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White Collar Criminal Defense Alert

October 2002

Plugging The Leaks: Guidelines For Conducting Internal Corporate Investigations Involving Disclosure Of Confidential Information

By R. Scott Thompson, Esq. and Matthew M. Oliver, Esq.

Consider the following scenarios:

• You get a call from a reporter who reads

to you from a confidential memorandum about your company’s strategic plans that you prepared last week.

• An article appears in the financial press

identifying the company with whom your Board favors a strategic alliance,

• ut
• f

several under active consideration.

• A competitor issues a press release

touting a new product or service days before your company had planned to publicize its

• wn

most recent innovation. Corporate executives and their counsel are confronted with increasing frequency by situations in which internal, confidential corporate information improperly has been disclosed by a director, officer, executive, employee, or consultant to the company. This article presents an outline of the general considerations attendant to the commencement of an internal investigation of “leaks” of confidential corporate information, and also presents a preliminary plan of action for undertaking such an investigation.

Preliminary Considerations In Investigating Improper Disclosures of Corporate Information

A company considering initiating an internal investigation into leaks of confidential corporate information to the media and/

• r competitors must

first and foremost come to grips with the reality that such investigations rarely reveal the identity

• f the individual or individuals responsible.

Certainly, some investigations do yield the identity of the wrongdoers. In those instances, the result of the investigation may be that the company takes employment action adverse to the employee or, depending upon the severity of the infraction and the evidence marshaled, refers the matter to the proper law enforcement authorities. However, the success of an internal investigation should not be measured by such a standard. Rather, a successful internal investigation should achieve the following goals: (i) Narrow the potential sources of the leak to a specific target, whether that target is a limited number of individuals or a certain group or unit of the company, so that the company can more effectively monitor future activity; (ii) Communicate to all employees that the company views the unauthorized disclosure

• f

information as an extremely serious issue, and that the company will thoroughly investigate

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any and all suspected leaks or suspicious incidents; and (iii) Review and strengthen the company’s policies and procedures to minimize the potential for future leaks. The focus should be on the prevention of future leaks, a goal which, while obviously difficult to measure, usually can be achieved.

Structuring the Investigation

The first priority in structuring an internal investigation is to ensure that the investigation itself will not cause further embarrassment or harm to the company. Accordingly, the investigation must be conducted in accordance with applicable company policies (and, of course, in accordance with applicable federal and state laws), regarding employee privacy, electronic communications, and related issues. The investigation also must be conducted in such a way so as not to damage employee morale. Furthermore, the investigation must not itself become the subject of further leaks. The specific steps that the investigation should take include the following: Step 1: Retain Competent Professionals to Conduct or Advise On the Investigation. Retaining qualified and competent professionals, such as outside counsel and/

• r a

private investigation firm, is the first and one of the most important steps in conducting any internal investigation. Employing outside counsel is important to ensure that the three primary evidentiary privileges that may be invoked to protect the confidentiality of information adduced during internal corporate investigations -- (i) the attorney-client privilege; (ii) the attorney work- product doctrine; and (iii) the self-critical analysis privilege -- are most effectively invoked and preserved. The investigating attorney and the corporation should memorialize the reasons for the retention, documenting the legal focus of counsel’s investigation to assist in refuting any later argument that the attorney was hired to provide business advice as opposed to legal advice. Similarly, to facilitate application of the work- product privilege, which applies only to written materials prepared “in anticipation of litigation,” counsel should document the prospects of litigation for the company, including as many specific details (type of anticipated action, names

• f potential adversaries, etc.) as possible.

Corporate management also should consider sending a directive to all or certain employees stressing the confidential nature

• f

the investigation and requesting cooperation with investigating counsel. Such a directive facilitates proof of the “confidential intent” requirement of the attorney-client privilege, and can also help to satisfy the factors set forth in Upjohn v. United States, 449 U.S. 383, 394 (1981), for preserving privilege in the context of communications with corporate employees. If private investigators or other experts are to be used by investigating counsel, it is advisable that counsel, and not the corporation, retain the services of those individuals so that they may be considered attorney agents for purposes of the attorney-client privilege. Counsel and these agents should enter into a written agreement that specifies that the agent’s help is being solicited in

• rder to assist counsel in offering the client legal

advice in anticipation of litigation. Moreover, every document generated by an outside agent should state that it was created at the request of counsel. Step 2: Analyze the substance of the information that was disclosed. The purpose of analyzing the disclosed information is to determine the range of

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individuals who could have had access to the information and how it could have been

