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Energy Law Exchange

October 15, 2019

General Counsel’s Decision Tree For Internal Investigations


Energy companies regularly face challenges that may require an internal investigation to determine the root cause of an issue in order to evaluate how best to remediate and guard against future occurrences of a potentially harmful event.  From corruption to data breaches, environmental catastrophes to human resource issues, there are more than enough landmines in today’s legal environment to keep any general counsel up at night.  While not all issues may be avoided, having a playbook in place for conducting an internal investigation that identifies and remediates issues is an important step in feeling prepared for whatever may come.

When a developing situation requires an internal investigation, a public energy company’s general counsel faces a series of decisions, sometimes in rapid succession.[1] Many constituents must stay top of mind as the situation moves forward, including some or all of the following: 

  • the board of directors
  • board committees
  • board committee chairs
  • senior officers
  • employees
  • independent auditors
  • government entities
  • listing exchange
  • shareholders
  • suppliers
  • customers
  • the public

Each constituent has differing information needs, and all constituents must remain in the general counsel’s focus.

This work flow document is designed to help navigate through the myriad decisions, twists and turns of an internal investigation while maintaining focus on the various constituents and how best to emerge on the other side of the situation.  This document should be used in conjunction with communications with counsel and existing company policies—it is not a complete legal or strategic analysis on any topic.  Even so, and although no one document can anticipate everything, we hope this provides an efficient, easy reference for what can be a difficult process.

Policy.  Does the company have policies, procedures, guidelines or other governing documents that govern how an internal investigation should be conducted? If so, to the extent governing documents differ from these suggestions, be sure to reconcile any differences, ensure authority for any changes, and keep records of steps taken that go beyond the company’s documented plans.

Scope.  Internal investigations may be required due to questions or information arising from internal sources (e.g. hotlines) or external sources (e.g. government agencies). Once the initial information is received and an internal investigation is deemed necessary, consider the following:

  • Determine Initial Scope. Identify the relevant time period, potential witnesses, and subject matters quickly.
  • Expect Changes. Recognize each could change as investigators learn more during the process.
  • Expand if Needed. It is important for the investigators to be able to confirm that no one hindered them from expanding the scope of the investigation in response to information learned during the investigation. For example, if the internal investigation involves financial reporting issues, the company’s independent auditor will need to hear that those conducting the investigation believed they (or someone else) adequately followed up on what they learned during the investigation.

Data Preservation.  Immediately upon determining that an investigation is needed, consider preserving potentially relevant documents and data for the relevant time period, potential witnesses, and subject matters.

  • Stop destruction. Involve an Information Technology resource, within the company if possible, who can stop any ongoing, routine document and data destruction or recycling.
  • Secure essential documents and data quickly. Electronic documents that are centrally monitored are the easiest to secure—these can include email and instant message systems, shared servers, and archived sources.  Investigators should work with internal stakeholders at the company to identify and preserve the most relevant essential data.
    • Consider imaging laptops and individually-controlled storage devices like USB thumb drives
    • Consider mobile devices—do the relevant witnesses communicate using means that are not centrally stored by the company (e.g., SMS, iMessage, or mobile apps like Slack or WhatsApp)? Are employees’ mobile devices property of the company? Are their contents company property? Will relevant personnel give permission for imaging their phones if permission is not already granted by company policy?
  • Data Retention Memo. Consider sending a data retention memorandum to selected employees, and potentially directors
  • Keep Records. Be ready to describe the retention activity and to evaluate whether to expand it as you learn more

Vocabulary for Roles During an Investigation

  • Oversee—a board committee, a legal department representative, or another senior employee whose conduct is not at issue typically would oversee the investigation that is being led by someone else
  • Lead—the voice of the company for purposes of directing the investigation; this could be a board committee, someone in the legal department, someone in internal audit or compliance, but someone needs to be on point and authorized to lead the investigation; if a board committee is leading the investigation, additional oversight typically is not necessary
  • Conduct—typically outside counsel, inside counsel, or inside employees such as internal audit or compliance personnel, conduct the investigation, in coordination with whoever is serving as Lead
  • Support—often one or more vendors are used, typically engaged by outside counsel if maintaining the attorney-client privilege is desired – these may include
    • Document vendors for gathering, processing, hosting, and reviewing documents
    • Subject matter experts such as forensic accountants, information technology experts, or others
    • Company employees who could be assigned to the investigation and reporting to the legal department for this limited purpose

