- Duane Morris Practice Groups Receive Top Rankings from U.S. News-Best Lawyers for 2014
- Duane Morris Partner Eric Breslin Appointed to New Jersey Supreme Court Criminal Practice Committee
- Duane Morris Partners Jonathan Armstrong and Eric Sinrod Release Milestone 100th Episode of TechLaw10 Podcast
- Duane Morris Partner Jonathan Armstrong to Discuss "Anti-Corruption Compliance: Protecting Directors, Officers and Employees in the New Era of Enforcement"
- Duane Morris Partner Jonathan Armstrong To Discuss "What Every In-House Counsel Should Know About Data Privacy Laws"
- Duane Morris Partners Robert Fineman and Laurie van Löben Sels to Speak at Community Investment Series Seminar
- Florida Legislature Unanimously Approves New Limited Liability Company Act
- Renewed Focus on European Cookie Laws
- Guide to Publicly Offered Private Placements Under New Rule 506(c)
Corporate Compliance and Internal Investigations
Duane Morris advises corporations, partnerships and sole proprietorships on developing internal programs to educate officers, owners and employees in all aspects of compliance. We also counsel our clients on conducting internal investigations and defend companies in government investigations, criminal prosecutions and civil enforcement actions.
Good business practice in today's complex business environment demands that companies take steps to ensure that all of their employees are acting in a lawful manner and avoiding any appearance of impropriety. Conducting a brief internal audit and implementing a compliance program is the most effective way for a business to meet both of these goals.
There are at least three important reasons to implement a compliance program. Most importantly, it makes business sense. A properly executed program will inform management of potential problems before they become costly mistakes. Second, the existence of an effective compliance program can deter both government and private lawsuits against a company. Finally, in today's complex regulatory environment, a compliance program ensures that a business is operating at peak performance and in conformance with all applicable laws and regulations.
Establishing Corporate Compliance Programs
Corporate Compliance Programs Are Essential
Today's corporations are subject to civil enforcement and criminal prosecution under a wide array of federal and state laws, including the Sherman Antitrust Act, the Federal False Claims Act, the Wire and Mail Fraud Acts, the Foreign Corrupt Practices Act, and securities, environmental and employment laws. In order to protect their businesses and avoid the high cost of sanctionable conduct, many companies have developed corporate compliance programs. Still other companies have not, hoping that their standards and policies alone will be sufficient deterrents to civil and criminal wrongdoing.
Because it is difficult for even the most responsible business to be fully aware of every employee's actions, formal compliance programs have proven to be the most effective way to protect the business and prevent and detect violations of law. These programs have taken on even greater importance in the wake of new corporate sentencing guidelines and case law that consistently reward internal accountability and impose severe sanctions on companies that failed to adopt compliance programs and enforcement procedures.
Business organizations can best defend against government oversight and possible sanction by developing internal procedures to ensure that all employees conduct themselves in a lawful manner before the first hint of a problem. An effective compliance program is "insurance" that can prevent both purposeful and accidental wrongdoing within a business and ensure that any deviation from policy is promptly detected and rectified. A compliance program is an essential component of any defense against criminal indictment by government prosecutors. It is also the first line of defense against civil enforcement proceedings, or a "whistle-blowing" former employee. Further, under current sentencing guidelines, fines can be substantially reduced if defendant corporations have effective compliance programs in place.
The benefit of corporate compliance programs is not limited to reduced penalties in the criminal justice system. Compliance programs are useful in conserving a company's financial resources by eliminating employee theft and diversion of corporate funds. In fact, these programs can actually prevent the demise of a company and can induce an investigating authority to decline to prosecute or bring civil charges. Moreover, they are viewed very favorably by investors, regulators, employees and clients.
The Sentencing Guidelines: Guarding Against Sanctions Through Corporate Accountability
An "effective program to prevent and detect violations of law" means a program that has been reasonably designed, implemented and enforced so that it generally will be effective in preventing and detecting criminal conduct. Failure to prevent or detect the instant offense, by itself, does not mean that the program was not effective. The hallmark of an effective program to prevent and detect violations of law is that the organization exercised due diligence in seeking to prevent and detect criminal conduct by its employees and other agents.
