In the wake of the stock market implosion of 2008, public companies are being subjected to the highest level of scrutiny by government regulators and prosecutors in recent memory. Thanks to political grandstanding and the populist urge to identify scapegoats, any public company senior executive caught in the glare of public anger directed toward “Wall Street” runs the risk of having a multi-decade career ended in one twenty-four hour news cycle. Just ask Rick Wagoner, the recently deposed Chairman and CEO of General Motors.

Regulators and prosecutors alike have been armed with new weapons and increased budgets to battle perceived corporate corruption, both domestic and global. The result has been a record number of civil penalties against corporations and individuals imposed by the Securities and Exchange Commission and the Department of Justice in recent years, relying on decades-old statutes as the legal basis for liability, including the aggressive use of the long moribund Foreign Corrupt Practices Act. More ominously, we all have witnessed the increasing criminalization of securities violations, marked by tough plea bargains and long jail sentences for corporate executives that have been ensnared in broadranging investigations initiated by the SEC, the Department of Justice and certain state Attorneys General.

The trend toward more aggressive enforcement has in some instances led to overzealous or misguided prosecutions by the government. The demise of Arthur Andersen several years ago is perhaps the most vivid example of the rush to judgment that has characterized certain governmental responses to perceived corporate malfeasance. Moreover, the long line of high profile corporate executive “perp walks” orchestrated by prosecutors nationwide can only heighten the fear and concern in every executive suite and board room in America today. And with good reason, as the ongoing crusade to clean up Corporate America has seen the enforcers broaden the scope of their targets to include not just corporate officers but directors, auditors, and both in-house and outside counsel.

Yet of the many cases that have resulted in large corporate penalties, executive departures, and in some severe cases, criminal prosecutions, some of the catastrophic results could have been controlled and very likely mitigated by early, effective action taken by the corporation in advance of or at the beginning of a government probe. Indeed, there are important lessons to be learned from the misfortunes of those we have all read about in the pages of the financial press in the years since we first heard of companies like Enron, Worldcom, Tyco, Parmalat, Satyam and AIG, to name but a few.

That corporate insiders and those that counsel them must remain on guard is manifest given recent government and political reaction to stock option backdating, the subprime meltdown, the banking crisis, and the deepening global recession. These events occurred just as it appeared that the regulators and prosecutors had reached the end of the major corporate frauds of the early part of this decade, and would resume a less aggressive tact toward corporate investigations and prosecutions. But as the pendulum was swinging back toward that more neutral state of enforcement efforts, these new, separate events served to reinvigorate calls for aggressive enforcement and yet more regulation of American business.

The result has been wave after wave of subpoenas issued by the SEC, DOJ and others, Congressional hearings, multiple investigations, proposals for new legislation and regulation, a new wave of threatened criminal prosecutions, and the proposed formation of a systemic risk regulator. In light of all of this, anyone involved in operating or advising a corporation today needs to be on alert and responsive to any concerns raised by politicians, regulators and prosecutors.

There are many things you can do to protect your company and yourself. What should you do if you pick up the paper one morning and read that your industry or a long-accepted corporate practice has become the latest object of interest to the SEC, or a Department of Justice task force, or even an activist state Attorney General or regulatory agency? The following example is instructive of things to keep in mind and actions to take sooner rather than later in just such a situation.

The situation

In the wake of published reports that prosecutors and regulatory agencies are conducting an investigation into industry business practices they now regard as questionable, your company has received a subpoena demanding the production of thousands of documents, including innumerable emails, covering a period of several years.

The corporation's top executives, including its general counsel, have previously considered the media reports concerning the business practices in question and have preliminarily concluded a) that the practices are not illegal or otherwise improper, and/or b) the corporation does not engage in such practices in any event. The corporation's general counsel determines that there is no need to conduct a formal internal investigation into the publicly reported allegations.

A law firm regularly engaged to represent the company in litigation is retained to respond to the subpoena on behalf of the corporation.

The challenge

At the outset, the Board, the executive management, and corporate counsel must operate on the assumption that the prosecutor and/or regulator conducting the investigation has preliminarily concluded that the industry practices under investigation violate some law, regulation or ethical duty. The prosecutor and regulatory agency will expect the corporation's full cooperation with the investigation. While the corporation has an absolute right to defend itself against false allegations of misconduct, prosecutors and regulators—having reached certain conclusions (perhaps prematurely)— may regard any efforts at advocacy, explanation or defense as obstruction, or at the very least, a failure of cooperation with the investigation.

“Cooperation” in recent years has come to be defined as a corporation's willingness to share the results of its internal investigation into the allegations that are the subject of the government's investigation. The question then becomes, what constitutes an “internal investigation” for these purposes? The law firm retained to respond to the subpoena necessarily will conduct sufficient inquiry of corporate executives and employees to determine what documents are responsive to the subpoena. Will the interviews conducted by that outside law firm be regarded by the prosecutor as part of an “internal investigation?” Will there be an expectation that the substance, if not the notes, of such interviews will be turned over to the prosecutor in the spirit of full “cooperation?” Will the refusal to turn over the product of the law firm's “investigation” be considered a failure of cooperation and publicly characterized as such by the investigating prosecutor? What will be the future implications for the corporation if prosecution is actually threatened?

The approach adopted

We counsel our clients to obtain an early objective assessment of the allegations that implicate the corporation or its industry. An in-house review of publicly reported allegations, particularly when they implicate particular categories of executives or business units, often yields results that are not reliable and embarrassingly inaccurate. Even where outside litigation counsel are retained to respond to a subpoena or other document or information demand, unless the task is approached with care, sensitivity and experience in civil and criminal investigations, executives or employees ultimately implicated in wrongdoing can be inadvertently insinuated into the information collection process with serious, if not fatal, consequences. We advise the earliest possible communication with investigating prosecutors and/or regulators in order to establish priorities for document production, refine the scope of information to be produced and to ascertain what information, not already requested, might put the inquiry in fair perspective and context. It is also important to determine the strength of the prosecutor's commitment to particular legal theories and receptivity to alternative views of the facts and applicable laws.

In sum, decisions made at the earliest stages of the government's investigation can have serious long-term implications. Experience in establishing credibility with investigating prosecutors and regulatory agencies is critical. Managing the expectations of prosecutors and regulatory agencies at the earliest stages of an investigation can increase the likelihood that the corporation will be credited for its cooperation.