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Representing the Targeted Executive: Diplomacy Matters

By Seth A. Goldberg and Matthew A. Taylor
May 29, 2014
Corporate Counsel

Representing the Targeted Executive: Diplomacy Matters

By Seth A. Goldberg and Matthew A. Taylor
May 29, 2014
Corporate Counsel

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Seth Goldberg
Seth Goldberg

Matt Taylor
Matthew Taylor

It seemed like a good idea. Provide a local media outlet with a peek under the company's hood—give a tour of the facilities, answer questions about operations, preview a few promising transactions. When the article ran, however, with facts misstated and statements taken out of context, it quickly turned into a very bad idea for the company and for its chairman and CEO, John Smith.

Within days, the company, its board of directors and Smith were caught in a media firestorm. Various news outlets raced to allege that Smith was engaged in self-dealing and conflicts of interest. Those stories suggested federal securities law violations, and an influx of civil actions for securities fraud and fiduciary duty breaches was ratcheting up the pressure. Attempts to correct the record only fanned the flames.

Within weeks, federal and state regulators had taken notice. The company and Smith received letters and subpoenas from various government agencies informing them that investigations had begun. Documents would have to be produced, witnesses would have to be interviewed and there was a very real potential for an enforcement action.

With Smith and the company now in the crosshairs of federal and state enforcement agencies, a wide range of interests and issues, some that were competing, quickly emerged. As the agencies sharpened their focus on Smith, mixed views about his conduct were voiced by the media, the board, the company's counsel and shareholders, among others.

Smith's predicament, while fictitious here, is not unique. An enforcement agency investigation targeting an executive has the potential to draw the ire or concern of a range of interested parties, and to raise a number of common issues. A review of those parties and issues demonstrates that blending large doses of diplomacy with legal substance in these moments of crisis is necessary to extricate the executive from these challenging circumstances.

Board of Directors

The board could itself be under the agency's scrutiny, or subject to civil lawsuits, and therefore board members may be motivated to protect themselves at the expense of the executive. If the board is not implicated, it may nonetheless be in a defensive posture, fending off assertions that it did not have enough oversight and control over the executive. Conversely, the board may believe the executive is being wrongfully accused, and thus be willing to show solidarity with the executive. In all events, given the heightened attention, the board will be careful to send a message that it takes the accusations seriously, and that it is taking the necessary steps to uncover and fix any problems. Because the executive's counsel may have little, if any, direct contact with the board, it will be necessary to develop a productive working relationship with the board's counsel.

The Company

It should be presumed that the company will want to cooperate with the agency in the hopes of mollifying and defusing what is likely to be a guilty-until-proven-innocent view of the company and the executive. Like the executive, the general counsel will be trying to balance the interests of the agency, the board, shareholders, the media and the executive. An influx of civil actions could further burden the GC's office from a resources and expense standpoint. The executive's counsel has to recognize the increased pressure on the GC in order to effectively position the executive for alignment with the company, which may be critical to the executive's defense.

In addition to the GC, the company's outside counsel will naturally be an important relationship for the executive's counsel. If there is an alignment of interests, it may be possible and beneficial for the executive's counsel to step back and draft off of the work the company's outside lawyers are doing with the agency. If the company is attempting to distance itself from the executive, however, effective diplomacy with both outside counsel and the GC is even more critical if the executive's counsel hopes to stay ahead of any adverse approach the company may take.


There is a strong likelihood that the plaintiffs bar will attempt to represent the shareholders by way of derivative lawsuits and class actions. But special attention may need to be paid to large institutional investors who can effect change at the board level. Activist shareholders may see the crisis as an opportunity to wrest control of the board. Here again, the messaging needs to be very careful. Direct communications with powerful shareholders, as well as statements made in earnings releases and at investor presentations, can be effective in easing concerns and correcting the record, but they may also require disclosure—and could constitute disclosures that result in additional scrutiny.

