The successful prosecutions of Martha Stewart and Frank Quattrone highlight the increased risk corporate executives face from “obstruction of justice” and similar offenses. Indeed, as a New York Times recent headline proclaimed, “In Recent Cases, It’s the Cover-Up, Not the Crime.” This path to proving criminality has long been known to prosecutors, who recognize the difficulty of substantiating complicity in a complex fraud, and the relative ease of showing that a target misled investigators or destroyed or tampered with evidence by, for example, encouraging the deletion of e-mail. Such was the fate of Ms. Stewart, Mr. Quattrone and other subjects of successful U.S. federal prosecutions for obstruction of justice, including a prominent physician at the University of Washington and executives at Computer Associates.
Many general counsels are now seeking guidance on the nature of obstruction and on how best to protect the corporation and its officers and employees from potential exposure to allegations of obstruction. There are risks associated with the failure to preserve data or documents relevant to a government investigation, as well as risks resulting from improper communications with a witness. It is important for businesses to consider best practices to respond to these risks.
A corporation’s initial response to learning of a government investigation is critical. All too often, that response is incomplete or even misdirected. The damage done in the first hours and days after learning of a government investigation usually cannot be undone and may ultimately prove to be more damaging than the underlying conduct under investigation. By having proper policies and procedures in place, and by following them, the corporation and senior management can gain significant protections against potential liability for obstruction of justice.
What Is “Obstruction of Justice?”
The term “obstruction of justice” encompasses a wide-range of conduct prohibited under federal and state laws, including the destruction of evidence relating to a criminal investigation and/or prosecution. One of the statutes under which Martha Stewart was prosecuted and convicted was 18 U.S.C. § 1505, which prohibits the corrupt obstruction of any proceeding by a federal agency or Congress. A non-exhaustive list of other conduct prohibited by federal laws on obstruction of justice includes withholding or falsifying documents or testimony responsive to a civil investigative demand made under the Antitrust Civil Process Act (see 18 U.S.C. § 1505); obstructing, by bribery, a criminal investigation of a federal crime (see 18 U.S.C. § 1510(a)); witness tampering (see generally 18 U.S.C. § 1512); obstructing a federal audit of a government contractor or subcontractor (see 18 U.S.C. § 1516); obstructing a federal agency’s examination of a financial institution (see 18 U.S.C. § 1517); and preventing, misleading or delaying the communication of information or records relating to a violation of a federal health care offense to a criminal investigator or attempting to do so (see 18 U.S.C. § 1518). A comprehensive list of all prohibited conduct included within the definition of obstruction of justice, and the legal authorities proscribing such conduct, is not possible here, and is unnecessary to the purpose of this article.
Martha Stewart was convicted for obstruction of justice, in part, because Stewart changed a record of a message left by her stockbroker regarding the sale of ImClone stock, when she knew that she was the subject of an anticipated federal investigation for inside trading. Frank Quattrone was prosecuted and convicted for sending an e-mail to co-workers reminding them to “clean up” their files in accordance with the company’s document retention policy, when he knew of the pendency of a grand jury inquiry involving, and federal investigation of, his company for securities violations. In another example, Dr. H. Richard Winn, a neurosurgeon at the University of Washington, pleaded guilty to obstruction of justice in connection with the government's investigation of Medicare and Medicaid billing practices; the related $35 million settlement is the largest ever against a U.S. teaching hospital.
In a further recent expansion of potential liability for obstruction, several Computer Associates executives pleaded guilty to obstruction of justice charges based on the executives’ false statements to Computer Associates’ outside counsel investigating alleged accounting improprieties, when they knew the misleading information would be provided to federal investigators.
Unfortunately, often the initial reaction of some to discovery of a government investigation is to attempt to “clean up” the problem. Such efforts will almost always create potential liability for obstructing the investigation. Consequently, when a federal investigation or criminal proceedings are pending or anticipated, for-profit and nonprofit entities must take affirmative steps to ensure that relevant materials, whether in paper or electronic form, are being preserved. Similarly, those involved in the matter should be instructed to limit their discussions of the case to counsel and not to engage in unprivileged discussions about their potential testimony or issues of defensive strategy.
