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DOJ and SEC Continue to Target Gatekeepers

The Justice Department and the Securities and Exchange Commission continue to focus on the gatekeepers — in-house counsel, internal auditors and compliance officers.  Underlying this strategy is the government’s desire to convert these officials into government”agents” to report suspected violations of the law.  The government does not have a healthy respect for the attorney-client privilege.  To the contrary, the government regularly argues that corporate actors have a greater responsibility to report wrongdoing rather than hiding behind the shield of attorney-client privilege.  The public supports the government’s view.

The government has been able to enact a sea-change in federal law surrounding corporate wrongdoing.  The Dodd-Frank bill enacted the most aggressive and innovative whistleblower provisions and protections that the government has ever seen.  Whistleblowers are not required to report corporate wrongdoing internally and can recover 10 to 30 percent of any fine or penalty secured by the government for securities violations, including the FCPA.  Corporation have to be concerned about this new incentive and the possibility that whistleblower reports will increase government prosecutions of corporation.

But the government did not stop there.  In the past year, the SEC prosecuted a record number of internal auditors for failing to react to potential financial misconduct and false reporting of material facts.  The SEC intends to energize internal auditors to report wrongdoing to the government.  Sarbanes-Oxley and internal auditing standards have been adopted which impose reporting obligations on internal auditors when they discover misconduct and the corporation does not adequately respond to such misconduct.

There is no privilege which applies to auditors and their “independence” is an important principle guiding their work.  The government wants to turn this “independence” into an affirmative obligation to report corporations for any wrongdoing.

And the government does not even stop with the whistleblowers and the auditors.  In 2011, the government prosecuted GlaxoSmithKline in-house counsel for obstruction of justice, and false statement claiming that in-house counsel withheld information which was responsive to a FDA informal request letter, even though in-house counsel relied on outside counsel to review and approve responses submitted to the FDA.

In a rare instance of judicial review and responsible action, the trial judge dismissed the case against in-house counsel and chastised the government for bringing the criminal case in the first instance.

Occasionally, it is important to take a step back and identify the trend and big picture.  The government wants to enlist the assistance of corporate actors to report corporate misconduct.  While such a goal may be laudable, the government’s efforts to carry out this policy are heavy handed and overly aggressive without justification.  More significantly, the Justice Department’s efforts against ion-house counsel show little respect for preserving he attorney-client privilege.

In-house counsel and auditors play an important and positive role as compliance agents.    If the Justice Department deputizes in-house counsel and auditors as “government agents” they risk turning these actors into law enforcement officers and will only undermine any positive role that in-house counsel and auditors can play in ensuring corporate compliance.

Greed is not good.  Greed in this case comes at the expense of compliance and a healthy respect for the attorney-client privilege.

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