The number of governmental investigations, both at the federal and state level, has risen considerably in the last five years. Fueled by the post Sarbanes-Oxley political climate, we anticipate this trend to increase for companies. Even if your organization is not directly involved in any investigation, it can easily be drawn into an inquiry of customers, clients, joint venture partners, or a co-member of a strategic alliance.
The most crucial error a company can make is to commit to a course of action without enough information.
Immediately upon receiving knowledge of government allegation or that an investigation is being conducted on your organization, written preservation instructions should be sent to all relevant employees and to your organization’s information technology department. Any destruction of documents will greatly impact the opportunity for a positive resolution of the matter. Thus, preserving all relevant information is a critical step in this process.
The company has a duty that its employees receive clear directives to retain all documents and not destroy any information. Failing to preserve all relevant information may not only look bad to the investigating agency, but may also bring about criminal penalties. 1
This includes halting the organization’s document retention policy in regard to electronic data, relevant back-up tapes, e-mail and voice mail Unitmessages, as well as information maintained in hard copy. Depending on the scope and severity of the allegations, consideration should also be given to removing and securing the hard drives of relevant employees.
Assess the Situation
After preserving the relevant information, it is time to assess the situation. By assessing the situation, you need to ensure that the issue is properly communicated to senior management, legal counsel, additional relevant personnel, and the board of directors. Do not announce any intention of conducting an internal investigation until the situation is assessed. As part of your assessment, initial questions that should be answered are:
- What is the nature of the misconduct involved;
- How did the misconduct arise; and
- Where in the organization did the misconduct arise, including how high up in the chain of command was there knowledge or participation?
It is also important to understand the sentencing guidelines for any alleged wrongdoing. Some governmental agencies provide insight into what they will account for in determining any corporate penalties. Such factors that can be anticipated are:
- Whether complicity in the violation is widespread throughout the corporation;
- The level of intent on the part of the alleged perpetrators;
- The degree of difficulty in detecting the particular offense;
- Presence or lack of remedial steps by the corporation; and
- Extent of cooperation.
Further, in assessing the above factors, a governmental agency will analyze the efforts of the organization in seeking to prevent and detect criminal conduct by its employees or other agents. This requires, at a minimum, that the organization has:
- Established compliance standards and procedures;
- Assigned high level personnel to oversee compliance;
- Effectively communicated its standards and procedures to all employees;
- Taken reasonable steps to achieve compliance with its standards, e.g., by utilizing monitoring and auditing systems reasonably designed to detect criminal conduct and by having in place and publicizing a whistleblower hotline;
- Consistently enforced the standards through appropriate employee disciplinary mechanisms; and
- Taken all reasonable steps to respond to the offense and to prevent similar offenses.
Consider Independent Counsel and Create a Special Committee
Once you have an understanding of what has happened, the next step is to establish credibility with the government. To do this, you should consider engaging independent counsel for assistance and create a special committee of independent board members to oversee the process. A governmental agency is less likely to trust an assessment or investigation performed by chief legal counsel or a company’s current outside counsel, both of which may appear to have conflicts from being objective.
After engaging independent counsel, the special committee, with counsel’s assistance, can determine whether the company should engage in its own internal investigation of the matter. This decision needs to consider the nature of the problem—its severity, its affect on the financial statements of the company, whether it is systematic or limited, and the number of high-level individuals involved. Note that it is important to provide independent counsel with all of the authority necessary to gather and review key information and interview key witnesses soon after the engagement. Time is of the essence at this stage of the process and these first two steps should occur almost immediately after your organization receives notice of an investigation.
Communicate with the Government
After you have a special committee in place, engage independent counsel, and assess the situation, it is time to communicate with the government. It is critical to establish lines of communication early and establish a good working relationship. Doing so will help determine what the government knows, wants to know, or believes it knows about your organization’s actions.
The government will consider the cooperation of the organization during the investigation when considering penalties, so it is important to work with investigators in the best interests of the organization to establish its willingness to cooperate to resolve the allegations. However, cooperation does not mean that you cannot be a strong adversary for your organization’s interests. This is true especially in regard to waiver of the attorney-client privilege. While federal investigators claim that seeking a waiver of the attorney-client privilege is rare, surveys of lawyers indicate that government investigators routinely demand a wholesale waiver of the attorney-client privilege during corporate investigations as proof that the entity is truly cooperating.
A corporation must also decide early on whether it will waive the privilege and the risks and benefits associated with such a waiver, not only in this investigation but also in on-going regulatory or civil litigation matters.
Taking the above proactive steps are keys to surviving government investigations.