These manuals and standard operating procedures also should identify a lawyer who is knowledgeable in this practice, and who could be consulted if necessary. This could be a corporate lawyer who is selected in advance and trained to deal with these types of inquires, or an attorney in private practice who defends criminal investigations. If there is time available to seek guidance, the executive should not be relegated to the legal department generally--or worse, to the municipal telephone directory.
Although written procedures and prior identification of a lawyer are important, it must be recognized that in many instances these precautions will not be effective. The company procedure manual will not be very helpful if it is in the office while agents confront the executive at home. Similarly, a corporate lawyer will find it difficult to provide instruction on the nuances of government investigative techniques while impatient and skeptical agents are seated in the same room with the executive.
Effective preparation should include an interactive corporate educational program. Executives and management personnel must understand the legal principles that apply to such an inquiry, and the extent of the government's power. Without such information, an executive will not be able to respond appropriately to the various investigative methods that will be employed. A specific written description of the process should be provided and discussed, and a check-list reviewed. Practice sessions and mock interviews should also be conducted. Until an executive has experienced this type of confrontation, there will not be confidence in the response. Uncertainty will only encourage the agents to continue to pursue their target.
Also, an executive's confidence can be increased if there is some document that can be relied on in the event of a contact by government agents. Some companies provide a wallet sized card which contains a summary of the executive's legal rights and obligations, the power and authority that is retained by the government, and the telephone number of a lawyer who can be consulted. Such a card will help many executives feel more secure in responding to the government.
B. Individual response to investigators
Training is great, but the fundamental issues remain. What should an executive be advised to say and do under these circumstances? There is a very simple and direct answer. The executive is free to make an independent determination of whether and how to respond to the government's inquiry.
Initially, this may not appear to be a very helpful answer. Upon reflection, however, it conveys more direction than might be immediately apparent. The ability to choose includes the power to refuse. An executive contacted in this fashion cannot be compelled to answer the agent's questions. Participation in the interview is voluntary.
Agents will often imply that there is a legal obligation to answer their questions. This is not true. Before disclosure of information can be compelled, a subpoena must be issued by a grand jury.11 Even the service of such a subpoena, however, does not entitle the agents to immediate answers. The subpoena merely commands a grand jury appearance by the witness on some future date. The provision of actual testimony will depend on whether it is subject to some protection - mostly notably the Fifth Amendment privilege against self-incrimination. Agents are prohibited from using the authority of a grand jury subpoena to compel informal interviews.12
It should be quite clear that there are very good reasons to advise an executive to politely but firmly decline to be interviewed, and for the executive to accept and follow that advice. This response will avoid several serious disadvantages of an immediate interview.
If the encounter is at least postponed, the executive will be able to consult with legal counsel. A lawyer representing the executive could determine that participation in an interview does not confer any benefit, and could waive important constitutional rights. This could lead to the conclusion that the executive should not consent to the interview.
Even if a decision were made to proceed, the interview would not occur as a surprise or in an intimidating and coercive atmosphere. The executive's lawyer would attend the meeting, and temper the use of aggressive investigative tactics. At the very least, the meeting will probably occur in a lawyer's office rather than in the executive's living room.
Also, the defense lawyer would prepare contemporaneous notes. This would help to avoid a later controversy about what information was conveyed, and whether any information responsive to questions was distorted or withheld. If appropriate, a verbatim transcript could be prepared.
If the executive's best interest is served by a meeting, then it is possible that the defense lawyer can secure an agreement to provide some level of protection against subsequent use of the information. The government might agree that the statements made will not be used as evidence against the executive, although it is unlikely that this protection will extend to the investigative leads that are provided. Alternatively, the government might agree to a "hypothetical" proffer by the defense lawyer which will not require the witness's direct participation. At least an understanding can be reached about the subjects to be discussed and the scope of the interview.
Moreover, this procedure will afford the executive time to prepare. Recollection could be enhanced significantly by some period of reflection on the topic, and perhaps relevant documents could be reviewed. Preparation could be very important to remind the witness of the context surrounding events that are now deemed significant, and thus provide a reasonable explanation for conduct that might otherwise appear sinister.
But what about pressure from the agents? Often they will warn that cooperation must be immediate, and that a refusal to provide information will set the executive on a course that leads inevitably to financial and social ruin. Government agents understand that the best opportunity to obtain damaging information is before the witness has consulted with a lawyer. The time pressure they seek to impose is designed to avoid such a delay.
