Federal Defense

Early Indicators of a Federal Investigation

Federal investigations usually build slowly, with information being gathered over time. Companies hear about these investigations or the potential misconduct that gets investigations started in various ways.

It can be reported by current or former employees, by customers, can be discovered through internal audits or can be disclosed in a whistleblower qui tam complaint.

If an investigation is already begun, a company could hear from government investigations asking to interview employees via a “target letter” indicating that an investigation is ongoing. Likewise, the service of a grand jury subpoena seeking records or testimony as a part of a federal grand jury investigation clearly indicates that a federal investigation is underway.

In a worst-case scenario, a search warrant could be executed to uncover potential evidence of a crime, indicating that a federal investigation has developed to the point that probable cause has been established that evidence of a crime exists.

Why Conduct an Investigation

When a company learns that there is potential wrongdoing within its business or that an investigation has begun, the company needs to determine whether there are any risks to the business, such as:

• Criminal liability

• Regulatory liability

• Professional, reputational, or brand damage.

If these risks are present, the information must be followed up on, and the company needs to initiate its own investigation to ascertain what, exactly, it is faced with.

Although any information uncovered in an investigation could later expose the company to criminal or civil liability, this has to be compared to the company’s fiduciary duty to get to the truth and minimize ongoing risk to the company.

Also, any information regarding wrongdoing is important to protecting the interests of the company and any shareholders and can also help the company take advantage of any incentives available as the result of early cooperation with any government investigation.

Whether to Conduct an Internal or External Investigation

The type of conduct involved in any particular instance is a main factor in determining whether an internal or external investigation is necessary.

However, in almost any case, it is important for a company (usually general counsel, senior management, the full board, or a board committee) to discuss the allegations at issue and what an internal investigation may accomplish.

An internal (or external) investigation can allow the company to determine what occurred surrounding any potential wrongdoing and have as complete an understanding of the facts as possible so that they can make more fully informed additional decisions.

The results of an internal or external investigation can allow a company to decide whether any criminal conduct occurred. This information, in turn, can allow a company to get ahead of federal investigations and limit, or even prevent, any further investigation or charges.

The information gained from an internal investigation can demonstrate to federal agencies that any additional federal investigation would waste time and resources.

Alternatively, the information could convince federal agents to limit the scope of their federal investigation, limiting the impact on the company.

Internal investigation results can also give a company what they need to deal quickly and appropriately with employees the investigation shows are involved in misconduct. This could include identifying who in management participated in, or was aware of, the conduct so that appropriate personnel actions could be taken.

The information can also allow a company to appropriately respond to any potential public perception of the company’s conduct.

Finally, an internal investigation can prevent a civil enforcement action, giving a company the information it needs to defend itself against civil litigation brought by private plaintiffs.

Apart from dealing with federal investigators, a well-conducted internal investigation can get ahead of public perception problems by getting to the root of potential misconduct quickly and discreetly and allowing a company to control potentially explosive problems that can harm brand and reputation.

Who Should Conduct an Investigation

Like anything, the person or group conducting or controlling an internal investigation will impact the investigation’s quality and effectiveness. Senior management or a special committee can be used; however, it is inevitable that attorneys are needed.

Attorneys can offer privileges that can protect information obtained in internal investigations, and these protections can be valuable at every stage of the investigation, including the outset.

Senior management or a committee can still be a part of an internal investigation still, but they can rely on counsel to conduct many aspects of the investigation initially.

For instance, counsel can locate and review documents and emails, interview relevant employees and witnesses, provide legal advice on investigative processes, retain appropriate experts and consultants to assist in the investigation, and prepare reports containing factual findings, conclusions, and recommendations that can be relied upon as legal advice.

Choosing Between In-House and Outside Counsel

Identifying which counsel should be involved is also critical. In-house counsel has certain advantages, such as being familiar with the company and its operations and having relationships with employees who may be needed in the investigation so they can be less disruptive to the workplace in routine investigations.

However, government authorities may not view in-house counsel as independent, and in-house counsel may lack the credibility outside counsel can bring to an investigation. Also, if an investigation does become more than routine and leads to litigation, outside counsel will be needed, and it is likely outside counsel will want to do what was already done by in-house counsel, resulting in delay and wasted resources. A better alternative to in-house counsel is outside counsel with the experience needed to conduct an effective investigation. Engaging outside counsel allows for an objective review that shows the government or courts that the investigation is being done for legal, not business, purposes, which can later facilitate claims of privilege and work product protections that may not be available if outside counsel is not involved.

How to Choose Outside Counsel

Experience, independence from the company being investigated, and familiarity with the relevant government authorities are important factors in deciding which outside counsel to retain for an internal investigation. The counsel a company normally uses for other business matters may have either advised the company on matters that are under investigation so not be objective, or they may appear tied to the company, so raise concerns about independence or loyalty to the company that in-house counsel would raise. Any perception of loyalty between outside counsel and a company can undermine counsel’s credibility when later dealing with the investigators or the government. It is important, then, to have truly independent outside counsel when conducting an internal investigation to assure investigators that counsel was not just “going through the motions” to help the corporation being investigated.

Outside counsel needs to have experience conducting investigations and be familiar with the conduct implicated and type of law involved with the allegations. It is also important that outside counsel has experience with the type of agencies involved in the investigation and have independence from the company or its management to maintain credibility. This independence will be critical to cooperation or self-reporting to investigative agencies or the Department of Justice (DOJ). In investigations arising from a government subpoena or other request that indicates a high likelihood of interactions with government authorities, counsel that has experience with and an effective working relationship with the relevant government authorities and those conducting the government investigation can be the most effective outside counsel a company can hire.

Outside Counsel’s Role

Outside counsel can be hired either by a special committee of the board to give an objective analysis of what happened, or by the company to defend them and advocate for them. In either case, outside counsel has to be able to do several things:

• Develop a clear investigative plan that maximizes the potential for cooperation and the cooperation credit that goes along with it. DOJ guidance sets forth expectations for receiving maximum cooperation credit, and outside counsel needs to have experience with utilizing this guidance and must know it intuitively.

• Tailor a plan that meets DOJ expectations but is deliberate about controlling costs.

• Be clear about their role and be explicit about who they represent to ensure there are no attorney-client privilege issues or any conflicts.

• Be prepared to hire appropriate consultants.

• Know whether employees should be notified of any investigation.

• Be able to properly collect, review and analyze documents and evidence.

• Know the complexities involved with conducting interviews.

Outside Counsel’s Reporting

Once outside counsel has completed an internal investigation, it is important that they know how to properly and effectively report findings to their client. Decisions regarding whether to issue a written or oral report, whether to allow company employees to review a final draft report, how to report to the government, and how to present to the government are all critical to outside counsel’s success. For instance, DOJ has a set of factors identified as DOJ guidelines for prosecutors to consider when evaluating potential corporate criminal conduct. Outside counsel must be familiar with these factors and how they will be weighed by the particular government prosecutors evaluating the information. Familiarity with specific offices and the office’s practices can be particularly helpful here.

Internal investigations are often the result of troubling information relating to wrongdoing within a company. However, a thorough approach to the information, and the proper use of outside counsel in the right circumstances, can get ahead of charges and avoid the harm to the brand or to the reputation that can come with a federal investigation or charges. Internal investigations must be conducted rigorously and by an attorney with the relevant experience and background to be independent and credible while also protecting the interests of the company.