Structure.  Who oversees, leads, and conducts the investigation should be considered carefully at the outset. Companies often have procedures that provide a guide in answering this question. Check there first. Critically, once decided, make sure stakeholders have a good understanding of the reporting structure.  This will help clarify expectations about communication channels and improve the likelihood of maintaining available privileges and protections.

  • When is independence required? An independent investigation is required if the company is subject to derivative litigation and determines to form a Special Litigation Committee to investigate the allegations in that litigation. Otherwise, independence may be useful to increase confidence in the findings.
  • What is the measure of independence for an internal investigation? The analysis under Delaware law includes whether the directors leading the investigation are free of economic ties to the individuals being investigated as well as noneconomic factors, all designed to ensure impartiality and objectivity when making decisions for the corporation. Whether a law firm and the investigation team are independent depends on a variety of factors including the extent to which the law firm and members of the investigation team previously have worked for the company, or any of the individuals under scrutiny.
  • Who oversees and who leads?
    • Consider having a board committee oversee or lead the investigation if it involves corporate-level issues including:
      • Accounting, financial reporting, or disclosure issues involving conduct by senior management
      • Integrity, “Me Too” or other conduct issues involving conduct by senior management
      • Allegations that, if true, could significantly harm the company and/or its constituents
      • A derivative lawsuit
    • If the conduct of independent board members is at issue and/or none of the independent directors are free of conflict regarding the issues under investigation, consider adding one or more directors to the board and having those new directors lead the investigation
    • If the conduct of the general counsel or chief legal officer is at issue, a board committee should lead the investigation and independent outside counsel should conduct it
    • If a board committee is overseeing the investigation and the general counsel is leading it, consider creating a reporting line for the legal department to report directly to that board committee for purposes of the investigation (to protect them from being fired if bad facts regarding senior management are discovered)
    • If internal audit or compliance leads the investigation, consider whether an attorney-client privilege is desirable, and if so, whether the legal department and/or outside counsel also needs to be involved in order to maintain the privilege
  • Who conducts? If legal advice is needed regarding the investigation or its findings, lawyers need to be involved and steps need to be taken to protect the attorney-client privilege and attorney work product. The choice of whether to rely on in-house lawyers or outside counsel will be driven to some extent by who is leading the investigation.
    • Any investigation that needs to be “independent” (for example, due to current or anticipated securities litigation, or for public or internal perception purposes) should be led by independent board members and conducted by independent outside counsel
    • Any investigation led by a board committee should be conducted by outside counsel
    • Any investigation overseen by a board committee should be conducted by counsel, which probably will be outside counsel (even if that outside counsel is led by the legal department under a protected reporting line to the board committee)
    • Any investigation led by the legal department could be conducted by inside or outside counsel, a decision driven by:
      • Whether the greater resources available to outside counsel are needed to handle the investigation quickly and efficiently
      • Whether the expertise of outside counsel is needed to provide attorneys familiar with government agencies, regulators, or prosecutors who already are, or who reasonably could be expected to be, involved
      • Whether the experience of outside counsel would be useful for complex judgment calls
    • Who Supports?
      • Those who are conducting the investigation typically would engage necessary consultants. If outside counsel is conducting the investigation and forensic accountants are necessary, for example, the outside counsel typically would hire the accounting firm using a special letter describing how attorney-client privilege will be handled
      • Costs can add up quickly, and typically the company will request a budget from outside counsel that includes third party support, even if the company is paying the supporting entity directly

