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PROFESSIONAL SERVICES
Outside Counsel Investigations
Why it’s important, what to expect
By Bryan Schroder
Every executive or business owner has shown up at their office on what seemed to be a perfectly normal morning and walked into a disaster. Most of the time when business leaders face a problem, they can evaluate the situation, take appropriate action, then move on. But what if the problem is too thorny—for any number of reasons? Maybe it’s beyond the management team’s area of expertise, such as a cyber-attack or a situation that has drawn the interest
of government regulators or even law enforcement officials. Or perhaps it involves allegations of misconduct of someone on a senior leadership team. In such situations, business leaders should consider whether hiring outside counsel to conduct an investigation is their best option.
Why Investigate?
Why do an investigation at all? Because the business matters. People don’t get to be a business owner or senior executive by ignoring problems. If something has gone wrong, they want to know why, and they want to know what can be done to make sure it does not happen again. If the problem is significant, especially one that might draw the attention of government regulators or law enforcement officials, they want to be ahead of the information curve, not behind. They want to know what the government knows, preferably before they know it. The bottom line is that taking proactive measures pays dividends.
Why hire an outside counsel to conduct the investigation? After all, senior leadership and owners know the business, and hiring outside counsel is a considerable expense. However, hiring outside counsel communicates to everyone in the company that when the owner or management team identifies a problem, it is dealt with directly. Depending on the type of situation, it can also send a message to employees that they need to follow the company’s established values and code of conduct.
If the matter has drawn, or may draw, the attention of government regulators or law enforcement officials, an outside investigation can pay even greater dividends. The Department of Justice and the Securities and Exchange Commission both have policies in place that reward companies for voluntary disclosure of information related to violations. An investigation can provide that information. However, to maximize the benefit, the investigation needs to be conducted by a thorough, independent entity.
Hiring a law firm to conduct the investigation also adds an additional level of control: protection of information under the attorney-client privilege and attorney work product
doctrine, both recognized in federal and state law. In-house investigations do not offer the same protections. Even if the company later decides to release information to the government, it retains greater control of information that is protected under the attorneyclient relationship. And if there are potential conflicts of interest, hiring outside counsel helps ensure that the investigation is independent and is viewed as independent by others, including the government.
Investigative Steps
What should decision makers expect if they decide to hire outside counsel to conduct an investigation? The first step is to set ground rules about the scope of the investigation. First, who will the outside counsel report to within the company? In many cases, outside counsel will report to the management team. However, if the company is publicly held, outside counsel may report to the board of directors. This is especially necessary if members of the management team are implicated in the matter. Second, the company must determine the scope of the investigation. While defining the investigation as clearly as possible is important, be cautious of making the scope too narrow. Outside counsel should be able to follow the facts to get to the bottom of the matter. Moreover, if government regulators or law enforcement officials become involved, the credibility of the investigation will weigh heavily on their decisions.
Credibility of the investigation will be judged by the independence and reputation of counsel, as well as the ability of the investigators to fully examine the matter.
As to investigative steps, expect outside counsel to focus initially on documents. Preserving documents (and any other physical evidence) must be done quickly and thoroughly. In the modern age, this means electronic files as well as paper. The broad range of electronic files makes this especially challenging. The company must identify and take steps to retain a variety of files including (and especially) emails, social media, and files contained on devices assigned to employees. In addition, the company
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The investigators will also interview employees or others with information. Those interviews will be sequenced according to the situation. Some interviews might be conducted early in the investigation, while others will happen after the investigators have had the opportunity to fully review documents and other evidence. It is important for the company to encourage all employees, even former employees, to fully cooperate with the investigation. Demonstrating public support for the investigation shows employees, regulators, and the public that the company is serious about getting to the bottom of any wrongdoing. In order to retain attorney-client confidentiality, employees will often be asked to limit any discussions about the matter to those within the company and possibly to only certain persons within the company.
Final Deliverables
What is the output of the investigation? In most cases the outside counsel/ independent investigator will provide a report, either oral or written. The client, with advice of counsel, chooses the type of report, usually driven by the preferred outcome. An oral report makes it easier to maintain confidentiality. A written report is more valuable when negotiating with regulators or law enforcement officials. Moreover, if the investigation is based on a publicly known incident or situation, choosing an oral report may look like the company is trying to sweep information under the rug. A written report gives more of an impression of transparency.
While no company wants to be in the situation of doing internal investigations, and especially hiring outside counsel, how the management team or board of directors handles a difficult situation is critical. Properly dealing with a challenging problem, especially in a thorough, evenhanded, and transparent (as the case allows) manner, will build confidence in the company’s leadership. That confidence, from the employees within to the stakeholders and the public on the outside, will make a successful resolution of the underlying problem much more likely.
Bryan Schroder practices law, including outside counsel investigations, with Cashion Gilmore & Lindemuth in Anchorage. He is the former US Attorney for the District of Alaska and is a retired US Coast Guard captain.
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