Between a Rock and a Hard Place When Duties of Disclosure Conflict with the Preservation of Privilege In a Corporate Inv

1. Between a Rockand a Hard PlaceWhen Duties of Disclosure Conflict with the Preservation of Privilege In a Corporate Investigation Program for the Association of Corporate Counsel, Washington Metropolitan Chapter ----------------------------- Williams Mullen Richmond, VA January 28, 2010

2. Patrick R. Hanes Co-Chair, Government and Corporate Investigations Williams Mullen, Richmond Virginia phanes@williamsmullen.com 804.783.6455 Speakers Gray B. Broughton Government and Corporate Investigations Williams Mullen, Richmond Virginia gbroughton@williamsmullen.com 804.783.6431 Preston D. Wigner Vice President, General Counsel, Secretary and Chief Compliance Officer Universal Corporation, Richmond Virginia

3. Introduction: What is an “internal investigation,” and what does your outside auditor have to do with it anyway? Communications during the internal investigation III. Privileges in a government investigation Outline

4. Subjects meriting investigation Potential criminal violations Potential regulatory violations Company policies Accounting irregularities Civil liabilities Malfeasance of senior and SOX certification officers I. An “internal investigation”

5. Whether an investigation is warranted Who will lead and conduct the investigation Internal body to direct, i.e. Audit Committee, Compliance Committee, or outside directors Internal/external to conduct, i.e. inhouse counsel, internal auditor, outside law firm Scope of the investigation Substantive (what type/breadth of conduct) Witnesses Preservation and review of documents and electronic stored information Initial Considerations

6. The attorney client communication privilege Protects communications made in confidence for the purpose of obtaining legal advice from the lawyer Work product protection Protects material generated by counsel in anticipation of litigation, i.e. summaries and analyses Waiver Intentional disclosure of a confidential communication or work product waives the privilege or protection Privilege Considerations

7. Interest of the Auditor: Certifying that the company has in place effective system of internal controls (SOX Sec. 404) Anything in the allegation/investigated matter that would indicate that there could be material errors affecting financial statements (i.e., falsification of records) Setting of litigation reserves for loss or fine contingencies Section 10A of Securities Exchange Act FAS 5 Impact of ENRON, WORLDCOM and SOX Auditing Practices Affecting the Privileges

8. Not within a recognized privilege E.g., Couch v. United States, 409 U.S. 322 (1973) (no federal court has recognized existence of an accountant client privilege under federal or state law) ABA Task Force proposals Constitutes a waiver of the ACP and WPP E.g., United States v. El Paso Co., 682 F.2d 530, 539-41 (5th Cir. 1982), cert. denied, 104 S. Ct. 1927 (1984) (client’s disclosure to independent auditors of a tax pool analysis made by counsel destroyed confidentiality and waived the privilege). Disclosures to auditor

9. Definition and Purpose “As Diversified disclosed these documents in a separate and nonpublic SEC investigation, we conclude that only a limitedwaiver of the [attorney-client] privilege occurred.” Diversified Industries v. Meredith, 572 F.2d 596, 607, 611 (8th Cir. 1978). Purpose is to allow disclosure to one person outside of the confidential relationship (i.e., an outside auditor or a government regulator) without waiving the privilege as to other third-parties (such as civil plaintiffs or business competitors) Often memorialized by a written agreement between the disclosing party and the recipient Status of the Case Law Majority of Circuits have held no “selective” or “limited” waiver A “Limited Waiver”?

10. SCENARIO An anonymous report over your hotline alleges that a senior vice president in the finance department of your company’s largest operating division has instructed employees to create false and backdated invoices to support a number of payments to an unknown third party (i.e., not on list of known vendors). Report includes a limited number of examples of the allegedly altered documents. Allegedly has been occurring since 2006. Also claims the chief business executive of this same division found out about the payments in 2008 but that the falsification of invoices did not stop. II. Communications during theinternal investigation

11. Communications with the auditor about how the investigation will be conducted (i.e. the Work Plan) Issues involved in seeking the auditor’s own relevant information Sharing the report and related documents – already waiving AC/WP? Initiation of the Investigation

12. Who will attend and receive briefings Counsel and auditor Forensic CPA firm Oral vs written Outlines for oral summaries Drafts What materials will be shared and copied Develop a Protocolfor Periodic Reports

13. SCENARIO, CONT’D The investigation team begins conducting the document reviews (including review of electronically stored information forensically recovered from servers and hard drives) and interviews pursuant to the Work Plan. The team provides general counsel and the chair of the Audit Committee with regular updates. After some investigation, the team has identified several suspect transactions that have become the focus of the investigation, totaling more than $1 million. None of these transactions appear to have been for the purposes that were described in the division’s general ledger, which “rolls up” into the financial statements of the public corporation. II. Communications during theinternal investigation, Cont’d