Witness Interviews

  • When? Different investigations require different strategies. In some investigations, it is important to talk with witnesses quickly, even before any documents have been reviewed, and then perhaps interview them again with a document set once those conducting the investigation know more. In other situations, reviewing the documents before interviewing witnesses is essential to an orderly and efficient process.
  • Where? Usually the interviews occur in a conference room at the company’s offices, preferably in an area that allows the process to remain as confidential as possible. Often, the lawyers conducting the investigation travel to the office location for each witness. Some interviews may be conducted by video conference or telephone, although neither of those situations is ideal.
  • Who participates?
    • Those conducting the investigation typically would lead the interviews.
    • When board members are overseeing or leading the investigation, various board members might want to attend the witness interviews and perhaps even ask questions of the witnesses. This certainly is not required, as board members are entitled to rely on the experts they hire to conduct the investigation, and could present complications.
    • In-house counsel sometimes attend witness interviews that are being conducted by outside counsel. Depending on the circumstances, the presence of in-house counsel could make witnesses more or less comfortable. It is important to ensure that witnesses feel free to provide accurate information and frank views.
    • Supporting consultants may also attend and participate in interviews, depending on the circumstances.
  • Counsel for the Witnesses?
    • Companies typically are not required to provide counsel to employees during internal investigations, and witnesses often are not represented during internal investigations. This is particularly true when the investigation is being conducted by company employees (internal audit, compliance, or legal department). It also is often the case when outside counsel is asking the questions.
    • Counsel representing the company or a board committee in the investigation typically cannot advise witnesses as to whether they need their own lawyers, even if the witnesses request that advice.
    • When companies decide to make counsel available to employees, companies sometimes engage “pool counsel” who would be available to represent multiple employees during the internal investigation. Pool counsel would be responsible to ensure that they could ethically conduct a joint representation without encountering insurmountable conflicts of interest or revealing confidential information. Pool counsel arrangements usually are set up so that the company pays the bills, but the attorney-client privilege would not include the company.
    • Senior officers may want counsel of their own, and companies often honor this request even if a short delay occurs while the officer selects an attorney. Legal departments and outside counsel may have recommendations tailored to the specific subject matter, potential government interest, or other factors.
    • Officers and employees may want the company to pay the bills for their individual counsel. Whether the company is obligated to do so often turns on provisions in employment agreements and corporate governance documents such as By-laws. Companies often “indemnify” officers, which usually entails reimbursing fees at the end of a process once it is determined that the officer is entitled to indemnification (g., acted in good faith), and also “advance” indemnification payments along the way so the officer does not bear legal fees out of pocket. Companies typically require officers to sign an “undertaking” to repay any advanced amounts if it is determined that the officer is not entitled to indemnification.
    • The cost of legal fees and expenses may be covered by director and officer insurance, although if no litigation has been filed, coverage is less likely. Coverage will be governed by the policy and negotiations with the carriers.
    • Sometimes, witnesses want to bring their own individual counsel to the internal investigation interview. Companies typically evaluate whether to proceed with interviews with counsel based on the relevant circumstances at the time.
  • “Upjohn Warnings” At the outset of interviews of company employees conducted by counsel for the company, it is important that the witness understand as much about the context as the investigators can share. It also is essential that the witness understands that the investigators do not have an attorney-client relationship with the witness.
    • The concept of “Upjohn warnings” comes from Upjohn Company v. United States, 449 U.S. 383 (1981), in which the United States Supreme Court held that a company’s attorney-client privilege is preserved when the company’s attorney communicates with the company’s employees.
    • The warning typically clarifies that:
      • the lawyers represent the company (or the board committee) and not the employee;
      • communication occurring during the interview is protected by the company’s attorney-client privilege; and
      • only the company will control whether to provide information learned through the interview to anyone outside of the company, including a government agency.
    • Documentation of the Witness Interviews
      • Attorneys often take notes during the interviews, and practices differ as to whether the notes are in the form of a transcript (Q, A) or include the attorney’s inferences, shorthand, and mental impressions. The latter are more easily protected from discovery.
      • Interview memoranda are more formal records of the communication during the interview.
        • These often are created by one of the lawyers who attended the interview, and then may be edited by other lawyers on the team.
        • Interview memoranda typically would be protected from third party access by the company’s attorney-client privilege and, depending on the circumstances, by the attorney work product doctrine.
        • Creation and completion of interview memoranda is time-consuming and expensive, and it is important to determine whether that expense is necessary under the specific circumstances of the investigation.

