Common Errors in Internal Investigations

Businesses often find themselves facing a situation calling for an internal investigation of misconduct, fraud, or other wrongdoing.  The problems requiring an investigation vary broadly in subject matter and severity.  Common examples include workplace misconduct issues (e.g., harassment or retaliation), internal policy violations, internal fraud/embezzlement/theft of trade secrets, fraud against clients or other third parties, and violations of federal laws or regulations (e.g., securities or antitrust violations).  Many businesses make the same predictable errors when it comes to internal investigations, a few of which we summarize below.

Not Doing One At All

Whether an employee brings something to management’s attention, or the business discovers an irregularity itself, ignoring the possible need for an investigation is one of the biggest mistakes a business can make. By failing to perform an investigation, businesses open themselves up to the possibility of a lawsuit, and depending on the situation, potential criminal charges. Even if the complaint or irregularity is unfounded or has an innocent explanation, an appropriate investigation should still be conducted.  Some business leaders are reluctant to initiate an investigation because they assume it will be a burdensome and expensive process that will distract from the business.  That is often not the case.  Investigations should be tailored in scope to the problem.  For example, an investigation of a minor policy violation may involve one or two interviews and a review of a small set of documents related to the violation, which can be completed in a week.

Waiting Too Long to Start

Running a business is a constant juggling act, and it is easy to conclude that other priorities justify delaying an investigation. Putting off an investigation, however, can have serious consequences. If there are clear signs of, for example, fraud or workplace personnel misconduct,  and the business fails to promptly investigate, outside entities such as a lawyer hired by an employee or a government agency may get involved. This can cause the company to face consequences, or far more severe consequences, than it would have if the business promptly addressed the issue.  Fully and promptly investigating an issue can even provide a complete defense to certain types of workplace civil claims.  Moreover, in situations involving fraud where the issue is not immediately addressed, outside entities (such as victims of the fraud, law enforcement, or later potential investors) may conclude that the company did not take the issue seriously – or worse, that it was complicit in the fraud and therefore responsible.

Not Thinking Through the Investigation Team and Reporting Structure

After recognizing the need for an investigation, a critical early decision is who will conduct the investigation and to whom that team will report its findings.  For minor and routine problems, it often makes sense for the company to conduct the investigation itself using its own personnel (e.g., human resources personnel conducting routine workplace misconduct investigations).  In some situations, however, the company may benefit from hiring an outside law firm to conduct the investigation.  The most common scenarios where outside investigators make sense involve issues where (i) the company may face serious civil liability for the misconduct that could impact the overall stability of the company (i.e., very expensive litigation with large potential damages); (ii) issues where the company could face criminal liability; and (iii) situations involving misconduct of any kind by senior management personnel.  All of these scenarios involve problems so serious that it benefits the company to demonstrate to outsiders – such as shareholders, regulators, and potential investors –  that the company understands the severity of the issue and is fully committed to conducting a thorough, independent investigation to fix any problems.

One issue that occasionally gets overlooked is who the investigating team reports to.  This is a fact-sensitive question that depends on the size and structure of the business.  A recurring problem is when the investigators are reporting to someone who may have done something wrong in connection with the issue being investigated.  This is a nuanced issue, but in general it benefits the company not to have anyone with potential exposure related to the investigation involved in directing the investigation and making decisions about it.  Failure to follow this general rule can undermine the credibility of the investigation and its findings because outsiders may be concerned that a potential wrongdoer effectively covered up misconduct by manipulating the investigation.  For large public companies, these problems can often be addressed by reporting to the Board of Directors or even a special subcommittee of the Board.

Not Giving Proper Upjohn Admonishments During Interviews

When there is a serious problem at a company, particularly involving deliberate wrongdoing, most of the time the problem boils down to a small pocket of “bad apples” who, unfortunately, acted inconsistently with the goals, policies, and directives of the company.  As a result, a business’s best defense to accusations of criminal wrongdoing (and some types of civil wrongdoing) is to internally investigate, identify the wrongdoers, terminate or appropriately discipline them, and cooperate with any government investigation.  In these situations, the businesses can credibly claim that the problem was not truly the core of the business, just a rogue employee or group of employees.

This is why “Upjohn admonishments” are critical. Named after a Supreme Court case, these warnings inform the employee that the attorney represents the company only and not the individual employee. This is a critical distinction.  Employees commonly admit to misconduct when confronted with evidence by prepared internal investigators, and it is often in the company’s best interest to be able to share those admissions with government investigators to prove the problem was the employee – not the company.  But if the attorney interviewing the employee does not give the proper Upjohn warning, then the employee can later claim that the employee believed the attorney represented the employee and that the entire conversation was protected by the attorney-client privilege and cannot be shared with outsiders.

Not Documenting All Steps and Actions Taken Properly

When conducting an investigation, getting the most accurate answers possible under the circumstances is of course a critical goal.  But businesses sometimes overlook that many of the benefits of conducting an appropriate investigation involve signaling to outsiders the business’s commitment to treating the issue seriously.  As a result, having evidence of a good process can be at least as important – and sometimes more important – than getting the “right” answer.  Thus, at the conclusion of an investigation, the business should have documentation reflecting that the investigation was thorough and proper.  The documentation should reflect, for example, that investigators:

• Gathered information from those directly involved.
• Reviewed relevant documentary evidence instead of relying on witness testimony alone.
• Contemporaneously documented and summarized witness statements to ensure their accuracy and completeness.
• Summarized key factual findings and conclusions.

Sometimes, investigation reports are functional documents meant purely for internal use.  Other times, however, there is a likelihood that the reports will be shared with outsiders (e.g., government regulators, the press, or potential investors).  Experienced outside counsel understand how to generate reports with appropriate tone and defensible conclusions that outsiders will recognize reflect an truly independent, thorough investigation.

Investigations Do Not Have to Be Difficult

Conducting a corporate internal investigation does not have to be difficult. An experienced attorney can help you through the process so you complete a thorough and appropriate investigation. Contact Delahunty & Edelman LLP at 415-891-6210 to discuss your case.

Patrick Delahunty

Patrick Delahunty is a former federal prosecutor with deep experience in resolving disputes. He advises individuals and companies in complex criminal, regulatory, and commercial litigation.