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June 2013 , Page 24 

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Achieving Credibility in Internal Investigations: Getting Inside the Enforcer’s Mind

By Jessica Nall and Janice Reicher

Despite the white collar defense community’s intense focus on the subject of internal corporate investigations in recent years, Securities and Exchange Commission (SEC) and U.S. Department of Justice (DOJ) leaders have expressed growing dissatisfaction with the “superficial” quality of some investigations. A “check-the-box” approach to internal investigations can lead the government to redo an investigation at enormous cost to the client or worse, increase the client’s exposure. What does it take to satisfy the government? A careful review of the history of internal investigations, evolving SEC and DOJ guidance, recent published decisions and press releases, and the authors’ experience conducting investigations suggest at least one x-factor unifying the elements of a successful investigation: getting inside the mind of the government investigator.

The Perceived Problem of Superficial Internal Investigations

Dissatisfaction on the part of prosecutors towards allegedly superficial internal investigations is hardly novel. Enron is an example. In 2001, a large international law firm conducted an investigation of complaints by Enron finance executive Sherron Watkins, who warned in a letter that the company might “implode in a wave of accounting scandals.”1 The inquiry, which did not probe reports by the company’s accounting firm or undertake a full-scale document review, absolved Enron of any wrongdoing. One week after the firm reported its findings and recommended no additional scrutiny of the company’s finances, the SEC announced its own formal investigation of Enron.2 SEC spokesman John Heine described the need for a formal SEC investigation this way: “[T]he opening of a formal inquiry enabled the commission to subpoena documents and was used when SEC staff members thought that the companies or executives were not responding voluntarily to their questions.”3 The SEC’s full-scale investigation was followed by extensive DOJ and FBI investigations, among others.4 These outside investigations resulted in numerous enforcement actions, as well as the criminal conviction of Enron’s chief executive officer.5 The firm conducting Enron’s internal investigation found itself accused of undertaking a “whitewash.”6 

More than a decade after Enron, high-ranking government lawyers have begun a drumbeat of criticism about a supposed trend of superficiality in internal investigations, expressing frustration with both the quality of internal investigations and, in their view, questionable defense counsel tactics. In a 2012 interview with Thomson Reuters, former SEC Division of Enforcement Director Robert Khuzami observed: “We are also seeing an increasing frequency of internal investigations that are not as objective and searching. These tend to be more like advocacy pieces for current management rather than reflecting what is in the best interest of the real client, the shareholders who own the company.”7 Khuzami also cited the “troubling trend” of attorneys making overly broad assertions of attorney-client privilege for documents not entitled to this protection.8 

At a presentation on Jan. 31, 2013, in San Francisco, former SEC Regional Director Mark Fagel and U.S. Attorney for the Northern District of California Melinda Haag similarly commented on emerging trends and challenges in government enforcement, expressing the perception that the quality of independent investigations is deteriorating.9 Fagel noted an increasing problem of counsel conducting superficial internal investigations and failing to undertake seemingly obvious steps in objective fact-finding. According to Fagel and Haag, counsel have been vague in reporting their findings and have attempted to prevent disclosure of substantive facts based on allegedly improper claims of attorney-client privilege. Across the country, Fagel said, the practice of conducting superficial investigations is diminishing the value of corporations’ cooperation with the government.

In a recent roundtable discussion on trends in white collar crime published in April 2013, a 13-year veteran AUSA in the Northern District of California, Doug Sprague, similarly noted that “[r]ecently some prosecutors have opined about a lack of quality in internal investigations. Not only compared to the stock options backdating time period, but generally.”10 Sprague continued, noting “more [investigations] in the mediocre to poor category, in my opinion.” Asked what indicates to him a poor quality investigation, Sprague responded, “There are certain questions that people … should anticipate will be asked by the [government] recipients of their presentations. One factor in the quality of an investigation is how many of those basic questions are they unable to answer without going back to the drawing board, sometimes repeatedly. Are there large troves of plainly relevant documents that were never reviewed? Are there large troves of plainly relevant documents that come up months later that the internal investigators apparently didn’t know of at the time? Are some facts shaded or not revealed, thus possibly indicating an unfair bias to the investigation?”11 

Unfortunately, there is no instruction manual outlining what constitutes a sufficiently thorough investigation. The SEC’s and DOJ’s published guides generally discuss the importance of company cooperation, emphasizing that such cooperation can be demonstrated by a thorough internal investigation and forthcoming disclosure of pertinent facts. Applying these high-level admonitions in the real world, where counsel must navigate conflicting interests and practical constraints — often within a short time period — requires thoughtful consideration of the goals that internal investigations are meant to achieve and the principles guiding government enforcement.

