conducting internal investigations amid...
TRANSCRIPT
Conducting Internal Investigations Amid Heightened Government Scrutiny of Corporate Practices Evaluating Whether to Investigate, Determining Scope, Selecting Investigators, Managing Privilege Issues, and More
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TUESDAY, MARCH 10, 2015
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
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I. EVALUATING WHETHER TO CONDUCT AN INTERNAL
INVESTIGATION
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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
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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?
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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
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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 original 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.”
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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
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II. PLANNING THE INVESTIGATION:
PRE-INVESTIGATION STRATEGIES
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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 other 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 o In-house Counsel
o Regular outside counsel
o 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
o Typically, better acquainted with company’s history, procedures and operations
o Employees may speak more openly
o Privilege Issues – What hat is in-house counsel wearing
o Internal relationships – must always maintain objectivity and appearance of neutrality Independence
Influence/control
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Who Should Conduct Investigation
Outside Counsel
o Increased objectivity
o Experience/expertise
o Preservation of privileged information
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Who Should Conduct Investigation
oNext issue: Regular outside counsel v. special investigation counsel
o Strategic and efficiency considerations
o Special expertise
oAvoidance of conflicts
oAvoidance of privilege issues
o Independence/objectivity
oPotential disadvantages
Deputized government agents
Expensive
Slippery Slope 26
What is the Scope of the Investigation
Work Plan o Nature of report
o Potential involvement/culpability of employees
Document collection, review and analysis o Document preservation notice
Use of Additional experts o Ethical and legal standards/considerations
o 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?
o Cooperation and voluntary disclosure considerations
When should notification occur?
o Triggering event may dictate timeline
Who do the investigators report to?
o Management
o Board of Directors
o Special Committee
28
III. CONDUCTING THE INVESTIGATION
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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
of 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 of 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
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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 others? 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
o Notes/memoranda should bear legends “Attorney-Client Privilege and Attorney Work Product”
o 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
o Ultimately, memos should be drafted with recognition that they may become public
o 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
o Presentation of findings – oral or written report?
o If written report, should it be disclosed to government?
McNulty Memo/Fillip Policy – U.S. Attorney’s Office
Seaboard Report - SEC
o Majority view – disclosure of information to government waives privileges with respect to information
o 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
o Waiver of other investigation documents
Underlying notes and memoranda
Underlying documents quoted or paraphrased in report
Drafts of reports
o 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 o 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
o 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 o 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? o 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
o 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
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Questions? 55
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