasily program and “[the] investigation has found that while the proposal didn’t contain anything untoward, the program was never implemented.”” From my experience, if you have a bribery scheme that has its own code name, even if you never implemented that scheme, it probably means that the propensity for such is pervasive throughout the system.

I have often written about the need for a company to have an investigative protocol in place so that it is not making up its process in the face of a crisis. However the GSK matter does not appear to be that situation. It would not have mattered what investigation protocol that GSK followed, it would seem they were determined not to find any evidence of bribery and corruption in their China business unit. So the situation is more likely that GSK should have brought in a competent investigation expert law firm to head up their investigation in the face of this anonymous whistleblower’s allegations.

In an ACC Docket article, entitled “Risks and Rewards of an Independent Investigation”, authors James McGrath and David Hildebrandt discuss the use of specialized outside counsel to lead an independent internal investigation as compliance and ethics best practices. This is based upon the US Sentencing Guidelines, under which a scoring system is utilized to determine what a final sentence should be for a criminal act. Factors taken into account include the type of offense involved and the severity of the said offense, as well as the harm produced. Additional points are either added or subtracted for mitigating factors. One of the mitigating factors can be whether an organization had an effective compliance and ethics program. McGrath and Hildebrandt argue that a company must have a robust internal investigation.

McGrath and Hildebrandt take this analysis a step further in urging that a company, when faced with an issue such as an alleged Foreign Corrupt Practices Act (FCPA) violation, should engage specialized counsel to perform the investigation. There were three reasons for this suggestion. The first is that the Department of Justice (DOJ) would look towards the independence and impartiality of such investigations as one of its factors in favor of declining or deferring enforcement. If in-house counsel were heading up the investigation, the DOJ might well deem the investigative results “less than trustworthy”.

Matthew Goldstein and Barry Meier discussed the need for independence from the company being investigated in an article the New York Times (NYT) about the General Motors (GM) internal investigation entitled “G.M Calls the Lawyers”. They quoted William McLucas, a partner at WilmerHale, who said, “If you are a firm that is generating substantial fees from a prospective corporate client, you may be able to come in and do a bang-up inquiry. But the perception is always going to be there; maybe you pulled your punches because there is a business relationship.” This is because if “companies want credibility with prosecutors and investors, it is generally not wise to use their regular law firms for internal inquiries.” Another expert, Charles Elson, a professor of finance at the University of Delaware who specializes in corporate governance, agreed adding, “I would not have done it because of the optics. Public perception can be affected by using regular outside counsel.””

Adam G. Safwat, a former deputy chief of the fraud section in the Justice Department, said that the key is “Prosecutors expect an internal investigation to be an honest assessment of a company’s misdeeds or faults, “What you want to avoid is doing something that will make the prosecutor question the quality of integrity of the internal investigation.”” Also quoted was Internal Investigations Blog editor, Jim McGrath who said, “A shrewd law firm that gets out in front of scandal can use that to its advantage in negotiating with authorities to lower penalties and sanctions. There is a great incentive to ferret out information so they can spin it.”

The GSK experience in China will inform compliance practitioners for years to come with the company’s plethora of miss-steps. Perhaps one day the company will become as successful as The Partridge Family and they can open their annual meeting with The Partridge Family Theme – Come On Get Happy!

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

Board Investigations and the Curse of the Mummy’s Tomb – Part II

Yesterday I began an exploration of a recent article in the Corporate Board magazine, entitled “Successful Board Investigations” by David Bayless and Tammy Albarrán, partners in the law firm of Covington & Burling LLP. In Part I, I reviewed the authors’ five key objectives, which they believe a board must pursue to ensure a successful investigation. Today, I will look at the authors’ seven considerations to facilitate a successful board investigation.

