Appeared as part of the sponsored section, 2018 Law Journal, in the September issue.
Cranfill Sumner & Hartzog, LLP
In both public and private companies, executives and board members are sued for a variety of reasons.
Directors and Officers liability insurance—commonly referred to as “D&O” coverage— exists to protect them and their companies.
As the Federal Government continues to ramp up enforcement against white collar crime and combat corporate fraud across industries from finance and health care to defense contracting and real estate development, it is more essential than ever for business leaders to recognize the role D&O coverage can play in criminal investigations and prosecutions.
A company’s indictment — let alone conviction — can lead to the death of the business.
Because of this reality, and the full-blown crisis it creates, I encourage clients to rely on D&O coverage and think about how to engage their insurance providers if and when the government comes knocking.
Wait, The Government is Looking at My Company in a Criminal Case?
The government can signal its interest in your company in a criminal investigation in many ways, from the in-person contact between an FBI agent and the company’s accountant to surreptitious scrutiny by intelligence agencies monitoring transactions with foreign politicians abroad. Often times, recognizing the first clue the government is scrutinizing your business depends on your industry. A securities broker will receive different types of notices from the Securities Exchange Commission compared to a hospital provider that might be contacted by the Department of Health and Human Services. A defense contractor and bio-pharma company may be operating in the same sub-Saharan nation but receive very different kinds of scrutiny from various United States agencies about their respective business practices.
Executives and management must be extremely sensitive to becoming entangled – even peripherally – in a criminal investigation. Often, the loudest alarm sounds through the Grand Jury subpoena. In my experience, companies too often treat the Grand Jury subpoena like a routine civil lawsuit subpoena.
That is a mistake.
Grand Jury Subpoenas Are Different
The Grand Jury investigates in secret, directed by prosecutors from the United States District Attorney’s Office. While protections like the right to remain silent under the Fifth Amendment technically exist, a corporation has no such privilege. A witness’s attorney may not be present while the government elicits testimony before the Grand Jury.
Even for seasoned executives who have been engaged in corporate litigation throughout their careers, testifying in a criminal inquisition while your lawyer sits in the hallway can be a uniquely terrifying experience.
Grand Juries Can Demand Crippling Amounts of Data from Your Company
Even if your company is not the subject or target of the investigation, Grand Juries have broad powers to demand the production of your records. In this day, that usually means electronic data.
Data means massive. And massive means expensive.
Because companies must comply with Grand Jury subpoenas but also not obstruct justice by hindering the government’s investigation, this can often mean expending exorbitant costs to manage data until there are assurances the investigation is complete. Compound those costs with industry-specific compliance issues such as health care or financial records, and the legwork to ensure regulatory compliance becomes extremely onerous.
The Life of a Company Will Be Shaped by Its Response at an Investigation’s Infancy
A criminal investigation against a company or its directors and officers is likely to be a watershed moment in the life of the organization.
Unlike a civil lawsuit, which starts with a filed complaint detailing facts and legal claims, a company must often make crucial, snap decisions with just a keyhole peek at the scope of what the government is concerned with in a criminal investigation.
Whatever form initial contact between the government and the company takes—through a subpoena, personal contact from an agent, or even a search warrant and raid of company facilities— the first interaction between law enforcement and corporate counsel will be critical. This initial interaction sets the tone of the investigation, its scope, and the government’s willingness to make accommodations to respond to its demands for information.
The criminal investigation process often will shape related civil litigation that may be brought by other stakeholders claiming to have been harmed by the same corporate acts.
D&O insurance providers recognize that civil liability can rise and fall with the outcome of the criminal investigation. This means that initial contact with the government should immediately trigger your company to contact its D&O coverage provider to assist with a defense.
D&O Coverage Can Help Identify Competent White Collar Defense Counsel and Allay Costs
Early and thorough cooperation by a corporation may lead to a decision not to file criminal charges, to defer criminal charges, or for a civil agency to decline to make a referral for criminal prosecution.
On the other hand, a company that fully cooperates may unnecessarily educate the government about its position too early in the game, foreclose various strategic approaches, and leave the corporation exposed later at trial.
While it may be incumbent on the company to cooperate with law enforcement, the company and its officers must also be prepared to defend themselves. Only by knowing the benefits and risks of a particular strategy can management make important decisions that can affect the future existence of the company. Early agreements with the government such as a Non-Prosecution Agreement can sometimes set the company up for failure, create burdensome compliance requirements that cripple business, or preclude lucrative government business contracting all together.
There is no universal strategy for a response to the government’s scrutiny. The critical need is to recognize at the outset that 1) there must be a quick and thought-through response made with the assistance of attorneys; and 2) that this will be an expensive endeavor. D&O insurance can be an essential ally to assist with both identifying competent white-collar defense counsel and alleviating legal defense costs.
Here are key questions to consider when evaluating your D&O policy:
1. Does the policy provide “pre-claim inquiry” coverage for the costs of responding to informal document requests or interviews with government investigators? If not, your company could be coming out of pocket before a “claim” your carrier recognizes.
2. Can coverage be denied before a “final, non-appealable adjudication” that fraud has been committed? Your company should ensure that the insurance company will not refuse coverage for a mere fraud allegation before a court has made a final determination the company has actually committed fraud.
3. Is your policy “eroding,” meaning fees and costs incurred by defense counsel eat into money available under the policy? Your company should recognize that responding to initial contact of an investigation can be extremely costly and diminish policy resources that may still be needed after an indictment or collateral civil litigation.
Patrick M. Mincey is a white-collar defense trial attorney. A partner in the Raleigh and Wilmington offices of Cranfill Sumner & Hartzog LLP, he chairs the firm’s White Collar & Criminal Defense Group. Patrick represents public and private companies, health care organizations, higher education institutions, boards of directors, officers, executives, professionals and public officials in Government investigations, complex civil litigation, corporate crises and sensitive matters.