When the whistle is blown, and a corporation must investigate an allegation of misconduct by a corporate employee, one of the first questions that faces in-house counsel or a board of directors' audit committee is whether the matter should be investigated by inside counsel from the corporation's office of general counsel or by outside counsel from a law firm retained specifically to conduct the investigation. A number of factors should be considered in deciding whether to keep the investigation in-house or retain outside counsel. If those factors bode in favor of bringing in an independent investigator from the outside, there are a number of steps that in-house counsel can take to make for a smooth collaboration between the two.
The Advantage Of In-House Counsel
It is obvious why a corporation would prefer to have its general counsel's office conduct an investigation into an allegation of misconduct. Regardless of whether the claim involves low-level employee misconduct or significant accounting malfeasance, or any of the other types of allegations that are prevalent in the new corporate governance environment, no corporation is happy to see outside investigators knocking at the door.
There are a number of benefits of an in-house investigation. Inside counsel are better equipped to get to the bottom of the issue at hand more quickly - and thus more economically - than are outside counsel. This is because inside counsel have a pre-existing knowledge of the corporation, its structure, its policies and procedures, its record-keeping practices, its culture, and perhaps even the personalities and politics involved in the underlying claims. Inside counsel are also usually already on-site and are typically supported by a staff of other attorneys, paralegals or secretaries. As a result, inside counsel are in a position to begin the investigation almost immediately.
Outside counsel, on the other hand, require start-up time to get their resources in place and move beyond the learning curve separating them from the corporation it will investigate. Even when outside counsel are retained and arrive on the scene quickly - it is not uncommon in today's environment of heightened sensitivity to potential misdeeds to have an investigator retained and on-site within a day - that outside lawyer will have to invest a certain period of time doing preliminary work to familiarize himself or herself, and the counsel's staff, with such things as the operations, structures and systems in place at the corporation.
A corporation must also be concerned about in-house counsel's prior experience, and any future role he or she may have as a witness in litigation resulting from the matter being investigated. With regard to counsel's prior experience, it is in the corporation's best interest to have an allegation of misconduct investigated by a lawyer who has investigative experience. No matter how time and cost efficient an inside investigation will be, an inquiry that fails to thoroughly and fairly adjudicate the allegation or is seen as partial or otherwise lacking in credibility will cause the corporation numerous headaches - including more time, more expense and, undoubtedly, further investigation - down the road.
Moreover, in-house counsel will not want to investigate a matter in which he or she could be a witness. For example, in-house counsel could become a witness in the investigation if the employee against whom the allegation is lodged defends himself or herself on the basis of advice of counsel. In-house counsel could also become a witness if he or she played a part in the conduct being investigated. Even after an investigation is concluded, it is possible that in-house counsel could end up in the witness chair if he or she is "viewed as [a] business rather than a legal adviser andclaims of privilege as to counsel's investigative materials will be challenged."1
Presuming, however, that in-house counsel has investigative experience and is unlikely to become a witness in the underlying matter, it is safe to conclude that he or she can get to the bottom of an allegation more quickly and more cost effectively, and do so with less upset to the corporation's productivity and its employees. Why, then, would a corporation ever decide to choose outside counsel to conduct an investigation into alleged misconduct?
The Credibility Of Outside Counsel
The main reason is credibility. Whether the investigation is meant to satisfy a board of directors, investors, outside auditors, the company's employees, federal or state regulators, or even the court of public opinion, the outcome of the investigation will be questioned if it is not seen as fair and impartial. The integrity and abilities of inside counsel are not the issue; independence - or the appearance of it - is. And if those assessing the findings and conclusion of the investigation question whether inside counsel, who is, after all, another employee of the corporation, was independent enough to conduct a thorough and impartial inquiry, the investigation lacks credibility, and neither the underlying allegation nor any resulting business-related problems are resolved.
Those operating in today's post Sarbanes-Oxley Act world are all too familiar with examples of outside auditors and federal agencies rejecting investigations of senior management or fiscal mismanagement that were conducted by inside counsel and insisting that such matters be probed by outside counsel. In such situations, the company involved, in addition to risking a seemingly heightened suspicion on the part of the auditors, regulators, prosecutors or others assessing the investigation, also risks doubling the delay and costs resulting from having an outside counsel investigate that which has already been investigated by inside counsel. Where the allegations have repercussions beyond immediate legal exposure, such as bad publicity for the corporation or suspension by the stock exchange pending resolution of the claim, the initial decision to forego investigation by outside counsel, which was undoubtedly made in an effort to limit cost and disruption to the corporation, has just the opposite effect.
