Corporations frequently retain outside counsel to investigate significant internal corporate problems. These internal investigations can benefit a corporation by enabling it to learn the relevant facts, implement measures to prevent inappropriate activities from recurring, and prepare to defend against government investigations and civil suits. Traditionally, courts have treated internal investigations as privileged and confidential. Several recent decisions, however, have ordered corporations to produce to their adversaries in civil litigation the results of internal investigations as well as supporting materials, including attorneys' notes of witness interviews. Courts in these instances have reasoned that the corporations used their internal investigations "as a sword, rather than a shield," and therefore were not entitled to keep the work generated by the investigations private.

Reasons for Internal Investigations

Internal investigations became popular in the 1970's when the Securities and Exchange Commission created a voluntary disclosure program to encourage corporations to hire counsel to investigate corporate bribery of foreign officials. Corporate use of internal investigations increased as government agencies intensified civil and criminal enforcement activities, and indicated a willingness to mitigate penalties if corporations took proactive steps to investigate and disclose improprieties.

Today, corporations undertake internal investigations for a variety of reasons. Many corporations will conduct internal investigations to investigate potential improprieties such as employee fraud or violations of company policy. An internal investigation in these circumstances can uncover the relevant facts, identify and contain the problem areas at the company, and enable directors to properly exercise their business judgment. Internal investigations often are commenced when government or regulatory agencies, such as the SEC or the Justice Department, start to investigate the corporation. Internal investigations can help the corporation prepare responses and formulate defenses at an early stage in anticipation of potential criminal or civil litigation, rather than waiting until litigation has been filed.

In most instances, the attorney-client privilege and attorney work product doctrine protect internal investigations from public disclosure. The policy rationale for treating internal investigations as confidential is to encourage corporations to ferret out wrongdoing and implement appropriate prophylactic measures. Corporations must be careful, however, to avoid waiving applicable privileges by publicly disclosing the results of internal investigations. Releasing this type of information may convince the public that the corporation was not part of any wrongdoing, or persuade a government agency not to bring criminal or civil charges, but will also increase the risk that the report and underlying data must be disclosed to civil adversaries.

Losing the Privilege

The crucial question in determining whether an internal investigation is privileged is whether the investigation is conducted for litigation or business purposes. The attorney-work product privilege will protect an internal investigative report if it has been prepared "in anticipation of litigation." Courts have interpreted this to require that the documents be prepared "principally or exclusively to assist in anticipation of litigation." Consequently, an internal investigation report prepared for business, as opposed to legal purposes, will not be protected.

For example, in In re Kidder Peabody, 1996 WL 69122 (S.D.N.Y. May 29, 1996), Kidder hired a prominent New York law firm to investigate alleged fraud by one if its bond traders. The internal investigation was part of a campaign by Kidder to convince the business world and the government that it was innocent of any wrongdoing and was rectifying any internal problems. Kidder hired the firm to prepare a detailed report assessing and recounting the events, together with recommendations for institutional reform. The law firm also was to defend Kidder in expected civil lawsuits and SEC proceedings. Immediately after retaining the firm, Kidder made a public announcement that it had hired the law firm for these purposes. When the law firm finished its investigation, Kidder released to the public a copy of the law firm's final report, which analyzed the events and discussed what operational changes should be made. Kidder also sent a copy of the report to the SEC.

Plaintiffs in shareholder class actions brought against Kidder arising out of the bond trader's fraudulent activities sought discovery of the attorney notes and memoranda of witness interviews upon which the final report was based. Magistrate Judge Dolinger granted their request. The court found that Kidder had failed to prove that the documents and interviews were created "principally or exclusively to assist in contemplated or ongoing litigation." The court noted that the investigation was undertaken for business purposes as well as to prepare for litigation. The firm was hired to conduct an intensive fact-finding investigation to discover what happened and why it took so long to discover the wrongdoing. The firm also provided Kidder with a detailed report recommending changes to avoid repetition of these events. Equally important, the firm worked with Kidder to address the negative publicity generated by the incident. Indeed, the court found that one of Kidder's key concerns was public reaction. Kidder wanted to make it clear from the outset that its management was not part of the wrongdoing, intended to discover any wrongdoing and would sanction those responsible. Since the law firm was hired for these business-related concerns, the court concluded that the investigation would have been undertaken regardless of whether litigation was threatened. Anticipation of litigation therefore was not the primary motivator for the internal investigation, and the court refused to apply the attorney work product privilege and forced Kidder to turn over the requested material to plaintiffs.

