Pitfalls in Probes

A SENIOR OFFICER AT A waste company learns from an informant that a veteran regional manager and two of his subordinates may have been involved in criminal wrongdoing. After confirming some of the critical events by talking to a second source, the senior officer reports what she's learned to the company president.

Under the circumstances, the company cannot disregard the information — even if it's unlikely that outsiders already know what happened. To do so may amount to a coverup.

An organization that finds itself in this situation often decides to undertake a formal internal investigation. The investigation usually is conducted by outside legal counsel who reviews documents, interviews witnesses, and prepares a report to the company's chief executive or board of directors. Depending on the circumstances, an investigation can take several days to many months, and the cost in dollars and lost productivity time can be considerable. Generally, employees are directed to fully cooperate with the investigation or risk being fired. After the report has been submitted and reviewed, the company may be obliged to appropriately respond. Actions may range from disciplining culpable employees to notifying regulatory agencies or law enforcement.

Companies often hire outside legal counsel because the person is perceived to act independent of management. This independence, with the lawyer's reputation for integrity and competence, lends credibility to the final investigative report. But the fact that counsel is independent can create a potentially compromising situation.

By serving the client's best interests, the outside attorney may dig up dirt on the client's operations and employees, and may spotlight potential liability. Investigators may need to disclose certain client information, and the client may need to take immediate, corrective action.

Outside disclosure of an internal report is almost inevitable if the organization seeks an amicable settlement with prosecutors and agency enforcement staff. The government wants to know the full dimensions of what happened before it will agree to limit the price of washing away corporate sins. This waiver of confidentiality may make it difficult for the company to keep the report from lawyers who represent plaintiffs and have filed claims against the company.

For these reasons, the client and the investigative counsel should agree to how much and what kind of paper should be generated — interview notes, documents, work papers, report drafts — and who, if anyone, within the client company should be allowed to see and comment on the documents during the investigation. However, once the client has helped to shape the focus and direction, it can no longer meddle in the investigation. Any attempt to interfere can risk undermining the necessary independence of the investigation and appear downright incriminating.