INDEPENDENT COUNSEL: A CORPORATE BEST PRACTICEBirth of Compliance and Ethics Function
Independent internal investigations came about as a vital outgrowth of the continuing development of the corporate compliance and ethics function. That function had its origins in the 1991 amendment to the Sentencing Reform Act of 1984, whereby Congress added Chapter Eight to the Federal Sentencing Guidelines in order to achieve uniform criminal sentencing of business organizations. These provisions were again revised in 2004 to bring them in line with various federal regulatory mandates.
Under the Guidelines, favorable sentencing treatment in the federal system was afforded companies that policed themselves by implementing corporate codes of conduct and other internal standards to ensure lawful operation of their business and other units. State criminal codes and regulatory guidelines followed this lead, and compliance and ethics became fixed in the lexicon and practices of the corporate world.
The elements of an effective compliance and ethics program under the Guidelines and the companion United States Federal Sentencing Commission Guidelines Manual include:
- prevention and detection procedures;
- high level oversight;
- due care in delegating substantial discretionary authority;
- company-wide training and communications with periodic updates;
- auditing, monitoring, and reporting including allowing for anonymity and confidentiality mechanisms;
- consistent enforcement; and
- response and prevention.1
With this carrot in front of them, companies began to establish compliance and ethics programs within their units with an eye toward reducing penalties and mitigating fine ranges by as much as ninety-five percent.2
Onset of Internal Investigations
In this environment, it became necessary to conduct internal investigations of alleged compliance and ethics violations in order to ensure consistent enforcement of corporate codes of conduct, and to undertake appropriate responses and prevention. To merit mitigation points from the government in criminal inquiries, prosecutors were interested in knowing whether the crime was an isolated incident undertaken by a few, or part of the core culture of the company3, and what was being done to ferret out and address these problems.
The same rang true in the arenas of civil litigation, administrative proceedings, and the board room, as corporate decision makers, shareholders, and investigative governmental agencies came to expect that corporations would conduct internal investigations when serious allegations of misconduct arose.4
Management personnel were particularly interested in effective internal investigations, given that jail terms and civil penalties had begun to be imposed for violations of the Business Judgment Rule. Under the Rule, directors and officers were immune from personal liability for informed, good faith business decisions made in the believed best interests of the company.However, as the Business Judgment Rule only protected informed decisions, directors privy to allegations of misconduct had to have responded with appropriate procedures, including commencing internal investigations, in order to gain the benefit of the Rule.5
Impact of McNulty Memorandum
The purposes and objectives of an internal investigation were to determine:
- whether allegations of corporate misconduct have substance
- who may have been involved and what level of involvement they had;
- the proper responses and the legal risks associated with failing to respond;
- how to minimize the regulatory, civil and criminal exposure of the corporation; and
- what, if any, preventative measures are applicable and available to prevent recurrence.6
This position was modified by the Department of Justice in December, 2006 with the issuance of the superseding McNulty Memorandum that scaled back the coercive tone of Thompson. Nevertheless, government interest in the yields of internal investigations remained constant, and results of those in-house inquiries that were not conducted or directed by legal counsel were obtained by subpoena and/or search warrant. Regardless of whether these materials could be used in evaluating whether or not to indict a corporation under the Thompson Memorandum, they were invaluable in presenting the government’s case in chief and impaling the company on its own sword.
Use of Attorney-Client Privilege and Counsel
As far back as 1981, the United States Supreme Court held that the attorney-client privilege and work product doctrine protected internal investigations from disclosure.8 The Association of Corporate Counsel felt that the leading practice in this regard dictated that the corporation protect its internal investigation from involuntary disclosure by conducting the investigation under the attorney-client and work product protections afforded it by Upjohn.9 Therefore and to blunt government access to internal investigatory results, responsibility for such inquiries was placed squarely onto the shoulders of corporate counsel, be they in-house or outside attorneys. Which of the two a company selected depended largely upon considerations of budget and expertise, but either satisfied the requirement that an attorney be at the helm to protect the investigation, its methodology, and its findings.
While use of counsel to undertake or otherwise direct internal investigations presented substantial privilege hurdles to government agencies, inroads were made to obtain investigatory results where waivers of privilege had occurred. As to attorney-client privilege, there was a danger of involuntary waiver in instances where in-house counsel served in multiple legal and non-legal capacities or disseminated investigation findings to business units, officers, or board members during the course of and after completion of the inquiry. In addition to this danger, lurked the perception by government agencies that bias attached to investigations conducted by in-house counsel.10 As a result, outside counsel came to be viewed as impartial and capable of delivering an independent investigation as promoted by the Federal Sentencing Guidelines, and therefore, preferable in cases of serious allegations of misconduct.