14. Are there material errors affecting the financial statements (primarily amount)? Did existing controls detect and, if so, why did they not prevent? What is the probability of a resulting proceeding for purposes of determining loss contingency?  Need for disclosure of information obtained from employees to the auditors (at a minimum) should be considered How Securities-related Obligations and Auditor’s Involvement Are Implicated

15. SCENARIO, CONT’D The investigation team has asked you as General Counsel to assist in requesting and arranging for investigation interviews of some of the more senior personnel who are potential witnesses. After communicating that request with outside counsel to one of your vice presidents, the vice president calls you back and asks you to confirm his understanding that whatever he discloses during the interview will be confidential and privileged “company information.” II. Communications during theinternal investigation, Cont’d

16. Interviewed personnel should be informed that the privilege belongs to the Company, not to the individual employee, and could be waived by the Company, and information shared with third parties, including: Outside auditors Government regulators At least one court has suggested that employees should be required to sign acknowledgement of “reading” of these rights The “Upjohn” Warning, or“Civil Miranda”

17. SCENARIO, CONT’D The investigation team concludes its investigation and gives a report to the Audit Committee on its findings. The investigation has discovered evidence that the $2 million in suspect payments were fraudulent. The team identifies a number of criminal statutes and securities laws violations that are implicated by the conduct, which the Senior VP of Finance directly controlled and which the chief business executive knowingly tolerated. II. Communications during theinternal investigation, Cont’dReporting the Findings

18. Choices Discipline including terminations Policy changes Self-reporting Reserves for loss contingency Privilege Considerations Documentation of findings How to communicate to AC and Board What to offer to the Government Next Steps?

19. SCENARIO, CONT’D The Company’s outside counsel notifies federal law enforcement personnel with jurisdiction to prosecute violations of the laws implicated by the suspect conduct. Inside and outside counsel meet with the Government, provide a timetable and summary about the investigation, and share what key witnesses said during their interviews. III. Privileges in a government investigation

20. SCENARIO, CONT’D As a result, the government opens its own formal investigation, issues subpoenas to the Company, involved employees, and the Company’s auditor, and requests the Company make several of its employees available for interviews. The government also requests copies of all notes and summaries of the interviews conducted during the internal investigation. III. Privileges in a government investigation

21. Necessity and impact of a public disclosure Any circling sharks To what extent will the Government respect the Company’s privileges Who will participate in various meetings with the Government and what will they be asked to disclose Protecting ESI or information in possession of the auditors subject to subpoenas Practical Considerations

22. Derivative action plaintiffs Dissident stakeholders Potential co-defendants Terminated employees Business competitors Circling Sharks?

23. June 1999 - Holder Memo January 2003 - Thompson Memo May 2004 - Commentary to Sentencing Guidelines October 2005 - McCallum Memo Government’s Respect for Privileges

24. Government’s Respect for Privileges • December 2006 - McNulty Memo • 2006 – 2008: Specter Hearings and Introduction of The Attorney-Client Privilege Protection Act

25. Government’s Respect for Privileges • "How can you reconcile or justify this sort of conduct by the Department of Justice to prove its cases?" Senator Arlen Specter • "I don't justify or reconcile or encourage or condone any coercion of anybody to waive the attorney-client privilege," Attorney General Michael Mukasey said. "And I think we've made that clear - I hope we've made it clear - to our prosecutors."

26. Government’s Respect for Privileges • August 2008 - Filip Memo • Future Memos / Legislation?

27. FOR THE COMPANY Outside counsel Forensic consultants In-house counsel Business executive Financial and auditors Government meetings

28. INDIVIDUALS Position of company regarding cooperation by its personnel Representation issues: Company counsel vs independent counsel Selection Single or multiple clients Preparation and information sharing Government meetings, cont’d

29. During an investigation: Assertion of investigative confidentiality protections under Fed Regs and FOIA exceptions Assertion of privilege and proprietary interests when auditors and individuals subpoenaed Procedures for Government hard drive examinations and searches After an investigation: Re-collection from third parties Consolidation and maintenance of investigative record Protocols for return to normal document retention Protecting ESI and other information gathered in the investigation

30. Public announcements and comments upon termination of investigated matter Coordination of statements with Government releases Avoidance of additional unintended subject matter waivers Communications with Government-appointed monitors Scope of obligations Assertions of privilege Post Mortem Considerations

31. Useful Sources • Corporate Counsel’s Guide to Legal Audits and Investigations (West Publishing 2009) • American Bar Association, Task Force on Attorney-Client Privilege, Report to the House of Delegates, June 14, 2006 • American Bar Association, The Attorney-Client Privilege and the Work-Product Doctrine (4th Ed. 2001) • The Department of Justice, “Principles of Federal Prosecution of Business Organizations.” www.usdoj.gov/opa/documents/corp-charging-guidelines.pdf

32. QUESTIONS? Patrick R. Hanes Gray B. Broughton Williams Mullen Government and Corporate Investigations Richmond, Virginia