Stanford Prosecutions Highlight Difficult Issues Posed by Company Counsel's Representation of Employees in Government Investigations
By: Matt T. Morley, Michael D. Ricciuti
The triggering event for the SEC’s action against Stanford International Bank, Ltd. and several of its senior executives appears to have been the abrupt public resignation of the company’s outside counsel. This occurred the day after SEC testimony by one of Stanford’s executives, Laura Pendergest-Holt. In apparently making what is known as a “noisy withdrawal,” counsel resigned and disavowed to the SEC all prior statements made by them in the matter. The SEC promptly filed an action against Stanford and several executives, including Ms. Pendergest-Holt, who was also arrested on obstruction of justice charges.
In connection with the SEC’s investigation, company counsel had represented both the company and Ms. Pendergest-Holt. According to press reports, counsel told the SEC that he represented the witness “insofar as she is an officer or director of one of the Stanford-affiliated companies.” In many cases, it is potentially more efficient for company counsel to also represent individual officers and directors in government investigations. But doing so often poses serious risks for conflict. Although we do not know, and may never know, what precisely caused counsel to resign in the Stanford case, these events serve as a reminder of the risks involved where several parties share the same lawyers. In such cases, parties need to consider in advance whether separate counsel should be retained and, if not, what will occur if a conflict subsequently arises.
When law enforcement officials first contact a company, it may seem – and may be the case – that the interests of individual employees are fully aligned with those of their employer. In some cases, at the outset of a criminal or SEC investigation, when the facts and/or the scope and focus of the probe may be unclear, corporate counsel may jointly represent the corporation and its individual officers, directors, and employees. Pursuant to Rule 1.13 of the Model Rules of Professional Conduct, such joint representation is permissible as long as it does not involve a conflict of interest. For example, in the event that an individual becomes a “subject” or “target” of an investigation – that is, someone who may be indicted as the result of a criminal probe – joint representation of the company and any such individual is not possible, and the employee will need separate counsel. Other circumstances, such as the discovery of additional facts, may also give rise to conflicts of interest between the company and its employees.
Indeed, in the internal investigation context, where company counsel represents only the company, employees are ordinarily provided with “Upjohn” warnings, making clear counsel is acting solely for the company, and that while the interview may be subject to the attorney-client privilege, the company and not the employee controls whether to assert that privilege. Employees are told that the company remains free to waive the privilege and disclose the substance of the interview to third parties, including the government, as part of its effort to cooperate.
Where company counsel also represents an employee, however, the Upjohn warning doesn’t fit, because counsel also has attorney-client relationships both with the company and with the employee, and the employee’s confidences cannot be revealed without his or her consent. If the interests of the company and the employee diverge, a number of critical issues will promptly arise. Counsel will generally be unable to represent both the company and the employee, and a change in representation will be required. Will the individual be required to get separate counsel? If that occurs, will company counsel remain free to represent the company? If so, what will happen to the employee’s confidences that have been shared with company counsel? Will the company be free to use that information as it chooses? Will the company be able to disclose this information to the government? The failure to resolve these questions in advance can harm both the company and the individual involved and thus, in a joint representation, it is wise to reach a clear and common understanding from the outset as to what will happen if the parties develop conflicting interests or objectives.
These questions take on even greater significance given that, in recent years, it has become increasingly common for the SEC to cooperate closely with criminal authorities. Documents and witness statements may be shared with criminal prosecutors without notice to the company or its employees – and in the current environment, one should assume that almost any SEC investigation involves criminal charges. Indeed, press reports indicate that, at the beginning of Ms. Pendergest-Holt’s SEC testimony, counsel tried without success to learn whether there was a parallel criminal investigation in the matter.
No single solution to these issues can fit every situation, but there are a variety of ways to address these issues. At a minimum, where counsel will represent multiple interests, the engagement letter should spell out the parties’ agreement as to what will happen in the event of a conflict. Sometimes, individuals may decide to retain “shadow” counsel, who are fully involved in providing advice and preparing for testimony, but who may not make a public appearance in the matter. In other circumstances, separate counsel may be the best choice. One thing remains clear – those who become the focus of attention by government authorities need to consider these issues at the very start.
