RESPONDING TO SEC AND DOJ INVESTIGATIONS

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RESPONDING TO SEC AND

DOJ INVESTIGATIONS

Charles R. Parker Charles R. Parker Gregory C. Hill Gregory C. Hill

INTERNAL AND GOVERNMENT INVESTIGATIONS

LOCKE LIDDELL & SAPP LLP

Houston, Texas

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2

What Triggers an SEC

Investigation?

n

n WhistleWhistle--BlowerBlower

n

n Risk Based InvestigationsRisk Based Investigations

n

n SECSEC ““WildcattingWildcatting”” for Fraudfor Fraud

n

n Industry Wide InvestigationsIndustry Wide Investigations

n

n Affiliation with Executives, Shareholders,_{Affiliation with Executives, Shareholders,} or Corporations under Investigation

or Corporations under Investigation

n

n Insider Trading_{Insider Trading}

n

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The New Cooperation

n

n Thompson Memorandum_{Thompson Memorandum}

n

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4

Cooperation

–

What

’

s Required?

n

n Audit Committee_{Audit Committee}

n

n Independent Internal InvestigationsIndependent Internal Investigations

n

n SEC and DOJ Want Immediate, Accurate_{SEC and DOJ Want Immediate, Accurate} Reporting of Misconduct

Reporting of Misconduct

n

n Terminate Responsible WrongdoersTerminate Responsible Wrongdoers

n

n Remedial Measures (Monitor)Remedial Measures (Monitor)

n

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Cooperation

–

What

’

s Required?

n

n Providing results of Independent_{Providing results of Independent} Investigation to the SEC and DOJ

Investigation to the SEC and DOJ

n

n Written Report vs.Written Report vs. PowerpointPowerpoint

n

n Request for Notes and Witness InterviewsRequest for Notes and Witness Interviews

n

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6

Fired CFO Wins Early Sarbanes

Claim

n

n Whistle_Whistle-_-Blower Wanted His Own Lawyer_{Blower Wanted His Own Lawyer} at Internal Hearing

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PCC Flow Technologies

PCC Flow Technologies (2006)(2006)

n

n Whistleblower is protected_{Whistleblower is protected} –_–

n

n Even if they are not the first to raise issue_{Even if they are not the first to raise issue}

about potential wrongdoing; about potential wrongdoing; oror

n

n They do not believe they are reporting_{They do not believe they are reporting} “_“fraud_fraud”_”

under the Securities and Exchange Act under the Securities and Exchange Act

n

n SOX Protection applies to the provision of any_{SOX Protection applies to the provision of any}

“

“violation of…violation of…any rule or regulation of theany rule or regulation of the Securities and Exchange Commission. Securities and Exchange Commission.””

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8

TONE AT THE TOP

COMPLIANCE PROCEDURES

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Why Cooperate?

n

n FCPA cases_{FCPA cases}

n

n Number of Reported Cases by DOJNumber of Reported Cases by DOJ

n

n As many in 2002_{As many in 2002}-_-2005 as the previous six_{2005 as the previous six} years

years

n

n Penalties from 2002Penalties from 2002--2005 equal $56MM2005 equal $56MM

n

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10

SEC FINES LUCENT $25 MILLION

FOR FAILING TO COOPERATE

n

n Non_Non-_-Cooperative Actions:_{Cooperative Actions:}

§

§ Incomplete and untimely documentIncomplete and untimely document production;

production; §

§ Comments from outside counsel thatComments from outside counsel that undermined the settlement; and

undermined the settlement; and §

§ Expanding the scope of employees thatExpanding the scope of employees that could be indemnified.

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CORPORATIONS FACE THREE

PRONG ATTACK

n n SEC_SEC n n DOJDOJ n

n Civil Suits_{Civil Suits}

n

n Aiding and Abetting_{Aiding and Abetting}

n

n “_“Creator Test_{Creator Test}”_”

n

n Manipulative or deceptive device or_{Manipulative or deceptive device or}

contrivance contrivance

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12

Process

n

n Knowledge of Investigation, InformalKnowledge of Investigation, Informal

Inquiry by SEC, or Receipt of Subpoena

n

n Provide Prompt Notice to All Employees toProvide Prompt Notice to All Employees to Retain Relevant Documents

Retain Relevant Documents

n

n This Notice Should Require the Retention_{This Notice Should Require the Retention} of All Relevant Electronic Data

of All Relevant Electronic Data

n

n Document Management Policies, such asDocument Management Policies, such as Routine Destruction, Should be

Routine Destruction, Should be

Suspended.

