The Winter Bench & Bar Programs
By Bennette D. Kramer and Steven M. Edwards
This articles describes the programs presented at the Winter Bench and Bar Conference.
Southern District Judge Valerie Caproni led a panel on internal investigations. After providing an overview, she noted that this subject was of special interest to her because she had served as Deputy General Counsel of Northrop Grumman, with responsibility for internal investigations among other things. She began the discussion with a simple question: Why are we talking about this?
David O’Neill of Debevoise & Plimpton responded that the name of the game today is to get ahead of a problem and report it to the government before the government discovers the problem on its own. Sullivan & Cromwell’s Karen Seymour emphasized a company’s interest in remediating, observing that we have an “uber cooperation model” today. Frank Wohl of Lankler, Siffert & Wohl suggested that the advantages of essentially conducting the government’s investigation for it may differ depending on whether the client is an individual or the company. Judge Caproni added that when the client is a government contractor, a proactive approach can help to avoid debarment.
The panel discussed a series of videotaped hypotheticals, the first of which featured Wohl’s partner John Siffert as a whistleblower calling into a confidential hotline. Whenever this happens, the question is whether to follow up with an internal investigation. Seymour acknowledged that every call to a hotline cannot give rise to an internal investigation, but where there could be a serious problem it is a mistake to let sleeping dogs lie – especially where high level executives could be involved. Richard Strassberg of Goodwin Procter described whistleblowers as “the next boom industry” because of the recoveries available in qui tam actions, and he suggested that in most cases it is beneficial to the company if the whistleblower has counsel for the company to deal with.
The panelists agreed that it is generally a good idea to start an internal investigation with a narrow focus and then see where it leads. There should be an engagement letter that specifies any limitations, but it is important to follow-up on leads that are developed because a lawyer can be sued for malpractice or breach of fiduciary duty if there is a problem that the internal investigation did not uncover. In some cases, the scope of the investigation can be defined by the scope of the subpoena if one is served.
While normal outside counsel can conduct an internal investigation, that might not be prudent if that counsel had some contact with the underlying facts. The key is credibility with the regulators. It is also important for one person to be in charge of the investigation; an investigation should not be guided by a committee.
One issue that frequently arises is who in the company should have his or her own counsel. Seymour noted that the government generally will tell you whether an individual needs counsel, and it is often possible to use pool counsel for lower level employees. Strassberg stated that joint defense agreements are generally a good idea so long as they do not restrict the company’s ability to share information with the government, and it is standard practice to obtain an undertaking to repay any fees advanced to individual counsel if there is a finding of wrongdoing. Actual clawbacks are rare, but it has happened – Goldman Sachs’ demand that Rajat Gupta return his fees is a recent example.
It is the government’s current policy not to require a waiver of the privilege in a plea agreement, but the government nevertheless will require extensive disclosure of facts if the company wants to get credit. O’Neill observed that sometimes this results in the disclosure of facts obtained in an investigation under circumstances covered by the attorney-client privilege. When that happens, it is best to disclose only the facts without disclosing the underlying materials such as interview memoranda. Wohl observed that the key problem is maintaining the privilege in follow on civil litigation. Selective waiver is an option, but Strassberg cautioned that selective waiver does not work in most cases, although there have been a small number of cases that have recognized a common interest privilege between the government and the company. In most cases, private litigants have been very successful in getting investigation materials.
The Religious Freedom Restoration Act
Judge Brian M. Cogan of the Eastern District of New York chaired a panel including Noel J. Francisco of Jones Day, Professor Mark L. Movsesian of St. John’s University School of Law, and Federal Bar President-Elect David R. Schaefer of Brenner Saltzman & Wallman that discussed the Religious Freedom Restoration Act and the cases decided under the Act.
Professor Movsesian provided an overview of the history of religious freedom and the law, the Act, and Burwell v. Hobby Lobby Stores, Inc., decided by the Supreme Court in 2014. He explained that any analysis of a statute requires a balancing of the government’s interest and the burden on the individual’s First Amendment right to free exercise of religion. Under the Act, the government must have a compelling interest to impose any burden on the free exercise of religion and must use the least restrictive means to further that interest. The Act does not apply to states, only the federal government. The majority of individual states have enacted statutes that include the compelling interest test.