1.             Consider whether you need independent outside counsel

The authors consider that the appearance of partiality “undermines the objectivity and credibility of an investigation.” That means you should not use your regular counsel. The authors cite to the Securities and Exchange Commission (SEC) analysis of how independent board members truly are to explain the need for independent counsel. They state, “the SEC considers the following criteria when determining whether (and how much) to credit self-policing, self-reporting, remediation and cooperation” which will consist of the following factors:

• Did management, the board or committees consisting solely of outside directors oversee the review?
• Did company employees or outside persons perform the review?
• If outside persons, have they done other work for the company?
• If the review was conducted by outside counsel, had management previously engaged such counsel?
• How long ago was the firm’s last representation of the company?
• How often has the law firm represented the company?
• How much in legal fees has the company paid the firm?

As Andre Agassi might say, ‘perception is reality’.

2.             Consider hiring an experienced “investigator” to lead the internal investigation

Noted internal investigation expert Jim McGrath has written and spoken about the need to utilize specialized counsel in any serious investigation. If a board is leading an investigation, I would submit by definition it is serious. The authors say that your investigation needs to lead by a lawyer with significant experience in conducting internal investigations; a strong background in criminal or SEC enforcement; and has substantive experience in the particular area of law at issue. The traits are needed so that your designated counsel will think like an investigator, not like an in-house lawyer or civil litigator.

3.             Consider the need to retain outside experts

In any Foreign Corrupt Practices Act (FCPA) or other anti-corruption investigation, there will be the need for a wider variety of subject matter experts (SME’s) than a compliance professional. The authors correctly recognize that “ if there are accounting issues, forensic accountants might be needed. In this day and age, an electronic discovery consultant is often required, and can be a cost effective option for gathering and processing electronic data for review.” These types of investigations will most probably be cross-border as well and this will require other varieties of expertise. The authors caution that, “The lowest bid may not necessar­ily be the best for a particular investigation. While cost is important, understand the limitations of each consultant and, with input from your investigator, determine which consultant best meets your goals.”

4.             Analyze potential conflicts of interest at the outside and during the investigation

The authors see two types of conflicts of interest that may come to light during an investigation. First is the one which comes up when the law firm or lawyers conducting the inves­tigation are those whose prior legal advice has some bearing on the matters being investigated because a company’s regular outside lawyers represent the company. During an internal investigation, however, the lawyers may be hired by, and represent, the board or its committee. The second occurs when a lawyer or law firm jointly represents the board and employees at the company as regulators have become increasingly concerned with joint representations. Moreover, “The trickier question is what to do when there simply is a risk that representing one client could limit the lawyers’ duties to the other.” So in these situations, joint representation may not be appropriate.

5.             Carefully evaluate Whistleblower allegations

With the advent of Sarbanes-Oxley (SOX) and Dodd-Frank, whistleblowers have become more important and taking their allegations seriously is paramount. This does not mean trying to find out who the whistleblowers might be to punish or stifle them, even if they are located outside the United States and therefore do not have protections under these laws. They can still get hefty bounties. The authors recognize that companies can come to grief when “companies run into problems when whistleblower allegations are discounted, if not outright dismissed, especially if the whistleblower has a history of causing trouble or is perceived as incompetent. When this type of whistleblower makes a claim, it is easy to presume ulterior motives.” While such motives might exist, it does not matter one iota when it comes to the investigation, as “Regulators are very wary of boards that do not satisfactorily evaluate a whistleblower’s complaint based on a perception of the whistleblower himself, as opposed to the substance of the complaint.”

6.             Request regular updates from outside counsel, without limiting the investigation

These types of investigations are long and very costly. They can easily spin out of cost control. But, by trying to manage these costs, a board might be perceived as placing improper limits on the investigation. The “goal is to strike the right balance between the cost of the investigation and its thoroughness and credibility.” To do so, the authors advise that flexibility is an important ingredient. A board can begin the project with an agreed upon initial scope of work and then “revisit the scope of work as the investigation progresses. If conduct is discovered that legitimately calls for expanding the scope of the investigation, then the board can revisit the issue at that point. Put another way, the scope of what to investigate is not a static, one-time decision. It can, and usually does, evolve.” By seeking regular updates and questioning counsel on what they are doing and why, directors can manage costs, while at the same time ensuring that the investigation is sufficiently thorough and credible.