Historical Roots of Internal Investigations

In the effort to derive principles for achieving credibility in internal investigations, it is useful to consider the needs that these investigations were historically intended to meet. In the 1960s, the SEC started a campaign of aggressive enforcement, appointing receivers at the time of corporate settlements to ensure that corporate actors refrained from future illegal activities.12 As an alternative to receivership, corporations proposed the use of internal investigations conducted by special counsel.13 By the 1970s, these investigations had become commonplace, allowing corporations greater autonomy in their compliance efforts and reducing the costs of government supervision.14 It became evident to corporate counsel that internal investigations conducted prior to or parallel with a government investigation were a valuable tool for corporations faced with government and regulatory enforcement.15 

In 1975, the SEC began what became known as the Voluntary Disclosure Program.16 This initiative was meant to encourage corporations that found evidence of potential improprieties to self-report to the SEC, conduct independent internal investigations, and report their findings to the SEC. Under this program, the corporation’s board of directors had a responsibility to: (1) declare an end to violations of law; (2) authorize a committee of independent auditors to use independent counsel and auditors to internally investigate the corporation’s practices; (3) provide information about the investigation’s progress and results to the SEC; and (4) give the SEC access to any information discovered through the investigation.17 The basic anatomy of an internal investigation has not changed to the present day, except that the SEC clarified in 2010 that counsel are not compelled to waive attorney-client privilege or work product protection when presenting their findings to the government.18 

With the passage of the Foreign Corrupt Practices Act in 1977, internal investigations became even more prevalent. By this point, internal investigations had become a mechanism for corporations to promote corporate accountability and gain some control in the effort to avoid or mitigate a government enforcement action.19 Investigating counsel in a sense were intended to serve as government proxies, objectively seeking to uncover the facts that the government would itself be seeking. This objective fact discovery has become the central focus for both counsel conducting an internal investigation and government staff tasked with evaluating the credibility of an investigation and the corresponding value of a company’s cooperation. Objective fact discovery is where the company and government’s interests appear to overlap.

Investigating counsel’s and the government’s interests, however, are not perfectly aligned. Unlike the government, investigating counsel are in an attorney-client relationship with the company or a board committee of the company and thus bound by the ethical duties that flow from that relationship. This gives rise to a multitude of challenges for investigating counsel working to achieve the maximum degree of benefit for clients from an internal investigation.

Challenges in Conducting Internal Investigations

Of utmost importance is counsel’s ability to establish and maintain credibility with the government. Investigating counsel must show the government that they know what it takes to conduct an adequate investigation, have secured the required resources and cooperation from the company, and have undertaken the tasks necessary to uncover the relevant facts. This process is easy to understand in theory, but in execution is far more art than science. If the government does not feel that investigating counsel have interviewed enough witnesses, collected enough documents, asked the right questions, or are committed to learning the truth, it might decide to redo the entire investigation at great cost to the company. The government might also decide to discount the value of the company’s cooperation in determining whether (and whom) to prosecute or bring an enforcement action.

Investigating counsel must also consider several diverse constituencies whose key interests are not always aligned. These constituencies include the Board of Directors or Audit Committee, who often oversees investigations and acts as the client contact, especially in public company investigations; the individual directors on the Board or Audit Committee; the company’s officers, directors, and employees; shareholders; and the company’s outside auditors. While minimizing investigation costs is typically a priority for many of these stakeholders, reasonable minds may differ as to how deep and searching an effective investigation must be. Investigating counsel’s primary responsibility is to probe deeply enough to cover all of the questions anticipated from the SEC or DOJ while mitigating the various costs to and business considerations of the company and its shareholders. This is not often an easy task.

There is no doubt that internal investigations can be very expensive. As one example, Wal-Mart reported that it spent $157 million in fiscal year 2013 in professional fees and expenses related to its internal investigations regarding alleged violations of the Foreign Corrupt Practices Act in Mexico.20 Notably, Siemens A.G. paid over $1 billion — a record — for its global internal investigation into bribes paid to foreign officials.21 Companies confronting potential violations must weigh the cost of self-reporting to the government and initiating an internal investigation against the risk of bringing upon themselves, in some cases, enforcement proceedings by multiple agencies in different jurisdictions. Many companies have considered this question and determined that internal investigations, with or without self-reporting, are worth the cost. It has fallen on investigating counsel, in subsequent dealings with the government, to prove them right.

How Much Investigating Is Enough?