Over the years, the United States Sentencing Commission's Guidelines for the Sentencing of Organizations have become increasingly more stringent. The Guidelines seek to combat white-collar crime by imposing mandatory sentences, harsh fines, imprisonment, restitution and public disclosures through imprisonment. The Sentencing Guidelines specifically provide that the severe impact of these sanctions can be dramatically reduced if "the offense occurred despite an effective program to prevent and detect violations of law." [Sentencing Guidelines Manual § 8C2.5(f)]. Additional benefits accrue if the corporation reports the offense, cooperates with authorities and accepts responsibility. [Sentencing Guidelines Manual § 8C2.5(g)]. Avoiding prosecution or securing the minimum penalty can be fraught with pitfalls, however, if not properly pursued by experienced counsel.
On numerous occasions, compliance programs developed by our attorneys have been credited with reducing sentences or persuading government authorities not to prosecute. In one such case, the late Honorable Robert S. Gawthrop, III specifically credited the corporate compliance program developed by our firm for his decision to sentence a corporate client to the lowest possible fine permitted under the Sentencing Guidelines. The judge noted that he was "impressed" with the way the company took its responsibilities seriously and was "truly impressed" by its efforts to ensure that there would not be any recurrence of past problems.
In developing effective programs to prevent and detect violations of law, businesses must do more than merely circulate ethics policies to employees. The hallmark of an effective compliance program is the company's exercise of due diligence in seeking to prevent and detect inappropriate conduct by its employees and agents. A company Code of Conduct must be developed, and it must be properly administered. High-level personnel must be responsible for overseeing established standards and procedures to reduce the prospect of criminal conduct. A premium is placed on proper education of the workforce regarding the Code of Conduct and on free communication between management and the employees regarding adherence to the Code of Conduct. Only compliance programs incorporating these factors enjoy the benefits granted under the law.
Effective enforcement procedures can include establishing monitoring and auditing systems to detect prohibited conduct, developing a system that permits employees to report forbidden conduct without fear of retribution, and implementing appropriate disciplinary sanctions when company policies are not followed.
Businesses can be held criminally liable for any criminal act carried out by one of its agents if that act occurs within the scope of the agent's employment for the benefit of the corporation. Corporate liability can be based on the unlawful conduct of even the lowest level employees, who may be acting contrary to their managers' express directions and even written company policy. Indeed, as a practical matter, except in those few situations in which the organization is strictly a victim, such as in an embezzlement, it can be assumed that the business may be held criminally liable if the prosecutor exercises his or her discretion to indict. Only internal monitoring can protect you and your company from liability.
Officers or employees can also be held personally liable for crimes committed in the course of their duties. Generally, liability can arise in one of three ways: (1) an employee participates directly in the commission of the crime; (2) an agent aids or abets the commission of the crime; or (3) an agent fails to prevent the crime by not properly controlling or supervising his or her subordinates.
Our lawyers have represented organizations and their officers and/or employees in all phases of civil actions, as well as criminal investigations and prosecutions. Many of our lawyers are former prosecutors who bring an added dimension to the representation of these sensitive matters.
The sentences imposed on businesses based on criminal convictions are stiff. Organizational sentences generally include a fine, corporate probation and remedial action, including restitution, community service and notice to victims. In addition to the criminal penalties, organizations may face civil monetary penalties, or treble damages, additional costs such as damage to reputation, legal fees, lost productivity, damage to employee morale and heightened government scrutiny. Moreover, any government litigation may prompt follow-up civil lawsuits, including shareholder derivative actions and debarment from government contracting.
Our lawyers are knowledgeable about the potential penalties associated with criminal prosecution. Civil actions by agency officials under the securities laws also provide for disgorgement of profits. Our lawyers have negotiated with both state and federal prosecutors and agency officials for reduced penalties or probation.
