Conducting Internal Investigations--What to Do and Not Do

Conducting Internal Investigations—What to Do and Not Do

Raymond C. Marshall

This Dialogue is derived from material presented by Raymond C. Marshall at the 28th Annual ALI-ABA Environmental Law Conference, sponsored by ALI-ABA and the Environmental Law Institute, held in Washington, D.C., on February 12-14, 1998.

Mr. Marshall is a partner in the San Francisco office of McCutchen, Doyle, Brown & Enerson, LLP. He has a strong background in civil and criminal environmental litigation in both federal and state courts. His work in environmental law includes representation of clients to recover costs by private parties under Superfund, cost allocation disputes with insurance carriers, and the defense of corporate and individual clients charged with violations of local, state, and federal environmental laws as well as indictments before the grand jury at both the state and federal level. A graduate of the College of Idaho and Harvard Law School, Mr. Marshall is a past president of the Bar Association of San Francisco and the State Bar of California. Recently, he was named Lawyer of the Year by the California Association of Black Lawyers. In addition to the many professional organizations he works on, Mr. Marshall is extremely active in community affairs and serves on the boards of the American Red Cross, the Alta Bates Hospital Foundation, and the United Negro College Fund.

[30 ELR 10901]

The investigation and prosecution of environmental crimes has steadily increased over the past decade.¹ Regulatory agencies responsible for overseeing compliance with environmental statutes have become aggressive prosecutors of environmental crimes. This change in posture, first witnessed in the early 1980s, has been contagious and is today evident at all levels of the law enforcement community. For example, in recent years, legislatures have enacted new environmental statutes and strengthened existing ones. Likewise, prosecutors have raised the stakes by exercising their discretion to investigate cases criminally rather than civilly, to charge matters as felonies rather than as misdemeanors, and to prosecute individual managers and employees rather than corporations alone. The same is true for the courts. At the federal level, courts are bound by the punitive provisions of the federal sentencing guidelines, and, for their part, state courts have demonstrated a new willingness to levy higher fines and penalties and to impose stiffer jail terms for environmental violations.

In light of these developments, it is critical that companies identify and respond effectively to even the earliest indications that they or their employees may have violated environmental statutes or regulations. Among other things, this requires that the company learn the underlying facts, identify knowledgeable employees, obtain relevant documents, understand procedures and techniques for interviewing employees, recognize the potential for conflicts of interest, and be alert to preserving the attorney-client and work product privileges. In short, companies must learn how to conduct a proper investigation. What to do and not to do in this regard is discussed below.

General Overview

Where potential criminal liability is involved, traditional rules of discovery, litigation, and counseling change dramatically.

More often than not, a company under investigation for alleged environmental violations is inclined to cooperate with the agencies conducting the investigation. This reflexive response may arise from several sources, including a fear of stimulating further investigation, a concern about disbarment or suspension from government contracts or loss of a license, the desire to avoid adverse publicity, and/or the natural tendency to view one's own company as a "good corporate citizen" with nothing to hide.

In civil litigation where the case has potential criminal implications, consideration should be given to the danger of incriminating admissions in responding to discovery requests and preparing witnesses for deposition. Unlike in civil proceedings, individuals charged in a criminal case stand a chance of going to jail—not just being fined. In addition, a criminal conviction may have an impact on a company's business and reputation that is not presented by an adverse civil judgment.

The goal of the government investigator is not to assist the company in complying with regulations, but to develop evidence to prosecute the company criminally. The U.S. Department of Justice's (DOJ's) recent guidelines for federal prosecution of corporations make clear that the primary goal of any criminal enforcement action still is to identify, prosecute, convict, and ultimately, incarcerate some responsible official; the "higher" up the corporate ladder, the better.²

The company, its management, and its lower level employees may have different and conflicting interests. These interests must be identified as soon as possible. Indeed, on some occasions, the attorney's interests, both professionally and ethically, may differ from the client's. As the responsible attorney, counsel may be forced to decide whether it is in the client's and/or counsel's best interest to continue the attorney-client relationship.

Keep in mind, however, that the government's case may be weak, even if an indictment has been filed. Simply because a person has been charged does not mean that he or she is guilty—government entities, not to mention grand juries, are far from infallible.

[30 ELR 10902]

Steps for a Successful Investigation

The Purposes of the Investigation

In order to conduct an effective investigation, the scope and purpose of the investigation must be thoroughly understood. First, one must determine what happened. Managers of a company cannot afford for the government to know more about the company than they know. Thorough investigation of the underlying facts is essential to determine whether disclosure is called for and whether any corrective action is required. This is the only way to effectively define and manage the problem.

