Uncharted Waters: Kramer Levin's Gary Naftalis On Corporate Internal Investigations

Monday, March 1, 2004 - 00:00

Editor: Please tell us something about your background and experience.

Naftalis:
Following law school and a clerkship with a federal judge, I served as an Assistant United States Attorney in the Southern District of New York. There I was in charge of prosecuting white collar crime cases, first under Bob Morgenthau and later under Mike Seymour. After leaving the U.S. Attorney's office, I practiced white collar criminal defense as part of a litigation boutique with three other partners. Some time later, Kramer Levin, which desired to enhance its litigation capacity and develop a white collar criminal defense practice, reached out to recruit me. I knew a number of the firm's partners and I was familiar with its culture, and thought it was a very fine place to pursue a career in litigation.

Editor: You have written recently about internal investigations conducted by corporate legal departments. Is this the result of the corporate scandals we have seen in recent years?

Naftalis:
The government has targeted corporations in a very aggressive way, and this is something of a departure from past practice. As a result, corporations are undergoing much more in the way of self-evaluation or internal investigations. In the past, corporations were generally not the subject of criminal prosecutions. No more than 1% of federal criminal defendants were corporations, and those that were prosecuted tended to fall into a few rather unique categories. One category involved small, closely held corporations, where the wrongdoer was engaged in his criminal activities in a corporate form. Another category was defense procurement, where corporations were prosecuted for defrauding the government. A third area involved violations of the antitrust laws. Outside of these specialized areas, the prosecution of a corporation was a rare occurrence.

Today there is an enhanced focus on corporations. President Bush has formed a corporate crime task force, under the direction of the Deputy Attorney General, and corporate actions are examined much more stringently than in the past. At the same time, the legal principles relating to corporate criminal liability are not very favorable from the corporation's standpoint. The corporation can be held liable for the actions of just about anyone in the organization who purports to act within his corporate role and allegedly to benefit the corporation.

Editor: Do you think this is part of the permanent landscape for corporations in this country?

Naftalis:
My guess is that this state of affairs is going to be with us for a long time. Congress has been reacting to the general public, and the public perception is that corporate wrongdoing is pervasive and serious and ought to be dealt with harshly. There is certainly no public outcry that Congress is overreacting to the corporate scandals.

Editor: One of the things that corporate counsel is often required to do, in the context of an internal corporate investigation, is interviewing and preparing witnesses in anticipation of litigation. Can you give us some idea of what is legitimate activity on the part of corporate counsel and what might be construed as obstruction of justice?

Naftalis:
There is an old joke in my end of the profession: when the government interviews a witness, they call it an investigation; when defense counsel interviews the same witness, they call it obstruction of justice. It is crucial, when you are representing a client, and whether you are outside counsel or inside, general counsel, to gain a mastery of the facts. Knowledge is power. Obtaining knowledge is a painstaking exercise, and attention to detail, attention to background and proper foundations and proceeding along a carefully defined path, with all of the procedural niceties in place, is essential. For example, if you are conducting an internal investigation and interviewing someone with access to that all-important knowledge, it is necessary to have someone else present. That person should take notes and serve as a witness in the event the person being interviewed decides on a different story after the interview. In addition, it is important that the person being interviewed understand the circumstances under which they are being interviewed and the uses to which their statements may be put. In my experience, a great many people in the corporate world who have ongoing interaction with general counsel or the company's outside attorneys - and this includes members of the senior management team - have the idea that anything they say to an attorney is somehow a privileged communication and will be kept confidential. When someone is engaged in an internal inquiry on behalf of the corporation, these conversations do not have that kind of protection. Counsel represents the corporation only and not the corporate officer being interviewed. It is the corporation - not the witness - which has the right to assert or to waive the privilege. Although the corporation may choose to maintain the confidentiality of the communication, it may also choose - in exercising its duty to act in the best interests of the shareholders - to turn the communication over to the SEC or the Department of Justice in connection with a governmental investigation to which it is subject. It is best that everyone understand the potential consequences of such an inquiry.

Editor: What would happen if the person being questioned was not advised that the privilege was the company's alone?

Naftalis:
The statements made by such a person might not be usable against him if it could be argued that they were elicited from him by stealth or trickery, or even the result of some misunderstanding as to whom counsel represented. At the very least, a public discussion of the matter would cause embarrassment and possible harm to the company and to the individuals concerned. It is much better for everyone to understand the rules at the beginning of an internal investigation.

Editor: For many years the legal departments of a great many corporations have been understaffed. One of the things our publication attempts to promote is the hiring of such additional lawyers are needed to support, on an in-house basis, the compliance functions of general counsel. Can you speak to this initiative?

