The Individual Accountability for Corporate Wrongdoing Memorandum (the Yates Memo), issued by the US Department of Justice (DOJ) on September 9, 2015, lays out a new, six-part policy relating to the investigation and prosecution of individuals involved in corporate wrongdoing. Perhaps the most significant aspect of the new policy requires that a company must provide the government with “all relevant facts relating to the individuals responsible for the misconduct” in order for the company “to be eligible for any cooperation credit.” Historically, “cooperation credit was a sliding scale of sorts” for companies allowing them to receive “at least some credit for cooperation, even if they failed to fully disclose all facts about individuals.” Under the new policy, “providing complete information about individuals’ involvement in wrongdoing is a threshold hurdle that must be crossed” before the DOJ will consider any cooperation credit. This all-or-nothing requirement begs many unanswered questions about the consequence to the attorney-client and work product privileges as part of both the corporation’s internal investigation process and the government’s cooperation credit analysis. (more…)
The crime-fraud exception to the attorney-client privilege sometimes becomes an issue in government enforcement matters, including litigation under the False Claims Act (FCA). For example, when a government contractor seeks legal advice regarding its compliance with complex regulatory schemes that touch upon the FCA, under some circumstances, a relator or the government may assert that the contractor’s communications with counsel could be discoverable under the crime-fraud exception. This post discusses a recent ruling in the U.S. Court of Appeals for the First Circuit in a criminal fraud case, in which the court addressed the crime-fraud exception, and expanded a district court’s ruling that ostensibly privileged documents should be produced pursuant to the exception.
In U.S. v. Gorski, No. 14-1963, 2015 WL 8285086 (1st Cir. Dec. 9, 2015), the government brought criminal charges for wire fraud under 18 U.S.C. § 1343 alleging that the defendant, David Gorski, had defrauded the United States by falsely representing to federal agencies that a company he established, Legion Construction, was eligible for designation as a Service-Disabled Veteran Owned Small Business (SDVOSB). Under federal law, three percent of government contracts must be awarded to SDVOSB entities. Effective February 8, 2010, the government amended the regulatory criteria for SDVOSBs. Legion retained a law firm to shepherd the company through a corporate restructuring to comply with the 2010 amendments. However, while this restructuring did not occur until March 2010, it was dated “as of” February 1, 2010, just before the new regulations went into effect. Gorski also retained a personal attorney for legal advice relating to the 2010 restructuring and his rights and obligations relative to Legion despite not being the company’s majority shareholder. The court noted that “the new corporate documents [prepared by Legion’s counsel, and submitted to the government] were crafted so as to make it appear that they were signed before the date of the SBA [U.S. Small Business Administration] regulatory amendments, when they were not.”
The district court concluded that communications between Gorski and Legion’s law firm fell into the crime-fraud exception because the government had made a prima facie showing that (1) the defendant was engaged in criminal or fraudulent behavior when the communications took place (the indictment satisfied this prong); and (2) that the communications were intended by the client to conceal the crime or fraud (i.e., that Legion misrepresented its compliance with federal regulations). The district court concluded, however, that communications between Gorski and his personal attorney should not be produced because his personal attorney played no role in the submission of Gorski’s allegedly false statements to the government.
The First Circuit affirmed in part, but concluded that communications between Gorski and his personal attorney did fall into the crime-fraud exception despite the attorney’s lack of involvement in the submission to the government. The court found this fact “legally irrelevant,” because Gorski’s alleged intent with regard to both representations was “arguably the same”—to obtain advice about the restructuring, which in this case, allegedly meant perpetrating an ongoing fraud on the government.[...]
In the wake of the U.S. Department of Justice’s (DOJ) recent memorandum regarding increased focus on individual culpability for corporate wrongdoing (on which we previously posted here) comes a district court decision with significant implications for individuals who attempt to assert an advice-of-counsel defense based on consultation with company counsel.
In a September 22, 2015 decision in U.S. v. Wells Fargo Bank, N.A, the U.S. District Court for the Southern District of New York ruled that an employee could not assert the advice-of-counsel defense because his employer, Wells Fargo, refused to waive the attorney-client privilege over the relevant communications between the employee and Wells Fargo counsel.
In Wells Fargo, the United States brought civil claims against Wells Fargo and individual defendant Kurt Lofrano for violation of the False Claims Act (FCA), along with other claims. Lofrano asserted that he had sought advice from Wells Fargo attorneys concerning the legal requirements he is now alleged to have violated, and acted in conformity with such advice. All parties agreed that the advice-of-counsel defense would provide a complete defense to the government’s claims against Lofrano.
But Wells Fargo objected to disclosure of the privileged communications at issue, and sought a protective order prohibiting disclosure. The Southern District engaged in a lengthy analysis of the competing principles that, on the one hand, a person accused of wrongdoing should be able to present “every available defense” and, on the other hand, the broader public interests underlying the sanctity of the attorney-client privilege.
Relying on the Supreme Court precedent (Swidler v. Berlin, 524 U.S. 399 (1998)) concerning the survival of the attorney-client privilege on death (a situation the Southern District conceded was not directly on point), the court rejected the argument that a balancing test should be used under which Lofrano’s need for the privileged evidence would be weighed against Wells Fargo’s need to keep it confidential: “That is, the use of a balancing test to determine whether a company, through no fault of its own, must forfeit its privilege based on an employee’s later assertion of an advice-of-counsel defense would render the privilege no less uncertain that the use of such a test to determine whether the privilege applies in the first instance.” The court held that the attorney-client privilege is not a qualified privilege and that, because Wells Fargo would not waive its privilege, the advice-of-counsel defense was not “available” to Lofrano.
