attorney-client privilege for financial institutions in...
TRANSCRIPT
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Presenting a live 90-minute webinar with interactive Q&A
Attorney-Client Privilege for Financial
Institutions in Internal Investigations,
Audits and Bank Regulatory Exams Preserving Confidential Information and Work Product, Navigating the
Bank Examination Privilege and Section 1828 Selective Waiver
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
WEDNESDAY, MARCH 16, 2016
Paul Bond, Partner, Reed Smith, Princeton, N.J.
Travis Nelson, Counsel, Reed Smith, Princeton, N.J.
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Attorney-Client Privilege for Financial
Institutions in Internal Investigations, Audits,
and Bank Regulatory Examinations
Travis P. Nelson
New York, NY / Princeton, NJ
(212) 549-0236 / (609) 524-2038
Paul J. Bond
Princeton, NJ
(609) 520-6393
Key Issues
• Causes of internal investigations, audits, and examinations.
• Attorney-client privilege and work product protection.
• Conducting internal investigations.
• Whether to provide a written report to the regulators.
• Utilization of outside consultants in an internal investigation.
• Preparing for an examination.
• Dealing with regulatory examinations and investigations.
• What to do and not to do when the examiners come calling!
6
What causes the need for an internal investigation,
audit, or examination problem?
• Consumer complaints.
• Examiner inquiry.
• Interagency referrals.
• Private litigation.
• Examples of examination issues giving rise to investigations:
• Customer Ponzi scheme.
• BSA/AML; safety and soundness; internal controls.
• Debit/credit add-on products.
• Third-party relationships management and monitoring.
• Robo signing/horizontal foreclosure review.
• Third-party relationships management and monitoring.
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Discussion
• Overview of the law regarding the attorney-client privilege and work product
doctrine, particularly in a corporate context.
• Practical considerations for in-house counsel.
• Q & A
• Keep in mind:
• basic purpose of the privilege: to encourage full and candid
communication between client and counsel.
• basic purpose of the work product doctrine: attorney’s need for privacy
in his or her work and the benefits that privacy brings to an adversary
system.
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• The Rule: Applies to communications made in confidence between a
client and his or her attorney for the purpose of obtaining legal advice.
• Assume nothing is privileged, then ask:
• Is it a communication that fits the definition?
• Does an exception apply?
• ERISA/fiduciary exception
• Crime/fraud
• Have we done everything we can to prevent a waiver?
The Attorney-Client Privilege
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Work Product Protection
Three-part test for fact and opinion
work product (FRCP 26(b)(3)):
• The materials or communications are of a nature
that qualifies for protection;
• They were prepared or obtained in anticipation
of litigation; and
• They were prepared by or for the party asserting
the protection, or that party’s attorney or other
qualifying representative.
Rule 26 - protection includes work of agents.
Work
Product
10
Work Product Protection (continued)
Key determination: anticipation of litigation,
or “an identifiable specific claim or impending
litigation at the time the materials were prepared”
• Some courts require that a specific claim be
asserted before the privilege applies. Leonen v.
Johns-Manville Corp., 135 F.R.D. 94 (D.N.J.
1990).
• Others hold that litigation need not be imminent,
provided there is “more than a remote prospect
of future litigation.” United States v. El Paso
Co., 682 F.2d 530 (5th Cir. 1982).
Work
Product
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Work Product Protection (continued)
Key determination: was the material produced because of the
prospect of litigation or for another purpose in the ordinary course of
business?
• Majority Rule – “Because of” test developed in Second Circuit extends work product
protection with respect to mixed purpose documents (business/legal)
• Extends to “documents containing analysis of expected litigation” whose “primary,
ultimate, or exclusive purpose is to assist in making the business decision.” United
States v. Adlman, 134 F.3d 1194 (2d Cir. 1998).
• As long as the document was not “prepared in the ordinary course of business” and
would not “have been created in essentially similar form irrespective of the litigation,”
the “fact that the document’s purpose is business related appears irrelevant to the
question of whether it should be protected.” Id.
• Minority Rule – “Primary motivation” test: If the primary motivation for creating the
materials is any purpose other than to assist in preparation for litigation, the work product
privilege is inapplicable. See United States v. El Paso Co., 682 F.2d 530 (5th Cir. 1982).