Second, determine who was involved. Any employees who were involved in the subject matter of the investigation, who have been contacted by government investigators, or who possibly could have any information relevant to the investigation should be interviewed. The company must determine as early as possible which individual corporate officers and employees may be liable individually. This is critical, because under many environmental laws, a corporation may be held criminally liable for acts committed by employees within the scope of their employment and for the benefit of the corporation.

Third, determine why it occurred. The element of intent often will be determinative in the government's decision whether to prosecute and, if so, which and how many charges will be brought. In addition, the determination of why an event occurred or did not occur will likely factor in the government's decision to treat the matter administratively, civilly, or criminally.

Next, determine remedial action. A proper internal investigation should allow the company to initiate appropriate steps to resolve the problem. Counsel should assist the company in developing practices and procedures that will help guide it in the long term. In the short term, remedial efforts during the pendency of the investigation may be an important factor in the prosecutor's decision on whether and how the case should be charged.

Last, determine corporate policies. The internal investigation should determine whether the company has established policies or procedures designed to prevent the violations charged. This may be important in the government's evaluation of the corporation's commitment to environmental compliance. In turn, the answer to this question will likely be a factor in determining who is charged with what violation and whether they will be prosecuted civilly or criminally.

Circumstances That May Prompt an Investigation

An internal investigation should be conducted as soon as there is reason to believe that a problem exists. If the internal investigation is not initiated until after the company or its employees have been charged with a criminal offense, the company may have lost valuable opportunities to undertake remedial action and possibly head off prosecution.

An internal investigation normally is prompted by the discovery of some evidence or accusation of wrongdoing. This may come from any of the following sources:

* company tips;

* employee complaints;

* reports of government auditors or inspectors which disclose questionable practices;

* internal and outside auditor findings;

* informal requests for information or documents by government investigative authorities;

* inspection of facilities by regulatory agencies;

* subpoenas;

* search warrants;

* administrative proceedings initiated by regulatory agencies; and

* civil suits.

Even thorough investigation of alleged wrongdoing does not, of course, guarantee a successful outcome. Nor is it risk free. Consider the following. Under the newly issued guidelines, the DOJ is obligated to weigh a corporation's willingness to cooperate in a criminal investigation when deciding whether (and how) to charge the corporation. Thus, either by choice or compulsion, the results of the investigation risk being disclosed to prosecutors, regulators, and potential private plaintiffs. In addition, pressures generated by the investigation itself may stimulate disgruntled or frightened employees to make accusations that otherwise would remain undisclosed. Similarly, the investigation, no matter how skillfully conducted, is likely to be disruptive to the company's operations. Moreover, the investigation may give rise to charges that otherwise would not have been brought. Even so, these risks are generally less dangerous than those incurred by turning a blind eye to a governmental investigation.

Organizing and Planning the Investigation

Before conducting any witness interviews, careful thought must be given to the organization and planning of the investigation. This would include making a preliminary determination of the major legal and factual issues relevant to the investigation; the criminal and civil exposure faced by the company; the location, volume, and identity of the key documents to be reviewed; the identity of key employees and nonemployees to be interviewed; the reporting and supervising chain-of-command overseeing the investigation; and the group to conduct the investigation.

At the outset, the company and its counsel must also reach agreement on the scope of the investigation. If the company is aware of the matters being investigated by the government, the task is easy—the company's internal investigation should mirror the investigation being carried out by the government. If the investigation has been prompted by a "belief" or "suspicion" of wrongdoing by the company, the investigation should be broad enough to uncover all information that could give rise to the company's potential liability.

Who Should Conduct the Investigation

The question most often asked is whether the investigation should be conducted by an attorney and, if so, whether by in-house or outside counsel.

As a general rule, an attorney should conduct or, at a minimum, supervise the investigation. The central issues and the major consequences will be dictated by statutes and case law. Sensitive legal questions invariably arise, including the ultimate question of whether the conduct constitutes a violation [30 ELR 10903] of law, and the agency decisionmakers are likely to be attorneys or heavily influenced by attorneys. In addition, the attorney-client privilege will be available to protect communications essential to the investigation, and the work product doctrine will likewise protect materials generated through the investigation.³

Notwithstanding increased scrutiny over their activities in criminal prosecutions, in-house counsel can play several important roles in an internal investigation. First, in-house counsel may be more effective in persuading company management that action is necessary. In addition, in-house counsel are usually better acquainted with the company's history, culture, structure, procedures, operations, and personnel than outside counsel. Likewise, in-house counsel are better known to the company's employees and, therefore, are likely to obtain greater cooperation in response to requests for interviews, information, and documents. Moreover, the use of in-house counsel is likely to be less costly and disruptive for the company.

