Conducting Internal Investigations Amid Heightened Government - - PowerPoint PPT Presentation

Conducting Internal Investigations Amid Heightened Government Scrutiny of Corporate Practices

Evaluating Whether to Investigate, Determining Scope, Selecting Investigators, Managing Privilege Issues, and More Today’s faculty features:

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Presenting a live 90-minute webinar with interactive Q&A Fritz E. Berckmueller, Partner, Calfee Halter & Griswold, Cleveland Theresa L. Davis, Partner, Reed Smith, Chicago

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Conducting Internal Investigations Amid Heightened Government Scrutiny of Corporate Practices

5

Presenters

Fritz E. Berckmueller

Partner

Calfee, Halter & Griswold LLP (Cleveland)

Theresa L. Davis

Partner, Financial Industry Group

Reed Smith (Chicago)

6

Agenda

• Evaluating whether to conduct an internal investigation
• Planning the investigation/ pre-investigation strategies
• Conducting the investigation
• Post-investigation strategies

7

• I. EVALUATING WHETHER TO

CONDUCT AN INTERNAL INVESTIGATION

8

What triggers an internal investigation?

• Data breach
• Government

inspection, visit, call - routine?

• M&A due diligence
• Stock transaction
• Auditor’s comment
• Subpoena
• Employee misconduct
• Civil suit or arbitration
• News article
• Competitor complaint
• Hotline/Anonymous tip
• Disgruntled employee
• Accounting irregularity
• OSHA, environmental,

federal contract, grant

9

Is an internal investigation necessary?

• Ask: if true, would the conduct
• Violate the law?
• Violate company policy?
• Violate duty to shareholders, creditors, etc.?
• Pose a risk to health or safety?
• Trigger any reporting disclosure duty?
• Better if disclosed voluntarily, not

involuntarily?

10

Is an internal investigation necessary?

(continued)

• Was it an isolated incident, or ongoing?
• Did internal controls catch it, or miss it?
• Is the subject peripheral, or at heart of the

business?

• Is the amount at stake material to shareholders?
• What harm would result from public disclosure

without investigation?

• In short, what is the risk level?

11

What are the benefits to conducting an internal investigation?

• Earn credit with investigating agencies
• Get to the bottom of critical issue

and make needed changes

• Have the facts first in event of

litigation

• Send clear message that illegal

activity will be dealt with and not tolerated

12

Who is your audience?

• Could be obvious
• If not, consider who ultimately will need to hear about and resolve

the issue

• Different audiences have different needs and make different

demands on the company

• Senior Management
• The Board
• Regulators
• Law enforcement
• Employees
• Media
• Shareholders
• Customers

13

• Caution: an internal investigation, to be

credible, must be independent.

• That means the problems it exposes

may be as bad as, or worse than, the

• riginal problem you set out to

investigate.

• Consider whether the company can the

scrutiny.

14

Example: GM Ignition Switch Recall: Investigation, Report, Fallout

• G.M. hired Jenner & Block to investigate failure to fix a faulty

ignition switch

• Reviewed millions of documents
• Interviewed 230+ people
• Result: 325-page report to federal regulators, made public in

June

15

GM GC Milliken Got a Mulligan

Barra: “There were silos, and as information was known in one part of the business, for instance the legal team, it didn’t necessarily get communicated as effectively as it should have been to other parts, for instance the engineering team.”

16

GM (continued)

• Cleared CEO Barra, lieutenants of wrongdoing
• Found no deliberate cover-up of switch problems. BUT
• DOJ is now investigating GM, including in-house attorneys, for

hiding evidence

17

• II. PLANNING THE

INVESTIGATION: PRE-INVESTIGATION STRATEGIES

18

Components of an Effective Internal Investigation: Necessity

• What is the issue?
• Simple or more complex?
• One employee or several?
• Single incident or repeated pattern?
• Minor, moderate, or major significance, such

as regulatory violation or disclosure violation?

19

Components of an Effective Internal Investigation: Planning

1. Confidentiality is essential 2. Is formal investigation required? 3. Who should conduct the investigation – internal/external? 4. What policies, work rules, or laws apply? 5. What relevant documents may assist investigation? 6. When and where to conduct investigation? 7. Who should be interviewed?

 the complaining and accused employee(s) and their supervisors  observers/witnesses, anyone with relevant information  authors of relevant documents

8. What time and place are best for interviews?

20

Components of an Effective Internal Investigation: Planning

• Control the Documents
• Get originals (make a copy if you need to add notes)
• Establish a chain of custody
• Maintain each document for at least the applicable statute of

limitations period, or longer as required

• Obtain and review relevant personnel file, company policies, and
• ther possibly relevant documents
• Seek all documents, including those on computers, hard drives,

cloud storage, and e-mail, all drafts and file notes

• Review all files in similar cases

21

Who Should Conduct Investigation?

