Magazine article Business Credit

Legal Traps for Unwary Managers during Corporate Criminal Investigations

Magazine article Business Credit

Legal Traps for Unwary Managers during Corporate Criminal Investigations

Article excerpt

In today's legal climate, managers are learning that it's essential to be on your guard (and your best behavior), even during internal criminal investigations. Two dramatic developments underscore the personal risk to unwary managers.

The most significant development involves the April 9, 2004 guilty plea to obstruction of justice charges by three former executives of Computer Associates. Readers will recall that Martha Stewart was convicted of lying to federal investigators looking into securities violations. Although this type of lying isn't a form of perjury, because it isn't usually under oath, federal law makes it a felony--obstruction of justice--because it impedes a government investigation of other crimes.

The Computer Associates case also involves obstruction of a federal criminal investigation by individuals who lied to the investigators. A garden-variety obstruction case? Not exactly. The managers didn't lie to either government investigators or a grand jury. Instead, they pied guilty to misleading the investigators--through lies to their company's lawyers--who were conducting the internal investigation. The guilty pleas were based on the theory that the managers knew their lies would be passed directly to the federal investigators by the lawyers who conducted the investigation.

When the federal investigation became public in February 2002, the company immediately agreed to cooperate with prosecutors. They hired experienced criminal lawyers to conduct an independent investigation. By cooperating, the company hoped to survive the investigation unscathed, or at least to limit the type of criminal conviction that has destroyed other organizations like Arthur Andersen.

In their plea proceedings, the Computer Associates managers disclosed a broad conspiracy at the company to lie to the internal investigators, to slow the government's investigation. While this will presumably not serve the company well at sentencing time, it turned out to be devastating to the individuals who actually misled the internal investigators. The prosecutors take the position that just because those lies were told through lawyers rather than by the executives directly (like Martha Stewart), they aren't excused from criminal wrongdoing; precisely because they intended to obstruct the investigation itself. According to Roslynn R. Mauskopf, United States Attorney for the Eastern District of New York, "Zar and other indicted C.A. officers made false statements to C.A.'s attorneys that were intended to--and did in fact--obstruct justice."

This element of intent lies at the heart of federal justice obstruction statutes.

Sophisticated readers may be asking, "But what about the attorney-client privilege? Doesn't that apply to an internal investigation?" No.

The lawyers were hired specifically to do an independent investigation. They did not represent the individual executives they interviewed. The conversations were not privileged. Had these witnesses disclosed underlying criminal conduct, the investigators would not be prohibited by privilege from disclosing the crimes to the company and the prosecutors. And, given the tremendous pressure on corporations to cooperate with investigators, most are waiving any privilege the organization may have with its own lawyers.

In addition to the obstruction charges, the investigators also pled to securities fraud. Two of them now face up to 10 years in prison, while the CFO could serve 20 years.

Lessons for Managers:

1. Recognize that if you are interviewed by company lawyers about any alleged federal crimes, those lawyers do not represent you and are not in a position to give you legal advice. This means they are not in a position to advise you on whether to invoke your right to avoid self-incrimination.

2. Consider all conversations with company lawyers during such an investigation "on the record."

3. …

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