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Avoiding & Defending Against Government ActionsManaging in a World of Whistleblowers

Jon Dean

Charles E. Weir

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Overview of Topics

Steps to take to avoid government actions

– Protecting You & Your Organization Against Whistleblowers

• Hiring, Internal Policies to Avoid Whistleblowers, and Termination

Initial considerations when faced with government actions

Questions

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Growth of Whistleblower & Employment-Related Claims

The number of government referrals, agency investigations and qui tam actions filed has grown exponentially over the last 20 years

– Financial incentives for former employees to blow the whistle:

• Relator gets 15% to 30% of any recovery from the litigation, based on alleged damages that the government suffers, not the relator

• FCA’s anti-retaliation provision 3730(h) and other common law protections

– Dodd-Frank has similar provisions (FCPA)

– OSHA and other statutes also have whistleblower provisions

Increasingly, the government action is the result of an internal whistleblower

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Growth of Qui Tam Settlements and Judgments Since 1988 (in Millions)

0

500

1000

1500

2000

2500

1988 1990 1995 2000 2005 2010

Qui tam

Relator share

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Rise in Qui Tam Actions

In January 2011, there were 1,341 qui tam cases under seal for which the government had yet to decide whether to intervene

According to the DOJ, 638 new whistleblower complaints under the qui tam provisions of the federal False Claims Act were filed under seal in 2011

– Represents a peak in such filings over prior years  

The DOJ recovered more than $3 billion under the FCA in 2011, of which $2.8 billion was generated from qui tam actions

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Top 10 FCPA Enforcement Actions: New Whistleblower Incentives

1. Siemens (Germany): $800 million in 2008.

2. KBR / Halliburton (USA): $579 million in 2009.

3. BAE (UK): $400 million in 2010.

4. Snamprogetti Netherlands B.V. / ENI S.p.A 

5. (Holland/Italy): $365 million in 2010.

5. Technip S.A. (France): $338 million in 2010.

6. JGC Corporation (Japan) $218.8 million in 2011.

7. Daimler AG (Germany): $185 million in 2010.

8. Alcatel-Lucent (France): $137 million in 2010.

9. Magyar Telekom / Deutsche Telekom 

(Hungary /Germany): $95 million in 2011.

10. Panalpina (Switzerland): $81.8 million in 2010.

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Protecting You and Your Organization Against Whistleblowers

Hiring

Internal Policies to Deter Whistleblowers

Termination

Facing Government Actions

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Who are the typical whistleblowers?

Examples:

– Controller

– Financial services employees

– Assistant Director, Dept. of Engineering

– Sales Reps / Sales Agents

– Director of Human Resources

– Lab technician (U.S. v. Poehlman)

– Research assistant (U.S. v. Cornell School of Medicine)

Identifying Potential Whistleblowers

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What are the risks associated with a particular employee, partner or agent?

What information should you gather to analyze risks?

Identifying Potential Whistleblowers

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Background Checks

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Prior Litigation Checks

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International Hiring:What Do You Look At?

Background Information

– Corporate structure; Incorporation documents

Scope of Business

– Services performed; Engagement in other businesses

Management and Employees

– Criminal, litigation and investigation records; Skills and training

Business Development

– Process; Client contacts

Financial Controls

– Record keeping; Cash management

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International Hiring:What Do You Look At?

Anti-Corruption Policies and Practices

– Formal policies and programs

– Compliance training

Relationship with Government

– Shareholders, officers, directors, employees

Investigations

– Bribery convictions or anti-corruption violations

– Prior government investigations or disciplinary actions

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How Do You Perform the Due Diligence?

Due diligence review should be managed by centralized authority at the corporate level to ensure consistent application of compliance protocols

Sources of information

– Public Databases (availability of information differs greatly by country)

• Criminal and litigation history

• Corporate records (incorporation documents, shareholders, officers)

• Internet and media searches

• US based anti-corruption databases

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How Do You Perform the Due Diligence?