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Determine Scope Of

…

_…

n

n Paper and Electronic Documents Available_{Paper and Electronic Documents Available}

n

n Subpoena might require that information from_{Subpoena might require that information from}

blackberry and home computer be retrieved. blackberry and home computer be retrieved.

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14

SEC SUPBOENA

n

n Review Order of Investigation, if available_{Review Order of Investigation, if available}

n

n Contact SEC office regarding subpoenaContact SEC office regarding subpoena

n

n Rolling Production_{Rolling Production}

n

n Costs_Costs

n

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CHARGES BY THE SEC and DOJ

n

n Who can Represent the_{Who can Represent the}…_…

n n Corporation_Corporation n n Officers_Officers n n Directors_Directors

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16

Disclosure in SEC Reports

n

n Q: When is Disclosure Required or Otherwise_{Q: When is Disclosure Required or Otherwise}

Appropriate? Appropriate?

n

n A: Disclosure is necessary or appropriate when_{A: Disclosure is necessary or appropriate when}

the results of an investigation are material to the the results of an investigation are material to the

company. company.

n

n Examples of Matters Requiring Disclosure?_{Examples of Matters Requiring Disclosure?}

n

n Underlying facts require a restatement of financials_{Underlying facts require a restatement of financials}

n

n _{Investigation discovers a material weakness in}_{Investigation discovers a material weakness in}

internal controls

n

n Misconduct by senior management or directors_{Misconduct by senior management or directors}

n

n Violation of laws_{Violation of laws}

n

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Disclosure in SEC Reports (cont.)

n

n Appropriate Form of Disclosure_{Appropriate Form of Disclosure}

n

n Press Release_{Press Release}

n

n Form 8-_{Form 8}-KK

n

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18

Disclosure to Auditors

n

n Importance of Prompt and Full Disclosure_{Importance of Prompt and Full Disclosure}

n

n Principal Areas of ConcernPrincipal Areas of Concern

n

n Impact on financial statements_{Impact on financial statements} –_– restatement_restatement

n

n Fraud_Fraud

n

n Credibility of Management_{Credibility of Management}

n

n Internal controls over financial reporting_{Internal controls over financial reporting}

n

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The Foreign Corrupt Practices

Act

n

n It is a crime to give anything of value to aIt is a crime to give anything of value to a foreign official

foreign official

n

n To obtain or retain business_{To obtain or retain business}

n

n for the purpose of obtaining an improper_{for the purpose of obtaining an improper}

advantage advantage n

n Primary componentsPrimary components

n

n Anti_Anti-_-bribery provisions_{bribery provisions}

n

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20

FCPA (cont.)

FCPA Applies to:

n

n Issuer_Issuer –_– essentially any company whose stock is traded in the U.S._{essentially any company whose stock is traded in the U.S.}

n

n Domestic concern_{Domestic concern} –_– U.S. citizen, national, resident, or a U.S._{U.S. citizen, national, resident, or a U.S.}

company or a company with its principal place of business in the

U.S. or officers, directors, stockholders, employees, and agents

U.S. or officers, directors, stockholders, employees, and agents ofof such an entity

such an entity

n

n Any person, if acting in U.S. territory_{Any person, if acting in U.S. territory}

n

n Any U.S. national or U.S. company acting outside the U.S._{Any U.S. national or U.S. company acting outside the U.S.} –_– does_does

not require use of interstate commerce

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FCPA Compliance

n

n FCPA Compliance Program_{FCPA Compliance Program}

n

n Training_Training

n

n Representations and warranties_{Representations and warranties}

n

n Certifications_{Certifications}

n

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22

Not Prohibited by FCPA

n

n Payments permitted by local law_{Payments permitted by local law}

n

n Facilitating PaymentsFacilitating Payments

n

n Gifts/promotional expenses_{Gifts/promotional expenses} –_– but must be:_{but must be:}

n

n Customary and reasonable_{Customary and reasonable}

n

n Not directly tied to obtaining/retaining_{Not directly tied to obtaining/retaining}

business business