The Internal Investigation- What Should a GC Consider?

I am not a lawyer and this is not legal advice.  But….In my 30 year career, I have assisted counsel in many investigations.  I have also been a compliance officer for a company that went through internal investigations involving allegations that preceded my tenure.  Lastly, I advised the audit practice and general counsel’s office of a big 4 firm on the adequacy of many internal investigations performed by audit clients.  I have seen good investigations that have been thorough, efficient and contemplated the concerns of all stakeholders.  I have also seen unmitigated disasters.  Here are some questions you should ask and some of my observations.

Does the nature of the allegation require an independent investigation?

Most internal investigations can and should be led and managed by internal counsel.  The issue may require the use of outside counsel, but it does not usually require an independent committee of the board.  To me, this boils down to a simple analysis.  Is it reasonable that senior management could have directed or disregarded the behavior that would have led to the allegation?   The term “disregarded” will vary depending on the inherent risk the alleged offense actually occurring.  If the company sells commoditized products to quasi-governmental entities with a high commission in a high-risk location, then the expected rigor of the anti-bribery controls would be high.  Failure to have those controls in place might cause one to believe that management disregarded the risk of a bribe.  On the other hand, if a collusive accounting fraud took place in a division ineligible for a bonus then this would more likely be a circumvention of controls.  In other words, examine the actual allegation or the allegation inferred from the subpoena or search warrant.  Is it credible that such behavior could occur?  Could senior management have been involved?

What law firm should be hired?

Independent or not?

There are terrific reasons to hire a law firm that knows the company.  They know management, the industry and the issues.  If the investigation needs to be independent, however, I would hire an independent law firm.  It just looks better to stakeholders and there are many good law firms out there.  Attorneys are entrepreneurs, as well.  They will make both of these arguments, depending on who they are trying to sell to!

Relevant experience

I would hire a firm that has three characteristics.  They should have attorneys with experience in your industry.  They should have white collar investigative experience and relationships with the ultimate enforcement body.  Finally, they should have securities attorneys who can contemplate ancillary litigation risk.  All three of these types of attorneys are critical to the success of the project.  That breadth of knowledge rarely, if ever, lies in one person.

It is not enough, however,  to have those skill sets in the firm you hire.  They must also play well together in the “firm sandbox”.  I have seen some firms that are more ruthlessly competitive internally than they are externally!  The risk is that they will not bring the appropriate resources to bear on your “bet the company” case.

Personality

The lead investigative attorney should have significant people skills and experience in these matters.  He or she is going to turn your company upside down for a period of months to years.  An internal investigation is distracting and disruptive. It is expensive and can drive a significant wedge between management and the board, divisions and senior management.  The investigation should be performed by an attorney who is empathetic to those issues.

There are law firms (usually comprised of former prosecutors) that view themselves as an extension of the Department of Justice. Their “scorched earth” tactics are, in my experience, less effective at fact gathering than the balanced alternative.  Further, their overreaching conclusions subject the company to horrific ancillary litigation risk.  Reports, if issued, should be carefully worded to convey the reasonable findings of an investigation and not be confused with language one uses in an indictment.   There is probably nothing more important than the final workproduct to all stakeholders.  Therefore, before I hired someone, I would obtain sample:

Reports

These are now widely available on the internet for many attorneys.  If not available, I would ask for a redacted sample.  I would look for a fulsome discussion on the scope and the limitations of the investigation.  Every investigation has scope limitations and the results should be interpreted accordingly.  Pay close attention to the conclusions.  Are they reasonable, given the scope?  Are the conclusions characterized by hyperbole? Did they stay within the original scope or greatly expand? Lastly-- and this is important, do they appear to be more interested in selling a second phase (a remediation phase) as opposed to reporting the results of the investigation?

How do you perform all of this diligence over the weekend after one of your offices has been raided on a Friday afternoon? Sadly, you don’t.  I have spent frantic Saturday mornings on the phone with attorneys (while watching my kids’ ballgames) bemoaning this fact.  The best advice I can give you is to line up an independent “bet-the-company case” attorney in advance.  If you don’t do that, at least have a trusted adviser attorney who can help you navigate the crucial first 96 hours until you can get such counsel in place.

I did not include location on this list.  Investigations are increasingly global and law firms have grown in response to this fact.  I believe that the nature of the allegation may make this an important consideration, but this factor can be lessened due to other law firm relationships and the litigation consultant retained by lead counsel.

Litigation Consultants (Fair warning- at this point, my own self-interest kicks in!)

I think the attorneys you retain should drive this decision, but that doesn’t mean you can’t weigh in.  I generally think the decision boils down to a relatively small universe of firms.

Accounting firms

Big 4 firms have good people, global reach and significant accounting expertise. Because they perform audits, they also have many more conflicts- some they can foresee and some they can’t. They also have positional conflict issues in some circumstances. You should weigh the pros and cons of these constraints on their ability to meet your engagement needs. You should also be aware of “bait and switch” tactics.  Just because the world’s foremost expert on SAB Topic 5 T resides within a firm doesn’t mean that he or she will have any available time for your engagement.  As a matter of fact, given the urgency of these engagements, normally you should assume they will not contribute to your engagement.

Global consulting firms

Global consulting firms have experienced significant growth due to the conflicts that accounting firms have experienced.  This has led to an exodus of former big 4 professionals who would like to be free of the conflicts an audit practice presents.  In your diligence, you should assess the global presence of the consulting firm.  Lack of in-country experience can be very detrimental to your engagement success.  You should also consider the industry expertise of the firm.

Ultimately, experience and personality plays a big part in this decision, as well. Your ultimate goal is a speedy, thorough resolution that is as minimally disruptive as possible.  That doesn’t happen with rookies.

One final thought

This is one of the most challenging processes your company will ever face.  Your management and key people may be at risk-- both from an employment and civil and/or criminal standpoint.  Your senior management and production people will be distracted and resentful.  Profitable divisions and revenue streams may disappear.  Competitors will use this in the marketplace and try and take your people.  Your company may face significant penalties and may be competitively disadvantaged for years.  The decisions you make in the first 96 hours are among the most impactful you will ever make.