SEC Settlements/Cooperation: Who got fired? A standard question these days when the SEC or DOJ investigates a claimed impropriety at a company is, “who got fired?” Demonstrating that those involved have been terminated is typically taken as an indication that the under investigation issuer is cooperating with the government probe. Indeed, the practice of discharging suspected employees has become so wide spread in the wake of government investigations that some firms which conduct internal investigations are reputed to routinely recommend the termination of all top tier management including the general counsel regardless of whether the executive was actually involved in the reputed illegal conduct. Is this really in the best interest of the company and shareholders?

There was a time when the policies were different. Before the SEC’s current Release regarding corporate penalties, its Section 21A report on cooperation and before the Sentencing Guidelines and the DOJ Thompson Memorandum, companies took the brunt of the sanctions for wrongful conduct and acted to protect top management. Management was considered a valuable corporate asset and loyalty was important. Some companies still stand by their executives until there is proof of malfeasance rather than just throwing employees “under the buss” at the outset to claim “cooperation.”

In the wake of a recent arbitration ruling against Merrill Lynch however, issuers (and internal investigative teams) may want to rethink their strategy. The Wall Street Journal reports (January 5, 2006) that an NYSE arbitration panel awarded $14 million in back pay and damages to three Merrill Lynch brokers who were fired in the wake of a late trading scandal. The former employees claimed that Merrill knew their clients engaged in market timing and not late trading when they joined the firm after leaving UBS and that their actions were in accord with company policy. Merrill denies this, claiming that it has always prohibited market timing. While Merrill is moving to vacate the award in court, the standards for doing so are difficult.

At a minimum the award suggests that before companies summarily terminate employees, they should check the evidence. Perhaps at the same time companies will also start to consider whether it is really in the best interests of the shareholders to terminate executives once viewed as valuable and possibly sacrifice employee good will in its zeal to be viewed as “cooperative.”


It is common in many internal investigations to give the so-called Upjohn warnings. Those warnings, based on the Supreme Court’s decision in UpJhohn Co. v. United States, 449 U.S. 383 (1981), typically are given to an employee in an internal investigation and state that investigating counsel: 1) represents the company and not the employee; 2) that information learned during the interview is privileged to the company and that only the company will determine whether to provide such information to the government and the employee will not be consulted; 3) information discussed at the interview is to be kept confidential to preserve the company’s privilege; and 4) the employee should state that he or she understands the warnings. The dangers of not giving the warnings are illustrated by the recent decision in In Re: Grand Jury Subpoena: Under Seal, 415 F. 3d 333 (4th Cir. 2005), cert. denied, 2006 U.S. LEXIS 229 (Jan. 9, 2006). There investigating counsel conducting an internal inquiry of AOL told employees that they represented the company and that the privilege and the right to waive it belonged to the company. Investigating counsel also told employees that they “can” represent them and advised one employee that they did not recommend retaining separate counsel in response to a question. When information from the interviews was subpoenaed in a grand jury inquiry the employees moved to intervene claiming that they had an attorney client relationship with investigating counsel based in part on the statements that such counsel “can” represent the employees. The court rejected the claim, drawing a distinction between “can” and “do.” The court was careful however to note that its holding was not an endorsement for watering down the Upjohn warnings. Indeed, while in many instances it may be convenient to “water down” the full warnings, this case illustrates the potential pitfalls with that approach.