The obstruction statute is very broad. Title 18, United States Code, § 1503 provides, in part, that “[w]hoever . . . corruptly or by threats or force, or by any threatening letter or communication, influences, obstructs, or impedes, or endeavors to influence, obstruct, or impede, the due administration of justice, shall be fined not more than $5,000 or imprisoned not more than five years, or both.” The Supreme Court has interpreted this statute to require that an actor have “knowledge that his actions are likely to affect [a] judicial proceeding” (see United States v. Aguilar, 515 U.S. 593, 599, 115 S.Ct. 2357, 132 L. Ed. 2d 520 (1995)). The Court thus imposed “a ‘nexus’ requirement—that the act must have a relationship in time, causation, or logic with the judicial proceedings. . . . In other words, the endeavor must have the ‘natural and probable effect’ of interfering with the due administration of justice” (see id. (citations omitted)). More recent cases and statutes addressing obstruction of justice, however, have relaxed this perspective and have held that a defendant may be convicted of obstruction of justice without a “nexus” between the defendant’s conduct and a specific judicial proceeding.
Title 18, U.S.C., § 1512(b), states, in pertinent part: Whoever . . . corruptly persuades another person, or attempts to do so, or engages in misleading conduct toward another person, with intent to . . . (2) cause or induce any person to . . . (B) alter, destroy, mutilate, or conceal an object with intent to impair the object’s integrity or availability for use in an official proceeding; . . . shall be fined . . . or imprisoned . . . or both (see 18 U.S.C. § 1512(b) prior to 2002 amendments).
In a recent case, a federal district court found that the term, “corruptly persuades,” is not limited to coercive conduct. Rather, it applies to any conduct motivated by “an improper purpose” (United States v. Arthur Andersen LLP, 2002 U.S. Dist. LEXIS 26870, at * 24 (S.D. Tex. May 24, 2002)). Moreover, the court held that “specific knowledge that one’s conduct violates the law is not required under [18 U.S.C.] § 1512(b)” (Id., 2002 U.S. Dist. LEXIS 26870, at *27 (May 24, 2002)). Finally, the court determined that even a preliminary investigation constitutes an “official proceeding” pursuant to 18 U.S.C. § 1512(b), and the statute does not require specific knowledge that an official proceeding is ongoing or scheduled to support a conviction for obstruction of justice (Id., 2002 U.S. Dist. LEXIS 26870, **30-31 (May 24, 2002)).
The Sarbanes-Oxley Act (Sarbanes) contains two important provisions, §§ 802 and 1102, that are applicable, in pertinent part, to all types of corporations—whether publicly held, nonpublic and/or nonprofit—and specifically define the crime of obstruction of justice in the context of document destruction. The act creates new felonies and penalties for such conduct as the destruction or fabrication of evidence and the failure to preserve financial and audit records.
One new provision added by Sarbanes § 802 applies criminal penalties broadly to any act of destroying, fabricating or concealing evidence when done with intent to obstruct, impede or influence an investigation or proper administration of any matter within the jurisdiction of any U.S. department or agency or any Chapter 11 bankruptcy proceeding, or in relation to or in contemplation of such a matter or investigation (18 U.S.C. § 1519). The required level of intent to trigger the penalty is the intent to obstruct, as opposed to some level of knowledge about the agency process or the precise nature of the jurisdiction of the investigating agency or court. As stated in the legislative history, the goal of the provision is simple: “[P]eople should not be destroying, altering, or falsifying documents to obstruct any government function” (148 Cong. Rec. H2673 (July 26, 2002), p. 57419). It is notable that this provision could also be used to prosecute not only one who destroys the documents, but also one who persuades another to do so. An additional new provision added by Sarbanes § 1102 (18 U.S.C. § 1512(c)(1)) applies criminal penalties, including imprisonment for up to 20 years, to an individual who corruptly alters, destroys or conceals evidence, or attempts to do so, with the intent to impair its availability for use in an official proceeding. A related provision (18 U.S.C. § 1512(c)(2)) prohibits an individual from corruptly engaging in any conduct that obstructs, influences or impedes any official proceeding, or attempts to do so.