At first glance, the degree of thoroughness necessary to establish credibility with the government may be in tension with the good-faith interests of some stakeholders. The government expects counsel to do as much as possible to uncover potential wrongdoing, while the company’s interest is usually in keeping costs down, keeping the business running, and, where possible, avoiding liability. The lack of clear guidelines from the government regarding what constitutes a sufficient investigation means that counsel are constantly playing a judgment game. With financial reporting deadlines looming, should counsel interview 20 employees who likely have knowledge of the issues at hand, or are sweeping interviews-for-the-sake-of-interviews of 50 employees — many tangential, with little or no knowledge of the issues — a better course? Is it enough to collect employee emails from the past three years when relevant conduct was likely to have occurred, or will the government want to see documents from the past five for the sake of thoroughness? The answers to these practical questions cannot be found in any enforcement manual, and the government’s view as to the “correct” answer is almost always formed with the benefit (or detriment) of hindsight, as well as government counsel’s own subjective judgment.

Self-reporting and/or Protecting Privileges?

Identifying the optimal means of cooperation with the government is crucial because in some cases the rewards for self-reporting can be outweighed by an increased risk of both exposure and liability.22 Indiscriminately turning over nonrelevant and superfluous documents may lead to new lines of questioning that have no bearing on the company’s liability or scope of the investigation, thus increasing costs for the company and wasting government enforcement resources.

More importantly, inattention to these concerns may present thorny privilege-waiver issues. Investigating counsel must keep in mind selective waiver considerations: waiving privilege for the purposes of seeking cooperation credit with the government can render otherwise confidential materials discoverable in future civil actions. United States v. Bergonzi illustrates this point. Bergonzi involved allegations of securities, mail, and wire fraud against former executives of McKesson and its recently acquired subsidiary HBOC.23 The McKesson Audit Committee retained a firm to conduct an internal investigation regarding accounting irregularities associated with the merger. The law firm initially entered into confidentiality agreements with the SEC and U.S. Attorney’s Office, agreeing that voluntary submissions of their future reports and back-up materials would remain confidential unless the government determined that disclosure was required, and that the submissions would not constitute waiver of any applicable attorney-client privilege or work product protection.24 After the government accidentally produced interview memoranda to former executives who were defendants in the case and one defendant refused to return them, the court held those privileges did not apply.25 The court reasoned that the reports and materials were created for the purpose of relaying the information to the government, a third-party, and thus were not protected by the attorney-client privilege.26 It further held that the production of work product to the government, an adverse party, constituted waiver of work product protection.27 The court would not allow McKesson to reap the benefits of cooperation with the government while simultaneously avoiding the detriments of disclosure. In addition to waiver of privilege in work product, the indiscriminate production of less-relevant documents may benefit future litigants in unrelated subsequent actions against the company. Thus, investigating counsel must carefully guard the company’s privilege and scope of disclosure while ensuring sufficient disclosure and production to the government to maintain the investigation’s credibility.

Cleary, proceeding in the uncertain terrain of an internal investigation presents a variety of challenges. Investigating counsel must conduct a sufficiently thorough investigation that will accurately show that the client is cooperative and worthy of government leniency, while also working within inevitable constraints. Approaching an investigation half-heartedly and with insufficient resources is unlikely to earn the company cooperation credit. However, producing too much to the government without adequately protecting applicable attorney-client privilege and work product protections may increase costs and risk greater subsequent liability for the client. How can investigating counsel devise an approach that is most likely to satisfy the myriad, often conflicting goals of keeping the investigation efficient, managing the company’s risk of liability where appropriate, and obtaining the optimal result in any subsequent government action?

The Guiding Principles Of Enforcement

The historical roots of internal investigations reveal how investigating counsel have been expected to stand in for the government as fact-finders. Unsurprisingly then, commentators have noted that a successful internal investigation will often track a government investigation.28 Considering the goals that the government hopes to achieve in prosecuting corporations may thus help guide counsel in forming a helpful frame of mind. The principles articulated in government enforcement guides, such as the DOJ’s Principles of Federal Prosecution of Business Organizations29 in the U.S. Attorneys’ Manual and the SEC’s Enforcement Manual30 (Red Book), though not a complete map, provide a good starting point.