There are some instances when an immediate discussion with the agent is the last realistic opportunity for a person with criminal exposure to mitigate the effect of a prosecution. This, however, is rarely the case in an investigation of potential business violations. Most often, negotiation by a knowledgeable defense lawyer will provide a much better result than would ever be possible through acceptance of the agents' dire predictions and promises of leniency.
It is important to understand that government investigative agents do not possess the power to make agreements that bind the government. Immunity, for example, must be sought by a government lawyer.13 These decisions will be made by supervising government attorneys only after substantial consideration and deliberation. They will not be made on an ad hoc basis by agents in the field. At most, an agent can make recommendations to prosecutors--which may or may not be accepted. An executive who succumbs to the pressure of a government agent might learn that promises of leniency and consideration translate into much less than was expected.
In reality, the information provided during an interview, no matter how favorable to the witness, probably will not terminate the investigation. It would be extraordinary if the government accepted the denials of a potential target without a thorough and critical review. The investigation will probably continue until all reasonable leads have been exhausted. Most likely, consenting to an interview will fuel rather than end the inquiry.
Certainly, there are many advantages to postponing the interview. Most important, however, is that trained legal judgment can be exercised to determine whether any information should be provided. In many instances, it will become apparent that there is no benefit to the executive, and therefore no reason to consent to the interview.
When all of these issues and considerations are factored together, the decision should be relatively simple for most executives confronted with this situation. Rather than consent to an immediate interview, they should politely but firmly decline. The executive should ask for the business card of each government representative, and state that the executive's lawyer will contact one of them. In almost all instances, this approach will maximize the potential benefit for the executive, and avoid the unintentional waiver of important legal and constitutional rights.
IV. There are perils for lawyers providing advice
The problems imposed by this type of investigation are not confined to executives or potential witnesses. Lawyers also confront difficult issues.
Lawyers have been charged with criminal violations-- usually obstruction of justice--for advice the government believes "corruptly" impedes an investigation. Prosecutors have focused on this activity, which has been described as an "affront to the heart of the judicial system."14 Defense attorneys have decried this type of prosecution as the "plastic concept of the 90s," and a violation that is "clearly in the eye of the beholder."15 In these types of investigations, cause for concern is not confined to the executive.
Prosecution of defense attorneys
The government has increased its focus on the activity of defense attorneys. Although these still constitute a very small proportion of criminal cases, they evidence a disturbing trend.
In some instances, defense attorneys have engaged in blatantly illegal conduct. But many cases have addressed conduct that is much less egregious. Several have alleged that a defendant or witness was compelled to either waive or invoke a legal right during the course of a judicial proceeding.
Invocation of the Fifth Amendment has been the subject of several cases. In United States v. Cioffi,16 for example, the government alleged that a defense attorney attempted to induce a grand jury witness to invoke the Fifth Amendment privilege rather than inculpate third parties. The court rejected the contention that advice in conformance with the constitution was protected from prosecution.
Similarly, in United States v. Cintolo,17 the defense attorney had advised a client to invoke the Fifth Amendment privilege before the grand jury, and then to persist in that invocation even after immunity had been granted. The jury found that this advice was motivated by a corrupt purpose. In sustaining the conviction, the court rejected the contention that advice to engage in lawful activity could not, as a matter of law, support a conviction for obstruction of justice. Rather, the court stated "Any act by any party - whether lawful or unlawful on its face - may abridge Section 1503 if performed with a corrupt motive."18
In essence, these cases stripped defense attorneys of an assurance that advice to engage in lawful conduct would provide a barrier against subsequent prosecution. Instead, the court concluded that "The contours of the line between traditional lawyering and corrupt intent. . .must inevitably be drawn case by case."19 Apparently, the court believed that this open-ended analysis would not frustrate aggressive advocacy.
This trend was recently extended by the United States Court of Appeals for the Seventh Circuit in United States v. Cueto.20 The defendant, an attorney who had engaged in business transactions with the target of an investigation, was indicted for obstruction. The charge focused on a civil suit that was brought against the FBI agent who was conducting the investigation, motions that were filed allegedly to hinder the function of the grand jury, and advice delivered to a separate attorney to file motions after the target of the investigation was indicted. Certainly, none of these activities, in and of themselves, are illegal or nefarious.
The court sustained the conviction, and stated that "it is not the means employed by the defendant that are specifically prohibited by the statute; instead, it is the defendant's corrupt endeavor which motivated the action."21 The fact that the attorney engaged in litigation- related activity "does not provide protection from prosecution for criminal conduct."22
The court was somewhat concerned that its decision would create substantial consternation among defense attorneys, and support broad inquiries by prosecutors who were unhappy with the direction of defense advocacy. In at least two instances, the court noted it intended to avoid "chilling vigorous advocacy" and "the potential dangers that could arise if prosecutors were permitted to inquire into the motives of criminal defense attorneys ad hoc." It asserted that the decision did not "create that avenue of inquiry."23
These cases demonstrate a very disturbing trend. Defense lawyers have now become the target of government investigations, and the basis for that decision may not always be the illegality of the conduct involved. Instead, it may be that the government has exercised its discretion to chill aggressive advocacy through the deterrent effect of indictment.
