We live in an era of sophisticated and pervasive scrutiny of companies (and their managers) by the government, the media and even company employees. Companies regularly contend with whistleblower allegations, shareholder demands, internal and external audits, subpoenas, negative media reporting, and inquiries by the government or civil litigants.
An internal investigation is oftentimes the best way to respond. Because corporate or executive wrongdoing may result in criminal prosecution, large civil fines, substantial damages, and negative publicity, a carefully-planned and well-executed investigation is critical. If handled properly, an internal investigation can prevent additional harm to the company.
An internal investigation is not always a “break-glass-in-case-of-emergency” tool. Rather, it is a way to proactively deal with issues of compliance before they fester. An investigation can aid in:
• Putting the company ahead of the problem,
• Preventing other occurrences of the same issue,
• Sending a positive message to stakeholders,
• Leading to a (relatively) pain-free resolution with the government or whistleblowers, and
• Establishing good corporate governance in the post-Enron era.
Here is more on the purposes of internal investigations, their benefits and the potential risks that a poorly-conducted investigation can have.
Purpose of an internal investigation
An internal investigation is a formal inquiry conducted by a company to determine whether laws, regulations, or internal policies were violated and, if so, recommend corrective action. They are conducted either before serious wrongdoing, but when there is a substantial likelihood of policy or legal violations by the company or its employees; or after potential wrongdoing, when a company becomes aware of allegations, whether from an outside source (e.g., law enforcement) or from inside the company (e.g., whistleblower claims).
The goal of any internal investigation is to obtain a straightforward view of the facts; that is, what happened, when it happened, who was responsible, who may have been harmed, and what further actions may be necessary to prevent the alleged wrongdoing from reoccurring. It is a fact-finding process that is undertaken to “get to the bottom” of potential wrongdoing by the company itself or by an officer, director or employee.
A well-done investigation often includes a final report that memorializes the investigation findings and includes specific remedial steps to be taken by the company. The advice of counsel is needed here both to structure the inquiry and to preserve the company’s attorney-client privilege and any related work products.
Benefits of conducting an internal investigation
Internal investigations assist the company in gathering information, fashioning defenses and crafting remedies for identified consequences. Specifically, internal investigations are useful for companies to identify personnel to censure as well as policies or procedures that need remediation. Such remedial steps may support a reduction in civil and criminal penalties levied against the company by the government or the judiciary. An internal investigation can also put a company in a position to accurately assess the alleged wrongdoing and consider initiating settlement negotiations with those harmed or, an investigation may yield support for the position that no wrongdoing has occurred.
Furthermore, by conducting an investigation, the company demonstrates that it is taking the alleged wrongdoing seriously, and subsequent remediation demonstrates that it expects its employees hold themselves to higher standards by following all laws and company policies.
Benefits received from the government
If an investigation is conducted in response to a government inquiry, the investigation findings can support a deferral by the government. In making civil and criminal prosecutorial decisions, both the SEC and the DOJ will consider whether a corporation undertakes, and voluntarily discloses the results of a properly conducted internal investigation. “Cooperation credit”—which most frequently takes the form of reduced civil damages and criminal penalties—may be granted to companies that voluntarily disclose misconduct that was previously unknown to the government, cooperate in an ongoing government investigation, and undertake appropriate remedial measures in response to a violation.
Additionally, some states (e.g. Pennsylvania) yields authority to companies to pursue litigation against its directors if the board commissions a special committee to investigate claims of wrongdoing. If the committee decides the derivative lawsuit is not in the best interest of the corporation, it may decline to litigate and seek dismissal of the suit. In certain jurisdictions, a well-conducted investigation will support that decision and provide substantial respect to the board’s decision.
Risks of a poor or lack of investigation
Failing to investigate may lead to increased scrutiny by government investigators and will strengthen the government’s resolve and basis for imposing civil and criminal penalties. Furthermore, it can send a negative message to employees and the public, essentially signifying that the company cares little about internal compliance or wrongdoing. Maybe most important is the civil and criminal liability that may lie against the company and its personnel if the alleged misconduct continues without remediation.
A poorly-conducted investigation brings its own set of risks. With that said, companies should take great care in their choice of legal counsel. Attorneys with little investigatory experience pose the risks of lost privileges, conflicts of interest, and even claims of obstructing justice. Besides having more practice in avoiding these pitfalls, an experienced counselor will have more credibility to leverage if or when the company decides to disclose its findings.
Planning and executing a quality internal investigation
Although the techniques needed to conduct a quality internal investigation vary with the circumstances, a quality investigation generally follows these practices:
1. Remains fair and objective. Do not prejudge the outcome, but consider the investigation a fact-finding operation. Follow the facts where they lead and weigh the evidence impartially. Conduct all interviews and review all relevant documents before making conclusions.
2. Maintains sensitivity to actual or perceived conflicts of interest. A good investigation avoids the appearance of bias and partiality.
3. Responsibly records and documents critical evidence. Upon learning of a potential policy or legal violation, make an interview plan that includes all key witnesses and the collection of all relevant documents for review. Immediacy is critical in order to collect testimonies while memories are fresh.
4. Protects confidentiality and attorney-client privilege. Confidentiality protects employee and company reputation. Preservation of the attorney-client privilege is key but can be a legal minefield. Outside counsel with investigatory experience is needed to accurately identify these issues.
5. Considers the broader implications of the investigation. How will the investigation affect the company? The board? The industry? Will it have business consequences? Is there a risk of civil or criminal exposure to the company or its officers? These considerations and more should be assessed.
When a company becomes aware of a government inquiry or an internal problem necessitating an investigation, it should perform an independent investigation with the help of experienced outside counsel. If done poorly, the investigation may be costly and disruptive to the business, privileges may be inadvertently waived, and public image may be compromised. However, a well-managed investigation may lend credibility to the company’s position, assist in fact development, mitigate financial or criminal penalties and function as a public relations response.