United States: Rethinking Independence In Internal Investigations

Last Updated: November 14 2017
Article by Jessica K. Nall, Nell K. Clement and Joshua W. Malone

For a company under actual or potential government scrutiny, an independent internal investigation performed by outside counsel, sometimes coupled with cooperation with the government, can mean the difference between indictment and much more palatable result. Often, outside counsel's "independence" is conflated with "absolutely no prior work done for the subject company." Indeed, some companies and Boards categorically refuse to hire outside counsel to handle internal investigations if the firm has previously performed work for the company, out of concern that the government will assume that such counsel cannot conduct an "independent" investigation.

Although there are circumstances in which an entirely new firm should be hired for an internal investigation, imposing this sort of bright-line rule in every case may risk disqualifying a firm that is otherwise best equipped to handle a particular investigation, driving up costs and reducing efficiency while failing to increase credibility. In many situations, investigative counsel can be diligent, objective, and independent despite having done some prior work for the client. Investigative counsel that are familiar with the inner workings of a company from a prior relationship can bring enhanced efficiency and understanding to the investigation that can be extremely beneficial to the truth-finding process as well as to cost control efforts. The point at which a prior counsel relationship may defeat independence must be considered on a spectrum. While hiring a firm with no prior relationship may be useful or even necessary for some types of investigations, in other circumstances an existing or previous counsel relationship can enhance effectiveness with minimal if any threat to the investigation's credibility.

As a threshold matter, while the government has stated that it favors "independent" investigations, it has offered little guidance on what that means. For example, the Department of Justice's recent checklist evaluating corporate compliance programs notes only that an investigation should be "properly scoped" and "independent, objective, appropriately conducted, and properly documented."1 Notably, the guidance does not state that a firm's prior work for a company disqualifies it as investigative counsel in all circumstances, nor does it state that some degree of prior work makes such counsel any less able to conduct an independent investigation. The U.S. Attorney's Manual focuses instead on the credibility of the investigation, noting that "[w]hichever process the corporation selects, the government's key measure of cooperation must remain the same as it does for an individual: has the party timely disclosed the relevant facts about the putative misconduct?"2

In the context of SEC investigations, Exchange Act Rule 10A-3(b)(4) requires that audit committees be authorized to engage "independent" counsel, but does not elaborate.3 The SEC's 2001 Seaboard Report, listing criteria for evaluating corporate cooperation, only briefly mentions prior company work: "If outside persons [conducted the review], had they done other work for the company? Where the review was conducted by outside counsel, had management previously engaged such counsel?"4 However, the Report does not specify how the Commission is to evaluate such facts and does not characterize prior company work as impacting credibility.

Because most internal investigations, especially for public companies, will need to satisfy auditors in addition to the government, it is helpful to consider the applicable audit standard regarding the level of independence required for a credible investigation result. AU-C Section 500 (Audit Evidence) sets forth the audit standards that govern a public company audit that may rely on the findings of a "specialist" such as investigative counsel.5 Notably, the audit standards provide that such specialists may be relied upon as objective despite prior or current business relationships as long as other indicia of objectivity are present. At least as far as the audit standards are concerned, the standard for credibility is "objectivity" rather than "independence," a concept that also seems to better describe the government's evaluation of credibility as a practical matter.

Although there are certainly situations when a company's prior working relationship with outside counsel, especially if extensive, may impugn the credibility of an investigation, some amount of prior work by investigative counsel should not act as a de facto disqualifier. First, taken to its logical extreme, this overly restrictive standard would potentially prevent companies from engaging counsel best-suited to address a particular issue. Large companies regularly spread matters across a dozen or more law firms. If a company could not then choose one of these familiar firms for an internal investigation - when criminal liability and/or millions of dollars in fines are at stake - companies may be foreclosed from choosing the best qualified counsel for a particular investigation. Second, the risks of perceived lack of objectivity based on a prior working relationship can in some situations be cured through structural safeguards. Depending on the type of investigation at issue, a company can establish lines of reporting and forms of supervision that allow outside counsel to bypass a prior or existing client contact. For example, investigating counsel that reports directly to the Board or Audit Committee (or another special committee where appropriate) are less likely to be perceived as being improperly influenced by pre-existing in-house counsel relationships. In an appropriate case, the lawyers within a firm who worked on prior matters can also be walled off from the investigation team.

