internal investigation 20110315 1

Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States;Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with whichMayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

Conducting InternalInvestigations

March 2011Presented by:

Michael Volkov

Partner, Mayer Brown LLP

The Increasing Use of Internal InvestigationsThe Increasing Use of Internal Investigations

Systematic and significant cases

– Sarbanes-Oxley enforcement

– Foreign Corrupt Practices Act

– SEC Option Backdating and Insider Trading

Effective technique for handling “routine” issues wherepotential liability exists

– Discrimination complaints

– Theft and embezzlement

– Other employee misconduct

2

Corporate Criminal LiabilityCorporate Criminal Liability

A corporation can be held criminally liable forwrongful actions of any employee IF

1. The act occurs within the scope of employment,

AND

2. The act was done for the benefit of the corporation(at least in part)

3

When?When?

What ToWhat To Do?Do?4

OverviewOverview

1. The Internal Investigation

2. An Independent Committee

3. The Documents, Data andEmail

4. The Interviews

5. Privilege

6. Waiver of Privilege

7. Disclosures

5




4. The Interviews

5. Privilege


7. Disclosures

The InternalThe InternalInvestigationInvestigation

6

The Internal Investigation: A Strategic OptionThe Internal Investigation: A Strategic Option

Effective way for management to gather facts needed forimportant decisions.

Provides credibility to fact-finding process.

Need for independence will depend on the situation.

Design of investigation depends on purpose and importance ofinquiry.

7

The Internal Investigation

TriggersTriggers of Internal Investigationof Internal Investigation

Hot-Line Call, anonymousletter, e-mail

Information from employee(often during disciplinaryproceeding or exit interview)

Discovery of inaccuratefinancial statements orirregularity

News stories of governmentprobes of other companies(e.g., options backdating)

Whistleblower lawsuit

8


Conducting an Internal InvestigationConducting an Internal Investigation

Before conducting any factual investigation, consider:

Who should oversee the investigation?

Who should conduct the investigation?

What should employees be told beforeand after they are interviewed?

What should be written down and how?(Will it be discoverable?)

9


Conducting an Internal InvestigationConducting an Internal Investigation

An internal investigation should neverbecome the strategy nor the goal itself.

A company should never authorize the“blind” investigation without answering:

– What is the purpose?

– Who is the potential audience?

– What does the company know about thefacts? Worst-case? Best case?

– What does the company expect to learn?

– What are remedial options, if needed?

10


Dynamic Supervision and Direction of InvestigationDynamic Supervision and Direction of Investigation

Continuing re-evaluation ofinvestigation and strategies.

As information is learnedthrough informal reportingprocess, outcomes,alternatives and remediationoptions should be reviewed.

11





4. The Interviews

5. Privilege


7. Disclosures

AnAnIndependentIndependentCommitteeCommittee

12

Do You Need an Independent Investigation?Do You Need an Independent Investigation?

Allegations raise significant potential liability and reflectserious misconduct;

High level management and/or board members may be liableor have exposure;

Independent investigation is needed to respond toprosecutors, regulators and/or shareholders;

Whistleblower complaint raises serious issue(s) which requirestrategic response;

Media and/or public attention may have a serious negativeimpact on the company.

13

An Independent Committee

Do You Need an Independent Committee?Do You Need an Independent Committee?

Should the Board, a Board Committee, an IndependentBoard Committee, or Senior Management oversee anddirect the investigation?

Are the allegations of misconduct serious?

Are board members or seniormanagers allegedly involved?

Will the company need toconduct a credible inquiryto respond to prosecutors,regulators and/or the public?

14


The Independent CommitteeThe Independent Committee

Independent Board Members or an Independent Committeeresponsible for supervising investigation and reporting back toBoard

Special Outside Counsel hired to conduct investigation

Depending on certain circumstances(“objectivity” is preserved),existing counsel can beretained to conduct inquiry

15


The Independent Committee: Investigations IssuesThe Independent Committee: Investigations Issues

Existing counsel should be considered to conduct investigationbecause of knowledge of company?

How to handle relationship between outside counsel, existingcounsel and in-house counsel?

16


InIn--House Investigations: The More Common ModelHouse Investigations: The More Common Model

Most internal investigationsdo not require independentcommittee, or even Boardsupervision.

In-House counsel and existingoutside counsel can handle anumber of investigations.

General Counsel can superviseand direct many internalinvestigations.

17


Scope of InquiryScope of Inquiry

Keeping it “real” by keeping it narrow.

Authorization and scope should be defined in writing byBoard.

For in-house investigation, scope of investigation needs to bedefined.

Scope can always be expanded.

Model for inquiry can be changed.

18





4. The Interviews

5. Privilege


7. Disclosures

TheTheDocuments,Documents,Data andData andEmailEmail

19

Initial StepsInitial Steps

It’s the documents stupid – act quickly to “hold” documents,gather and review.

