Part II: Self-Reporting and Cooperation: Key Issues
The question of self-reporting begins with the legal obligations and compulsions, as discussed in the initial segment of this series. A key component of the decision however, is the question of cooperation and cooperation credit. The self-reporting business organization faces broad, virtually open-ended liability. Since that liability can frequently severely injure the company, the question of mitigating the impact of any charging decision becomes critical.
Both the SEC and DOJ offer business organizations the prospect of avoiding being charged or at least mitigating any sanction through cooperation. While this seems like a reasonable proposition, the difficulty is not so much with the principle as its application. Stated differently, what is cooperation, what is required and what is the “credit?”
Cooperation credit is typically discussed in terms of providing the prosecution — either the SEC or DOJ — with a full report of the facts. Again, this appears to be a sensible proposition. Any prosecutor making a charging decision needs to know the facts. In practice however, this proposition can have significant implications for both the business organization and its employees.
Furnishing all of the facts frequently begins with the question of privilege waivers. Frequently, the organization has learned the facts by conducting an internal investigation. Materials and information obtained during the inquiry are often covered, at least in part, by the attorney client privilege and/or the work product doctrine. While it is clear that waiver of those privileges may have significant implications for the business organization, it is equally apparent that waiver may be required.
The Seaboard Release (discussed here), the SEC’s seminal statement on cooperation, makes this point clear. At the beginning of the Release, the Commission gives an example of cooperation drawn from the underlying case on which the report is based. The key factors which led the SEC not to prosecute the company are:
• The conduct was a limited financial fraud discovered in a subsidiary;
• Within one week of the discovery, the internal auditors had conducted a preliminary review and advised management of their findings; management informed the audit committee;
• The board was advised and outside counsel was retained;
• Eleven days after discovery, the person deemed responsible was dismissed, along with two other employees who had not adequately supervised the responsible person;
• Twelve days after discovery, the company self-reported to the SEC and issued a press release noting that a restatement would be necessary; the share price did not decline;
• The company pledged, and gave cooperation to, the staff;
• The company furnished the staff with all information relevant to the violations including details from its investigation, such as notes and transcripts of interviews of the responsible person and others;
• The company did not invoke the attorney-client privilege, work product protection or other privileges or protections with respect to any facts uncovered in the investigation; and
• The company strengthened its financial reporting process to address the specific conduct involved.
Later in the Release, the Commission returned to the question of cooperation in two passages. In the first, the SEC discussed what it called “complete” cooperation, an undefined term. The second focuses on whether the company gave the staff information it “might not have uncovered,” a comment followed by a footnote which discusses non-waiver agreements which the SEC argues can be used to produce privileged material without waiving those privileges as to third parties.
The message of Seaboard is reinforced by a speech given by the Director of the Division of Enforcement. In that speech the Director gave two examples of cooperation. In the first privilege was waived; in the second it was not. Both companies got cooperation credit. Only the first was not prosecuted.
Next: DOJ, waivers and their impact on the organization.