INTERNAL CORPORATE INVESTIGATIONS



From PLI’s Course Handbook

Internal Investigations 2008: Legal, Ethical & Strategic Issues

#14541

6

internal corporate

investigations—anticipating

possible voluntary disclosure

Steven M. Kowal

Bell Boyd & Lloyd, LLP

STEVEN M. KOWAL is a partner in the Chicago office of Bell, Boyd & Lloyd, LLP. He chairs the White Collar Criminal Defense and Corporate Investigations Group, and is a member of the Antitrust and Trade Regulation Department. His practice is concentrated in complex criminal and civil litigation, particularly antitrust and trade regulation, investigations and enforcement proceedings by FDA, healthcare, securities, and business matters. He has successfully defended numerous companies and individuals in many grand jury investigations and criminal prosecutions, as well as civil regulatory proceedings. He also has conducted internal investigations for major corporations. Mr. Kowal is a Fellow of the American College of Trial Lawyers. He has extensive federal trial experience and has prepared criminal and civil appeals in five federal circuit courts of appeals and several state appellate courts. Mr. Kowal has been listed as one of The Best Lawyers in America, recognized as one of the nation’s leading lawyers in white collar criminal defense by Chambers USA, America’s Leading Lawyers for Business, included in the Guide to the World’s Leading Competition and Antitrust Lawyers and the Cross-Border Competition Handbook and listed in Illinois Super Lawyers in white collar criminal defense and antitrust law. Prior to entering private practice, Mr. Kowal was a senior trial attorney in the Antitrust Division of the U.S. Department of Justice where he prosecuted numerous criminal and civil antitrust cases. He received several awards for outstanding performance including the Attorney General’s Special Commendation. He was the chair of the Criminal Practice and Procedure Committee of the American Bar Association’s Section of Antitrust Law from 2001 through 2005. He received two awards from the ABA for Exceptional Leadership in Preparing Policy Comments on behalf of the Section of Antitrust Law relating to proposed amendments to the Federal Sentencing Guidelines for Organizations. He has authored numerous articles and is a frequent speaker around the country on criminal defense and regulatory enforcement issues. Mr. Kowal graduated magna cum laude from St. Procopius College where he was the valedictorian of his class, and cum laude from the Northwestern University School of Law.

INTERNAL CORPORATE INVESTIGATIONS – ANTICIPATING POSSIBLE VOLUNTARY DISCLOSURE

Steven M. Kowal*

Bell Boyd & Lloyd, LLP

Chicago, Illinois

INTRODUCTION

Companies conduct internal investigations for many reasons. In the run of the mill case, the investigation may be intended to get to the bottom of some form of employee misconduct in the work place. In more serious situations, the lawful management of the company may be called into question. Often, allegations of misconduct by officers and executives must be investigated to meet evolving standards of effective corporate governance.[i] The investigation will generate the factual information necessary to evaluate potential liability, gain control of problematic conduct and minimize injury. The investigation will allow the company to craft a strategy that will address civil liability, limit or avoid criminal and regulatory sanctions and implement remedial measures. In certain situations, a report that the company has conducted an investigation may buttress investor confidence and enhance market position.

Increasingly, internal reviews are conducted either in anticipation of a formal government investigation or immediately after a government investigation has commenced. In these situations, the government’s prosecutorial policies and practices will have a substantial effect on the design and implementation of the internal review. Unfortunately, the government’s policies strongly encourage disclosure of at least some aspects of the internal review for the company to receive favorable consideration in the government’s exercise of its prosecutorial discretion.

The prospect of such a “voluntary” disclosure places special emphasis on the manner in which the investigation is initiated, designed and conducted. This paper will consider those issues which require particular attention when disclosure to the government should be anticipated.

GOVERNMENT POLICIES REQUIRING DISCLOSURE

The United States Department of Justice has issued a series of guidelines delineating the factors to be considered by prosecutors in determining whether criminal charges should be brought against companies. Although the current version of these guidelines does not explicitly require disclosure of information gained through the company’s internal investigation to receive favorable credit, previous versions were very direct. The government stated it would place significant emphasis on whether the company waived its applicable privileges and disclosed information derived from the internal investigation. Many believe the government’s previous guidelines generated a “culture of waiver” which will result in disclosure of privileged information even under the current guidelines.