Conduct initial interviews if needed to confirm location andexistence of documents needed.

Technology experts and possibly regular counsel can assist.

Define employee cooperation: preserve and provide documents(home or office); and available for interviews.

20

The Documents, Data and Email

ImportantImportant StepsSteps

Designating Someone Who “Owns” This IssueWithin Your Team

Savvy about litigation and IT perils and speak the language of bothgroups.

Detailed knowledge about the company’s IT environment– knowing where data is stored, by whom, and how.

An appreciation for the capability, timing, andcost associated with matter-specific e-discovery.

21


Preservation: Documents, Data and EmailPreservation: Documents, Data and Email

What Can Go Wrong?

Plenty -- if you are not prepared!

Employees do not comply with the preservation directive.

Company does not send preservation notice to third partieswho possess responsive materials over which the companyhas control or legal right.

Company does not comply with e-discovery protocolsdeveloped to preserve relevant information.

Failure to preserve pertinent materials may lead to spoliationclaims and even obstruction charges.

22


Document ReviewDocument Review

Critical to review as quickly as possible

Prior to witness interviews

Develop picture of whathappened and why

Identify important actors inthe events under investigation

Document control and indexingis critical so that you have all,available information wheninterviewing witnesses

23


Pitfalls for Document Collection and ReviewPitfalls for Document Collection and Review

Data privacy laws and regulationsoutside the United States mayprevent or hinder collection,dissemination and review ofrelevant documents.

Documents which are broughtwithin the United States may thenbecome subject to subpoena byUnited States authorities.

Document collection and reviewmay have to take place in foreignlocations in order to avoid runningafoul of these restrictions.

24





4. The Interviews

5. Privilege


7. Disclosures

TheTheInterviewsInterviews

25

Conducting Witness InterviewsConducting Witness Interviews

In general, start with lower-level employees and work way upto more important witnesses.

Be careful of witness’ sharing information about investigation.

Simultaneous interviews can be used but are overrated.

Element of surprise interviews rarely work in corporatecontext.

26

The Interviews

ConductingConducting Witness InterviewsWitness Interviews

Tread cautiously: Think of overall planand potential issues before interview.

Review key documents first(when possible).

Have someone "witness" the interview.

Request person to maintainconfidentiality.

Don't forget Upjohn warnings.

The Interviews

Upjohn DecisionUpjohn Decision

U.S. Supreme Court held thatcommunications made by employees tocompany counsel at the direction ofsuperiors to secure legal advice fromcounsel were protected by the attorney-client privilege.

The Court set forth guidelines, as opposedto a bright-line test, for determining whenthe privilege applies in this situation.

Upjohn Decision (449 U.S. 383 (1981))

28

The Interviews

Upjohn Decision:Upjohn Decision: WarningsWarnings

Purpose of interview is to assist counsel in providing legaladvice to company.

Counsel represents company, not individual employees.

Discussions between employee and counsel are privilegedcommunications and privilege belongs to the company, notthe employee.

Company has the right to keep the communicationsconfidential and privileged, but it also has the right to waivethe privilege and disclose to third parties.

Employee should not discuss the interview with anyone,including fellow employees.

29

The Interviews

Conducting an Interview: Part IConducting an Interview: Part I

Heavy-handed techniques neverwork.

Witnesses are worried aboutcriminal liability, losing their jobsand their lives as they know it.

No witness ever tells youeverything.

Personal rapport is critical.

You are doing a job, you are goingto be respectful, but you needanswers to questions.

30

The Interviews

Conducting an Interview: Part IIConducting an Interview: Part II

Let the witness tell you his/herstory as to a part or all of the story.

It is critical to get their story onthe record.

Use documents where appropriateto fill out the story – let thewitness talk.

Do not confront witness withcontradictions but use facts youknow, and documents to questionin order to show witness you knowhe is not telling whole story.

31

The Interviews

Conducting an Interview: Part IIIConducting an Interview: Part III

Memorialize the entireinterview.

Have someone with you to takenotes and memorialize.

Be prepared to answer questionfrom employee asking if theyneed an attorney.

32

The Interviews




4. The Interviews

5. Privilege


7. Disclosures

PrivilegePrivilege

33

Protecting the PrivilegeProtecting the Privilege

It is critical to protect privilege during investigation.

Decision to waive privilege for disclosure to government orregulators can only be made as part of overall strategy.

Along the way, operational decisionscannot undermine ultimate need topreserve and protect the privilege.

34

Privilege

Privilege: ConsiderationsPrivilege: Considerations

Privilege varies by jurisdiction:

What law governs? Federal lawand/or law in a particular state?

In certain states, only an attorney’scommunications with the “controlgroup” are privileged.

Control group is limited to seniormanagement and employees thatadvise senior managementon final decisions.

35

Privilege

Privilege: Communications with Former EmployeesPrivilege: Communications with Former Employees

Communications that wereprivileged during employment likelyretain that privileged status evenafter employee leaves company.