Notwithstanding such benefits, it is still in the best interests of the company under most circumstances to rely on outside counsel. Outside counsel may be more independent and objective in assessing questioned practices because they are less involved with the company's programs and personnel. This is especially true because of the "responsible corporate officer" concept and the possibility that the counsel, or one or more of the counsel's close friends or associates, may be the "responsible corporate officer." In addition, experience suggests that management is often incredulous about the possible bases for criminal liability—corporate or personal—under environmental laws. Yet, management must come to grips with the company's possible exposure. Otherwise, insufficient weight will be given to the possibility of criminal prosecution. Thus, the judgment of outside counsel, who are experienced in defending criminal cases and have been involved in similar cases, may be a valuable asset. Outside counsel may have certain advantages in dealing with government investigators and prosecutors. Though it may be unfair, in-house counsel are likely to be viewed by the government as part of the corporate management structure and, therefore, as lacking independence. In-house counsel may have greater difficulty establishing credibility with the prosecutor and investigative agents than outside counsel. The company will want to demonstrate to the agency and the public that it is subjecting itself to a rigorous, honest, and complete examination, but in-house counsel may not have the time or necessary resources to conduct the investigation, and, even if they do, time pressures and the devotion of those resources may be inappropriate given other demands. Outside counsel should have credibility with prosecutors for the quality of their investigation, preparation, and presentation. Moreover, outside counsel may be perceived as a formidable trial adversary, since the company's willingness to go to trial and its capacity to win are significant deterrents to prosecution of marginal cases. In addition, the risk of inadvertently waiving the attorney-client privilege is higher for in-house counsel than for outside counsel because in-house counsel are frequently called upon to provide business as well as legal advice with respect to matters under investigation. Thus, it may be more difficult for in-house counsel to establish and maintain the privilege. Finally, it is often in the personal interest of in-house counsel not to be put in the position of having to make the hard decision regarding whether to disclose information to a prosecutor, to discipline responsible employees, or to explain how and why violations were committed in the first place.

In summary, while outside counsel may be blamed, at least initially, as the bearer of bad news, it is often most effective for an internal investigation to be conducted by outside counsel in close coordination with in-house counsel. This will enable a company to take advantage of both the familiarity of in-house counsel with the workings of the company and the experience of outside counsel with the workings of the environmental criminal process.

Conducting the Investigation

There are three principal elements of an internal investigation: communication with the client and investigator, analysis of documents, and employee interviews.

Regarding communications, counsel first should make clear to all parties involved (company management, employees, and the government investigator) that he or she has been retained for the express purpose of rendering legal advice. If practical, the company should issue a board resolution authorizing the retention of counsel, and the engagement letter should be explicit on that point. Likewise, to avoid speculation, fear, and rumors, some companies have found it useful to write an internal memorandum to employees in advance of interviews in order to advise them of the company's decision to conduct an internal investigation and to request that the employees cooperate with the investigating attorneys.⁴

In addition, counsel should contact the government investigator promptly to notify him or her of the representation. This is a first step in building a relationship that should permit candid communication in the future. Lack of information about the government's plans, evidence, or views of the case is a serious problem at all stages of the investigation. The contact may also place restraints on the government's ability to bypass counsel to communicate directly with employees.

All communications between the attorney and the company (and the company's employees) must be treated in a confidential manner. Written communications should be separated from other documents and identified as privileged. It is helpful to engage only in oral communications as to matters where the privilege may not apply. However, such communications should not be tape recorded unless the witness is potentially adverse. In that regard, the person or group to whom counsel will report should be carefully identified, and disclosure to anyone else should be avoided.

[30 ELR 10904]

Outside consultants may be required and, if possible, should be engaged by and report to outside counsel, not the corporation. Employment contracts between consultants and counsel may therefore prove useful. Any work product produced by outside consultants should be directed to outside counsel and marked "confidential" and "privileged." The privilege may apply to communications involving such experts when they are working at the direction and under the supervision of counsel and the consultant's advice is not revealed to persons outside those in the corporation with a need to know.

With respect to document analysis, it is preferable to review relevant documents before conducting the interviews. Documents may identify persons to be interviewed, can raise critical questions that can only be answered through interviews of employees, and may help to refresh the recollection of interviewees.