In 2003, Deputy Attorney General Larry D. Thompson issued a revised set of guidelines for corporate prosecutions.[ii] These guidelines identified several factors that prosecutors were to consider in evaluating “the proper treatment of a corporate target” including the nature of the offense, the corporation’s history of similar conduct, the existence or adequacy of a corporation’s compliance program and a corporation’s timely and voluntary disclosure of wrongdoing.

In particular, the Thompson version stressed that a corporation’s “timely and voluntary disclosure of wrongdoing” and its willingness to cooperate in the investigation of its agents including, if necessary, the waiver of corporate attorney-client and work product protections, were factors that influenced the prosecutorial decision. In determining whether the corporation was in fact cooperative, prosecutors were authorized to consider whether the company had waived the attorney-client privilege and work product protections “both with respect to its internal investigation and with respect to communications between specific officers, directors and employees and counsel.”

The issuance and implementation of the Thompson Memorandum caused great consternation. In effect, the government had explicitly stated that the quality of a company’s cooperation was an important factor in determining whether criminal charges would be brought, and the assessment of that cooperation would be influenced by, if not depend on, the decision to waive attorney-client and work product protections and disclose information that had been gained through the company’s internal investigation. This policy raised concerns not only among the defense bar and eventually the United States Sentencing Commission, but also attracted heightened congressional scrutiny.

In response to these concerns, Deputy Attorney General Paul J. McNulty issued revised guidelines in December 2006.[iii] The McNulty Memorandum stressed the value of corporate cooperation and advised that, in determining whether to charge an organization, prosecutors should favorably consider the organization’s willingness to disclose information requested by the government including that protected by attorney-client or work product protections. The McNulty Memorandum, however, backed away from the virtual requirement of disclosure that was imposed by the Thompson version. Rather, the McNulty Memorandum states that the government can seek an explicit waiver only in certain limited situations, and even then only with the approval of superiors within the Department of Justice. Nevertheless, the McNulty Memorandum does recognize that companies that “voluntarily” waive the applicable privileges should receive favorable consideration for that decision. Many believe the “culture of waiver” that was generated by the implementation of the Thompson Memorandum will affect decisions under the McNulty policy, and that companies will understand that to receive full credit for cooperation with the government, they will be expected to waive applicable privileges and disclose the internal investigation information.

Policies favoring the waiver of privileges and the disclosure of information are not confined to the Department of Justice. In 2001, the Securities & Exchange Commission used the report of an investigation of wrongdoing at the Seaboard Corporation to set out 13 nonexclusive factors that it would review in determining whether a company deserved reduced penalties for violations.[iv] The significance of cooperation was made explicit. One of the factors in the policy focused on whether “the company promptly, completely and effectively disclose[d] the existence of the misconduct to the public, to regulators and to self-regulators. Did the company cooperate completely with appropriate regulatory and law enforcement bodies?”

The SEC Seaboard policy also focuses on whether the company identified the “possible violative conduct with sufficient precision to facilitate prompt enforcement actions against those who violated the law,” and “did the company voluntarily disclose information [the SEC staff] did not directly request and otherwise might not have uncovered?” In effect, the SEC has stated that the company’s decision to uncover evidence of misconduct and present it to the Commission would be a substantial factor in determining whether an enforcement action would be initiated against the company and the amount of the penalty that would be sought.

In this context, a company’s internal review of misconduct that may generate a government investigation, or which already is the focus of such an investigation, must be conducted with the expectation of disclosure to a government agency. This realization will substantially affect the manner in which the investigation is designed and implemented. Without consideration for the potential for disclosure, the company and its counsel may find that they have generated substantial additional problems for the company, its officers and employees and the investigating legal counsel.

THE INVESTIGATION SHOULD BE CONDUCTED BY OUTSIDE COUNSEL

An important issue is who should conduct the investigation. A review by in-house counsel would appear to afford certain advantages. The in-house counsel will be familiar with the structure and operation of the company, and may have personal relationships with important executives that will facilitate the flow of information. Unquestionably, such an investigation will control cost.