• communicated. For example, if the information

was disclosed at a meeting, who attended? Is the disclosed information “hard” (copies of documents, electronic or paper) or “soft” (oral information)? If “hard”, who had access to the documents? What electronic or other trail exists to determine access? How quickly was the information disclosed after it was first known within the company? Who benefited from the disclosure? Step 3: Identify the outlet in which the leak was reported or disclosed. The purpose of identifying the outlet in which the information was reported or disclosed is to gather information which will assist in narrowing the field of potential suspects. Information such as the phone numbers of reporters or competitors, and whether any corporate employees had personal

• r past professional relationships with members of

the media or competitors, can be extremely important in focusing the investigation. Promptly narrowing the focus of the investigation allows the company to most efficiently devote the proper amount of resources to the investigation and increases the chances of success. Step 4: Identify individuals with knowledge and/or access. Using the information garnered in steps 2 and 3 above, those charged with conducting the investigation should be able to begin to focus the investigation on certain areas or groups within the company, if not even more specifically on certain individuals or categories of employees. Step 5: Utilize appropriate non-intrusive investigative tools. Once the process of narrowing the potential universe

• f

directors,

• fficers,

executives, employees and/

• r consultants is underway, the

investigators can utilize the company’s resources and systems to advance the investigation in a non- intrusive, non-public manner. For example, subject to company policy and applicable laws, investigators can review electronic mail, computerized document management systems, match records of telephone calls to media outlets

• r competitors, review phone logs, message books,

rolodexes, and other documentary and electronic evidence to follow up on, confirm, or discard suspicions or likely targets. Step 6: Conduct interviews. Conducting face-to-face interviews with employees is one of the most important steps in the internal investigation. Interviews are the best way to achieve the goal of communicating to all employees the seriousness with which the company views leaks of confidential information. Similarly, interviews can uncover information that cannot be learned in any other way. The company must strive to balance the sometimes competing objectives of communicating seriousness with the need to make employees feel comfortable, both so that the company will receive complete cooperation and also so that morale will not be damaged. To this end, we recommend that the interviews be conducted by outside counsel, as well as a member of the company’s legal or security department. Outside counsel should carefully consider the extent to which discussions with entry-level and mid-level corporate employees will be privileged. Ordinarily such communications will be deemed privileged if: (i) the communications were made by employees to the corporation’s attorney in order for the corporation to secure legal advice; (ii) the employees were cooperating with counsel at the direction of corporate superiors; (iii) the communications concerned matters within the

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scope of the employees’ employment; and (iv) the information was not available from upper-level corporate managers. The task of selecting interviewees should be undertaken with great care. Support and administrative staff should not be ignored or undervalued, both as a source of helpful information and also as potential targets. A detailed script of questions should be developed, which should be tailored to the interviewee’s specific job functions, access to information, knowledge of other employee’s activities, media contacts, and possible motives. Step 7: Reinforcing and/or establishing policies and procedures. A critical step in the prevention of future

• ccurrences is the reinforcement of existing

policies and procedures as well as the development and implementation of new ones. Beyond the substantive aspects of improving security with respect to the company’s confidential information, this step communicates to employees that anyone considering making an unauthorized disclosure will be taking an enormous risk. This review of policies and procedures should include the applicable rules regarding use of computers and other electronic media, limits on contacts with members of the media, and document disposal procedures, just to name a few. On a final note, any investigation must carefully adhere to existing company procedures and all applicable laws regarding privacy, electronic communications, and the like. Before undertaking any investigation, the company should thoroughly review and consider potentially applicable state and federal laws, and company policies, pertaining to these issues.

Conclusion

The unauthorized disclosure of confidential corporate information can harm a company in many ways, and senior management responsible for initiating an internal investigation into such “leaks” should take care to ensure that the investigation itself does not exacerbate that harm. Management should consider engaging competent and experienced outside counsel to structure, supervise, and conduct the investigation, taking care to preserve any and all applicable privileges and directly retaining investigators and other experts as appropriate. All of the company’s information systems should be utilized to maximize the amount of information obtainable through non-intrusive investigative techniques and to narrow the focus of the investigation to a specific profile or group of potentially responsible directors,

• fficers, executives, employees or consultants. The

investigation should also include a thorough review and, where necessary, revision of the company’s policies and procedures to ensure that adequate systems are in place to guard against future improprieties. Throughout the investigation, however, the company should bear in mind that even if the identity of the responsible party is never revealed, the investigative process should send a strong message to corporate personnel that the company takes such matters seriously and will not tolerate improper conduct. For more information on this issue or any other criminal defense matter, please contact R. Scott Thompson, Chair of Lowenstein Sandler’s White Collar Criminal Defense Practice Group, at 973.597.2532 or at rthompson@ lowenstein.com, or Matthew M. Oliver, a member of the Group, at 973.597.2318 or at moliver@ lowenstein.com.

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