Editor: What practical steps should general counsel take to prepare for potential investigations into stock option backdating and related document productions?
Mack: The first thing Counsel needs to do is make an assessment of who is involved in the option backdating.
Next you need to assess the potential exposure. Before making a search, you should be sure that the process you use will enable you to satisfy a court regarding good faith in handling your potential evidence. If you should find matters that might be subject to an investigation or subsequent lawsuit, you should keep the evidence in a state that does not give the appearance of impropriety. For example, if you should pull up a spreadsheet that has the options listed on it, by saving it or allowing it to automatically save, the file will get a new date, making it appear as though someone tampered with the data. In other words, investigate on a copy of the data, not the original. Many enterprises are doing a proactive preservation collection.
You should be sure that the CIO and the people who normally would do in-house data collection are not themselves implicated in option backdating. This would obviously affect their credibility if put on the stand to testify on what they did to collect evidence on behalf of the company. It may be that your processes and procedures are ironclad, as is true of the financial industry that routinely investigates itself. Companies that do not have that type of process for their collections may want to consider looking around for a third party to assist them long before the government comes calling.
Editor: Many of the backdating practices took place before 2002 when there was no email in the corporate record system. What should corporate counsel do if asked to produce the relevant evidence to avoid the appearance of intentional document destruction and related spoliation charges?
Mack: Counsel should keep in mind that before 2002, their IT departments, like many others, may not have had a document retention policy other than for disaster recovery - a very loose practice by today's standards. They should locate people in the organization who were around before 2002 who can testify as to the practices at that time. It is important to realize that some important information may reside on backup tapes that may need to be readied as evidence for any inquiry. Make a physical inventory of those tapes. By narrowing down the time periods and only addressing tapes within those periods, you can take initial steps in reducing your costs.
You may want to consider sampling of data for the purposes of an early evidence assessment, focusing on some of the key people that may be targeted in the investigation. The other option is to wait until the time of the investigation and then propose a sampling protocol at that time. However, my sense is that it is good to know what is in the document set that may be requested by the government or in the sampling you are offering.
Records management personnel and compliance personnel should be involved in the data collection process. Both inside and, particularly, outside counsel should make sure that everything is labeled properly and that conversations take place under the privilege umbrella.
Editor: In certain industries where competition for talent was extreme, there seems to have been a practice of dating options back to the date a job offer was made. This practice in turn may have generated personal emails to friends who are outside the purview of the corporate Web site.
Mack: Prior to 2002, emails sent on Yahoo or AOL more than likely would not be maintained on the email server, but use of a computer that could be forensically analyzed would allow the email to be recovered. Clarify at the beginning of negotiations with the government exactly what they want, whose personal mail they would need, etc. Narrow the search as much as possible.
As part of witness interviews, you should include questions about home computer use and what the company's practices were during the relevant time period. This should be done in consultation with outside counsel. Because it always takes longer to get access to home computers, it is wise to offer to produce information centrally stored that you can easily secure before producing evidence from home computers as you negotiate reductions in scope. PDAs and other handheld devices are generally part of an electronic discovery investigation, and the data on those devices can be copied into the desktop or the central location unless forensic collection is necessary.
Editor: To what extent should a corporation alert the individuals who may be targeted by a potential investigation?
Mack: When and how to notify an employee is a legal call. When the notification does take place, employees should be educated about the need to preserve evidence - not to erase any data! Non-technical people may think that they are doing the company a favor by erasing electronic information, not knowing that erased data can be recovered. Counsel should let people know what spoliation is and its consequences.
Editor: Given the tight deadlines around government investigations, what are the risks of handing over all the data and letting the agency sift through it all?
Mack: When the government comes calling with a 30-day deadline, there are some companies that want to give all the information to the government because they do not want to bear the expense of the review. Only by undertaking a review will you be aware of items that you may be able to properly withhold, such as personal embarrassing items, confidential business information, trade secrets and privileged matters. With the privilege being eroded, plaintiffs' lawyers are having success in getting material that was handed over in a government investigation. You cannot count on confidentiality when you hand over all your information to the government.
Editor: The interplay between the Fios' searching capabilities, accumulated knowledge and the lawyer's knowledge of the legal principles involved provides the basis for segregating significant data. How should this process ideally be managed?
Mack: We collaborate with the lawyers on search term optimization. One way to short cut the process is to put representative samples of data into a review platform where attorneys can then test their search strategies.
Since the word "privilege" is on every legal department disclaimer, we work with the lawyers to refine the search so as to isolate the truly "potentially privileged" material as much as possible. We can isolate and earmark items that may be confidential, such as trade secrets and other forms of intellectual property. Everything is potentially privileged until the lawyer makes the call.
Editor: Should corporate counsel develop ways to identify on a continuing basis those documents that are likely to be privileged to distinguish them from documents where the "privilege" term is part of the boilerplate?
Mack: Yes. That would be a proactive step to take right now. Every legal department should have a convention for how they want to identify their truly privileged documents and train the entire legal department and staff in its use. Likewise, whenever a litigation response team is formed it should adopt a designator for all email circulating among the team.
This applies also to a company's intellectual property. Once, in my experience, there was an allegation that an engineer had taken material to a competitor. Because the company had embedded its intellectual property designations deep inside the software product used to produce blueprints and drawings, its ownership showed up easily in a forensic search. Marking intellectual property is a cost effective way to protect yourself in the future.
Editor: What other actions should general counsel take, especially given the likelihood of follow-on shareholder lawsuits in the wake of scandals such as the current backdating problem?
Mack: On December 1, 2006 new federal rules are going to take effect governing e-discovery. The key step in becoming litigation-ready is to assess where you stand currently. You need to figure out if you have a team that knows where the data is, whether you have content maps as opposed to very confidential security maps of your network, and whether you feel comfortable about handing over particular types of information and making it public.
Which law firms would you be using? Are you using a different law firm for the government than you would for potential shareholder suits? If so, is there a way to coordinate what is being asked for? The same staff people and the same evidence repositories can be used for both. Because companies embroiled in the backdating scandal may be subject to multiple litigations, it might be desirable to anticipate the need for privilege reviews and do a review now under supervision of independent outside counsel rather than reviewing for privilege from scratch in each case.
In cases where you have multiple outside counsel, you may want to bring them all in for purposes of developing common operational strategy for the various cases as opposed to legal strategy.
Editor: What is the impact of the amendments to the federal rules that become effective December 1 on follow-on lawsuits by plaintiffs' counsel in backdating cases?
Mack: My assessment is that the plaintiffs' firms will wait until December 1 to start filing these suits so that they can take advantage of the new rules. Overall, I think that these rules tend to tilt in favor of the plaintiffs' firms. For example, the corporation will need to be ready to meet and confer with opposing counsel within 99 days after the suit is filed. At that time you will need to be ready to discuss issues regarding preservation, collection and production of documents. The "safe harbor" requires good faith preservation. Decisions on these issues made now will ripple into cases filed after December 1.
Many companies are doing a proactive preservation right now, keeping in mind a terminal date for keeping documents. Early assessment of who is involved and what to preserve is important. You want to look reasonable to the investigator, the potential plaintiff's firms, the judge and/or special master. Having a protocol in place and being able to use it with some facility at the time the new rules become effective may help protect that privileged material that we value so dearly. All of these things are best done when you can think clearly and are not under pressure.