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Challenge: Legal Advice v. Business Advice
(or anything else)
• Commingled communications.
• Wearing two hats: a dilemma for in-house attorneys.
• Common 3-part analysis:
• For what purpose was the lawyer contacted?
• Could a non-lawyer perform this function?
• Did the client or lawyer acknowledge the nature of the in-house counsel’s
role?
• Making the in camera review easy.
13
Recommendation
• Segregate legal and business advice to the extent practicable. If not
possible, signal that legal advice is being given:
• “You asked for my legal advice about X. Here it is: . . .”
• Avoid over-designating communications as privileged.
• Avoid reflexively “copying” in-house counsel.
• Does not automatically make a communication/document privileged.
• Do so only purposefully.
• Be cognizant that acting in a business capacity may compromise the
privilege.
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Challenge: Internal Investigations
– Ordinary Course of Business or Legal Advice?
• Companies in heavily regulated industries (finance, healthcare, government
contractors) – need for compliance departments and/or “Code of Business
Conduct”.
• Compliance department often separate from legal department.
• Use of non-lawyers for investigations.
• Litigation imminent?
15
Recommendation
• Establish processes to identify “privileged” investigations.
• Involve a lawyer, preferably outside counsel.
• Clearly document investigation is for obtaining legal advice/anticipating
actual or potential litigation.
• Be mindful of implications for document preservation.
• Communicate privileged nature of investigation to employees when
applicable:
• Use Upjohn warnings.
• Enhanced Upjohn warnings after the Yates Memorandum.
• Confidentiality agreements disclose legal nature of investigation.
• Use findings in first instance to obtain/provide legal advice, not directly drive
business decisions.
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Challenge:
Waiver and Regulatory/Government Investigations
• Disclosing privileged information as part of a regulatory/government
investigation can result in a waiver.
• Once waived, always waived: the decline of the doctrine of selective
waiver.
• Nota Bene: The bank regulator privilege under 12 U.S.C. § 1828(x)(1).
• Side agreements regarding confidentiality are generally ineffective.
• Government’s recent use of crime-fraud exception – Madoff investigation.
17
Codification of Selective Waiver as to Bank Regulators
• “The submission by any person of any information to any Federal
banking agency, State bank supervisor, or foreign banking
authority for any purpose in the course of any supervisory or regulatory
process of such agency, supervisor, or authority shall not be construed
as waiving, destroying, or otherwise affecting any privilege
such person may claim with respect to such information under Federal or
State law as to any person or entity other than such agency,
supervisor, or authority.” – 12 U.S.C. 1828(x).
• Impact of the law.
• Challenges and concerns.
18
Bank Examination Privilege
A qualified privileged designed to protect communications between
banks and their examiners
•Effective supervision/regulation depends on candor by banks
•Limited to deliberative process material and does not cover factual documents
Who owns the privilege?
Scope of the privilege?
•12 C.F.R. 4.32 (definition of “non-public OCC information”).
• Documentary evidence.
• Testimonial evidence.
• OCC materials and materials that would not have been generated but for an
OCC request.
• What about internal discussions of OCC materials?
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Bank Examination Privilege
Duties of persons served with a request for production of privileged
materials.
•“Any person, national bank, Federal savings association, or other entity served with a
request, subpoena, order, motion to compel, or other judicial or administrative process
to provide non-public OCC information shall . . .” – 12 CFR 4.37(b)(3).
• 3 duties of persons served.
•Privilege log issues.
• What do you list as the reason for withholding responsive material?
Courts are permitted to override the privilege in response to a showing
of good cause by the requesting party.
•Five factor balancing test…
•See e.g., Lutzeier v. Citigroup, 2015 WL 7306443 (E.D.Mo. Nov. 19, 2015); Wultz v.
Bank of China Ltd., 61 F.Supp.3d 272 (S.D.N.Y. 2013).
20
Examiner requests for privileged materials.
OCC’s guidance on examiner requests for privileged information
•Examiners must consult with OCC Law Department before making any
request for privileged information.
•Examiners may request privileged documents “only where there is a material
risk exposure to the bank’s earnings and capital.”
•Examiners must limit the form and scope of request for privileged documents.
• Only that which is necessary to explore material risk exposure to
earnings and capital.