In addition, the response to any governmental demand for information requires balancing competing concerns. The company's response should be carefully formulated so as to minimize the risk that it will later be found to be a waiver of privilege. Likewise, the company must be careful to ensure that it has not withheld any information that has been validly requested. To do so risks liability under 18 U.S.C. § 1001 for knowingly concealing or covering up a material fact or making a false statement. Further, the general obstruction of justice statute prohibits concealment, destruction, alteration, or fabrication of documents during or pending judicial and administrative proceedings.⁵

Regarding employee and/or witness interviews, it is preferable to interview employees and others before they are interviewed by the government. A witness' recitation of past events may often favor the party who first reaches the witness. In addition, it is often helpful to have a responsible corporate official directing employees to search for and deliver the documents to counsel and to serve as a contact point inside the company and as a liaison with counsel in coordinating these efforts. To the extent possible, this person should have no involvement in the underlying transactions.

Employees may be confused about whose interests the interviewing attorney represents. They should therefore be told at the outset that the interviewer is counsel to the company, not to the employee personally. The employees should not be led to believe that the information provided to the company counsel will not be disclosed to management, government regulators, or prosecutors. This privilege belongs to the company, not the employee. At the same time, however, the substance of the conversation between the company counsel and an employee is confidential, and the employee should be told not to disclose the conversation with others, including the government. Employees should be advised that the decision to waive the privilege and to disclose materials or information gathered during the course of the investigation, either within the company or to the government, will be the prerogative of the company rather than the employee. Nevertheless, because of the possibility that the information may ultimately be transmitted by the employee to the government investigator, care should be taken to avoid unnecessary disclosures to the employee during the interview.

It is commonplace in criminal investigations of corporations for government investigators to contact employees directly and to seek to interview them with respect to the matters at issue. Such contacts often occur at home in the evening, when the employee is relaxed and away from work. Government investigators often suggest to employees that they do not need to seek counsel or consult with the company representatives prior to being interviewed. Although employees are free to talk to government investigators, they often are not aware that they have no obligation to do so. Similarly, employees may be unaware that they have a right to consult with counsel prior to agreeing to the interview or that the company may be able and willing to indemnify them for the costs of such representation.

It is thus well advised that companies inform their employees about various aspects of the investigation process prior to being interviewed. In order to avoid any "misunder-standing" over what was or was not said, it is advisable that the employees' rights and obligations be set forth in writing and, if requested, provided to the employee. Employees should be informed as to the purpose of the investigation and the importance of the employees' cooperation prior to any witness interview. Employees should also be told that the government is conducting an investigation of certain matters, and that the government investigators may wish to interview a number of employees in connection with the investigation. Employees should also be told that the company has retained outside counsel to represent the company in connection with the investigation. Likewise, they should be informed that the company has retained an attorney to be available to provide advice to those employees who wish to consult with counsel independent of the company's lawyers, and that the interview is voluntary and may stop at any time requested by the employee. Similarly, the company should recommend that the employee consult with counsel prior to any interview. It is the employee's sole decision, however, whether or not to do so, as the employee has the right to deal directly with government investigators without counsel, or to confer with counsel prior to doing so. Moreover, it is essential that employees be truthful when responding to any questions at any interview. The role of separate counsel should also be explained to employees. The separate counsel's role is to advise the employees as to the nature of the investigation, the purpose of the government interview, the employee's rights and obligations in connection with the interview, whether it is in the employee's interests to be interviewed, and the appropriate conditions for any such interview. Last, if the company has agreed to be responsible for advancing fees and related expenses for the employee's legal representation in connection with the investigation, the employee should be informed of this prior to the interview.

When employees are advised of their rights and obligations in connection with the investigation, it should not be suggested to them that they should refuse to speak with government investigators. Some lawyers caution employees about talking with investigators or anyone else. This advice risks liability under federal witness tampering and obstruction of justice statutes. The interview should be conducted in a manner that avoids any suggestion that the company is attempting to tamper with or improperly influence a potential witness or otherwise obstruct the government's inquiries. Such conduct would be illegal under the Victim and [30 ELR 10905] Witness Protection Act of 1982,⁶ which prohibits the use of misleading conduct with an intent to (i) influence testimony, (ii) induce the withholding of testimony or documents, or (iii) hinder, delay, or prevent the communication of information regarding the possible commission of an offense to a federal law enforcement officer.⁷

Before concluding the interview, it is important to answer any questions the employee may have regarding his or her rights and obligations and to reiterate the importance of answering any questions posed by government investigators truthfully. At the conclusion of the interview, the substance of the conversation with each witness should be summarized by counsel in writing. Because the company may ultimately choose to disclose the substance of the witness interviews to the government, the summary should not contain counsel's mental impressions or theories of the case. On the other hand, an interview summary that appears too much like a witness statement, as opposed to a statement of counsel's mental impressions, may be discoverable by federal prosecutors under Federal Rule of Criminal Procedure 26.2.

