As regulatory schemes get more complex and government enforcers become increasingly aggressive, C-suite executives are in the direct line of fire more than ever. Whether an executive is targeted by a government investigation or risks losing his position because of the reputational and legal damage his company has suffered after a multimillion-dollar settlement with the Department of Justice, leaders in the C-suite must be cautious when facing a bet-the-company problem.
An executive’s first layer of protection is consulting in-house counsel to ensure confidentiality when discussing sensitive issues, possible discovery of significant regulatory infractions or even criminal violations. Not every communication is privileged, only those confidential communications with counsel to secure legal advice. Even then, if any communications are relayed to third parties not covered by the privilege, it can be waived. If a CEO evinces some knowledge of a violation in that communication—a violation that was eventually disclosed to the government—a cooperating company likely would choose to waive corporate privilege and provide the government those communications. The CEO may have no control over that decision, and it may subsequently place him in jeopardy.
The intertwined nature of the interests held by a company and its executives is best illustrated by the attorney-client privilege issues that arose in the recent prosecution of Elizabeth Holmes. When her company, Theranos, began developing its controversial blood testing devices, Holmes sought legal services from Boies Schiller Flexner (BSF) for several issues related to intellectual property, corporate governance and interaction with regulators. From 2011 to 2016, BSF provided Holmes and Theranos legal representation until Holmes secured separate representation when targeted by the DOJ and the Securities and Exchange Commission. When the DOJ charged Holmes and brought her to trial, she objected to the government’s use of some of her email communications with BSF, arguing that they were privileged because BSF jointly represented both Holmes and her company, and she had not waived privilege. By that time, the company was under receivership and the receiver-assignee had waived corporate privilege.
Company executives often consider in-house counsel to be 'our lawyers.'"
Holmes argued that she was entitled to claim her individual privilege under a “subjective belief” test; she subjectively believed BSF represented her individually and that this belief was reasonable under the circumstances. The court declined to use the subjective belief test and instead adopted the Bevill test out of the Third Circuit, which required Holmes to show that (1) she approached counsel for legal advice; (2) she made it clear she was seeking advice as an individual; (3) counsel saw fit to communicate with Holmes in her individual capacity regardless of the potential conflict; (4) the communications with her were confidential; and (5) conversations with counsel did not concern matters within the company or its general affairs.
Holmes could not meet that test. The court found no indication that BSF was communicating with her because she was seeking advice in her individual capacity. Despite years of representation, Holmes could not produce an engagement letter with BSF that defined the representation’s scope or specific assignments for which BSF was retained. Additionally, there was no evidence that Holmes had personally paid legal fees to BSF or that she sought to exercise any right to indemnification as a company executive. There was no proof that the subject communications were exclusive to her alone. Rather, Theranos’ in-house counsel and other senior management participated in conversations involving company business. Given that Holmes did not present evidence to establish that BSF represented her personally, the government could use the email communications between Holmes and BSF in her prosecution for fraud.
The Holmes opinion is instructive to corporate counsel because company executives often consider in-house counsel to be “our lawyers,” but that approach can backfire when serious issues arise. Discussions and email traffic that appear to criticize a potential whistleblower or dismissively discuss a potential violation more severe than first noted will be seen negatively by government prosecutors, often years after, even if the original communication was meant in good faith. Privilege provides important protections for executive management grappling with freely discussing difficult topics.
Therefore, upon opening an investigation, if the company and its executives believe joint representation is advisable, they should clearly define the scope of the representation and identify all clients in the engagement letter, as well as specific procedures to follow if conflicts arise between the executive and the company. This typically occurs when the government targets executives as potential defendants. Moreover, when engaging counsel, an executive should clearly state when he or she is seeking legal advice personally or as a company representative.
In certain circumstances, both in-house and outside counsel may use Upjohn warnings before interviewing executives in internal investigations to acknowledge that the communication is protected by the company’s privilege, and it is not the executive’s decision whether to waive the privilege. Even if an executive agrees to joint representation during a government inquiry, that approach should be reevaluated periodically to determine its validity. Pool counsel or separate counsel for each witness is usually the better option.
A company facing a disclosure to the government may feel pressured to waive corporate privilege in an investigation. The DOJ does not require companies to waive attorney-client privilege, but it has issued policies like the Yates Memorandum, which calls on prosecutors to deny or reduce cooperation credit if the company fails to disclose all individuals who have been accountable for wrongdoing. The Trump Administration relaxed this rule, but Deputy Attorney General Lisa Monaco issued a memorandum that reemphasized that to be eligible for any cooperation credit, corporations must disclose all relevant, nonprivileged facts about individual misconduct. The disclosure must be timely enough to allow prosecutors to effectively investigate and seek criminal charges against culpable individuals. Prosecutors should complete investigations of individuals, and seek charges, before or simultaneous to the entry of a resolution against the corporation. Given these requirements, corporate counsel conducting an internal investigation with the intent to disclose its results may find it difficult to report their findings to the government, including identifying sources of information, without at least an arguable waiver of privilege.
Time will tell whether the new policies will drastically change DOJ’s approach to cooperation credit in corporate prosecutions, but the government’s expectations will pressure the denizens of the C-suite to identify potential compliance issues and consult with counsel early in the process. However, these discussions are not protected by a privilege belonging to the executive unless explicitly stated in a representation letter or other communication. In considering their exposure, C-suite executives should mull whether they want to extend the privilege protections joint representation can provide to preserve the confidentiality of their legal communications.
Joan Meyer is a partner at Thompson Hine and leads the firm’s Government Enforcement, Internal Investigations & White-Collar defense practice. She has more than 30 years’ experience handling complex criminal and civil litigation, primarily domestic and international white-collar defense for companies involving anti-corruption, financial frauds, government contracting, false claims, securities and commodities violations, and trade compliance matters. Joan also conducts domestic and international internal investigations for corporate clients to determine if legal and regulatory violations were committed and defends companies and individuals in litigation with U.S. government agencies.