Courts are divided as to whethercommunications with a formeremployee that occurred post-employment are privileged.

36

Privilege

Work Product DoctrineWork Product Doctrine

Materials prepared “in anticipation of litigation” enjoy aqualified protection against disclosure. Fed. Rules CivilProcedure 26(b)(3).

Work product, to the extent it is mental impressions,conclusions, opinions and theories, usually is protected.

Other work product, however, must be disclosed if a partyhas a substantial need and cannot obtain the informationwithout substantial hardship.

37

Privilege

International Law: PrivilegeInternational Law: Privilege

Caution: Privilege laws in foreigncountries may be quite differentfrom those in the United States.

It is not always clear whichcountry’s privilege laws will beapplied (choice of law issue).

Employee communications within-house lawyers will not betreated as privileged in certaincountries.

38

Privilege




4. The Interviews

5. Privilege


7. Disclosures

Waiver ofWaiver ofPrivilegePrivilege

39

Waiver: General RuleWaiver: General Rule

The general rule is that once the client waives the attorney-client privilege, it is waived as to all third parties.

Unlike the attorney-client privilege, the protection of the workproduct doctrine is not automatically waived by disclosure toany third persons.

Courts will find waiver of work product doctrine only if:

– the disclosure is made to an adversary, or

– the disclosure substantially increases the opportunity forpotential adversaries to obtain the information.

40

Waiver of Privilege

Waiver:Waiver: ScenariosScenarios

Assuming your communications are privileged, will you waivethe privilege if you share information with:

Representatives of a parent or wholly-owned subsidiary?

Auditors?

Insurance carriers?

Media consultants?

41

Waiver of Privilege

Common Interest DoctrineCommon Interest Doctrine

42

Waiver of Privilege

The Common Interest Doctrine

Communications made in thecause of a common legal interest

Designed to further acommon legal interest

Made with a reasonableexpectation of confidentiality

No waiver

Joint Defense AgreementsJoint Defense Agreements

43

Waiver of Privilege

The Joint Defense Privilege

Communications made inthe cause of a commonlegal interest

Designed to further acommon legal interest

A pending or anticipatedlitigation

Made with a reasonableexpectation of confidentiality

No waiver

DisclosuresDisclosures

44

Disclosure: To ParentsDisclosure: To Parents andand WhollyWholly--ownedowned SSubsubs

Most courts recognize that both attorney-client privilege andwork-product protection extend to parents and wholly-ownedsubsidiaries since they are assumed to have a “community ofinterest”.

As the percentage of ownership/control decreases, it becomesless likely that courts will extend the privilege.

If the entity is not majority-owned/controlled, there may needto be a specific shared common legal (not just business)interest -- and communication must be in furtherance of thatcommon interest.

45

Disclosures

Disclosure: To Insurance CarrierDisclosure: To Insurance Carrier

Communications with an insurance carrier may not result inwaiver depending upon the circumstances.

Does company have a common interestwith the insurance carrier?

Is the carrier on board with the defense and agreeing toprovide coverage?

Or is the insurer taking an adverse position (denying coverage)or adopting a “wait and see” position? If so, the companyprobably does not have a common interest with the carrierand courts would find that disclosure to carrier waives theprivilege.

46

Disclosures

Disclosure: ToDisclosure: To AuditorsAuditors

Will disclosure of attorney-client communications tothe company’s auditors waive the privilege?

YES

Will disclosure of work product to auditorswaive the protection?

DEPENDS

Turns on whether the outside auditor is anadversary or is likely to reveal the company’s

information to an adversary.Courts are divided.

47

Disclosures

Disclosure: ToDisclosure: To Media ConsultantsMedia Consultants

In re Grand Jury Subpoenas,265 F.Supp.2d 321, 331 (S.D.N.Y. 2003)

Holding: “(1) confidential communications (2) between lawyersand public relations consultants (3) hired by the lawyers to assistthem in dealing with the media in cases such as this (4) that aremade for the purpose of giving or receiving advice (5) directed athandling the client's legal problems are protected by theattorney-client privilege.”

Consultant must be hired by lawyer.

Privilege not lost if client speaks directly to consultant if “thecommunications were directed at giving or obtaining legal advice.”

48

Disclosures

Reporting ResultsReporting Results

Periodic oral reports can be made to Independent Committee,Board, or senior management.

No written reports should be created since results maychange.

Ultimately, a written report may be prepared reporting on thefindings of the investigation but such a document may bediscoverable by the government and private parties.

49

Disclosures

Consultations with Government and RegulatorsConsultations with Government and Regulators

When investigation is needed torespond to government, regularconsultation is critical.

Get government “buy-in” toconduct, credibility and findingsof investigation.

Prevent questions fromgovernment as to how and whycertain steps were taken.

50

Disclosures