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Responding to a Government Investigation-
First Steps Must Be Quick But Deliberate

Kevin M. Kinross
Reprinted from Acredula -- Winter 2007

The number of governmental investigations, both at the federal and state level, has risen considerably in the last five years. Fueled by the post Sarbanes- Oxley political climate, we anticipate this trend to increase for both public and private companies with the return of bipartisanship in Congress and the state offices of Ohio. Even if your organization is not directly involved in any investigation, it can easily be drawn into an inquiry of customers, clients, joint venture partners, or a co-member of a strategic alliance.

How your organization answers the government’s call may even direct its existence. So, if your organization is the subject of a government investigation or allegations, what do you do? First, take a breath. The most crucial error an executive, board member, or chief legal officer can make is to commit to a course of action without enough information. Over the next several issues of Acredula, we will take this same question but answer it from the perspective of each target audience separately. This first article will provide some guidance and first steps to consider that are important to each audience.

1.     Contact Company Counsel and Preserve Information

Immediately upon receiving knowledge of government allegation or that it is conducting an investigation into your organization, contact your company counsel. Everything that your organization does from this point forward will be looked at in a “rear view mirror.” So, contacting your company counsel as soon as possible is a necessity.

Next, written preservation instructions should be sent to all relevant employees and to your organization’s information technology department. Any destruction of documents will greatly impact the opportunity for a positive resolution of the matter. Thus, preserving all relevant information is a critical step in this process. The company has a duty that its employees receive clear directives to retain all documents and not destroy any information.

Failing to preserve all relevant information may not only look bad to the investigating agency, but may also bring about criminal penalties. This includes halting the organization’s document retention policy in regards to electronic data, relevant back-up tapes, e-mail and voice mail messages, as well as information maintained in hard copy. Depending on the scope and severity of the allegations consideration should also be given to removing and securing the hard drives of relevant employees.

2.     Assess the Situation

After taking all necessary steps to preserve relevant information, it is time to assess the situation. The most critical, and sometimes irreversible errors are made at the beginning of the inquiry. By assessing the situation, you need to ensure that the issue is properly communicated to senior management, additional relevant personnel, the board of directors, and any specific board committee (i.e. audit committee if the company’s financial statements are the subject of the inquiry). Do not announce any intention of conducting an internal investigation until the situation is assessed.

As part of your assessment, intitial questions that should be answered are:

• What is the nature of the misconduct involved;

• How did the misconduct arise;

• Where in the organization did the misconduct arise, including how high up in the chain of command was knowledge or participation in the misconduct?

It is also important to understand the sentencing guidelines for any alleged wrongdoing. On the federal level, the SEC provides some insight into what a government agency will account for in determining any corporate penalties. Such factors that can be anticipated are:

• The need to deter the type of offense;

• The extent of the injury to innocent parties;

• Whether complicity in the violation is widespread throughout the corporation;

• The level of intent on the part of the alleged perpetrators;

• The degree of difficulty in detecting the particular offense;

• Presence or lack of remedial steps by the corporation; and

• Extent of cooperation.

Further, an organization can anticipate that in assessing the above factors, a governmental agency will analyze the efforts of the organization in seeking to prevent and detect criminal conduct by its employees or other agents. This requires, at a minimum, that the organization has:

• Established compliance standards and procedures;

• Assigned high level personnel with the overall responsibility to oversee compliance with such standards and procedures;

• Exercised due care not to delegate substantial discretionary authority to individuals whom the organization knew, or should have known, had a propensity to engage in illegal activities;

• Effectively communicated its standards and procedures to all employees;

• Taken reasonable steps to achieve compliance with its standards, e.g. by utilizing monitoring and auditing systems reasonably designed to detect criminal conduct by its employees and other agents and by having in place and publicizing a whistleblower hotline;

• Consistently enforced the standards through appropriate disciplinary mechanisms, including discipline of employees responsible for failure to detect an offense; and

• If an offense was detected or reported, all reasonable steps were taken to respond appropriately to the offense and to prevent similar offenses from occurring.

