General Observations as to the Conduct of an Internal Defence Investigation

1. General Observations as to the Conduct of an Internal Defence Investigation Presented by: David J. Martin Martin + Associates 863 Hamilton Street Vancouver, BC V6B 2R7 For : November 28, 2011 BC CLE “Transnational Criminal Law”

2. The triggering event can arise from various sources and involve diverse allegations: • By a shareholder as to the appropriateness of executive compensation (Hollinger); • By an external auditor or senior manager as to conflict of interest of Board members or excessive payment to intermediaries (Olympus); • By current or former employees as to industrial espionage or foreign corrupt practices (Rio Tinto/Alcan); • By customers or members of the public as to improper or illegal treatment (Newscorp); • By acquirers as to misrepresentation of the financial condition of the enterprise (Livenet);

3. The triggering event can arise from various sources and involve diverse allegations:(cont’d) • By Tax investigators as to the promotion of aggressive tax avoidance schemes (KPMG) and the provision of services related to such schemes (UBS); • By securities investigators as to the accounting advice related to the manipulation of corporate debt or earnings (Arthur Anderson); • By suppliers as to misrepresentations related to the acquisition of subsidies (CINAR).

4. Internal and external counsel will need to develop a preliminary strategy that inevitably involves questions as to: • Who should have independent representation? In most cases counsel will need to be appointed to represent the company, the primary shareholders, senior management and if the business enterprise is a reporting issuer, then perhaps to advise the Board; • Who will be retained so that a coherent, cost effective, hopefully joint investigation and response can be developed? Will there be a joint defence agreement? What will be the terms of the JDA? Who will be invited to become party to it? • Who will lead the conduct of the internal investigation? Clear lines of authority and reporting must be established at the outset.

5. Internal and external counsel will need to develop a preliminary strategy that inevitably involves questions as to: (cont’d) • All investigations are driven by the circumstances giving rise to the need to investigate with the result that the commissioning counsel or client will need to set clear investigative goals, timelines and investigative standards at the very outset.

6. No matter what triggers an internal investigation the first questions that must be clearly answered include: • Why is the investigation being conducted? Is it a counseling investigation conducted at the request of a client in order to assist in advising the client? Is it a due diligence investigation conducted by the client in order to ground representations to a third party? Is it a reliance investigation conducted by the company to be shared with government, the public and the Courts? • To what standard of care will the investigation be conducted? • All investigations should be as complete as possible however a counseling investigation may well need to be done quickly and perfection can be the enemy of the good as events unfold rapidly. In contrast, reliance and statutory duty investigations will be subject to truth standards of objectivity, independence, sufficient inquiry and evidentiary reliability (See: Michels, Internal Corporate Investigations and the Truth, 40 Seton Hall Law Review 83)

7. No matter what triggers an internal investigation the first questions that must be clearly answered include: (cont’d) • A preliminary assessment of a defence strategy will have to be made in real time by counsel experienced in dealing with corporations in crisis and with the avalanche of agencies and antagonistic interests that will emerge. A substantial enterprise with transnational operations can expect to deal with the RCMP and FBI, the SEC and Canadian securities regulators, the CRA and the IRS, as well as potential civil actions brought in the name of the corporation, the shareholders and on behalf of various classes. Navigation through the thicket of often conflicting liberty, financial and reputational issues will inevitably involve judgment calls driven by experience.

8. Special Considerations Relevant to all Investigations • These are generalizations and the special circumstances of each case must be considered (See: Bennett, Internal Investigations and the Defense of Corporations in the Sarbanes-Oxley Era, 62 The Business Lawyer 55). • Independence, objectivity and care must be hallmarks; allegations of witness tampering and obstruction of justice are all too common; employees must be immediately advised that document destruction is explicitly prohibited; • In house counsel will almost always be ill suited to conduct the internal investigation because as in house counsel often provides both business and legal advice it will be difficult for in house counsel to preserve privilege particularly if in house counsel’s work product is shared with auditors and management; government agencies may not view in house counsel as sufficiently independent or, worse, as compromised or complicit;

