March 01, 2018 Feature

Top 10 Mistakes in Internal Investigation Reports

A compilation of the top 10 faux pas made in these reports from the perspective of a government lawyer.

Sunil R. Harjani

For many litigators, conducting internal investigations is now a regular part of their practice. From small matters, such as employee misconduct, to much larger corporate bribery and embezzlement cases, both inside and outside counsel are regularly called upon to conduct internal investigations. That process includes gathering and reviewing documents, interviewing witnesses, and making determinations about the misconduct, liability, and exposure of individuals and the company.

Often, a decision is made to prepare a report of the investigation, and its intended audience may be the general counsel’s office, senior management, the audit committee, or a special committee of the board of directors. Sometimes that report is written with the intent to disclose it to a state or federal regulator or prosecutor’s office. Much has been written about how to conduct an investigation and prepare a solid internal investigation report, but usually from the perspective of the author of the report.

White-collar prosecutors and regulators, by the very nature of their jobs, are on the receiving end of internal investigation reports prepared by attorney investigators. As a result, prosecutors and regulators have seen these reports in all shapes and sizes, and they have a particular viewpoint about the quality and contents of such reports. No doubt styles vary greatly among different attorneys writing internal investigation reports, which, unlike briefs, are not restricted by any formal rules. However, despite the myriad differences among these reports, there are some fundamental missteps that repeat themselves.

So here is a compilation of the top 10 faux pas made in written internal investigation reports from the perspective of one of the potential recipients of the report—a government lawyer.

Another Whitewashed Report?

Everything seems to be easier when a low-level employee commits the misconduct. The employee takes the fall, upper management is supposedly unaware of the crime, the employee is usually fired, and the company emphasizes its good corporate citizenship along with its strong culture of compliance, which it promises to make even stronger. The internal investigation report is turned over to the government with a promise of full cooperation. Sometimes this description is true to the facts, but sometimes this scenario is far too rosy.

The “whitewashed” internal investigation report is by far the most common deficiency in the preparation and production of reports. It is sometimes done because it can make the client happy by supposedly narrowing and limiting the conduct to a “small fish.” It protects senior management, who can blame one rogue employee. It can limit the company’s exposure in civil and criminal actions. More often than not, a company is not charged by the government for a rogue employee’s actions. Even worse, the whitewashed report is sometimes prepared by an attorney with a defense mind-set, rather than the independence that is required in such an investigation. This results in a report that reads like a defense brief, purporting to uncover all of the facts but, through well-chosen words and selective discussion, conveys the impression that the conduct is limited.

The reality is that the attorney investigator must assume that the government will conduct its own, detailed investigation once the report is disclosed. This will include interviews of many of the same witnesses, if not more, and a review of all relevant documents.

And if the facts uncovered during that investigation vary from those recounted in the report, the entire credibility of the internal investigation is in doubt. That, in turn, affects the company’s ability to (1) advocate that civil or criminal charges should not be brought against it, (2) resolve the case through a civil regulatory settlement only, or (3) enter into a non-prosecution or deferred prosecution agreement to potential criminal charges. All are outcomes that a company generally wants in decreasing order of favorability.

Experienced practitioners know that when the decision is made to cooperate with a government investigation, there is a spectrum of options ranging from minimum to partial to full cooperation. In the context of an internal investigation, a report that follows the facts wherever they lead and provides an unvarnished account of what happened is paramount to obtaining full cooperation credit.

Senior Management Is Safe—Really?

A corollary to the above situation is when the internal investigation report affirmatively concludes that senior management or the board had no knowledge of or role in the misconduct.

However, there are often multiple red flags where there is corporate misconduct. At times, these red flags are not detected by the company because of incompetence or negligence by senior managers. Sometimes, through willful blindness, those red flags are ignored by the company because of the stature of the employee or executive or because of the profitability of the business unit in which the misconduct occurred. Often, through sheer recklessness, fraudulent transactions are permitted to continue because of a corporate culture problem or a self-rationalization that business is a tough world that benefits those who take risks. In a smaller percentage of cases, senior management not only is aware of the illicit transactions but also authorized and concealed them.

