Independent Corporate Investigations

Because it is crucial to the success of the investigation, providing for the true independence of outside counsel should be a priority from the outset of the investigation. Before retaining outside counsel, the company should perform a conflicts analysis and should consider, as part of that analysis, whether chosen counsel has a prior relationship with the company that may create a perceived lack of independence. Once the company has identified conflict-free outside counsel, there are several steps it can take to ensure that the investigation is, and is perceived to be, truly independent. That said, every company and every investigation is different, and these differences may present unique challenges to maximizing the independence of outside counsel. This article is not intended to be a soup-to-nuts guide but highlights ways companies can provide for the independence of outside counsel.

Identify the Client

At first blush, this seems too obvious: the client is the company. But if the investigation begins to reveal wrongdoing, the views of management and the board may diverge and factions may develop among management or board members. To whom outside counsel reports and from whom it takes direction itself may begin to cast doubt on outside counsel's independence. Identifying as the client members of the board of directors or, best of all, a committee of outside directors, makes independence clear at the outset. It also ensures that privileged information gathered in the course of the investigation will be transmitted to individuals who are obligated to kept the information confidential and can help avoid disclosure to those whose conduct is being investigated. The company's audit committee, if made up of outside directors, is often the sensible choice. Care should be taken, however, where the subject of the investigation overlaps with the audit committee's responsibilities.

Once identified, the client and outside counsel must make it clear to employees who counsel represents. Indeed, counsel conducting employee interviews must clearly and concisely inform the employee at the beginning of the interview (1) whom the lawyer represents, and (2) that the lawyer does not represent the employee. Failure to do this may give the employee room later to assert a privilege with respect to the content of conversations with outside counsel, thus preventing the company from disclosing the information even if the company later determines that it would be in its best interest to do so. This, in turn, can hamper company efforts to cooperate with regulators. See, e.g., United States v. Int'l Bhd. of Teamsters, 119 F.3d 210, 217 (2d Cir. 1997). Aside from the legal consequences, if employees feel misled by outside counsel, their confidence in the independence of the investigation will be undermined.

Identify Counsel's Point Of Contact

When companies retain outside counsel in the ordinary course of business, outside counsel's point of contact for the company normally will be the general counsel's office. In investigatory situations, however, the individuals in the counsel's office may be close to or involved with the conduct or employees at the center of the investigation. This may make it difficult, if not impossible, for outside counsel to interact with them without appearing to compromise the investigation. In this situation, the company should erect a firewall to ensure that certain individuals are not involved in running the investigation. It may designate an uninvolved attorney in the counsel's office to interact with outside counsel or may make other arrangements allowing outside counsel to bypass the in-house counsel's office and interact directly with a designated representative of the board.

Explain the Business

Companies expect their outside counsel to be up to speed on the law that applies to the subject of the investigation. But counsel also must learn quickly the company's business model, corporate structure, and infrastructure in order to understand who may possess relevant information and documents. In seeking out and reviewing all relevant documents, outside counsel must ensure that the investigation does not compromise any original sources of information and that the company instructs its employees to maintain all relevant documents. Furthermore, because an investigation may implicate employee rights defined in the company's by-laws, articles of incorporation or collective bargaining agreements, counsel must be provided with those documents. For example, employees may have a right to have their own counsel present during an interview, and the company may be obligated to pay counsel fees incurred by employees. Counsel can avoid delays by understanding the scope of these rights at the outset of the investigation.

Continue to Utilize SEC Disclosure Counsel

A company that retains outside counsel to investigate potential misconduct is likely to have announced the retention and possibly the scope of the investigation in a press release aimed at reassuring investors and regulators that the company has the situation under control. At the conclusion of the investigation, the company may issue another press release describing counsel's conclusions and outlining actions it plans to take in response. As the investigation proceeds, however, counsel may uncover and report to the company information that implicates the company's reporting obligations. Unless there are other reasons not to involve them, the company must continue to seek advice from SEC counsel regarding whether and when such information must be disclosed. If SEC counsel is somehow intertwined with the subject of the investigation, the company should secure additional outside counsel to ensure that it receives conflict-free advice about regulatory requirements as the investigation proceeds.

