Experience Counts When Involved In An SEC Investigation

Monday, August 2, 2010 - 01:00

Editor: Would each of you tell our readers about your backgrounds and the composition of your current practice?

Berke: I am co-head of our white collar criminal defense and government investigations group, which represents companies and individuals in all types of investigations. We represent Fortune 100 companies, senior executives, lawyers and accountants in investigations conducted by the SEC and other agencies as well as criminal investigations. We pride ourselves on being trial lawyers, which can often help us get the best results for clients, both by persuading regulators not to bring a case that we convince them they will lose, as well as by prevailing in a contested proceeding.

Schoeman: Our practice has about a dozen partners who are very experienced in white collar and government investigations, including a number of former prosecutors of whom I am one. I was an Assistant U.S. Attorney in the Eastern District of New York before I came to Kramer Levin. I left Kramer Levin in 2007 to become the Chief Assistant United States Attorney in the Eastern District of New York and returned to the firm in 2009 to rejoin the white collar criminal defense and government investigations group.

Editor: When a corporation receives notice that it is being investigated by the SEC, what should the general counsel immediately do or not do?

Schoeman: The most important thing to keep in mind is that you should never answer questions from the SEC without being fully prepared. Sometimes the SEC will give the impression that a conversation is informal or not fully on the record, and sometimes people think that a quick informal answer will make the inquiry go away. Nothing is ever informal or off the record with the SEC. Always make sure that you are fully prepared and that you know all of the relevant facts when you talk to the SEC. Being fully prepared usually means making sure that documents have been preserved and collected and that an appropriate internal review of the matter in question has been conducted within the protections of the attorney-client privilege.

Berke: The initial interaction between the company or the individual and the SEC can at times form the basis for the factual dispute. What was said and not said can lead to a difficult exchange with the regulator that outside counsel then has to address whereas it often would have been much better if outside counsel was able to determine the most strategic response, after reviewing the documents and issues.

Editor: Do you have a preliminary conversation with the regulator to find out what he is really after?

Berke: Yes. What we'll often do is identify ourselves as counsel for the company, indicate that we understand the SEC called and that we would like to know what issues the SEC is interested in learning more about. When outside counsel makes the call rather than in-house counsel, we can honestly say that we don't know the answer to the specific questions and will have the luxury of learning more about the SEC's focus and then can consider the issues before responding. When the client is speaking directly with the regulator, it's harder to disclaim knowledge of the set of issues or to determine the regulator's primary concerns.

Editor: What is the SEC's Division of Enforcement policy change that was announced in January? Are you aware of any examples of the SEC demonstrating a new degree of flexibility regarding the imposition of sanctions against cooperators?

Berke: One of the most significant new changes is that the SEC now has formally announced that they will be seeking to offer a specific cooperation benefit to individuals whereas formerly the SEC only had a formal policy of encouraging cooperation of corporations. Basically the "Seaboard policy" provided that when a corporation fully cooperated with the SEC in an investigation, the corporation itself would be rewarded by receiving a lesser sanction as a result of the investigation.

The policy for individuals is modeled after what presently exists for the DOJ's prosecution of criminal cases. It seeks to formalize a procedure whereby company employees can be promised the benefit of not being charged by the SEC if they agree to give testimony against others in the company, including the company itself.

I happen to have represented a client in a case that involved the first use of this policy while still in its formative stages, and I was able to witness firsthand what I think are the potential risks involved with this policy. For example, it's not uncommon for the general counsel or assistant general counsel of a company to sit down with all of the various individuals who may be involved in the relevant issues and discuss not only the facts but also how the company may respond to those issues. Today, corporate counsel has to be much more concerned that the employees or officers with whom they are speaking could be subjects of an investigation and may be offered various incentives by the SEC to provide evidence against the company. Companies should be mindful of protecting the attorney-client privilege and handling the communications in a strategic way beyond simply learning the facts from the individuals involved.