In Hobby Lobby, the Court addressed the contraceptive mandate in the Affordable Care Act. The Court, with Justice Samuel A. Alito writing for the 5-4 majority, held:
1. for-profit, closely-held corporations are persons who can exercise religion;
2. the mandate burdened exercise of religion by requiring employers to pay for drugs or face economic consequences; and
3. the provision that the government would pay for the contraceptives, if the employer objected on religious grounds, was not the least restrictive means of furthering the government’s interest.
Next, Steven Edwards and Steven Hyman gave a mock argument on a hypothetical situation involving a publicly traded corporation, the Family Medical Leave Act, and a request for leave for a sex change operation.
David Schaefer noted that before Hobby Lobby, the Act was used to protect minorities, such as doctors who did not want to perform abortions. Now, corporations are making claims. People see the Act as an opportunity to protect those who do not like same sex marriage.
Noel Francisco stated that the issue in Hobby Lobby was not the requirement of having to pay money, but the moral objection to signing the exemption form because they are forced to act in violation of their beliefs. Schaefer said that you have to look at the burden on third parties, i.e., the women who may not get contraceptive coverage. Francisco agreed that the unanswered question in Hobby Lobby was the rights of employees who were entitled to receive benefits under the Act against the rights of corporations to exercise religious freedom. He said that the majority understood that this was an issue that would have to be dealt with in the future.
Balancing the interests of enforcement priorities and privacy was the subject of the next panel, chaired by Southern District Judge Richard Sullivan. Judge Sullivan reviewed the law on searches incident to arrest leading up to the Supreme Court’s recent decision in Riley v. California. Prior to Riley, warrantless searches generally were permissible if they were incident to an arrest. In Riley, a unanimous Court ruled that a cellphone search requires a warrant, even if it is incident to arrest. The amount of private information stored on cellphones prompted the Court to depart from past precedent in this area.
Georgetown Professor Marc Rotenberg explained the technology involved and noted that technology is always ahead of the law but the law catches up. In Olmstead v. United States, Justice Brandeis focused on the expectation of privacy for telephone conversations which, in his view, resulted in the need for a warrant to conduct a wiretap. He analogized it to a letter in a sealed envelope. Riley simply brought Olmstead into the modern age.
Travis LeBlanc of the Federal Communications Commission, who was on the losing side in Riley, acknowledged that getting a warrant is not very challenging. The difficult part is extracting the data, and it is very important to make sure the data is not erased before it is extracted. One issue that came up in Riley was remote wiping. One solution is to use a radio-frequency shielded bag to impound the phone while the warrant is being sought.
The panel also discussed these issues in the light of United States v. Jones, where the Supreme Court ruled that the attachment of a GPS to a car was a search under the Fourth Amendment that could require a warrant. In the digital age, the Supreme Court seems to be more interested in protecting privacy interests than before. The panel discussed the implication of these rulings on the so-called “third party waiver” doctrine articulated by the Court in Katz v. United States, where the Court ruled that there is no Fourth Amendment interest once the information is given to a third party, as in a banking transaction. David Howard of Microsoft suggested that a distinction can be made between content and metadata, and a warrant should not be required for metadata.
Luke Dembosky of the Justice Department noted that the government prefers to use subpoenas rather than warrants. A subpoena is a much quicker and easier way to gather data when you are dealing with issues like a hacker gaining access to a million computers. A subpoena also may permit the government to seize a physical object even though it has not yet found evidence of a crime.
Rotenberg believes that the Court may cut back on the third party waiver doctrine. All panelists agreed that it would be good for Congress to pass new laws to deal with this area, but LeBlanc pointed out that it takes five or six years to pass a law and technology generally changes in that period of time. Rotenberg, who has been involved in drafting statutes, believes that the key is to focus on the data in question as opposed to the technology that delivers it.