7.             Consider whether an oral report at the conclusion of the investigation is sufficient

While there may be instances in which, due to complexity and the nature of allegations involved, a written report is necessary, the authors believe that there may be times when an oral report delivered to a board is better than a written report for “a written report may be easier to follow and appear to be the logical conclusion to an investigation, it is an expensive and time-consuming endeavor, and it comes with great risk.” The authors indicate three reasons for this position.

First, it is much easier to inadvertently waive the attorney-client privilege if a written report is created and in the wrong hands, such a written report may well create “a road map to a plaintiff” in any shareholder action. Second, once those findings and conclusions are written they may become “set in stone. If later information comes to light that impacts the report’s conclusions, altering the conclusions may undermine the credibility of the entire investigation. So, retaining flexibility to change the findings if further information is later learned is a real advantage of an oral report.” Third, and finally, “it takes time to prepare a well-written and thorough report. When an internal investigation must be conducted quickly, spending time to prepare a written report may not be an efficient use of time.” For all of these reasons, and perhaps others, an oral report presented to the board and documented in the Board of Director meeting minutes may be sufficient.

The authors conclude their piece by stating, “By keeping in mind the issues addressed above, the board will be better prepared for the investigation and readily able to exercise good judgment throughout the review. A well-conducted investigation by the board may spare the company further disruption and costs associated with follow-on investigations by the regulators, or at the very least minimize the company’s exposure.” I would only add that by following some of the prescriptions set out by Bayless and Albarrán your Board might also avoid the fate that befell Lord Carnarvon and the Curse of the Mummy’s Tomb.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

Board Investigations and the Curse of the Mummy’s Tomb – Part I

On this day in 1923, the tomb of King Tut was opened. It created a worldwide stir that has in many ways continued down into the 21^st century. Clearly, the boy ruler influenced Steve Martin , (How’d you get so funky?, Funky Tut). Moreover, when the King Tut exhibit first toured the US in the 1970s, it sold out everywhere that it went. And, of course, there was the Curse of the Mummy’s Tomb, which led to some great Universal classic horror pictures. This curse may have killed the dig’s benefactor, Lord Carnarvon who died just months after entering the tomb in November 1923, but the archeologist who discovered King Tut, Howard Carter, seemingly outlived the curse, dying at the age of 64 on the eve of World War II.

I thought about the techniques employed by these two archeologists in the Curse of the Mummy’s Tomb when I read an article in the Corporate Board magazine, entitled “Successful Board Investigations” by David Bayless and Tammy Albarrán, partners in the law firm of Covington & Burling LLP. Why the Curse of the Mummy’s Tomb? It is because if a Board of Directors does not get an investigation which it handles right, the consequences can be quite severe. Over the next two posts I will explore the article by Bayless and Albarrán. Today in Part I, I will review the author’s five key objectives, which they believe a board must pursue to ensure a successful investigation. Tomorrow. in Part II, I will review the authors seven considerations to facilitate a successful board investigation.

The authors recognize that the vast majority of investigations will be handled or directed by in-house counsel. However, if and when such an investigation is needed, it is critical that it be handled with great care and skill. The authors note that “While this task is fraught with peril, there are a number of steps a board can take to ensure that the investigation accomplishes the board’s goals, which will enable it to make informed decisions, and withstands scrutiny by third parties” because it is this third party scrutiny, in the form of regulators, government officials, judges/arbitrators or plaintiffs’ counsel in shareholder actions, who will be reviewing any investigation commissioned by a Board of Directors. The authors believe that there are five key goals that any investigation led by a Board of Directors must meet. They are:

Thoroughness – The authors believe that one of the key, and most critical, questions that any regulator might pose is just how thorough is an investigation; to test whether they can rely on the facts discovered without having to repeat the investigation themselves. Regulators tend to be skeptical of investigations where limits are placed (expressly or otherwise) on the investigators, in terms of what is investigated, or how the investigation is conducted. This question can be an initial deal-killer particularly if the regulator involved views an investigation insufficiently thorough, its credibility is undermined. And, of course, it can lead to the dreaded ‘Where else’ question.