The court observed that this result “is arguably harsh in this particular case, as it may well deprive Lofrano of his best defense to liability for tens of millions of dollars. It is, however, the price that must be paid for society’s commitment to the values underlying the attorney-client privilege.” The court went on to chronicle the ways in which the result might not be as harsh as it seems including, for example, the “significant number of cases” where the employer will also seek to assert the advice-of-counsel defense alongside the employee, and thus agree to waive. But this was [...]
On Tuesday, August 11, 2015, in United States ex rel. Barko v. Haliburton et al., the U.S. Court of Appeals for the D.C. Circuit issued an opinion vacating another series of rulings by the United States District Court for the District of Columbia that had required defendant Kellogg Brown & Root, Inc. (KBR) to produce the privileged files underlying its internal investigation into allegations that the company defrauded the U.S. government. The District Court had concluded that KBR impliedly waived the privilege by putting the contents of its corporate investigation at issue in the litigation when it produced an in-house lawyer as a deposition witness on the topic of KBR’s investigation and referenced that testimony in connection with its motion for summary judgment. The District Court had also ruled that the attorney-client privilege did not extend to summary reports prepared by KBR’s non-lawyer investigators. In vacating the District Court’s ruling, the D.C. Circuit reached three key holdings.
First, the D.C. Circuit held that KBR did not put the privileged investigation files at issue in the case by merely referencing the testimony in a footnote in its summary judgment brief because “KBR neither directly stated that the [internal] investigation revealed no wrongdoing nor sought any specific relief because of the results of the investigation.” In reaching this holding, the D.C. Circuit reasoned that cursory statements made in footnotes of briefs should not be indulged as a matter of practice, and the mere inference of “no wrongdoing” that could be drawn from KBR’s footnoted assertion held little weight because as a summary judgment movant, all inferences were to be drawn against KBR.
Second, the D.C. Circuit held that simply designating an in-house lawyer in response to a deposition notice on the topic of the privileged nature of an internal investigation, while still preserving the privilege in response to specific questioning during the deposition, does not compel the production of privileged materials reviewed by the witness to prepare for the deposition under Federal Rule of Evidence 612. In reaching this holding, the D.C. Circuit observed that “[i]f all it took to defeat the privilege and protection attaching to an internal investigation was to notice a deposition regarding the investigations (and the privilege and protection attaching to them), we would expect to see such attempts to end-run these barriers to discovery in every lawsuit in which a prior internal investigation was conducted relating to the claims.” It was this potential “floodgates” consequence that drove the D.C. Circuit to conclude that “the District Court’s rulings would ring alarm bells in corporate general counsel offices throughout the country about what kinds of descriptions of investigatory and disclosure practices could be used by an adversary to defeat all claims of privilege and protection of an internal investigation.”
Finally, the D.C. Circuit held that the District Court wrongly concluded that some of the summary reports prepared by KBR’s investigators were not privileged because it was clear that portions of the documents summarized statements made to the investigator, who “effectively steps into the shoes the [...]
Companies internally investigating potential false claims issues recently received another reminder of the care that must be taken to maintain attorney-client privilege over internal investigation files and reports. In particular, companies must be very cautious with internal dissemination of any internal investigation files and reports. On June 25, in the midst of trial, a federal judge in the Eastern District of Texas ordered the production of a report from Kellogg Brown & Root, Inc.’s (KBR) internal investigation regarding alleged kickbacks, finding that attorney-client privilege had been waived. While the precise grounds for waiver have not been spelled out in an order as of the publication of this post, one notable waiver argument raised in the parties’ briefing was that the report was transmitted internally from a KBR supervisor to a KBR employee.
The court’s order highlights the treacherous terrain companies must navigate from the get-go when faced with the possibility of internally investigating potential False Claims Act (FCA) violations. As recently discussed by MWE in this Health Care Compliance and Defense Resource Center Newsletter, KBR continues to be embroiled in separate but related ongoing litigation in D.C. federal court — and in that case, too, KBR was ordered to turn over internal investigation files. The primary basis for waiver of privilege over the files at issue in the D.C. case was that KBR affirmatively placed the investigation at issue in the litigation. This basis for waiver was also asserted by the government in the Texas case as well, with the government arguing that KBR elicited testimony from an employee, who then testified as to the existence of the investigation and the subsequent resignation of the investigated employee.
Though the ultimate impact of the Texas court’s recent ruling remains to be seen, the grounds for waiver recognized by the court should give pause to companies conducting internal investigations. Company personnel involved in an investigation must take care to ensure investigation materials are not transmitted internally outside of the circle of those “who have a need to know in the scope of their corporate responsibilities,” as the Eastern District of Louisiana held in In re Vioxx Products Liab. Litig., 501 F. Supp. 2d 789, 796 (E.D. La. 2007).
A best practice for in-house counsel and management is to maintain control over materials generated over the course of an internal investigation. Dissemination of investigation materials internally can jeopardize a company’s control over deciding down the line whether to affirmatively rely on the investigation, or rather to fight to preserve privilege. While there can never be any guarantees that a privilege claim will be upheld as to investigation files, keeping those materials in as few ‘need to know’ hands as possible is an important early step towards a robust privilege defense.
Case: United States of America v. Kellogg Brown & Root, Inc., Civ. Action No. 1:04-CV-00042 (E.D. Tex.).