Contact: Mark Thornhill; Spencer Fane Britt & Browne LLP (Missouri, USA)
Your business may routinely receive requests for data from regulators. These requests may be handled by knowledgeable staff and may not come to the attention of general counsel. At times, however, staff may forward a regulator’s request for information that is unusual and noteworthy. These requests might state the data is sought in connection with an investigation of potential law violations. Similarly, a subpoena for information may be received from a law enforcement agency such as the United States Attorney’s office.
These inquiries certainly are the focus of general counsel as they may present a substantial risk to the corporation or its executives. General counsel needs to understand what conduct may have occurred, why it occurred, who is responsible for the conduct and how its effect can be mitigated. These are the issues of the internal investigation.
General counsel should not conduct the internal investigation. The scope of the investigation likely would require more time than is available. Also, the investigation may focus on executive colleagues who are friends, or on superiors who have power over the general counsel due to their position. In either circumstance, it can be difficult for general counsel to take action that is in the company’s best interest but adverse to the fellow employee. Further, the internal investigation may be the first step toward an indictment and trial. The business will rely on outside counsel for those situations, so it is sensible to engage outside counsel from the start.
General counsel should expect to work in extremely close collaboration with outside counsel in the internal investigation. General counsel will be the liaison to executives and the board, the source of critical background information and a partner with outside counsel in shaping legal strategy.
This presentation identifies some of the highly important decisions general counsel will need to make in the internal investigation and describes factors that may guide those decisions.
Selecting the Law Firm to Conduct the Internal Investigation
General counsel frequently retain a law firm that does not generally represent the corporation to conduct an internal investigation. The rationale is that a firm with “independence” from the business is more likely to conduct a thorough and probing investigation, unencumbered by considerations of future business with the company. By contrast, a firm generally engaged by the corporation would face some of the same potentially disabling circumstances the general counsel would confront if he were running the investigation, such as difficult situations with friends or those who have power over the relationship. The selection of “independent” counsel is supported by Exchange Act Rule 10 A-3(b)(4), which requires that the audit committee of public company boards be authorized to engage independent counsel.
General counsel may conclude that “independence” is not as important as deep knowledge of the company’s issues. A recent example is the decision by General Motors to hire two of its established law firms to conduct its inquiry regarding ignition switch issues. “As Scandal Unfolds, GM Calls In The Lawyers”, NYTimes.com, March 26, 2014.
General counsel’s decision on what law firm to hire ultimately is based on the analysis of what firm offers the best array of expertise and credibility with the investigating agency. General counsel should be sure to engage a firm that has depth sufficient to conduct a thorough, yet prompt investigation, with a lead lawyer who has experience both in managing internal investigations and with the government agency that alleges a possible law violation.
The Scope of the Investigation
Often the internal investigation identifies issues that were not mentioned in the notice from the investigating government agency. New problems may appear as witnesses are interviewed and documents are reviewed. The engagement letter with counsel should state the known issues, but also acknowledge that counsel will review whatever issues are revealed by the evidence. General counsel must focus on ensuring that new matters appear to be material before resources are committed to their investigation.
Interviewing Employees
Retained counsel will interview all employees with a meaningful connection to the core matter being investigated. Employee interviews present a broad scope of issues. Many are discussed below.
Controlling the Message
The internal investigation is a confidential matter of the corporation. General counsel is required by Rule 1.6[1] to maintain that confidence. General counsel and retained counsel are authorized by the same rule to disclose the investigation matter to the extent reasonably necessary to obtain necessary information and, more broadly, as directed by the corporation. Obviously, the matter under investigation needs to be revealed in some detail to employees and directors who are identified for an interview and to custodians of documents that are to be preserved. Depending on many factors, including the size of the organization and prominence of the persons central to the issue under investigation, the fact of an internal investigation may become well-known throughout the rank and file. General counsel should consider a statement to employees that acknowledges the investigation, presents a general statement about its nature and affirms the company’s commitment to compliance with law and regulation.