Agree on an End Product

Internal investigations often begin under emergency circumstances, and the impulse to put outside counsel to work immediately is strong. But time spent articulating the scope of the retention up front will re-enforce the independence of outside counsel as the investigation proceeds. The company and outside counsel should reach a clear understanding at the outset about how counsel will provide feedback and what product is expected at the end of the investigation. For example, will outside counsel make a formal presentation to the entire board of directors? Will it be oral or in writing? Will counsel be expected simply to report the facts, or will they make recommendations regarding policy or personnel changes? Keep in mind that any written product counsel provides to the company may become the subject of litigation over privilege issues in subsequent lawsuits or investigations. Determining the expected final product up front will avoid further compromising public confidence later with a suggestion that the company cut off the investigation early because it was unhappy with the information being uncovered.

Conclusion

When it comes to internal investigations, perception can skew reality. If a perception that outside counsel lacks independence takes hold, the investigation is not likely to serve its purpose of reassuring regulators, investigators and employees. To enhance the effectiveness of the investigation, a company should take steps at the outset to ensure that outside counsel is truly independent and is perceived as such.

Marjorie J. Peerce ([email protected]), a member of this newsletter's Board of Editors, is a partner at Stillman, Friedman & Shechtman, P.C., in New York, NY. Peggy M. Cross is an associate at the firm.

In this age of regulatory and prosecutorial focus on corporate compliance, companies increasingly are relying on special outside counsel to conduct internal investigations into potential wrong-doing. Sometimes, these investigations are prophylactic: A company may want to understand the consequences of its current hiring prac-tices so it can develop standard operating procedures to better ensure compliance with anti-discrimination laws. Because this sort of pro-active, self-reflective investigation generally proceeds in the absence of outside scrutiny, counsel has the time and space to conduct a deliberate investigation.

Other times, outside counsel are retained to investigate suspicions or allegations of wrongdoing by or within the company. These investigations may proceed under a growing threat of ' or pursuant to ' government inquiry and rising investor and employee fear and confusion. One of the company's primary goals in retaining investigatory counsel is to conduct a fair, thorough and complete investigation so it can assure investors, regulators and employees that it has discovered the extent of any problems that exist and has a plan not only to correct them but to prevent their recurrence.

Whether the company succeeds in providing these assurances depends in significant part on the degree of confidence these groups have in the outside counsel conducting the investigation. One thing is certain: unless they trust that the investigation was truly an independent one, they are not likely to have faith in its outcome. Such a lack of faith can have devastating consequences for the company: valuable employees distrustful of management may leave, investors may pull their support, and regulators may disregard the results of the internal investigation and decide to conduct their own, disrupting the company and further undermining the investing public's faith in it. And if regulators feel that the investigation was deliberately compromised by the lack of independence, they may decide to investigate the company and its senior management further.

Because it is crucial to the success of the investigation, providing for the true independence of outside counsel should be a priority from the outset of the investigation. Before retaining outside counsel, the company should perform a conflicts analysis and should consider, as part of that analysis, whether chosen counsel has a prior relationship with the company that may create a perceived lack of independence. Once the company has identified conflict-free outside counsel, there are several steps it can take to ensure that the investigation is, and is perceived to be, truly independent. That said, every company and every investigation is different, and these differences may present unique challenges to maximizing the independence of outside counsel. This article is not intended to be a soup-to-nuts guide but highlights ways companies can provide for the independence of outside counsel.

Identify the Client

At first blush, this seems too obvious: the client is the company. But if the investigation begins to reveal wrongdoing, the views of management and the board may diverge and factions may develop among management or board members. To whom outside counsel reports and from whom it takes direction itself may begin to cast doubt on outside counsel's independence. Identifying as the client members of the board of directors or, best of all, a committee of outside directors, makes independence clear at the outset. It also ensures that privileged information gathered in the course of the investigation will be transmitted to individuals who are obligated to kept the information confidential and can help avoid disclosure to those whose conduct is being investigated. The company's audit committee, if made up of outside directors, is often the sensible choice. Care should be taken, however, where the subject of the investigation overlaps with the audit committee's responsibilities.

