It is every in-house lawyer’s night-mare. Following disclosure to federal authorities of your company’s non-compliance with laws or regulations, you receive word that, while your company has been admitted to a, government-sponsored voluntary disclosure program, one of your senior managers has been designated a target of the criminal investigation triggered by your disclosure. You now confront the dilemma of completing settlement negotiations with the Department of Justice ("DOJ") while dealing with an anxious executive who does not want to be thrown to the wolves.
How should the targeted executive be treated by the company during its efforts to obtain favorable treatment from the government? What options are open to the company that will allow it to assist its employee without appearing to tolerate or reward alleged criminality? This tension is particularly acute in high-risk industries, such as healthcare, pharmaceuticals, government contracting, securities, and banking, where the risk of administrative exclusion is catastrophic.
An essential theme in every voluntary disclosure program is that the company will settle its dispute by "cooperating" in the broadest sense, which often means disengaging from the accused executive. Because that individual may be a tenured and loyal officer of the company and because the required showing of cooperation may occur long before he or she has been convicted of any crime, in-house counsel must find a solution that is at once satisfactory to the government and fair to the employee.
Although the company must take some action with respect to the accused employee to demonstrate cooperation, a variety of options are available that are, to varying degrees, fair to the employee while addressing concerns of the government.
Transfer to a nonregulated function or subsidiary. The government has a legitimate interest in seeing that the targeted employee stops performing the function that gave rise to the alleged violation. For example, removal of such an employee from direct sales contacts with government customers (in a gratuity investigation) or a transfer from the military to civilian manufacturing component (in a defective testing investigation) usually suffices to eliminate the government’s concern about future violations.
Administrative leave pending conclusion of trial. It may be necessary to remove the employee completely from the line of fire pending trial by affording him administrative leave with pay. The personnel policies of some companies allow such action during the course of a job-related investigation without loss of position or compensation. Such protections are more common in government employment than in the private sector, but consideration should be given to this option even if not formally recognized by company policy.
Consultancy relationship pending trial. Given the government’s insistence on cooperation, it may not be feasible to retain the executive as a direct employee pending his criminal trial. Other considerations, such as securities laws reporting requirements for officers and directors, may make it difficult to retain an indicted employee on the payroll. A paid consultancy for the executive may represent a satisfactory compromise because it removes the former employee from direct involvement in company activities while maintaining some relationship.
Resignation, severance, and outplacement. When termination of the employee’s relationship with the company is unavoidable, it may still be appropriate to offer the executive a severance package and outplacement assistance. The prosecutor may grumble that a departing employee should not be "rewarded" for alleged misdeeds, but few corporate dispositions are derailed because the board of directors negotiates a severance agreement with the employee.
The remaining question is whether the company may claim the benefits of cooperation while funding an employee’s criminal defense. Under the laws of most states, a board of directors is permitted to advance attorneys’ fees for the defense of an indicted employee on a certification by the employee of his good faith belief that his conduct was in the best interests of the company. In some jurisdictions, the employee may be required to execute a promise of repayment in the event he is ultimately determined not to have been entitled to advancement.
The availability of legal fees is indispensable to an indicted corporate employee seeking vindication at trial. By the same token, federal prosecutors have long appreciated the tactical value of denying the defendant well-funded representation.
The official Justice Department policy on corporate prosecutions sets forth the general principle that "[i]n determining whether to charge a corporation, that corporation’s timely and voluntary disclosure of wrong-doing and its willingness to cooperate with the government’s investigation may be relevant factors." The commentary to this principle includes the following:
. . . Another factor to be weighed by the prosecutor is whether the corporation appears to be protecting its culpable employees and agents. Thus, while cases will differ depending on the circumstances, a corporation’s promise of support to culpable employees and agents, either through the advancing of attorneys’ fees, through retaining the employees without sanction for their misconduct, or through providing information to the employees about the government’s investigation pursuant to a joint defense agreement, may be considered by the prosecutor in weighing the extent and the value of a corporation’s cooperation. . . "
Federal Prosecution of Corporations, § VI, ¶ A (June 16, 1999).
The commentary notes that "[s]ome states require corporations to pay the legal fees of officers under investigation prior to a formal determination of guilt. Obviously, a corporation’s compliance with governing law should not be considered a failure to cooperate." (Id., fn. 3.) Unfortunately, very few states "require" the advancement of legal fees before a formal determination of guilt, but rather authorize the corporation, consistent with its bylaws, to pay legal fees upon submission of an affidavit of good faith by the employee. The official DOJ policy, therefore, does not definitively resolve whether the company may advance its employee’s legal fees.
Ultimately, the issue must be resolved in case-by-case negotiations with the prosecutor, mindful that it is rarely in the long-term interest of the company to throw its employee over-board without a lifeboat.
Roger C. Spaeder is a partner in the Washington, DC office of Zuckerman Spaeder. A version of this article originally appeared in the Business Crimes Bulletin, Vol. III, No. 1 (February 1996), published by Leader Publications, a division of New York Law Publishing, Co., and is published here with permission.
Reprinted with permission of the American Corporate Counsel Association as it originally appeared: Roger C. Spaeder, "Walking the Voluntary Disclosure Tightrope," Zuckerman Spaeder’s Outside Counsel, Winter 2001: 6–7. Copyright © 2001 by Zuckerman Spaeder and the American Corporate Counsel Association. All rights reserved. For more information or to join ACCA, call 202/293-4103, ext. 360, or visit www.acca.com.
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