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Markkula Center for Applied Ethics

Investigating Possible Wrongdoing

Margaret Steen

When a company learns of a possible legal violation, how should it handle the investigation? A panel of experts looked at "Current trends in internal investigations in Silicon Valley" as part of the Business and Organizational Ethics Partnership at Santa Clara University's Markkula Center for Applied Ethics.

The panelists included Darryl P. Rains, a partner a Morrison & Foerster who specializes in litigation involving securities, investment management and SEC investigations; Anne C. Stromberg, a partner at McPharlin Sprinkles & Thomas in the employment law and litigation department; and Stephen J. Williams, director of internal investigations at Cisco.

The panelists first discussed the types of cases they're seeing now. Williams said his group focuses on "cases that are preparatory to corruption," such as conflicts of interest. "We want to get ahead of it."

He noted that good controls are crucial, especially in offices that are far from headquarters. "Unless we get those controls right and apply them properly, the problems are amplified elsewhere," Williams said.

Stromberg, whose focus is on employment law, said complaints about discrimination and retaliation are a concern. She added, "The current trend is mental disabilities. They're not easily identified, and an employee might be in the middle of an employment counseling situation and the employer may need to accommodate the disability, including in the investigation."

Rains, who handles larger investigations as an outside investigator, said corruption involving public officials or sales practices has been and still is a big part of his practice. Recently, whistleblower protections have also become an issue. And cyber security breaches have also become a subject for investigations: both those that are discovered "the ugly way" and made public, and problems discovered by nonpublic sources that the boards of directors still want investigated.

How do companies decide whether to do an investigation in-house or externally? Rains suggests that companies "start with the presumption that internal audit, internal counsel or, at a large company, an internal group should do it."

Two considerations are why the investigation is being done, and who is being investigated. If the audience of the investigation is management – they want to understand how a problem happened so they can run the business better – there may not be any reason to bring in outside investigators, Rains said.

However, if the audience is external – regulators or third-party auditors, for example, or a judge if the matter is already in litigation – then "you've got to seriously ask whether your internal team will have the credibility and resources" to satisfy that audience," Rains said.

And in a situation where senior management is potentially at risk, outside investigators are almost always required, Rains said. He noted that sometimes it's not clear at the beginning of an investigation, for example, whether a corrupt sales practice is confined to one subsidiary or will eventually implicate the head of sales.

Other considerations when deciding whether to hire outside counsel to conduct an investigation:

  • Cost. External investigations can cost millions of dollars, especially when the outside law firm has to also hire an accounting firm, for example, or other experts to assist. However, internal investigations also have costs, though they are not always billed by the hour. And Williams noted that "it's not all or nothing": Some investigations are run internally but use outsiders for specific tasks.
  • Attorney-client privilege: This is a tricky area, but it can be easier to protect attorney-client privilege with outside counsel. However, it's important to remember that even with outside counsel, the elements required for attorney-client conversations to remain confidential may not always be met. Also, privilege is treated differently in other countries.
  • What constitutes a truly "outside" investigation? Rains said for a truly independent investigation, the firm hired cannot be doing (or have recently done) other legal work for the company.

Margaret Steen is a freelance author.

Oct 1, 2014