The Case for Outsourcing Internal Corporate Investigations to Outside Counsel

Credibility, independence, and expertise are among the reasons for retaining independent legal counsel to conduct internal investigations 

Key takeaways:

• The regulatory climate and heightened public accountability make it necessary for companies to respond quickly to allegations of corporate misconduct.

• Internal investigations have become an important component of good corporate governance.

• The involvement of trusted outside counsel adds independence, experience, and subject-matter expertise to the investigatory process.

• Hiring outside counsel can also lend credibility to an internal investigation and result in more leniency from government agencies if violations are proven to have occurred.

Corporations face unparalleled levels of regulatory oversight and public scrutiny. If legitimate allegations of wrongdoing arise, the best response is a well-orchestrated, comprehensive, and credible investigation. 

Looking outside of the company’s in-house legal team is recommended. Hiring independent counsel can preserve the integrity of the investigation and avoid potential conflicts of interest. It can also lead to more favorable treatment by governmental authorities, should they take formal action.

Reasons for conducting internal investigations

Internal investigations have become an important component of good corporate governance, particularly in the wake of increased accountability standards necessitated by the Dodd-Frank Act, the Sarbanes-Oxley Act, and the Foreign Corrupt Practices Act (FCPA).

There are few U.S. statutory or regulatory requirements for investigating suspicion of wrongdoing within a company, with the exception being for highly regulated public corporations. But there are several “incentives” for all companies to initiate their own investigations of alleged misconduct. 

First, proactive investigation increases the possibility of putting an end to the misconduct by raising the allegations’ visibility. An investigation may reveal information that guides management’s next steps and provides evidence of the company’s “good faith” response should the misdeed warrant the attention of authorities.

Internal investigations provide particular value when allegations involve violations that invalidate or otherwise compromise corporate reporting to regulatory bodies such as the IRS and the SEC. 

In discretionary investigations, companies that self-investigate and self-report their findings have the potential to receive more lenient treatment by federal and state authorities. In the most recent update to the Department of Justice’s (DOJ) Evaluation of Corporate Compliance Programs, the DOJ stated that prosecutors should consider the presence of a “well-designed and maintained” compliance program when establishing a company’s role in an alleged violation. 

Similarly, the SEC’s “Seaboard Report” announced that the agency would take into account a company’s level of “cooperation” and the quality of its internal review when determining penalties for violations. The DOJ and SEC backed up this promise of leniency in a recent case involving a South Carolina-based consumer loan company.

If a company’s investigatory efforts are well-conducted and thorough, it may position itself well in any subsequent regulatory and criminal investigations. A sloppy investigation or one that lacks credibility can have the opposite effect. 

Choosing the appropriate investigators

Mobilizing a robust response to allegations of misconduct promotes a culture of transparency and compliance. In some cases, a company can rely on an internal team of employees in their legal or compliance departments to handle the task. 

When allegations appear to be serious and include numerous employees or involve actions that could implicate company leaders or board members, it often makes more sense to bring in an outside team. The involvement of expertly sourced outside counsel can add independence, experience, and subject matter expertise to the investigatory process. Bringing in external legal assistance is also a good way to avoid the perception of a conflict of interest.  

Hiring outside counsel, especially if the firm does not typically represent the company, can add credibility to an internal investigation in the government’s eyes. A new firm, especially one with deep resources in the area of the alleged misconduct, often attains thoroughness and objectivity that would be difficult for the company’s internal team or its primary counsel. 

When reporting or regulatory violations are the subjects of the investigation, it helps to engage firms known for their expertise in due diligence and specific compliance areas. Experienced attorneys and investigators can bring fine-tuned industry knowledge and methodologies to the investigation. Qualified firms will objectively make a case for action based on positive and negative outcomes they have witnessed. 

Outside counsel and attorney-client privilege

Privilege and all its complexities are essential considerations when a company hires an outside firm to investigate alleged misconduct. From the very start of the investigation, all parties involved must be aware of the “nuances” of attorney-client privilege in this specific situation. Failure to do so could result in making employee-lawyer communications vulnerable to discovery should a lawsuit or charges result from the alleged violation.

The Supreme Court’s 1981 “Upjohn” ruling (Upjohn v. United States, 449 U.S. 383) laid the basis for best practices concerning the use of the “Upjohn warning,” which is essentially a corporate “Miranda warning.” Upjohn is now interpreted to mean that while some employee communications are covered by attorney-client privilege, that privilege belongs to the corporation in most cases, not the individual employee.

When using outside counsel for an internal investigation, all parties involved must clarify the role of the investigating attorneys. The Upjohn warning should be given before every employee interview. All employees and corporate officers must understand that the outside attorneys represent the corporation, not any of them as individuals. 

Other considerations to weigh 

When conducting internal investigations, the magnitude and potential implications of the alleged misconduct can determine the necessity of retaining outside counsel. But it should not be the only factor.

If your company is determined to conduct business with the highest levels of transparency and seeks to emerge from any allegations with its reputation intact, outsourcing even less-critical internal investigations can make good business sense.  

In many situations, hiring an independent, experienced firm to conduct an internal investigation of allegations is the best way to protect the organization’s legal compliance efforts, ethical practices, and integrity. And at Johnston Clem Gifford, we believe that when the stakes are high, independence is critical.

The attorneys at Johnston Clem Gifford understand the critical role outside counsel plays in corporate investigations. Our Investigations team has experience guiding large and small corporations, banks, and other financial institutions through the investigatory process while maintaining the highest levels of discretion. Contact us online or by calling (214) 974-8000.