January 3, 2024
The Watergate adage “the cover up is worse than the crime” is an imperfectly allegorical but useful concept for businesses and other organizations to keep in mind when there are allegations from either internal or external sources regarding wrongdoing, or simply where company management suspects something just might be rotten in Denmark, to quote the Bard.
The relevance of the phrase is imperfect to the concept of internal investigations, as there is not always a criminal act that is at the heart of the concerns prompting such an investigation, nor is there necessarily a cover up so to speak. An internal investigation may well uncover criminal activity, but the purpose of such an investigation might be to determine whether civil wrongdoing has occurred (e.g., whether an employee has violated certain civil SEC regulations), or even activity that does not have legal implications but may violate the ethics of an organization (e.g., whether a megachurch pastor has engaged in an extramarital affair).
An internal investigation might take place prior to a government investigation, concurrent with one, or where no governmental action ever takes place. Internal investigations can be expensive affairs and put stress on employees, management, and even shareholders. Yet, despite these costs, an internal investigation may be the most beneficial action a company can take when evidence of potential wrongdoing in the organization begins to emerge.
What is the Purpose of an Internal Investigation?
If internal investigations can be expensive and stressful, and if the government may or may not do its own investigation anyway, then why in the world would a company put itself through the pain of an internal investigation?
There are numerous reasons for conducting an internal investigation. In the case of a sole proprietor like a realtor or solo attorney with no employees, it is unlikely that such a business would require an internal investigation. That sole proprietor is the only person conducting business and thus generally has the ability to access all the information relevant to his or her business. But the larger the business gets, the more difficult it is to know what employees or management is doing on behalf of the business (or on behalf of themselves, while at the same time creating liability for the company), far from the oversight of directors, officers, and/or shareholders. For example, the directors of a pharmaceutical company selling drugs and equipment in countries all over the world might have very limited visibility into the full nature of what its sales representatives are doing in South Africa or Japan.
One central purpose of an internal investigation is thus for the management and owners of the company to understand to the fullest extent possible what if any wrongdoing is taking place in the company in order to move forward in either taking corrective action and/or helping to avoid further negative consequences in the form of a government enforcement action and/or loss of public and shareholder trust. By doing so, the company can, among other things, take preemptive action by bringing their findings to the attention of government regulators and/or shareholders and/or be in a better position to respond to government intervention if and when it does occur.
Furthermore, undertaking an internal investigation may indeed be required by either government corporate oversight rules or the internal bylaws of the organization itself, and failure to do so might result in negative consequences such as government investigations and enforcement actions into not just the underlying wrongdoing but the failure to exercise proper corporate oversight, shareholder liability suits against company management, and/or loss of trust and business from customers, business partners, and shareholders.
Common Scenarios Involving an Internal Investigation
There are any number of potential situations within a business or organization which might necessitate an internal investigation by a third party law firm conducted on behalf of management and/or shareholders. In essence, if suspected behavior within the organization might result in a significant lawsuit and/or government enforcement action, some level of internal investigation may be warranted. These situations might include the following:
- False Claims Act / Procurement Fraud: Violations of the FCA which often involve healthcare fraud or procurement fraud can lead to steep financial penalties and criminal enforcement actions, thus it is important for an organization to understand if such fraud is occurring by employees and/or shareholders and respond accordingly.
- Securities Fraud: Potential insider trading and other violations of state and federal securities laws can occur within financial institutions in manners that are not abundantly clear to management, and it is thus critical to take proactive steps to monitor, correct, and report such actions if necessary.
- Foreign Corrupt Practices Act and Public Corruption: Many companies face significant legal liability when employees engage in bribery/corruption practices on local, state, federal and international levels (including FCPA violations for bribery of government officials in other countries), and a robust internal investigation is commonly necessitated to identify and appropriately handle such issues.
- Sexual Misconduct: While the individual perpetrators of sexual misconduct certainly – whether this be sexual harassment, creation of a hostile workplace environment, sexual discrimination, or other misconduct – face the prospect of legal liability, how companies and organizations act to prevent and/or respond to such misconduct involves significant legal liability as well, and it is often necessary for an internal investigation to be part of such a response. Furthermore, organizations must be continuously vigilant in
- Cybersecurity: Businesses face ever-increasing requirements and public scrutiny to comply with cybersecurity requirements and promote a safe cyber environment for customers, employees, and others. Thus, a cybersecurity internal investigation may be warranted where government regulators request evidence of such compliance, customer or employee complaints arise as to cybersecurity, or where management simply suspects the company is not doing what is necessary to effectively promote cybersecurity.
- Violations of Employment Law: Employers must comply with a bevy of state, local, and federal laws relating to the way in which employees are managed and treated. While much of this compliance can be effectuated from a “top down” approach, it is often necessary for an employer to conduct an internal investigation, for example, into whether managers and others throughout the company are complying with a range of issues such as discrimination, anti-retaliation policies, wage/hour requirements, and many other issues that can result in liability.
The Importance of Working With an Attorney in an Internal Investigation
It is often critical to work with experienced internal investigations counsel in conducting an effective and confidential internal investigation. One overriding principle to keep in mind is that, by having an internal investigation conducted by counsel retained by the company, the findings and conclusions of the internal investigation will generally be held confidential due to the attorney-client communication and/or attorney-work product privilege doctrines, although it may be the case that a strategic decision is made to share such findings with the government or other third parties. The last thing a company under scrutiny wants or needs is to have the sensitive results of an internal investigation improperly shared with the public or government regulators.
Furthermore, conducting an internal investigation is by definition generally a delicate affair. Careers, reputations, and business relationships are often on the line. Thus, it can be more effective and less stressful on a company to have an outside third party law firm conduct the internal investigation, where such internal investigators are experienced in collecting and analyzing information, and may be able to do so with less disruption to the corporate culture and everyday business operations as compared to an investigation conducted solely by a mix of internal counsel, management, and HR personnel.
Additionally, an experienced internal investigations law firm may have relevant experience both working in the government and/or engaging with government investigators on a regular basis. As such, counsel can more effectively obtain the information that government overseers are interested in understanding and can work with the government to provide such information and work towards the least disruptive outcome for the company.
Contact a Seasoned Internal Investigations Attorney
How an organization responds to wrongdoing can be just as important if not more important than the underlying wrongdoing itself. Furthermore, it is often beneficial to an organization to respond to potential wrongdoing within its ranks with what might be considered an overabundance of caution in order to demonstrate that it takes oversight seriously and to prevent future wrongdoing. To schedule a consultation with a seasoned internal investigations attorney, contact our office today.
