Lessens for Counsel After Hewlett-Packard

In early 2005, HP's Chairman, Patricia Dunn, ordered an investigation into leaks of company information from the Board of Directors to various news sources. None of the leaks, standing alone, would likely have triggered either legal or regulatory issues. The investigation lasted nearly a year and half, during which HP employed tactics it later conceded were 'disturbing' to investigate board members and journalists. Instead of appointing an independent committee of the board or independent outside counsel to lead the internal investigation, Dunn and those below her reportedly oversaw most of the investigation personally.

When the tactics employed were finally reported to the board of directors, one member resigned in protest over the methods used to investigate directors: 'I did not resign from the board for frivolous reasons but because HP was standing [sic] into dangerous waters ' waters hazardous with both illegal and unconscionable governance practices.' E-mail from Thomas Perkins to Hewlett Packard's Board of Directors (July 28, 2006, 13:52) (available at http://i.n.com.com/pdf/ne/2006/perkins_letter.pdf). The House Committee on Energy and Commerce asked several of the individuals involved to testify about the scandal. Some defended their actions, while others, including HP's former General Counsel and its former Senior Counsel, asserted their Fifth Amendment rights.

What was supposed to be an internal matter to stop directors' leaks instead became front-page news, spawning investigations by the SEC, California's Attorney General, and the U.S. Department of Justice; criminal indictments, including of HP's former Senior Counsel and Chief Ethics Officer; possible civil actions; and the resignations and terminations of virtually everybody tainted by the scandal, including the Chairwoman, General Counsel, and other HP senior managers.

Internal Investigations Must Be Insulated from Corporate Politics

The decision to conduct an internal investigation should be governed at the outset by two important determinations: the purpose of the investigation, and whether that purpose mandates an internal investigation. Defining the purpose will guide and control nearly every aspect of the investigation. Although the leaking of confidential company information to the press is a worthy subject of inquiry, the HP case reveals that corporate political issues, when cloaked in or commingled with legal issues, should either be resolved without conducting an internal investigation or insulated from the investigation. For example, certain members of HP's board and senior management became so singularly focused on ferreting out fellow board members who may have been responsible for leaks that they allowed the investigation to spin out of control. As corporations, regulators, prosecutors, legislators and the public increasingly look to counsel to be the corporate gatekeepers or fiduciary leaders, counsel must play an important role in advising corporations about whether a matter merits an internal investigation and, if so, how that investigation should be conducted. The role of outside counsel is especially important in the midst of a crisis fraught with emotion and marked by corporate infighting.

That is not to say that engaging outside counsel will necessarily insulate an investigation from public scrutiny. First, when advising the corporation regarding any aspect of an internal investigation, counsel should be cautious not to offer business advice as opposed to legal advice; the former may jeopardize the attorney-client privilege. U.S. v. Davis, 636 F.2d 1028, 1044 (5th Cir. 1981). Second, absent a pending investigation or possible civil litigation, internal investigations are not protected by the work product doctrine. Binks Mfg. Co. v. National Presto Industries, Inc., 709 F.2d 1109, 1120 (7th Cir. 1983). HP is a case in point. Because the company was not facing the possibility of an investigation or civil litigation, documents related to the investigation are arguably discoverable. Finally, the attorney-client privilege and work product doctrine do not shield improper techniques used at any point in the investigation. U.S. v. Zolin, 491 U.S. 554, 556 (1989).

Developing the Correct Process and Strategy

In the post-HP era, companies embarking on internal investigations must develop and monitor investigative techniques to insure that the investigation can withstand public and governmental scrutiny. That effort will involve a number of determinations regarding various elements of the investigation, including identifying the client, defining the scope of the investigation, establishing oversight controls for the investigation, and selecting the appropriate counsel, in-house or outside, to conduct the investigation.

The failure to consider these elements adequately can discredit the entire investigation and create liability for the company and the investigators, including counsel. This is precisely what happened in the HP investigation. As HP's new CEO Mark Hurd declared, the ultimate root of the scandal was the failure of those involved to adhere to an appropriate process. 'What began as a proper and serious inquiry of leaks to the press of sensitive company information became a rogue investigation that violated our own principles and values. It's an age-old story. The ends came to justify the means.' Hewlett-Packard's Pretexting Scandal Before the H. Subcomm. on Oversight and Investigations, 109th Cong. (2006) (statement of Mark V. Hurd, HP Chairman and CEO).

Establishing the Reporting Structure for the Investigation

The client in an internal investigation can be the corporation itself or one of the committees of its board. Identifying precisely who is the client may seem elementary, but HP underscores the danger of failing to make that choice clearly ' in particular, the danger of not identifying an independent committee as the client. The client may nominally have been the company, but in effect, Chairman Dunn acted as the client. Indeed, the other board members were not briefed about the investigation until several months after it began, and even then were briefed only on the results and not the tactics of the investigation. The lack of an appropriate client created conflicts, reporting issues, and questionable corporate governance practices that arguably were at the root of the scandal.

