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By Virginia A. Davidson and Fritz E. Berckmueller
Virginia Davidson chairs the White Collar Defense and Investigations practice at Calfee, Halter & Griswold LLP, a full-service corporate law firm. A former assistant U.S. attorney, Davidson advises and defends individuals, publicly and privately held corporations, boards, committees and governmental bodies in enforcement actions, internal and external investigations, and related civil and administrative actions and compliance reviews.
Fritz Berckmueller is a partner in the Litigation Group and a member of the White Collar Defense and Investigations practice at Calfee. He focuses on securities and shareholder litigation, white collar criminal defense and internal corporate investigations.
As the CEO of General Motors sees herself in the headlines day after day, month after month, responding to Congress, grand juries and angry shareholders, one thought must be on her mind: It isn't even about the ignition switch anymore!What started as a safety concern about an automotive part is now about the honesty and integrity of the brand itself. The government's review of GM's internal investigation of ignition switches has virtually all GM employees, in-house counsel and outside counsel's investigation under the microscope. This unfolding story is a cautionary tale for all corporate counsel that any internal investigation is a potential “bet the company” experience. It is no wonder corporate officers and directors cringe at the prospect.
At one time or another, your company will confront an issue that requires it to decide whether it needs to conduct an internal investigation. The concern can come from anywhere: M&A due diligence, an auditor's comment, a routine government agent's inspection, visit or call, a subpoena, a private lawsuit or arbitration, a news article, an anonymous tip, or even an employee's quip. It can touch on any subject matter—accounting practices, environmental waste disposal, health care billings, government contracts, imports and exports, or foreign sales agents—wherever and however the company operates. It simply is not possible to eliminate every problem. Even the best risk management/compliance procedures and departments miss issues from time to time.
When that issue presents itself, it may not be obvious how best to respond. Is an internal investigation necessary? Who should conduct it? How broad is the scope? What do you intend to do with the results?
How far an investigation goes, and what it costs, depend largely on two things: (1) the demands of the audience that needs to see its results and (2) the discretion and experience of the people who will conduct the investigation. Unfortunately, once the stage is set, there is little that can be done about managing the former; whether your audience is the consuming public, the government, the board or the shareholders, they will need a meaningful and satisfactory response. The real ability to manage scope and costs comes through the choice of an investigation team. It is this team that will help keep the investigation within scope and help minimize the costs to achieve that scope. That day one choice often influences whether an investigation turns out to be a useful tool or a high-priced road to nowhere. Ultimately, what you want from your team is a professional and independent assessment of a problem and advice on how to fix that problem, done with as little possible disruption to the flow of business.
The first questions you should answer are: what kind of issue do you face and who is your audience? With respect to the first question, a company, acting through its officers, board, committees and directors, should investigate whenever it is in the best interest of the company; that is, when it has reason to believe that the conduct, if true, would matter to shareholders, consumers, the government or others to whom a duty is owed. Investigations typically involve conduct that:
This is not to say that companies need to react with a full-blown, independently handled internal investigation every time they face one or more of these types of issues. They also need to gauge the weight of the issue. Is the conduct completed or continuing? Is the risk slight or significant? Would the disclosure be material to shareholders? These are all important concerns to be weighed in structuring the appropriate response and engaging the right team.
Just as it is critical to understand your issue, it is even more vital to know your audience, or audiences. Sometimes the audience is obvious, particularly when the issue is put directly to the company, as in shareholder litigation, government investigations or publicly reported scandals. Other times, though, the audience is not as obvious, especially if the issue has been identified internally through risk management or compliance tools. In those situations, the company will need to predict who ultimately will need to hear about and resolve the issue: the board, a special committee, regulators, criminal authorities or even the public at large. These audiences have different needs and will make different demands on the company.
For example, if a government investigation is pending, the company (continued on page 286)(continued from back page)will face pressure to share the results of its investigation with the authorities. In so doing, it subjects itself to waivers of the attorney-client privilege not only with respect to those authorities, but also as to other, later government agencies and private litigants, and with respect to documents on the same subject matter, beyond those shared with the authorities. Shareholder disputes, because of the vast scope of cases on this issue, limit what must be done and disclosed to whom, though even there it can lead to disclosure to plaintiffs or other parties.
Issues in the public eye, lastly, have almost no bounds. They require a balance between giving the public the reassurance it needs, when it needs it, without reenergizing the news cycle or disclosing privileged information or litigation strategy. Judges read newspapers, too. Knowing your audience and their demands will help you pick the right team to conduct your investigation, and will guide the scope and process of your investigation throughout.
So you know your issue and your audience, the next question is: whom do you use to conduct the investigation? Not every concern demands an army of lawyers and accountants. Some matters need not even be investigated by in-house attorneys, so long as the work is done at the direction of counsel. Issues such as employee theft or time mismanagement, for example, may be best handled by internal security, human resources or non-legal compliance staff.
