Attorney’s Fees in a Company’s Criminal Investigation Are Like Rabbits
Legal fees are a “cost of doing business,” right? That’s what you will hear. But legal fees in a criminal investigation can feel like they take on a life of their own.
Consider two companies: Company Alpha makes widgets in a highly-regulated industry. It has 80,000 employees and is a public company with a 20-person board of directors. Company Beta provides professional services in a niche industry. It has 50 employees and is a private company with a small board of directors.
Representing Alpha in a criminal investigation will be a very different experience than representing Beta.
Alpha is much more likely to have been through an investigation before. It has more employees, who are potential whistleblowers, and it faces more exposure to government scrutiny thanks to its regulated industry and its public structure.
This may be the first time for Beta navigating a criminal investigation. And the first time is the hardest.
If you are at a company like Beta, then read on to learn what will happen to attorney’s fees in a criminal investigation.
It’s best to be prepared than surprised.
Beta learns that it is the subject of a criminal investigation involving a particular overseas transaction. Beta doesn’t have in-house counsel yet. It’s been growing and meaning to hire someone, but has been able to handle things using outside counsel for discrete matters.
Beta’s chief operating officer is the person in charge of responding to the criminal investigation at Beta. The COO is not an idiot. She knows she needs outside counsel.
So, Beta hires company counsel, Candid & Counsel (“C&C”). This reputable small law firm appropriately staffs the matter with a partner and an associate. After all, this is not a complex deal and Beta is a fairly small company.
Beta may think that C&C will simply only need to act as a liaison with the government, coordinate its subpoena response, maybe do a little legal research. That could get expensive, but not too bad.
To best represent Beta, though, C&C needs to interview the key employees involved in the transaction. It needs to review emails about the deal. If there is a board of directors, then C&C may need to talk to the board and review board materials to find out what the board knew about the transaction. Plus, there’s a broad subpoena from the government and C&C needs to make sure Beta has preserved the documents that could be responsive and gather and produce the documents.
All of the fees for this work adds up. But it’s not even close to the beginning of what Beta will pay.
After the initial employee interviews by C&C, it’s clear that two of Beta’s employees (John and Jane) are squarely in the middle of the deal and may have done something wrong. There’s nothing wrong with C&C interviewing John and Jane—in fact, it’s C&C’s obligation to Beta to find out what happened.
But if the governments wants to interview John and Jane, then C&C can’t represent them because their interests may be different from Beta’s interests. They each need their own counsel.
Depending on John and Jane’s employment agreements, Beta may be required to indemnify—or pay the attorney’s fees for—them. Even if Beta has no legal obligation to pay their attorney’s fees, Beta may want to do so voluntarily. It doesn’t want its employees unrepresented, and C&C advises Beta that it’s best if John and Jane have excellent counsel who will join a joint defense arrangement, or at least work together until conflicts may prevent that. That way, Beta can learn more about what the government asks them during the interviews.
So, Beta is now paying for C&C, counsel for Employee John and counsel for Employee Jane.
It’s starting to add up.
Beta then learns that the FBI showed up on the doorstep of Sam, a low-level accounting employee. Sam was smart enough not to talk to the agent right then, but he contacted Beta’s COO to explain what happened and asked about getting a lawyer.
Who knows how many employees will be interviewed by the government? Most of them had nothing to do with the transaction and many are low-level worker bees. C&C recommends that the company retain “pool counsel.”
Pool counsel is a single lawyer or law firm to represent multiple employees. As long as no facts arise that create an ethical conflict, a single lawyer can represent multiple people. It’s a less expensive method than hiring a separate lawyer for every employee. But it’s still adding up.
Beta is now paying for C&C, counsel for Employee John, counsel for Employee Jane and pool counsel for the other employees.
Next, Beta learns that the government thinks that the board knew all about the overseas transaction and wants to interview all of the board members.
C&C interviews the board members to find out if any of the members had knowledge of wrongdoing. One of the members, Diane, knew about the shady details of the deal and told Jane and John to go ahead with it any way. The other members had no idea about the deal.
The bylaws make clear that the company must indemnify board members for attorney’s fees.
Director Diane needs her own lawyer, because she may have approved the deal that is under investigation. Two other board members, Tony and Max, are nervous. They didn’t do anything wrong but want their own lawyers. And the rest of the board needs counsel too, since the government wants to interview them.
C&C is trying to keep costs down, so it suggests pool counsel for the board members, along with separate counsel for Diane, Tony and Max.
Beta is now paying for C&C, counsel for Employee John, counsel for Employee Jane, pool counsel for the other employees, counsel for Director Diane, counsel for Director Tony, counsel for Director Max and pool counsel for the other directors.
Beta hasn’t been charged with a crime, and the attorney’s fees have multiplied like rabbits.
The legal spend for Beta the year before may have been $50,000 and now it’s hundreds of thousands of dollars.
Here’s the kicker: The government doesn’t care.
No prosecutor has ever said to me, “Hey, we realize this investigation is getting expensive for Beta. It’s a small company. We don’t need to interview everyone. We’ll keep our subpoena limited in scope.” The government does not care that hours of time spent responding to an overbroad subpoena meant that Beta did not expand its operations to hire ten new employees, as it had previously planned. The government may not realize that its broad investigation into a single transaction meant that Beta let go three employees to have enough revenue to pay for counsel.
But, a good defense attorney can have these conversations in an effort to potentially limit the scope of subpoenas or determine how else the government may feel comfortable limiting its reach. Another but…it does not mean the government will take any different approach.
There’s little that Beta can do in this situation except find efficient, reasonably-priced counsel to guide it through the investigation.
If you are at a company like Beta, go into a criminal investigation with your eyes open.