DOJ Principles of Federal Prosecution of Business Organizations

The DOJ cites several key tenets in its Principles of Federal Prosecution of Business Organizations. It notes that the prosecution of responsible individuals within the corporation is the strongest deterrent against future corporate wrongdoing, and emphasizes that those individuals should be pursued even when the charges against the corporation have been resolved.31 Both punishment and deterrence may be accomplished through the imposition of substantial fines, mandatory restitution, and the institution of compliance measures.32 The goal of rehabilitation is met when corporations move forward by reinforcing their compliance programs and otherwise work to ensure that violations will not occur again.33 The DOJ manual also highlights the prosecutors’ role in protecting the public, as in cases of environmental crimes or widespread financial frauds.34 The principles set forth in the DOJ’s manual map directly onto some of the fundamental purposes of criminal law — deterrence, punishment, rehabilitation, and protection of the public.35 

In deciding whether to charge a corporation, the DOJ considers several factors. These include the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate with the government.36 The corporation’s remedial actions, including efforts to implement or improve a compliance program, discipline or terminate wrongdoers, pay restitution, and cooperate with the relevant government agencies, may also be considered.37 Corporate conduct intended to impede the investigation, including inappropriate instruction of employees to be untruthful or to conceal relevant facts, is taken into account as well.38 The DOJ values serious commitment to discovering violations, vigorous pursuit of the underlying facts, and fulsome disclosure by counsel. Notably, whether a company waives attorney-client or work product privilege is not a factor the government may consider in evaluating cooperation credit.39  

SEC Red Book

The SEC’s enforcement principles appear to be very similar to the DOJ’s. For the SEC, deterrence is also a central principle.40 This includes deterring a company and its individuals from misconduct. Although the SEC Red Book does not mention punishment specifically, it references the interest of holding individuals accountable for their actions.41 Remediation and rehabilitation of companies are also important values that the SEC considers in evaluating a company’s cooperation.42 The Commission also considers whether the misconduct at issue caused widespread harm to investors and other victims and values the protection of the investing public.43 Broadly, the fundamental principles arising from the SEC and DOJ manuals are deterrence of illegal activity, punishment for harm caused, rehabilitation of offending corporations, and protection of the public and markets.44 

Though it is not investigating counsel’s task to further the principles of enforcement directly, understanding the government’s motivations is crucial to devising an investigation that those entities are more likely to find adequate. For example, if the government wishes to prosecute individuals within the corporation in order to punish them and deter them from future misconduct, it would benefit counsel to present their factual findings in a way that would help the government justify their prosecutorial decisions. Digging more deeply into the facts related to such individuals and presenting the facts clearly to situate their involvement in the broader context of the issues under investigation may allow the government to make this determination more easily.45 Under this analysis, counsel’s approach to each stage of an internal investigation requires a certain empathy for the enforcer’s frame of mind.

Internal Investigations: The Government’s Wish List

Examining how the government has translated its enforcement principles into practical guidelines provides further insights into the enforcer’s frame of mind. The government’s major priorities include establishing the facts, maximizing the impact of limited resources, and determining credibility.

The Seaboard Report

The SEC has also made clear that it values cooperation from companies. The Commission’s Exchange Act Release No. 44969 (Seaboard Report) released in October 2001 outlined several factors that the SEC considers in valuing that cooperation and determining whether to charge a company.46 In the Seaboard case, an employee of a public company’s subsidiary had entered inaccurate books and records that led to misstated periodic reports and a subsequent cover-up effort. The SEC decided not to take action against the parent company, Seaboard, because the company had taken quick action to remedy the errors within a week of learning of the employee’s misconduct. Seaboard completed a preliminary review, hired an outside law firm to conduct a thorough, independent inquiry, dismissed the employees at fault, and pledged complete cooperation with the SEC. The company produced the details of the internal investigation, including notes and transcripts of employee interviews, gave all information regarding the underlying violations, and waived attorney-client privilege and work product protection.47 

The Seaboard Report emphasized self-policing, self-reporting, remediation, and cooperation with law enforcement as critical to the SEC’s decision not to pursue an enforcement action.48 Applying the report’s nonexhaustive list of considerations will generally vary according to the nature of the misconduct, the harm caused to investors and other corporate constituencies, and the company’s response to the misconduct. But of particular interest to investigating counsel scoping an investigation are guiding questions such as: Did the company commit to learn the truth, fully and expeditiously? Did the company make available to the SEC the result of its review and provide sufficient documentation? Did the company facilitate prompt action against those who violated the law?49 The SEC wants counsel to commit to learning the truth “fully and expeditiously,” to probe more deeply into areas where violations may exist, and to disclose the findings to the government with sufficient documentation.