There are, however, important countervailing considerations. If the government is investigating potential misconduct by senior management, then the credibility of the company’s internal review may be questioned if conducted by in-house counsel. Moreover, the participation of in-house counsel may raise a question of whether the investigation was conducted for business purposes in addition to the legal issues, and create another potential vehicle for compelled disclosure in either criminal or civil proceedings.

If the internal investigation is being conducted to try to persuade the government not to pursue enforcement proceedings, then almost certainly it should be done by outside counsel. The government will be more willing to accept that the investigation was conducted thoroughly and that disclosures are complete.

If the investigation focuses on conduct by senior management, the company may also consider whether special outside counsel should be retained. Such an arrangement will enhance the government’s perception of a credible investigation, and perhaps increase the likelihood that enforcement proceedings can be avoided. The use of special outside counsel will help to eliminate the concern that the company’s regular law firm did not want to ask difficult questions or criticize the management officials who are otherwise responsible for its retention. The use of special outside counsel will raise the cost of the investigation, and may create an unfortunate perception among management and employees that these new lawyers were engaged to find a problem, not merely to investigate whether a problem exists. Nevertheless, if the goal is to place the company in the best position possible to deal with prosecutors and regulators, then the use of such special counsel must be seriously considered.

THE CLIENT MUST BE CAREFULLY DEFINED

At first blush, this would seem to be a relatively straightforward determination. The client is the corporation, and the attorneys conducting the internal investigation owe a duty of loyalty only to the corporation. The American Bar Association’s Model Rules of Professional Conduct Rule 1.13(a) states “A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.”

In practice, however, this becomes a more nuanced question. Counsel conducting the investigation must report to some individual or committee of the company, and the designation of that group is important. If the investigation is focused on possible misconduct by officers or senior executives, the lawyers conducting the internal review cannot be responsive to those officers or executives.

If the investigation is focused on middle or lower level employees, then the investigating counsel can report to the Board of Directors. In those situations where the accounting and financial practices of the company have been called into question, then it would be most appropriate to report to the audit committee of the board. This committee has special expertise to review and assess the accounting and financial practices of the company. Of course, a report to the audit committee assumes that members of that committee are not involved in the subject area of the investigation. If, however, the investigation is focused on senior officers or executives, then it is particularly important for the investigation to be conducted with complete independence and objectivity and to be able to convey that perception to the government. In most instances, this will suggest that a special committee of the board should be formed consisting of independent directors. This structure will enhance the prospect that the investigation will be viewed as credible, and that any recommendations will be implemented effectively.

A recent case has demonstrated the importance of defining exactly who represents the client, and to whom investigating counsel should report. In Ryan v. Gifford,[v] the court reviewed whether the report of investigating counsel resulted in a waiver of privileges. In Gifford, counsel was retained by a “special committee” of outside directors to investigate the possible backdating of stock options. Some of the members of the Board of Directors were a focus of the investigation. Nevertheless, investigating counsel delivered its report to the full Board of Directors, rather than just to the special committee. In addition, the individual lawyers for the suspect directors were present for the investigating law firm’s presentation.

The court focused on this disclosure as one basis to conclude that the attorney-client and work product protections related to the investigation had been waived, and that all of the information obtained during the investigation must be disclosed in related civil litigation. Basically, the court held that the disclosure to members of the Board of Directors, rather than just to the special committee, included individuals who did not have a common interest with the special committee. Accordingly, the requisite confidentiality had been waived.

If a special committee is appointed, then its authority should be established by a resolution from the board. In addition, the special committee should be authorized by the board to retain counsel and any additional professionals that may be necessary to conduct the investigation efficiently and effectively. This could include, for example, forensic accountants and electronic discovery consultants.

The group representing the company must carefully and specifically define the scope of the investigation that will be pursued by outside counsel. The letter of retention with outside counsel should describe the allegations that have prompted the investigation and limit the scope to examine those allegations. If it is necessary to expand the scope as the investigation progresses, that decision should be made specifically by the group or committee representing the company. Investigating counsel should not be allowed to conduct a broad inquiry into any area of potential misconduct. This may have the unfortunate effect of opening new areas and resulting in disclosure to the government and potential civil claimants of other areas of problematic conduct. The retention letter also should specify that investigating counsel is to provide interim reports during the course of the investigation. In most instances, it is advisable for these interim reports to be provided orally. Such a reporting relationship will keep the committee informed without creating the problem of preparing tentative written conclusions that may change during the course of the investigation. Even if later investigation undermines those tentative conclusions, they may raise substantial questions if disclosed to either the government or civil plaintiffs.