The spectrum of senior management liability varies from case to case.

Whatever the situation may be, it is far better to report the unvarnished facts, including key witness statements and highlighting significant documents in the report about all players involved in the potential misconduct. This can include senior executives who spotted red flags but either chose to ignore them or signed off on the misconduct.

Sure, there is always context surrounding these red flags, such as whether a senior manager fully understood the extent or ramifications of the conduct. Nevertheless, any good internal investigation report should identify both the red flags and the context, rather than leave it all out.

Moreover, it is unnecessary to characterize the conduct as unknowing, negligent, reckless, or intentional. Those are battles for another day, after the government has generally conducted its own investigation and is ready to make charging decisions. At that time, among other issues, the intent (or lack thereof) of key players comes into play. A preemptive attempt to absolve the company and senior management of liability, if incorrect, will likely not work and often will backfire as it affects the credibility of the investigation.

Can the Witness Statements Be Introduced at Trial?

Statements of witnesses from internal investigation interviews are often helpful because they come early in the matter, before the witnesses have had time to craft and color their story. These statements can be obtained in the investigation because employees are often required to cooperate with company counsel as part of their status as employees. In the rare case, an eyewitness to the misconduct will come forward in these interviews. But from a regulator’s or prosecutor’s perspective, there are three key factors that must be known to make these witness statements usable.

First, state whether the witness was given an Upjohn warning. By now, Upjohn warnings are as ingrained as Miranda warnings. In Upjohn v. United States, 449 U.S. 383 (1981), the U.S. Supreme Court held that communications between a company and lower-level employees were subject to protection under the attorney-client privilege. Thus, after Upjohn, employees of a company could claim the privilege if they reasonably believed they were being represented by the attorney conducting the investigation. An Upjohn warning informs the witness that the attorney investigator represents the company (and not the individual), that the attorney-client privilege belongs to the company, and that the company can and may decide to disclose information obtained during the interview to third parties. An Upjohn warning can prevent suppression of statements by a court when a witness claims to have provided information to someone the witness believed was representing him or her in an attorney-client relationship. Prosecutors and regulators need to know if witnesses were “Upjohned.”

Second, often not mentioned in the report is who was present during the interview. Unrecorded statements to an attorney are useful only if there is someone who can testify to the conversation if called at trial. Among other reasons, this is important because that witness could be a defendant one day and the statement could be used in a case-in-chief at trial, or the witness may remain a witness but may need to be impeached with his or her prior statement. Moreover, the last thing the lead attorney investigator wants is to be called as a witness, which is why it helps to have a prover present. Government lawyers need to know whether a prover was present and who that prover was, whether a partner, associate, paralegal, or intern. The prover’s job is solely to take accurate notes of the interview and be able to testify to the statements at trial. Also, attorneys (and others who attended the interview) can change employment, and identifying who can testify about the conversation now will save resources later in finding that person when that statement needs to be introduced at trial.

Third, if you are reporting about interviews involving a public sector matter and its employees (for example, misconduct at a public university), it is important to state whether the subject of the interview was advised of his or her Garrity rights. The Supreme Court in Garrity v. United States, 385 U.S. 493 (1967), held that public sector employees have a right to be free from compulsory self-incrimination. Forcing a public employee to provide information under threat of potential employment disciplinary action would violate the Garrity rule and thus makes the statement inadmissible when introduced by the government. A Garrity warning advises, at a minimum, that any statement is voluntary and that no disciplinary action will be taken if the employee refuses to answer questions. Thus, a report statement that a witness was informed of his or her Garrity rights is an important piece of information.

What Else Did You Find?

Investigations can be like peeling back the layers of an onion. Once people start talking, the investigator often finds that the misconduct goes deeper and into different areas. What started as an embezzlement case may instead uncover a kickback scheme. Accounting fraud morphs into insider trading based on a better company earnings announcement. While investigations are often started on the basis of suspicions about a particular type of misconduct, it is no surprise to any experienced investigator that investigations branch off into different directions, with the potential for other misconduct to be uncovered. Reports often leave the other stuff out.