The credibility concern is just as valid when a corporation is determining whether its regular outside counsel is an appropriate alternative to in-house counsel. Like in-house counsel, regular outside counsel has a pre-existing knowledge of the corporation, its structure, its policies and procedures and the like, and perhaps even knows the players in the alleged misconduct. Regular counsel can no doubt get the investigation up and running more quickly then a new outside counsel can. But regular counsel, like in-house counsel, may be vulnerable to claims of, among other things, bias or pecuniary interest and concerns of being called as a witness in future proceedings.
Which To Choose?
The message is clear: where the investigator reports to the target of an investigation, has some other relationship with the target (or the whistleblower), has a pecuniary interest in seeing the corporation survive the allegation, or has some other connection that would give pause to those who assess the conclusions of the investigation, it is better to turn the investigation over to outside counsel. For all the costs and delay associated with outside counsel's start-up period, the ideal outside counsel, unlike in-house counsel, will have no connection to the corporation, its management or its employees that will compromise the integrity of findings.
As suggested by renowned former federal prosecutor Dan Webb and his co-authors in their seminal work on internal investigations, barring any of these concerns, the controlling factor in deciding whether to use in-house or outside counsel is frequently the seriousness of the offense.2 The concerns set forth above may not warrant the use of an outside counsel, for example, where there is an allegation of petty theft by a low level employee of a company. If, however, the position of the employee, the dollars involved or the nature of the alleged misconduct rise to a certain level of seriousness, a corporation will be well served by a fair, thorough outside investigation.
Collaboration Between In-House And Outside Counsel
The decision to use an outside counsel does not and should not signal the end of in-house counsel's participation, albeit in a limited way, in the investigation. Indeed, in-house counsel performs a number of tasks that are crucial to the success of the investigation.
At the investigation's outset, it is typically in-house counsel who meets with outside counsel and provides him or her with the known facts relating to the allegation. This background meeting helps the investigating attorney learn who the players relating to the allegation are, what the relationship is between the whistleblower and the employee against whom the allegation has been made, and what is known at this early stage that corroborates or undermines the allegation.
The investigating attorney also relies on in-house counsel to shorten the learning curve with regard to the corporation and such aspects as its operations, structure and politics. Where accounting malfeasance is among the allegations made, a primer on the corporation's bookkeeping practices is of particular interest, and in-house counsel normally helps coordinate the production of this information as well.
Once in-house counsel has given the investigating attorney the background information needed to formulate an investigation plan, the inquiry proceeds to those phases that are the heart of any investigation: the collection and review of documents followed by the interviewing of witnesses. In-house counsel normally provides essential support by coordinating the retrieval and production of documents (both electronic, which requires accessing key employees' computers, and paper) and, once document review is complete, the scheduling and production of employees whom the investigating attorney wishes to interview.
In conclusion, a corporation is best served when in-house counsel identifies the factors discussed above, such as bias, pecuniary interest and the like, and analyzes them to determine whether an outside counsel should be brought in to conduct the investigation. Given the importance of the thoroughness, fairness and credibility of the investigation, in-house counsel's decision will more likely result in the use of an outside counsel unless the allegation is minor in nature. A corporation will continue to be well served if in-house counsel makes himself or herself available to the investigation attorney for background information and assistance with document and witness production. This is the paradigm of the efficient and thorough investigation that will stand the test of time.
1 Webb, Dan K., Robert W. Tarun, and Steven F. Molo . Corporate Internal Investigations. New York: Law Journal Press, 1993. 3.03[a].
2 Id. at 3.03[b].
Timothy S. Susanin is a Director in the Business & Commercial Litigation Department of Gibbons, Del Deo, Dolan, Griffinger & Vecchione in the firm's Philadelphia, PA office. He is a former federal prosecutor and Navy JAG. He regularly provides legal commentary on CNN, Fox News Channel and MSNBC, among other outlets.