Considerations in Making the Decision
Part of the internal-resources/external-resources analysis will depend on the company’s internal resources. Conducting interviews, collecting and reviewing documents (including electronic ones), providing updates and ultimately a report and recommendation to members of the senior management team, and potentially communicating with regulators are time-consuming endeavors, regardless of whether internal resources have the requisite expertise.
Other considerations relevant to the decision about whether to outsource include the following:
- Financial impact of the potential issue
- Complexity of the potential issue
- Specialized skill set of potential investigators
- How far up the management ladder the issue may go
- Whether the legal department has sufficient resources to conduct the investigation quickly (especially where the government may evaluate penalties based on timeliness of response, or if there is potential for repeat misconduct in the near future)
- Cost
- Best chance of maintaining privilege
- Likelihood that government will eventually become involved
Benefits of Internal Resources
If the issue is relatively small and contained, internal personnel (whether from the legal department, human resources, or the business unit) who are sufficiently trained in the distinctive protocols and procedures of the portion of the investigation that they will be involved in may well be suited to the task. If there is a person within the company who has the skill, experience, time, and training to conduct the investigation effectively, impartially, and thoroughly, in-house counsel may wish to proceed using internal resources.
If the company appears to be the victim of an employee’s crime, starting with internal resources often makes sense. Internal personnel know the business and company policies, are more familiar with personnel, can hit the ground running, and maybe can resolve an isolated issue quickly. They can also conduct the investigation with less disruption to operations and possibly more discretion because employees do not see outside counsel coming into the business. In some cases, the ability of internal resources to maintain attorney-client privilege and work-product protection may be more difficult, but the lower cost of using existing employees may outweigh these concerns.
Benefits of Outside Counsel
If the issue is more complex, is likely of interest to regulators, has a potentially material impact on the financial reporting or disclosure of the company, or carries potential criminal exposure, corporate counsel should carefully consider outsourcing the investigation to a law firm or, as appropriate, a forensic accounting firm.
External resources have a number of advantages over internal resources for more intricate investigations. Many lawyers in private practice who specialize in internal investigations, securities law, and white-collar criminal defense have prior experience within government agencies. That experience assists them in knowing how the government might view certain facts. In addition, outside investigators often have already established a level of credibility with prosecutors or regulators, which enables them to negotiate more effectively on the scope of discovery, scheduling of deadlines, witness interviews, grand jury appearances, and the scope of document productions. They often may be in a better position to negotiate a favorable outcome at sentencing as well. Outside counsel also may obtain better fact-finding results from senior management members, who do not have a prior relationship with the investigator as they might with the in-house lawyer. Furthermore, they may have specialized experience in preparing reports and disclosures. In addition, when outside counsel retain financial and/or technology experts, as a practical matter, they stand a better chance of protecting attorney-client privilege and work-product protection.
Often, corporate counsel should look beyond the corporation’s usual lawyers and firms when choosing professionals to lead the investigation. Existing partner law firms may very well be substantively independent and have valuable historical knowledge of the business, but their apparent independence may be questioned. The risk therefore exists that the company could perform and incur the substantial time and costs associated with an investigation only to have the regulator or trier of fact not rely on the results.
In-house lawyers should be aware that the financial cost to the company of using external resources can be considerable. In cases where criminal liability or substantial fines are possible, however, the cost of not using them can be far greater. Furthermore, in some cases, insurance coverage may apply to certain issues and subsidize some of the costs of investigation by external resources.
Privilege Issues
When the government is already aware of the problem, corporate counsel should consider how much involvement the government will want to have in the process and what the impact on the attorney-client privilege will be. The privilege may be difficult to maintain depending on the government’s existing knowledge of the issue and the degree of its involvement. The government may also decide to conduct its own investigation by requesting documents and meeting with potential witnesses.
When the government is not yet involved, the ability to preserve attorney-client privilege and work-product protection is a very important reason to outsource the investigation. If there is an inkling that the company benefited from an employee’s actions and it appears that government or civil suits could follow, using outside counsel, often with other experts, is the best way to protect the privilege. While attorney-client and work-product privileges apply to in-house counsel, privilege does not apply to facts, only to communications made for the purpose of rendering legal advice. After the fact (and with opposing counsel and a judge in the mix), it can be difficult to separate legal communications from business advice. (Privilege also does not apply to communications made to facilitate a crime or fraud. See United States v. Lentz, 419 F. Supp. 2d 820, 830 (E.D. Va. 2005).)
Another thing to keep in mind regarding privilege and work product is that other jurisdictions do not necessarily recognize it (either at all or to the same extent as the United States does). Accordingly, where the investigation, the potential wrongdoer, and the company are located is pertinent. For example, many countries, including some in Europe, do not extend the privilege to in-house lawyers. In many countries in Asia, there is no formal recognition of the privilege, but outside counsel may have a better claim to it than in-house counsel. Therefore, it is critical to evaluate the privilege laws of every country where the investigation may lead.
