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Surviving a Federal Criminal Investigation. June 13, 2006. Jeffrey Bornstein, Partner Kirkpatrick &Lockhart Nicholson Graham LLP Tamara Neiman, Supervisory Special Agent Federal Bureau of Investigation. How does the FBI decide to initiate a white collar investigation?.

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surviving a federal criminal investigation

Surviving a Federal Criminal Investigation

June 13, 2006

Jeffrey Bornstein, PartnerKirkpatrick &Lockhart Nicholson Graham LLPTamara Neiman, Supervisory Special AgentFederal Bureau of Investigation

how does the fbi decide to initiate a white collar investigation
How does the FBI decide to initiate a white collar investigation?
  • Referral from SEC or other federal or state law enforcement or regulatory agencies
    • Can be premised on routine agency inquiry, “sweeps,” case specific investigation, civil lawsuits
  • Newspaper articles
  • 10K or 10Q filings announcing restatements or other unusual circumstances
  • Informants
  • Referrals from counsel or audit committees
  • Civil lawsuits
what does the fbi do when it gets a referral
What does the FBI do when it gets a referral?
  • Background checks on company and principals
  • Consultation with U.S. Attorney’s Office
  • Letter requesting access to SEC files/materials
  • Initial briefing on key facts
  • Review of key corporate filings with particular attention to restatements or other out of the ordinary events
  • Review of insider trading
  • Review of stock prices
    • Event study
    • Google search
what types of cases are the fbi likely to investigate
What types of cases are the FBI likely to investigate?
  • Accounting fraud
    • Revenue recognition
    • Side letters
    • Fake/inflated or round-trip sales
  • Insider trading
    • Especially if involves high level officers
    • Can also include loss avoidance, e.g. Enron
  • Embezzlement involving interstate conduct
what are some of the new trends
What are some of the new trends?
  • Options grants
      • Back dating agreements
      • New Hire Option Dates
      • Special Treatment for Officers
      • False documents, i.e., meeting did not occur on the dates noted
    • Ponzi schemes back in vogue
    • Disclosures issues to shareholders, creditors, etc.
other new trends
Other New Trends
  • Investigation issues
    • False statements to FBI, auditors, audit committee, counsel conducting internal investigations
      • Obstruction
      • Destruction of evidence
    • Theft of trade secrets
    • FCPA
what makes a case worthy of investigation or prosecution
What makes a case worthy of investigation or prosecution?
  • Loss usually greater than $100,000
  • Clear evidence of fraud
  • Can you boil it down into something a jury will understand and recognize as a crime
    • $$$$ (greed)
    • Arrogance
    • Innocent victims
    • Lies
    • Deliberate or feigned ignorance
what are some of the steps the fbi will take if it decides to investigate
What are some of the steps the FBI will take if it decides to investigate?
  • Identify an initial theory, including key witnesses, subjects and possible targets
    • USAM definitions
      • Subjects
      • Targets
  • Examine SEC (and/or Company records)
    • Identify key/hot documents
investigative steps continued
Investigative Steps (continued)
  • Develop investigative strategy
    • List of interviews
    • Usually start with lower level people
    • Identify financial accountants or auditors
  • Meet with company representatives
    • Could be company counsel or counsel for audit committee
    • Ask for results of internal investigation
    • Determine if the company is going to cooperate
what does it mean to cooperate
What does it mean to cooperate?
  • Thompson Memo (DOJ) and Seaboard Report (SEC)
  • Conduct a thorough independent internal investigation
  • Voluntarily disclose facts to the SEC, FBI and USAO as appropriate
  • Make it easy for the government to investigate
    • Identify and produce key witnesses for interviews
    • Provide organized “hot” documents
  • Discipline wrongdoers
cooperation continued
Cooperation (continued)
  • Take remedial and corrective action
  • Make full restitution
  • Be open, candid and honest with the government at all times
  • Waive the attorney-client and work product privileges
    • Most controversial can include the following
      • Provide the detailed results of your investigation, preferably in writing
      • Make experts available
      • Perform additional analysis as requested, especially emails and accounting records
cooperation continued1
Cooperation (continued)
  • Be careful about taking steps that the government may believe protects alleged wrongdoers, including
    • Indemnifying or advancing legal fees unless required by state law or corporate bylaws
    • Sharing information with employees under a joint defense agreement
  • Consequences of failing to cooperate
    • Millberg, Weiss
what are the problems with fully cooperating
What are the problems with “fully cooperating”?
  • You have no assurance that you won’t be prosecuted
  • The information that you provide can be used against the corporation itself in a criminal or civil enforcement action
    • Even full cooperation can result in a criminal indictment, deferred prosecution agreement or civil enforcement action
problems with fully cooperating continued
Problems with “Fully Cooperating” (continued)
  • Deferred prosecution agreements can have collateral consequences
    • Detailed factual admissions
    • Further admissions of criminal conduct
    • Payment of full restitution
    • Payment of substantial “penalties”
    • Corporate Compliance Program – usually with an independent monitor; huge cost
    • Possible debarment from federal programs
problems with fully cooperating continued1
Problems with “Fully Cooperating” (continued)
  • The information that you provide can be used against the corporation’s employees
    • Without indemnification or insurance, it is very costly and difficult to defend
    • May have trouble recruiting strong executives and board members
    • Fundamentally unfair to employees/officers who were not disloyal to corporation
what makes a case criminal
What makes a case criminal?
  • Things to look for
    • False records
    • Backdated records
    • Lies and deceit including
      • False explanations to accountants/auditors
      • Undisclosed side letters/agreements
    • Insider stock trades
    • Common patterns beyond a strong CEO

and weak CFO