Don't be fooled by the Department of Justice's failure to prosecute financial fraud following the economic meltdown of 2008. White-collar prosecutions actually are on the rise. And now that the presidential election is over, expect even more.
As a result, executives must avoid behaviors that can, even inadvertently, draw them into a federal criminal investigation. While every white-collar case is different, each shares common origins and causes. In no particular order, here are five ways to protect yourself from being accused of a white-collar crime:
1. When you hear the corporate Miranda warning, it's time to get your own lawyer.
Most executives assume their communications with corporate counsel about a legal problem are privileged, and that they are free to talk about problems at the company. They would be only half right.
In the seminal Supreme Court case Upjohn Co. v. United States, the court held that communications between company counsel and executives of the company are privileged, but critically, the privilege is enjoyed by the company, not the employee.
What does that mean for you, the executive? If the government were to come knocking, the company alone would determine whether those conversations are treated as privileged. And while you may expect loyalty from your employer, know that corporations in that situation face tremendous pressure to waive attorney-client privilege, and for many, the decision is an easy one: Tell the government whatever it wants to know in the hopes the company will be spared.
As a result, there has been an increased focus on so-called Upjohn warnings (otherwise known as the "corporate Miranda"), which require company counsel to advise employees that he or she represents the company.
Most executives dismiss this admonition as boilerplate legalese and assume the company will treat their conversation as confidential. But the reality is that you likely need to obtain your own lawyer who will look out solely for your interests. Company counsel will never say upfront that you need your own lawyer because his or her goal is to elicit information.
Bottom line: If you hear the corporate Miranda warning, you should consult with your own lawyer.
2. Everything you say over email can and will be used against you.
Another rule in day-to-day behavior that will help you steer clear of white-collar prosecutions is to be careful about what you say over email. Know this fact: Virtually every email you send is preserved somewhere and will remain available to the government for years to come.
Avoid aggressive or loose dialogue over email. Emails containing statements like "killing the competition," "checking with my inside sources," and, worse, "we shouldn't be talking about this in writing," can, years later, be made to look sinister and corrupt regardless of good-faith intent or meaning. In every white-collar case, the government zeros in on a handful of colorful emails that make the person look like they're deserving of punishment.
Bottom line: Delicate subjects should be handled face-to-face or via telephone; avoid locker room talk over email; and assume every email you send will be read later in the worst possible light.
3. Be wary of discretionary accounting.
Another risk factor is the degree to which your profitability depends on accounting. If you live by the sword of accounting, you may die by it.
If there is a lot of discretion involved in how your company accounts for revenue, there will be a tendency for prosecutors later to say that management either pressured or deceived the accountants into: (1) mark-to-market accounting (as with Enron); (2) ignoring non-cash book entry expenses (as in the stock option backdating prosecutions); or (3) devising percentage completion accounting (as with the revenue recognition software cases), so as to mislead the public as to how well they were doing.
Anything that smells like a clever accounting maneuver will later, in the harsh light of a business failure, look like fraud. While most non-accountants (and even some accountants) think that accounting is boring, esoteric and elevates form over substance, accounting fraud is a staple of the white-collar world, and, more often than not, it is non-accountants who find themselves being accused of accounting fraud.
Bottom line: Don't assume that just because you are not responsible for accounting, you can't be charged with accounting fraud. If accounting decisions are important to the success of your business, make sure you get clear guidance from the experts on what information needs to be disclosed to the accountants and auditors.
4. If something doesn't feel right, it probably isn't.
Many white-collar criminal defendants can pinpoint a definitive moment in the past where they thought something was amiss in their business dealings, and they wanted to speak up, but for one reason or another, decided to stay quiet. Inaction can lead to trouble just as easily as enthusiastic misconduct. Prosecutors do not limit their ire to the architect of a crime; rather, they look to ensnare everyone who was complicit.
White-collar statutes generally do not recognize the concept of "relative responsibility." In most cases the least culpable member of a criminal conspiracy is punished just as harshly as the most culpable. Corporate executives are assumed to know everything that is going on at their company, and it is difficult to argue that you didn't have enough information to know that something was a fraud.
Bottom line: If something feels shady or seems too good to be true, it almost certainly is. Trust your instincts and affirmatively remove yourself from the situation.
5. The attempted cover-up is usually worse than the crime.
Think of Martha Stewart or Barry Bonds, who were convicted not for the crimes that initially led investigators to their doorsteps, but for their attempts to cover up their actions.
A failed cover-up attempt often becomes the focus of the prosecution because it is easier to prove than the crime, and because the government can use the cover-up as a proxy for criminal intent. Prosecutors will argue that the defendant knew what he or she did was wrong because they tried to cover it up by lying about their actions, deleting emails, contacting people to line up their stories, etc. These are things ordinary people can understand as indicative of a guilty conscience, which often becomes the default mental state for all the conduct that preceded it.
Keep in mind that in most white-collar cases, the primary defense is, "I never thought I was doing anything wrong at the time." But that defense gets seriously compromised if the first step taken after being alerted to a potential criminal investigation is to lie about your actions, or try to rewrite history.
If you become involved in a criminal investigation, do not try to finagle your way out of it. It's best to hire a lawyer and say nothing, even if it means taking a minor public relations hit. The problem with trying to "clear your name" at the inception of the investigation is that you don't know what evidence the prosecutors have, and it is easy to make statements that you think are harmless but come back to haunt you during the investigation.
Bottom line: One of the best ways to avoid becoming a white-collar criminal is to listen to your criminal defense lawyer, who will tell you not to talk to anybody other than him or her.