The McKesson Investigation

The government typically keeps its investigations confidential until it charges a target company or reaches a settlement with the party.50 However, counsel may make important inferences into the government’s thought process by looking to its press releases and court pleadings. For example, the McKesson investigation, discussed above in the context of the Bergonzi case on privilege, may offer guidance into what the SEC seeks from investigating counsel.51 

Investigating counsel in the McKesson case, working with an outside accounting firm, conducted 55 interviews of 37 present and former employees of McKesson and HBOC, preparing interview memoranda for each individual interviewed. They prepared and produced a report of their conclusions and back-up materials, including the interview memoranda, to the SEC and U.S. Attorney’s Office.52 In the dispute over whether the reports were privileged, an SEC administrator said that the reports “proved invaluable in focusing the SEC’s investigation on the primary wrongdoers and providing evidence of the wrongdoers’ intentional fraudulent conduct and allowed the SEC to tailor its investigation in a manner that allowed the government to save both time and money.”53 An AUSA involved in the case further noted that the report was a “useful initial road map that concisely summarized the basic facts leading to the Restatement” and the “interview memoranda served as useful factual summaries.”54 Unfortunately for McKesson, the court’s holding that the disclosures were not privileged meant that counsel had delivered this road map not only to the government but to future adversaries as well.55 

The publicity surrounding the McKesson case does not reveal whether the government approved of investigating counsel’s methodology for the review or the scope of the investigation, including the number of interviews conducted. It does show, however, what the government valued in that investigation: providing a factual report of the evidence of wrongdoing that could help the government focus its investigation and optimize its use of time and resources. In other words, according to the government, investigating counsel should not limit focus solely to constraining client costs. Understanding the enforcer’s frame of mind also means thinking about how to minimize the government’s costs as well.

The Panalpina Investigation

The Panalpina case in 2010 also provides insight into what the government expects of investigating counsel and the virtues of understanding, if not adopting, the enforcer’s mentality. The DOJ had investigated Panalpina, Inc. after receiving evidence that the company had a longstanding practice of paying bribes to foreign government officials on behalf of its customers, generally to circumvent the customs process for imports and exports of goods.56 Panalpina’s investigating counsel undertook a comprehensive investigation of operations in nine countries, and expanded the scope of its investigation when they encountered new evidence of wrongdoing.57 Importantly, when counsel found potential issues in 36 additional countries, they investigated each of those issues and the company remediated them. In resolving its case against Panalpina, the DOJ informed the district court of its deferred prosecution agreement with Panalpina and cited the company’s “exemplary” cooperation with the Department’s investigation.58 

The DOJ touted Panalpina’s internal investigation efforts as a “comprehensive internal investigation that fully supported and paralleled the Department’s investigation.”59 The company hired an outside audit firm to perform forensic analysis and supplied the DOJ and SEC with information from interviews and documentary evidence regarding potential violations. They also made over 300 current and former employees available for interviews to counsel and the government.

Investigating counsel for Panalpina appear to have successfully put themselves in the position of the government in digging deeper when encountering evidence of wrongdoing outside their investigation’s initial scope. Where potential issues arose outside of the principal countries under investigation, counsel expanded their scope to identify and address those issues as they emerged. Notably, in declining to prosecute the DOJ cited how the company’s investigation “paralleled” the DOJ’s own review.60 

The FCPA Resource Guide

The FCPA Resource Guide, published jointly by the SEC and DOJ in 2012, also highlights the merits of understanding an enforcer’s thought processes in the context of FCPA investigations.61 The Guide states that once an allegation is made, companies should have in place an efficient, reliable, and properly funded process for investigating the allegation.62 While it does not specify how counsel should conduct investigations, it provides some helpful anonymized examples of matters the DOJ and SEC have declined to pursue based on the scope and conduct of preceding internal investigations.

In one example of a decision to decline prosecution, the Guide describes a case in which a company discovered that its employees were receiving competitor bid information from a third-party agent with ties to a foreign government.63 The company conducted an internal investigation to uncover FCPA red flags and disclosed them to the DOJ and SEC. In another case, the DOJ and SEC declined to pursue a publicly held oil and gas services company for small bribes paid by a foreign subsidiary’s customs agent. The government considered that the company self-reported the misconduct and investigated whether any of its subsidiaries in the same region had engaged in misconduct.64 In the government’s view, the company’s willingness to look into its subsidiaries after self-reporting evidence of misconduct lent the company credibility.

Of particular note is the SEC’s first deferred prosecution agreement for FCPA violations in May 2011.65 That case involved allegations that Tenaris, a global manufacturer of steel pipe products, violated the FCPA by bribing Uzbekistan government officials in bidding to supply pipelines for transporting oil and natural gas. The FCPA Guide cites the company’s thorough internal investigation, and complete, real-time cooperation with the government, as well as extensive remediation efforts, as the basis for the decision to enter into a deferred prosecution agreement.66 Outside counsel’s investigation included a worldwide inquiry into Tenaris’ operations and control, as well as extensive and complete disclosure of wrongful conduct.67 The SEC touted the company’s decision to investigate its business conduct worldwide. Tenaris’ counsel appear to have taken the enforcer’s approach in their commitment to uncovering wrongdoing, and the government rewarded the company with leniency.

