“If there were no bad people there would be no good lawyers.” [1]

As a general rule, it is a bad thing when a company employee lies to a federal, state, or local governmental agency. Criminal investigations are often triggered. Grand jury subpoenas arrive at the company's office. Agents carrying badges and guns come knocking at the door. The company may lose customers and can go out of business. And employees may go to prison.

A corporation's general counsel may contact you for legal advice when such an event occurs. For example, a company may learn that one of its employees appears to have falsified documents that were submitted to a federal agency in response to a request for information from the company.

The general counsel will want to know what the company should do. Should it call in the suspect employee and confront him on the behavior? Should the company notify the government agency of the false information? Should the company immediately suspend or fire the employee? Will any of these things trigger a criminal investigation? What will be the impact on the company's reputation if the misconduct is reported by the news media?

There are a numerous questions and various options for the corporation to consider. Doing nothing, however, is not one of the options. Covering up the incident creates more problems and can be a crime in itself. A more prudent course of action is for the company to conduct an internal investigation. The timing, nature of the investigation, and the investigators are crucial components for the internal investigation to be successful.

By conducting an internal investigation, the company will be able to determine if the problem is isolated or systemic in the organization. Were the actions intentional or negligent? Is this the action of a rogue employee or concerted action (or inaction) by more than one employee? To find the answers to these questions is the goal of the investigation. And it is better for the company to figure out who, what, when, why the problem occurred before the government agent comes knocking at the company's door.

Timing: Act Promptly When Conducting an Internal Investigation

Unlike fine wine, investigations do not improve with the passage of time. When an incident happens, people may remember things vividly if the incident is fresh in their minds and if they have first hand knowledge of the event. But as time passes, people forget the details. If nothing is done to address the incident, employees may begin to talk and gossip. Rumor and innuendo circulate. Morale and productivity may decline. And, believe it or not, a disgruntled employee may contact law enforcement or the news media.

In addition to memories of events, employees may have generated email messages, made notes from telephone calls, and created documents that pertain to the incident. These records may be deleted or discarded as time passes. A prompt investigation will assist in preservation of documents to refresh, memorialize, and corroborate statements of witnesses in the investigation.

It is imperative for the company to act swiftly by conducting an internal investigation. Depending on the nature of the incident, allegations, or event, the company needs to determine who should do the investigation.

Independence - Employ Outside Counsel as Investigator

To avoid any appearance of general counsel going on a witch hunt, covering up facts, or showing favoritism/retribution to employees, it is recommended that the company hire outside counsel to conduct the investigation. The investigator must have independence in order for the investigation to be objective and fair.

If isolated or systemic impropriety is discovered, the investigator can advise the company's board of directors on the nature of the problem(s) and present courses of action. An outside investigator will feel less pressure or incentive to achieve a preordained result that might exist if the general counsel conducts the investigation.

Employees may be confused as to why general counsel is asking them questions in an investigation. The employees may be confused about who general counsel represents in the investigation. Outside counsel should explain that he is doing the investigation for the company and is not providing legal advice to the employees.

Objective Factfinding - Interviews Not Interrogations

The investigator's role must be to figure out the facts.

Should the interview be recorded or summarized by the investigator? It may be prudent to make a recording of the interview so that the employee does not claim that his or her answers are inaccurate. In those states which require two party consent to recorded conversations, the consent of the employee will be necessary. In any event the employee should be advised that the conversation is being recorded. The employee may be more reluctant to speak openly in such cases. If a decision is made to record the conversation, explain to the employee that the recording is being made to ensure that his or her statements are being accurately recorded.

Some attorneys prefer to prepare a summary of the interview. This can present challenges in the event the attorney's recollection of the interview answers differs front the employee. If this format is used, it may be beneficial to show the employee the summary and ask the employee to review and verify the accuracy.

Upjohn Warnings – Who Does the Attorney Represent?

If counsel is the investigator, it is prudent to provide Upjohn warning (corporate Miranda warnings) to the employee. These warnings are crucial to avoiding confusion about the relationship. “The attorney-client privilege is the oldest of the privileges for confidential communications known to the common law.” Upjohn v. United States, 449 U.S. 383, 389, 101 S.Ct. 677, 66 L.Ed. 2d 583 (1981) “[W]hen the privilege applies, it affords confidential communications between lawyer and client complete protection from disclosure.” The Supreme Court narrowly construes the privilege, and recognizes it “only to the very limited extent that ... excluding relevant evidence has a public good transcending the normally predominant principle of utilizing all rational means for ascertaining the truth.” Trammel v. United States, 445 U.S. 40, 50, 100 S.Ct. 906, 63 L.Ed. 2d 186 (1980). The privilege applies only to“[c]onfidential disclosures by a client to an attorney made in order to obtain legal assistance.” Fisher v. United States, 425 U.S. 391, 403, 96 S.Ct. 1569, 48 L.Ed. 2d 39 (1976).