Investigation Report

  • Investigation findings may include conclusions regarding:
    • Whether the company and/or individuals violated the law, rules or regulations
    • Whether the company and/or individuals violated company policy
    • Whether, given their conduct as determined by the investigation, company officers and employees can be relied upon by the company’s independent auditors
      • Were senior management’s representations to auditors accurate?
      • Were their certifications of financial statements accurate?
      • Were their representations to lenders, analysts, shareholders accurate?
      • Was the tone they set at the company supportive of ethical conduct by employees (a good “tone at the top”)?
    • Whether the company’s public filings remain reliable in light of the information learned, and if not, whether restatement is required (using, among other things, a SAB 99 materiality analysis)
    • Whether the investigation revealed material weaknesses or significant deficiencies in the company’s internal controls
  • Deciding whether and how to document the results of the investigation requires a complex analysis. Drafting a formal report of the investigation is time-consuming and expensive. Many constituents would prefer a full, detailed report of the information gathered during the investigation and the findings that may ultimately be made public. Others may prefer only oral reports and no public disclosure at all. Whether the ultimate report remains privileged or not depends on the facts and circumstances of the specific investigation and will require detailed analysis and thoughtful legal advice.

Special Obligations of Independent Auditors

  • Securities Exchange Act of 1934 Section 10A (15 U.S.C. Section 78j-1) requires a company’s independent auditor to work through a set of detailed procedures if the audit firm “detects or otherwise becomes aware of information indicating that an illegal act (whether or not perceived to have a material effect on the financial statements of the issuer) has or may have occurred.” The term “illegal act” is very broad, defined as “an act or omission that violates any law, or any rule or regulation having the force of law.”
  • The procedures set forth in Section 10A include:
    • determining whether it is “likely” that an illegal act has occurred
    • determining and considering “the possible effect of the illegal act on the financial statements of the issuer”
    • informing “the appropriate level of the management of the issuer and assur[ing] that the audit committee of the issuer, or the board of directors of the issuer in the absence of such a committee, is adequately informed with respect to illegal acts that have been detected or have otherwise come” to the firm’s attention “unless the illegal act is clearly inconsequential”
    • determining whether the illegal act has a material effect on the issuer’s financial statements
    • determining whether senior management (or the board) has taken timely and appropriate remedial actions
  • Special—and more serious—procedures are triggered if the audit firm concludes that the company’s actions have not been sufficient. Under that circumstance, Section 10A requires that the audit firm determine whether that failure “is reasonably expected to warrant a departure from a standard report of the auditor, when made, or warrant resignation from the audit engagement”
    • if so, the auditor must report the results of this determination to the board of directors
    • if this report is made to the board, the issuer must notify the SEC within 1 business day and provide a copy of this notice to the auditor
    • if the auditor does not receive a copy within 1 business day, the auditor must resign or furnish a copy of its own report to the SEC within 1 business day
    • if the auditor resigns under this provision, it must furnish a copy of its own report to the SEC within 1 business day after resigning.
  • If these procedures are underway but are not yet complete, the auditor may not be able to complete its quarterly review or its annual audit.  And, as the independent auditor, the firm cannot advise the company of the company’s obligations—it can only react to what the company does and reach a view as to whether that is sufficient. This can set up a challenging dynamic in which experienced outside counsel may be especially valuable, particularly when navigating issues related to conveying information and conclusions from an investigation that might be protected by the attorney-client privilege. 
  • When a company conducts an internal investigation that could trigger the auditor’s Section 10A obligations, the auditor typically involves individuals from its forensic practice and/or its office of general counsel to advise the audit team.

Government Investigations Whether as a result of the company’s “self-report” to the government or because of the government’s own information sources, the government may conduct an investigation at the same time as the company’s own internal investigation. 