The panel also talked about hackers. LeBlanc explained that there are two types of hackers: individuals and countries. The FCC focuses on the consumer protection angle and encourages companies to think in advance about data breaches. Howard emphasized that every company needs to be concerned about this because they have a responsibility to protect their customers from data breaches. Rotenberg believes that companies collect too much data, which then makes it more difficult to protect. He thinks that there should be federal legislation in this area, although he does not think it should pre-empt the field. The federal legislation should establish a baseline, which the states should be able to modify and improve. LeBlanc cited California as a good example of what states can do.
The Downfall of Secret Foreign Banking
Judge Michael P. Shea of the District of Connecticut introduced the panel and provided some background on Swiss banking secrecy. Judge Shea commented that Swiss bank secrecy laws have long roots and were key to thwarting Nazi efforts to seize money belonging to German Jews. In 2001, the United States, through the Qualified Intermediary Program, began seeking the records of U.S. account holders from certain Swiss banks, including UBS. In February 2009, UBS admitted to aiding and abetting tax evasion and turned over the names of thousands of account holders. The U.S. then criminally prosecuted U.S. taxpayers and set up the voluntary disclosure program offering amnesty.
In 2013, Wegelin & Co. pled guilty and paid $20 million in restitution plus forfeiture. Wegelin & Co. was founded in 1741, did not have any U.S. branches, but used a Connecticut bank to transfer money. As part of its guilty plea, Wegelin admitted it knew its conduct was wrong, but it believed it would not be prosecuted because it had no U.S. branch and its conduct was lawful in Switzerland. Following its criminal conviction, Wegelin collapsed. After August 2013, Swiss banks could enter into the Justice Department’s non-prosecution program as long as they did not break U.S. law in the future.
A series of skits illustrated the efforts of American citizens to escape detection of their Swiss accounts and subsequent efforts by the government to obtain disclosure of those accounts. Following the first skit segment, Sharon McCarthy of Kostelanetz & Fink noted that in opening his account in 1980 an American citizen had lied about his nationality, used a Panamanian corporation to open the account, had all account-related mail held by the bank, and failed to report the account on his tax returns. Dr. Cedric Chapuis of Bärr & Karrer in Geneva, Switzerland, stated that the Swiss banker had violated Swiss law because he failed to ask about the origin of the funds and the gold bars used were suspicious assets. The fact that this person was evading taxes in the U.S. and France was not his concern and was not against Swiss law. Kathryn Keneally of DLA Piper, formerly Assistant Attorney General for the Tax Division of the U.S. Department of Justice, said that it was unclear whether the Swiss banker had broken U.S. law by facilitating U.S. tax evasion because willfulness is required for both conspiracy and facilitating tax evasion.
In the next skit segment, the account holder received a letter from the Swiss bank telling him that his name would be turned over to the U.S. government. Amy Walsh of Morvillo LLP said that the account holder could do nothing and wait for the IRS to find him or enter the voluntary disclosure program and cooperate with the IRS, including disclosing the facilitator in Switzerland. Because the account holder’s nondisclosure was willful, he would not be eligible for the lowest penalty. Instead, he would have to pay a 20 percent penalty along with a 27.5 percent FBAR (Report of Foreign Bank and Financial Accounts) penalty on the year with the highest balance. Chapuis said that from the Swiss point of view the U.S. program to determine the identity of account holders was compatible with Swiss law. The Department of Justice sought the account information and the client name through a treaty request. The bank gave notice to the account holder before complying with the treaty request. Keneally said that by statute any U.S. person who challenges the U.S. treaty request must report such an application to the DOJ.
As of July 2014, the FBAR penalties rose to 50 percent for U.S. individuals with accounts in certain banks that were cooperating or under investigation. Chapuis said that cooperation created problems for the Swiss banks that have confidentiality obligations under Swiss law, which makes it a criminal offense to cooperate with foreign authorities. Because the U.S. and European authorities have put pressure on Switzerland, the Swiss have had to adapt. Chapuis believes that rogue bankers pushed clients and created a situation in which the whole industry has suffered. Keneally said that 14 Swiss banks already were under criminal investigation and the number is increasing. It is clear that the Swiss government and the banks just want the investigation to end.
