Academic journal article
By Lotchin, Theodore R.
William and Mary Law Review , Vol. 46, No. 3
"Great corporations exist only because they are created and safeguarded by our institutions; and it is therefore our right and our duty to see that they work in harmony with these institutions.... The first requisite is knowledge, full and complete." (1)
The public image of corporate America has taken a beating. (2) Arguably, no period of history has seen corporations struggle through such a widespread range of civil and criminal enforcement activities at the hands of government agencies. (3) On any given day the business sections of the country's newspapers are full of grand jury testimony, indictments, and settlement agreements between federal enforcement agencies and high-profile corporations or their boards of directors. According to the Washington Post, "[a] former top mutual fund executive pleaded guilty ... to tampering with evidence to thwart a probe of illegal trading and agreed to pay $400,000 to the Securities and Exchange Commission to settle allegations that he cut deals giving special trading privileges to certain wealthy customers." (4) On the same day, "[t]he New York Stock Exchange ... found evidence that the five largest of seven 'specialist' firms that control trading on the exchange regularly engaged in abusive practices.... [that] have cost investors as much as $150 million," (5) and "[a] former executive with the McKesson Corporation pleaded guilty ... to securities fraud charges in connection with an accounting scandal that cost shareholders of the company $9 billion." (6) While the New York Times affirmed that "Richard M. Scrushy, the founder and ousted chief executive of HealthSouth, refused to answer lawmakers' questions ... about his knowledge of a fraud scheme at the company," (7) the Wall Street Journal reported that "[j]ury deliberations in the fraud trial of a former Rite Aid Corp executive headed into a third day, after jurors failed to reach a verdict yesterday." (8) Although shockingly extensive, perhaps the most troubling aspect of these headlines is that they represent only one day in the life of corporate America.
In response to the increased pressure resulting from these public embarrassments, corporations have turned to internal investigations as a way of placating federal investigators and fulfilling their fiduciary responsibilities to their shareholders. (9) At the most basic level, internal investigations involve an extensive fact-finding effort on the part of either a corporation's general counsel or an independent legal professional. (10) Corporations may initiate an internal investigation "in response to an ongoing government investigation or agency subpoena, pursuant to a consent decree with the Securities and Exchange Commission (SEC), the Internal Revenue Service (IRS), or another government agency," (11) or "[a]n investigation may ... be prompted internally, through either a complaint or grievance from an employee or group of employees." (12) Once a threat to a corporation's stability becomes apparent, both directors and managers may hold an affirmative duty to investigate any potential irregularities. (13) Accordingly, the decision to conduct an internal investigation can have far-reaching impacts, both positive and negative. (14)
Regardless of the immediate motivation, a corporation may realize some important benefits from conducting an internal investigation. (15) First, a corporation that releases the results of an internal investigation to government regulators may be able to secure more lenient civil or criminal penalties. (16) Second, conducting an internal investigation allows a corporation to respond proactively to any potential litigation by controlling the flow of relevant information. (17) Third, even in the absence of litigation, an internal investigation may help improve corporate performance. (18) At the very least an internal investigation is concrete evidence that a corporation's directors have fulfilled their fiduciary duties to their shareholders. …