Practical Constraints

While the government’s statements regarding investigations are valuable, it is important to recognize that they reflect only the “best” of internal investigations in the government’s view. The SEC and DOJ are, of course, incentivized to publish information about these “exemplary” internal investigations in order to raise the bar for investigating counsel and target companies in future cases. The government, unsurprisingly, does not fully take into account the practical constraints on these investigations, and indeed every internal investigation, or the risks of increased liability that counsel must consider when expanding the scope of their investigations and disclosing information to the government.

In many of the cases cited above, the government praises the companies’ extensive, worldwide inquiries into company operations and interviews of numerous witnesses. In reality, not every company has the resources to expand an investigation from a scope of nine countries to 36, as Panalpina did. For multibillion-dollar companies such as Wal-Mart or Siemens, A.G., the government’s expectation that the company would allocate substantial resources for an in-depth probe is arguably more defensible. The government would likely consider anything less to be a sign of the company’s unwillingness to probe deeply into the misconduct — an attempt to keep the inquiry at a more superficial level in order to avoid liability. But it may be less reasonable to expect these sweeping steps to be taken by a much smaller company or by a company on the verge of financial collapse.

Lessons for Investigating Counsel

Nonetheless, the government’s views of internal investigations as reflected in the cases and guides provide significant insight into what government agencies value in internal investigations and what principles and precedents may inform an enforcer’s mindset. The government wants investigating counsel to establish the facts surrounding potential violations and go beyond the minimum requirements. It wants counsel to commit to learning the truth of what happened — the who, what, when, where, and why. Counsel’s actions in the fact-finding phase of the investigation will evidence this commitment and allow the government to determine whether counsel are credible and their investigation is reliable. The government wants counsel to lay out the facts in a way that gives the government a road map for the most critical issues and individuals to pursue so that it can focus its time and resources. All this must, of course, be balanced against the practical realities of particular client representations and resource constraints.

Understanding the Enforcer’s Frame of Mind

Devising and conducting a “successful” internal investigation thus requires a multitude of balancing acts. Success depends not only on competent execution of fact-finding tasks, but also on skillfully navigating competing interests and risks. Counsel must undertake the difficult job of balancing the pursuit of government credibility with the protection of their clients’ broader interests. Providing the government nonrelevant and superfluous information may increase the client’s exposure to government enforcement or liability in future civil actions. Yet failing to investigate thoroughly and disclose sufficient information could drive up the company’s (and the government’s) costs on the back end if the government decides to “do it all over again,” or worse, charge the client criminally. There are questions defense lawyers should ask themselves at every stage of the investigation: What are the government’s goals? How can I demonstrate that this investigation is furthering these goals? How can I do this while faithfully discharging my duties to the client and advancing their interests? Always anticipating the government’s next question and thinking ahead about the implications of disclosing various materials is crucial, as is proper and judicious invocation of the attorney-client privilege. Until the government publishes a step-by-step manual for conducting internal investigations, counsel’s best guide to serving their clients as powerful advocates begins with understanding the enforcer’s frame of mind. Even then, achieving sterling results in internal investigations depends on employing investigating counsel experienced in the art of balancing.

Benjamin C. Geiger, a senior associate at Farella Braun + Martel LLP, also contributed to this article.  


