Surviving a Federal Criminal Investigation

1. Surviving a Federal Criminal Investigation June 13, 2006 Jeffrey Bornstein, PartnerKirkpatrick &Lockhart Nicholson Graham LLPTamara Neiman, Supervisory Special AgentFederal Bureau of Investigation

2. 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

3. 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

4. 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

5. 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.

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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