Securities enforcement litigation this week echoed with familiar themes: Backdated options, the FCPA and cooperation credit and privilege waivers.

Closing Option Investigations

Perhaps the backdated options crisis is finally winding down. The SEC staff continued informing companies under scrutiny for their options issuances practices that an enforcement action would not be recommended. Recently Electronic Arts, Linear Technology Corp., Nvidia Corp, PMC-Sierra Inc. and Zoran Corp. were informed that the investigations involving their options granting practices were being closed. Undoubtedly this is good news, not only for these issuers, but perhaps dozens of others who are waiting to hear whether an action will be brought against them by the SEC. While it is clear that the SEC still has a large inventory of backdated option cases and that more will be brought, this wave of closing letters may suggest that it is the beginning of the end of this scandal.

The Brocade Criminal Case

Stephanie Jensen, former Brocade Communications Human Resources director, also received some good news in her backdated options case. The government is dropping more counts in the indictment.

Ms. Jensen was named as a defendant in an SEC enforcement action, and indicted on criminal charges along with former Brocade CEO Gregory Reyes, who was convicted on all ten counts in September. Significant fanfare surrounded the filing of the civil and criminal charges against Ms. Jensen and Mr. Reyes in July 2006. At that time, there was a joint press conference with SEC Chairman Cox and representatives of the U.S. Attorney’s office for the Northern District of California, among other, joining in the announcement.

The notice that the government was dropping four of the remaining six counts was contained in a single sentence in a recently filed government brief. The charges dropped include securities fraud and making false filings with the SEC. Previously, other counts had been dropped. Two counts remain, conspiracy to falsify books and falsification of the books.

The FCPA Again

The SEC also brought another in a series of Foreign Corrupt Practices Act (“FCPA”) cases. This time, Chevron Corp. was named as a defendant in a settled action based on improper payments to Iraq under the U.N. Oil for Food Program. According to the complaint, over a two year period third parties that contracted with Chevron paid about $20 million in illegal kickback payments in connection with Chevron’s purchases of crude oil under the U.N. program. Surcharges paid by the third parties in connection with Chevron’s purchases of oil bypassed the escrow account and were paid to Iraqi-controlled bank accounts. Chevron consented to the entry of a statutory injunction to settle the action. In addition, the company agreed to the entry of an order directing it to pay disgorgement of $25 million and a civil penalty of $3 million. The company also has to pay $5 million in disgorgement under an agreement with the U.S. Attorney’s Office for the Southern District of New York and a $2 million penalty to the Office of Foreign Asset Controls of the U.S. Department of Treasury. SEC v. Chevron Corp., Civil Action No. 07 CIV 10299 (S.D.N.Y. Filed November 14, 2007). The Commission’s Litigation Release appears here.

Legislation, Cooperation and Waiver

Finally, the Attorney Client Protection Act of 2007 passed in the House of Representatives this week as discussed here. That Act is designed to end the so-called “culture of waiver” that has resulted from government cooperation standards in the SEC’s Seaboard Release and DOJ’s Thompson and McNulty memos. The proposed legislation would bar officials such as SEC enforcement staff and attorneys at DOJ from seeking the waiver of an organization’s attorney client privilege or work product protection. In addition, the proposed legislation would bar SEC enforcement officials and criminal prosecutors from considering matters such as the indemnification payments and common interest agreements in the charging process.

Unfortunately, the proposed legislation will probably have little impact on the SEC or DOJ. Under the Act, companies can voluntarily waive their rights in the name of cooperation and receive credit in the charging process. While passage of the Act may bar enforcement officials from making specific requests, it will not require any alteration to statements such as those made by SEC Enforcement Chief Linda Thomsen earlier this year. In her remarks Ms. Thomsen gave two examples of cooperation: in one the company cooperated, waived privilege and was not prosecuted. In the second the company cooperated, did not waive privilege and was prosecuted. Ms Thomsen’s remarks before the Mutual Fund Directors Forum 7th Annual Policy Conference are available here. Given these examples what else needs to be said?

The Attorney Client Privilege Protection Act passed the House of Representatives yesterday. The Act is backed by a broad coalition of business and legal groups. It is designed to end what has become known as the “culture of waiver,” a term used to describe the fact that many corporations and their advisors believe that fundamental rights must be waived as part of any effort to cooperate with the Department of Justice and the Securities and Exchange Commission to avoid prosecution.

