by Robert N. Rapp
In cases whether allegedly
incriminating statements given in the course of interviews during an internal
investigation conducted by the Audit Committee with the assistance of outside
counsel and forensic accountants should be admitted as evidence against a
person in his upcoming trial. Such ruling may significantly impact internal
investigations conducted by public companies into potential wrongdoing or
issues raised in government investigations.
In a criminal case alleging
multimillion-dollar securities and accounting fraud brought against the former
Executive Vice President of Sales of Carter's Inc., a Georgia federal court is
poised to determine whether allegedly incriminating statements given in the
course of interviews that were part of an internal investigation conducted by
the Audit Committee of the Board of Directors with the assistance of outside
counsel and forensic accountants should be admitted as evidence against him in
his upcoming trial. The former officer, Joseph Elles, is charged with executing
a scheme to defraud Carter's and its shareholders by concealing and lying about
an accounting fraud, causing false SEC filings and falsifying company records.
Elles consented to be interviewed by Carter's outside lawyers as part of an
internal investigation launched by the company into accounting irregularities
and relationships with wholesale customers that ultimately resulted in the
company restating earnings. The Government alleges that Elles made significant
admissions during the interview, and Elles has asked the court to bar the use
of his statements on grounds that they were coerced, and that the company was
effectively acting as an agent of the government in forcing him to waive his
Fifth Amendment constitutional right against compelled self-incrimination.
The government has opposed Elles' attempt to suppress his statements, and
indeed has most recently taken the further step of affirmatively asking the
court to admit his interview statements into evidence at trial as
"incriminating admissions." To this, Elles has mounted a further
attack articulated on October 31, 2012, that doing so could, among other
things, pervert the jury's perception of events out of which the charges
against him arise. The ruling by the court on all issues raised by Elles may
significantly impact internal investigations conducted by public companies into
potential wrongdoing or issues raised in government investigations.
Although companies undertaking internal investigations involving interviews of
current and former employees take steps to address procedural fairness and the
potential consequences of voluntary participation, in this case Elles makes a
fundamental constitutional attack on the process. Corporate internal
investigations, and the voluntary disclosure of their results, have grown to be
important proactive and cooperative undertakings by companies when dealing with
wrongdoing that exposes the company itself to potential enforcement action.
Constraints now being addressed by the Georgia federal court, if imposed, could
not only significantly reshape the process, but also impact the effectiveness
of internal investigations generally.
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Robert N. Rapp is a partner in the Capital Markets Regulatory,
Enforcement and Litigation practice at Calfee, Halter & Griswold
LLP, Cleveland, Ohio. His contributions to legal scholarship include
numerous published articles addressing securities and financial market
regulatory topics, many of which have been cited by state and federal
courts, including the United States Supreme Court. He has served on the
adjunct faculty of the Case Western Reserve University School of Law,
and as Distinguished Practitioner in Residence at the Cornell Law
School. Mr. Rapp is a former member of the NASD Legal Advisory Board,
and is currently a public member of the Market Operations Review
Committee of the Nasdaq Stock Market. He has twice served as Public
Chair of the Enforcement Advisory Committee of the Ohio Department of
Commerce, Division of Securities. A graduate of Case Western Reserve
University (B.A., 1969) and the Case Western Reserve University School
of Law (J.D., 1972), Mr. Rapp also holds a Masters of Business
Administration from the Cleveland State University School of Business
(1989). Mr Rapp authors Matthew Bender's Blue Sky Regulation and is a
contributing author to Federal Securities Act of 1933.