‘Miranda’ for corporate execs under scrutiny

By Diane Karpman

Karpman

Early in law school, we learned that a “Miranda warning” is given by police to criminal suspects in custody before they are interrogated. If the suspect talks after Miranda, the statements are deemed voluntary and are admissible if adequate warnings were given.

The rash of corporate scandals in 2002 (Enron being iconic) resulted in aggressive governmental corporate prosecutions where CEOs and CFOs are routinely given “corporate” Upjohn/Miranda warnings (Upjohn v. U.S., 449 U.S. 383 (1981)) during internal investigations. Self-policing, self-reporting, remediation and cooperation will often result in favorable treatment from the government. Internal investigations range from examining companywide accounting fraud to looking into a single allegation of harassment. An adequate corporate Miranda will warn the person that she is not individually represented; that the corporation is the client; that the corporation can waive attorney-client privilege at its sole discretion; and that the person might want to hire her own counsel.

A recent Ninth Circuit case (U.S. v. Ruehle No. 09-50161 9/1/09) is chock-a-block full of ethics concepts for lawyers in “the treacherous path which corporate counsel must tread under the attorney-client privilege when conducting an internal investigation.” (pg.1) Although En Banc review has been sought, according to the current case status, attorney-client privilege did not shield communications between the former CFO of Broadcom and outside counsel regarding the company’s backdating of stock options.

The Ninth Circuit reversed the finding that a law firm had an individual attorney-client relationship with both the company and the CFO. The firm concurrently represented the CFO in class action litigation and the backdating case. The CFO understandably said he could not “split his mind” as to information about the backdating as opposed to the civil litigation. The court rejected this argument, because the CFO was far too sophisticated to make that allegation believable.

Do we really expect even highly sophisticated clients to be able to switch “trust” off and on? (Last week I could trust you and this week I can’t.) Clienthood is based upon the reasonable expectations of the client. Apparently in this case, because of Sarbanes-Oxley and other factors, the level of sophistication was enhanced, which raised the bar in internal investigations of publicly traded companies for officers.

The CFO claimed he did not receive the Upjohn/Miranda warnings, whereas the firm said he did. The huge takeaway from this case is get it in writing. However, even if the warning was evidenced by an informed written consent, how voluntary is that consent?

What choices did the CFO have? Refuse to talk and get fired, or talk and risk criminal prosecution? A conflicts consent pursuant to Rule 3-310 (multiple clients) would be detailed, whether it’s a sophisticated client or not. If the circumstances were fully explained, such as you may go to a country club like Lompoc or a Super-max, then wouldn’t a truly sophisticated client get his own lawyer instead of allowing himself to be thrown under the bus?

• Legal ethics expert Diane Karpman can be reached at 310/887-3900 or karpethics@aol.com.