The retention letter also should require investigating counsel to provide a detailed final report to the group representing the company, but the letter should not specify whether that report should be in writing or made orally. Investigating counsel should agree that all work product, data and documents collected during the investigation, and all analyses prepare belong to the corporation. Finally, investigating counsel should be instructed explicitly that the decision to waive confidentiality protections is retained by the corporation’s representative, and that no waiver should be made unless and until appropriate authorization is conveyed.

Compliance with these procedures will help to avoid uncomfortable situations. Investigating counsel will be aware of exactly what group represents the corporation, and therefore to whom all reports should be made. The possibility of inadvertent waiver through premature disclosure will be reduced. In addition, adherence to the defined scope of the investigation will buttress the argument that the information and material generated during the investigation is subject to work product protection. Because of the spectre of a government investigation, there is a legitimate argument that the investigation was conducted in anticipation of litigation. Exceeding the defined scope of the investigation, without appropriate authorization, could undermine this argument.

V. THE INVESTIGATION MUST BE CONDUCTED THOROUGHLY AND IN COMPLIANCE WITH LEGAL AND ETHICAL OBLIGATIONS

If the internal investigation is to generate information that will be used to persuade the government to forego enforcement activity, or to mitigate the effect of an enforcement decision, then the investigation must be conducted thoroughly to uncover all of the potentially relevant facts. An investigation that appears to have been conducted in an haphazard manner will not have a beneficial effect on the government’s decisions.

The first stage of the investigation is to gather the relevant documents. Often, this process begins with the identification of the employees who are likely to possess those documents. This process may benefit from the knowledge and guidance of in-house counsel. Employees who may have relevant documents or electronic information should be advised that an investigation has been commenced, and that documents or electronic data should not be destroyed without the explicit approval of counsel. In effect, a litigation hold should be imposed just as if a government investigation had been commenced or a civil suit had been filed. As the investigation progresses, it is likely that the universe of the employees involved will expand, and therefore the litigation hold should be revised as appropriate.

To demonstrate the thoroughness of the investigation, effective document gathering techniques should be employed. Investigating counsel should be able to recreate the source of the documents and demonstrate that all responsive documents were gathered and reviewed. In most instances, this will require that documents be properly numbered and logged, and that employees be required to certify that all relevant documents and information have been produced.

Inevitably, it will be necessary to interview employees. This process presents special challenges which have been increased by some of the government’s recent prosecutorial decisions.

Prior to the commencement of interviews, the group representing the corporation should communicate with the employees who are subject to interviews. The employees should be told that an investigation is being conducted by counsel for the corporation. The employees should be instructed to cooperate in the investigation. They should be informed that they must produce all documents and materials requested, comply with all instructions to retain documents and electronic data, and submit to interviews when requested. In certain instances, consideration should be given to discussing the scope of the corporation’s policy on indemnity for retention of individual legal counsel.

In Upjohn v. United States[vi], the Supreme Court suggested the standards for instructions to employees prior to interviews. The Court defined those situations where the company can protect the information obtained from its employees in the course of an internal investigation from compelled disclosure.

The Upjohn decision effectively established a set of instructions and warnings that should be conveyed to employees during the course of interviews to protect the company’s attorney-client privilege and in fairness to the individual employees. The investigating counsel should state that (1) the counsel represents the company (or an independent committee); (2) counsel is not the employee’s lawyer and does not represent the employee’s interests separate from those of its own client; (3) the conversation is protected by the attorney-client privilege, but the privilege belongs to the company; and therefore (4) the company can choose to waive its privilege and disclose all or part of what the employee has told investigating counsel to external auditors, the government, regulators or others. The employee should also be instructed that the communications with investigating counsel should be held in confidence.