Failure to Preserve Financial Records
Another new provision added by Sarbanes § 802 (18 U.S.C. § 1520) criminalizes the willful failure of an accountant to preserve financial audit papers of companies reporting under the Securities Exchange Act of 1934. It also required the U.S. Securities and Exchange Commission (SEC) to adopt rules reasonably necessary, relating to the retention of relevant audit-related records of such companies and criminalizes violations of those rules. The goal of this section is not only to penalize the willful failure to maintain certain audit records but also to require safeguards for the retention of corporate audit records. A principal feature of this particular provision is not only to provide for the prosecution of those engaging in obstruction of justice but also to help preserve important financial evidence that can ultimately be used by law enforcement officials, regulators and victims to assess whether a violation of law occurred and, if so, whether it was intentional and was committed with or without the knowledge or assistance of the auditor.
Sarbanes §§ 805(a)(1) and (a)(2) required that the U.S. Sentencing Commission review the sentencing guidelines to ensure that the sentencing guidelines that apply to organizations “are sufficient to deter and punish” the obstruction of justice and provide enhancements for specific conduct, including the destruction or modification of evidence. These enhancements went into effect on January 25, 2003 (supplement to the 2002 Federal Sentencing Guidelines Manual, §2J1.2 (effective January 25, 2003)).
Additionally, Sarbanes § 805(a)(5) required the U.S. Sentencing Commission to review the sentencing guidelines to ensure that those applying to organizations “are sufficient to deter and punish organizational criminal misconduct.” The commission’s proposed amendments were sent to the U.S. Congress on May 1, 2004, and will become effective on November 1, 2004, unless rejected by Congress (U.S. Sentencing Commission, “Commission Tightens Requirements for Corporate Compliance and Ethics Programs,” News Release, dated May 3, 2004). Significantly, the proposed amended sentencing guidelines set forth the standards by which organizations that maintain an effective compliance and ethics program can obtain credit during sentencing for corporate wrong-doing, including but not limited to obstruction of justice. Thus, they require particular attention by corporate leaders.
The following are steps that corporate management can take to reduce potential exposure to allegations of obstruction of justice.
A company should ensure that it has an appropriate document preservation policy in place. All companies must take particular care when instituting any new policy or changing any existing policy relating to the destruction of documents. This is particularly true where a company has previously been the subject of government investigation or is the subject of any ongoing investigation. In one case, the court found that the defendant’s creation and enforcement of a document destruction policy was an intentional effort to avoid further SEC enforcement action. Accordingly, during the pendency of an investigation, alterations to an existing document retention policy should only be made at the direction of counsel.
A company should have an established policy to ensure that its management team and legal counsel are timely informed of all formal government investigations, including the receipt of a subpoena and informal investigations into the company, its officers or employees, including any interview of company personnel by government agents.
Once a company learns of or anticipates receipt of a subpoena or government investigation, the company should take all appropriate steps to ensure the preservation of relevant documents. As part of this effort, the company should suspend the destruction of documents under its existing document preservation policy. In addition, the company should issue a directive instructing directors, officers and relevant employees to preserve relevant information, including relevant e-mails, drafts of documents, voice-mail messages and other electronic documents and data. Depending on the circumstances, this directive may need to include agents of the company who are in possession of the company’s documents, such as independent contractors, lawyers and accountants.
A corporation, through its audit committee and general counsel, should work with its outside auditor to develop protocols and procedures designed to preserve substantive audit records and other related material for an appropriate amount of time, given applicable statutes and regulations. Included within the scope of retained information would be all relevant audit records, including but not limited to conclusions, opinions, analysis, work papers and financial data relevant to an audit or review, regardless of whether they support the final conclusions reached by the auditor or expressed in the final audit or review.
The corporation’s policies and procedures should make clear that, once notice of a government investigation is received, directives concerning document retention are to be made by a specified individual, such as the general counsel, and are not to be made by others.
Corporate managers should be informed that, upon receiving notice of a government investigation, all communications concerning the matter should be directed to counsel, and company officials should not engage in unprivileged discussions among themselves concerning their knowledge of the underlying events, their prospective testimony or defensive strategies. While discussions with counsel about such matters are entirely appropriate, discussions between witnesses to alleged misconduct concerning the allegations create needless risk of witness tampering allegations or related liabilities.
A company should institute, if it has not done so already, internal compliance/educational sessions or other “in service” programs directed by the general counsel on the topic. For senior management, the subject should be integrated into new employee training programs and reinforced during periodic training for current employees.
Having the right company policies reduces the risk of liability for obstruction of justice, including document destruction by individuals at lower levels of the company.