The Scope of the Investigation: Keeping It Focused

Before commencing an internal investigation, it is essential that the client, with the advice of counsel, determine the scope. In HP, the investigation was supposedly directed at the actions of board members, but the scope quickly expanded to encompass journalists and their families. HP's failure to clearly define the scope permitted investigators to expand their methods and targets beyond what was legal and necessary.

Oversight: Preventing the Investigation from Spinning Out of Control

Regardless of whether outside or in-house counsel conducts the investigation, in-house counsel or an appropriate committee of the board must insure that the demand for results is not satisfied by questionable means. HP blamed the scandal on 'rogue' investigators who 'became so focused on finding the source of the leaks that they lost sight of the privacy of reporters and others.' Id. But some of those investigators were employees, and HP failed to establish an appropriate oversight process and heed warnings about unethical investigatory practices.

Whether conducted by in-house or outside counsel, the investigation must be overseen by independent board members, and not individuals who have an interest in the result. All HP board members and others with access to leaked information were potential subjects of the investigation. Accordingly, none of them should have played any role in directing the inquiry. But they did. Several directors and officers were actively involved in directing the investigation. HP's Chairman took it upon herself to initiate and oversee the effort to plug leaks. The Chairman's interest in the results ' ending the leaks that were creating distrust and conflicts among her board members ' suggests her lack of the independence necessary for ordering and essentially overseeing the investigation. Independent oversight might have prevented most of HP's questionable practices.

Conclusion

The post-Enron era is marked by unparalleled scrutiny of counsel's role in internal investigations. Failure to heed the lessons of HP can result not only in dire consequences for the company, but also for counsel and others involved in conducting the investigation. Avoiding those consequences depends not on reaching the 'right result,' but whether the investigation can withstand scrutiny by the government or the press.

Jonathan Feld (jonathan.feld@katten law.com), a member of this newsletter's Board of Editors, and Gil Soffer are partners in the Chicago office of the national law firm of Katten Muchin Rosenman, LLP. Both are former federal prosecutors. They handle internal investigations for corporate clients and represent corporations and individuals in complex criminal and civil matters. Jeffrey Jamison is an associate in the Litigation Department.

Indictments and resignations following an internal investigation are not necessarily surprising. In the case of the Hewlett-Packard ('HP') investigation, however, it's the investigators who are in dire straits. In the months since HP publicly announced that it had conducted an internal investigation into news leaks by corporate directors, its Chairman and General Counsel have resigned, criminal charges have been filed against those involved in the investigation, and one person has pled guilty. HP exemplifies the pitfalls and problems that can result from an internal investigation itself, for both the company and its counsel. As one Congressman asked: 'Where were the lawyers? There were red flags waving all over the place,' but 'none of the lawyers stepped up to their responsibilities.' Hewlett-Packard's Pretexting Scandal Before the H. Subcomm. on Oversight and Investigations, 109th Cong. (2006) (statement of Rep. John D. Dingell).

HP serves as an example of how not to conduct an internal investigation. The two overarching lessons it offers are that investigations are jeopardized when not done for a valid purpose ' which means, among other things, that they must not be driven by corporate politics ' and when they do not follow a valid process. If the purpose or process of the investigation is compromised, the consequences for a corporation and counsel may be worse than doing nothing at all.

Background

In early 2005, HP's Chairman, Patricia Dunn, ordered an investigation into leaks of company information from the Board of Directors to various news sources. None of the leaks, standing alone, would likely have triggered either legal or regulatory issues. The investigation lasted nearly a year and half, during which HP employed tactics it later conceded were 'disturbing' to investigate board members and journalists. Instead of appointing an independent committee of the board or independent outside counsel to lead the internal investigation, Dunn and those below her reportedly oversaw most of the investigation personally.

When the tactics employed were finally reported to the board of directors, one member resigned in protest over the methods used to investigate directors: 'I did not resign from the board for frivolous reasons but because HP was standing [sic] into dangerous waters ' waters hazardous with both illegal and unconscionable governance practices.' E-mail from Thomas Perkins to Hewlett Packard's Board of Directors (July 28, 2006, 13:52) (available at http://i.n.com.com/pdf/ne/2006/perkins_letter.pdf). The House Committee on Energy and Commerce asked several of the individuals involved to testify about the scandal. Some defended their actions, while others, including HP's former General Counsel and its former Senior Counsel, asserted their Fifth Amendment rights.

What was supposed to be an internal matter to stop directors' leaks instead became front-page news, spawning investigations by the SEC, California's Attorney General, and the U.S. Department of Justice; criminal indictments, including of HP's former Senior Counsel and Chief Ethics Officer; possible civil actions; and the resignations and terminations of virtually everybody tainted by the scandal, including the Chairwoman, General Counsel, and other HP senior managers.