Similarly, in In re Leslie Fay, 161 F.R.D. 274 (S.D.N.Y. 1995), the Leslie Fay company hired outside counsel to investigate accounting irregularities. Plaintiffs in a related class action suit sought disclosure of memorandum and notes underlying the investigation's final report. The court held that the material was not protected and therefore discoverable. The court acknowledged that one reason Leslie Fay conducted the investigation was to address the threat of potential legal liability. Nevertheless, the court found that the report was created primarily for business reasons, including to reassure creditors and future lenders that culpable parties had been caught and suspect internal polices eliminated. Since Leslie Fay would have conducted the investigation even if there was no ongoing or anticipated litigation, it could not prove the materials were prepared "primarily in anticipation of litigation."

In Martin Marietta Corp. v. Pollard, 856 F.2d 619 (4th Cir. 1988), the Fourth Circuit found that Martin Marietta had waived its attorney-client and attorney work product privileges by disclosing the results of an internal investigation to the government. In that case, Martin Marietta hired outside counsel to defend against a government investigation for travel agency fraud. The law firm interviewed witnesses and prepared a written memorandum intended to convince the government not to pursue charges. The report, which quoted employee interviews, accused certain employees of wrongdoing and denied any vicarious liability for the company. In a subsequent lawsuit involving the accused employees, the court permitted discovery of the report and the underlying interviews, holding that the corporation could not use the internal investigation as a sword to ward off criminal charges and as a shield in a subsequent lawsuit. By affirmative use of the report, the corporation waived both the attorney-client and attorney work product privileges.

In sum, affirmative use of an internal investigative report, may waive the confidentiality of that report and by implication, any underlying documents. In particular, dissemination of the report outside the corporation, and especially to the press, almost certainly will result in discovery of the report and underlying work product to civil adversaries.

Steps to Preserve Confidentiality

To protect internal investigations from discovery, corporations should make every effort to minimize dissemination of the investigation's results and avoid making affirmative use of the investigation or its results in lawsuits or the media. Among other things:

  • Counsel and management should determine the scope of the investigation from the beginning and keep it as narrow as possible.
  • If feasible, avoid creating a final written report. Oral conclusions are preferable because a written report easily could be disseminated outside the company and result in the loss of confidential privileges.
  • If a written report is necessary, counsel should state explicitly that the purpose of the report is to render legal advice based on the facts continued in the report, and not simply to relate the facts. The report also should include legal conclusions.
  • Restrict dissemination of any final report and underlying documents to as few people within the company as possible.
  • Do not create any unnecessary documents, since documents generated by an internal investigation may be discoverable even when attorneys take the best precautions. Any document that is created should be clearly marked as privileged.
  • Interview notes and statements of witnesses should avoid direct quotations. Instead, counsel should try to characterize the notes as thoughts and opinions learned from the interviews. Such material will then be considered "opinion" work product and entitled to heightened protection.
  • If the corporation is going to release the report to the government, include a provision in the agreement with the government that the limited disclosure to the government does not constitute a waiver of any privilege. The agreement also should prohibit derivative use of the information and disclosure to any public or private entity. Although not every court will find such provisions sufficient to protect the investigation's confidentiality, many will find no waiver if disclosure is made to the government pursuant to a confidentiality agreement.

Conclusion

Although necessary, internal investigations could lead to disastrous consequences for a corporation if the results of the investigation are deemed discoverable. Even after a carefully managed investigation, litigation battles over disclosure often ensue. Nevertheless, if a corporation observes precautions, it will improve the chances of protecting the confidentiality of its investigation.

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.

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