Determining Whether Employees and Former Employees Should Be Represented by Separate Counsel

Because the company can only act through its directors, officers, and employees, the conduct of such individuals is always at issue in criminal investigations. It is prudent therefore to consider immediately whether these individuals should be represented by counsel for the company or whether separate counsel is preferable or required. "Target" employees may require entirely separate counsel on an individual basis.

The results of the investigation often will dictate the answer to this question. As a general matter, when a company is the subject or the target of an investigation, there is often a serious potential for conflict between the company and its employees. For example, an employee may have taken an illegal action based on information or direction received from a supervisor. Even if contrary to company policy, the action may be attributable to the company, and the company could be held vicariously liable for the action if the individuals involved possessed the requisite knowledge or intent. In such a case, the interests of the company, the supervisor, and the employee may vary, and counsel for the company should refrain from providing legal advice to the individuals involved. On the other hand, if the employee is determined to be a witness rather than a target or a subject of a government investigation, joint representation by corporate counsel may be appropriate. The caveat to this is that a person's status as a witness, subject, or target of a government investigation may change as the investigation progresses. This may pose serious problems in the future because if joint representation is undertaken in the beginning of an investigation and a conflict later emerges, corporate counsel may be disqualified from representing either the corporation or its employees.

An employee's Fifth Amendment right is another dilemma. More than any other issue, this can drive a wedge between the corporation and its employees. The employee's assertion of the privilege cannot be used against the corporation or any defendant in criminal proceedings. Yet, it can and will be used against employees and, most importantly, against the corporate employer in civil or administrative proceedings. Even if former employees invoke the Fifth Amendment, it can be the basis of an adverse inference against the former corporate employer in a civil or administrative proceeding.

There may be advantages to separate counsel even in situations where there is no apparent conflict. Separate counsel will provide independent judgment for individual employees who might otherwise be tempted by overreaching offers of immunity or plea bargains or intimidated by the prosecutor's power to seek and obtain an indictment. Separate counsel may have greater credibility with the government regarding representations made on behalf of individuals and may be able to solicit more information from the government thancorporate counsel can. In addition, separate counsel can prepare the employee to be interviewed or to testify without the risk that the company will be accused of improperly attempting to influence his testimony. Separate counsel will demonstrate the company's commitment to employees to protect them from the personal risks of a criminal investigation and will establish a buffer between the company and the employees that reduces inferences of corporate noncooperation when employees are recalcitrant or untruthful. Separate counsel also may avoid excessive reliance by the prosecutor on the grand jury process for information and persuasion. Separate counsel provides an additional source of input to the prosecutor and intelligence about the course and direction of the government's investigation, and separate counsel usually will allow advance notice of an individual's decision to cooperate with the government and the content of any evidence that may be used against the company. Further, separate counsel will provide individuals with protection from the risks of indictment for perjury and false statements if prosecutors decide to prosecute individuals for such collateral crimes. Last, separate counsel may alleviate the risk that corporate counsel will be disqualified later because of a conflict of interest.

In order to maximize efficiency and minimize expense and complexity, a group of employees may be represented by the same attorney if there is no conflict among them. Logical groupings of individuals can be established based on witness, subject, or target status, and/or on similarities, dissimilarities, or conflicts in evidentiary matters. Each logical grouping may be represented by separate counsel. Under such circumstances, however, counsel should keep in mind that each employee has the prerogative to decline any representation or to select his or her own counsel. Moreover, the company may and should influence that decision constructively by pointing out the advantages of representation generally and/or representation by the particular attorney recommended by the company. As a practical matter, the company's willingness to pay the employee's legal costs often is dispositive. As a general matter, however, payment may have to be continued regardless of the action taken by the employee in the proceedings. An arrangement whereby representation would cease if the employee were to cooperate with the government could be viewed as coercive and probably unlawful.

The company also must determine early in the investigation whether it will provide counsel to its employees at corporate [30 ELR 10906] expense. Under the corporate law of California,⁸ Delaware,⁹ and many other states, companies may be required to indemnify an employee even in the context of a criminal inquiry. It is never in the company's interest to permit an employee to become subject to a criminal investigation without the benefit of legal counsel. Moreover, the company should avoid the risk of angering the employee and having him become an adverse witness or, worse, file a civil suit against the company during the course of the criminal investigation. On the other hand, the company may want to make some assessment of whether the employee's conduct was within the course and scope of his employment. Indemnification may not be required under applicable statutes for conduct outside the scope of employment, and the company may not wish to provide indemnification under these circumstances for business reasons.

