Transcript Document

Whistleblowers and Investigations
Under Sarbanes-Oxley
Gordon M. Shapiro
Jackson Walker L.L.P.
February 1, 2006
Pre-SOX Statutory Framework
• Whistleblowers had protection
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Clean Water Act
Toxic Substance Control Act
Energy Reorganization Act
OSHA
State statutes
• Boards under no obligation to have anonymous
compliance reporting hotlines
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Willy v. Administrative Review Board, 423 F.3d
483 (5th Cir. 2005):
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In-house attorney fired from Coastal Corp. in 1984,
allegedly for making a harsh environmental audit report
and for lying to a superior.
In-house attorney qualified as whistleblower under federal
environmental statutes.
Could use former employer’s privileged attorney/client and
work product information to support claim.
Case remanded, not yet final.
SOX Provides Additional Protections to
Whistleblowers
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Civil and criminal liability for retaliation
SOX protects whistleblowers engaging in “a protected activity.”
SOX §806(a). A “protective activity” is defined as providing
information concerning a protected subject matter to:
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a federal law enforcement or regulatory agency
a committee or member of Congress
a person with supervisory authority over a subject employee or
such other person retained by the employer who is authorized
“to investigate, discover or terminate [for] misconduct.”
The New Whistleblowers
• Shareholder activists
• DuPont Shareholders for Fair Value
• Massey Energy derivative action
• Labor unions
• Ashland action by AFL-CIO Pension Fund
• Third Party Contractors?
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Can Whistleblowers be considered
beneficial?
• Company objective is fair presentation of all
reportable environmental risks and liabilities.
• Company implements robust procedures and
controls to identify and evaluate environmental
conditions.
• Company actively manages environmental risks
and constantly looks for new opportunities.
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Audit Committee responsibilities under
SOX include:
• Promulgating procedures for the reporting of and
responding to complaints by company employees
concerning accounting, internal accounting controls,
and auditing issues. SOX §301(m)(4).
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Implementing the new SOX
requirements:
• Implementation of ethics hot lines
• Independent, objective, and robust internal audit
function
• Senior executive hired in compliance function
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General Counsel as gatekeeper under
SOX
• “We are also considering actions against lawyers,
both in-house and outside counsel, who assisted
their companies or clients in covering up
evidence of fraud, or prepared, or signed off on,
misleading disclosures regarding the company’s
condition. One area of particular focus for us is
the role of lawyers in internal investigations of
their clients or companies. We are concerned
that, in some instances, lawyers may have
conducted investigations in such a manner as to
help hide ongoing fraud, or may have taken
actions to actively obstruct such investigations.”
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General Counsel as gatekeeper under
SOX
• Document Retention Issues
Arthur Andersen LLP v. United States, ___ U.S. ___, 125 S.Ct. 2129, 161
L.Ed.2d 1008 (2005).
• SOX added 18 U.S.C. §1519:
Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or
makes a false entry in any record, document, or tangible object with the intent
to impede, obstruct, or influence the investigation or proper administration of
any matter within the jurisdiction of any department or agency of the United
States or any case filed under title 11, or in relation to or contemplation of any
such matter or case, shall be fined under this title, imprisoned not more than 20
years, or both.
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Some Examples of SEC Enforcement
Against Attorneys
• In the Matter of David C. Drummond, Admin. Proc. Rel. No. 33-8523
(January 13, 2005)
• In the Matter of James Fitzhenry, Admin. Proc. Rel. No. 34-46870
(November 21, 2004)
• SEC v. John Isselmann, Case No. CV 04-1350 (D. Ore.) (September 21, 2004)
• SEC v. Steven Woghin, Case No. 04 Civ. 0487 (E.D.N.Y.)