Duane Morris Can Assist Businesses in Limiting Their Exposure to Criminal Liability by Promptly Investigating Allegations of Serious Misconduct and Taking Appropriate Action
While the Sentencing Guidelines are intended to impose punishment on businesses for acting unlawfully, the guidelines also handsomely reward organizations that have taken steps to ensure compliance with the law and have acted to remedy any wrongdoing as soon as it is uncovered. The Guidelines' emphasis on early detection and reporting has prompted many businesses to conduct internal investigations or implement compliance programs. Company standards and policies alone are not sufficient to avoid liability. Only active and effective compliance programs, including internal investigations or audits, can shield your company from liability. An internal investigation thus acts as any good insurance policy does: It mitigates the negative impact of unfavorable events. In order to protect their businesses and avoid the high cost of sanctionable conduct, many businesses have retained our lawyers to conduct internal investigations and develop and monitor corporate compliance programs.
Conducting Internal Investigations
Businesses can best defend against government oversight and possible sanction by developing internal procedures to ensure that all employees conduct themselves in a lawful manner. Internal investigations and/or audits are the first step towards ensuring compliance with the law. Such investigations or audits are useful prior to the implementation of a compliance program because these audits identify issues that need to be highlighted in the program. Failure to develop an adequate compliance program is a significant negative factor, but failure to enforce a reasonable compliance program can result in dire consequences and may be used to demonstrate willfulness or worse. Later, after a compliance program has been designed and implemented to meet business needs, such investigations or audits are good mechanisms for reviewing the effectiveness of the compliance program. An audit can also identify areas that warrant further training sessions for employees.
The benefits of internal investigations are compelling. Voluntary audits, coupled with remedial action when necessary, can be very useful in dealing with federal agencies contemplating investigations of their own. In addition, internal investigations are less time-consuming and less disruptive from an employee and customer relations perspective than those conducted by the government. Voluntary disclosure to the government of the results of an internal investigation can substantially reduce the potential for negative publicity associated with government action or investigation. On balance, the cost associated with these prophylactic measures is considerably less than the costs associated with litigation.
Some Issues to Consider. A host of sensitive issues arise when a business contemplates voluntarily conducting an investigation. Should a special committee of the board of directors be appointed? Which directors should serve on such a committee? How should the committee's "charge" be articulated? Who should conduct the investigation - in-house counsel or special counsel? If done improperly, will the investigation violate an individual's right to privacy? Are individuals whose conduct is suspect entitled to have counsel present when questioned by corporate counsel? What impact will the investigation have on employee morale? Will the investigation violate collective bargaining agreements? Does their insurance cover civil suits and/or counsel fees? When should the insurance carrier be placed on notice?
Benefits of Voluntary Disclosure. Our lawyers have assisted numerous corporate executives and special committees of boards of directors in conducting sensitive internal investigations and identifying the risks and rewards associated with them.
Side Effects of Voluntary Disclosure. Assuming an internal investigation reveals conduct that should be reported, what side effects will that disclosure have? Will the government guarantee that disclosure will result in either a decision not to prosecute or substantial discounts in the sentence? What noncriminal consequences can arise from the disclosure of an internal investigation to government officials? Will the corporation be disbarred or suspended from receiving government contracts? Can litigants obtain the information disclosed in civil proceedings against the cooperating corporation? Along with voluntary disclosure, will acceptance of responsibility for the events encourage civil litigation by parties who perceive themselves to be injured by the corporation's conduct?
Attorney-Client Privilege. As the internal investigation proceeds, what discussions among employees and counsel are protected by the attorney- client privilege? Is the privilege waived if communications are disclosed when reporting to the government? Because of these risks, we almost always recommend to clients that initial interviews of employees suspected of any wrongful behavior be conducted by counsel.
These and other issues must be carefully evaluated before an investigation moves forward. Our lawyers are familiar with the internal and external stresses that can develop and have worked with numerous corporations to resolve difficult situations in a timely and appropriate manner.
Internal Investigations and Defense to Shareholder Derivative Actions. State corporate laws generally require that a shareholder who believes that a claim should be asserted on behalf of a corporation against corporate directors or officers to recover damages allegedly suffered by the corporation first make a demand on the corporation to prosecute the action. Typically, a board of directors receiving such a demand will appoint a special litigation committee, usually consisting of independent directors, to investigate the matter. This committee will either make a decision itself or make a recommendation to the board of directors on whether prosecution of the action is in the best interests of the corporation. The committee normally selects special legal counsel to advise it. Our firm has frequently been chosen to serve as counsel to such committees.