  • The government could include civil or criminal authorities, at federal, state, local or international levels. It also could include “quasi-government” authorities such as self-regulatory organizations. More than one government inquiry could occur simultaneously.
  • Navigating this multi-front process is challenging, as the company’s obligations as a public company issuer continue to apply, even as the government’s requests and demands roll in.  Experienced outside counsel will be invaluable during this process.
  • The extent to which government investigators offer “cooperation credit” to a company for promptly sharing with the government information gathered during the internal investigation differs between government agencies and organizations, and sometimes even between teams within the same agency.
    • For example, the Department of Justice issued guidance to its False Claims Act litigators on May 7, 2019 regarding the incentives the Department offers to companies that provide “voluntary disclosure,” “cooperate” with the Department’s investigation, “shar[e] information gleaned from an internal investigation and tak[e] remedial steps through new or improved compliance programs.” 
    • The SEC’s cooperation program is rooted in a Report of Investigation from October 2001 that is commonly known as the “Seaboard Report.” See Securities Exchange Act of 1934 Release No. 44969 (October 23, 2001). The SEC has provided updated guidance on cooperation through the years, including a formal cooperation program launched in January 2010 and multiple statements in speeches and enforcement settlements.
    • The credit a company will get for cooperating is uncertain and difficult to quantify, and the cost of cooperation is high. But the cost of not cooperating may be higher.
  • In attempting to cooperate with a government investigation, a company and its counsel can become so intertwined with the government that an internal or independent investigation can be found to be “attributable” to the government, creating subsequent evidentiary risks for the government.
    • In such instances, the Fifth Amendment rights of employees – who may be facing the difficult decision of whether to either provide statements to counsel conducting an investigation or face potential termination – can potentially be violated.
    • Recently, the U.S. District Court for the Southern District of New York issued a decision that reviewed at length the factors suggesting counsel’s internal investigation had essentially become the government’s investigation.  U.S. v. Connolly, et al., 16-CR-370-CM (S.D.N.Y. 2019), the Southern District of New York. The factors cited by the court included:
      • The government directed the company and its counsel whom to interview and when.
      • The key witness was compelled, upon pain of losing his job, to sit for multiple interviews with the company’s counsel.
      • The company’s counsel provided the government with timely, detailed information from interviews.
      • The government did not appear to have undertaken any investigative steps involving witnesses outside of counsel’s investigation.
      • The government directed the company’s counsel over an extended period and did not make its own governmental investigation known to interview subjects.
      • The government ultimately constructed its own subsequent investigative plan based almost entirely on the information provided by the company’s counsel.
    • To protect the integrity of investigations conducted by the government and the company, counsel for the company should, as appropriate, document that significant investigative decisions are based on independent reasons for the benefit of the company and not taken at the direction of the government.  Counsel should also consider providing language in communications with the government to make it clear that the company and its counsel are conducting their own investigation and exercising their own, independent discretion with respect to investigative steps and decisions.
  • Whistleblowers may complicate both the internal investigation and government investigations, often without the company having any knowledge that a whistleblower has contacted the government.
    • The SEC, for example, is required to maintain the confidentiality and anonymity of whistleblowers and must pay a monetary reward to whistleblowers under certain circumstances.
    • The SEC has authority to bring an enforcement action companies and individuals for retaliating against, or impeding, a whistleblower. 
      • “Retaliating” can include discharging, demoting, suspending, threatening, harassing, or discriminating (directly or indirectly) against the whistleblower.
      • “Impeding” can include severance or confidentiality agreement provisions that could be read to prevent, or potentially even discourage, whistleblowers from reporting potential securities law violations to the SEC.
    • The federal securities laws protect whistleblowers against retaliation by:
      • preserving their ability to file a claim in federal court against the company alleging retaliation without exhausting administrative remedies first;
      • providing a six-year statute of limitations for employees to file claims in court, and
      • awarding double back pay to prevailing whistleblowers.
    • In 2018, the United States Supreme Court (in Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767 (2018)) concluded that the federal securities laws do not protect whistleblowers if, at the time of the retaliation, they have not yet reported a potential securities law violation to the SEC itself. 
    • Although the SEC’s whistleblower program does not provide for payment of attorney’s fees, many lawyers now specialize in pursuing whistleblower claims, including claims for whistleblower rewards from the SEC.
    • Whistleblowers can include current employees who provide information to the government in real time. Given the significant penalties for retaliating against whistleblowers and the many ways retaliation can be alleged, companies often decide not to engage in any effort to identify whistleblowers who have, or may have, reported potential violations.
    • If the company is in communication with the whistleblower, whether because the whistleblower has not chosen to remain anonymous or because the company’s systems allow for an anonymous communication with the whistleblower, consider developing a communication strategy to provide appropriate updates to the whistleblower. Here again, experienced counsel can be very helpful.