9. Special Considerations Relevant to all Investigations (cont’d) • It is important and entirely appropriate that employees be advised of their rights and obligations if contacted by government agents and that separate counsel has been appointed by the company to provide this service. Questions will inevitably arise as to whether individual employees will be entitled to independent counsel and whether such employees will be indemnified by the company for such costs; • External counsel will need to consider whether to communicate with employees by way of formal memorandum to document propriety and minimize confusion while weighing the effect of such communication upon the risk of the public dissemination of the fact that the investigation is being conducted; • Generally, and if possible, document assembly and review will precede witness interviews, employees will generally be direct to search for and deposit relevant documents with external counsel or a designated corporate official carefully sequestered to preserve privilege;

10. Special Considerations Relevant to all Investigations (cont’d) Generally, before employees are interviewed they are advised of the fact that: • the government is conducting an investigation, • the nature of the problem being investigated, • that counsel has been appointed to advise the company, • that the interview is necessary so that the company can be appropriately advised, • that investigating counsel is not counsel to the employee, • that any privilege arising from the interview is that of the company not of the employee, • that the contents of the interview may or may not be disclosed to government, and • that if the company’s interests and that of the employee are in conflict the employee may wish to obtain independent representation.

11. Special Considerations Relevant to all Investigations (cont’d) • Generally, there may be many advantages to key employees being represented by separate counsel, particularly by counsel with experience in the conduct of complex investigations who are prepared to work within the framework of a carefully designed joint defence agreement. While acting solely in the interest of the employee independent employee counsel can prepare a key employee to be interviewed and gain a deeper understanding of the entire matrix of the facts and legal issues within the privileged confines of a collaborative joint defence agreement.

12. The Purpose of the Investigation and its proposed use will define the process that will be followed • If the counseling opinion is conducted for the strategic benefit of a primary shareholder such that it will remain completely privileged then traditional processes will be followed: preserve evidence, accurately record interviews, maintain work product and solicitor client privilege; • If a due diligence opinion is conducted for the benefit of senior management for confidential release to investigative agencies then a variety of issues arise in addition to traditional concerns; conflict of interest, completeness, strategic impact of the report on the company’s criminal and civil liability, and requirement for Board approval.

13. The Purpose of the Investigation and its proposed use will define the process that will be followed (cont’d) • If a reliance report is being developed for the benefit of the company or the audit committee of the Board for release to the public, government agencies and the Courts then the Audit Committee will wish to ensure that the report be conducted by thoroughly independent counsel to a very high standard of care.

14. Special Advocacy Considerations • The adverse consequences of indictment and/or civil and administrative sanctions can be devastating to the business enterprise and its personnel. Each case will be assessed individually but companies will inevitably consider whether or not a detailed factual and legal submission can be made to government to avoid sanctions taking into account that such a submission will necessarily provide the government with a guideline to the defence case. Consideration should be given to whether to seek a prior assurance that such a submission will not be treated as a waiver of work product or solicitor client privilege; • The consideration of whether or not to make a pre-indictment submission will take into account whether an offence has been committed, whether the operating mind of the company or an employee possessed intent, whether there is a reasonable likelihood of conviction, whether alternative sanctions or remedial steps are available or appropriate and whether the prosecution is in the public or federal interest;

15. Special Advocacy Considerations (cont’d) • Self reporting in a marginal case combined with remedial proposals may minimize the risk of prosecution. Alternatively, cooperation may exculpate the company while leaving employees exposed. At minimum, if the enterprise is a closely held non-reporting issuer a competently conducted internal investigation will enable the enterprise and its principals to respond to any investigation with confidence and agility.

16. Conclusion The facts of the case will determine strategy • Is there actual misconduct or mere misinterpretation? • If there is misconduct was it known to management or was it the conduct of a rogue employee? A due diligence report to investigating agencies may limit damage to the company, senior management and stakeholders; • If the misconduct was known within management was it also known to primary shareholders or the Board? A Board special litigation committee or audit committee report may avoid corporate criminal administrative or civil liability;

17. Conclusion (cont’d) • If there was misconduct by management sanctioned by the primary shareholders or the Board how can the company be preserved and exposure to criminal liability be mitigated? A thorough and completely privileged counseling investigation will define strategies for battening down the hatches for the storms ahead.