Editor: Tim, you have conducted internal investigations for clients in the U.S. and overseas. Why does your role as a litigator equip you uniquely to perform an internal investigation?
Harkness : A litigator's skills in collecting, organizing and assessing evidence as well as understanding how to question witnesses and assess credibility are core skills that litigators have which are very important for the team conducting internal investigations. Our firm has started to put together multi-disciplinary teams in our internal investigations that can be extraordinarily effective. While we always have litigators working on internal investigations, we also frequently have corporate attorneys who understand disclosure requirements and occasionally employment specialists who are familiar with the various regulations applicable in the United States and overseas with regard to employment relationships, privacy and the like. We find that having other specialists on the team really enhances our ability to do a proper investigation.
Editor : What do you do when you're doing an internal investigation overseas? Do you have employment lawyers within the firm who understand all of those very arcane privacy requirements?
Harkness : In our firm we have people who have a basic familiarity with a lot of those rules because many of our clients are multi-national clients. Having American employment law specialists who are adept at flagging an issue unique to a given culture is always helpful. There are times when we need to get local counsel to advise us even though we may be doing an investigation for an American-based multi-national since privacy issues are never self-evident.
Editor: You had played key roles in the Enron case, other high-profile cases and most recently the case of State of New York v. Grasso . Please tell our readers about your role in these cases.
Harkness : In the Enron case my role was that of a member of the team defending the audit work in Enron done by Arthur Andersen. In the State of New York v. Grasso case, our firm represented Kenneth Langone, who was chairman of the compensation committee during many of the years in which Mr. Grasso received sizable compensation. My role in these cases was in some ways fundamentally the same because the challenge was fundamentally the same - digging into the evidence to elicit the actual facts. The fact is that none of these cases was nearly as simple as the media portrayed them to be. Our firm's role in these cases was to get an understanding of the facts so we could properly defend our clients. It's never the case that the initial portrayal of a particular set of circumstances is 100 percent accurate.
Editor: Our theme in the August issue is "audits and investigations." Why are audits a critical part of the investigative function?Harkness : Audits are a critical part of the investigative function for two reasons. First, internal auditors and external auditors will sometimes uncover malfeasance - a critical part of what the internal auditors in particular, but also the external auditors, are committed to do. The second part of the audit function that is critical in interacting with investigators is that often auditors will have appreciation for where the important information in a company resides. They will be able to appreciate what the ramifications of findings of the investigation are in terms of the reliability of financial statements. Audits and investigations fit together in a very important way.
Editor: How does counsel avoid the risk of a waiver of the attorney-client privilege when disclosing investigation results to outside auditors?
Harkness : Everyone involved in an investigation needs to understand that once you start divulging information outside the company, disclosing it to outside auditors, the risk of waiver is certainly there. One way that people typically try to protect information is to boil it down to just the facts that are being uncovered so that internal analysis remains privileged. Often our procedure is to put together key document sets which we present to an outside auditor so that he or she can assess whether his audit conclusions coincide with the facts laid out in these documents. Internal investigations can be very helpful to auditors in culling through various internal documents that might give auditors a greater understanding of a particular situation without really uncovering work-product or attorney client privilege communications.
Editor : Aren't you able to make outside auditors your agents?
Harkness : This is a very careful balancing act because outside auditors need to remain independent. They can't represent or be advocates on behalf of their clients. And accordingly, the outside auditors don't get within the privilege.
Editor: Have you been involved in investigations preliminary to your then becoming a lead counsel in litigation?
Harkness : Having conducted an investigation prior to defending a client in litigation can be helpful because you have a great familiarity with the facts. Often when we find that if the company has decided to have an independent investigation supervised by a special committee of the board, the people doing that particular investigation do not go on to represent the company in the litigation. If the matter under investigation has not risen to that level, doing the investigative work really helps one understand the facts of the case.
Editor : What steps do you counsel a client to take when an investigation, either internal or by the government, is impending?