Once again, a good government investigator is going to talk to all those witnesses and read the emails, and will likely find out the information anyway. And a witness may blurt out that she informed the investigator about the matter, which will likely prompt the investigator to claim the matter was “not relevant” or was “outside the scope” of the inquiry. But sometimes that misconduct is reasonably related in some way to the core of the investigation. Thus, a rift develops in the level of trust between the government lawyer and the attorney investigator.

Leaving out these facts affects the credibility of the report and the company’s purported claims about being up-front and fully cooperative with the government. To be clear, no one expects every misconduct or violation of the company’s code of conduct to be in the report. However, to the extent it is a serious matter—namely, one that would reasonably trigger government curiosity—it is far better to put the facts in the report than to leave them out, only to have them discovered later.

Where Are the Documents?

Reports that do not identify documents are not particularly helpful. Nor are reports that are produced without the underlying documents. Indeed, in particularly long reports, there might be references to hundreds of documents. Producing a report without identifying those documents, whether it be by Bates numbers or control numbers or by designated exhibit numbers, is a disaster. It makes it difficult to verify the accuracy of the information in the report. It will also likely lead to a request from the government to produce and identify documents discussed in the report, in addition to a full-scale production of all documents relevant to the subject matter of the investigation. It is far better to identify the documents in the internal investigation report in a manner that allows them to be easily retrieved and reviewed from the outset.

Who Are the Key Witnesses?

You might as well identify the key witnesses in the reports. The government will ask for their names. Describing them as the vice president of finance or the chief operating officer is of limited value. People have names and you might as well use them.

Reports also sometimes identify a few individuals but not everybody with knowledge of the misconduct. It seems this is done to limit the number of people who might get pulled into a government interview or have to provide testimony under oath in a more formal proceeding. While the company would prefer that only a few of its employees be interviewed, unfortunately that’s not the way government investigations work. Anyone with knowledge of the misconduct will likely be questioned. A thorough government investigation requires interviewing everyone connected to the misconduct. Save everyone the time and just identify the people who are knowledgeable about either the background of the situation or the facts.

Two Hundred Pages of Industry Jargon?

Industry jargon is prevalent within businesses, whether it is real estate, securities trading, auditing, or consulting. Too often reports are filled with that jargon because the investigator is so deeply embedded in that world and has learned to speak the lingo after interviewing multiple witnesses and reviewing thousands of emails and other business documents. For example, terms such as “crossing the spread,” “cherry-picking,” and “commodity pools” do not mean much to the ordinary reader but are known terms in securities and commodities trading.

Reports that don’t explain the basics of the business and the terminology used often lose the reader. It simply makes the report unintelligible, which results in the report being not particularly helpful to the government attorney. As in any good presentation on complex issues, a certain degree of background and context is needed to understand the operative facts. Providing that to the reader allows for a better appreciation of the investigation.

Similar to this, but a problem on its own, is excessive detail in internal investigation reports. Sure, the government wants to know all the facts, but does the government really need to know every minute detail? The fallacy of report writing is that there are no page or word limits, as in court filings, and therefore no ceiling to stop the writer from describing the facts uncovered. Hence the 200-page internal investigation report. The length of the report is not reflective of the thoroughness of the investigation. Any good prosecutor or regulator can figure that out. Thus, it is far better to provide a report that accurately reflects the important facts and that is pointed and direct in its analysis. You want the report to be digestible to the regulator or prosecutor. That helps the government’s investigation, which in turn helps your cause in trying to obtain the most cooperation credit possible.

A Half-Hearted Investigation

It is well known that there are competing interests in deciding to prepare the report and producing it to the government. There is a risk that it could leak to the press and the public. There is the additional risk that the report could become a road map for plaintiff’s counsel and other third-party civil litigants. While varying from state to state, the concept of “selected waiver” of the attorney-client and work-product privileges, whereby a company can disclose the report to the government and avoid disclosing it in a third-party civil action, has apparently been rejected in the majority of states and thus can’t be counted on to prevent disclosure of the report. There is also the risk that the agency that originally receives the report, such as a regulatory body with only administrative or civil remedial powers, will share the report with criminal authorities, whether it’s federal or state prosecutors.