Conducting Interviews of Employee and Board Members
The employees or board members (“constituents”) who are at the center of the controversy certainly will be asked to provide an interview to retained counsel. Some constituents may have personal interests that are adverse to the corporation. For example, a constituent could be suspected of criminal conduct that could be imputed to the corporation under the principals of respondeat superior. These persons must be advised, before the substance of an interview, that counsel does not represent their interests. Rule 1.13(d) Comment 7. If adversity between the business and a constituent is clear, the constituent should further be advised to consider retaining independent counsel. These same constituents may also hold information which is critical to forming legal advice for the corporation. In this capacity, the constituents must be given advice, before the substance of an interview, that the corporation considers their information to be privileged and confidential although it may later change its position by disclosing the information and waiving the privilege.
Information provided by constituents should be privileged under the familiar Upjohn test, if (1) the constituent’s information is solicited for the purpose of providing legal advice for the corporation; (2) the constituent’s information is needed by counsel to formulate legal advice for the corporation; (3) the information is on matters within the constituent’s job duties; (4) the constituent knows the interview is for the purposes of legal advice to the corporation; and (5) the constituent’s information is intended by the corporation to be confidential and, at least at the time of the interview, the corporation has no intention of waiving its privilege.[2]
The issues of potential adversity and privilege require that counsel provide advice before the witness interview substantially as follows:
Counsel represents the corporation, not the constituent
A description of the issues being investigated by the corporation
The corporation believes the constituent has information that will assist in formulation of the corporation’s legal advice
The corporation believes the constituent’s information will be subject to the attorney-client privilege
The corporation currently intends to maintain the information in confidence, however, the company may later decide to waive the attorney-client privilege and disclose the constituent’s information
If the constituent’s personal interest is adverse to the corporation’s, and the constituent is at risk of being prosecuted, retention of personal counsel for the constituent should be discussed
The Prosecution Target
The constituent who is a prosecution target, and whose conduct may be imputed to the corporation, should have personal counsel. The corporation likely can advance the fees for personal counsel, although a special board resolution may be necessary. See, Mo. Rev. Stat § 351.533; K.S.A. §17-6305. Often, the constituent will be required to provide an “undertaking” to repay all advanced fees and costs in the event that the constituent’s conduct results in his conviction of a serious crime. The steps necessary to advance legal fees for a constituent’s counsel will be guided by the corporation’s Bylaws and the law regarding indemnification in the state of incorporation. The constituent must give informed consent to the payment of fees by the corporation and the corporation must not interfere with personal counsel’s commitment to his client. Rule 1.8(f) Comment 11. The lawyer engaged to represent the constituent-prosecution target must evaluate whether payment from the corporation threatens his ability to act solely in the best interests of his client. Rule 1.7(b) Comment 13.
It is important to seek an interview of the prosecution target employee before personal counsel is retained. In the context of a criminal investigation the constituent’s counsel may decide against sharing information with the corporation’s counsel, leaving the corporation without information vital to prepare its own defense.
The Mere Witness
Sometimes counsel is retained for a group of constituents who are not prosecution targets but who have information about corporate operations that are connected to the criminal investigation. These lawyers are referred to as “pool counsel”. An example of where pool counsel might be used is an environmental investigation where a group of employees were directed to move soil or divert water. Another example is a financial investigation where a group of employees were directed how to account for customer transactions. In these examples, the employees did not formulate any instructions that are significant to the criminal investigation, they merely performed the instructions. But in performing the instructions, they obtained information about how a potential criminal scheme was carried out.
These are almost always low-level employees. In the criminal investigation, the government typically considers these employees to be mere witnesses. Since these employees are not prosecution targets and will not be adverse to the corporation, one lawyer can represent all members of this employee “pool”.
Pool counsel is useful in grand jury investigations where a number of employees with the status of mere witnesses are to be interviewed by the government. These employees will appreciate the assistance of a lawyer to explain the government interview process and to give guidance. Since the mere witness employees are not viewed as being adverse to the corporation, pool counsel generally can obtain consent from each member of the pool to reveal the witness’ information to corporate counsel.