Internal Investigations Must Be Insulated from Corporate Politics

The decision to conduct an internal investigation should be governed at the outset by two important determinations: the purpose of the investigation, and whether that purpose mandates an internal investigation. Defining the purpose will guide and control nearly every aspect of the investigation. Although the leaking of confidential company information to the press is a worthy subject of inquiry, the HP case reveals that corporate political issues, when cloaked in or commingled with legal issues, should either be resolved without conducting an internal investigation or insulated from the investigation. For example, certain members of HP's board and senior management became so singularly focused on ferreting out fellow board members who may have been responsible for leaks that they allowed the investigation to spin out of control. As corporations, regulators, prosecutors, legislators and the public increasingly look to counsel to be the corporate gatekeepers or fiduciary leaders, counsel must play an important role in advising corporations about whether a matter merits an internal investigation and, if so, how that investigation should be conducted. The role of outside counsel is especially important in the midst of a crisis fraught with emotion and marked by corporate infighting.

That is not to say that engaging outside counsel will necessarily insulate an investigation from public scrutiny. First, when advising the corporation regarding any aspect of an internal investigation, counsel should be cautious not to offer business advice as opposed to legal advice; the former may jeopardize the attorney-client privilege. U.S. v. Davis , 636 F.2d 1028, 1044 (5th Cir. 1981). Second, absent a pending investigation or possible civil litigation, internal investigations are not protected by the work product doctrine. Binks Mfg. Co. v. National Presto Industries, Inc ., 709 F.2d 1109, 1120 (7th Cir. 1983). HP is a case in point. Because the company was not facing the possibility of an investigation or civil litigation, documents related to the investigation are arguably discoverable. Finally, the attorney-client privilege and work product doctrine do not shield improper techniques used at any point in the investigation. U.S. v. Zolin , 491 U.S. 554, 556 (1989).

Developing the Correct Process and Strategy

In the post-HP era, companies embarking on internal investigations must develop and monitor investigative techniques to insure that the investigation can withstand public and governmental scrutiny. That effort will involve a number of determinations regarding various elements of the investigation, including identifying the client, defining the scope of the investigation, establishing oversight controls for the investigation, and selecting the appropriate counsel, in-house or outside, to conduct the investigation.

The failure to consider these elements adequately can discredit the entire investigation and create liability for the company and the investigators, including counsel. This is precisely what happened in the HP investigation. As HP's new CEO Mark Hurd declared, the ultimate root of the scandal was the failure of those involved to adhere to an appropriate process. 'What began as a proper and serious inquiry of leaks to the press of sensitive company information became a rogue investigation that violated our own principles and values. It's an age-old story. The ends came to justify the means.' Hewlett-Packard's Pretexting Scandal Before the H. Subcomm. on Oversight and Investigations, 109th Cong. (2006) (statement of Mark V. Hurd, HP Chairman and CEO).

Establishing the Reporting Structure for the Investigation

The client in an internal investigation can be the corporation itself or one of the committees of its board. Identifying precisely who is the client may seem elementary, but HP underscores the danger of failing to make that choice clearly ' in particular, the danger of not identifying an independent committee as the client. The client may nominally have been the company, but in effect, Chairman Dunn acted as the client. Indeed, the other board members were not briefed about the investigation until several months after it began, and even then were briefed only on the results and not the tactics of the investigation. The lack of an appropriate client created conflicts, reporting issues, and questionable corporate governance practices that arguably were at the root of the scandal.

The Scope of the Investigation: Keeping It Focused

Before commencing an internal investigation, it is essential that the client, with the advice of counsel, determine the scope. In HP, the investigation was supposedly directed at the actions of board members, but the scope quickly expanded to encompass journalists and their families. HP's failure to clearly define the scope permitted investigators to expand their methods and targets beyond what was legal and necessary.

Oversight: Preventing the Investigation from Spinning Out of Control

Regardless of whether outside or in-house counsel conducts the investigation, in-house counsel or an appropriate committee of the board must insure that the demand for results is not satisfied by questionable means. HP blamed the scandal on 'rogue' investigators who 'became so focused on finding the source of the leaks that they lost sight of the privacy of reporters and others.' Id. But some of those investigators were employees, and HP failed to establish an appropriate oversight process and heed warnings about unethical investigatory practices.

Whether conducted by in-house or outside counsel, the investigation must be overseen by independent board members, and not individuals who have an interest in the result. All HP board members and others with access to leaked information were potential subjects of the investigation. Accordingly, none of them should have played any role in directing the inquiry. But they did. Several directors and officers were actively involved in directing the investigation. HP's Chairman took it upon herself to initiate and oversee the effort to plug leaks. The Chairman's interest in the results ' ending the leaks that were creating distrust and conflicts among her board members ' suggests her lack of the independence necessary for ordering and essentially overseeing the investigation. Independent oversight might have prevented most of HP's questionable practices.

Conclusion

The post-Enron era is marked by unparalleled scrutiny of counsel's role in internal investigations. Failure to heed the lessons of HP can result not only in dire consequences for the company, but also for counsel and others involved in conducting the investigation. Avoiding those consequences depends not on reaching the 'right result,' but whether the investigation can withstand scrutiny by the government or the press.

Jonathan Feld (jonathan.feld@katten law.com), a member of this newsletter's Board of Editors, and Gil Soffer are partners in the Chicago office of the national law firm of Katten Muchin Rosenman, LLP. Both are former federal prosecutors. They handle internal investigations for corporate clients and represent corporations and individuals in complex criminal and civil matters. Jeffrey Jamison is an associate in the Litigation Department.