Other Executives and Employees

Executives and employees not involved in the facts underlying the allegations may feel personally betrayed, angry about the distraction and nervous about their future. Knowing whom to trust can be difficult. Likewise, while it may be ideal to know there is alignment among those who are or who may become targets, there is a strong likelihood that others will cooperate with the agency if and when push comes to shove. Messaging to employees to calm nerves and correct the record may be desired and useful, but it should be limited and carefully worded to avoid any statements that could be taken out of context.


Media outlets rushing to judgment with incomplete or inaccurate facts can inflame the various interested bystanders—most notably regulators, the board and shareholders. The agency may latch onto incorrect or embellished facts to justify a deeper investigation. Attempts to correct the record by answering questions or issuing press releases rarely achieve the intended effect, and more often perpetuate the bad press. A public relations firm that specializes in crisis management may be a useful intermediary to respond to requests from the media for information, but counsel need to take an active role in crafting any public statements. Not commenting, however, may be the best way to have the story become old news.


Of primary importance to the executive is whether, and the extent to which, he will be indemnified for defense costs. Indemnification agreements between the executive and the company, as well as obligations under federal and state law, may provide for indemnification of some, all or none of the executive's expenses in defense of the agency's investigation, an internal investigation and/or civil lawsuits concerning the same facts. Indemnification may include advancement of expenses, for which the company may require the executive to execute an undertaking. Having a thorough understanding of the executive's entitlement to indemnification, and being able to obtain and maintain the company's commitment and obligation to indemnify under the challenging circumstances, will make a significant difference to the intensity with which the executive and his counsel participate in the defense.

Internal Investigation

Depending on the facts and circumstances at issue, the board may commence an internal investigation. This would likely be handled by a law firm hired by and reporting to the board. Although this firm may cooperate with the executive in order to facilitate the executive's forthcoming participation in the internal investigation, such cooperation will be limited so that the investigation maintains the appearance of independence.

The internal investigation should be considered an extension of, and the first phase in, the agency's investigation, given the likelihood that the internal investigator's findings will be reported to the agency. Therefore, effective communication between the executive's counsel and the internal investigators is critical.

Attorney-Client Privilege

There is a strong likelihood that the company will cooperate with the agency as much as possible, which may include waiving, to some extent, the attorney-client privilege. This is especially true if an internal investigation is commenced. A common interest or joint defense agreement may provide some protection against waiver and disclosure, but the company may be reluctant to agree to protect the privilege under all circumstances. Counsel must be aware of the impact a waiver may have on the executive, and make it a priority to negotiate a favorable common interest agreement, if possible.


A natural question is whether the executive will be terminated or will negotiate a separation from the company as a result of the investigation. Provisions in an employment agreement concerning termination may dictate whether and how the executive departs. Similarly, the executive may also be required to vacate any board membership. Either step could require negotiations in which the executive, the company and the board have a significant amount at stake in terms of information control, expenses and optics. Civil actions could arise out of a termination or separation.

Civil Lawsuits

Private shareholder securities or fiduciary duty claims can be easily cobbled together based on misstated facts learned from the bad press or a lawyer's basic investigation. These actions, which may name as defendants the executive, the board, the company and other executives, intensify the pressure on the company as a result of the immediate defense costs and potential for costly settlements. Counsel for the executive must manage the additional strain these lawsuits can put on the already stressed relationship between the executive, the company and the board.

In addition to the above, of paramount importance is the executive counsel's interaction with the agency during the investigation. Although more difficult to summarize, diplomacy with the agency most certainly includes establishing credibility and communicating a willingness to cooperate, while demonstrating a preparedness and determination to defend the executive on the merits through trial.

So, returning to Smith's hypothetical dilemma, what does counsel need to do to disentangle an executive from similar challenging circumstances? Counsel who are adroit in diplomacy, and who are able to manage the sensitivities of the various interested groups, stand the best chance of obtaining a successful resolution to the agency action. While establishing credibility with the agency, and signaling a readiness and willingness to defend on the merits is critical, the failure to succeed on the nonagency fronts will make success with the agency very difficult, if not impossible.

Seth A. Goldberg is a partner in the trial practice group of Duane Morris. Matthew A. Taylor is the head of the global trial practice group. Both are based in Philadelphia.