Although this is certainly an unfortunate development, it is one that must be recognized in this type of representation. Every attorney who will advise a client concerning contacts with government investigators must be cognizant of the potential ramifications.
V. Conclusion
A surprise "ambush" interview affords the government enormous advantages. Witnesses confronted with this situation are often ignorant of the rights they possess and the obligations that are imposed. Frequently, this uncertainty is resolved by a decision to cooperate immediately and provide the answers sought by the government. This decision, however, is neither compelled by the circumstances nor is it necessarily in the witness's best interest.
The only effective response is education and training imparted long before an investigation has commenced. The executive must understand that choices are available, and the lawyer who is consulted must be ready to render knowledgeable advice. Without this preparation, an "ambush" interview presents substantial peril for both the witness and the lawyer.
_______________
Mr. Kowal is a partner in the law firm of Bell, Boyd & Lloyd in Chicago, and concentrates in the defense of white collar criminal cases and complex civil litigation. He has defended numerous criminal cases involving antitrust, food and drug, health care and business matters. Prior to entering private practice, he prosecuted criminal and civil cases in the Antitrust Division of the U.S. Department of Justice.
1. U.S. Const. amend. VI.
2. Model Rule of Professional Conduct Rule 4.2 (1983).
3. Antitrust Division Grand Jury Practice Manual, at 153 (CCH 1991).
4. Pam Belluck, "In Crackdown on Health Care Fraud, U.S. Focuses on Training Hospitals and Clinics," N.Y. Times, Dec. 12, 1995, at A32.
5. Steven M. Kowal, "Execution of a Criminal Search Warrant by FDA - Effective Preparation and Response," 52 Food and Drug L.J., 117 (1997).
6. Ronald Yates, "Battlelines Drawn in ADM Probe; Midnight Raids in Decatur; Legion of Lawyers Mustered Worldwide," Chicago Tribune, July 30, 1995, at C1.
7. United States v. Marcus, 848 F.Supp. 417 (D.Md. 1994).
8. William B. Crawford, Jr., "Trader's Wife Tells of FBI Visit, Chicago Tribune," Jan. 17, 1991, at C3.
9. 18 U.S.C. §1001 (1996). Punishable by a fine of not more than $10,000 and imprisonment for as much as five years.
10. FDA, Investigations Operations Manual, §433.22.
11. Fed. R. Crim. P. 6.
12. United States v. DiJulio, 538 F.2d 972, 985 (3rd Cir. 1976); Durbin v. United States, 221 F.2d 520 (D.C. Cir. 1954).
13. 18 U.S.C. §§6001-06005.
14. BNA, Criminal Practice Report, Vol. 12 at 152 (April 22, 1998).
15. Id.
16. 493 F.2d 1111 (2nd Cir. 1974).
17. 818 F.2d 980 (1st Cir. 1987).
18. Id. at 991.
19. Id. at 995.
20. 151 F.3d 620 (7th Cir. 1998).
21. Id. at 631.
22. Id.
23. Id. at 634.
By Andrew J. Stoltmann, Maddox Koeller Hargett & Caruso, Chicago
I. Introduction
On February 15, 2000, the Securities and Exchange Commission approved Rule 10336 and added it to the NASD Code of Arbitration Procedure. The new rule, which establishes the Single Arbitrator Pilot Program, is the first opportunity investors, stockbrokers and brokerage firms have been granted to have a single, public arbitrator hear their dispute for claims between $50,000.01 and $200,000. While the Rule was approved in February of 2000 and became effective in May of 2000, as of at least March 1, 2001, according to the Securities Arbitration Commentator, not one claim has been filed under the new Pilot Program. The Rule will be tested through May 15, 2002, at which time the Pilot Program will be evaluated to determine if it should become a permanent program at the NASD.
II. The rule
Rule 10336 allows parties with pending securities arbitration claims at the NASD between the amounts of $50,000.01 to $200,000 to select a single arbitrator to decide their case, rather than the panel of three arbitrators they would otherwise select. The Pilot Program is voluntary, and includes provisions that allow the parties to communicate directly with the arbitrators under certain conditions.
