When You Really Need to Know:
When, How and Why to Conduct
Internal Investigations
Robert Lavet
Miriam Lefkowitz
Victoria McKenney
Summary
In the current political and regulatory environment, government
oversight and enforcement activities are increasing rapidly; internal
and external scrutiny over corporate and accounting practices is at an
all-time high. Prompt and thorough internal investigations of
allegations of mismanagement and potential misconduct are critical to
respond to a governmental investigation or threatened litigation.
Panelists will discuss assessing the risks of fraud and the consequences
of doing nothing, benefits of comprehensive investigations, effective
investigative techniques and how to undertake necessary and
appropriate remedial efforts to manage results of investigations at
organizations of varying size.
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Agenda
• What is an “internal investigation”
• When are internal investigations required by
regulators, and when should they be conducted even
though not required
• Ethical considerations for in-house counsel
investigating employees
• Strategies for conducting an effective internal
investigation
• What to do once you have completed the
investigation
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What is an internal investigation?
• Review of alleged misconduct by employees or others
representing the company to determine what happened.
– May arise from employee or third party allegations (raised
anonymously, in person, via a hotline, etc.), audit findings, media
reports, or the initiation of a government investigation.
– Often conducted by in-house counsel or external counsel retained by
management.
– Seeks answers to the five W’s: Who, What, When, Where, Why.
• Independent investigations are a type of internal
investigation.
– Usually commissioned when there is high reputational or economic
risk or the specter of voluntary disclosure or a parallel government
investigation, or when management may be implicated/interested.
– Overseen by the board or an appropriate board committee or special
committee comprised of independent directors.
– Conducted by independent external counsel (i.e., a firm not
historically retained by management to provide legal advice).
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Required Investigations – Federal
• Rarely* is a company required by federal law or regulation
to conduct an internal investigation, but certain situations
essentially demand as much:
– Significant Compliance Issues – Regulators will have a negative
reaction if a company learns of a significant compliance issue and does
not thoroughly investigate to determine the cause and extent and to
take remedial action.
– Voluntary Disclosure – Regulators will expect detailed factual
information about the conduct at issue, which would require a
thorough investigation.
– In response to government investigations – A company may learn that
it is the target or subject of a government investigation, leading the
company to conduct its own intensive investigation.
– Cooperation Posture – Regulators may suggest expansion of an
internal investigation (e.g., to additional markets) and consider the
company’s response when considering cooperation credit and scoping
their own investigation.
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Required Investigations – Federal
• Policies and procedures for investigating and remediating
misconduct are key elements of an effective ethics and
compliance program under the U.S. Sentencing Guidelines
applicable to organizations, which include the following as
among the minimum necessary components of such a
program:
– Promotion and enforcement of the organization’s compliance
program, including through “appropriate disciplinary measures for
engaging in criminal conduct and for failing to take reasonable
steps to prevent or detect criminal conduct.” USSG §8B2.1(b)(6).
– Following detection of misconduct, “reasonable steps to respond
appropriately to the criminal conduct and to prevent further similar
criminal conduct, including making any necessary modifications to
the organization's compliance and ethics program.” USSG
§8B2.1(b)(7).
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FINRA Rules
• All FINRA registered broker-dealers are subject
to FINRA Rule 4530 which requires firms to
“promptly report to FINRA, but in any event
not later than 30 calendar days, after the
member has concluded or reasonably should
have concluded that” certain violations of the
securities rules or regulations have occurred
by the firm or persons associated with the
firm.
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ETHICAL CONSIDERATIONS
FOR CORPORATE COUNSEL
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CORPORATE COUNSEL ROLE BECOMING
INCREASINGLY COMPLEX
• Corporate Counsel are playing a critical role in
protecting their organization from compliance risks.
• Given recent attention on corporate scandals there is
increased emphasis on governance issues.