• Objectivity – Here the authors write that any “investigation must follow the facts wherever they lead, regardless of the consequences. This includes how the findings may impact senior management or other company employees. An investigation seen as lacking objectivity will be viewed by outsiders as inadequate or deficient.” I would add that in addition to the objectivity requirement in the investigation, the same must be had with the investigators themselves. If a company uses its regular outside counsel, it may be viewed with some askance, particularly if the client is a high volume client of the law firm involved, either in dollar amounts or in number of matters handled by the firm.
• Accuracy – As in any part of a best practices anti-corruption compliance program, the three most important things are Document, Document and Document. This means that the factual findings of an investigation must be well supported. For if the developed facts are not well supported, the authors believe that the investigation is “open to collateral attack by skeptical prosecutors and regulators. If that happens, the time and money spent on the internal investigation will have been wasted, because the government will end up conducting its own investigation of the same issues.” This is never good and your company may well lose what little credibility and good will that it may have engendered by self-reporting or self-investigating.
• Timeliness – Certainly in the world of Foreign Corrupt Practices Act (FCPA) enforcement, an internal investigation should be done quickly. This has become even more necessary with the tight deadlines set under the Dodd-Frank Act Whistleblower provisions. But there are other considerations for a public company such as an impending Securities and Exchange Commission (SEC) quarterly or annual report that may need to be deferred absent as a timely resolution of the matter. Lastly, the Department of Justice (DOJ) or SEC may view delaying an investigation as simply a part of document spoliation. So timeliness is crucial.
• Credibility – One of the realities of any FCPA investigation is that a Board of Directors led investigation is reviewed after the fact by not only skeptical third parties but also sometimes years after the initial events and investigation. So not only is there the opportunity for Monday-Morning Quarterbacking but quite a bit of post event analysis. So the authors believe that any Board of Directors led investigation “must be (and must be perceived as) credible as to what was done, how it was done, and who did it. Otherwise, the board’s work will have been for naught.”

To help manage these five issues the authors have seven tangible considerations they suggest that a Board of Directors follow to help make an investigation successful. Tomorrow I will review and scrutinize these seven considerations.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

Read All About It-Newspaper Reporting and FCPA Allegations

One of the avenues rarely discussed for allegations of violations of the Foreign Corrupt Practices Act (FCPA) to work their way to the Department of Justice (DOJ) or Securities and Exchange Commission (SEC) is through good old newspaper reporting. It looks like we may see an example of that in the upcoming months.  The story involves the company Gold Fields Limited, which is a South African gold mining firm, one of the world’s largest, which is listed on both the Johannesburg Stock Exchange (JSE) and the New York Stock Exchange (NYSE).

As reported on September 6, in the Mail and Guardian Online, by reporters Craig McKune and Stefaans Brümmer, in an article entitled “Investigators: ‘Gold Fields bribed Mbete‘”, there were allegations made that the company bribed African National Congress (ANC) chairwoman Baleka Mbete to get a mining right for its South Deep mine. Moreover, these allegations were made not by outside authorities or investigations but were apparently uncovered in an internal investigation commissioned by the company’s Board of Directors and handled by the New York law firm of Paul, Weiss, Rifkind, Wharton & Garrison (Paul Weiss) “to determine the facts and to provide recommendations to the board”. When the law firm returned with a finding which the law firm believed warranted a self-disclosure, the article said that “the company’s board disregarded the advice – and instead decided not to have the findings written up.”

The Underlying Deal

The transaction at issue involves a stake a gold mine named South Deep and the South African Department of Mineral Resources’ requirement that the “company find an empowerment partner.” Under South African law, certain transactions are designated as Black Economic Empowerment (BEE) transactions and they require an empowerment partner. In 2010, Gold Fields announced that it had secured the rights for the South Deep mine and that it had finalized the terms of the related BEE transaction, which was required to secure the license for the mine. As part of this original BEE transaction, certain “politically connected people” including ANC chairperson Mbete and Jerome Brauns, one time the lawyer for the President of South Africa, as part of this BEE structure.