Schoeman: Another important practice point for general counsel to understand is that the cooperation incentives offered by the SEC should encourage corporations to publicize the means by which employees can report internally any concerns that they have. It's far better for the general counsel to be hearing from employees any concerns that they may have rather than those concerns being relayed in the first instance to the SEC.

Editor: What are the advantages and disadvantages of deferred prosecution agreements or non-prosecution agreements?

Berke: For a significant period of time regulatory agencies and law enforcement would seek either a deferred prosecution agreement (meaning that if the company did not have future problems and complied with specific requirements of the agreement, the prosecution would be deferred for a period of time and then dropped) or non-prosecution agreement (i.e., the government will not prosecute the company provided the company has agreed to certain measures). Our view is that too often the government was requiring one of these two agreements and companies were entering into them despite the fact that there were valid defenses and real issues as to whether or not the company had done anything wrong. The public at large often viewed entering into either of these agreements as an acknowledgement by the company that it had done something wrong but was making a deal so that it could continue operating. We have found that where companies are more aggressive in seeking to push back and meet with more senior staff to demonstrate why the company should not be required to enter into any such agreements that companies can have success in persuading the agencies to forego any charges or such agreements.

Editor: Will the new enforcement procedures of the SEC weaken or strengthen the attorney-client privilege? Are there ethical issues that should be addressed?

Berke: There are a few issues implicated with regard to the attorney-client privilege. There has been a continuing policy debate within the Department of Justice and other agencies as to how far the government can go in asking companies to waive privileges as part of a company's cooperation. The pendulum has now shifted. It's much more difficult for the government to ask for waivers, and companies are more comfortable in resisting requests for waivers of privilege when they are requested. There are greater protections today than there had been in prior years. On the other hand, through the increased use of cooperation agreements with company officers and employees to gather information against the company, there are greater risks that the government will have access to high-level communications involving those individuals and in-house or outside counsel. Companies have to be particularly vigilant in identifying and protecting privileged communications when a company believes that one of its employees or officers may be speaking to the SEC under this new policy.

Editor: What risks lie with "parallel investigations"?

Schoeman: It is important to recognize that in today's world the SEC investigation may not be the only investigation relating to a particular matter. It is quite common to have what are called parallel investigations, meaning that more than one law enforcement agency's investigation and a plaintiff's civil suit may be going on at the same time. The strategy that may seem to be the best with respect to one investigation may not be the best with respect to another. It is important that counsel who is handling an SEC inquiry be very familiar with the other investigations and with shareholder litigation so that a course can be plotted that avoids the potential pitfalls from all of these other investigations, which may not be apparent on the surface at the time that the SEC calls. One of the things about parallel investigations is they may not all start at the same time, and you may only learn later that an issue you thought was only under review by the SEC is also under review by the DOJ, the New York State Attorney General and plaintiffs' lawyers.

Editor: Will directors' and officers' insurance (D&O) cover the expense of an SEC investigation? Are there loopholes in policies about which inside counsel should be aware when reviewing the insurance contracts?

Berke: This is often a contested issue. D&O insurers will sometimes take the position that they'll only cover SEC investigations after a complaint has been filed. We have seen that companies have great success pushing back and insisting that when there is a formal investigation, the D&O policy kicks in at that stage. Today companies generally can get D&O carriers under most policies to cover the expense of the investigation when it has reached the formal investigation stage.

Schoeman: It is also important for general counsel to periodically review their employment and indemnity agreements with officers and directors so that in the event of an investigation they know exactly what the company's responsibilities will be in terms of indemnifying and advancing defense costs to individuals.

Editor: Would you comment on the new Supreme Court decision in Skilling regarding "honest services" and how that may affect future SEC investigations?

Schoeman: What I think you saw in the Skilling case is that prosecutors have pushed the envelope a little too far in aggressively applying the honest services statute to cases that in the Supreme Court's view were not necessarily criminal cases. What you may see will be prosecutors now looking to the SEC to investigate and bring enforcement actions in those kinds of cases that prosecutors will not be able to bring in light of the Skilling ruling.

Please email the interviewees at bberke@kramerlevin.com or pschoeman@kramerlevin.com with questions about this interview.