Harkness : First, if an investigation is reasonably anticipated, preserving the documents that relate to that investigation is important. That's a key step that we talk to clients about right off the bat. The other thing that I've started to talk to clients about is putting together a core team of individuals who we are reasonably certain had nothing to do with the behavior being investigated who have a clear set of reporting lines and a management structure to oversee the investigation. If it is a very large investigation, there must be clear lines of reporting to the board. The reason for that is really two-fold: first, having clear reporting lines and responsibilities helps the process move ahead and second, investigations, particularly large ones, can be a huge distraction to a management team of a company that is trying to continue to function. By delegating and really cordoning of the people in charge of the investigation, you allow the line personnel who are running the company day-to-day to continue to function. Sitting down and talking to senior management about the management of their company and how we're going to fit the investigation into the continuing operations of their company is important at the outset of the investigation.
Editor : Have you seen a change in the attitude of government prosecutors since the Stein case? Is the McNulty Memorandum still "gospel"?
Harkness : The fact is that I think that a lot of people in the white collar bar have not seen a big change of attitude since the Stein case. In the last year there has been testimony in Congress suggesting that some line prosecutors are really not following the McNulty memo. In my personal experience, the people that I've been dealing with have been following the McNulty memo, but I have certainly heard stories from clients and colleagues that suggest that to be a cooperating company the culture of waiver is still the rule. While it is important for in-house counsel and outside counsel to be mindful of the McNulty memo and its contents, one should also be mindful of the reality that waiver is still a problem to be confronted as you deal with the government. There is currently a bill in Congress to deal with the privilege. And, Deputy Attorney General Mark Filip has just sent a letter to the Senate Judiciary Committee to address lingering concerns about the criteria used to measure corporate cooperation with government investigators. People should pay close attention as these issues evolve.
Editor : Many state prosecutors have stepped into the role of taking on cases of corporate malfeasance. How does a defendant corporation contend with an overzealous, politically ambitious prosecutor whose reading of the law may be biased?
Harkness : The short answer is "very carefully." There are instances in which you come across this sort of prosecutor and it can be very difficult for a company, particularly one in a regulated industry. In these instances, one of the things that companies need to ask themselves is: what is the price of cooperation and what benefits ensue? Certainly, in the last few years, prosecutions of individuals have been brought by former Attorney General Spitzer's office in which individuals decided to fight charges and have won. This is one path that individuals can follow. That is a very difficult path for companies that are facing disclosures and possible regulatory ramifications of an indictment or a serious civil charge. I recommend that if you are in that situation, get outside counsel that is experienced with the particular prosecutor involved, and also get skilled public relations advice from people who specialize in dealing with public relations in the litigation context.
Editor : What is the role of outside counsel in pulling together all of the relationships within the company that are necessary to wage a successful defense?
Harkness : The role of outside counsel in pulling together the relationships is an extremely important one because what outside counsel can do, is assess who is going to be important for the defense of a company. Outside counsel can often broker interpersonal tensions, particularly if there is a longstanding history of bad feeling between the parties. Sometimes when you're dealing with a former employee, particularly one who has been terminated, it can be tricky, and outside counsel can sometimes do that more effectively than inside counsel because they weren't part of the decision to terminate the employee. I have also found that getting particularly recalcitrant witnesses counsel, people who are reluctant to cooperate with the company or with the government, sometimes helps the situation by allowing for someone who represents that witness' interest to really explain to him what the situation is and where their interests might lie. That does not always mean that they turn into cooperating witnesses, but it does often allow companies to have the kind of dialogue that otherwise wouldn't happen. These are a few areas where outside counsel can bring real value.
Editor : Why is a comprehensive internal investigation mandatory whenever a government investigation is contemplated?
Harkness : Fundamentally, it boils down to governance - a management or a board cannot make the best decisions without full information. Making decisions about how to respond to a governmental investigation and to understand the potential severity or the lack of seriousness of a particular set of allegations, whatever the case may be, cannot be understood until you have had a full investigation and really understand the facts. In the exercise of a fiduciary duty to management and the board, getting the kind of information that you obtain from an internal investigation is important.
Editor : Do you see many more internal investigations flowing out of the credit crisis that we're now witnessing?
Harkness : I would imagine that any time you have major write-downs or large sums of money disappearing that companies will want to make an evaluation of how this happened. There are going to be evaluations of why companies wrote down their positions and whether those rise to the level of internal investigation is difficult to say. I think that use of internal investigations as a mechanism for understanding company behavior or major events in the life of a company is going to be standard practice going forward.
Please email the interviewee at tharkness@kramerlevin with questions about this interview.