Labor and Employment
Lawyers in our Employment Law and Management Labor Relations Practice have conducted audits of corporations' employment practices, policies and procedures. Our Employment Practices Audit assesses to what extent an employer is complying with applicable laws, identifies areas in which the employer may be vulnerable to liability, and suggests ways of reducing the risk of employee disputes and grievances, union-organizing activity, arbitrations and employment litigation.
Theft and Misuse of Corporate Funds
Our lawyers counsel corporations that are being victimized by theft of trade secrets, misuse of corporate funds and individuals who are threatening employees with physical harm. In these cases, we often assemble a team of lawyers with backgrounds in employment, intellectual property and criminal law.
Our lawyers have served as special counsel to a committee of independent directors of the holding company for a savings and loan association. In that capacity, our lawyers have participated in the committee's investigation of a "problem loan," reporting the findings to the board of directors.
Our lawyers have served as independent outside counsel to various banking institutions and have performed investigations of the activities of boards of directors leading to the entry of cease and desist orders.
Our lawyers have advised various broker-dealers who have been required by regulators to hire independent counsel to investigate their compliance procedures. We have determined whether the broker-dealers' existing systems and controls are sufficient and whether they have been properly implemented. Our lawyers have conducted a limited review of the compliance and supervisory systems for over-the-counter trading and market-making practices and have also assessed the adequacy of all of the systems of a particular firm. Following these reviews, we have provided recommendations and revisions to compliance and supervision procedures, practices and manuals.
Our lawyers have served as counsel to the audit committee of an insurance holding company and as corporate counsel to the board of directors, assisting company officials in the investigation of an internal check forgery scheme and recovery from the bonding company for the losses sustained.
Lawyers in our Environmental Law Practice have worked with businesses in overseeing investigations by technical environmental firms to determine compliance with environmental laws.
Lawyers in our Health Law Practice have reviewed contracts between healthcare providers to identify potential violations of federal and state law, particularly with regard to the antifraud and abuse provisions of the Medical Assistance Act. In one of these instances, we recommended and conducted an internal investigation and as a result of voluntary disclosure, our client, a publicly traded healthcare corporation, avoided large amounts of fines and immeasurable adverse publicity. Further, no public charges were filed.
Our lawyers have provided evaluations of contracts to determine conformity with the federal "safe harbor" regulations. Our lawyers closely track the opinions and actions of the Office of the Inspector General (OIG) and are prepared to appraise potential compliance problems from OIG's perspective. In the event compliance concerns should arise, we can assist healthcare providers in restructuring or modifying existing relationships so as to lessen or eliminate the risk that a particular relationship will be found to be contrary to federal or state law.
Lawyers in our Trial Department represented a manufacturing plant accused of selling unstable and/or inferior products to the U.S. government. We conducted an internal investigation of the government's allegations and made presentations to federal prosecutors and the Food and Drug Administration (FDA) concerning the stability of the product that yielded a successful result for our client. Our lawyers later designed a comprehensive compliance program for the client to lessen or eliminate the risk of additional problems.
Our lawyers assist numerous executives and special committees of boards of directors in conducting sensitive internal investigations and identifying the risks and rewards associated with them. Among other benefits, the firm's involvement at the investigative level ensures that as the internal investigation proceeds, discussions between employees and counsel will be protected by the attorney-client privilege. In order to protect a business, we recommend that initial interviews of an employee suspected of any wrongful behavior be conducted by counsel.
Government Investigations, Prosecutions and Enforcement Actions
Duane Morris also represents corporations that state and/or federal agencies are investigating or have accused of wrongdoing. Many of our lawyers are former federal, state and local prosecutors, with experience leading and participating in high profile and other sensitive investigations for the federal government, the Securities and Exchange Commission, state governments and big city district attorneys' offices. Each brings valuable insights to the representation of clients under investigation, as well as clients needing advice on corporate compliance generally.
There are several different methods by which government agencies conduct investigations:
Search Warrant. When a criminal investigating agency has reason to believe that a corporation may destroy incriminating evidence, a judge is authorized to issue a search warrant, which allows the agency to forcefully enter upon premises and conduct a search. Resistance is unlawful and unwise. Legal counsel should be involved as soon as possible, to meet with the agents, to minimize any disruption with ongoing business activity, and to determine the extent of the investigation and the reason for a search warrant. The issuance of a search warrant generally reflects a high likelihood that criminal prosecution will be invoked in the future.