In addition to providing those warnings that are required to comply with Upjohn, investigating counsel should consider whether additional information should be provided prior to or in the course of the interview. Investigating counsel should consider, for example, whether the topics to be covered during the interview should be described to the employee in advance, and whether the employee should be afforded an opportunity to review documents before the interview is conducted. In appropriate circumstances, investigating counsel might also inform the employee of the company’s policy on indemnification if the employee should elect to retain independent counsel. Finally, if the company has already made a decision to waive privileges and disclose the information to the government, then perhaps that decision should be communicated to the employee.

Inevitably, employees will raise difficult questions in relation to these warnings and admonitions. An employee, for example, might ask whether he or she needs independent counsel. Investigating counsel should be very careful in responding to this type of inquiry. In most instances, it is advisable for investigating counsel to state that a direct response cannot be provided, but that if the employee wants to speak to individual counsel then consideration will be given to adjourning the interview for a reasonable time.

Substantial problems can be generated if counsel provides a confusing response to the employee. This situation was reviewed in In Re Grand Jury Subpoena.[vii] In that decision, the court criticized the responses given by investigating counsel to questions from employees. The case stemmed from an internal investigation at AOL. During employee interviews, the investigating counsel stated “We represent the company. These conversations are privileged, but the privilege belongs to the company and the company decides whether to waive it. If there is a conflict, the attorney-client privilege belongs to the company.” To this extent, the admonitions of investigating counsel were correct. Unfortunately, counsel also explained to the witness “that they represented AOL but that they could represent him as well as long as no conflict appeared.”

Subsequently, the company received a grand jury subpoena which, among other things, sought “written memoranda and other written records reflecting the interviews conducted by attorneys for [AOL].” The company agreed to waive the attorney-client privilege and produce the subpoenaed records, but counsel for the employees moved to quash the subpoena on the grounds that each employee had an individual attorney-client relationship with the investigating attorneys. The district court denied the motions to quash and held that the employees failed to prove they were clients of the investigating attorneys. Although this decision was affirmed on appeal, the conduct of the investigating attorneys was harshly criticized. The court stated:

We note that our opinion should not be read as an implicit acceptance of the watered down “Upjohn warnings” the investigating attorneys gave the appellants. It is a potential legal and ethical mine field. Had the investigating attorneys, in fact, entered into an attorney-client relationship with appellants, as their statements to the appellants professed they could, they would not have been free to waive the appellants’ privilege when a conflict arose. It should have seemed obvious that they could not have jettisoned one client in favor of another. Rather, they would have had to withdraw from all representation and to maintain all confidences. Indeed, the court would be hard pressed to identify how investigating counsel could robustly investigate and report to management or the board of directors of a publicly traded corporation with the necessary candor if counsel were constrained by ethical obligations to individual employees. However, because we agree with the district court that the appellants never entered into an attorney-client relationship with the investigating attorneys, they averted these troubling issues.

Thus, it should be clear that investigating counsel must adhere to the warnings suggested by the Upjohn decision, and any attempt to reassure the employees that their interest may in fact be protected will raise substantial ethical issues.

The interview should be memorialized in memoranda prepared by investigating counsel. Preferably, these memoranda will include mental impressions by investigating counsel to enhance work product protectability. In most instances, the interview should not be transcribed. This will undermine protectability in the event of subsequent civil litigation. Also, the interview memoranda should record the documents that were reviewed with the employee. This will help to prepare the most complete record of what occurred, and avoid questions concerning whether the employee was somehow mislead during the course of the interview.

VI. SPECIAL CONSIDERATIONS IN CONDUCTING EMPLOYEE INTERVIEWS

In the last few years, the government has returned criminal charges in three cases based on alleged misrepresentations by employees to the company’s lawyers in the course of an internal investigation. Basically, the government has alleged that individuals understood that the company’s lawyers would disclose information to the government, and therefore a misrepresentation to those lawyers was intended to mislead the government and obstruct its investigation. This form of criminal liability raises substantial questions concerning the ethical obligations of attorneys conducting internal investigations and the warnings that should be given to employees.

