How Does A Company Pursuing An Internal Investigation Retain The Confidence Of Its External Constituencies?

Tuesday, August 1, 2006 - 01:00

Editor: Would each of you tell our readers about your professional experience?

Rogers: I have the benefit of having served both as inside counsel and in private practice, having started my career with a law firm. After a few years I went in-house at what is now Verizon, where I did labor and employment work for 15 years. I also handled privacy of communications and wiretapping issues. I counseled the Security Department and worked closely with the Corporate Compliance Office. This in turn led me to handle a significant number of internal investigations. About eight years ago, I joined Pitney Hardin, where, again, I practice primarily in the labor and employment arena, but also have conducted several investigations for clients.

O'Reilly: Following law school, I clerked for a New Jersey Superior Court judge and then went into the Public Defenders' Office in Essex and Morris Counties. I later switched sides and became the First Assistant Prosecutor in Morris County and then was appointed the Prosecutor of Warren County from 1992-1998. After 25 years in public service, I came to Pitney Hardin.

Editor: In light of the corporate scandals and Sarbanes-Oxley, when is it important to have outside counsel, as opposed to inside counsel, conduct one of these investigations?

O'Reilly: When you are dealing with management at the highest level, it is almost always important to have outside counsel involved. The presence of inside counsel often raises issues of proprietary personal interest, if not bias, on the part of the corporate attorneys who are, of course, also members of the senior management team. For purposes of public confidence, particularly in the case of publicly traded companies, an independent, third-party counsel is very important. There are also privilege and work product issues to address.

Rogers: Any time you have law enforcement or a regulatory agency knocking at the door it is essential to have outside counsel. This provides the company with almost instant credibility. It demonstrates to the party conducting the inquiry that the company takes them seriously, and it also demonstrates to the board of directors - increasingly concerned with their exposure to liability - that the company is being proactive.

The presence of outside counsel can provide an important comfort level to employees who may have information to divulge. These people may be reluctant to speak to a company attorney, but outside counsel lend an aura of impartiality to the process, and that encourages disclosure. Once you have established the authority that outside counsel have been accorded, and their independence, you are well on your way to a level of comfort that, very likely, is going to result in getting the truth out of people. And let me add that where you are conducting a prompt investigation that will serve as a defense in subsequent litigation - in an allegation of sexual harassment, for example - the presence of outside counsel is often crucial.

Editor: You've talked about high-profile matters. How does inside counsel deal with the minor situation that suddenly becomes significant?

O'Reilly: The sooner you respond by getting outside counsel into the picture, the better off you will be. The time to do this is when the situation first begins to escalate. In addition, general counsel must be cognizant of what is going on in the industry. When one of the company's competitors or peers is under investigation, it is important for inside counsel to determine to what extent the company has connections with the organization under investigation and whether there is a possibility that it might be drawn into the process. At that point you consider whether outside counsel should be called upon for assistance.

Rogers: Along the same lines, a company representative might be subpoenaed to testify at, say, a political corruption trial or be interviewed by the prosecutors concerning political contributions. This is usually not a routine matter to be handled by in-house counsel alone. Corporate counsel must be very cautious in these circumstances because something may emerge in the course of the investigation that turns the attention of the investigators to the company. Bringing outside counsel in to help with the gathering of records, interviewing the relevant employees, and preparing company representatives to testify is usually the right step. And, at a minimum, consulting with outside counsel is certainly indicated.

Editor: Suppose the company is contemplating adverse action against an employee?

O'Reilly: In my experience, there is often a conflict within the company between the human resources people and general counsel on what to do when adverse action against an employee is under consideration and when to do it. Where there appears to be some evidence of fraud or abuse, an almost automatic response is to terminate employment. Human resources, as the repository of the company code of conduct, may feel very strongly about taking such a step immediately. General counsel may wish to take a different approach. It is important to talk to the suspect employee, and to try to find out as much as possible about the situation through the employee's e-mails and other records. In addition, most of these situations involve more than one person, and it is important to find out who those people are and to talk to them. All of this takes time, and often that investment of time turns out to be extremely worthwhile. Bringing outside counsel into the matter at an early point serves to validate an independent, deliberate, and thoughtful investigative process.