  1. Nathan Koppel, Executives on Trial: Lay Says Classic Run on Bank Ruined Enron — Energy Firm’s Outside Counsel Sits in the Cross Hairs of Lerach, Securities Class Action Kingpin, Wall St. J. Apr. 25, 2006, at C1.
  2. See Deborah L. Rhode & Paul D. Paton, Lawyers, Ethics and Enron, 8 Stan. J. L. Bus. & Fin. 9, 636 (2002); Alex Berenson, S.E.C. Opens Investigation Into Enron, N.Y. Times, Nov. 1, 2001, available at http://www.nytimes.com/2001/11/01/business/sec-opens-investigation-into-enron.html.
  3. See Alex Berenson, S.E.C. Opens Investigation Into Enron, N.Y. Times, Nov. 1, 2001, available at http://www.nytimes.com/2001/11/01/business/sec-opens-investigation-into-enron.html.
  4. See David Johnston, Enron’s Collapse: The Investigation; Justice Dept.’s Inquiry Into Enron Is Beginning to Take Shape, Without Big Names, N.Y. Times, Jan. 16, 2002, available at http://www.nytimes.com/2002/01/16/business/enron-s-collapse-investigation-justice-dept-s-inquiry-into-enron-beginning-take.html?pagewanted=print&src=pm; DOJ in Enron Criminal Probe, CNN Money, (Jan. 9, 2002), http://money.cnn.com/2002/01/09/companies/enron/.
  5. See Spotlight on Enron, http://www.sec.gov/spotlight/enron.htm#enron_enforce (last visited Mar. 29, 2013); Jeremy W. Peters & Simon Romero, Enron Founder Dies Before Sentencing, N.Y. Times, Jul. 5, 2006, available at http://www.nytimes.com/2006/07/05/business/05cnd-lay.html.
  6. See Dan Ackman, Enron’s Lawyers: Eyes Wide Shut?, Jan. 28, 2002, http://www.forbes.com/2002/01/28/0128veenron.html; see also John Schwartz, Enron’s Many Strands: The Lawyers; Troubling Questions Ahead for Enron’s Law Firm, N.Y. Times, Mar. 12, 2002, available at http://www.nytimes.com/2002/03/12/business/enron-s-many-strands-the-lawyers-troubling-questions-ahead-for-enron-s-law-firm.html?pagewanted=all&src=pm.
  7. Ted Knutson, Interview: SEC Enforcement Division Director Robert Khuzami, Thomson Reuters News & Insight, Apr. 4, 2012, http://newsandinsight.thomsonreuters.com/Securities/News/2012/04_-_April/Interview__SEC_Enforcement_Division_Director_Robert_Khuzami/.
  8. Id.
  9. Mr. Fagel provided a disclaimer that he was speaking on his own behalf, and not on behalf of the SEC.
  10. Mr. Sprague provided a disclaimer that he was speaking on his own behalf, and not on behalf of the DOJ. Cherree Peterson, Roundtable: White Collar Defense, Cal. Lawyer, April 2013, at 81.
  11. Id. at 86.
  12. Lucian E. Dervan, International White Collar Crime and the Globalization of Internal Investigations, 39 Fordham Urb. L.J. 361, 363-64 (2011).
  13. Id. at 364.
  14. Id.
  15. Id. at 365.
  16. Arthur F. Mathews, Internal Corporate Investigations, 45 Ohio St. L.J. 655, 667 (1984).
  17. Id. The compelled production of work product and waiver of attorney-client privilege is not a feature of modern government enforcement. See Securities and Exchange Commission Enforcement Manual (Nov. 1, 2012), available at http://www.sec.gov/divisions/enforce/enforcementmanual.pdf [hereinafter SEC Enforcement Manual].
  18. See Federal Agency Privilege Waiver Policies, American Bar Association, available at http://www.americanbar.org/advocacy/governmental_legislative_work/priorities_policy/independence_of_the_legal_profession/federal_agency_privilege_waiver_policies.html. The SEC’s change in policy came about after criticism that the SEC and DOJ were effectively promoting the waiver of the attorney-client privilege and work product protection in exchange for cooperation credit. See Rachel McTague, Corporate Law & Business Professional Information Center: Thomsen Defends SEC’s Policy on Waiver of Attorney-Client Privilege, BNA, Vol. 37, No. 46 Nov. 21, 2005, available at http://subscript.bna.com/pic2/clb.nsf/id/BNAP-6J7V8A?OpenDocument (last visited 4/2/2013) (“A diverse coalition — including the U.S. Chamber of Commerce and the American Civil Liberties Union — is campaigning to stop the ‘erosion of the attorney-client privilege’ and has said it will ask the SEC and DOJ to alter any policy they have that ‘effectively forces’ waiver of the privilege.”). For the SEC and DOJ’s official positions on this matter, see discussion of attorney-client privilege and work product waiver infra note 47.
  19. Arthur F. Mathews, Internal Corporate Investigations, 45 Ohio St. L.J. 655, 669-70 (1984).
  20. Walmart.com, http://news.walmart.com/news-archive/investors/walmart-reports-q4-eps-of-167-full-year-eps-of-502-walmart-us-gains-market-share-adds-47-billion-in-comp-sales-for-year-company-announces-fy-14-dividend-of-188-up-18-or-1787345 (last visited Mar. 29, 2013).
  21. Peter J. Henning, The Mounting Costs of Internal Investigations, N.Y. Times, Mar. 5, 2012, available at http://dealbook.nytimes.com/2012/03/05/the-mounting-costs-of-internal-investigations/.
  22. See Defending Securities Claims, SN084 ALI-ABA 691, 1014 (2008).