Claims arising between a customer and a stockbroker or brokerage firm member for amounts from $50,000.01 to $200,000, including damages, interest, costs, and attorneys' fees, will be eligible to be heard by a single arbitrator. Claims that include a request for punitive damages will not be eligible for the Pilot Program unless all of the parties agree.
After parties receive notice that a panel of three arbitrators has been selected, as provided by Rule 10308, the parties may agree to have one of the arbitrators serve as the single arbitrator who will decide their case. The parties shall have a 15 day window from the date the NASD sends notice of the names of the arbitrators to agree on a single arbitrator. This 15-day period will run concurrently with the time period to select a chairperson under Rule 10308(c)(5). If the parties do not agree to have one of the arbitrators serve as the single arbitrator, then the claim will not be eligible for the Pilot Program and will proceed instead under the usual procedures of Rule 10308.
Parties may send written materials, including information requests and motions, directly to the single arbitrator, provided that copies of such materials are sent simultaneously and in the same manner to all parties and to the NASD. Parties shall send the NASD, arbitrator, and all parties proof service of such written materials, indicating the time, date, and manner of service upon the arbitrator and all parties. Service by mail is complete upon mailing. If the arbitrator and all parties agree, written materials may be served electronically.
If the arbitrator agrees, parties may initiate conference calls with the arbitrator, provided that all parties are on the line before the arbitrator joins the call. The arbitrator may initiate conference calls with the parties, once again provided all parties are on the line before the conference call begins. Parties may not communicate orally with the arbitrator unless all parties are present.
Rule 10336 only applies to customer-member arbitration disputes. The Rule is not available for the resolution of employment disputes or other intra-industry disputes.
III. Advantages and disadvantages of Rule 10336
Claimant's counsel may want to consider utilizing Rule 10336 for some important strategic and economic reasons. First, the Rule has the ability to remove the industry panelist from the panel. Under the Rule, any of the three chosen arbitrators may be the single arbitrator, but both sides must agree to the selection. Typically, a Claimant's counsel would not agree to have the industry representative be the sole representative. Many securities arbitration practitioners feel the industry member exerts undue influence on the two public panelists and is biased in favor of the broker and brokerage firm. However, Claimant's counsel has the ability, through Rule 10336, to ensure that his investor's case will be decided by a single public panelist.
Second, if the Claimant's counsel, after agreeing to the Pilot Program, learns of additional claims that would increase the damages in excess of the $200,000 limit under Rule 10336, the Claimant may request that the other two panel members originally chosen be reinstated and the action proceed without the damage limitation of Rule 10336. If the single arbitrator refuses to grant the Claimant's counsel request to reinstate the other two arbitrators, then the attorney may move to dismiss the claim without prejudice and the claim can then be re-filed as a regular, three person case. Unfortunately, the new, re-filed action would involve the payment of another filing fee.
The biggest advantage for Respondent's counsel under the Pilot program is that arbitration claims that include a request for punitive damages are not eligible so long as both sides do not specifically request that they be considered. At the agreement of both parties, punitive damages may be considered by the arbitrator but the $200,000 limitation will still apply. While punitive damages at the NASD in 2000 were only $21 million, knowing they will not be awarded under Rule 10336 (absent a specific agreement allowing them by both Claimant and Respondent counsel) will be welcomed news to many brokerage firms and the attorneys who represent them and provide a cost certainty to damages that might be incurred.
An advantage for both parties under Rule 10336 is lower expenses. Hearing session fees are reduced in the Pilot Program to reflect lower arbitrator honoraria. For claims between $50,000.01 and $100,000, hearing session fees under the Pilot program will be $550 per session, or $1,100 for a two-day session. This represents a reduction of $200 per session for the parties when compared with normal NASD arbitration costs. For claims between $100,000.01 to $200,000, hearing session fees under the Pilot Program will be $750 per session or $1,500 for a two-session day. This is a savings of $375 per session for the parties.
IV. Additional information
Additional information on Rule 10336 and the Pilot Program can be found in NASD Notice to Members 00-22. All past Notice to Members may be viewed on the NASD's Web site (www.nasdr.com) in the "Members Check Here" section. Additional questions may be answered by Jean Feeney, Special Advisor, Office of Dispute Resolution, NASD Regulation at 202/728-6959 or via e-mail at jean.feeney@NASD.com.
V. Conclusion
With the recent plunge in the stock market, the number of future NASD arbitration actions against stockbrokers and brokerage firms can be expected to increase in coming months. Rule 10336 should be considered as a viable option for Claimants and Respondents counsel, depending on the type of claim at issue, for controversies between $50,000.01 to $200,000.