Rogers: Even where possible criminal activity is not at issue, once the employee has been terminated, you will have great difficulty in getting to him, and you will never be able to get the full story. This is particularly true when the person to be let go is someone of authority who has some financial stake in the matter under investigation. In these cases, we have often recommended that the person be placed on paid administrative leave. There are times when the influence of an impartial third party - outside counsel - may be helpful in bringing the CEO and the senior management group to see the wisdom of a delay in firing the person.

Editor: Is it not also a question whether inside counsel has the resources and time to conduct a full-scale internal investigation?

Rogers: As a former in-house counsel, I can state for a fact that corporate counsel are usually stretched pretty thin, particularly at a time when legal departments are experiencing downsizing. They do not have the associates and paralegals to do the legwork, and they may lack ready access to other departments within the company which would enable them to bring other resources to bear on the investigation, such as corporate, IP, and employment and benefit lawyers from the HR area. Another resource that in-house lawyers usually lack is investigators. You certainly do not wish to spend a lot of time trying to find an investigator and then worrying whether you've selected the right one.

By contrast, outside counsel bring all of these resources to the table. One in particular I would like to emphasize. A firm with extensive resources is in a position to take on an investigatory project from a multi-disciplinary point of view. That means that litigators such as John and I are in a position to bring into the investigation the expertise of corporate lawyers who understand the corporate structure and how the company actually works, employment lawyers who are able to effectively interview the employees on their own terms, IP lawyers who understand how the company's systems may have been compromised, compensation and benefits lawyers who understand how compensation arrangements may have been manipulated, and so on. The multi-disciplinary approach is probably the most important service that a large full-service firm brings to corporate counsel in this area.

Editor: What should general counsel look for in a law firm it is considering to conduct an internal investigation?

O'Reilly: Corporate counsel should be looking for an outside law firm with a diverse practice that includes people with prior experience in government regulatory or enforcement and who have conducted these types of internal investigations. One problem for outside counsel is that often you conduct these inquiries, find the problem, rectify it, eliminate the culprits, and - since the company doesn't want any publicity - no one knows how effective your firm is at resolving these issues. Publicity is a real concern for public companies with stock that might be adversely impacted, but let me point out that news of a resolved problem, even one with criminal consequences, may have a positive impact on the market. In short, you need people who have navigated these waters before and who can put their egos aside for the client's benefit.

Editor: Would you share with us the benefits of using outside counsel with respect to credibility with external constituencies?

Rogers: The media can be an important external constituency. Experienced outside counsel can advise clients on the legal risks of dealing with the press - for example, not running afoul of privacy issues or making statements that can come back to haunt in subsequent litigation. Also, a reporter is less apt to be suspicious when a client says, "We have turned the matter over to outside counsel and are awaiting their conclusions." Outside counsel often have relationships with media consultants. We've called upon ours in a number of high profile matters.

O'Reilly: One of the things the Thompson Memorandum considers in determining whether the company has done a thorough and complete investigation is whether it's been done independently. That means by someone who does not have a stake in what the investigation reveals.

In addition, the investigation may well turn up some things that require correcting. Hearing the bad news from a third party, as opposed to hearing it from a member of the staff, is often easier for the company to accept. And outside counsel is probably in a better position to monitor and then report on what has been done to rectify the situation down the road.

With respect to external constituencies, the use of outside counsel in an investigation serves to meet the claim that in-house counsel have conducted a self-serving investigation that is essentially a cover-up. That plays well with the public and with the company's shareholders. It also lends credibility to the positions that the company is attempting to establish with the investigative and regulatory agencies which are scrutinizing the company in the first place.

I would add that for the shareholders, the investing public and the general public, it is extremely important to bring outside counsel into an internal investigation at the earliest possible moment. A company that is entirely innocent of wrongdoing can lose the confidence of all of its external constituencies overnight, and it usually takes a very long time to regain it. Getting the right people on board to conduct an internal investigation, and doing it as quickly as possible, is the best way to avoid such a loss of confidence, or at least to have a fighting chance of not losing it.

Please email the interviewees at joreilly@daypitney.com or mrogers@daypitney.com with questions about this interview.