 Three Main Choices

• In-house Counsel
• Regular outside counsel
• Independent outside counsel

 Combination of investigators

22

Components of an Effective Internal Investigation: Selecting the Investigator

• 1. Familiarity
• Knows policies, personnel, context and significance
• 2. Unbiased
• Beware of partiality perception
• 3. Trained
• Need grows in proportion to severity of the allegation
• 4. Timely
• Must the investigator juggle other assignments?
• 5. Professional
• Must obtain information from nervous and unwilling witnesses.
• Consider presentation: assess how investigator would “come across”

to a jury. 23

Who Should Conduct Investigation

 In-house Counsel or Human Resources

• Typically, better acquainted with company’s history,

procedures and operations

• Employees may speak more openly
• Privilege Issues – What hat is in-house counsel

wearing

• Internal relationships – must always maintain
• bjectivity and appearance of neutrality
• Independence
• Influence/control

24

Who Should Conduct Investigation

• Outside Counsel
• Increased objectivity
• Experience/expertise
• Preservation of privileged information

25

Who Should Conduct Investigation

• Next issue: Regular outside counsel v. special

investigation counsel

• Strategic and efficiency considerations
• Special expertise
• Avoidance of conflicts
• Avoidance of privilege issues
• Independence/objectivity
• Potential disadvantages
• Deputized government agents
• Expensive
• Slippery Slope

26

What is the Scope of the Investigation

• Work Plan
• Nature of report
• Potential involvement/culpability of employees
• Document collection, review and analysis
• Document preservation notice
• Use of Additional experts
• Ethical and legal standards/considerations
• Privilege considerations
• United States v. Kovel, 296 F.2d 918 (2d Cir. 1961)

27

How Should the Investigation Proceed?

• How should the investigation be structured?
• Who should be notified of the investigation?
• Cooperation and voluntary disclosure considerations
• When should notification occur?
• Triggering event may dictate timeline
• Who do the investigators report to?
• Management
• Board of Directors
• Special Committee

28

• III. CONDUCTING THE

INVESTIGATION

29

The heart of the investigation

• Review records (paper, electronic)
• Perform substantive testing (if necessary)
• Interview current and former employees, other

relevant parties

• Inform client of the reasons and extent of needed

follow-up work

• Avoid terminating an employee for refusal to

cooperate until the end of the investigation

30

Data collection and review

• Step 1: Litigation hold
• Step 2: Identify the sources and custodians
• f data
• Step 3: Identify topics or search terms to identify pertinent

documents

• Step 4: Review the relevant data
• Step 5: Follow up to obtain more data as needed

31

The importance of an initial response

• Consider whether

the company needs to respond right away, and if so, how to respond

32

33

Anthem Data Breach Investigation

• FBI and several states

are investigating the breach and Anthem’s response

• Attack detected week
• f Jan. 26; Anthem did

not report it until the following week

Exposed 80 million people’s names, contact information, and social security numbers

34

Anthem’s Responses

• Notified FBI about breach
• Hired cyber security firm to evaluate networks and recommend

changes

• Sent notices to consumers
• Established website and toll-free number for members with facts

and information

• Offered free credit monitoring and identity protection services

35

Other Companies Affected by Data Breaches in 2014

• Target
• Sony
• Home Depot
• Staples
• Goodwill Industries
• JP Morgan
• Neiman Marcus
• Michaels

36

Managing the message throughout the investigation

37

A Word About Messaging

Don’t blame the victim!

38

39

Witness interviews

• Upjohn warnings
• Do any employees need their own

counsel?

• Who pays?
• Conduct them off site
• Memorialize them in a privileged

writing

40

Wait to take any permanent personnel actions

• Minimize premature disclosure
• Dodd-Frank considerations
• 21F - Bounty Component
• Do not impede individuals from going to SEC
• 21F - Anti-retaliation Component
• SEC recently brought first whistleblower anti-retaliation case against

Paradigm Capital Management

• Federal, state whistleblower, tort, contract suits

41

Ongoing considerations

• Disclosures (e.g., auditors and

regulators)

• Data privacy
• Foreign jurisdictions
• Language limitations
• Regulatory restrictions

42

When and how does the investigation conclude?

• Not an exact science. Calls for judgment.
• Summarize findings
• Evaluate impact (financial, organizational, reputational,

regulatory)

• Communicate results to key decision-makers
• Develop corrective action plans
• Advise whether/how to share results by audience, use, type

43

• IV. POST-INVESTIGATION

STRATEGIES

44

Documenting the Investigation: Credibility Determinations

• Demeanor and body language
• Reaction to allegations
• Did person’s chronology of events match or contradict
• thers? If not, how did it diverge?
• Does the version make sense – could it have happened

that way?

