Conducting Ethical Internal Investigations: Considerations for Corporate Counsel
| Citado como | Vol. 53 No. 1 Pg. 0034 |
| Páginas | 0034 |
| Año de Publicación | 2012 |
2012 Spring, Pg. 34. CONDUCTING ETHICAL INTERNAL INVESTIGATIONS: Considerations for Corporate Counsel
Volume 53, No. 1
Spring 2012
I. INTRODUCTION
Board members, shareholders and governmental agencies often expect that corporations will conduct internal investigations upon the discovery of circumstances that raise concerns over potential liability or corporate misconduct. Investigations are required in order to determine the facts and recommend a response. In-house counsel understands that internal investigations are a cost of doing business in the current regulatory environment. Last year, in fact, The Washington Post reported that the Department of Justice ("DOJ") and the United States Securities and Exchange Commission("SEC") are relying on internal investigations rather than conducting their own investigations and expect organizations to share the results of those conducted internally(fn1).
Since the enactment of the Sarbanes-Oxley Act in 2002, more than 2,500 companies have retained external counsel to conduct internal investigations into suspected wrongdoing, according to the American College of Trial Lawyers.(fn2) Further, 2011 marked the largest number of enforcement actions brought in a single year by the SEC in the agency's history.(fn3) A properly conducted internal investigation may help minimize regulatory, civil and criminal exposure to both the company and its senior management. A well-executed internal investigation will allow a company to maintain its reputation and minimize damage to shareholder value and develop, if necessary, preventative measures to avoid repeating the same mistakes. The results of an internal investigation will equip a leadership team with the information necessary to make solid decisions and enable them to mitigate loss to the company and its employees.
An internal investigation can be triggered for a number of reasons. Whether it arises from the discovery of accounting irregularities, to internal allegations of wrongdoing, an anonymous whistleblowers' report to management or a regulatory agency, media reports or governmental inquiries, to customer or vendor complaints, all internal investigations pose ethical and practical challenges. Further, a government agency may request that a corporation disclose the results of an internal investigation to government prosecutors or regulators to receive leniency.(fn4) Despite these challenges, a proper and ethically run internal investigation may be the corporation's best opportunity for defending itself, mitigating losses and limiting additional liability.
II. CONDUCTING INTERNAL INVESTIGATIONS
An internal investigation is often undertaken to avoid or resolve government actions or shareholder issues. It is also a mechanism for discovering and halting misconduct that might result in civil or criminal liability. It is a means to establish cooperation with auditors and regulators. At the outset, it is important to determine whether an internal investigation is warranted. Factors to consider include: (i) the nature of the allegations, (ii) the role of senior management, (iii) government inquiries, (iv) shareholder interest, (v) a report from an external auditor, or (vi) media attention to the issue.(fn5) A full-blown investigation is not required for every complaint or incident. Naturally, the more serious the allegation, the more likely an investigation will be warranted. While an investigation should uncover and stop misconduct, remedy problems that might exist, help formulate a defense to potential allegations and allow the organization to deal with the government proactively, they are costly and may end up providing a map to regulators and plaintiffs. Therefore, evaluating whether an internal investigation is necessary is a crucial first step. In order to do this effectively and rapidly, companies must have policies and procedures for making a determination to launch an investigation. Having a protocol in place will help avoid delay in developing a strategy to remedy or ameliorate the circumstances facing the company.
An effective protocol will include substantial involvement by in-house counsel, and depending on the nature of the incident triggering the protocol, in-house counsel may be responsible for the initial assessment of the matter. Established policies and procedures can not only provide a road map for the internal legal team to respond timely and effectively to an incident, but they can also aid the in-house attorneys in meeting their professional and ethical responsibilities to their client. New Hampshire Rules of Professional Conduct 1.2(a) requires that counsel determine the scope of an investigation and determine the objectives of the investigation.(fn6) This will allow the company to establish the purpose of the investigation and assess when that purpose has been accomplished. Furthermore, Rule 1.3 requires that an attorney act with reasonable diligence and promptness.(fn7) Policies and procedures will aid counsel in responding promptly to an allegation of misconduct and execute diligently her responsibilities to the corporation in commencing an internal investigation.
On an elemental level, the purpose of an investigation is to fairly, thoroughly and credibly find the truth and correct the problems. While a pre-established process for addressing issues of misconduct or whistleblower complaints will foster a culture of compliance, allow for prompt and diligent response, and enhance internal controls, each investigation is unique. Decisions on each investigation must be made case-by-case. The investigation team must determine whether the purpose of the investigation is to position a company to defend against government inquiries and private litigation. Will information from the investigation be shared externally? Outcomes must be anticipated such as whether the investigation will lead to significant internal changes, and how senior management will be impacted. The anticipated end product must be identified and investigation counsel and management must agree on the objectives. When responding to a whistleblower complaint, a government inquiry or independent auditors, the goal of the investigation will be to demonstrate that the company takes compliance seriously, that it is able to provide accurate and complete information, and that the company has taken steps to avoid a reoccurrence of the misconduct in the future. Understanding how the end product might be used will govern the process going forward.
At the start, decide on the time, scope, staffing and methods of the investigation. These factors will vary depending upon the nature of the matter and the risk to the corporation. Keep in mind a company may need to defend its decision as to the investigation's scope. Shareholders and other interested parties will want to know that the investigation was commenced in a timely manner(fn8), that it is thorough and that all relevant documents and witnesses were identified and obtained or interviewed by investigators. An overbroad scope, on the other hand, may result in the production of thousands of documents.
The scope of the investigation should be written so that roles and authority are understood. A concise description of the matter to be investigated will ensure that objectives are being met and may aid in the corporation's defense if there is a question over the corporation's response to the allegations. This is critical to avoid tangents into irrelevant inquiries, as facts are uncovered, and if necessary, this description may be revised if discovery reveals additional misconduct.
Documents are a key part of most internal investigations. In every instance, a first step in an internal investigation is to issue a document hold that suspends routine document destruction and advises all relevant parties to preserve documents related to the allegations. Furthermore, as quickly as possible, investigators must collect relevant hard-copy and electronic documentation. Preliminary interviews may help identify people who have knowledge of locations and custodians of relevant documents. The investigation team must identify search terms. This process is typically the most expensive part of an internal investigation. It is important to execute this phase properly the first time. If a regulatory agency is not satisfied with an initial document review, it will ask a company to go back and redo the discovery. During document review and production, it is also important to take steps to avoid an inadvertent waiver of the attorney-client privilege, as is discussed more fully below.
Following a review of relevant documents, witnesses will be identified and interviewed. Interviews must be conducted in an effective and unbiased manner. Upjohn warnings, discussed below, must be provided prior to conducting an interview. Best practice dictates that a second person participates in the interview process in order to take thorough notes and create an interview report. It is important to note that Rule 5.3 of the New Hampshire Rules of Professional Conduct ("RPC") states, in part, that" [e] ach lawyer having direct supervisory authority over the nonlawyer shall make reasonable efforts to ensure that the person's conduct is compatible with the professional obligations of the lawyer." Therefore, any individual participating with an attorney in an interview is bound by the ethical rules. Furthermore, in accordance with Rule 5.7 of the RPC, it is important that the interviewee understands that the individual participating with counsel in the process represents the company and is not providing any legal assistance to the employee. The order of employee interviews and the methods to be used...
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