Traits of a Good Investigator
Whether in-house counsel keeps the investigation truly “internal” or enlists the assistance of outside investigators, there are certain traits that any investigator should have. Knowledge regarding applicable aspects of law, neutrality, objectivity, passion, and discretion are key. Listening skills, being detail-oriented, and the ability to ask tough questions about uncomfortable subjects also are important skills. An effective investigator will know enough about the business, regulatory environment, and legal issues involved to ask the right questions and to follow up when there are inconsistencies or missing pieces.
Subject Matter Experts
Just as important as using specialized legal resources to lead complex investigations is ensuring the involvement of appropriate subject matter experts. Specialized expertise that often proves valuable on complex investigations may include financial, accounting, technology, and data, among others. Identifying and retaining experts at the earliest possible stage of the investigation is critical.
As Barry F. McNeil and Brad D. Brian have written, company resources may be the best place to start: “Many internal investigations deal with complex questions that only specialists can address. Auditors, engineers, and specialized technicians can provide invaluable assistance. Because these individuals can be found within the company, their participation will have the added benefit of reducing the cost of the internal investigation.” Overview: Initiating an Internal Investigation and Assembling the Investigative Team, in Internal Corporate Investigations 17 (Brad D. Brian, Barry F. McNeil & Lisa J. Demsky eds., 4th ed. 2017).
However, just as with the outsourcing of the investigation to outside counsel, it may make sense to bring in outside subject matter expertise. This is especially so when the potential liability is large. Outside experts may have experience and credibility working at, and with, the enforcing government agencies. In addition to the benefits associated with the credibility that such experts may have with regulators and other third parties with a vested interest in the investigation (e.g., independent auditors and board members), the experts can be a valuable source of knowledge and best practices as they relate to forming and executing the investigative plan, applying creative and efficient investigative techniques, and considering and assessing remedial actions.
Waiver of the attorney-client privilege generally is not an issue when outsourcing subject matter experts. In the 2015 case of In re Kellogg Brown & Root, Inc., the U.S. Court of Appeals for the District of Columbia reaffirmed this principle:
Some of the COBC documents in this case involve communications from an investigator, acting at the direction of in-house counsel, to an attorney who is in-house counsel. In such a circumstance, the investigator effectively steps into the shoes of the attorney. . . . Linde Thomson Langworthy Kohn & Van Dyke, P.C. v. Resolution Trust Corp., 5 F.3d 1508, 1514 (D.C. Cir. 1993) (“The attorney-client privilege undeniably extends to communications with one employed to assist the lawyer in the rendition of professional legal services.”) (internal quotation marks omitted); see also United States v. Kovel, 296 F.2d 918, 921 (2d Cir.1961) (holding that the attorney-client privilege covers communications from a client to an attorney’s non-lawyer employee).
796 F.3d 137, 149 (D.C. Cir. 2015), cert. denied, 136 S. Ct. 823 (2016).
Special Committees
In larger corporations, an issue may be so important to the finances, operation, or management of the business that it warrants the appointment of a special committee of the board of directors. Note that the board, and not management, appoints the special committee. Significant accounting or public reporting issues, government investigations into antitrust violations, whistleblower or other allegations involving senior management, and the like may require the officers and directors to separate themselves from the investigation to maintain independence. In such circumstances, the general guidelines discussed here apply, with several additional considerations.
In-house counsel must be vigilant in avoiding conflicts of interest. As noted above, corporate counsel may want to bring in outside counsel (who is not the company’s usual counsel) to represent the committee and to bring a new and wholly independent point of view into the equation. Working with outside counsel, corporate counsel should articulate the mandate and authority of the special committee. The special committee, among other things, will need to be able to engage specialists to advise the committee, analyze the facts, and assist with presentations to the board. Care should be taken in preparation of any minutes of meetings of the special committee, and it should be assumed that such minutes will not be privileged.
The result of the investigation is typically a report (either written or oral) to the board of directors and then a determination as to what, if any, next steps must be taken.
Conclusion
The decision about whether to outsource an internal investigation can have lasting consequences. Therefore, in-house counsel must conduct a thorough analysis of the subject matter of the investigation and the potential risks posed by exposure of the issue when making that decision. To the extent that the business decides to use internal resources at the outset, the business should evaluate at critical junctures of the investigation whether outsourcing makes sense. Especially where criminal liability may be involved, outsourcing to specialized counsel and other experts will likely be the best course of action to manage risk. Of course, the general counsel or other member of the in-house legal team should keep close tabs on the investigation regardless of whether internal or external resources are used.
Elizabeth S. Fenton is a partner with Saul Ewing Arnstein & Lehr LLP in Wilmington, Delaware. Michelle N. Lipkowitz is a partner with Saul Ewing Arnstein & Lehr LLP in Baltimore, Maryland. John Levitske and Mark A. McGrath are senior managing directors of Ankura in Chicago, Illinois.