– Higher expectation on Corporate Counsel
– Increased duty on Corporate Counsel to
communicate wrongdoing to higher authorities in
organization
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CORPORATE COUNSEL ROLE BECOMING
INCREASINGLY COMPLEX (cont’d)
• General counsel’s office often directly
accountable/responsible for:
– Risk assessment
– Document management
– Code of conduct
– Compliance training
– Risk management
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THE COMPANY AS CLIENT
• Corporate Counsel role by its very nature leads to heightened
risk of ethical dilemmas. This is particularly true in conducting
or managing corporate internal investigations.
– Aspect of being Corporate Counsel that is most attractive
(working closely with one client/employer) is precisely what
makes in-house ethical considerations challenging.
• Company management likely to view Corporate Counsel
as more than just an attorney providing legal services for
the company.
• Advice Corporate Counsel provides not exclusively legal.
• Maintaining confidentiality to client creates ethical
conflicts when constituents of client behave in manner
adverse to client.
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THE COMPANY AS CLIENT (cont.)
• Overview of the organization as client
– ABA model rule 1.13: “a lawyer employed or retained by an
organization represents the organization acting through its duly
authorized constituents.”
• Who are the company’s duly authorized constituents? Board of
Directors; senior management, employees.
• Whether or not client is an organization or an individual, lawyer owes
client the same duties:
– Fiduciary duty of undivided loyalty
– Duty to maintain client confidence and secrets
– Duty to represent client competently
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ETHICAL ISSUES FACING CORPORATE COUNSEL
CONDUCTING INVESTIGATIONS
• Company may ask Corporate Counsel to conduct
internal inquires into allegations of employee or
management misconduct.
– Corporate Counsel conducting internal investigations will
have actions and conclusions closely scrutinized.
• Finding no misconduct may be viewed skeptically by regulators,
etc.
• Finding of misconduct has to be well supported to get approval
within company, including board level
– In real life Corporate Counsel invariably has strong
personal relationship with company’s
management.
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ETHICAL ISSUES FACING CORPORATE COUNSEL
CONDUCTING INVESTIGATIONS (cont’d)
– Corporate Counsel may be too close to some
problems to see them.
• E.g., stock option backdating cases
• Clarity is critically important when Corporate Counsel
advises management and board on issues relating to
start and ongoing conduct of an internal corporate
investigation.
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ETHICAL ISSUES ARISING DURING INTERNAL
INVESTIGATIONS
• Corporate Counsel’s Duty to Represent Entity in Internal
Inquiries
– Under ABA Model Rule 1.13, Corporate Counsel represents the
organization acting through its duly authorized constituents.
– A lawyer must, in matters within the scope of representation,
“avoid impermissible conflicts of interest.” Restatement of the
Law Governing Lawyers, Section 16.
– Conflicts arise if employees of organization believe that counsel
represents them, not the entity.
– Attorney- Client relationship may arise by implication. See
Restatement of the Law Governing Lawyers, Section 14.
– New York Disciplinary Rule 5-109(a).
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ETHICAL ISSUES ARISING DURING INTERNAL
INVESTIGATIONS (cont’d)
Duty to Inform Employees
• Corporate Counsel should protect the Company by adequately
disclosing who you represent, and the nature of the investigation.
In Upjohn*, the Supreme Court recommended that counsel state:
– Counsel is conducting an internal investigation on behalf of the
organization.
– Purpose of the investigation is to provide legal advice to the entity.
– Counsel represents the entity and not any individual employee.
– The employee may seek independent legal representation (note: this
is not necessarily the case in all inquiries).
– Any information disclosed to counsel may not be protected by
attorney- client privilege, may be disclosed to the organization, and
may even be disclosed to third parties at the organization’s discretion.
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ETHICAL ISSUES ARISING DURING INTERNAL
INVESTIGATIONS (cont’d)
• Both ABA Model Rule of Professional Conduct 1.13(d) and New York
Disciplinary Rule 5-109 [22 N.Y.C.RR § 1200.28] require attorneys to
explain clearly whom they represent if interests of employee are or may
become adverse to that of company.
• Since internal investigations are means for determining whether employee
engaged in illegal or improper conduct, interview of employees inevitably
creates situations in which conflict between company and employee
should be apparent.