Fraud on the Market
Judge Edgardo Ramos of the Southern District of New York chaired a panel on the efficient market theory in securities class actions, which was the subject of the recent Supreme Court decision in Haliburton Co. v. Erica P. John Fund. In Haliburton, the Court declined to overrule Basic v. Levinson, which endorsed the fraud on the market theory, but it held that a defendant may rebut the presumption of reliance by showing that an alleged misrepresentation did not impact a stock’s price. Judge Ramos kicked off the discussion with a review of Rule 23 and the requirement that common issues must predominate over individual issues for a class to be certified.
Bob Giuffra of Sullivan & Cromwell discussed the statutory framework surrounding the efficient market theory. When Congress passed the securities laws, it created a private right of action for cases brought under §11 and §18(a). The courts then created an implied private right of action permitting suits to be brought under §10(b) and incorporated economics into the analysis by adopting the fraud on the market theory, which creates a presumption that stock purchasers rely on the integrity of the price in an efficient market and, therefore, individual reliance need not be shown. This enables plaintiffs in securities suits to satisfy the predominance requirement in Rule 23. Giuffra questioned whether it is good policy for courts to create these theories, which have given rise to a huge class action business, in the absence of congressional action.
Kristin Feitzinger of Cornerstone Research described the economic theory underlying the fraud on the market presumption. In securities cases, experts generally conduct a time and events study in which they attempt to determine whether there is a statistically significant relationship between news about a company and movements in the stock price. If there is, then it is assumed that all information is reflected in the stock price, and that price will be inflated if the information includes a misrepresentation. An investor who relies on the integrity of the price will be misled by the misrepresentation even though that investor actually may not have seen it. Feitzinger observed that the efficient market theory may be flawed because it assumes that a market is either efficient or not efficient, and economic literature suggests that this is not a binary question. Giuffra added that dark pools and computerized trading have made markets less efficient.
Donald Hall of Kaplan Fox & Kilsheimer disagreed with this and argued that everyone relies on the integrity of the price and assumes that it has not been affected by fraudulent information. He also pointed out that Congress had an opportunity to do away with the fraud on the market theory when it passed the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The PSLRA imposed other restrictions, as a result of which more than 50 percent of securities class actions are dismissed, but Congress did not alter the basic approach to class certification under Rule 23 or the fraud on the market theory.
The Pentagon Papers Case
The program started with a reenactment of the 1971 Pentagon Papers case, following the case from the district court through the Supreme Court decision. After the reenactment, Judge Paul A. Crotty of the Southern District of New York, Neal K. Katyal of Hogan Lovells US, and the Honorable Robert S. Smith, a retired Associate Judge of the New York Court of Appeals and now associated with Friedman, Kaplan, Seiler & Adelman, discussed issues relating to secrecy and national security, focusing on the release by Wikileaks of national security information. Judge Smith said that the people who release information can be regarded as whistleblowers and traitors at the same time. Treason is defined by the Constitution as providing aid and comfort to the enemy – neither Daniel Ellsberg in connection with the Pentagon Papers nor Snowden and Manning in connection with the Wikileaks release fit the definition of traitor. Katyal explained the difference between Manning and Snowden on the one hand and Ellsberg on the other. Manning and Snowden made a wholesale document dump heedless of the harm to the U.S, while it would be hard to make a case in connection with the Pentagon Papers that the U.S. was harmed. Both Ellsberg and Manning were challenging authority and each had signed an agreement not to disclose classified information. As a result of the Wikileaks disclosures, the government will tighten access to information and less information will flow.
The case of the air marshal who disclosed that the TSA had cancelled all air marshal flights is an example of the government’s effort to stop release of sensitive (rather than classified) information. The Supreme Court, protecting the whistleblower, held that the Department of Homeland Security could not make up its own rules regarding sensitive information. However, there is no whistleblower protection for government employees like Ellsberg and Manning who disclose classified information.