•Exchanges of privileged information must:
• Set forth the precise identity of the materials being provided.
• Confirm that the materials are being requested pursuant to OCC
examination authority – the production is not entirely voluntary.
• Confirm that confidentiality will be maintained. 21
Recommendation
• Control the decision - minimize surprise:
• Never assume the nature of review/investigation fails to implicate
privilege.
• Make waiver decision with appreciation for content of communications
to be disclosed.
• Review documents, segregate privileged documents and log them.
• Know who can waive: directors and officers. CFTC v. Weintraub.
• Outside of Ds & Os, typical agency principles apply.
• Investigations involving fair lending risk and/or fraud:
• Clearly document internal investigation is for obtaining legal
advice/anticipating actual or potential litigation.
22
Challenge: Waiver and Disclosures
to Outside Consultants and Auditors
• Sharing privileged information with outside advisers may result in waiver of
privilege.
• The “interpreter” standard: Is the individual’s participation necessary to explain
concepts to the lawyer? See, e.g., U.S. v. Kovel, 296 F.2d 918 (2d Cir. 1961).
• The “functional equivalent” doctrine: Privilege extends to counsel’s
communications with corporate consultants who are de facto employees. See,
e.g., In re Bieter Co., 16 F.3d 929 (8th Cir. 1994); In re Copper Market Antitrust
Litigation, 200 F.R.D. 213 (S.D.N.Y. 2001).
• Disclosures to outside auditors – U.S. v. Deloitte
• Extended work product protection to auditor-created document prepared in
course of determining appropriate reserves.
• Consistent with “agency” approach in Rule 26, court not concerned with who
created document; rather, focused on content and “because of” test.
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Recommendation:
• Ask if the function can be handled internally?
• Make consultants part of the “team.”
• Establish relationships with consultants through legal department or outside
counsel.
• Require confidentiality agreements.
24
Challenge: Waiver and Inadvertent Disclosure
• Turning over documents by mistake may result in a subject matter waiver of
the privilege.
• Fed. R. Evid. 502 – the middle-ground approach.
25
Recommendation
• Institute protocols to avoid inadvertent disclosure (e.g., use a separate
server and different e-mail addresses for the in-house group).
• Identify in-house staff connected with issue.
• Clearly state your intent to maintain confidentiality on documents and e-mail
prior to sending.
26
Challenge: Waiver Through Broad Dissemination
• Losing the privilege by publishing a privileged communication beyond those
who have a “need to know.”
• Some state laws (e.g., Illinois) maintain control group test.
• The Exxon and Merck examples.
27
Recommendation
• Educate clients on risks of dissemination beyond protected group.
• Sensitive documents should be marked “attorneys’ eyes only.”
28
Challenge: Communications with Former
Employees
• Communications between company and former employees are privileged if
they concern information obtained during the course of employment. Weber
v. Fujifilm Med. Sys., 2011 WL 3163597 (D. Conn. July 27,2011).
• When in communicating with former employee, counsel discloses trial
strategy, mental impressions, and/or legal conclusions, work product
protection might prevent disclosure.
• However, adversity with former employee may compromise privilege claims.
29
Recommendation
• Determine whether there is any adversity or potential for adversity with
former employee.
• Advise former employee that you – as counsel – represent the employer,
not the former employee.
• Limit interview discussion to matters within scope of former employees
employment.
30
Challenge: Waiver and Communications
Among Affiliated and Non-Affiliated Defendants
• Communications with co-defendants, even if affiliated companies, can waive
privilege.
• Mere status as co-parties in litigation does not always permit the sharing of
confidential information.
31
Recommendation
• Consider entering into a common interest or joint defense agreement.
• Understand the differences.
• Watch out for divergence of interests.
32
Protecting Privileged Information in Due Diligence
Treat Like Document Production –
Review, Segregate and Log.
Risk of Waiver Affects All Parties to
Transaction.
• Confidentiality agreements do not protect
against waiver.
Privilege is Not Avoidance Device.
Great Hill (Del. Ch.) – Privilege passes
from target corp. to surviving corp. in a
merger.
Privileged
Information
33
Preparing for an Examination
• What are the primary stages of an examination?
• Discovery: Examiners gain a fundamental understanding of the condition of the
bank, the quality of management, and the effectiveness of the risk management
systems.