Finally, it can reasonably be anticipated that a governmental agency will take into account the size of the organization, the likelihood that certain offense may occur due to the nature of its business, and the prior history of the organization.

3.     Consider Independent Counsel and Create a Special
        Committee

Once you have an understanding of what has happened, the next step is to establish credibility with the government. To do this, you should consider engaging independent counsel for assistance and create a special committee of independent board members to oversee the process. Aside from any unusual situation, or financial hardship, it is highly recommended that independent counsel be engaged early on in the process. A governmental agency is less likely to trust an assessment or investigation performed by chief legal counsel or a company’s current outside counsel, both of which may appear to have confl icts from being objective.

After engaging independent counsel, the special committee with counsel’s assistance, can determine whether or not the company should engage in its own internal investigation of the matter. This decision needs to consider the nature of the problem -- its severity, its affect on the financial statements of the company, whether it is systematic or limited, and the number of high-level individuals involved.

Further, the committee needs to assess and recognize the benefits and risks associated with conducting an internal investigation. Note, that it is important to provide independent counsel with all of the authority necessary to gather and review key information and interview key witnesses soon after the engagement. Time is of the essence at this stage of the process and these first two steps should occur almost immediately after your organization receives notice of an investigation.

4.     Consider Engaging a Public Relations Firm

The next step to consider is whether to announce the pending investigation and whether or not to engage a public relations firm to assist in the process. This decision should be driven by the scope and severity of the investigation. If the allegations are severe, the standard “no comment” response to press questions may not be the best tactic and may simply provide the government with an unadulterated position in the public eye. This is especially true for a publicly traded company. Some factors a publicly traded company should consider are whether the investigation will (a) materially affect the company’s financial results, business dealings or reputation; (b) lead to the dismissal of senior employees or board members; or (c) result in private litigation against the company.

If your organization does agree to announce the investigation, seek advice of both independent counsel and a public relations firm hired by the independent counsel for the appropriate wording of the specific disclosure. In these situations, courts have determined that the attorney-client privilege may extend to public relations firms if the communications are directed at or giving legal advice. So, the ability to communicate openly with the public relations firm will not constitute a waiver of the attorney-client privilege. As such, this option should be considered. However, at a minimum, your organization should employ a capable spokesperson that can field media inquiries quickly, accurately and calmly, if and when the media come calling.

5.     Communicate with the Government

After you have a special committee in place, have engaged independent counsel, and have assessed the situation, it is time to reach out and communicate with the government. It is critical to establish lines of communication early and establish a good relationship with the government. Doing so will help determine what the government knows, wants to know, or believes it knows about your organizations actions.

The government will consider the cooperation of the organization during the investigation when considering penalties, so it is important to work with investigators and in the best interests of the organization to establish its willingness to cooperate to resolve the allegations.

However, cooperation does not mean that you cannot be a strong advocate for your organization’s interests. This is true especially in regards to waiver of the attorney-client privilege. While federal investigators claim that seeking a waiver of the attorney- client privilege is rare, surveys of lawyers indicate that government investigators routinely demand a wholesale waiver of the attorney-client privilege during corporate investigations as proof that the entity is truly cooperating.

Corporations must also decide early on whether or not it will waive the privilege and the risks and benefits associated with such a waiver, not only on this investigation but also on-going regulatory or civil litigation matters. At the same time, the organization must realize that certain communications involving the investigation will not be afforded the attorney-client privilege regardless of the efforts made by independent counsel in delivering legal advice to the board. One such communication is the minutes of the Board. While the minutes must accurately refl ect the decisions of the Board in regard to the investigation and in furtherance of the Board’s fiduciary duties, the minutes should not reflect any theories or premature conclusions of the Board, or special committee and notes taken during any such meetings should be destroyed at the end of the meeting to allow the minutes to act as the record of what transpired.

After working through these initial steps, the Board, the chief legal officer, and executives can move towards focusing on an amicable resolution to the matter. A process, which will include different tasks and responsibilities for each of the above.