Skeletons in the Closet: Critical Company Guidelines for a Successful Internal Investigation
March 3, 2008
This article is the second in a four-part series on critical white collar and internal investigations issues.
OK, you survived the search warrant in Part One of this series. Or, let's say your first inkling that something is amiss in your company is a grand jury subpoena, or a whistleblower action, or merely a serious internal complaint. No matter what the "trigger," you need to decide whether to investigate the allegations of wrongdoing, and, if so, how you will do this without creating more problems than you might already have. We are not here concerned with what your attorneys will do during any internal investigation, but with what you need to do to ensure the best possible outcome for your business. Let's start with the basics.
1. Determine Whether an Internal Investigation is Warranted
If the government is actively investigating the conduct of your company or employees, you cannot afford not to investigate. The government is not inclined to launch investigations willy-nilly. If government investigators are targeting your company, they know something (or at least they think they do), and you must do whatever you can to (a) figure out what they know, and (b) counter it.
Let's say, however, that the trigger is not a government inquiry but an internal (or nongovernmental, external) complaint. Under what circumstances should you launch an internal investigation? First, if you're a public company, you must consider your fiduciary obligations to your shareholders, including the duties of care and loyalty. In order to survive any challenge to the exercise of management's business judgment," company officers and directors must make informed decisions, based on material information about the potential problem. That's hard to do in the absence of a thorough, independent investigation of alleged wrongdoing.
Second, the company must consider any relevant disclosure obligations. Although there is no general legal duty to disclose internal problems – including potential violations of the law – the company may have (a) a legal obligation not to conceal a felony; (b) a statutory or regulatory duty to disclose material, adverse information; and/or (c) a desire to disclose wrongdoing in an effort to avoid criminal prosecution and/or to mitigate any penalty resulting from a criminal conviction (a topic that we will address in greater detail in Part Three of this series). In short, unless the allegation is wholly trivial – and there is minimal likelihood of any governmental entity ever taking an interest in it – the better course is to undertake the internal investigation.
2. Decide Who Will Conduct the Investigation
When deciding who should conduct the investigation, the company must understand that the credibility of the process is paramount. Whether the company endeavors to explain the allegations to its employees, to the government, or to civil litigants, the more independent the
investigation, the better.
That is not to say that the company cannot handle the investigation in-house. Among the advantages of having in-house counsel conduct the inquiry are lower cost, superior understanding of the company and its business, and greater on-site availability. Thus, for example, if the alleged wrongdoing does not implicate management, is of moderate dollar value, is of limited duration, is of minor import to the business, and is primarily internal, an inhouse investigation may be appropriate.
On the other hand, outside counsel are indispensable for more significant matters. Among other things, outside counsel have more investigative experience, are seen as more independent of the company, are more familiar with the applicable criminal statutes, have greater trial experience, and are more accustomed to dealing with prosecutors. For this reason, it is rare that a company of any significant size performs inhouse investigations in matters of potential criminal significance, though outside counsel should, of course, work closely with in-house counsel (or management) in any such investigation.
The remaining question, then, is which counsel to choose – the company's regular outside counsel or special investigative counsel. Regular corporate counsel possesses many of the advantages of in-house counsel, but may also suffer from many of the same shortcomings with respect to independence and experience. When attempting to strike the proper balance, the company may be best served by interviewing both regular corporate counsel and special investigative counsel on these key issues.
3. Establish an Appropriate Protocol for the Investigation
The goal of an internal investigation is to uncover the unvarnished truth, while protecting the results of the investigation from third-party disclosure. Thus, the company must establish a protocol that preserves its attorney-client privilege (though the company may eventually choose to waive the privilege in the context of pre-indictment negotiations with the government). In order to achieve these twin goals, the company should begin with four simple steps.
First, public companies are well advised to pass a Board resolution authorizing, and defining the scope of, the internal investigation. This is indispensable where counsel represents the Board, and not the company itself. Among other things, the resolution should (a) state that the attorney-client privilege will cover all aspects of the investigation; (b) provide for the retention of expert assistance to counsel; and (c) direct employees to cooperate fully in the investigation. Second, the company should enter into a written retention agreement with outside counsel. Any such agreement should, at a minimum, (a) identify the specific client; (b) delineate the scope of the investigation; (c) state that the purpose of the investigation is the provision of legal advice to the client; and (d) cover logistical issues, such as outside counsel's staffing, fees, and expenses.
Third, management should provide employees with notice of the internal investigation. Such notice should, at a minimum, include (a) a discussion of the nature of the inquiry; (b) the need for cooperation with counsel (including, if necessary, an admonition that cooperation is a condition of employment); and (c) directions regarding preservation of the attorney-client privilege, including management's expectation that employees will keep confidential all communications with counsel.
Fourth, the company must discuss with counsel the law applicable to the attorney-client privilege in the relevant jurisdiction. If the alleged wrongdoing implicates solely federal interests, the Supreme Court's holding in Upjohn Co. v. United States, 449 U.S. 383 (1981), extends the attorney-client privilege, in essence, to all company employees. Where state action is possible, however, the company and its counsel must take care to comply with state law on privilege, which may be more limited in scope. In Illinois, for example, the attorney-client privilege extends only to the "control group" of managers in the company.
4. Choose How to Memorialize the Results of the Investigation
Once counsel has completed the internal investigation, the company must decide whether it wants the results reported orally or in writing. In this regard, the company must consider several factors. First, the company may have a duty, pursuant to law or regulation, to produce a written report.
Second, depending on the nature of the allegations, the company may want a written report in order to document the basis on which it took, or failed to take, any particular action, in a manner consistent with its fiduciary duties to its shareholders. The more serious and complex the situation, the greater the potential need for a written report.
Third, the company must discuss with counsel the "discoverability" of a written report, both by the government and by future civil litigants. If the client and counsel determine that production to such a third party is likely, counsel can either report findings orally or produce a "sanitized" written report that focuses on facts and omits specific legal advice.
Fourth, the company should consider whether a written report that provides a pre-packaged presentation for the Board and management, a road map to the company's defense against a government investigation and/or prosecution, and guidelines for any necessary corrective measures is a net benefi t to the business or a possible dagger in the company's heart in later criminal or civil litigation.
Internal investigations are a fact of modern life for companies of virtually any size. Although such investigations may entail both cost and disruption, companies that understand the issues and prepare effectively can minimize both. The reader is cautioned, however, that lengthy tomes have been written on the subject of internal investigations. As such, the foregoing pointers – critical though they may be – are no substitute for the advice and efforts of competent, experienced legal counsel when it comes to preserving all of the good that your company has worked so hard to achieve."