• How? Document requests and interviews.
• Correction: Examiners seek bank management’s commitment to correct
supervisory concerns and verify that the bank’s corrective actions have been
successful.
• Periodic reporting pursuant to outstanding enforcement documents.
• Monitoring: Examiners respond promptly to risks facing individual banks and the
industry as a whole.
• Who are the players and their roles?
• Examiner-in-Charge.
• Supervisory Office.
• Law Department substantive areas.
34
Preparing for an Examination (continued)
• What type of examination is the OCC conducting?
• Full-scope examination.
• Targeted examination.
• Is there a particular issue that has sparked the OCC’s interest?
• Specialty consideration examination.
• Information technology examination.
• Asset management examination.
• BSA/AML examination.
• Consumer compliance examination (fair lending).
• CRA examination.
• Review policies and procedures regarding the relevant area of the
examination.
• Compare policies and procedures to OCC examiner handbooks and
examination checklists.
• Self-identify problems before the OCC notices them.
35
Dealing with Regulatory Examinations/Investigations
• Designate a central point of contact
to coordinate examination matters
and deliver requested information –
the “Examination Manager”.
• Manage the message.
• Avoid obstruction of the
examination.
• Examination manager is the chief
liaison with agency examiners.
• Designate a management official
who can provide an overview of the
institution’s operations and can
direct operational units under exam
review.
• Should include someone from the IT
function and the head of the BSA
compliance function.
• Make sure that the examiners’
requests are promptly and
properly met.
• Is the deliverable in the proper format?
• Does it convey your message – the right
message?
• Defending your position vs. educating
the examiners – What’s the difference?
• What about privileged material? Drafts?
• Have a plan for responding to
requests for privileged material
• Consult outside regulatory counsel
• Clearly document minutes of
meetings and forward to regulatory
counsel
36
What to do and not do
when the examiners come calling!
Know the rules: Must be familiar with
the examination policies and informal
guidelines of the regulators.
Involve counsel immediately:
Comments in meetings or supervisory
correspondence. Protection of privilege
and document control.
Review comparable enforcement
actions: What remedies have the
regulators sought in the past? Consider
comparable corrective action.
Do not overreact: Sometimes more
regulators/enforcement counsel are
brought than are necessary – Shock and
Awe!
Know the players: Learn the relative
authority and roles of the supervisory
staff.
The examiners do not just “go
away” – remember their unique role.
37
• Member of the Financial Services Regulatory Group
• Former Enforcement Counsel with the Office of the Comptroller
of the Currency, U.S. Treasury Department, Washington, D.C.
• Focuses his practice on financial services regulation,
enforcement defense, internal investigations, and litigation
matters
• Represents clients before federal law enforcement and
regulatory agencies, including the OCC, FRB, FDIC, CFPB, and
HUD, as well as various state authorities across the country
• Adjunct faculty teaching Regulation of Financial Institutions at
Villanova University School of Law
• Editor-in-Chief of the ABA’s Banking Law Committee Journal
• Vice-Chair, Banking Law Section, NJ State Bar Association
• Editor of the Reed Smith Financial Services blog –
www.financialregulatoryreport.com
Travis P. Nelson
Counsel
(609) 524 2038
Princeton, NJ
(212) 549 0236
New York, NY
38
• Co-practice leader of the Information Technology, Privacy & Data
Security Group
• Focuses his practice in the areas of data security, privacy, and
management
• Counsels clients on how to meet their obligations under, e.g., the
Gramm-Leach-Bliley Act (GLBA), the Fair Credit Reporting Act
(FCRA) and its Identity Theft Red Flags regulations, the Drivers
Privacy Protection Act (DPPA), Video Privacy Protection Act (VPPA),
and the dozens of other federal and state privacy laws and
regulations
• Chair, Privacy & Cyber Security Committee, Labor and Employment
Law Section, New Jersey Bar Association
• Member, International Association or Privacy Professionals
(CIPP/US)
• Board of Directors, Identity Theft Resource Center
• Instructor in Information Security Law, CISO Executive Education
and Certification Program, Carnegie Mellon University’s Heinz
College
Paul J. Bond
Partner
(609) 520 6393
Princeton, NJ
* 39