(September 21, 2004)
• In the Matter of Stanley Silverstein, Admin. Proc. Rel. No. 34-49676
(May 11, 2004)
• SEC v. Jonathon Orlick, Case No. CV-03-4376 (C.D. Cal.) (January 6, 2004)
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Example scenario of a reported
violation under SOX:
• Anonymous report made to ethics hotline of
Company A
• Report states that company owns dozens of properties
with known soil and groundwater contamination that
would be very costly to clean up.
• Report also states that these conditions are not reported
in Company A’s financial statements and disclosures
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Effect of the ethics hotline report:
• Routing of the report to compliance, general
counsel, notice to audit committee
• Cannot ignore the report under SOX
• Internal investigation
• Independent external investigation
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Internal Investigation: Issues to
consider
• Independence
• Reporting
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Communications with outside auditor (SAS 99).
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Is the investigation continuing or complete
Privilege issues
Independent Investigations: Issues to
consider
1. Independence
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Can the independent investigation fairly and independently
report about the company, including management
Generally companies retain law firms to lead independent
investigations who have no ties to company or management
Obtaining input from external auditor in the selection process.
2. Handling possible expansions of scope
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Independent Investigations
3. Privilege Issues.
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Who is the client?
Disclosure of privilege as an issue of “cooperation” in
sanctions/sentencing
Recent authority on Upjohn warnings in context of
investigation
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In Re: Grand Jury Subpoena: Under Seal, 415 F.3d 333
(4th Cir. 2005)
Independent Investigations
4. Reporting Issues
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Establishing reporting lines
Frequency of reporting
“Up the ladder” issues
Challenges regarding disclosure while investigation is
ongoing.
Form of the report
About Jackson Walker LLP
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Jackson Walker L.L.P., one of the largest Texas-based law firms, offers expertise in virtually every area
of the law.
Jackson Walker has a strong regional base of over 300 attorneys in Austin, Dallas, Fort Worth, Houston,
Richardson, San Angelo, and San Antonio. The firm regularly represents clients in such areas as
corporate and securities, litigation, intellectual property, health care, labor and employment, legislative
and regulatory, real estate, tax and estate planning, technology, bankruptcy, aviation and international
law. The firm's corporate clients include Fortune 500 companies, multi-national corporations, major
financial institutions, and a wide range of publicly traded corporations and closely held businesses.
Recognizing that the demands of our clients have assumed international proportion, Jackson Walker in
1994 was one of the founding members of GlobalawSM, a world-wide network of law firms with offices
throughout the U.S. and in over 65 countries. These affiliates are a major presence in each of their
markets insuring the extension of excellence in service, creativity, and business standards that are
reflected by Jackson Walker.
In addition to providing superior legal representation, the firm has always encouraged its attorneys and
employees to be involved in the community. Numerous members of the firm are presently serving, or
have recently served, as members of city, state, and federal government and on the board of directors of
civic, charitable, and trade organizations.
As part of the firm's commitment to excellence, a common characteristic stands out: a focus on practical,
cost-effective solutions to legal problems that add value and emphasize what works for our clients based
on the highest professional standards.
About Gordon M. Shapiro
• Partner, Litigation
• Co-Chair Special Investigations Practice
• Lead Defense Counsel, 10 week jury trial U.S. district court, named
to annual national list as “Top Defense Win” by National Law Journal;
judgment later affirmed by U.S. 5th Circuit Court of Appeals
• Lead Defense Counsel in multiple actions arising out of alleged
MTBE water contamination of City of Dallas water supply
• Listed, Best Lawyers in America, commercial litigation (2006 Edition)
• Author, “E-mail Discovery and Privilege,” 23 Corporate Counsel Rev.
203 (2004), 30 The Advocates Quarterly 258 (2005)
• Contact information: 901 Main Street, Suite 6000, Dallas, Texas
75202; telephone 214.953.6059
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Referenced Opinions and Materials
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Willy Opinion
SEC Speech (September 20, 2004)
Arthur Andersen Opinion
Memo from Larry Thompson (January 20, 2003)
In Re: Grand Jury Opinion