Surviving a Congressional Investigation

The kickoff meeting of the Financial Crisis Inquiry Commission earlier this month, impaneled to root out the causes of the Wall Street meltdown in 2008 and 2009, is only one of many Washington-backed investigations to come this year. Corporate executives should plan accordingly.

Executives from Wall Street have already been called before the FCIC to testify, in an exercise that was one part inquiry and one part political theater. Michael Bopp, a partner at the law firm Gibson, Dunn & Crutcher, recently hosted a Webcast on the FCIC’s ambitions and other congressional investigations likely to pull Corporate America into their orbit. “Make no mistake: The [FCIC] understands that its responsibility goes well beyond taking a look at what went wrong within the financial regulators of the government,” he said. The panel plans to pursue any companies that it believes “participated in the markets when the financial crisis occurred.”

FCIC officials have said they plan to explore more than 20 areas of inquiry related to the financial crisis. The issues that have received the most attention so far, Bopp said, include executive compensation, derivatives, risk management, and credit rating issues—key areas of focus that will likely “give clues to where they may be going in the future.”

Levine

Congressional investigations work in a similar manner as the FCIC, where a committee chairman sets the agenda as he deems appropriate. In some instances the chairman might want to spotlight what he believes to be “an extremely important issue,” said Mel Levine, another Gibson Dunn lawyer speaking at the Webcast. Other investigative ideas might come from sources such as agencies’ inspectors general, the Government Accountability Office, or news reports.

In other instances, an investigation may arise from a combination of both. For example, the attempted Christmas Day airliner bombing may prompt more security-related hearings, “and those issues can impact companies sometimes very significantly,” said John Williams, chief investigator of the U.S. Senate Committee on Commerce, Science, and Transportation. Congress may decide, for instance, to declare more rules for greater security at chemical plants.

Regardless of how a congressional investigation gets started, companies that find themselves in the crosshairs must give the matter full attention. Congressional investigations are their own “unique institution,” Levine said, and preparation for them should be “every bit as thoughtful, detailed, extensive, and detail-oriented as preparation for a trial.”

“Make no mistake: The [FCIC] understands that its responsibility goes well beyond taking a look at what went wrong within the financial regulators of the government.”

—Michael Bopp,

Partner,

Gibson, Dunn & Crutcher

One significant mistake would be to assume a congressional investigation will have the same look and feel as a regulatory probe launched by the executive branch—not so, Williams warned. “There are different authorities, different powers, and more importantly different goals that then lead to different ways in which a congressional committee or the FCIC, for example, will carry out its investigation,” he said.

One of the biggest differences between a congressional investigation and those of the executive branch or a court is that rather than having an independent arbiter (usually a federal judge, if it comes to that) ruling on objections or disagreements, the committee chair “generally holds all of the cards,” Levine said. The congressional committee’s authority ultimately flows from the court of public opinion rather than a court of law, so committees have wide latitude to create and interpret rules as they need.

In other words, if a company receives a deposition or document request from an investigative committee and doesn’t reply promptly (or even just asks for an extension), don’t expect the committee to respond with a notice expressing its unhappiness, Williams said. That notice may well be delivered by the local media instead.

Bopp

No matter how inconvenient the timing, a congressional investigation must be carefully considered, Bopp said. Even if the company believes the executive summoned to appear before the committee is the wrong person (say, the CEO is summoned but has no knowledge of the topic in question), “somebody needs to get on the phone with the committee, and start talking it through,” he said.

IN TIMES OF CRISIS

The FCIC is charged with conducting a comprehensive examination of 22 specific and substantive areas of inquiry related to the financial crisis. These include:

fraud and abuse in the financial sector, including fraud and abuse towards consumers in the mortgage sector;

Federal and State financial regulators, including the extent to which they enforced, or failed to enforce statutory, regulatory, or supervisory requirements;

the global imbalance of savings, international capital flows, and fiscal imbalances of various governments;

monetary policy and the availability and terms of credit;

accounting practices, including, mark-to-market and fair value rules, and treatment of off-balance sheet vehicles;

tax treatment of financial products and investments;

capital requirements and regulations on leverage and liquidity, including the capital structures of regulated and non-regulated financial entities;

credit rating agencies in the financial system, including, reliance on credit ratings by financial institutions and Federal financial regulators, the use of credit ratings in financial regulation, and the use of credit ratings in the securitization markets;

lending practices and securitization, including the originate-to-distribute model for extending credit and transferring risk;

affiliations between insured depository institutions and securities, insurance, and other types of non-banking companies;

the concept that certain institutions are ‘too-big-to-fail’ and its impact on market expectations;

corporate governance, including the impact of company conversions from partnerships to corporations;

compensation structures;

changes in compensation for employees of financial companies, as compared to compensation for others with similar skill sets in the labor market;

the legal and regulatory structure of the United States housing market;

derivatives and unregulated financial products and practices, including credit default swaps;

short-selling;

financial institution reliance on numerical models, including risk models and credit ratings;

the legal and regulatory structure governing financial institutions, including the extent to which the structure creates the opportunity for financial institutions to engage in regulatory arbitrage;

the legal and regulatory structure governing investor and mortgagor protection;

financial institutions and government-sponsored enterprises; and

the quality of due diligence undertaken by financial institutions

Source

Financial Crisis Inquiry Commission.

The congressional committee may be open to negotiating the point, depending on the purpose of the hearing. If the committee is looking to speak with the person accountable and that person is the CEO, then the company likely has no room to maneuver, Williams said. If the hearing is only for information-gathering purposes, the chances are better.

Regardless, companies should always raise whatever concerns they might have (albeit diplomatically) because different committees have different approaches. At the U.S. Senate Committee on Commerce, Science, and Transportation, for example, “we certainly exercise our discretion all the time and try to understand what the situation is and make sure that we’re aware of what else is going on,” Williams said.

If necessary, document requests can result in a subpoena, which is enforceable in three ways: criminal, civil, or contempt (after a vote of full House and Senate). While both the House and Senate have subpoena power, “seldom is a situation so dire that a committee needs to resort to contempt in order to enforce a subpoena,” Levine said. And in some cases, an employee actually wants a subpoena issued before testifying before a committee so he can protect himself legally, Bopp noted.

Committees have differing approaches to attorney-client privilege as well. In general, however, Congress doesn’t believe it has an obligation to honor attorney-client privilege. Don’t expect the courts to bail you out of an attorney-client dispute, Bopp said; the Supreme Court has never ruled on whether Congress has to honor the privilege.

Trade secrets and work-product protections won’t necessarily hold much water with a congressional investigation either. “You should not assume that documents and communications that are privileged in other contexts will necessarily be protected in the context of a congressional investigation, because that is often not the case,” said Bopp.

Neither should companies assume that because a committee has taken one approach in the past, it will continue to use that approach in the future. Advances in technology are only one example of how committees are changing their investigative styles. In just the last few years, a few committees have upgraded to electronic databases—which means that instead of trolling through hundreds of paper documents, they can now troll through millions of electronic ones, Bopp said. “It’s going to change the way that congressional committees do document requests, and the way they do investigations.”