All of these concerns sometimes lead to a report that is half-hearted in its investigative efforts. Such a report is not thorough in its investigation but seeks to provide the impression of cooperation without really diving deeper into the facts in laying out culpability and red flags. It’s usually too short, does not recount all the key facts, lacks attention to detail, and generally makes it appear that there are no issues worthy of regulatory or criminal scrutiny.

A better approach would be to weigh the risks of a half-hearted investigation before deciding to produce that report. It may be that the company, in consultation with counsel, concludes that disclosure of the matter is not in its best interests. Or it is possible that an oral presentation of the results of the investigation, coupled with a package of key documents, is a safer approach under the circumstances.

These options are certainly better than a half-hearted investigation and a report that fails to reveal the full truth for fear of the collateral consequences. If the ultimate goal is full cooperation and no government action for the entity, a half-hearted report is probably not going to get you there. The U.S. Sentencing Guidelines, in application note 13 to section 8C2.5, make that clear in stating that disclosure of “pertinent information” means “whether the information is sufficient for law enforcement personnel to identify the nature and extent of the offense and the individual(s) responsible for the criminal conduct.”

Your Personal Background and Views Are Not Relevant in the Report

It doesn’t matter if you were a top prosecutor, regulator, or politician before you became an investigator or defense counsel. Your personal views about the misconduct and who is at fault based on your prior government experience don’t matter to the government lawyers reading the report. Your credentials may make you credible when pitching or reporting to your client, and that’s understandable. But your background really has no effect on the credibility of the investigation. To take the point further, no one would consider giving less weight to an internal investigation report because it was prepared by an attorney without prior, stellar government experience. Only the facts matter, and they are primarily obtained from documents and witness interviews.

Indeed, displaying your impeccable background can backfire. If, through the government’s own investigation, the truth differs materially from the information in the report, it will only hurt your credibility within the government office. So leave it out—it’s not necessary.

Independent Counsel

Is completely independent counsel necessary? Or can a company’s usual go-to firm conduct the internal investigation and then represent the company in the government’s investigation?

Trusted independent counsel certainly can help establish the credibility of the investigation. It is, of course, natural for a company to be concerned about using completely new counsel due to a lack of familiarity with the business and company personnel and a limited relationship with the legal department or the board.

But that’s kind of the point. It’s hard to imagine a report having the perception of credibility if the investigation counsel has represented the company for the past 15 years in multiple matters. The perceived concern is that the pressure to maintain the relationship with the company and management in the hopes of obtaining future business is too great to ensure a completely objective view of the facts, which may include identifying misconduct by senior and influential executives at the company. Nor is the report credible if the counsel who had some involvement in the transaction at issue is now called to conduct an investigation into that very transaction. That counsel’s connection to the company and the transaction is too deep and close for counsel to claim independence, no matter the impeccable reputation of the outside counsel claiming that independence. Certainly, not every complaint of misconduct warrants a full-scale independent, internal investigation. But we are talking here about conduct that could trigger regulatory or prosecutorial scrutiny of the company, which constitutes a serious enterprise risk.

A fresh eye, taking an objective and independent view of the conduct without having to worry about preexisting relations, generally offers the safest approach and promotes the most credibility. So, if that is the course chosen, it is often helpful to the reader to provide some detail in the report about the independence of counsel from the matter under investigation. It’s a good fact for you, so why not highlight it?

Conclusion

There is no one way to write internal investigation reports. Not everyone will agree with the views expressed in this article, particularly lawyers who believe that some degree of advocacy is necessary in anything that is provided to a regulator or prosecutor.

However, any good written material must always be written with its intended audience in mind. If your audience is a government attorney, avoiding these missteps and understanding the interests and concerns discussed above could help guide you toward a more credible internal investigation report and a potentially better outcome for your client. 

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Sunil R. Harjani

The author is an assistant U.S. attorney in Chicago with a focus on white-collar crime prosecutions. The views expressed in this article are those of the author and do not reflect the views of the U.S. Department of Justice.