Once identified, the client and outside counsel must make it clear to employees who counsel represents. Indeed, counsel conducting employee interviews must clearly and concisely inform the employee at the beginning of the interview (1) whom the lawyer represents, and (2) that the lawyer does not represent the employee. Failure to do this may give the employee room later to assert a privilege with respect to the content of conversations with outside counsel, thus preventing the company from disclosing the information even if the company later determines that it would be in its best interest to do so. This, in turn, can hamper company efforts to cooperate with regulators. See, e.g., United States v. Int'l Bhd. of Teamsters , 119 F.3d 210, 217 (2d Cir. 1997). Aside from the legal consequences, if employees feel misled by outside counsel, their confidence in the independence of the investigation will be undermined.

Identify Counsel's Point Of Contact

When companies retain outside counsel in the ordinary course of business, outside counsel's point of contact for the company normally will be the general counsel's office. In investigatory situations, however, the individuals in the counsel's office may be close to or involved with the conduct or employees at the center of the investigation. This may make it difficult, if not impossible, for outside counsel to interact with them without appearing to compromise the investigation. In this situation, the company should erect a firewall to ensure that certain individuals are not involved in running the investigation. It may designate an uninvolved attorney in the counsel's office to interact with outside counsel or may make other arrangements allowing outside counsel to bypass the in-house counsel's office and interact directly with a designated representative of the board.

Explain the Business

Companies expect their outside counsel to be up to speed on the law that applies to the subject of the investigation. But counsel also must learn quickly the company's business model, corporate structure, and infrastructure in order to understand who may possess relevant information and documents. In seeking out and reviewing all relevant documents, outside counsel must ensure that the investigation does not compromise any original sources of information and that the company instructs its employees to maintain all relevant documents. Furthermore, because an investigation may implicate employee rights defined in the company's by-laws, articles of incorporation or collective bargaining agreements, counsel must be provided with those documents. For example, employees may have a right to have their own counsel present during an interview, and the company may be obligated to pay counsel fees incurred by employees. Counsel can avoid delays by understanding the scope of these rights at the outset of the investigation.

Continue to Utilize SEC Disclosure Counsel

A company that retains outside counsel to investigate potential misconduct is likely to have announced the retention and possibly the scope of the investigation in a press release aimed at reassuring investors and regulators that the company has the situation under control. At the conclusion of the investigation, the company may issue another press release describing counsel's conclusions and outlining actions it plans to take in response. As the investigation proceeds, however, counsel may uncover and report to the company information that implicates the company's reporting obligations. Unless there are other reasons not to involve them, the company must continue to seek advice from SEC counsel regarding whether and when such information must be disclosed. If SEC counsel is somehow intertwined with the subject of the investigation, the company should secure additional outside counsel to ensure that it receives conflict-free advice about regulatory requirements as the investigation proceeds.

Agree on an End Product

Internal investigations often begin under emergency circumstances, and the impulse to put outside counsel to work immediately is strong. But time spent articulating the scope of the retention up front will re-enforce the independence of outside counsel as the investigation proceeds. The company and outside counsel should reach a clear understanding at the outset about how counsel will provide feedback and what product is expected at the end of the investigation. For example, will outside counsel make a formal presentation to the entire board of directors? Will it be oral or in writing? Will counsel be expected simply to report the facts, or will they make recommendations regarding policy or personnel changes? Keep in mind that any written product counsel provides to the company may become the subject of litigation over privilege issues in subsequent lawsuits or investigations. Determining the expected final product up front will avoid further compromising public confidence later with a suggestion that the company cut off the investigation early because it was unhappy with the information being uncovered.

Conclusion

When it comes to internal investigations, perception can skew reality. If a perception that outside counsel lacks independence takes hold, the investigation is not likely to serve its purpose of reassuring regulators, investigators and employees. To enhance the effectiveness of the investigation, a company should take steps at the outset to ensure that outside counsel is truly independent and is perceived as such.

Marjorie J. Peerce ([email protected]), a member of this newsletter's Board of Editors, is a partner at Stillman, Friedman & Shechtman, P.C., in New York, NY. Peggy M. Cross is an associate at the firm.