Internal investigations are an ever-present challenge for companies. They can involve virtually any topic and arise in myriad ways. Embezzlement, accounting improprieties, bribery, and financial statement adjustments can all lead to a closely scrutinized investigation, with likely triggers of whistleblower reports, news articles, litigation demands, or regulatory inquiries. The common denominator is that they present high pressure and/or high stakes. Consequently, it is imperative that matters not be made worse through a flawed internal investigation. In today’s post, we cover some of the essential topics to keep in mind when managing an internal investigation to ensure that the investigation itself does not cause or exacerbate harm to the company.
Privilege. Internal investigations conducted at the direction of counsel can be covered by the attorney-client privilege and work product protection. At the outset and throughout the investigation, steps should be taken to maintain the privilege and minimize risk of waiver. To determine if an investigation is entitled to privilege protections, Courts evaluate whether the purpose of an internal investigation is to obtain legal advice. Who conducts the investigation, including who conducts interviews, is an important consideration in maintaining privilege. For example, in United States ex. rel Barko v. Halliburton Co., the District of Colombia District Court found that investigations conducted by compliance department staff were not privileged because the Department of Defense requires government contractors to have internal controls. 1:05-CV-1276, 2014 WL 1016784 (D.D.C. Mar. 6, 2014). The DC Circuit later vacated the order requiring production of internal investigation documents, and stated that the question of privilege turned on whether “obtaining or providing legal advice was one of the significant purposes of the attorney-client communication.” In re Kellogg Brown & Root, Inc., 756 F.3d 754 (D.C. Cir. 2014). As we previously discussed, the decision provides some comfort that internal investigations can be privileged when directed by internal employees, but this case also illustrates the fact-specific nature of a court’s review of privilege.
Representation and Scope. The Board of Directors, its committees, and different corporate entities can have slightly different interests and perspectives on a given matter. It is important to clearly define the client at the outset of an investigation, such as the Audit Committee, or a particular corporate entity. After the client is identified, it is imperative that the investigators clearly communicate who is and who is not the client to all involved, and especially to interviewees through Upjohn warnings. In addition, the investigation team and client should consider who can oversee the investigation internally. If internal lawyers or business associates were involved in the underlying contact, their interaction with the day to day management of an investigation could call into question its objectiveness down the road.
Investigation Process. Seasoned investigators tailor protocols for each factual investigation, including data collection, interviews and other fact gathering, and transaction testing. This process should aim to thoroughly but efficiently uncover the factual records and meet the investigation objectives. The investigation procedures should also, as a guiding principle, prioritize maintaining all applicable privileges. For example, interviews should be conducted by or with the assistance of attorneys to maintain that the investigation is for the purpose of providing the company legal advice. Interviewers should provide an Upjohn warning at the outset of each interview to clarify the nature of the conversation, the company’s privilege, and the importance of confidentiality. Upjohn Co. v. United States, 449 U.S. 383 (1981). Internal procedures should also be conscious to respect rules regarding whistleblowers or retaliation for participation in the investigation.
Use of Outside Consultants. Attorneys often seek help from consultants such as forensic accountants, who can design procedures to test financial transactions and internal controls. Attorneys should oversee and direct their work, to ensure a clear record is maintained that the consultant’s work is assisting with providing legal advice.
Reporting. When the investigation team reports the results of an investigation to the client, there is an opportunity to provide the legal advice sought and illustrate the facts uncovered. Careful consideration should be made of the form and content of the investigation report as well as the recipients. In preparing the report, careful attention should be paid to balancing the tension between the substantive benefit of including legal advice (and the related procedural benefit of enhanced protection from discovery) and the reality that the company may want to or be required to produce the report to a third party. As a piece of core work product, the investigation report is often the target of discovery requests. Disclosure of the report or its contents to third parties can run the risk of waiver.
Press and External Scrutiny. Companies with public disclosure obligations often struggle with how much to disclose about an investigation and when to make an announcement. The initial announcement of an investigation can lead to the immediate filing of shareholder litigation. On the one hand, these filings are often made too soon to meet applicable pleading standards. For example, as we recently reported, the Ninth Circuit joined other circuits last year in holding that the announcement of an internal investigation, standing alone, is insufficient to show loss causation at the pleading stage. On the other hand, related litigation can stress internal resources and make investigations more complicated. The timing and contents of public announcements should consider many factors, including disclosure obligations, litigation exposure, and minimizing risk of privilege waiver.