What To Do Before The Government Knocks

Sunday, April 1, 2007 - 01:00

Editor: Judge Poritz, you have been Chief Justice of the New Jersey Supreme Court for the last 10 years - have you had experience in conducting investigations during that period?

Poritz: As Chief Justice of New Jersey's Supreme Court, I was also the administrative head of the court system, a role that led me to conduct investigations of any issues related to the administration of the court system. For example, if there was a claim of discrimination that required an internal investigation, we would conduct that inquiry, often using outside investigators to assure that the investigation was entirely impartial. We had written procedures that included a separate chain of command for complaints; we implemented those procedures and followed up with investigations and a report that almost always came to the Chief Justice for final review and discussion. We also conducted regular audits of our operations. As a court system we took in filing fees and fines, funds we were obligated to safeguard. We conducted both regular audits and spot audits. If any irregularity was discovered, we conducted an internal investigation that amounted to an intense audit in the vicinity of where the irregularity occurred. We then took steps to correct the matter.

Prior to becoming Chief Justice, I also served as Attorney General of New Jersey. I was chief attorney on a number of investigations where there were important matters of concern to government and where the criminal division was pursuing a matter that had important implications. As the final authority on their conduct, I ruled on whether they should proceed and under what circumstances.

Editor: Barry, during your 24 years at the U. S. Department of Justice, did you supervise investigations?

Gross: That was the majority of my practice. I coordinated various federal investigative agencies, primarily the FBI and IRS. A lot of times I also had to coordinate with state police in New Jersey and Pennsylvania. Those investigations focused on racketeering charges such as organized crime, labor racketeering, public corruption, fraud (including mail, wire and bank fraud), tax matters, money laundering, and public corruption. We had a long-term investigation of the Philadelphia Housing Authority that resulted in 12 officials and seven contractors being convicted. I also was involved in parallel proceedings with the Civil Division of the U.S. Attorney's Office and dealt with some of the qui tam actions.

Editor: Why would it benefit a corporation to retain either of you to do an internal investigation?

Gross: Two reasons. We both have vast experience supervising complex, long-term investigations. Also, we bring credibility to the investigation - the retired Chief Justice of New Jersey brings instant credibility and someone like myself with 24 years experience with the Justice Department also gives credibility. If we were to conduct an internal investigation, the company can go to the governmental authorities, the SEC, and other governmental agencies who will know that the Chief Justice and I investigated the matter thoroughly. They would know that we did not try to obstruct any investigation and that it was a fair investigation. Hopefully we could convince the regulatory agencies to follow our opinion and conclusion.

Poritz: I would second what Barry said. I would also add that when a corporation is deciding whether to review a matter internally or to reach out for outside counsel to do the investigation, the impartiality and the fact that outside counsel is not part of the internal structure of the organization lends additional credibility to the investigation. Even in the court system, we reached outside for help to obtain that impartial review.

Editor: Why is this area such a hot-button issue that has gained increased prominence in the last few years?

Poritz: People have become very concerned about questions of corporate governance since we have all seen significant attention given in the media to scandals associated with corporate governance and compliance issues. New laws have been passed to bring those issues to the fore and to require corporations to do business differently. That in turn has meant that corporations have to look for legal advice and assistance in dealing with those issues. There was a long time in government when those issues also had become very important. We have seen in recent years a new questioning of what is happening in the private sector as well.

Editor: Are investigations instituted in anticipation of a government investigation or simply to make sure there is no wrongdoing within the corporation?

Gross: The importance of internal investigations is that the corporation may feel that there is something that has gone wrong or that there has been some misconduct but is uncertain of this. By having a thorough internal investigation rather than contacting the U.S. Attorney or other government authority, it often turns out that the misconduct was not as great as they thought or that there was no misconduct but certain errors were made that can be quickly corrected.

Poritz: When I was Attorney General, I served on a national body convened by the EPA that was made up of Indian tribal leaders, attorneys general and environmental commissions. We talked about corporations doing internal environmental audits so that we could encourage self-compliance by corporations with environmental laws. We are seeing these kinds of approaches in many areas of the law today.

Editor: Is there a role for outside counsel if there are no complaints against the corporation or against persons who work for the corporation?

Poritz: As Barry mentioned, there could be concern that something might be wrong. The board is aware of some issues and by getting an internal investigation under way, it can take corrective steps early on. Even without the sense of any wrongdoing, if a corporation takes a good look at its practices, it can prepare itself to be in a good position in the future to deal with any question that arises.