Judge Smith explained that there is a difference between the government employee who steals classified information and a person who disseminates such information. The disseminating entity is treated more favorably, but the prior restraint cases do not apply to a source with a government contract. Katyal stated that a journalist who induces the disclosure of classified information falls under the Espionage Act as opposed to a journalist who just publishes information that has been given to him or her. Wikileaks may be different because its dump of information served no journalistic function and there was no good faith effort to distinguish between harmful and non-harmful material as Ellsberg and The New York Times tried to do with the Pentagon Papers.
Conversation with Justice Alito
On the last day of the programs, Second Circuit Judge Richard Wesley sat down for an informal conversation with Supreme Court Justice Samuel A. Alito, Jr. (with an audience of 150 people watching). Justice Alito observed that the Court has a particular way of doing things and there are many traditions. “It is like a Thanksgiving dinner that never ends.”
Justice Alito was led to a career in the law by his passion for debate, which began in junior high school. They would start with a national topic, which would be debated all year. This gave the students an opportunity to argue both sides of the issue, which Justice Alito found to be a “fascinating” experience.
Justice Alito went to Princeton and then to Yale Law School. After law school, he clerked for Third Circuit Judge Leonard Garth in Newark, which triggered a desire to work for the U.S. Attorney’s office and ultimately become a judge. Justice Alito realized that ambition, working first as an Assistant U.S. Attorney in Newark and later becoming the U.S. Attorney and, ultimately, a Third Circuit judge.
When President George H.W. Bush nominated Justice Alito to the Supreme Court in 1990 he was surprised because, after the interview, he thought he would be rejected. Among Justice Alito’s favorite cases are the Free Exercise cases under the Religious Freedom Restoration Act, including a case decided earlier this year in which the Court ruled that a prison could not prohibit a Muslim from wearing a beard. His least favorite cases are the asylum cases, which he finds very troubling because they come down to a credibility determination that can have a substantial impact on a person’s life.
Among Justice Alito’s favorite times on the bench were the brown bag lunches on Fridays when he was on the Third Circuit. Justice Alito’s office was in Newark, so he often ate with the district court judges who sat in that courthouse. According to Justice Alito, they would sit around and complain about things that the Third Circuit had done. They would also predict whether he was going to be reversed by the Supreme Court, at times with embarrassing accuracy, Justice Alito said.
Justice Alito thinks it is important to recognize that the circuit courts and the Supreme Court have different perspectives. The primary job of a court of appeals is to decide concrete cases. The Supreme Court does not take cases for the purpose of error correction; it takes cases for the purpose of deciding important issues of law.
Justice Altio says that when he was on the Third Circuit, he yearned for advocates who really understood the law. That is no longer an issue on the Supreme Court. The Supreme Court not only sees the best advocates in the country, but they receive a lot of amicus briefs, which Justice Alito finds very helpful because they provide context.
Justice Alito is not in the certiorari pool, where cases are divided up among clerks to make recommendations on which petitions to grant. Justice Alito’s clerks review every certiorari petition, although they do not write memos on each one. Justice Alito feels that this approach provides an opportunity for him to take a second look, and it is a way of making sure that nothing slips through the cracks.
Justice Alito acknowledges that the number of cases decided by the Court each year has gone down, and he says that no one is really sure why that is the case. No one has ever suggested to him that there is a limit on the number of cases that the Court should hear. If anything, the Justices would like to have more cases.
Justice Alito noted that in petitioning for certiorari, the way the questions are framed is very important. When a question goes on for pages and has too many facts, it is unlikely that the petition will qualify. When the questions are too sparse, that is not helpful either. It is important to find a happy medium, in Justice Alito’s view.
Justice Alito hires his own clerks and does not involve his existing clerks in that process at all. He describes his approach as “impressionistic.” He is not necessarily interested in hiring someone who was first in his class. He is more interested in hiring good writers. Justice Alito observed that undergraduate education these days does not have the emphasis on writing that it once had. He relies heavily on the application letter, which can be very revealing. He gives less credence to writing samples, which he assumes are heavily edited.