Originally, Mbete’s share as a participant was a “near-negligible value.” But later in 2010 she allegedly complained that her share was too small and “threatened to scuttle” the deal unless she was given a larger share. This allegedly led to approximately a 10% share increase of the BEE structure; which translated to R25-million, which converts into approximately $2.51MM USD.

In a Business Day article, entitled “Gold Fields BEE deal raises US inquiry red flag”, reporters Lindo Xulu and Jana Marais reported that “Mamphela Ramphele, former Gold Fields chairwoman who appointed Paul Weiss to probe the deal, told Business Day in an interview earlier this year that the department of mineral resources, which issues mining licences, had forced Gold Fields to include certain people in its list of beneficiaries.” The company itself denied this claim.

Paul Weiss Investigation

In December, 2012, Paul Weiss was brought in to investigate the matter. The law firm found enough evidence of legal violations that it recommended to the Board that they should “self-report” the evidence to the relevant authorities. This would include the DOJ and SEC as Gold Fields is listed on the NYSE. It also would have presumably included reporting to the relevant South African authorities under the “Prevention and Combating of Corrupt Activities Act. This law requires anyone who knows or reasonably suspects that any other person has committed an act of corruption, theft, fraud, extortion, forgery or uttering to report it to the police. Failure to do so is a criminal offence and carries a fine or imprisonment of up to 10 years.”

As reported in the Mail and Guardian Online, the Board received two power point presentations from Paul Weiss. The article said, “Sources with direct access have described the contents of key slides to amaBhungane. One said the full findings were “devastating” for Gold Fields.” However after a week of deliberations, the company decided the better course would be to terminate Paul Weiss before they put their final findings in any written report. The article reported that “Gold Fields chairperson Cheryl Carolus claimed last week that this was to avoid further expenses and because Paul Weiss had properly briefed the board.” Further, the Board decided not to self-report because “self-reporting would damage the company too much.”

The Board did release a statement which said in part that “the implementation of the [BEE] transaction did not consistently meet the high standards set by Gold Fields”. Some additional fallout came when three foreign Directors departed from the Board. One of them, Roberto Dañino, a former Prime Minister of Peru, resigned “once it became clear that the board had concluded its examination of the BEE transaction”. He was quoted in the article that “I thought it was my duty to stay at the board and ethics committee to see that the investigation was finalised and that the board had considered its findings. Once the board made a decision, I decided to resign irrevocably. That’s all I can say and you can draw your own conclusions.”

Going Forward

Jeff Kaplan writes and lectures on the duties of Boards of Directors. One of the things that he assuredly does not include is any item which says that a company should not self-report substantive allegations of FCPA violations because it would “damage the company too much.” The lesson for the compliance practitioner is that a Board has its own separate duties and burying information from such a well-respected law firm as Paul Weiss is not going to protect it going forward, particularly when the allegations reach the headlines of national newspapers. What exactly does the Board think? If we just bury our head in the sand long enough this will all go away? Or perhaps that because no final report was authorized, then the underlying facts which led to the putative recommendation will go away?

Neither the DOJ nor SEC will sit back and watch a company sustain such allegations against it without doing anything. I have heard DOJ representatives say that one of their avenues to obtain information on new claims is news reporting and this would seem to a very good case for such a scenario. After all, the Wall Street Journal first reported on the allegations of bribery and corruption against Hewlett-Packard and the next day, the DOJ and SEC announced they were investigating the company. The timeline may have been similar regarding Wal-Mart after the New York Times broke the story about allegations of bribery and corruption in the company’s Mexico subsidiary. Whatever the answer is for Gold Fields, it would certainly not appear to be positive.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

FCPA Enforcement as a Security Issue and Implications for the Compliance Practitioner