In 2004, three senior executives of Computer Associates Inc. were indicted for a series of criminal acts including obstruction of justice. The indictment alleged that during interviews by the company’s investigating counsel, the defendants “did not disclose, but instead falsely denied and otherwise concealed” the existence of backdating practices at the company. After these interviews were conducted, the company waived its privileges and provided the results to federal investigators. The indictment alleged that the defendants must have known the company’s outside counsel would forward their statements to the government, and therefore they had knowingly provided false information that was material to the government’s investigation. All three of the defendants pled guilty to obstruction of justice.[viii]

The second case was brought in 2006. The government’s investigation focused on pricing practices at El Paso Merchant Energy, a natural gas trader. The indictment alleged that during interviews conducted by the company’s internal investigating counsel, the defendant “did not disclose, falsely denied, and otherwise concealed that he had provided false information to trade publications.” The indictment charged that the defendant “believed that El Paso’s outside lawyers would inform government agencies of his statement during the interview.”[ix]

The case was tried and the defendant was acquitted of the obstruction of justice charges at the close of the government’s case. The judgment of acquittal was granted in large part because the testimony provided by the company’s outside investigating attorneys was equivocal about whether they had informed the defendant that the information he provided would be transmitted to the government.

The most recent case was brought in 2007. An executive vice-president of an auto parts maker was charged with obstruction of justice for providing false information in the course of an investigation being conducted by the company’s audit committee. The indictment charged that the defendant understood that this information would be communicated to Securities & Exchange Commission.[x]

There has been substantial attention focused on the government’s use of statements made to a company’s investigating counsel to support an obstruction of justice charge. Some believe that individuals do not really understand these statements can affect a government investigation, and therefore that it is unfair and improper to use such statements to charge obstruction of justice. Irrespective of the correct application of the obstruction of justice statute, it is clear that the government’s prosecutorial practice has created a form of liability based on representations made by the company’s legal counsel to the government based on an employee’s interview. This raises significant questions related to the investigating attorneys ethical obligations.

Many of these concerns stem from the fact that employees are discouraged from asserting their Fifth Amendment privilege against self-incrimination in the course of an internal investigation. Often, companies state that employees will be terminated if they do not cooperate with the internal investigation. Such failure to cooperate will be found if the employee asserts the Fifth Amendment privilege against self-incrimination to refuse to submit to an interview. In effect, the company can prevent the employee from relying upon this constitutional privilege, and the government is the beneficiary of that decision. The government can use the company’s employment leverage to circumvent this important constitutional protection.

The participation of investigating counsel in securing information from employees under these circumstances raises concerns under Model Rule 4.4. The rule states that “in representing a client, a lawyer shall not….use methods of obtaining evidence that violate the legal rights of a third person.” Moreover, the comment to the rule provides:

Responsibility to a client requires a lawyer to subordinate the interests of others to those of the client, but that responsibility does not imply that a lawyer may disregard the rights of third persons. It is impractical to catalog all such rights, but they include legal restrictions on methods of obtaining evidence from third persons… .

It is difficult to reconcile the policy of requesting privilege waivers with either the mandate of Model Rule 4.4 or the commentary. It is even more challenging to do so when the practice results in obstruction of justice charges based upon statements to investigating counsel. This is a situation in which the government has “essentially enlisted private companies and their counsel in doing the work of law enforcement agencies without making this connection clear to those interviewed in the course of internal investigations,”[xi] There is a serious question of whether investigating counsel and prosecutors are respecting the rights of third persons.

Additionally, enlisting private attorneys in law enforcement appears to conflict with the directives of Model Rule 3.8 that prosecutors “….shall make reasonable efforts to assure that the accused has been advised of the right to, and the procedure for obtaining, counsel and has been given reasonable opportunity to obtain counsel.” If the government demands a privilege waiver, then the government may also be obligated under Rule 3.8 to make reasonable efforts to ensure that the employee was informed of the right to counsel prior to the commencement of questioning by the company’s investigating attorney.

Moreover, Model Rule 1.13(f) requires that the attorney for the company explain the identity of the client when the organization’s interest is adverse to the person being addressed. In the situation where investigating counsel is an informal agent for the government, there is a question of whether the attorney has adequately identified the client to the person being interviewed. This must be considered in the light Model Rule 4.3 which imposes an affirmative duty on the attorney to correct any misunderstandings when the attorney knows, or reasonably should know, that an unrepresented person misunderstands the attorney’s role.