Sources of information (continued)

– Local personnel

• Business justification

• Information about the how the agent was identified

– Agent or JV partner

• Due diligence questionnaire

• Document requests (financial records, corporate policies)

• Interviews of management

• Site visit

– Third party references

• Other customers

• Industry groups

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Protecting You and Your Organization Against Whistleblowers

Hiring

Internal Policies to Deter Whistleblowers

Termination

Facing Government Actions

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To combat the huge financial incentives posed by whistleblower program, companies need to re-evaluate their compliance programs

What are the hallmarks of an effective compliance program?

– Setting the tone from the top

– Having a clear written policy that is well known

– Regular training of staff and related parties

– Strong internal controls

– Consistent and fair enforcement

– Continual monitoring

– Making changes when needed

Incentivizing Compliance

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In order to create a culture of compliance, an organization should:

– Develop compliance goals for senior managers and include in performance evaluation/compensation metrics

– Compensate managers who achieve compliance goals

– Reward employees who are compliance-minded and file accurate internal reports

– Strengthen anti-retaliation protections for employees

– Reward business units where compliance shown to be a key driver

– Enforce policies consistently (use of carrots and sticks)

Incentivizing Compliance

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In order to encourage accurate internal reporting, an organization should:

– Set up anonymous hotlines and surveys for employees to raise issues

– Treat all employees with respect, even if they raise a non-issue

– Stress confidentiality and promptly investigate reported concerns

– Document the resolution of every compliance issue that is raised by employees

• Whistleblowers always claim they tried to get management to correct noncompliance, but were rebuffed

Incentivizing Internal Reporting

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Two kinds of squeaky wheels

– Ones who want to be heard

– Ones who want to protect their hide, includes bad actors

Either way, have a good compliance program, and follow procedures consistently

Avoid trap for the unwary with bad actors:

– Don’t allow yourself to be provoked: be patient, consistent and keep in mind that you need to show you treated the same as others

– Underlying claim need not have merit

Working with Whistleblowers

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Ordinary employment actions that are not unfavorable

– Business as usual, but document all interactions

– Consider designating a liaison

– Train managers and employees in your anti-retaliation policies

Unfavorable employment actions

– Must show you treated whistleblower the same way you treated similarly situated employees who were not whistleblowers

– Scrutinize documentation (don’t take manager assertions on their face) and objectively look at comparators

– Best evidence is when you can show decision-maker had no knowledge of the protected activity and the investigation.

Working with Whistleblowers

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Whistleblowers routinely steal company documents during and at the end of their employment to bolster their case

– Have clear policies that documents are considered company property and may not be taken for personal use

– At exit interview have terminated employees certify that they have returned any company property, including documents and electronic data

Electronic Mail: Precautions and Policies

– Assume it will exist forever

– Assume it will be the permanent record of your conduct

– Do not use company e-mail for “chat”

– Make these policies for your employees

Minimize Risk of Whistleblowers

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Some executives do not understand the Attorney-Client and Work Product Privileges

Some executives prefer to keep lawyers out of their business

Some executives prefer to direct the work of consultants themselves and not involve legal counsel

What can go wrong?

– Business-to-business communications lack attorney-client protection

– Consultant reports create a roadmap for fraud/negligence claims

– Qui tam relator

Use Attorney-Client Privilege (When Appropriate)

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Treat privileged communications in Board meetings/minutes with the same care as other privileged communications

Maintain privileged communications separate from other documents and in a secure (locked) location

Lead by example

Use Attorney-Client Privilege (When Appropriate)

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Protecting You and Your Organization Against Whistleblowers

Hiring

Internal Policies to Deter Whistleblowers

Termination

Facing Government Actions

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Initial motivation for going to the government and/or seeking to sue the employer often stems from the employee’s perception of and attitude toward the former employer

How to Head Off Potential Employment-Related Claims

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Consider doing the following during the departure of any employee:

– Be honest about the reasons for termination (voluntary or involuntary) but consider the feelings of the employee, as well

– Consider the timing of any involuntary terminations—For example, try to avoid terminating an employee during the holidays

– Have an internal company policy on how to handle terminations—Consistency is important

Treat Outgoing Employees with Dignity and Respect

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Take notes and document the interview