The Act is intended, as its preamble notes, to “[p]lace on each agency clear and practical limits designed to preserve the attorney-client privilege and work product protections available to an organization and preserve the constitutional rights and other legal protections available to employees of such an organization.” Accordingly, the legislation would preclude any agency or attorney representing the U.S. from:

1. requesting the disclosure of privileged material; or

2. considering in a charging decision:
a. valid assertions of privilege;
b. indemnification agreements;
c. common interest agreements; or
d. the failure to terminate employees because of an exercise of constitutional rights.

The same bill has also been introduced in the Senate.

The bills were introduced following congressional hearings at which witness after witness testified to the pressure on organizations to waive fundamental rights such as the attorney client privilege and work product protections, as well as employee rights to indemnification and counsel and others in an effort to obtain cooperation credit from DOJ and the SEC and avoid prosecution.

Both DOJ and the SEC have repeatedly denied that rights must be waived in the name of cooperation. Portions of the DOJ cooperation policies in the Thompson memo, however, have been held to violate the Fifth Amendment right to a fair trial and the Sixth Amendment right to counsel in Stein v. U.S., 485 F.2d 330 (S.D.N.Y. 2006). Although those policies have been recast in the McNulty memo, which places limits on the circumstances under which prosecutors can request a waiver, critics contend that DOJ still pressures organizations to surrender rights in the name of cooperation. This fact was confirmed in a letter from E. Norman Veasey, former Chief Justice of the Delaware Supreme Court, to Senators Leahy and Spector, dated September 13, 2007. The letter (available here), was written in connection with the pending legislation, and chronicles instance after instance of prosecutors disregarding the restrictions of the McNulty memo and demanding waivers.

Although the SEC has repeatedly stated that organizations can receive cooperation credit without waiving privilege, the agency has made it clear that to have an opportunity to avoid prosecution, waiver is essential. The example in the Seaboard Release, which contains the SEC’s organizational prosecution and cooperation standards, suggests as much. The example is of a company which is not prosecuted because it cooperated and waived privilege, giving the staff evidence it could not otherwise obtain – that is, privileged material. This point was recently reiterated by Linda Thomsen, Director of the SEC’s Division of Enforcement in a speech which cited two examples of cooperation. In one example the company cooperated, did not waive privilege and was prosecuted. In the second the company cooperated, waived privilege and was not prosecuted. Remarks Before the Mutual Fund Directors Forum 7th Annual Policy Conference, available http://www.sec.gov/news/speech/2007/spch041207lct.htm.

While passage of the Attorney Client Protection Act may bar prosecutors and agency enforcement attorneys from requesting waivers or specifically considering certain factors in the charging process, it is doubtful that it will end the culture of waiver. As presently written, the statute would permit issuers to waive privileges and receive cooperation credit. Issuers facing the pressure of a charging position and reaching for any avenue that may score an additional cooperation point, will surely continue to waive any and all rights under these circumstances.

In addition, the legislation does not address one of the key issues in the battle over waivers: witness statements. Both the DOJ in Thompson and McNulty memos and the SEC in the Seaboard Release, encourage issuers to conduct internal investigations when an impropriety is discovered and immediately self-report. In many instances, employees and former employees may wish to cooperate with the investigation of the company, but not that of the government. This is particularly true if there are parallel civil and criminal investigations.

As part of the price of cooperation, DOJ and the SEC typically want the organization to produce the privileged lawyer notes of the witness interviews from the internal investigation. This key cooperation credit bargaining chip gives the DOJ and the SEC witness testimony which is otherwise constitutionally beyond their reach. At the same time, this byproduct of pressurized waivers undermines the constitutional protections of the employee and places that person at risk of criminal false statement and obstruction charges if the government decides the testimony is false, even though the statements were given to private attorneys. See, e.g., U.S. v. Kumar, Case No. 1:04-Cr-00846 (E.D.N.Y. 2006) (charging employees of Computer Associates with false statements in an internal investigation; defendants pled guilty); U.S. V. Singleton, Case No. H-04-314-SS (S.D. Tex. 2006) (Rule 29 motion for acquittal granted re charge of false statement from internal investigation).

The legislation is entitled The Attorney Client Protection Act. Before it is finally passed into law, we would do well to ask if in fact it really protects the fundamental organizational and individual rights which are at stake in the charging and cooperation process.