Movement to Outside Counsel
The Association of Corporate Counsel profiled leading practices for the use of outside counsel in conducting internal investigations, and the results revealed that as a general rule, two factors drove such a practice: the need for independent and impartial inquiries whose methods and results were beyond government reproach, and the desire for the concomitant confidentiality afforded by the attorney-client and work product privileges.11
As to the first factor, an unidentified communications company within the United States viewed this use of outside investigation counsel as the best way to achieve the goal of independence and impartiality and thereby protect the company12, and for an unidentified food company with production facilities and product distribution around the world, use of outside counsel to investigate situations in which independence is deemed critical was the general rule.13 As to the second factor, an unidentified company that operates residences for senior citizens within the United States indicated that preserving the attorney client privilege and resulting confidentiality was a critical concern in engaging outside counsel to undertake an internal investigation.14
Whether to employ outside counsel that also represented the corporation in transactional or litigation matters, or to retain specialized investigation counsel, was likewise a decision driven by concerns of fiscal and resource economy, but respondents considered the use of specialized counsel to be a leading practice.
In this regard and for sensitive investigations, an unidentified federally regulated bank in the United States typically selected an experienced but smaller firm that did not regularly provide legal advice to the bank on the basis that there was significantly lower a perception of bias attached to a law firm that was not highly dependent on the bank for its fees, and that the investigative conclusions of a firm that received a significant portion of the bank’s outside legal work might be viewed with skepticism by a judge or jury.15 The same company indicated that an added value provided by use of specialized investigation counsel was a minimization of risk of waiver of the attorney-client privilege compared to inquiries conducted by in-house counsel.16
Additional Factors Favoring Specialized Counsel
In addition to the foregoing leading practices and corporate preferences, companies favored other attributes most commonly found in specialized investigation counsel. These included the use of former law enforcement personnel who possessed excellent investigation skills and professional affiliations17 and were able to maintain a good working relationship with government agencies18, are able to conduct productive interviews, and are able to gather evidence properly and effectively.19 Lastly, companies favor investigators who are professional, are in sync with the corporate mission and values, and will conduct the inquiry with due sensitivity to the concerns of, and implications for, the business and other units within the entity.20
All of the foregoing factors and leading practices hold true to the present and into the foreseeable future. McGrath & Grace possess the skills and attributes that match these corporate needs.
McGrath & Grace wishes to extend its gratitude to the Association of Corporate Counsel for its permission to use the printed materials cited herein, and to Kim Howard, Editor-in-Chief of the ACC Docket, and Sabrina Bosse, ACC Assistant General Counsel, for their invaluable assistance in coordinating the same.
To access cited ACC Docket materials online, please go to www.acc.com/docket.
To access cited ACC InfoPAK materials online, please go to www.acc.com/infopaks.
1 John P. Langan & M. Jack Rudnick, ”Managing an Internal Corporate Fraud Investigation and Prosecution”, ACC Docket 25, no. 3 (Mar. 2007): 34-38, available at http://www.acc.com/legalresources/resource.cfm?show=14543. Copyright © 2008 the Association of Corporate Counsel. All rights reserved. For more information about ACC please go to www.acc.com
2 Id., p. 38.
3 Id., p. 38.
4 “Internal Investigations”, ACC InfoPAKSSM (Feb. 2007), at 6, available at http://www.acc.com/legalresources/resource.cfm?show=19675. Copyright © 2007 Lindquist & Vennum, P.L.L.P. and Association of Corporate Counsel. All rights reserved. Non-members may purchase this InfoPAK at the link above.
5 Id., p. 10.
6 Id., p. 6.
7 Theodore L. Banks, Tom Giller, & Scott R. Lassar, “Recent Trends in Internal Investigations”, ACC Docket 25, no. 3 (Apr., 2007): 24-33, 28, available at http://www.acc.com/legalresources/resource.cfm?show=14544. Copyright © 2008 the Association of Corporate Counsel. All rights reserved.
8 See Upjohn Co. v. United States, 449 U.S. 383 (1981).
9 “Attorney-Client Privilege”, ACC InfoPAKSM (Jan. 2006), at 21, available at http://www.acc.com/legalresources/resource.cfm?show=19681. Copyright © 2006 Association of Corporate Counsel. All rights reserved. Non-members may purchase this InfoPAK at the link above.
10 “Internal Investigations”, ACC InfoPAKSM (Feb. 2007), at 23, available at http://www.acc.com/legalresources/resource.cfm?show=19675. Copyright © 2007 Lindquist & Vennum, P.L.L.P. and Association of Corporate Counsel. All rights reserved. Non-members may purchase this InfoPAK at the link above.
11 “The Use of External Investigators to Aid in Corporate Investigations”, ACC Leading Practices Profile (Jan. 2007), available at http://www.acc.com/legalresources/resource.cfm?show=16794. Copyright © 2007 Association of Corporate Counsel. All rights reserved.
12 Id., p. 23.
13 Id., p. 20.
14 Id., p. 17.
15 Id., p. 15.
16 Id., p. 15.
17 Id., p. 6.
18 Id., p. 10.
19 Id., p. 12.
20 Id., p. 12.