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Whistleblowers and Investigations Under Sarbanes-Oxley Gordon M. Shapiro Jackson Walker L.L.P. February 1, 2006.

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Presentation on theme: "Whistleblowers and Investigations Under Sarbanes-Oxley Gordon M. Shapiro Jackson Walker L.L.P. February 1, 2006."— Presentation transcript:

1 Whistleblowers and Investigations Under Sarbanes-Oxley Gordon M. Shapiro Jackson Walker L.L.P. February 1, 2006

2 1 Pre-SOX Statutory Framework Whistleblowers had protection Clean Water Act Toxic Substance Control Act Energy Reorganization Act OSHA State statutes Boards under no obligation to have anonymous compliance reporting hotlines

3 2 Willy v. Administrative Review Board, 423 F.3d 483 (5 th Cir. 2005): 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.

4 3 SOX Provides Additional Protections to Whistleblowers 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: 1)a federal law enforcement or regulatory agency 2)a committee or member of Congress 3)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.”

5 4 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?

6 5 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.

7 6 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).

8 7 Implementing the new SOX requirements: Implementation of ethics hot lines Independent, objective, and robust internal audit function Senior executive hired in compliance function

9 8 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.”

10 9 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.

11 10 Some Examples of SEC Enforcement Against Attorneys In the Matter of David C. Drummond, Admin. Proc. Rel. No (January 13, 2005) In the Matter of James Fitzhenry, Admin. Proc. Rel. No (November 21, 2004) SEC v. John Isselmann, Case No. CV (D. Ore.) (September 21, 2004) SEC v. Steven Woghin, Case No. 04 Civ (E.D.N.Y.) (September 21, 2004) In the Matter of Stanley Silverstein, Admin. Proc. Rel. No (May 11, 2004) SEC v. Jonathon Orlick, Case No. CV (C.D. Cal.) (January 6, 2004)

12 11 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

13 12 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

14 13 Internal Investigation: Issues to consider Independence Reporting Communications with outside auditor (SAS 99). Is the investigation continuing or complete Privilege issues

15 14 Independent Investigations: Issues to consider 1.Independence 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

16 15 Independent Investigations 3.Privilege Issues. Who is the client? Disclosure of privilege as an issue of “cooperation” in sanctions/sentencing Recent authority on Upjohn warnings in context of investigation In Re: Grand Jury Subpoena: Under Seal, 415 F.3d 333 (4 th Cir. 2005)

17 16 Independent Investigations 4.Reporting Issues Establishing reporting lines Frequency of reporting “Up the ladder” issues Challenges regarding disclosure while investigation is ongoing. Form of the report

18 17 About Jackson Walker LLP 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 Globalaw SM, 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.

19 18 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. 5 th 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, “ 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

20 19 Referenced Opinions and Materials Willy Opinion SEC Speech (September 20, 2004) Arthur Andersen Opinion Memo from Larry Thompson (January 20, 2003) In Re: Grand Jury Opinion


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