One of the things that has long puzzled me is what led to the significant rise in the enforcement of the Foreign Corrupt Practices Act (FCPA) beginning in the 2003-2004 time frame? One of the more consistent theories that I have heard proffered, by Dan Chapman, Dick Cassin, Alexandra Wrage and others is that after 9/11, the Bush administration viewed corruption as a security issue. I admit that I was not totally sold on this theory until last week when, the FCPA Blog, in an article entitled “NSA spying also linked to FCPA enforcement”, reported that the National Security Agency (NSA) has engaged in economic espionage for the benefit of the United States and perhaps others. The FCPA Blog quoted a story from the American Spectator, entitled “Rise of the Surveillance State”, by James Bovard. One of the items which Bovard discussed is the program monikered ‘Echelon’, which he described as “a spy satellite system run by the National Security Agency along with the United Kingdom, Australia, New Zealand, and Canada. Echelon reportedly scans millions of phone calls, e-mail messages, and faxes each hour, searching for key words.”

Apparently this program is also used for FCPA enforcement. Bovard wrote that “A February report by the European Union alleged that Echelon has been used for economic espionage. Former CIA Director James Woolsey told a German newspaper in early March that Echelon collects “economic intelligence.” One example Woolsey gave was espionage aimed at discovering when foreign companies are paying bribes to obtain contracts that might otherwise go to American companies. Woolsey elaborated on his views in a condescending March 17 Wall Street Journal oped, justifying Echelon spying on foreign companies because some foreigners do not obey the U.S. Foreign Corrupt Practices Act. To add insult to injury, Woolsey noted there’s no reason for U.S. companies to steal backward Europe’s secrets.” Isn’t that a comforting thought when the US claims the Chinese are stealing secrets through computer hacking.

But what are the implications for the compliance professional? For a more Orwellian prediction, John Batchelor, in an article entitled “ NSA Scandals: FCPA Compliance Game Changer?”, has this chilling predeiction, “Currently it takes months or years to develop a solid FCPA case and most of those end up with fines and some type of penalty. Could that change to a new way of enforcement where the government targets a company, identifies corruption, gathers evidence, and instead of going through the motions, simply calls them to schedule a meeting, slapping a fine and a series of actionable tasks for the company in question? It’s not happening now, but that is a question.” It would seem to do away completely with the concept of due process so I would discount this scenario as unlikely.

However, Batchelor does point out that such government oversight might well occur in countries which are known or perceived to be high risk for corruption. He says, “Under the FCPA we focus on anti-bribery, however, with our current emphasis on national security, I think there is a serious question to ask for any company that operates in high CPI areas where terrorist cells or money laundering outfits to terrorist cells operate.” From this premise, Batchelor poses several topical inquiries which you should consider now. They include: “How well do you know your agents? How well do you know their relationships? How well do you know the companies they are affiliated with? Are there red-flags that low-level DPL type screenings might not uncover?”

I believe that the revelations which came out last week will make the compliance professional’s job more difficult but that difficulty may well be due to the backlash against not only the massive collections of data that the US government is obtaining through its surveillance programs but also the arrogance shown in statements like former CIA Director Woolsey, in the statement quoted in the American Spectator article. I believe that there three general areas which will negatively affect US compliance professionals.

First, is in the area of data access. Edward Luce, in a Financial Times (FT) article entitled “Obama has hurt himself and business over privacy”, said that the “US is losing credibility in its goal of trying to stop the internet from balkanizing into separate national frameworks.” While Luce discussed this in terms of the US criticism of “the great firewall of China”; a US investor might think about the Securities and Exchange Commission’s (SEC’s) struggle to get China to agree to allow auditors to provide data to the US consistent with US securities laws, or laws which the SEC enforces, such as the books and records component of the FCPA.

Second, what about data privacy? I think that the acknowledgement of the US surveillance programs will lead other countries to toughen up their data privacy requirements. This means that the compliance professional will be faced with an even more bewildering set of data privacy requirements to deal with to accurately access a company’s compliance program. For the intelligence angle, Luce quoted Ira Hunt, the CIA’s chief technology officer for the following, “Since you can’t connect the dots you don’t have…we fundamentally try and collect everything and hang on to it forever.” However, we now know that this surveillance also was used for other law enforcement issues such as enforcement of the FCPA. While foreign governments cannot legislate privacy as to the data collected by the US government, they certainly can do so vis-à-vis US companies doing business in their jurisdictions or home-domiciled foreign companies which are subject to the FCPA through a US subsidiary.