• When Corporate Counsel should advise employee of need for separate
counsel.
– Employee is target of investigation
– Employee is probable whistleblower
– Employee under risk of criminal liability
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TAKING DIRECTION FROM THE ORGANIZATION
•
•
•
Corporate Counsel’s duty is to represent the Company. Generally this means acting
under the direction of CEO and the Board and accepting their decisions.
Corporate Counsel must not be persuaded by personal interests of company’s
directors, officers and employees.
Duties of Corporate Counsel where following directions may result in substantial
injury to the organization.
– Rules don’t favor disclosure to authorities – they actually limit disclosure outside of
organization.
• Example: Fair Laboratory Practices Act v. Quest Diagnostics* – former general counsel of
defendant violated N.Y. Rule 1.9(c) (which prohibits lawyers from using confidential information
of a former client protected by Rule 1.6 to disadvantage of former client) by participating as
plaintiff in qui tam case against former employer.
• Under New York Disciplinary Rule 5-109(b) and ABA Model Rule 1:13(b) lawyer must minimize
disruption to the organization and risk of revealing information relating to representations
outside organization.
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TAKING DIRECTION FROM THE ORGANIZATION
(cont’d)
– Steps to take – ABA Model Rule 1:13(b)
•
•
•
Ask reconsideration
Advise that separate legal opinion be sought for presentation to appropriate
authority in organization
Refer to highest authority in organization (usually the board)
– NY D.R. 5-109(c)
•
•
Permits attorney to resign if despite lawyer’s efforts, the highest authority that can act
for organization insists on action or refusal to act that is clearly a violation of law and
ultimately to result in a substantial injury to organization.
Impact of Sox § 307 and SEC’s implementing rules. Do they trump state disciplinary
codes? Difficult to do this under individual or family plays dominant role in a public
company.
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TAKING DIRECTION FROM THE ORGANIZATION
(cont.)
• Reporting Out:
Amended ABA Model Rule 1.6:
– A lawyer may disclose client confidences to the extent he
reasonably believes it is necessary
• To prevent the client from committing a crime or fraud that is
reasonably certain to result in substantial injury to the financial
interests or property of another and in furtherance of which the
client has used or is using the lawyer’s services, or
• To prevent, mitigate or rectify substantial injury to the financial
interests or property of another that is reasonably certain to result
or has resulted from the client’s commission of a crime or fraud in
furtherance of which the client has used the lawyer’s service.
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TAKING DIRECTION FROM THE ORGANIZATION
(cont.)
• Amended ABA Model Rule 1.13:
• If a lawyer knows of a violation of law or a legal duty
to the organization in a matter related to the
representation that is likely to result in substantial
injury to the organization
• And the highest authority in the organization fails to
timely and appropriately address the violation, then
the lawyer
• May reveal information relating to the
representation, but only if and to the extent the
lawyer believes necessary to prevent substantial
injury.
• Pitfalls of this evident in Quest Diagnostics case.
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PRACTICAL CONCERNS FOR CORPORATE COUNSEL
CONDUCTING INTERNAL INVESTIGATIONS
• Protecting Privilege
– UpJohn case
• Answers to written questionnaires by UpJohn foreign
managers prepared by GC conducting internal investigation
into concerns of improper payments to foreign government
held privileged.
• Attorney-client privilege not limited to senior managers.
• Attorney-client privilege protected information provided by
middle and lower level employees used by counsel to
provide legal advice protected.
• Recognition that lower level employees acting within scope
of employment can embroil corporation in serious legal
difficulties.
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PRACTICAL CONCERNS FOR CORPORATE COUNSEL
CONDUCTING INTERNAL INVESTIGATIONS (cont’d)
• UpJohn holds that factual investigations performed by
attorneys acting as attorneys are protected by attorneyclient privilege.
• Challenges to preserving privilege in internal investigations.
• Perception that “expanded role of legal counsel within
corporations has blurred the line between business and legal
advice.” Acostou v. Target Corp., 281 F.R.D. 314, 322 (N.D. Ill.