Interests of Various Constituents During the course of an internal investigation, it may be helpful to pause and consider whether the interests of the various constituents are being addressed. While it may not be possible to address all of these interests, and while the list below is not exhaustive, keeping these various interests top of mind will help those leading an investigation serve their companies more effectively during the pendency of the investigation.

Constituent

Interests in the Internal Investigation Include:

the board of directors

  • Clear understanding of process, schedule
  • Updates as needed and appropriate
  • Appropriate documentation of process including minutes, resolutions
  • Integrity of process, findings, remedial measures
  • Ability to rely on committees, experts, management

board committees

(in addition to interests as board members)

  • Timely understanding of allegations involving subject matters overseen by their committees
  • Timely understanding of role in investigation (oversee, lead, receive reports, ensure appropriate documentation, provide information, preserve documents)

board committee chairs

(in addition to interests as board and committee members)

  • Audit Committee chair needs to understand information being provided to independent auditors
  • Audit Committee chair needs to understand if timeliness of public filings is at risk
  • Other chairs may need early focus of upcoming needs in their areas (e.g., nomination and governance, compensation)

senior officers

  • Doing their jobs, and leading the workforce to continue doing their jobs, despite the distraction of the investigation
  • Potential personal liability

employees

  • Information flow
  • Confidence in fairness of process and integrity of management
  • Job security

independent auditors

  • Early alerts of potential illegal acts that may trigger special procedures by the auditors
  • Confidence in those overseeing, leading, conducting, and supporting the investigation
  • Timely and accurate updates regarding investigation process, information learned during investigation, findings, remedial measures
  • Thoroughness of investigation
  • Confirmation of reliability of senior officers
  • Briefing regarding all remedial action by management and/or the board of directors
  • Understanding of management’s view, in light of information learned in the investigation, of the adequacy of its internal controls

government entities

  • Compliance with laws, rules, regulations
  • Early alerts of potential illegal acts, including possible self-reports
  • Confidence in those overseeing, leading, conducting, and supporting the investigation
  • Timely and accurate updates regarding investigation process, findings, remedial measures
  • Thoroughness of investigation
  • Cooperation by sharing of detailed factual information, making witnesses available to meet with the government

listing exchange

  • Timely disclosures
  • Compliance with listing standards

shareholders

  • Clear and accurate financial statements and disclosures
  • Timely filings if at all possible

lenders

  • Timely disclosures of any provisions required by agreements, including covenant breaches
  • Timely filings if at all possible

suppliers

  • Timely and reliable payments
  • Integrity of ultimate products containing suppliers’ parts/ingredients/contents

customers

  • Safety and reliability of company’s goods and services
  • Timely delivery
  • Respect for company’s integrity

the public

  • Good neighbor in company locales
  • Confidence in the company

Internal investigations can be extremely complex, but being prepared with a plan that evaluates the scope and considers carefully the roles of the stakeholders involved goes a long way in ensuring that an investigation will start on the right foot. 


[1]
  Although this article focuses on public company preparation for internal investigations, many of the steps outlined here also apply to private companies.  Different stakeholders must be considered, of course, but large private companies facing the same potential issues should also be prepared for how to respond in the event an internal investigation is necessary.
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