No executive wants an investigation into wrongdoing at his company to end poorly. The key to avoiding that fate, legal specialists say, is to be sure the company’s own internal investigation starts strongly.
If done properly, an internal investigation “can go a long way to persuading the government that a company should not be prosecuted,” says Peter Verniero, a former justice of the New Jersey Supreme Court who also served as that state’s attorney general. “The converse, unfortunately, is also true. An investigation that begins poorly—that’s hopelessly conflicted and does not have credibility—will not be very helpful to the corporation at the end of the day.”
What occurs in the initial days of investigation “tends to shape everything that you do,” says Jeffrey Zuckerman, former general counsel for Citigroup and Smith Barney and now a partner with Pillsbury Winthrop Shaw Pittman. “First, you don’t want to delay unduly in determining whether there is some issue that has to be addressed and understanding exactly what it is. And second, you need to make sure that evidence doesn’t disappear, either inadvertently or otherwise.”
Linscott
Walter Linscott, former general counsel of Solvay Pharmaceuticals, agrees. “The actions taken in the infancy of the investigation process can significantly color the process,” says Linscott, currently a partner at Thompson Hine. “If there’s not a robust and solid program to ensure there is a retention of documents and a virtual lockdown all these electronic systems we use so freely today, you can run into obstruction and spoliation questions. The things you did may have been perfectly harmless or explainable or reasonable, but it may look bad.”
Who Investigates?
The Sarbanes-Oxley Act and more aggressive government oversight of corporations has raised the stakes for the initial stages of an internal investigation. Indeed, a good-faith effort to uncover illegal behavior is one of the keys to avoiding indictment under the Thompson Memo, a Justice Department document that spells out how prosecutors should handle corporate cases.
Beckler
Richard Beckler, former chief of the Justice Department’s Criminal Fraud Section, warns that companies must resist any temptation to underestimate the seriousness of certain kinds of allegations. “In the beginning of an inquiry, a lot of people may fluff it off—kind of waive it off,” says Beckler, now a partner with the firm Howrey Simon Arnold & White. “They may feel that the first story you hear may not be accurate. But if there’s a ring of legitimate truth—especially if it impacts the highest levels of the corporation—you have to be careful about how you do” the investigation.
One potential misstep is choosing the wrong person to lead an investigation, says Christopher Mills, a former in-house counsel at AT&T and now a partner at Fisher & Phillips. Such a mistake isn’t likely to arise in a high-profile incident—say, something that could cause a Sarbanes-Oxley issue—but can occur for lesser problems such as workplace disputes or harassment claims. “Letting a line manager investigate rather than bucking up to someone more removed can doom the investigation,” Mills says.
Verniero
Verniero, now of counsel at the law firm Sills Cummis Epstein & Gross, cites the recent options backdating scandal as an example of a situation where the people who ordinarily might lead an investigation shouldn’t take the reins. “If I’m the general counsel and I have an allegation of backdating that involves my CEO or my CFO or myself, the first call I make will probably be to the chairman of the board to say there’s an issue here that requires that I and senior management relinquish to the board all the [control] in terms of this investigation,” he says. “You have to find someone who has sufficient independence to handle [the investigation].”
INTERNAL PROBES
The excerpt below is from a column written by former Securities and Exchange Commissioner and Compliance Week Columnist Harvey Pitt, titled, "The Changing Landscape Of Internal Corporate Investigations." The column was first published July 27, 2004:
How should you conduct an internal corporate investigation?
To have maximum impact, an internal corporate investigation must be thorough, independent, transparent and competently performed. This often sounds easier than it really is.
From a regulatory perspective, the best internal investigation is one that does the government’s work for it. This means conducting a swift but thorough investigation and remediating problems or adverse consequences of any misconduct. In essence, if you leave nothing for the government to do, it’s less likely the government will take action or—if action is taken—that any action it takes will have devastating consequences.
Questions often persist regarding what constitutes a thorough investigation. Does this mean that the company has to look for any and all other forms of misconduct that might have occurred?
While the answer to this question will depend on the peculiar circumstances, it is important to mesh the company’s perspective with the likely perspective of the government. Thus, for example, if a problem is found in Latin America, it’s reasonable to ask whether a similar problem exists in other company locales.
While companies may not be required to go looking for problems of which they have no indication, once a problem is perceived or suspected, the investigation should be reasonable in scope to find possible related problems.
Source
The Changing Landscape Of Internal Corporate Investigations (Harvey Pitt, Compliance Week; July 27, 2004)
Zuckerman notes that putting the right person in charge of the investigation is crucial to its integrity. “Particularly when it may be a matter of interest to regulators, but really in any case, you need credibility,” he says. “Obviously it would be inappropriate in some cases for somebody to lead an investigation that may involve their own conduct. And that’s true whether there’s a belief that the person did or didn’t do something wrong.”
Finding The Information
Albert Lilienfeld, a partner with Deloitte Financial Advisory Services, says expeditious gathering of information is another crucial necessity. As companies increasingly become global operations, he says, the logistical challenges of tracking down information can mount. “It’s important to identify those global aspects and have sufficient resources to unearth issues wherever they may legitimately exist,” he says.
Tim Stevens, former general counsel of Borland Software Corp., says the whole tenor of an investigation “is dependent on the information you can sequester and use to get to the bottom of whatever the matter is. There are so many situations where information is inadvertently destroyed, not timely produced or captured, or not well understood.”
Mack
Mary Mack, technology counsel for Fios, an electronic discovery services firm, says failure to act in the initial days of an investigation can make otherwise routine conduct seem suspicious. She gives the hypothetical example of a company president who hears that Employee A is under investigation, and the president then waits a week to tell the general counsel, who waits another week to tell the IT department. “I would have the opportunity to keep working on my computer and, not knowing I’m under investigation, I might start deleting things all over the place,” Mack says. “It would look like documents were destroyed in bad faith.”
Many companies falter in the initial days of an investigation because they haven’t prepared in advance to retain documents if an issue arises, says Bill Olsen, a principal with Grant Thornton. “At some point in time every organization is going to be faced with some type of allegation of wrongdoing,” he says. “It always plays better, with regard to dealings with government regulators and even in terms of public trust, if you are prepared to respond to those allegations and can, at some point, give full disclosure and educate regulators and the public about what those issues were and how you dealt with those issues.”
If a company doesn’t “have a program in place to properly respond to allegations, when they finally get their arms around the situation it’s often too late—information may have been lost or tainted,” Olsen says.
Related columns on this topic can be found in the box above, right.
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