• Was he or she cooperative or reluctant?
• Did he or she make conflicting or contradictory

statements?

• Did the verbal account differ from the written account?

45

Documenting the Investigation: Credibility Determinations (cont’d)

• Did he or she provide circumstantial or corroborating

evidence?

• What did he or she admit?
• What did he or she deny?
• Has a significant period of time passed from when the

witness observed the behavior to when the witness discussed the behavior at the interview?

• Does the witness display a great level of certainty?

46

Privilege Considerations in Conducting Investigation

• Privilege Considerations Critical When Determining Whether and How

to Memorialize Interviews

• Notes/memoranda should bear legends “Attorney-Client Privilege and

Attorney Work Product”

• Initial paragraph of memo should indicate:
• Memo contains attorney’s mental impressions and strategies
• Attorney’s thought processes and opinions are intertwined with factual information
• Statements ascribed to witness are not verbatim transcripts
• Ultimately, memos should be drafted with recognition that they may

become public

• Notes/memoranda should be kept in secure location to prevent

unauthorized disclosure/dissemination and establish expectation of confidentiality 47

Privilege Considerations in Conducting Investigation

• Early Determination of End-Product of Investigation
• Presentation of findings – oral or written report?
• If written report, should it be disclosed to government?
• McNulty Memo/Fillip Policy – U.S. Attorney’s Office
• Seaboard Report - SEC
• Majority view – disclosure of information to government waives

privileges with respect to information

• Divided view –
• “Selective Waiver” – confidentiality agreement with government

agency maintains privilege as to other parties

• “Common Interest Privilege” – Disclosure to auditors and others with

whom company has a “common interest” or where necessary for effective consultation between client and lawyer 48

Privilege Considerations in Conducting Investigation

• Disclosure of Final Written Report to Government
• Waiver of other investigation documents
• Underlying notes and memoranda
• Underlying documents quoted or paraphrased in report
• Drafts of reports
• FRE 502
• Statutory presumption against subject matter waiver
• Unless “fairness” requires further disclosure to prevent

selective and misleading presentation of evidence

49

Implementing Decision/Action

Meet with accused employee and review action to be taken (complete all documentation)

• Explain/describe allegations.
• Describe investigative process.
• Describe findings.
• Describe action to be taken and explain why.

Meet with complaining / reporting employee(s) if appropriate:

• Explain findings, conclusion and reasoning.
• State action being taken.
• Tell employee to report perceived retaliation.
• Tell employee how to challenge decision if he or she disagrees

with action.

• Ask for continued confidentiality consistent with law.

50

Reporting the Results of the Investigation

• Notification of the Investigation
• Advantages of voluntary disclosure
• Decreases risk of corporate prosecution
• Mitigating factor in sentencing/penalties
• Create cooperative relationships with government/regulator
• Reduce risk/cost of litigation and defense
• Qui tam suits – could avoid government intervention
• Disadvantages of voluntary disclosure
• Making mountains out of molehills
• Deputized agents of government
• Premature disclosure could dictate course/scope of investigation
• Identification of culpable employees and required disciplinary action
• Public company disclosure mandatory if potentially material issue

51

Reporting the Results of the Investigation

• Reporting the Results of the Investigation
• To whom should reports be made?
• Maintaining the privilege
• Timing of reports
• Nature of reports
• Written
• Oral

52

Attorney-Client Privilege Issues

• Special Committee Investigations – Who Holds Privilege?
• Disclosures to full board or other members of corporation could

result in waiver of privilege

• OM Group Sec. Litig., 226 F.R.D. 579 (N.D. Ohio 2005) – held audit

committee waived privilege as to documents underlying detailed investigation presentation made to full board

• Ryan v. Gifford, 2007 WL 4259557 (Del. Ch. 2007) – held special

committee waived privilege when committee presented findings to full board, including directors suspected of wrongdoing

• Remedy?
• Two-tiered reporting structure

53

Productions in Government Investigations

• Significant risk when party produces documents to comply

with subpoena or government investigation, intentional, limited waiver may subject party to claims of waiver by subsequent third party (civil) litigants

• Rule 502(a) protects undisclosed communications/information

– no subject matter waiver

□ However, risk exists that third parties can seek access to information/documents disclosed to government

• Some government offices have agreed to enter into 502(e)

agreements

• Also consider submitting agreements to appropriate court for

entry of 502(d) order to bind third parties to state and federal proceedings

54

Questions?

55

For more information, contact . . .

Fritz E. Berckmueller

fberckmueller@calfee.com

Theresa L. Davis

tdavis@reedsmith.com

56

Q&A

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