Justice Alito described the atmosphere on the Court as very collegial. He observed that one of the most difficult things is determining how far to go along with an opinion he is not comfortable with. Consensus is important, but it is also important to reach a clear decision. Justice Alito generally does not write a separate opinion unless he really has something to say. Justice Alito will rely heavily on his clerks when he writes a majority opinion because he is speaking for the Court, but he usually writes dissents and concurrences himself because they are more personal statements.
Justice Alito views himself as a textualist, and he thinks there is a trend toward textualism on the Court. “Language is more important today than it was in the 1970s,” in his view. Justice Alito acknowledges that sometimes there is purposeful ambiguity, which he thinks is unfortunate and an abdication of legislative responsibility. He told a story about a conversation with a bill drafter, where he told the bill drafter he had struggled over the meaning of slightly different words in a complicated bill. The bill drafter responded: “Oh, we meant the same thing, we just got tired of using the same word.” Being a Justice of the Supreme Court is probably not easy, but one gets the impression that Justice Alito is thoroughly enjoying it.
Supreme Court Review
Judge Wesley also moderated a discussion of Supreme Court cases from this term with Miguel A. Estrada of Gibson, Dunn & Crutcher and Neal Katyal of Hogan Lovells US.
First, Katyal described trends and data in Supreme Court practice. Estrada then reviewed criminal cases. In North Carolina v. Heien, the Court held (8-1) that a police officer’s reasonable mistake of law giving rise to reasonable suspicion may justify a traffic stop under the Fourth Amendment. The car was stopped because one of the brake lights was out and a subsequent search uncovered drugs. In North Carolina, cars are only required to have one brake light, but the court ruled the officer’s mistake of law was reasonable. In Yates v. United States, Yates was charged with throwing undersized fish overboard to prevent the government from seizing them, falsely stating that all the undersized fish measured at sea were aboard and violating the Sarbanes-Oxley Act by destroying a “tangible object” with the intent to obstruct the investigation. Estrada said that the Supreme Court had tried to bury the case, and Justice Scalia asked if there were any adults at the Justice Department. Following the conference, on February 26, the Supreme Court reversed Yates’ conviction, holding that fish were not “tangible objects” under Sarbanes-Oxley.
Katyal provided insight into two First Amendment cases undecided at the time. In Elonis v. United States an estranged husband was convicted of posting rap lyrics about killing his ex-wife and an FBI agent who had visited him at home. He was charged with transmission of a communication containing threats to injure a person, was convicted, and the Third Circuit affirmed, holding that 18 U.S.C. § 875(c) incorporates a “reasonable person” standard and does not require proof of subjective intent. Reed v. Town of Gilbert involves a town ordinance regulating signs. Petitioner The Good News Community Church’s sign directing people to its church services violated the ordinance, and the question before the Court is whether the town’s lack of discriminatory motive and content-neutral municipal sign ordinance comported with the First Amendment.
Estrada talked about King v. Burwell, the case challenging federal tax-credit subsidies for health insurance paid to individuals purchasing health care from exchanges established by the federal government. The language of the statute provides for the tax credit to be paid to individuals enrolled in an exchange established by a state. According to Estrada, the goal of the lawsuits is to bring down the Affordable Care Act. The primary issue is whether a federal exchange is an exchange set up by a state. Katyal described the case as a real fight between statutory purists and the policy people looking at the real purpose of the statute.
Finally, Katyal and Estrada examined the same sex marriage cases. Katyal noted that the issue has moved very fast and the Court will consider four cases from the Sixth Circuit. The Supreme Court and other courts have been moving steadily in one direction and now will have to decide whether, under the Fourteenth Amendment, states have to issue marriage licenses to two people of the same sex and whether the Fourth Amendment requires a state to recognize a marriage between two people of the same sex when their marriage was lawfully licensed and performed out of state. In connection with the refusal of the Court to stay the federal judge’s order to Alabama to issue marriage licenses to same sex couples, Justice Clarence Thomas dissented and said that the Court had already made up its mind.