Once the employees have separate counsel, consideration should be given to entering into a joint defense agreement among the attorneys for the company and for the individuals. Although disfavored by government prosecutors, a joint defense agreement will allow the attorneys to discuss the investigation and prepare a joint response under the "joint defense" component of the attorney-client privilege rule. The joint defense agreement should maintain the privilege of the information exchanged and state the attorneys' understanding with respect to a common defense of their clients. To wit, a joint defense agreement should provide that:

* counsel believe that there is a mutuality of interests in a common defense and representation;

* counsel wish to pursue the separate but common interests of their clients without any waiver of privilege communication;

* the information exchanged is for the purpose of facilitating the parties' representative;

* any information or materials (e.g., witness interview memoranda) that would otherwise be protected from disclosure to third parties will remain confidential notwithstanding their exchange among counsel;

* counsel consider disclosures among themselves of matters of common concern essential to the preparation of an effective defense of their client, and therefore covered by the joint defense doctrine;

* shared privileged information will not be disclosed to parties outside the agreement without the prior consent of the party that originally made it available; and

* shared privileged information will not be used by one party against another in possible civil litigation after the resolution of the criminal case.

Under the joint defense agreement, the company's interests are advanced by a team of lawyers who share information. It is especially advantageous if all of the attorneys are knowledgeable of the subject matter area and have previously worked together. Counsel must keep in mind, however, that they must render independent judgment on behalf of their individual clients. Separate counsel for individuals owe their professional duty to their client, not to the company, even though the company may be paying their fees.

Preparing Witnesses for Government Interviews and Grand Jury Appearances

In most corporate environmental criminal cases, the decision to indict almost invariably depends on inferences of the intent and knowledge of officers or employees, often with respect to conduct that may have occurred years before in a setting governed by complex regulations.

The preparation of witnesses to be interviewed or to appear before a grand jury is critical. The poorly prepared witness may lose an opportunity for immunity, make himself an attractive target of the investigation, or innocently expose himself to charges of making a false statement or perjury. The witness should therefore be told to tell the truth, to listen carefully to each question that is asked and answer only that question, to distinguish between what he or she knew or understood at the time of the events at issue and what he or she has learned since that time, to avoid speculation in response to questions about his or her knowledge of the events, and to avoid volunteering information that is not responsive to the question.

In reviewing documents with a witness, be careful to avoid selective presentation that could suggest an attempt to mislead the witness and improperly influence his testimony. Also avoid characterization of the facts or the recollections of other witnesses.

Reporting Findings and Recommendations to the Company

After the investigation has been conducted, it is often helpful to prepare a memorandum that provides a summary of facts developed through the investigation, an analysis of applicable legal principles, the identity of any weaknesses in the company's practices or procedures, any arguments against criminal prosecution or administrative sanctions, and recommendations for corrective actions or other measures that would improve operations and enhance the company's criminal and administrative defense of the case.

This memorandum should be used to help counsel develop a strategy and make oral and/or written submissions to the prosecutor. It should be marked "confidential" and designated a privileged document protected by the attorney-client privilege and attorney work product doctrine. The memo should be presented to the company's board, special committee, or audit committee, and all copies should be collected and securely maintained.

One caveat: the decision to produce a report should be carefully considered. Keep in mind that the company may decide to voluntarily produce some or all of the report to negotiate a favorable plea with the government. Second, where indictment of the company is a virtual certainty, a detailed report of the investigation's findings can be disastrous. A leak of the report could jeopardize the company's defense. Under such circumstances, consider giving an oral report and not documenting the problems.

Voluntary Disclosure of Findings From the Investigation

At the end of the investigation the company will be faced with a critical question: whether it has an obligation to disclose [30 ELR 10907] any information about possible wrongdoing that may not be known by the government and, even if not obligated, whether it should do so voluntarily.

As noted above, absent a mandatory disclosure obligation, usually specified in the statutes, a company has no general duty to come forward and acknowledge improprieties or wrongdoing. There are, however, substantial benefits to voluntary disclosure. Disclosure tends to demonstrate the integrity of the company. It also may allow the company to avoid indictment or criminal prosecution. In addition, disclosure presents the government with the company's version of the facts and may allow the company to shape the contours of the government's investigation, and disclosure may be able to close off other areas of investigation. In addition, voluntary disclosure of violations, cooperation with the government in investigating the violations, and the use of the internal investigations or environmental audits are all factors the DOJ will consider in determining whether to prosecute a case criminally. This is consistent with the DOJ's policy "to encourage self-auditing, self-policing, and voluntary disclosure of environmental violations by the regulated community."¹⁰