Indeed this very issue is now in the forefront of EU-US trade negotiations. In another article in the FT, entitled “Data scandal clouds trade talks”, Hannes Swoboda, leader of the socialist members of the European Parliament was quoted as saying, “With all the information that we’ve found out in the recent days about how easily the US spies on people’s private data I think it will be difficult for the Americans to oppose a strong data protection agreement.” The article notes that many of the rules proposed for EU data protection are opposed by US companies because “their business models would be damaged.”

Lastly, what about jurisdiction and the FCPA? Currently if a banking transfer goes thought the US banking system, FCPA jurisdiction attaches. While it has not yet been tested, several commentators have spoken about information which might be saved on servers based in the US. So what if information appears on Google or through a Google-search or on Facebook? Now take the next step and ask, if there is data mining, which strikes pay dirt, could that create or even portend jurisdiction?

As an American, I understand the need for enhancing security protocols after 9/11. It is an irritation, but only that, similar to taking off my shoes to go through security, all courtesy of Richard Reid, ‘the Shoe Bomber’. Further, these US government surveillance programs, which have been ongoing though both a GOP and Democratic administration, were authorized by an overwhelming majority of both houses of the US Congress and has judicial oversight. But many outside the US may not see the same needs and protections that I see in place. Luce said in his article, “Washington’s reassurances are irrelevant to the 3.4bn non-Americans who are online…But foreigners might not be comforted to learn that their privacy is protected by a secret US court, which is overseen by a select group of US lawmakers who are themselves sworn to secrecy.”

I think that the job of the compliance practitioner just got a lot tougher.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

Do Law Firms Have an In-House Privilege?

There is often a discussion about the retention of outside counsel to lead an investigation of alleged violations of the US Foreign Corrupt Practices Act (FCPA) so that the company may maintain the attorney-client privilege. But is there some other privilege which might be lurking in this relationship? This question was discussed in an article in the May issue of the ABA Journal, entitled “Inside Story”, by Mark Curriden, which details a discovery dispute before the Georgia Supreme Court where a law firm has claimed that it enjoys an attorney-client privilege in a malpractice claim brought by a former client. The case involves allegations that communications between a law firm and its in-house counsel are privileged in favor of the law firm and poses the following query: “whether communications between lawyers and in-house counsel are protected by the attorney-client privilege and the work product doctrine when a dispute arises between the firm and a client.”

The case involves three lawyers from the Savannah, GA law firm of Hunter, Maclean, Exley & Dunn PC (Hunter Mclean). The law firm had prepared certain real estate sales contracts, which were used by the firm’s client, St. Simons Waterfront LLC. After buyers began to opt out of these contracts to purchase certain properties, the law firm suggested that the company negotiate with the purchasers.

The company demanded that the law firm work to enforce the agreements. Curriden wrote that “The lawyers for Hunter Maclean took the scolding as a sign that St. Simons Waterfront was planning a malpractice claim against them and contacted the firm’s in-house counsel immediately after the call.” He quoted the lawyer for St. Simons Waterfront who said that “Within minutes of the conference call, Hunter Maclean lawyers were already taking legal steps to defend themselves for litigation, even though they were still representing the client and would continue to represent the client for another three months.”

The law firm understood that the company was threatening litigation against the law firm and claimed they told the client that it needed new counsel. The company said at no time did it suggest that it was preparing to sue its own lawyers and denies that the law firm told them after the phone call in question that a conflict existed and that the company should retain new counsel.

Indeed later, the client sued the law firm for malpractice in the drafting of the real estate contracts, in a case styled, St. Simons Waterfront v. Hunter, Maclean, Exley & Dunn. The dispute currently before the Georgia Supreme Court is over certain documents that the law firm claims is its internal attorney-client privileged communications , specifically including a 33-page memo from the firm’s own in-house lawyer describing the Feb. 18, 2008, conference call referenced above, that lawyers at the firm wrote the day after the telephone conversation occurred.