Gross: As a result of an internal investigation, we might be able to make certain recommendations as outside counsel, seeing that certain procedures may not be in the company's best interest. We can then help correct them, such as making changes in their compliance programs.

Editor: Is there a virtue in going outside the normal outside counsel relationship to have another outside counsel conduct the investigation?

Gross: Yes. It is always helpful to have a completely independent eye. It could be that to do an internal investigation using lawyers who do not have other work with the corporation examining its procedures could be very helpful in suggesting improvements in governance matters.

Editor: What processes can a company put in place to prevent situations from reaching a point where an investigation is necessary?

Gross: Outside counsel should be part of the process of implementing a strong independent compliance program, then later called in to review adherence to the compliance program, thus making it less likely that there would be certain conduct that would trigger a government investigation.

Poritz: It is also important to have written policies and procedures permitting employees to have assurance that they would have protections should they need to use an outside chain of command to report such issues as discrimination complaints or questions of management misconduct.

Editor: What about having an ethics code of conduct?

Poritz: I hope that most companies already have those in place. Certainly, government entities have had codes related to discrimination, sexual harassment and ethics for government employees. Similar codes should be employed by corporations. For example, under state law in New Jersey that is one of the prime ways a corporation can protect itself against claims.

Editor: Should there be a written policy in place concerning how to handle contacts from federal or state investigators?

Gross: I am strongly in support of such a policy, both to handle internal investigations as well as contacts from federal and state investigators. It is important to have set procedures, especially during investigations when there is a question of advancement of legal fees. If you have certain written policies that set out the criteria for those fee advancements in certain situations and with certain individuals, you have protected yourself from a governmental agency trying to claim that you are trying to obstruct their investigation. Also, it is important with internal and outside investigations to have set step-by-step procedures to preserve documents, especially in light of some of the new obstruction of justice rules under Sarbanes-Oxley about destruction of documents.

A corporation has to suspend any document destruction policy when an investigation is commenced, putting a hold on all documents. These policies need to be put in effect immediately and communicated with all officers in all subsidiaries around the world. That way you can ensure that the corporation cannot be charged with obstruction of justice later.

Poritz: Written policies are essential in dealing with document destruction and the preservation of evidence as well as making sure that employees know in advance what their obligations are and the trigger for those obligations so that they are not surprised when the time for compliance comes.

Editor: What disclosure should be made relating to investigations?

Gross: Even with an internal investigation I do not believe that it should be disclosed until the investigation is completed. Then it is up to the board to examine the results of the investigation to determine if certain procedures have to be changed, certain employees may need to be reassigned or terminated, or if there is a duty to disclose to regulators or to refer the matter to the U.S. Attorney's Office or state attorney general's office. It is important that everything be kept confidential until a resolution as to any action is reached. The investigation may begin because of an allegation of employee misconduct, and the investigation may reveal that the employee was acting legally and within the company's policies. If the investigation is disclosed early on that would jeopardize the employee's status both inside and outside the corporation.

Poritz: Another reason for confidentiality during the investigation is that people are sometimes reluctant to speak out when another employee is involved but may be willing to speak if confidentiality is assured.

Editor: What are some of the things inside counsel can do when faced with an investigation in order to assure fairness?

Poritz: In-house counsel have often been involved in issues that are closely related to the investigation. They have views about the matter and are in many ways better off when the matter is handed to outside counsel. Their loyalty is to the corporation. We had this in government when we turned to outside counsel in those instances where we felt that it was a matter of getting an impartial outside judgment from someone who brought a fresh view of what was being considered.

Editor: What skills do people with governmental experience bring to the table in the area of corporate compliance and internal investigations?

Gross: Both Judge Poritz and I have worked for governmental investigative agencies and know what the outside regulators are looking for, what they feel is important and what types of things they find most disturbing. Having conducted so many investigations dealing with different agencies gives one a very good background to work with corporations to help them set up compliance programs to avoid problems. My job is not to help them so much in avoiding prosecution as to help them put compliance programs in place so there is no question of misconduct or wrongdoing. In this way they do not need to engage us to conduct internal investigations. There are checkpoints in place and procedures to be followed that allow the corporation to conduct its business in a way that does not potentially run afoul of any regulations.

Please email the interviewees at deborah.poritz@dbr.com or barry.gross@dbr.com with questions about this interview.