There are, however, some serious risks to voluntary disclosure. A company should therefore consult with counsel before disclosing anything to the government. Disclosure may have a chilling effect on the cooperation of employees in the course of the internal investigation. It also increases the possibility that the attorney-client privilege and attorney work product protection may be waived with respect to otherwise privileged communications and materials generated in the course of the investigation, including the underlying documents used to prepare any report to the government. Moreover, disclosure will not preclude the government from prosecuting, and it may provide the government with a road map to other potential areas of investigation. In addition, disclosure will provide the government with a blueprint of the company's defense of the case, including helpful documents of which the government may be unaware, and testimony that the company expects to be available from favorable witnesses.

Counsel should assume that all reports, testimony, and scientific data disclosed to the administrative agency will be provided forthwith to criminal investigators. Disclosure to the government may result in transmission of information to private civil litigants. In such cases, counsel should consider requesting protective orders and/or moving to stay civil discovery pending the criminal investigation. Close supervision of outside consultants by counsel is critical, particularly in drafting technical reports.

Persuading the Government Not to Prosecute Criminally

Counsel should decide early to make a presentation to the prosecutor as to why the facts of the case do not justify prosecution. If counsel elects to make a presentation, it is advisable to obtain the government's agreement in advance that the presentation is made without prejudice to the company and without waiver of the attorney-client privilege and work product doctrine.¹¹

Prior to making a presentation, counsel must determine whether the prosecutor has an open mind about the case. In addition, presentations are most effectively made in writing, whether or not in combination with an oral presentation. Be specific in detail and demonstrate to the prosecutor that the company is prepared to challenge the charges, and that if an indictment is sought, the government will have a difficult battle on its hands. Also place negative facts in context, as this tends to neutralize the government's efforts to prove criminal intent or knowledge.

The key issue in determining criminality in many cases will be intent. Intent is typically established by circumstantial evidence, i.e., inferences drawn from such facts and circumstances as individuals' conduct and statements. While it is helpful to put actions into context to support an inference of good faith, it is important to remember that many criminal environmental statutes require only general, not specific, intent.¹²

There are numerous arguments that may be made to avoid criminal prosecution. For example, perhaps the facts do not support an inference of criminal knowledge or intent, or acquittal would be likely if the case were brought to trial. Counsel may also argue that no substantial federal interest would be served by prosecution, that the conduct in question is a low enforcement priority relative to other areas, that prosecution is unnecessary to achieve deterrence, or that there is no evidence of corrupt motive. Likewise, if the company has no criminal history and an excellent record of public service, the company made timely disclosure and has been and will continue to be fully cooperative with the government's investigation, or available civil remedies equal the probable sentence if a conviction were to be obtained, the government may be less inclined to prosecute. It also may be worth arguing that the adverse consequences of prosecution, including the disruption of important federal programs and economic dislocation of a company's work force, would be contrary to the public interest (this argument is often not persuasive, however, because almost any company can make it). In addition, if the misconduct is geographically and organizationally isolated, the company took or will take strong disciplinary action against the wrongdoer, or the company has in place effective systems for preventing, detecting, and correcting criminal activity, counsel should argue these facts to the government.

Counsel also must be aware of the factors prosecutors consider in determining whether or not to seek an indictment. These factors include: likelihood of success; strength of the evidence; indications of the company's knowledge and intent concerning the misconduct; organizational level of the employees involved; pervasiveness of the illegal conduct; strength of federal interests involved; quality of the company's cooperation during the investigation; nature of [30 ELR 10908] the remedial actions taken by the company in the wake of discovery of the misconduct; quality of the company's efforts to prevent misconduct in the first instance through a meaningful compliance program implemented in fact as well as on paper; noncriminal alternatives to prosecution; the existence or likelihood of effective criminal prosecution in another federal or state jurisdiction; whether the company made a timely disclosure of the criminal activity to the proper authorities and cooperated in the investigation; whether any proffered remedial measures will compensate victims and prevent repetition of the wrongful act; and whether the company took or will take meaningful disciplinary measures against those employees responsible for the misconduct.

Even when these factors do not prevent indictment, they may be useful to help persuade the government to reduce the number of counts charged; limit the scope of the fine or penalty; charge a misdemeanor instead of a felony; indict no individuals; limit the factual proffer at the time of the plea; intercede on the company's behalf with the sentencing judge and/or with regulatory agencies; and/or provide a press statement that may reduce the adverse publicity associated with the indictment.

