The Nuts And Bolts Of Internal Investigations

Tuesday, April 22, 2014 - 09:37

The Editor interviews Paul H. Schoeman, Partner in the Litigation Department of Kramer Levin Naftalis & Frankel LLP.

Editor: Please tell our readers about your background as first a government prosecutor as well as your practice at Kramer Levin.

Schoeman: I was a prosecutor in the United States Attorney’s Office in the Eastern District of New York. Later, I came to Kramer Levin and was partner in our White Collar Defense group. Then I returned to the Eastern District to be the Chief Assistant United States Attorney. I returned to Kramer Levin in 2009, where I practice with a preeminent group of lawyers representing a broad group of corporations and individuals in all kinds of white collar matters, as well as an array of complex civil cases.

Editor: What differences are there in the way you prepare your cases and your witnesses when the investigation is by the SEC or Department of Justice and one that is performed for internal purposes by a corporation that suspects there may have been some wrongdoing?

Schoeman: It would be a mistake to fail to prepare rigorously for internal investigations. I advise clients that they should assume that whatever they say is likely going to be relayed in some form to prosecutors and regulators. In all contexts, it is very important when a client agrees to answer questions that he or she be truthful and fully prepared. Obviously, I try to give clients who are going to be interviewed by anyone a sense of what they can expect in terms of substantive questions and documents, as well as the tone and the formality of the interview. But the bottom line is that in any context, the client has to be fully prepared to answer questions and expect that the answers to those questions could be shared both within a corporation and outside with regulators.

Editor: Under what circumstances do you feel a company can adequately investigate its own personnel by using internal counsel and at what junctures should outside counsel be brought in to conduct the investigation?

Schoeman: There are a number of factors to be considered. In many circumstances it is a question of resources and the in-house capabilities of the corporation. A lot of corporations have developed sophisticated internal investigation capabilities and feel very comfortable handling investigations internally. But even when the corporation has the resources to do its own interviewing, there are instances where I would advise handing the interviews over to outside counsel. Certainly if there are allegations of wrongdoing by senior executives or there are allegations of a delicate or personal nature, it would be prudent to have an attorney from the outside do the questioning. It is also important to consider that in many situations, outside counsel presenting to government agencies might be perceived as having additional credibility based on the independence of their investigation. But each circumstance is different. I think it is important to have a dialogue with in-house personnel as to the role for outside counsel that best suits the particular situation.

Editor: Should it be the company’s own outside counsel or some outsider who has not represented the company before?

Schoeman: Again, I think that depends on the situation. There was a period when companies went overboard bringing in new counsel who had not previously represented the company. That’s not always necessary. However, in instances where there is a question about the integrity of the senior management, you will add to the credibility of the investigation if you bring in a firm that does not have a previous relationship with the company. That may turn out to create a helpful dynamic when counsel interfaces with the government.

Editor: It is frequently said that the SEC under Mary Jo White has become less lenient with companies it investigates. Is there evidence to back up this proposition?

Schoeman: Last year, we had the very high-profile announcement that the SEC was going to be requiring admissions of guilt in certain cases going forward, and we have seen some examples of that in 2013 and 2014. I personally think that the SEC should be very cautious about going down this path in most cases. Generally, a settlement is reached because it is something that both sides can live with and does not involve an admission of guilt that could have wide-ranging collateral consequences. So from a policy perspective, the SEC needs to examine very carefully what public good it is furthering by requiring an admission of guilt in the settlement context. Insisting on an admission of guilt might prevent the corporation from settling where it otherwise would, and therefore needlessly require the SEC to devote resources to litigate cases that could otherwise be resolved. Admissions may be a tool that the SEC feels compelled to use in certain circumstances, but the public interest is not going to be served by requiring admissions of guilt in most cases.

Editor: Actually, the SEC should not be a criminal prosecutor, but only be involved on the civil side. Has a more stringent attitude been noted also on the part of the Justice Department, particularly as regards its investigation of Foreign Corrupt Practices Act (“FCPA”) violations – especially of individuals?

Schoeman: FCPA is an area where the Department of Justice continues to be very aggressive and has been publicizing its intent to increase the number of prosecutions of individuals. In 2013, there was an uptick in the number of such prosecutions. But the sample size for FCPA prosecutions is small, so one or two additional cases with multiple defendants can dramatically skew the numbers. Moreover, sometimes the individuals indicted are not within the United States and are never extradited to the United States, so the fact that they were charged in an indictment isn’t all that significant. In another major FCPA prosecution, charges against numerous individuals were dismissed. It is important for the Department of Justice to keep in mind, with respect to individual prosecutions, that the FCPA isn’t just a policy prescription, it’s a criminal statute. Charges against individuals should only be brought where there is proof beyond a reasonable doubt of an individual’s criminal intent. In addition, all of the factors that go into prosecutorial discretion need to come into play. It should not be the case that the stated goal of increasing individual prosecutions leads to prosecutions that are higher in quantity but lower in quality.