Naftalis:
One of the trends I've seen recently among public companies is the hiring of people with regulatory experience, from the Department of Justice, the SEC, and the United States Attorney's Office. Increasingly, these companies have created a position of director of legal and regulatory compliance, which is separate from that of general counsel and involves a very special and sophisticated expertise. This represents a step in the right direction and something of a departure from the way things were handled in the past. There was a time - and perhaps something of this lingers on - when general counsel was expected to stay within a budget and handle as much legal work as possible himself. Bringing additional expertise in-house enables general counsel to provide a better service to the corporation and, in addition, gives general counsel a better handle on when to turn to outside counsel.

There are times when it is important to bring outside counsel in to address a problem, however. A situation involving a serious allegation against senior management and potential or actual regulatory inquiries, is one which plainly requires outside counsel. Very often outside counsel has more credibility in dealing with the government than in-house counsel, particularly if counsel has not been historically connected to the corporation but has been brought in on special assignment. There is a perception - valid or otherwise - among government lawyers that in-house lawyers who conduct investigations are lacking in experience and generally want the issue to disappear. In my experience, the findings of an outside counsel's investigation are greeted with less skepticism, and this is particularly the case when outside counsel concludes that there is nothing wrong or that the wrongdoing is isolated and does not reflect pervasive misconduct or a corporate culture that encourages behavior that is close to or crosses the line.
Some years ago I represented the general counsel of a major public company, who decided to forego using outside counsel and conduct the internal investigation himself. The case in which I represented him involved an allegation by a disgruntled former employee that during that internal investigation he, the former employee, had informed general counsel about serious wrongdoing by the senior management, which was then covered up. Fortunately, we prevailed after a jury trial. The point, however, is that none of this would have taken place had outside counsel been brought into the situation in the first instance.

Editor: You recently co-authored an article on perjury. Could you provide our readers with an overview of this area of the law?

Naftalis:
Perjury is essentially making a material false statement under oath. Sometimes the alleged wrongdoing is not proven, but people are nonetheless prosecuted because they have not told the truth. What is key here is that the witness be fully prepared, that the lawyers be on top of every document in the case and that they have a clear understanding of what the witness is going to say. I have seen witnesses go into administrative or investigative proceedings before a government agency who are unprepared - perhaps they have not taken such proceedings as seriously as those in court - and invariably very severe consequences result. It is critical for witnesses to obtain professional advice. Indeed, there are times when they should not testify at all; such as when, if they do, they will be testifying themselves into a corner.

Editor: How about obstruction of justice? Why has this become such a live issue recently?

Naftalis:
The recent corporate scandals have focused a great deal of attention on the concept of obstruction of justice. Some of this attention is pretty extreme. For example, Arthur Andersen, an accounting firm of great repute, and Martha Stewart were both prosecuted for obstruction of justice even though neither was charged with the underlying substantive crime which was the subject of the Government's investigation. Under the Victim and Witness Protection Act, engaging in what is called "misleading conduct" toward a witness constitutes obstruction of justice. In the context of an internal investigation, questioning a potential witness and failing to alert him to all of the facts of the matter - because you have a legitimate interest in getting an unvarnished view - may translate into obstruction of justice. I do not think it was originally intended that the law should be so applied. Martha Stewart is about to go to trial. Perhaps her proceeding will shed some light and even establish some ground rules, in what has become a very confusing area of the law.

Editor: The pendulum has swung very far in one direction in this area of the law. Do you think it is likely to swing back?

Naftalis:
Yes, but not all the way. In the '80s, with the attention given to insider trading, the pendulum moved in one direction and then came back, but not to the initial point of departure. The standard had been raised, and the next time the pendulum moved it was from a higher starting point. The Sarbanes-Oxley legislation represents, I think, the recognition by Congress of this higher starting point. And, of course, the attitude of Congress on an issue like this is a reflection of the mood of the public. I might add, that the average person does not have a great deal of sympathy for someone who makes a lot of money. One of the challenges in representing people in these circumstances is persuading a jury, or persuading a group of governmental regulators, that a transaction that is complicated and involves a great deal of money is not automatically wrong.

Editor: Looking back over your career, what have you enjoyed most?

Naftalis:
I certainly enjoy the intellectual challenge. In addition, I get great satisfaction in representing someone who has a great deal at stake, whether their liberty, their fortune or their reputation, and being able to salvage these things in the face of an unjust allegation. I have been very fortunate in my career in having been able to do this.