Susan W. Cox, counsel representing Hunter Mclean, said that “The documents and communications sought involve efforts by the firm to investigate, evaluate and consider how to respond to the client’s asserted claim.” Curriden further quoted her as stating that “Under the plaintiff’s argument, Cox says, “a law firm would have to immediately withdraw from any further client representation, regardless of the harm to the client and regardless of whether the client consented to the additional temporary and necessary representation, in order to protect its in-house information from disclosure in the malpractice claim. It was impossible for Hunter Maclean to immediately withdraw without causing great harm to the client. Under Georgia and federal law, the attorney-client privilege is interpreted to protect against disclosure of information obtained or shared in a confidential relationship, and that applies equally to communications with in-house and outside counsel.””

However, the trial court disagreed with the law firm’s position and ordered production of the documents “ruling that the privilege didn’t apply because Hunter Maclean failed to inform the client about its conflicts. The judge ordered Hunter Maclean to turn over the internal documents that St. Simons Waterfront was seeking.” Then “The Georgia Court of Appeals reversed, ruling that the firm’s communications with in-house counsel remained privileged because the in-house counsel was completely isolated from the St. Simons Waterfront legal work and thus did not have a conflict. St. Simons Waterfront appealed to the state supreme court. Oral arguments were held in March.”

The article posited the two schools of thought on this question. Attorney John G. Nelson, counsel for the St. Simons Waterfront, was quoted as saying “The appellate court’s reasoning “makes it too easy for law firms to conceal unethical conduct from clients…If the client’s attorneys consult with the in-house attorney—not for the purpose of meeting their ethical obligations to the client but to cover up their own malpractice, and the in-house attorney assists them in doing so—the firm could withhold that information simply because the in-house attorney was ‘segregated’ from directly representing the client.”” Nelson further said that “The reason is simple: When a law firm represents a current client, the entire law firm’s fiduciary and ethical duties are to that client.”

However at least 13 law firms which are not parties to this dispute, signed an amicus brief in support of the law firm in the discovery dispute. Interestingly, the American Bar Association (ABA) filed an amicus brief which stated the ABA “takes no position on whether the privilege and work product claims in this case should be sustained.” After quoting this statement, Curriden goes on to quote from the ABA’s amicus brief that ““the ABA urges that lawyers’ communications when seeking legal advice from their in-house counsel should be broadly protected because of the benefits to their clients and the legal system, and to lawyers and their firms,” states the association’s brief. “Lawyers face an increasing array of legal and ethics duties, and the availability of in-house advice, without the cost or inconvenience of seeking an outside lawyer, encourages lawyers to pursue internal investigations where questions of misconduct or malpractice arise.”” Therefore, the attorney-client ““privilege should not be abrogated or limited except for compelling reasons.” But this analysis changes “if it is concluded that the client may have a malpractice claim against the lawyer,” states the brief. “Whether the privilege as to further in-house consultations is abrogated or limited during a continuing representation might become a question of fact for the trial court as to whether the client were promptly and adequately informed of the potential claim.””

As a former in-house counsel I certainly find it troubling if, at the slightest spat between a law firm and a client, the law firm then ‘lawyers-up’ and girds for a lawsuit. One of the greatest things about the legal profession is that it holds the highest duty possible to its clients. If a law firm is taking a position contrary to its client’s interest, it cannot no longer ethically represent the client. Curriden ends his article with a short discussion on this point when he said, “many corporate GCs privately express concerns about what their law firms may be doing behind their backs.” He quoted Randy Johnston, who focuses his practice at JohnstonTobey PC in Dallas on professional malpractice cases, who said “Corporate general counsel have every right to be concerned that their law firm is secretly plotting against them and their best interests, and are doing so without notifying them,”. Johnston goes on further to say “In the end, I think there’s only one solution: Law firms should have the right to internal defense and to work product, but the law firm must immediately inform the client when there is a conflict. Failure to tell the client eviscerates the privilege. Period.”

This is a case which certainly bears watching as it may go quite a long way towards fundamentally altering the attorney-client relationship.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013