2012).
• UpJohn court: “the inclusion of general counsel does not
transform all decisions into privileged attorney-client
communication.”
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PRACTICAL CONCERNS FOR CORPORATE COUNSEL
CONDUCTING INTERNAL INVESTIGATIONS (cont’d)
• Increasing inclusion of in-house counsel is business
discussions and decisions has “increased burden that must
be borne by the proponent of corporate privilege claims
relative to in-house counsel. In re Vioxx Products Litigation,
501 F. Supp. 2nd 789, 799 (E.D. La. 2007).
• Privilege waived if communication not kept confidential
– Failure to create expectation of confidentiality can lead
to waiver
– Having third parties attend witness interviews can lead
to waiver
– sharing report beyond those who need to know
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PRACTICAL CONCERNS FOR CORPORATE COUNSEL
CONDUCTING INTERNAL INVESTIGATIONS (cont’d)
• Privilege waivers in investigations of sexual harassment
– Companies that premise defense on results of internal
investigation.
– Assertion of Faragher-Ellerton defense premised in
whole or part on internal investigation can waive
attorney-client privilege on report and all documents,
witness interviews, notes and memoranda.*
• Hotline complaints
– Are communicated between in-house counsel and
anonymous employee whistleblowers protected?
* See e.g., Angelone v. Xerox, No. 09 CV. 6019 ( U.S.D. Ct., W.D. N.Y. Sept. 26, 2011) (“Xerox can
not rely on the thoroughness and competency of its investigation and corrective actions and
then try and shield discovery of documents underlying the investigation… ”)
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PRACTICAL CONCERNS FOR CORPORATE COUNSEL
CONDUCTING INTERNAL INVESTIGATIONS (cont’d)
– Is complaint and subsequent communications between
complainant and in-house counsel made by a client for purpose
of seeking legal advice?
– Do in-house counsel responding to hotline complaints represent
interests of company or individual complainant.
– Does hotline website tell potential whistleblower that a company
attorney will review the submission?
– Recent case - Freescale Semiconductor v. Maxim Integrated
Funds, 2013 U.S.D. Ct. Lexis 155391 (W.D. Tex. 2013).
• Issue raised on motion to compel discovery in copyright
infringement dispute.
• Submissions made via Ethics Point portal used by Maxim
• Initial submission by whistleblower held not privileged.
• Subsequent communications between Maxim GC and
Whistleblower held privileged under UpJohn.
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Who should be involved?
• Board and/or management – Oversee the investigation and
receive periodic status reports.
• In-house counsel – Conduct the investigation or interface
with external counsel conducting the investigation.
• External counsel – Conduct the investigation, if necessary.
– Significant issues, extensive scope.
– Issues implicating specialized areas of law.
– Voluntary disclosure/regulator interaction likely.
• Independent external counsel – Conduct the investigation if
circumstances warrant.
–
–
–
–
Senior management potentially implicated/interested.
High reputational or economic risk.
Possible voluntary disclosure or parallel government investigation.
Main benefit – No doubts/questions about impartiality and
credibility of investigation.
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Who should be involved,
small firm considerations
• Recognize and respect the relationships
– Who can be most objective?
• What if in-house counsel also serves in other
role?
• What if no budget for external counsel?
• What if no one is independent?
Strategies/Techniques
• Document Preservation:
– Issue a broadly worded preservation notice to all individuals who
may have relevant documents as soon as an issue arises that may
result in litigation or a government investigation.
– Take steps to ensure that electronic documents are preserved
(e.g., suspend periodic auto-delete/overwrite mechanisms).
– Consider imaging hard drives of involved personnel.
• Document Collection:
– Develop an interview template/questionnaire to help employees
identify responsive hard copy documents.
– Ensure that electronic documents are collected in a forensically
sound manner that preserves metadata. Use in-house IT resources
or a third party vendor, as necessary.
• Review relevant documents; assemble key documents
binder and list of key individuals to interview.