It is also appropriate for in-house counsel to handle some investigations. On the plus side, they know your culture, policies, people and records. On the down side, they are not independent. Their mixed business and legal roles can dilute attorney-client privilege. If their work is not privileged, they are potential witnesses who could themselves need counsel. Even if their work is privileged, in-house counsel are viewed by governmental and other third parties as biased. At General Motors, it is the decisions of in-house counsel to not push the issue further that has come under attack ( 29 CCW 227, 7/23/14). You need to determine if by choosing in-house counsel you are putting them in an untenable situation.
Any violation of law or policy that would expose the company to civil or criminal liability should be handled by outside counsel, if only to protect applicable privileges against disclosure to third parties. Similarly, any matter that touches on the conduct of the legal department, upper management, the board or a committee of the board, or that would be reportable on the company's financial statements, or that involves potentially criminal conduct should be handled by outside counsel.
If the company decides the matter is best not handled by in-house counsel, then the company might not want to look to its regular corporate counsel either. General Motors may illustrate the issues with in-house counsel, but people should not forget how the court harshly criticized the choice of regular counsel to investigate in the granddaddy of them all, Enron. Granted, it is hard not to turn to trusted, known advisors when the matter is highly sensitive. But agencies and courts are skeptical of the “independent” findings of attorneys who regularly look to the company for fee income. Instead, hire attorneys who, whether they have handled one matter or another for the company, are experienced in investigations and in dealing with the government, and whose independence will not be questioned.
For significant matters, management (or the board of directors or a standing committee thereof) should direct chief in-house counsel, in writing, to investigate. The matter should then be delegated to outside counsel, if appropriate. The writing should:
Ask your counsel for a plan of work, with clear objectives, steps, responsibilities, time table and estimated cost, understanding that it will be necessary to adjust as facts develop. Establish regular meetings or calls to refine the plan, not to discuss the facts before they are known and understood.
Appoint one person to act as liaison among counsel, employees and non-employee sources of information, at the direction of counsel.
Appoint one person to speak on behalf of the company to the public, as appropriate, in coordination with counsel.
Once you have your team in place, you need to move quickly. Though every investigation is unique and will take its own path, there are certain preliminary activities that should be taken right out of the gate to make sure that the investigation is being efficiently conducted and is effectively protecting the information and the process. For example, investigation counsel will:
These actions should be completed by the investigation team as soon as possible. Any potential issues with the completeness or accuracy of the information can damage the credibility and effectiveness of the investigation.
Once these first steps are complete, you should expect the following:
Although an investigation must be thorough and independent, it is important to know when it has reached its natural end. It takes confidence and tact to establish parameters and to communicate those limits credibly to external decisionmakers. There is a way to tell outside auditors, for example, that they will not sit in on employee interviews, that it is not necessary to conduct yet another electronic “quality” check of millions of documents or that expensive metadata forensic techniques are not warranted. Similarly, there are times when it is in everyone's interest to bear those expenses and burdens. These judgment calls arise in every investigation.
As to tone, costs can escalate unnecessarily when an investigation takes on an aggressive or belligerent—as opposed to a firm and serious—tone. It can lead to unnecessary and expensive roadblocks, obfuscation, distraction and long-term morale problems. It also can backfire if an internal investigation is followed by litigation or civil or criminal government enforcement.
Always keep in mind that the goal of the investigation is to satisfy the audience that spurred it in the first place. A board or special committee may allow a reasonable time and require only a reasonable process, regardless of the answer. The public or your regulator, on the other hand, might allow no time, requiring an immediate and reassuring answer. These are the kinds of pressures that drive your tone and limits. If you miss your goal, you may end up investigating far longer, and far more things, than you ever intended at the start.
As the investigation winds down, at least pursuant to the original scope, the investigation team should be:
Just as it is critical to start the investigation on the right foot, so it is at the end. Privileges and confidences that were protected can be easily waived or exposed. Rash decision-making on reporting, and action-items, can lead to further liability or claims from those impacted by the same. Due care needs to be exercised in dealing with each of the above activities to make sure that you are achieving what you need without undue risk or harm. If you have made it this far, don't trip going across the finish line.
The headlines make it clearer than ever that investigations carry complex, long-term and far-reaching consequences for both companies and their employees. While you need to be able to rely on your internal resources, you also need to be mindful of their limitations on protecting the company's confidences and accomplishing the goal. The jury remains out on whether the blame will rest on General Motor's use of in-house counsel or the goals that they were tasked with achieving, but the takeaway is clear: internal investigations are fraught with peril, even in what initially appear to be routine situations. An investigation consists of multiple moving parts, each of which requires exacting judgment. From the very first meeting, it is important to stay flexible while keeping in mind the process—an independent, thorough yet cost-effective investigation that allows the company to handle its legal issues and move forward with a better self-understanding—and also the goal, a satisfied audience, whatever that might be.
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