If the investigator is an attorney, he should explicitly advise the interviewee of the following: (1) counsel represents the company, not the employee; (2) information learned in the interview is privileged to the company and it is the company's decision whether to waive the privilege and disclose the information to the government or third parties; (3) the contents of the interview is to be kept confidential so the company's privilege can be preserved. [2] Lawyers who elect to “water down” these warnings during an investigation should be wary of the potential consequences. See In re Grand Jury Subpoena: Under Seal , 415 F.3d 333, 340 (4th Cir. 2005)(noting that doing so creates a “potential legal and ethical minefield”).

Preservation of Documents – Don't Destroy Them! (including electronic mail)

If an internal investigation is conducted, employees should be advised to preserve documents. Destruction of documents (reports, electronic mail, financial data) can lead to prosecutions of obstruction of justice. [3] Having the company employees preserve their notes, correspondence, and records during the investigation is a prudent step to take. Corporate officers should be particularly cognizant of any message to employees to destroy records.

An illustrative example is worth noting that involves the federal prosecution of investment banker Frank Quattrone. The indictment alleged: “...Quattrone directed, and caused a subordinate to direct, the destruction of evidence related to the IPOs, he knew of the existence and nature of the regulatory and law-enforcement investigations and knew that CSFB had received subpoenas that required the production of documents relating to the IPOs.” [4] The indictment also alleged that Quattrone acted “with the intent to obstruct the investigations by the SEC and the grand jury.” Id.

The indictment makes Quattrone's conduct sound downright nefarious. The facts, however, show that Quattrone's conduct involved the sending of two emails. One of the emails endorsed an colleague's message to “clean up those files” which resulted in document destruction. [5] After incurring millions of dollars in legal fees and enduring several jury trials and an appeal, Quattrone's conviction for obstruction of justice was eventually overturned. The end result, however, is cold comfort for an employee, officer, or board member who would prefer not to run the gauntlet of federal prosecution.

As a result, preservation of documents for the duration of an internal investigation is a wise protocol to follow.

What if the Company Does Nothing? “Vicarious Liability?”

The devil's advocate may suggest that conducting an internal investigation is expensive and that the company should do nothing. This course of action is a dangerous one.

In recent years, the U.S. Department of Justice (DOJ) has come down hard on companies who violate the law. In addition to putting the company out of business, DOJ will prosecute employees of the company who participate in the conduct as well as employees who cover up the conduct.

Under the doctrine of vicarious liability or respondeat superior , a company can be held liable for the crimes of its officer, directors, employees, and agents. [6]

Courts will look at two factors in determining whether to hold a company liable for its employee' actions. Did the employee/agent act within the scope of his duties and was the conduct done to benefit the company or the employee. To trigger the doctrine, case law requires that the corporation's agent act within the scope of his duties and at least in part with the intention of benefiting the corporation.

Cooperation with Government Agency?

Once the internal investigation is completed, the company's board of directors can decide on what action to take (i.e. firing the employee; issuing a corporate policy to provide clear guidance to employees; etc.). The company may desire to “self report” the incident to the government to show it is proactive in pursuing the investigation and taking action to ensure the problem is solved.

Cooperation with the government agency may avoid criminal charges. However, cooperation may also require the company to waive its privilege and disclose the internal investigation to the government investigators.

Conclusion

When an incident occurs that may trigger a potential criminal investigation, the company should be proactive and conduct an internal investigation. The investigation must be timely, objective, and independent in nature. Doing nothing is simply not an option.

Craig S. Denney is counsel with Downey Brand LLP. He practices in the areas of white collar criminal defense and litigation in Nevada and California. He served as a federal prosecutor before joining the firm. Mr. Denney is board certified by the National Board of Trial Advocacy.

[1] Charles Dickens, English novelist.

[2] Rule 4.3 of the ABA Model Rules of Professional Conduct places a duty on lawyers to “make reasonable efforts to correct” a misunderstanding of the lawyer's role of someone who is not represented by counsel if the lawyer “knows or reasonably should know” of the misunderstanding.

[3] The company should consider issuing an internal investigation “litigation hold” directive so that employees preserve documents for this investigator and avoid spoliation of potential evidence.

[4] http://fl1.findlaw.com/news.findlaw.com/hdocs/docs/csfb/usquattrone51203ind.pdf

[5] New York Times, “Star Banker, With Future, Emerges Free” by Andrew Ross Sorkin (August 23, 2006) (http://www.nytimes.com/2006/08/23/business/23star.html)

[6] See DOJ “Principles of Federal Prosecution of Business Organizations” Memorandum (known as the “McNulty Memorandum”) at http://www/usdoj.gov/dag/speech/2006/mcnulty-memo.pdf (Dec.2006).