November 1, 2023
When we think of businesses and professional individuals getting in trouble with the law,, the first examples that might come to mind are headline-grabbing prosecutions and trials involving high-profile business people and organizations: Enron, Michael Milken, WorldCom, Bernie Madoff, and more recently Sam Bankman-Fried and Elizabeth Holmes.
However, while those cases involved the courtroom trials and verdicts of individuals (Jeffrey Skilling and Ken Lay in the case of Enron, and Bernard Ebbers in the case of WorldCom), where every word could be covered by cable news and journalists, much of the universe of white collar law enforcement happens behind the scenes in the form of government investigations. Such investigations can happen without publicity or even public knowledge, and are often confidentially pursued by a wide variety of state and federal agencies, including, for example, the Securities and Exchange Commission, the IRS, the FBI, the Federal Trade Commission, the FDA, any one of the 93 U.S. Attorney’s offices, and any number of state attorney generals’ offices and state regulators.
Some of these government investigations might result in a high-profile prosecution that ends a person’s career or business’s existence, and may also result in prison time and bankruptcy. Other government investigations may result in a reasonable settlement that resolves the matter at the same time that the public even becomes aware an investigation was occuring at all. Other investigations may never see the light of day as the subject of the investigation works with the government to resolve the investigation without the matter ever becoming known to the public or having a lasting effect on the individual or business.
What is often key in setting the table for what outcome occurs is how the subject – whether an individual, company, or other organization – responds to the first signs of the government investigation.
Financial Implications and Operational Disruptions
Regardless of whether prohibited conduct actually took place, responding to a government investigation can be expensive, and it can disrupt the everyday business of a company. However, attempting to avoid or minimize these expenses and disruption can cost a business even more in the long run if the investigation is not properly addressed.
An investigation may commence and progress in a number of different ways. On one end of the spectrum, the investigation may involve the request for a voluntary production of documents or a voluntary government interview of employees and/or executives. At the more extreme end of the spectrum, the first sign of a government investigation might be an early morning raid of a business during which all of the company’s computers and files are taken, leaving the business unable to operate.
The government’s investigation tactics will often be determined based on how much cooperation the government believes it will receive from the subject individual, company, or organization. Thus, avoidance and insufficient attention to the investigation (or potential investigation) in the name of cost-savings and efficiency can have quite the opposite result in the end.
A government investigation can have a massive effect on a company or individual’s reputation and, by extension, their livelihood. Although in some rare cases government investigation and prosecution provides an investigation subject with a somewhat useful notoriety, for the vast majority of market players, a government investigation can be extremely damaging. Even if retail customers may not be concerned, potential business partners and investors may shy away. This is particularly true in industries where honesty is critical, such as the financial industry. As one notable example, even though the accounting firm Arthur Andersen eventually had its Enron-related criminal conviction overturned, the reputational damage suffered by the firm through the years-long investigation and prosecution, among other things, led to its demise.
As mentioned above, government investigations can resolve in a variety of ways – from jail time and loss of licensure to never becoming publicly known. Much of this has to do with the way that the subject of the investigation responds to and navigates the challenges and requirements of the investigation.
Of course, a fundamental concern of a government investigation is whether the investigation will lead to an enforcement action and/or prosecution with the possibility of civil and criminal penalties. In some cases, these may be worse than the costs of responding to the investigation itself and the reputational damage, but in other cases they may not.
Where there is evidence of wrongdoing – particularly in situations of company subjects where the wrongdoing was carried out by employees or executives acting on their own accord and not at an institutional level – the goal may not necessarily be to avoid all legal penalties, but rather to work with counsel to reach a manageable settlement with the government. In many cases, large companies under investigation will work to reach a settlement that might involve the payment of a fine, restitution, the installation of a monitor to oversee company activities, the termination of certain individuals in the company, and/or increased compliance policies. Such an outcome is far preferable to onerous financial penalties, delisting of the company on stock exchanges, publicization of the company as being untrustworthy, or even a criminal conviction of the company or individuals.
Potential for Further Investigations and Charges
There is an old adage that, when under investigation, “don’t let the cover-up be worse than the crime.” Unfortunately, companies and individuals under government investigation far too often fail to heed this advice.
As one example, quick quiz: what crime was Martha Stewart convicted of?
If you answered “insider trading,” you are incorrect. Ms. Stewart was indeed charged with a violation of the insider trading laws, but the courts dismissed that charge. Instead, Ms. Stewart was convicted for acts that she took in responding to the government investigation of the alleged insider trading, namely obstruction of justice and making false statements to a federal investigator.
Thus, how a subject of a government investigation may be as or more important than the underlying acts that are being investigated. A single obstruction of justice charge (i.e. one based on withholding or destroying documents requested by the government) can result in a 20-year prison sentence, even where there was actually no underlying criminal activity. Furthermore, the government may investigate one issue only to find other acts of criminality along the way, thus it is important to manage the scope of the investigation and the manner in which the investigation response is handled.
Speak with an Experienced White Collar Investigations Lawyer
The time to seek experienced counsel from a skilled white collar defense attorney is at the first signs of a potential government investigation, enforcement action or prosecution. Often, the first steps in responding to a potential government proceeding are the most critical in setting the course for an ultimate outcome that defends one’s interests, reputation, and, in some cases, freedom. Contact our office to speak with an experienced white collar defense attorney regarding your situation today.