Part I of this article appears in the October 2004 issue of The Metropolitan Corporate Counsel.
Conducting The Internal Investigation
While each internal investigation will be customized to suit the scope of the crisis and the issues presented, the crisis management plan should provide a process for developing this framework. First, it is advisable that senior management clearly communicate to the individuals who will be participating in the investigation that the investigation is important and that all company personnel must cooperate. It is important, not only from the standpoint of the investigation but also to better facilitate good corporate governance practices in the future, that employees understand the company's expectations regarding communication of potential wrongdoing. Steps may be contemplated in the plan to protect employees from potential retribution arising from their participation in the process, while not jeopardizing the overall process.
The crisis management plan should also describe a process for establishing the expected output from the investigation - whether a report to the general counsel, a report to the audit committee or recommendations. If outside counsel is retained, it may be important for the firm to be instructed on whether interim reporting of tentative conclusions is desired. A balance must be struck between creating an impression of interference with the investigation which might be caused by too frequent reporting and possible delay in the reporting of the results of the investigation because the investigators are polishing up a report containing conclusions that were reached long before the report was drafted.
Recommendations And Responses
The crisis management plan should also provide general guidelines as to the development and implementation of recommendations and responses. In many cases, it may be determined that no wrongdoing took place and no remedial recommendations are required. On the other extreme, wrongdoing may be determined which could involve civil or criminal liability to the company, public disclosure requirements, personnel changes and other steps. In these cases, there may be a number of steps that must be taken to fully address the concerns, and solutions to one set of problems will often create additional issues. It may not be sufficient simply to take steps to terminate on-going criminal activity. For instance, if as a result of the investigation, the company's auditors determine that financial statements must be restated to correct material noncompliance with financial disclosure requirements, there may be shareholder class action lawsuits to deal with, Sarbanes-Oxley recapture of bonuses and profits from the CEO and CFO and probable SEC inquiries. A team consisting of all relevant disciplines will be needed to anticipate these issues and provide guidance. Similarly, it may be necessary to determine whether changes need to be made to the firm's system of controls and its legal compliance program in light of any wrongdoing.
At the conclusion of the investigation in which misconduct or violations are identified, the legal team will need to determine whether the company is legally required to disclose the misconduct or will want to do so voluntarily. Reporting companies may be required under applicable securities laws to disclose information related to the issue. In addition, other regulated companies may be required to file reports with their regulators, depending on the nature of the wrongdoing.
Companies often wish to voluntarily disclose information regarding internal misconduct or violations. Often, companies believe that the information will become known to the public. Voluntary disclosure allows the company to frame the information in a way that can provide clear, precise and complete information to the public.
Voluntary disclosure to government agencies or prosecutors may be advantageous if the company is seeking leniency, either in terms of charging or sentencing. Federal sentencing guidelines take into account self-reporting. The Department of Justice has a longstanding policy of providing immunity to the first party that voluntarily discloses an antitrust violation. Similarly, the EPA has provided leniency where companies have self-reported.
Voluntary disclosure may open the company to civil litigation, but this is often a risk that companies expect to face anyway.
No discussion regarding crisis management and internal investigations would be complete without a discussion of attorney- client and work product privileges. Generally speaking, steps can be taken to provide the company with the full benefit of these privileges, but there are very significant practical concerns that often defeat the most well laid plans. For instance, the Department of Justice will usually require the company to waive its privileges as a requirement for any leniency in terms of the criminal charges that are brought. This waiver then likely makes the information available to third party litigants. Very little success has been had in this area with respect to limiting the waiver through confidentiality agreements with the law enforcement agencies but such confidentiality agreements should be considered in any event.
Further, the sentencing guidelines indicate that a factor for lenient sentencing will be the waiver by the company of these privileges. Accordingly, companies may be compelled to do so. Attorneys working on internal investigations should operate under the assumption that all communications and factual work product will ultimately be disclosed to the government and perhaps third party litigants at some time in the future.
The frequency of internal corporate investigations has increased significantly during this post-Enron/Sarbanes-Oxley period. Today companies have heightened sensitivity to reporting requirements, violations of law and corporate best practices. Information regarding such violations can come from a number of sources. New whistleblower protections make it easier for employees to report evidence of wrongdoing. The SEC has hired a much larger staff of attorneys and accountants and has begun the process of reviewing the periodic filings of all reporting companies. Tighter economies have made obvious what boom-times concealed. Audit committee members are driven by fears of personal liability and have become watchdogs of management as well as auditors. Auditors are spending more time (and money) on the audit process and questioning management at every step. Attorneys have newly mandated professional responsibilities. Prosecutors are more eager than ever to indict companies and executives for business misconduct. All of this, and more, drives the need for an orderly proactive approach to crisis management.
Craig L. Evans and James R. Eiszner are Partners at Shook, Hardy & Bacon L.L.P.