Editor: Why is a carefully designed investigation prior to a potential indictment by a governmental agency a good proactive device to fend off such an indictment or at least diminish its impact?

Schoeman: At the beginning of an investigation or when an allegation of wrongdoing is first raised, a corporation is not going to know what its best course of action is going to be.  It won’t know whether there is wrongdoing, whether there is remediation that needs to take place or whether there is individual discipline that needs to occur. The only way the corporation is going to be in a position to make those decisions is to know the relevant facts. If it turns out that the corporation’s best course of action is to try to negotiate a resolution short of indictment, being able to demonstrate to prosecutors that the corporation did its own internal investigation, uncovered the relevant facts, took the appropriate remedial measures and has addressed issues raised by the allegations is going to be an important factor in persuading the Department of Justice or other enforcement agency that it doesn’t need to bring an indictment to vindicate the public interest. It may also be the case that there are factual defenses and that a particular allegation is not true and the only way to explain that in a credible way to the government, or to mount a defense, is to have done your own internal investigation and to be in possession of the facts. No matter what course the company is going to take down the road, it is going to be best situated if it is armed with a full knowledge of facts that are only obtainable from an internal investigation.

Editor: How effective can an internal investigation be in obtaining a deferred prosecution agreement for a company?

Schoeman: I would like to think that the Department of Justice and others will still live up to the principle that a company that comes forward voluntarily and discloses wrongdoing as uncovered by the company’s own rigorous internal investigation stands the best chance of avoiding charges and receiving a deferred prosecution or, ideally, a non-prosecution agreement. I am concerned that the government is increasingly afraid to appear to be too lenient on corporations and may be reluctant to enter into agreements short of prosecution. But there’s a tremendous public benefit to motivating corporations to police themselves. The only way to provide that incentive is to make sure those corporations that do what they’re supposed to do receive a very meaningful benefit. It would be unfortunate if some of the public clamor for more prosecutions of corporations undercut the public interest in encouraging corporations to keep their own houses in order.

Editor: In many instances where a deferred prosecution agreement is reached, a monitor is assigned to the corporation. There are pros and cons as to this arrangement. What is your feeling about that?

Schoeman: In the right instance, there can be a role for a monitor. In the wrong instance, it can be a cumbersome and expensive proposition where the affairs of a corporation are unduly subject to approval by a monitor who may be no better than current management at making good decisions for the corporation. On the other hand, where you have serious doubts about the ability of current management to ensure that prior instances of wrongdoing are not repeated, I can see a role for a monitor. But it would usually be a mistake to think that a monitor should be the default solution. In most cases, the shareholders and the public are going to be best served by leaving the oversight and management of corporations to corporate directors and officers, provided those directors and officers have not been implicated in any misconduct. 

Editor: How do you involve corporate counsel when you are engaged to defend a potential wrongdoer who has a viable and credible defense?

Schoeman: I try to have a very productive relationship with in-house counsel.  Many are very sophisticated with respect to white collar matters. They understand that even though the individual’s interest and the corporate interest are not always the same, there is value to both sides from a constructive dialogue between an individual’s counsel and corporate counsel. When there are strong factual defenses to allegations, then it really is useful for the individual’s counsel to have access to information that the corporation may have, and it is very useful for the corporation to get feedback from an individual’s counsel in order to reach the right conclusion about whether an allegation is founded or unfounded. Oftentimes, individuals do have strong defenses to allegations. When that happens, the corporate interest, the individual interest and the public interest are all served by making sure that the true facts are found and shared both inside and outside the corporation.

Editor: Is there a danger that a company’s own internal investigation may trigger an investigation by an outside governmental agency?

Schoeman: It is always a possibility that an internal investigation may lead to investigations by outside parties. Often, those government investigations would have occurred anyway. Obviously, a corporation can’t hamstring itself by failing to learn the facts out of a fear that learning the facts might cause others to investigate. What the corporation can do, and must do, is take precautions to prevent leaks, such as controlling the flow of information about an investigation and carefully planning the investigation and sequencing the steps in the investigative plan.

Please email the interviewee at with questions about this interview.