Counsel should also review the DOJ's Principles of Federal Prosecution¹³ to determine whether or not a prosecution would be brought under the government's internal guidelines. These principles instruct the prosecutor to evaluate whether a federal offense has been committed, to determine the likelihood of conviction if indicted and tried, and to decline prosecution where no federal interests would be furthered by, or where there exists an adequate noncriminal alternative to, prosecution.

Public Relations

Cases of environmental crimes may put a company's public reputation squarely on the line. Consequently, in-house or outside counsel should be involved in the public dissemination of all statements. Public and government affairs officials and top management should always consult counsel before disclosing information to the public.

Insurance

Counsel also must explore whether any criminal liabilities or counsel fees are covered by insurance. Criminal acts are often excluded from coverage. However, under a "claims made" policy, the company may have an obligation to disclose any matter that might reasonably lead to an insured claim. Under a "per occurrence" policy, the failure to make timely disclosure of known facts relating to a claim also may lead to an argument by the insurer that its ability to provide coverage was impaired and that the claim should be denied.

Conclusion

When an environmental matter becomes the subject of criminal proceedings, the rules of the game suddenly change. Counsel must take steps to prepare for the issues he or she will confront and to prepare the client for difficult decisions it will face. The first step in this process will be determining what happened and why.

The key to uncovering the facts and being able to handle a criminal proceeding is the internal investigation. Indeed, as a practical matter counsel cannot even begin to give advice unless he or she has ascertained the facts through a thorough internal inquiry. Moreover, by conducting a proper inquiry, counsel is likely to minimize the risk of criminal prosecution and the resultant adverse consequences.

1. In fiscal year (FY) 1998, the U.S. Environmental Protection Agency (EPA) referred 266 criminal cases to the U.S. Department of Justice (DOJ) and assessed $ 92.8 million in criminal fines. EPA also referred 411 civil cases to the DOJ and assessed $ 91.8 million in civil penalties. Collectively, the 677 referrals and $ 184.6 million in fines and penalties were the second highest one-year totals in EPA's Office of Enforcement and Compliance Assurance's history. See OFFICE OF ENFORCEMENT AND COMPLIANCE ASSURANCE, U.S. EPA, ENFORCEMENT AND COMPLIANCE ASSURANCE FY98 ACCOMPLISHMENTS REPORT 2-3 (1999). Statistics for FY 1999 were still in the process of being complied when this Dialogue was sent to press.

2. See U.S. DOJ. FEDERAL PROSECUTION OF CORPORATIONS § I (1999) (also available at http://www.usdoj.gov/04foia/readingrooms/6161999a.htm) [hereinafter FEDERAL PROSECUTION GUIDELINES].

3. The DOJ's guidelines state that "the [DOJ] does not, however, consider waiver of a corporation's privilege an absolute requirement, and prosecutors should consider the willingness of a corporation to waive the privileges when necessary to provide timely and complete information as only one factor in evaluating the corporation's cooperation." See FEDERAL PROSECUTION GUIDELINES, supra note 2, § VI. Nevertheless, anecdotal evidence strongly suggests that federal prosecutors are aggressively demanding waiver of privileges as the price of negotiating favorable plea agreements.

4. Any such memorandum should be carefully crafted and critically reviewed to make sure that it cannot be cited by government prosecutors as evidence of the company's interference with the government's investigation, or worse, to support a charge of obstruction of justice.

5. See 18 U.S.C. §§ 1503 and 1505.

6. Id. § 1512 et seq.

7. Id. § 1512(a).

8. See CAL, CORP. CODE § 317(d) (West 1999).

9. See DEL. CODE tit. 8, § 145 (1999).

10. See U.S. DOJ, FACTORS IN DECISIONS ON CRIMINAL PROSECUTIONS FOR ENVIRONMENTAL VIOLATIONS IN THE CONTEXT OF SIGNIFICANT VOLUNTARY COMPLIANCE OR DISCLOSURE EFFORTS BY THE VIOLATOR (July 1, 1991) (available at http://www.usdoj.gov/enrd/factors.htm); see also FEDERAL PROSECUTION GUIDELINES, supra note 2, § VI.

11. See In re Martin Marietta, 856 F.2d 619 (4th Cir. 1988) (privilege held to be waived with respect to entire subject rather than to disclosures contained in corporation's written submission to the government).

12. See, e.g., Resource Conservation Recovery Act, 42 U.S.C. § 6928(d)(1), ELR STAT. RCRA § 3008(d)(1) (knowing transportation of hazardous waste to an unpermitted disposal facility).

13. U.S. DOJ, PRINCIPLES OF FEDERAL PROSECUTION (1980).