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Strategies/Techniques
• Interviews:
– Prepare outlines in advance of each interview to ensure that all
key areas are covered.
− Include an Upjohn warning to ensure that it is delivered
consistently to all interviewees.
− Include specific and open-ended questions.
− Include questions about key documents, as necessary.
− Include questions about other potentially relevant
documents and other potential interviewees.
– It often makes sense to speak with the complainant first,
followed by the key witnesses and then the alleged
wrongdoer(s).
− Exceptions may be required if there is time pressure and/or
if there is a risk that delay will undermine the investigation
(e.g., loss of evidence, loss of access to witnesses).
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Strategies/Techniques
• Documentation of Investigation:
– Document Preservation and Collection – Maintain a detailed
log/timeline of all steps taken to preserve and collect documents.
– Interviews –
− Maintain all interview outlines, notes taken during interviews, and a
copy of any documents provided by interviewees during interviews.
− Draft a memorandum summarizing at least the key points from each
interview, including the Upjohn warning provided. Include language
to protect privilege (e.g., note that the memorandum is a summary
and not a transcript, which was prepared to provide legal advice and
contains mental impressions of counsel).
− Investigation Report – Prepare a report describing the investigation
process, setting forth factual findings with reference to relevant
documents, analyzing the facts in light of applicable law or
company policy, and make conclusions/recommendations. Include
language and headers to protect privilege.
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Strategies/Techniques
Jack Quinn, et al., Corporate Compliance: Building a World-Class Borderless Ethics Compliance Program, 103 Corporate
Practice Portfolio Series (BNA).
These materials are part of Bloomberg BNA’s Corporate Practice Portfolio Series No. 103 and are being distributed with
the permission of BBNA.
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Strategies/Techniques
• Remediation/Follow-up:
– Where relevant, the investigation report should include
recommended remedial measures, possibly including disciplinary
action for wrongdoers and/or process/control enhancements.
– The individual responsible for remediation should be clearly
identified, and the results of the investigation should be
communicated to that person, along with a deadline.
– The investigator or another appropriate person should follow up
with those tasked with remediation to ensure that all
recommended actions have been addressed.
– Implementation of all remedial measures should be documented,
including precisely what was done, when it was done, and by
whom. If any recommendations are not accepted/implemented,
the reasons why should be documented.
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Strategies/Techniques
• Other Key Considerations:
– Carefully consider whether and how to provide interim status
reports to the board or senior management.
– At all stages, limit distribution of information about investigations
to those who have a need to know.
− This can help protect the integrity of the investigation, reduce the risk
of unauthorized release of information about the allegations or
conclusions, and preserve privilege.
− Consider whether and how the individual who raised the allegations
should be informed of the results.
– Consider whether oral reports may be more suitable for certain
audiences (e.g., auditors or other third parties).
– For cross-border investigations, be sure to consider foreign laws,
especially those regarding privilege and data privacy. Consult local
counsel, as necessary.
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Trends – Internal Investigations
• Board Oversight –
– Increasing as a result of heightened enforcement climate and need
to demonstrate independence/credibility to regulators.
– In re: Caremark, Stone v. Ritter, and related cases raise the prospect
of director liability for compliance program failures.
– Sarbanes-Oxley empowered/required audit committees to have
authority to retain independent advisors.
• Involvement of external counsel –
– Can help preserve privilege to the greatest extent possible.
– May be viewed as more independent than in-house counsel and
suggest to regulators that the company is taking the issue seriously.
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Trends – Regulator Interaction
• Voluntary Disclosure –
– Encouraged by regulators as a way to build credibility and
potentially avoid prosecution or receive reduced penalties.
– May be valuable if the government is likely to learn of the
misconduct through another channel.
– But the benefits are often uncertain, and disclosure may result in a
lengthy and costly government investigation.
• Privilege Waivers –
– May help build credibility with regulators and earn cooperation
credit.
– But beware of collateral consequences (e.g., in shareholder
derivative lawsuits).
– DOJ may no longer condition cooperation credit on privilege
waivers post-Filip Memorandum.
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