Two interviewers are better than one

Obtain a proper release of liability

Obtain a return of property certification

Require disclosure of any compliance concerns and take concerns seriously

– Many Whistleblowers first raise their claims after they are terminated for cause

• Require another certification at employment exit interview identifying any compliance issues

Inform company management of any concerns raised or allegations made against the employer

Consider involving counsel in conducting any post-interview review or investigation

Conducting an Effective Exit Interview

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Identify compliance issues

Document Corrective action

– Important if any government investigation ensues or if litigation is ultimately filed

– Innocent conduct can become willful once notice of noncompliance is received

Document Steps Taken to Address Concerns Raised During the Exit Interview

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Remember that current and former employees still talk to each other

Do not ignore a former employee’s concerns

Avoid talking about the employee in a negative light

Even After the Employee is Gone…

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Summary: Dealing with Whistleblowers

Do ensure all employees are trained and understand anti-retaliation provisions of the company’s compliance policy

Do document all employment decisions concerning whistleblowers in real time and retain records for 10 years

Do promptly investigate all reports made and document the results contemporaneously

Do assure whistleblowers that they will not be retaliated against for making good faith reports of wrongdoing

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Protecting You and Your Organization Against Whistleblowers

Hiring

Internal Policies to Deter Whistleblowers

Termination

Facing Government Actions

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Government Actions

You received a subpoena – what do you do? Instruct your employees to notify management and the legal

department.

– Employees should be trained that they are not authorized to decide whether to disclose information to a government agent. They may only do so upon management instructions.

Immediately suspend all routine document destruction processes that could result in the loss of records potentially relevant to the litigation or investigation.

Be careful in providing oral information.

– Most subpoenas are for the production of records and do not entitle the subpoenaing party to obtain information from the party being subpoenaed by interview, deposition or testimony. Any oral information provided in these circumstances is done so voluntarily, and is unwise, and should be avoided.

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Government Actions

Conducting internal investigations:

Demonstrates your good faith and is taken into account by the government in making decisions

Independence is important: Look to third parties (law firms, auditors, etc.) that do not have a long-standing relationship with the company

Individual responses should be carefully thought out – false statements are chargeable

Handling uncooperative employees can be a problem, particularly in the face of government pressure

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Government Actions

What to consider when faced with a government action

Identifying targets and securing counsel

The advancement of fees and maintaining order

Handling the inevitable divergence of interests—the company’s tools

– Privilege waivers

– The timing and order of actions

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Government Actions

Identifying targets and securing counsel

Sometimes the targets are obvious, and sometimes they are not

Identify those groups that could and/or should be jointly represented by counsel

Fees need only be reasonable—ideally you hire counsel that can handle both the civil and criminal components of the case

Securing counsel in the face of government pressure to cooperate

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Government Actions

The advancement of fees and maintaining order

Paying your employees’ legal fees

– The advancement of fees is typically permissive

– Have an established practice or plan of action

Whether the government may consider the company’s payment of legal fees when analyzing company cooperation and making charging decisions

Counsel should be able to effectively work together

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Government Actions

Handling the inevitable divergence of interests—the company’s tools

Pressure to waive the privilege—to waive or not to waive

Pros Cons

Credit given by prosecutors and regulators

Growing debate as to whether voluntary disclosure has value

May provide additional defenses Waiver to government is a waiver to all parties

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Government Actions

The timing and order of actions

The criminal case will likely be the driver

Managing the impact on related civil litigation

Motions to stay litigation. See, e.g., Volmar Distributors, Inc. v. New York Post Co., 152 F.R.D. 36, 39 (S.D.N.Y. 1993); Pacers, Inc. v. Superior Court, 162 Cal. App. 3d 686, 690 (1984) (recognizing that a stay of civil proceedings “is in accord with federal practice where it has been consistently held that when both civil and criminal proceedings arise out of the same or related transactions, an objecting party is generally entitled to a stay of discovery in the civil action until disposition of the criminal matter”)

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Questions?

Jon Dean +1 310 788 4164 jdean@mwe.com

Charles E. Weir +1 310 284 6159 cweir@mwe.com