Recommended Practices for Companies and Their Counsel in Conducting Internal Investigations

American Criminal Law Review, Winter 2009 | Go to article overview
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Recommended Practices for Companies and Their Counsel in Conducting Internal Investigations


PURPOSE OF THE RECOMMENDATIONS

Since 2001, over 2,500 public companies have retained outside counsel to conduct internal investigations into suspected wrong-doing by corporate executives and employees. These investigations have included inquiries into suspected violations of the Foreign Corrupt Practices Act; alleged options backdating activities; alleged violations of the antitrust, environmental, import/export, and other laws; and financial statement improprieties. (1) The Federal Criminal Procedure Committee of the American College of Trial Lawyers ("the Committee") has observed counsel implementing a wide variety of procedures and protocols in conducting corporate internal investigations for issuers and public companies in particular. The result has been variances, both in treatment of officers and employees and in outcomes of the investigations for such officers and employees and the corporations themselves. The Committee has sought to determine, and now recommends, what it believes to be the fairest and most effective practices for conducting internal investigations of possible corporate wrongdoing. (2) Although the principles articulated in this paper are tailored to internal investigations by issuers and public companies where significant allegations of malfeasance are alleged or suspected, many of these principles may be applied in the context of other entities and smaller investigations.

In Part I, we examine the internal and external factors to consider when deciding whether to conduct an internal investigation, including what conditions usually provoke the need to do so and what policies of federal or state prosecutors or regulators or of external auditors might influence the manner of conducting an internal investigation. Part I also examines the role of the Board and management in conducting the investigation, including the roles of internal counsel, regular outside counsel, and independent outside counsel. Part I concludes by analyzing the Board's and Special Counsel's role in putting together the basic building blocks of an internal investigation, from determining the appropriate scope of the inquiry, to creating an accurate factual record, including the preservation, collection, and examination of the company's records, to communicating with and examining witnesses, including issues of indemnification and warnings.

In Parts II and III, we analyze whether and how the attorney-client privilege and attorney's work product are impacted in the course of conducting and finalizing an effective investigation. In Part IV, we turn to the external investigation and the roles of special and regular counsel in such investigation. Finally, in the Appendix, we summarize our recommendations.

I. QUESTIONS BEFORE BEGINNING AN INTERNAL INVESTIGATION

A. Factors to Consider When Evaluating Whether to Commence an Internal Investigation When Allegations Have Been Lodged of Significant Corporate Malfeasance or Where an Outside Auditor Suspects Illegality

Internal investigations typically result from discovery--by the Company, the media, an external auditor, or a whistleblower--of circumstances that raise a serious concern of potential liability or financial misconduct. The investigations are thus meant to determine the validity and seriousness of the circumstances alleged or disclosed and what action, if any, the Company should take consistent with the best interests of the shareholders. Among the possible responsive actions are remediation, market disclosure, and preparation for, and defense of, potential prosecutorial and regulatory actions or civil lawsuits. Depending on whose conduct is the focus of the investigation, senior management, the Board of Directors, an audit committee, or a special committee of disinterested directors may decide to commence an investigation. There are some respected corporate lawyers who counsel that Boards should resist the trend of having audit committees or special committees of independent directors routinely investigating whistleblower complaints and the like.

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