The government’s aggressive enforcement policy and the ethical concerns under the Model Rules raise the question of whether the warnings given to employees prior to interviews should be expanded. There is at least a reasonable basis to ponder whether investigating counsel should inform an employee that false statements during the course of an interview can, under certain circumstances, constitute a federal crime. If there is a likelihood of such jeopardy, then perhaps the investigating attorney should also advise the employee that an opportunity will be afforded to consult with independent legal counsel.

This is a very murky area. What is clear is that the government has pursued an enforcement policy that compromises the position of the company’s investigating counsel. That lawyer is no longer working merely to obtain information to help formulate legal advice for the company. Investigating counsel may also be working to develop information that will support a criminal charge by the government.

VII. REPORTING THE RESULTS OF THE INVESTIGATION

As mentioned above, investigating counsel must be careful to report the results of the investigation to the representative of the company that constitutes the client. In addition, however, there are substantial issues relating to how that report should be conveyed.

If potential government disclosure is contemplated, then a written report is useful. Generally, such a report will summarize the circumstances that led to the investigation, detail the investigation that was conducted, and summarize the facts. Perhaps information developed during the investigation that is favorable to the company should also be included. If the written report itself is to be conveyed to the government, then probably no further information should be included.[xii]

If, however, the written report is only for the use of the company, then the report should also analyze the applicable law, develop arguments for and against liability or prosecution, identify any internal procedures or practices that led to the misconduct and that could be improved or prevented, and recommend remedial action.

Irrespective of the use anticipated for the written report, it should not quote or directly cite interview memoranda or other documents or information that would be subject to attorney-client and work product protections. Direct quotations or references in the written report could undermine any argument to withhold this investigative data from plaintiffs in subsequent civil litigation.

VIII. CONCLUSION

Corporate internal investigations are useful and necessary to effective corporate governance. They provide the factual information necessary for the company to make important legal decisions, and to correct and prevent future problems. Unfortunately, the government’s aggressive enforcement, including the policy of seeking “voluntary” disclosures and pursuing obstruction of justice charges, has converted investigating counsel into a form of government agent.

In this context, there is reason to be concerned that the government’s enforcement policies will undermine the implementation of programs to prevent and detect misconduct within a company. Nevertheless, it is incumbent upon investigating counsel to be aware of the effect these government policies have on the manner in which an investigation should be conducted, and to design and pursue investigations that recognize these issues.

ENDNOTES

* Steven M. Kowal is head of the White Collar Criminal Defense and Corporate Investigations practice group at the law firm of Bell, Boyd & Lloyd LLP in Chicago. He has tried numerous criminal and civil cases and is a Fellow of the American College of Trial Lawyers. He defends companies and individuals in criminal investigations and prosecutions, particularly relating to antitrust, FDA, healthcare, securities and other business matters. Also, he has conducted internal investigations for numerous major corporations.

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[i] In re Caremark International, Inc. Derivative Litigation, 698 A. 2d 959 (Del. Ch. 1996).

[ii] Memorandum from Larry D. Thompson, Deputy Attorney General, Department of Justice, to Heads of Department Components, U.S. Attorneys, Principles of Federal Prosecution of Business Organizations (Jan. 20, 2003)

[iii] Memorandum from Paul J. McNulty, Deputy Attorney General, Department of Justice, to Heads of Department Components, U.S. Attorneys, Principles of Federal Prosecution of Business Organizations (Dec. 12, 2006).

[iv] Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Exchange Act Release No. 34-44969 (Oct. 23, 2001).

[v] 2007 WL 4259557 (Del. Ch. 2007), 2008 WL 43699 (Del. Ch. 2008).

[vi] 449 U.S. 383 (1981).

[vii] 415 F.3d 333 (4th Cir. 2005).

[viii] United States v. Kumar et al, 1:04-CR-00846 (E.D.N.Y. 2006).

[ix] United States v. Singleton, H-04-514 SS (S.D. Tx. 2006).

[x] United States v. Jones, 1:07-CR-00227 (S.D.N.Y. 2007).

[xi] Legal Ethics, Professionalism and the Employee Interview, 2003, Colum. Bus. L. Rev. at 952-53.

[xii] Disclosure to the government will almost certainly waive attorney-client and work product protections. The information will then be subject to compelled production in related civil litigation. See, e.g., In re Qwest Communications International Sec. Litig. 450 F.3d 1179 (10th Cir. 2006).

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