Pool counsel has to be alert to unanticipated adversity between any of his clients. Adversity could create a conflict of interest prohibited by Rule 1.7(a). If a member of the pool is adverse to others in the pool and the adversity would materially limit the representation, pool counsel could be found to withdraw from the matter. Rule 1.7 Comment 4. At the outset of the engagement, pool counsel should advise each pool member that information learned from any one of them may be shared with the entire group. This is required because pool counsel has the duty to all use available information for the best interest of each member of the pool. See Rule 1.7 Comment 2. Any putative pool member who is uncomfortable with the sharing of information should be excluded.
Representing All Employees
Counsel for the corporation may take the position that it represents all corporate employees. Dual representation of the corporation and all its employees is permissible under Rule 1.13(e) if not prohibited by a conflict under Rule 1.7.
Corporate counsel may assert its representation of all employees in an effort to stop ex parte interviews by government investigators with corporate employees. Government lawyers, and the investigators they control, are subject to state’s disciplinary rules under 28 U.S.C. §530B. Rule 4.2 prohibits lawyers from contacting persons known to be represented about the subject for which they have their representation. Therefore, if company counsel can represent all company employees and company counsel so informs the government of it representation of all employees, government agents may be forced to stop ex parte interviews.
Representation of all employees of the corporation has perils. At the outset of an investigation, conflicts between the corporation and any of its employees may not be foreseen. But if a conflict subsequently develops on the matter being investigated by the government, the conflict may require the lawyer to withdraw from representing any party. Rule 1.7 Comment 29 provides, “ordinarily the lawyer will be forced to withdraw from representing all of the clients.” This could occur if the late-developing conflict renders company counsel unable to provide diligent and competent representation to all of his clients.
Dual representation in the context of a government investigation is more likely to be sustained if the corporate counsel represents only those constituents who are in the position to impute liability to the corporation through their conduct or who regularly consult with counsel. Still, the prospect of a disqualifying conflict may be a serious concern if the common representation fails.
Advice to Employees Who Are Not Represented
Tactics used by government agents are well known. Agents appear unannounced and uninvited at the homes of employees. They insist that only immediate and truthful disclosures will avoid future scrutiny. Fellow employees learn about these incursions and wonder whether they have the right to refuse access and information to the agents.
The corporation is concerned that the incursions will continue and that an employee will say something that is incorrect. Incorrect statements can create beliefs among the prosecution team that are difficult to overcome. Corporate counsel would prefer to instruct the employees they should refuse to speak with the agents. That could be legal advice, however. The employees all could claim to be clients of corporate counsel. This probably is not desired due to the possibility of conflicts. Further Rule 3.4 may prohibit a lawyer from advising a person who is not a client that the person should not talk to law enforcement. Finally, a “don’t talk” instruction could cause corporate counsel to be scrutinized for possible obstruction of justice charges. Under 18 U.S.C. § 1502 and §1512, it is a crime to make an intentionally false or misleading statement for the purpose of influencing a government agency investigation or a grand jury investigation.
The appropriate action is to disclaim any representation of the employees but to state their rights. General counsel can state:
You have no obligation to speak with a law enforcement agent unless it is pursuant to a subpoena or summons which would require you to appear at a courthouse or government office at a future date
An agent appearing at your home has no right to demand that you answer any questions. Even if the agent serves a summons or subpoena, there is no obligation to speak to the agent at the time
It is solely your decision whether to speak with an agent
If you decide to speak with an agent, the corporation would appreciate the opportunity to have a representative present. This is because the corporation wants to understand the issues it may confront
If the employee would be in the position to know information protected by the corporation’s attorney-client privilege, it is appropriate to advise the employee that the corporation has not waived privilege
Does the Litigation Hold Obligation Apply
Not every law enforcement inquiry requires a litigation hold. A summons or subpoena to the corporation necessarily is for documents only. If the corporation is considered a mere witness by the prosecution, it can fully satisfy its responsibility by gathering documents made or received through the closing date stated in the summons or subpoena. If the corporation is a subject or target of the investigation, litigation hold procedures may be necessary. If subpoenaed information is deleted or destroyed, the corporation or its actors could be scrutinized for possible obstruction of justice. Corporate counsel should check with the lawyer in charge of the government investigation regarding the corporation’s status and whether a litigation hold is necessary.
