Editor: Why do corporate internal investigations serve as a mitigating factor when followed by external investigations and enforcement actions?
Burke: Internal investigations do not necessarily prevent the harmful effects of external investigations, but a corporation's cooperation with an investigation and a commitment to self-police can soften the impact of both SEC and DOJ evaluations of corporate culpability. Under current law, corporations and their directors have an obligation to police themselves and to seek to investigate material wrongdoing when discovered, remedy it and hold those involved responsible for their acts. If they fail to do so, the corporation is at risk for being a target of criminal prosecution.
Editor: What are some of the critical factors that can trigger an internal investigation?
Burke: There are a variety of sources from which these investigations can arise. Sometimes a lawsuit by a third party brings facts to light that were unknown to the corporation. It can be whistleblower complaints, the auditors can uncover wrongdoing. Sometimes in-house counsel or internal auditors will discover material non-compliance with corporate codes of ethics or norms of conduct. There are a variety of different sources, both internal and external.
Editor: Should the investigation be conducted by in-house or external counsel?
Burke: It is sometimes permissible for in-house counsel to conduct these investigations. It is customary for in-house counsel to start the investigations. By far, the most prevalent course is for independent outside counsel to do the investigation. Such firms offer independence and credibility so that regulators can satisfy themselves that all leads were followed, all evidence was considered and that there was an appropriate examination of the role of senior management.
DeWine: From the general public to shareholders, everyone needs to be assured that there has been a fresh and independent look. It is a question of credibility and public perception. To have the right public perception in some cases you will need to have persons who everyone is convinced are clearly independent - that they have no interest in this matter one way or another. Credibility is really the key so that when they deliver their findings, they will carry much weight.
Editor: Is it possible that the company's law firm of long-standing can be that independent?
DeWine: Since so much is determined by perception, it depends on the individual case and what the facts are. We are living in a different world today than we were 10 or 15 years ago. The public, which has a good feel for corporate behavior, is demanding that there be transparency.
Burke: While it is possible that outside counsel can do the investigation, it is preferable for someone independent of management and with no past history with the company to perform the investigation, particularly where the subject of the investigation may be something in which outside counsel was involved. To get a full and clear picture of what really occurred you need someone who is fully independent of senior management.
Editor: Where there is an egregious wrongdoing, why is it important to disclose it early?
DeWine: After 30 years in government service I have found that if you discover a mistake, you are better off getting those facts out as soon as you can. The same is true for a corporation. The challenge for both government officials and corporate officials is to find out what the facts are. You should do absolutely nothing to hide the facts. In fact, you should take a proactive role in trying to disclose those facts; the politician is better off and the corporation is likewise better off if each finds the facts and gets them before the public. Where people get in trouble is where they try to hide facts and put their own spin on them. Invariably the facts come out leaving the perception of a cover-up.
Burke: Under both the DOJ and SEC guidelines, self-reporting is a very important factor in assessing a corporation's level of cooperation. A corporation's level of cooperation is one of the factors taken into account when deciding whether to take criminal action against a corporation. The resolve of a company to take proactive steps to investigate and advise the regulators of potential issues is important in demonstrating that the corporate culture does not tolerate misconduct. Holding wrongdoers accountable is critical. In addition, if the regulators believe that an effective, independent investigation is being conducted, they are more likely to defer their own action. They may let the internal investigation run its course and ask the corporation to share the results before conducting their own investigation.
Editor: Does the quality of the investigator make a difference with the government?
Burke: It certainly does. The regulators must have confidence that, if they stand aside and let an internal investigation proceed, the investigators are independent, and will conduct a thorough investigation, preserve critical documents and electronic data and reach sound conclusions. The regulators must have assurance that the quality of the investigation is comparable to what they would do themselves.
Editor: How should employees be informed and prepared for both an internal investigation and one conducted by the government?
Burke: The critical fact that has to be made clear to those involved in an internal investigation is that the lawyers represent the corporation, not the employees. The law firm reports to the independent directors who are not involved in the conduct that is being investigated. Employees are expected to cooperate but cannot be forced to do so. They have the right to seek counsel. There is no privilege that exists between the employee and the investigating firm. In fact, the corporation may decide to reveal the results of the investigation, including the employee's interview without the employee's consent.
Editor: Do you tell employees to put a hold on document destruction?
Burke: Absolutely. This must be done as soon as an investigation gets underway. The corporation must take steps to assemble relevant documents and computer files. Relevant laptops used by key employees need to be imaged and email servers need to be preserved. It is critical to preserve all records to ensure the creditability of the internal investigation and in keeping with the corporation's responsibility to federal regulators who will rely on the record you have assembled.
Editor: Why is it important for counsel to determine exactly what government investigators are seeking in order to narrow the scope of the investigation?
Burke: It is important for the investigating firm to understand what the government is seeking so that it can appropriately structure the internal investigation. As an investigation proceeds, the investigator and the independent directors are expected to follow whatever leads come to light. Even though there may be an initial focus on certain transactions or individuals, if the trail leads elsewhere, it must be pursued, and the regulators apprised of any new information.
Editor: As you both have been involved in many investigations, what impresses you the most when you are involved with a government investigation as to the measures a company can take?
DeWine: You are always looking at the credibility of the people that are under investigation. Anything that they can do to show that they want to disclose all possible information is a very positive thing. I know from my experience in the Senate that if a government agency is seen as trying to hide something, that is very damning. These principles certainly apply in the corporate world where the premium is on forthrightness and making all the facts available.
My experience has been that you had better be the one who discloses the bad news and put it out as quickly as you can. That is true from a public relations point of view, the press's point of view and a credibility point of view for the people conducting the investigation.
Burke: In my experience, regulators do not like surprises. If there are issues or problems, they want to hear them from you first. At all times one must maintain credibility with the regulators.
Editor: Under the terms of the McNulty Memo, sanctions can still be levied against companies. Would it not be better that culpable individuals be the target?
Burke: Ordinarily, yes. As the McNulty Memo and the other DOJ and SEC materials make clear, the issue is how pervasive is this misconduct? Is it something that is isolated at a low level of the organization or is it something that reflects a poisoned corporate culture? Did senior management acquiesce in or sanction wrongdoing? If a corporation takes appropriate action when it discovers a problem, cooperates and shows that its corporate culture does not tolerate such activity, action usually will not be taken. On the other hand, if misconduct is pervasive and conduct is condoned by upper management, or there is a culture where misconduct is encouraged, regulators could find that this justifies prosecution of the corporation.
Editor: Do you suggest that any disclosures to government officials be sealed so that word of any transgression is not available to other third parties who can bring shareholder suits?
Burke: Companies will frequently enter into confidentiality agreements with the regulators in connection with an investigation because they fear creating a road map for plaintiffs in later civil actions. Such confidentiality agreements may not be successful. Most of the cases have held that the disclosure of privileged information to the regulators waives the privilege for subsequent litigation. Congress is considering changing this rule because it punishes corporations for doing the right thing. Another way around the dilemma is for the report of an internal corporate investigation to be presented orally, rather than in written form, both to the independent directors and to the regulators.
Published June 1, 2007.