  23. See United States v. Bergonzi, 214 F.R.D. 563, 566 (2003) (superseded by United States v. Bergonzi, 216 F.R.D. 487 (2003)).
  24. See United States v. Bergonzi, 216 F.R.D. 487, 491 (N.D. Cal. 2003).
  25. See id. at 491.
  26. See id. at 493-94.
  27. See id. at 497-98. The Ninth Circuit has since rejected the doctrine of selective waiver. See In re Pac. Pictures Corp., 679 F.3d 1121, 1129 (9th Cir. 2012) (holding that voluntary disclosure of company investigation documents to the government in compliance with a grand jury subpoena did not retain attorney-client privilege pursuant to a theory of selective waiver and noting the “near universal” rejection of selective waiver doctrine among the circuit courts).
  28. See, e.g., Dan K. Webb et al., Corporate Internal Investigations, § 4.03(4)(b) (2012).
  29. U.S. Dept. of Justice, United States Attorneys’ Manual, Principles of Federal Prosecution of Business Organizations (Aug. 2008), at 9-28.200, available at www.justice.gov/opa/documents/corp-charging-guidelines.pdf [hereinafter Principles of Federal Prosecution of Business Organizations].
  30. See SEC Enforcement Manual.
  31. See Principles of Federal Prosecution of Business Organizations, at 2.
  32. See id. at 20.
  33. See id.
  34. See id. at 2.
  35. See id. at 5.
  36. See id. at 4, 7.
  37. See id. at 4.
  38. See id. at 12.
  39. See id. at 8.
  40. See Principles of Federal Prosecution of Business Organizations, at 1-2, 19.
  41. See id. at 119, 121.
  42. See id. at 123.
  43. See id. at 4-5.
  44. See Principles of Federal Prosecution of Business Organizations, at 1-2, 19.
  45. The ethical issues relating to investigating counsel’s interactions with company employees lie beyond the scope of this article. However, it is important that counsel are aware of the potential conflict of interest that exists between the client company and its employees and approach interactions with employees with candor and fairness. Investigating counsel should advise employee interviewees that counsel are not representing them, that the company holds any privilege that may exist, and that the company may waive that privilege at any time by disclosing the contents of their interviews to any third party (“Upjohn warnings”). For further discussion of this issue, see Bruce A. Green & Ellen S. Podgor, Unregulated Internal Investigations: Achieving Fairness for Corporate Constituents, 54 B.C.L. Rev. 73 (2013) (arguing for the expansion of attorney-client jurisprudence to take into account the corporation’s duty of fairness to its employees).
  46. See Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Exchange Act Release No. 44969 (Oct. 23, 2001) [hereinafter Seaboard Report].
  47. See id. Since the Seaboard Report’s release, the SEC has made clear that it will not compel investigating counsel to waive attorney-client or work product privilege. See SEC Enforcement Manual, at 95 (“The staff should not ask a party to waive the attorney-client privilege or work product protection without prior approval of the director or deputy director.”). The DOJ has taken the same stance on the waiver of privilege. See Principles of Federal Prosecution of Business Organizations, at 8-9 (“[W]hile a corporation remains free to convey nonfactual or ‘core’ attorney-client communications or work product — if and only if the corporation voluntarily chooses to do so — prosecutors should not ask for such waivers and are directed not to do so.”).
  48. Seaboard Report.
  49. Id.
  50. See Defending Securities Claims, SN084 ALI-ABA 691, 1010 (2008) (“As with informal [SEC] inquiries, formal investigations will remain nonpublic in almost all cases.”).
  51. See United States v. Bergonzi, 216 F.R.D. 487 (2003).
  52. See id. at 491.
  53. See id. at 501 (internal quotations omitted).
  54. See id. at 500-02 (internal quotations omitted).
  55. In fact, any time an investigation report is created as a written document, whether disclosed to the government or not, concerns may arise regarding future disclosure to potential civil plaintiffs.
  56. United States v. Panalpina, Inc., Agreed Motion to Waive the Presentence Report, at 8-9, (S.D. Tex. Nov. 10, 2010) available at http://www.justice.gov/opa/documents/panalpina-inc-waive-psi.pdf.
  57. See id. at 5-6.
  58. See id. at 5-6.
  59. See id. at 16.
  60. Id.
  61. A Resource Guide to the U.S. Foreign Corrupt Practices Act, Criminal Division of U.S. Dept. of Justice and Enforcement Division of U.S. Securities and Exchange Commission (Nov. 14, 2012) [hereinafter FCPA Guide].
  62. FCPA Guide, at 61.
  63. Id. at 77-78.
  64. Id. at 79.
  65. Id. at 77; see also Tenaris Deferred Prosecution Agreement, SEC (Mar. 29, 2011), http://www.sec.gov/news/press/2011/2011-112-dpa.pdf.
  66. FCPA Guide, at 77.
  67. See Tenaris Deferred Prosecution Agreement, SEC (Mar. 29, 2011), at 7, http://www.sec.gov/news/press/2011/2011-112-dpa.pdf.
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