Written by attorney James John Knibbs

Internal Investigations: An Outline for a Company and its Leaders

INTERNAL INVESTIGATIONS: Outline for the Corporation

This outline discusses issues to consider when a corporation faces misconduct allegations. Corporations are at times confronted with allegations that their employees have violated state or federal law, or have engaged in other serious misconduct. These allegations may come to light through a complaint by a whistleblower, shareholder demands in the nature of threatened or actual derivative action, board member suspicion of misconduct, a governmental or law enforcement request for information, the commencement of a lawsuit, and through auditors and compliance personnel. The company’s board of directors must make important early decisions about whether an investigation is warranted, whether an investigation directed by independent board members is needed, the scope of the investigation, and the use of the results of the investigation.

In some instances the board, or a special committee of the board, will decide to conduct an internal investigation utilizing special counsel. Special counsel is responsible for organizing the investigation, gathering facts through documents, witnesses, and appropriate forensic analysis, and then reporting to the board or board committee. The following factors should be considered:

1. Is any investigation needed? If a complaint alleges serious misconduct and cannot be dismissed as frivolous, some level of investigation is needed to determine the facts.

  • What are the specific allegations? Is a violation of criminal law alleged? Regulatory violation? Violation of corporate policy? Get a handle on the specific violation alleged.
    • Who is making the allegation? Is it a credible source or someone with a history of questionable charges?
    • What are the potential consequences to the corporation and its shareholder

Many investigations can be handled internally by management and general counsel. Other situations call for the use of special counsel and an independent investigation. Factors to consider in making this decision include:

  1. Is an independent investigation by the board or a board committee needed?
  • Do the allegations involve senior officers and top management?
  • Do the allegations involve those who would otherwise oversee an internal management-led investigation or who oversee the business area to be investigated? In those situations, it is important that management, including the general counsel’s office, not direct the internal investigation.
  • Is the corporation a focal point of a governmental inquiry?
  • Are there conflicts within the board?
  • What are the demands and expectations of auditors, regulators, and other third parties? While the decision to commence an internal investigation is often discretionary, Section 10A of the Exchange Act requires external auditors who become aware that an illegal act may have occurred to determine if such an act has occurred and the effect on the company’s financial statements. Under those circumstances, auditors will look to the company to conduct an independent investigation.
  • What is the overall significance of the matter to the corporation? The greater the possible impact on the company, the greater incentive for the board to initiate an independent investigation by special counsel.

Once the decision is made to use special counsel, there are a number of steps that should be taken. They include:

1. Initial steps to take after the decision is made to utilize special counsel

  • · Define the scope of the internal investigation and agree on reporting issues. There should be a clear understanding of the area of inquiry. Special counsel’s mandate is to investigate the validity of the specific allegations, and do what is necessary to determine the merits of the charges, including the use of investigative, technological and other professional resources.
  • · An engagement letter should set forth the scope of the inquiry and make clear that special counsel is to advise the company of its legal rights and obligations, as well as any potential liabilities.
  • · Protocols: Specific protocols should be arrived at for documenting the investigation, the use of forensic consultants, and reporting procedures. To the extent possible, all work conducted by special counsel should be considered work product and confidential, and efforts should be made to protect any attorney-client privileges that the company may have.

2. Identify all relevant witnesses inside and outside the company

  • Determine the identity of all potential witnesses inside and outside of the company and the best way to contact the witnesses.
  • The employee witnesses should be told to cooperate and answer all questions fully and truthfully.
  • Give consideration to distributing a memorandum to affected employees, notifying them of the nature of the prospective investigation, the need for witness interviews, the importance of document preservation, and potential indemnification and individual attorney issues.

3. Identify the universe of documents and electronic evidence and institute a document preservation order or litigation hold to make certain that documents are retained

  • Implement a litigation hold to make certain all employees know the importance of preserving relevant documents and electronic information.
  • The universe of potential hard copy documents and electronic documents must be identified and collected as early as possible.

- Note that documents and computers are at times kept on external drives, or on the employees’ home computer, or on private e-mail accounts. The employees should understand the importance of producing all known relevant data, wherever it is located.

4. Retention of outside consultants: accountants, computer consultants, other experts

  • Determine the need for outside consultants, such as computer imaging experts, auditors, investigators, etc.

- Retention agreements with consultants should make it clear that their engagement is in contemplation of providing assistance for legal advice and should be deemed work product.

5. Employee interview issues

  • Generally, corporate inside counsel should not attend interviews with employees to avoid any chilling effect on the process.
  • Special counsel should advise the employees that special counsel is not the employee’s lawyer and does not represent the employee’s individual interests. Employees should be further advised that the interview is protected by attorney-client privilege, but that the privilege belongs to the company, which gives it the right to waive the privilege and disclose all or part of what the employee has said to external auditors, government regulators and others.
  • In addition, the employees should be advised that the D.O.J. has taken the position that if an employee lies to special counsel during an internal investigation and knows that the statement may be shared with a government agency conducting its own investigation, that employee could be indicted for obstruction of justice.

6. Documentation of employee interviews

Witness interviews should be memorialized as close in time as possible and in a manner consistent with the attorney work product doctrine

  • · Unless there are issues relating to the integrity of the investigation, the witness or his counsel should be allowed to review the witness statement for accuracy. This will help to avoid possible inconsistencies later on.
  • · Because the case law is mixed as to whether the production of special counsel’s work product to outside auditors constitutes a waiver, consider entering into written confidentiality and common interest agreements that allow for work product information to be provided without creating a waiver issue.

7.Reporting issues

  • Special counsel and the board or independent committee should agree before the start of the investigation as to the schedule of interim reports. Generally, these updates should be oral in order to avoid consistency issues resulting from the retrieval of information in the future that gives a fuller picture of the area under consideration.
  • At the conclusion of the investigation, special counsel should report its findings to the board or independent committee in a full written report. Board members should be reminded that it is up to the board or independent committee to draw their own conclusions as to the evidence presented.

8. After completion of the investigation and report by special counsel

  • The database of documents and other information excluding the thought processes of special counsel, can be available for use by any special litigation subcommittee, counsel to the corporation, and counsel for present and former employees.
  • If an investigation is also ongoing by a governmental agency, the corporation is expected to be cooperative with that agency. While a waiver of attorney client privilege is not required to demonstrate cooperation, it is important that the corporation be, and appear to be, forthcoming about any allegations of criminality by the corporation and its employees.

Each corporate internal investigation will generate issues of its own. There is no general “fill in the blanks" approach that can anticipate all contingencies. The points made here are designed to be basic guidelines that are to be considered in the context of the specific issues facing the client.

Some of the factors discussed above were outlined in Recommended Practices for Companies and Their Counsel in Conducting Internal Investigations (American College of Trial Lawyers, February 2008).

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