The Benefits and potential pitfalls of cooperating with regulatory agencies and the government: How to navigate the minefield

Conventional wisdom dictates that if you represent a corporate entity (or even a senior corporate official) involved in a securities or other regulatory investigation ‐ whether by the U.S. Securities and Exchange Commission, U.S. Department of Justice, U.S. Attorney’s Office, Commodities Futures Trading Commission, New York Stock Exchange, National Association of Securities Dealers or one or more of the state attorneys general or other federal or state regulators ‐ it is important to cooperate fully in the investigation, even if that means “confessing” to corporate wrongdoing. Indeed, there are many benefits to cooperation, such as potentially avoiding criminal prosecution or an enforcement proceeding altogether or negotiating reduced penalties. And for regulated industries or regulated entities, there may be no choice but to provide full cooperation in order to avoid making an enemy of your regulator. But there are important potential pitfalls as well to cooperating with governmental or self‐regulatory investigations ‐ pitfalls that sometimes outweigh the benefits of cooperation. These potential pitfalls include bringing problems to the government’s attention about which it might not learn otherwise, or strengthening the government’s case against your client by doing the regulators’ work for them, such as by marshalling the evidence against your client for use by the regulators. And more and more, regulators are requiring entities to waive the protections of the attorney‐client privilege and work‐product doctrine as one of the prices you need to pay to be treated as a cooperator. If a regulatory authority insists on a privilege waiver, any documents turned over to the agency also may be available to potential third‐party litigants, such as the class‐action bar, or other government entities. In fact, the regulatory agency itself may use the formerly privileged materials to support a complaint against your client. Because of these potential pitfalls, the cooperation road may resemble a minefield at times, with the client one wrong step away from disaster. For that reason, it is critical for counsel to avoid reflexively choosing to cooperate in a regulatory investigation aimed at his or her client. Although cooperation may turn out to be the right approach to many regulatory investigations, each situation must be analyzed based upon its own individual facts so that the benefits of cooperation can be balanced appropriately against the pitfalls before making an informed decision as to what is best for the client in any particular circumstance.