Grand Jury Subpoena. The grand jury has virtually unlimited power, working with a prosecuting attorney, to issue a subpoena. The receipt of a subpoena does not necessarily indicate that the business receiving it is suspected of criminal activity, but this is a possibility. Very often subpoenas are routinely issued to third parties for information that may aid the grand jury and the prosecutor in investigating criminal conduct.
Grand jury subpoenas are often limited to the production of documents. A business receiving a subpoena has the right to file objections to the subpoena, particularly where the scope of the documents to be produced would be extremely burdensome. Duane Morris' attorneys are frequently called upon by clients to negotiate compliance with a subpoena.
A grand jury may also subpoena an individual or a representative of a corporation to testify before the grand jury. Legal counsel should always be retained in this event, although counsel is not permitted in the grand jury room when the witness is testifying.
Antitrust Price Fixing Grand Juries. Our lawyers have frequently represented individuals and corporations who are the subject of antitrust price fixing investigations. These are highly sensitive investigations that are managed by experienced prosecutors in a special unit within the United States Department of Justice. Counsel should always be retained for any business or individual receiving such a subpoena.
Civil Investigative Demand. When a federal prosecutor has reason to seek documents from a company relating to its business conduct, but the inquiry is noncriminal in nature, the government attorney may use a "civil investigative demand" to require the production of documents. An attorney should be retained to negotiate the scope of information requested and determine the nature of the investigation.
We have defended clients accused of paying bribes, receiving kickbacks, making false claims to the government, submitting defective or substitute products and diverting corporate funds. Our lawyers have mitigated and prevented the forfeiture of assets in both civil and criminal proceedings and have dealt with the United States Department of Defense and the Defense Logistics Agency in debarment and suspension matters that always require improving existing or initiating corporate compliance programs. We have also represented clients in collateral matters involving civil tax liabilities and professional or other licensing proceedings.
Lawyers in our Employment Law and Management Labor Relations Practice represent companies during audits of wage payment practices conducted by the United States Department of Labor, Wage and Hour Division and during audits to determine compliance with federal affirmative action plan requirements conducted by the Office of Federal Contract Compliance Programs. We also represent clients in inspections by the Occupational Safety and Health Administration and in other investigations of the workplace by federal, state and local agencies.
Formal Order of Investigation. The SEC has full power under the various federal securities laws to order investigations of alleged violations of those laws. The SEC is empowered to make investigations whenever it appears that such provisions have been or are about to be violated. Formal investigative proceedings may be held before the SEC, before one or more of its members, or before any officer designated by it for the purpose of taking testimony of witnesses and receiving other evidence. Such designated officers have the power to issue and to prosecute enforcement of subpoenas.
Prosecutorial Discretion. Some governmental agencies have a wide range of remedies available to them when prosecuting violations of agency laws, rules and regulations. Investigations are opened when there is evidence, however scant, that the agency's statutes or rules have been violated. The prosecutor must assess the evidence and make a determination as to whether purported violative conduct rises to the level of a criminal violation. The prosecutor will also determine whether to close the investigation with no enforcement action or to pursue the perceived appropriate remedial venue. Available courses of action include an administrative proceeding before an agency official; an injunction in a civil court of law and penalties including disgorgement of profits; or a criminal prosecution including imposition of sanctions, fines and imprisonment. The prosecutor has to decide which course to take based upon the investigating officials' assessment of a variety of factors. The ultimate decision determines whether a civil investigation becomes a criminal prosecution.
Government Requests for Information. Very often businesses receive requests for information from government agencies. These requests may range from an innocuous inquiry for factual information from a regulatory agency to a grand jury subpoena that indicates a company is the target of a criminal investigation. If our clients have any questions about the purpose of a particular inquiry, we recommend that they consult with us. Our experience in dealing with government agencies enables us to guide our clients in preparing an appropriate response. Further, our involvement maximizes the protections afforded by the attorney-client privilege.