Like their auditors will, companies should weigh on an individual basis the question of whether outside counsel can conduct a thorough, objective investigation that will be viewed as credible - realizing that there are instances in which a prior working relationship will be acceptable or even beneficial. For example, outside counsel with prior experience will often bring an in-depth understanding of the company's business operations and relevant personnel - which can be crucial in time or dollar-constrained investigations. Likewise, if outside counsel previously worked as a company's employment counsel, it will be well-acquainted with company policies regarding termination and thus able to quickly analyze employment repercussions - common issues in any internal investigation. Despite investigative counsel's prior work, the government is still very likely to grant such findings considerable weight where objectivity is otherwise present. For General Motors' internal investigation on defective ignition switches, G.M. hired two law firms (King & Spalding and Jenner & Block) that had previously done legal work for the company. G.M. reached a favorable settlement with the Department of Justice more quickly and for far less than other car companies involved in similar defective ignition switch investigations. Preet Bharara, the former U.S. Attorney for the Southern District of New York, specifically cited G.M.'s internal investigation and cooperation as a reason for the favorable settlement.6

Choosing outside counsel with prior experience with the company may be especially appropriate where counsel has worked only on a limited number of unrelated cases. For example, in both the Yahoo! data breach and the Wells Fargo fraudulent account investigations, both investigating firms (Sidley Austin LLP and Shearman & Sterling, respectively) had previously been engaged for unrelated work.7 On the other hand, there are clear instances where a company's prior relationship with outside counsel should disqualify that counsel from conducting a subsequent internal investigation. For example, the government may view outside counsel as too self-interested to conduct an objective investigation if counsel was involved directly or even indirectly in the events under investigation. The seminal example is Vinson & Elkins' investigation into the Enron fraud allegations. Vinson was hired as investigative counsel despite the firm's role in helping to create several off-the-books investment partnerships that were a focus of the government's investigations.8 The internal investigation concluded that the partnerships were legally appropriate, a result that did little to deter government scrutiny.

A similar situation exists when the company's in-house or general counsel's advice is itself under investigation, or where the actions of a non-lawyer client contact are under scrutiny. Because of the risk that investigating counsel may be perceived as reticent to make findings that might result in discipline of their prior or current client contacts, a fully independent firm should be hired. The perceived lack of credibility may also require completely "new" counsel to investigate some whistleblower complaints. Depending on the severity of the conduct alleged, a whistleblower's own perception of bias or fear of his or her identity being uncovered by longstanding counsel may make completely new counsel a safer choice.9

In summary, outside counsel's independence should not be viewed as a strict binary determined solely by whether counsel had a previous working relationship with the company. The degree of independence required in a given situation should instead be considered on a spectrum, informed by the specifics of each case, with an overall eye toward counsel's objectivity under the particular circumstances.

Footnotes

1 U.S. Department of Justice, Evaluation of Corporate Compliance Programs, available at https://www.justice.gov/criminal-fraud/page/file/937501/download.

2 U.S. Department of Justice, U.S. Attorney's Manual 9-28:720; see also id. ("The extent of the cooperation credit earned will depend on all the various factors that have traditionally applied in making this assessment [e.g., the timeliness of the cooperation, the diligence, thoroughness and speed of the internal investigation, and the proactive nature of the cooperation.])"

3 Exchange Act Rule 10A-3(b)(4) ("Each audit committee must have the authority to engage independent counsel and other advisers, as it determines necessary to carry out its duties.")

4 U.S. Securities and Exchange Commission, Seaboard Report (Oct. 23, 2001), available at https://www.sec.gov/litigation/investreport/34-44969.htm.

5 AU-C §500.A38.A39 et. seq.

6 Ivory and Vlasic, $900 Million Penalty for G.M.'s Deadly Defect Leaves Many Cold (Sept.17, 2015), available at https://www.nytimes.com/2015/09/18/business/gm-to-pay-us-900-million-over-ignition-switch-flaw.html ("Mr. Bharara cited an internal investigation conducted for G.M. as favorable in determining the penalties paid by the automaker. The two law firms hired for that inquiry, King & Spalding and Jenner & Block, had previously done legal work for G.M. And court papers show that Anton R. Valukas, the chairman of Jenner & Block, who headed the G.M. investigation, helped represent the automaker in its talks with the Justice Department.")

7 Sidley had previously represented a group of technology companies, including Yahoo!, in an amicus brief that it wrote in In re Seagate Litigation in 2007. See 2007 WL 1032685 (C.A. Fed.). Shearman had previously represented Wells Fargo Securities LLC, a subsidiary of Wells Fargo & Co., in a debt offering in 2015. See http://www.shearman.com/en/newsinsights/news/2015/06/wells-fargo-in-fts-international-notes-offering.

8 James Grimaldo and Peter Behr, Houston Law Firm Helped Craft Enron Deals (Jan. 27, 2002) available at https://www.washingtonpost.com/archive/politics/2002/01/27/houston-law-firm-helped-craft-enron-deals/a4011343-6a7e-432b-a526-697849e9bf1d/?utm_term=.e8eea215d9c9 Hou

9 Dan Dunne, Compliance & Ethics Professional, Foxes and Henhouses (Aug. 2011).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions