Internal Investigations : Ethical Issues and Best Practices

Internal Investigations: Ethical Issues and Best Practices

Jim Doris Mark Katz Sarah Powell

December 3, 2014

Overview • Introduction • Design of Internal Investigations

– Case Study: Scope of Investigation – Case Study: Litigation Privilege

• Conduct of Internal Investigations – Case Study: Upjohn Warning

• Management of Outcomes – Case Study: Whistleblowing

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When to Investigate? • Regulatory investigation expected or underway • Whistleblower complaint • Media report • Compliance with internal policies

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Why Investigate? • Uncover and stop misconduct quickly

− get ahead of regulators and potential private litigation

• Permit company to take appropriate corrective actions • Board member, shareholder, agency expectations • Strategic decisions: defending case, leniency, reputation

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Investigation Plan • Issues:

– goals of investigation (establish facts, assess risks, propose corrective actions, establish defences, comply with internal policies, etc.)

– scope of investigation – timetable – investigator – privilege – costs

• Poorly planned investigation may expose participants to liability, create impression of whitewash, misidentify corrective actions, etc.

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Scope of Investigation • Potential sources of information • Document collection • Independent experts • Timing, format and scope of interviews • Timetable − when results needed? • Report in writing and to whom?

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Who Will Oversee Investigation? • Choice of investigator depends on nature of allegations

and degree of risk to company • Most investigations should be conducted by legal counsel • "Choosing independent counsel with few, if any, ties to

company… has become commonplace and generally regarded as first step in convincing governmental authorities of 'authenticity' of cooperation" (American College of Trial Lawyers)

• LSUC Rules – Duty to Avoid Conflicts of Interest (3.4-1 & 3.4-2)

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Case Study: Scope of Investigation

• Multi-billion dollar corporation with global operations • Former executive in corporation's foreign subsidiary

advised senior in-house counsel of widespread bribery in foreign operations

• Potential violation of foreign corrupt practices legislation • Recommendation for in-depth investigation ignored;

narrow investigation conducted instead • Internal investigators used

Was scope of investigation appropriate?

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Privilege • One obvious risk of any investigation is creation and

potential disclosure to third parties of documents that may be harmful to company's interests

• Risk can be minimized or reduced by assertion of privilege, which protects against compelled disclosure of – communications with counsel for purpose of obtaining legal advice

(solicitor-client privilege) or – information obtained for pending or anticipated litigation (litigation

privilege)

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Protecting Privilege • Maintaining privilege during investigation crucial to ensure

that results of investigation are not used against company without explicit waiver of privilege

• In addition to minimizing risks that results of investigation will be used against company, maintaining privilege also – encourages full and frank disclosure of relevant facts – allows accurate understanding of what happened so that

appropriate remedial actions can be taken – permits company to make more informed decision about what

disclosure (and associated waiver of privilege) should be made once investigation is completed

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Protecting Privilege (cont'd)

• Ability to assert and maintain privilege over documents created during investigation and to prevent disclosure to third parties should be important consideration in setting up any investigation process

• In Canada, privilege applies to communications to and from company's in-house counsel for purposes of obtaining legal advice

• Some jurisdictions, such as European Union, do not extend privilege to communications by in-house counsel

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• Because in-house counsel often creates documents as both business advisor and co-worker to other employees of company (in addition to working as lawyer), more difficult to assert that all communications to and from in-house counsel are privileged

• If internal investigation is conducted by in-house counsel, must be made clear that counsel's mandate during investigation is to provide legal, not commercial or business, advice

• Important to document investigation throughout process and record that lawyer is acting in capacity as legal counsel

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• Use of external counsel will eliminate possible argument that in-house counsel was acting in business, rather than legal, capacity, which strengthens claim of privilege

• External counsel should be retained with retainer letter that clearly identifies client and purpose of investigation

• Privilege can also extend to communications between counsel and other members of investigation team. If third- party experts are retained, they should be retained by counsel. Retainer letter should state that this non-legal assistance is being rendered at request and under direction of counsel in order to inform legal analysis

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• For privilege to be protected, – investigation must be conducted by lawyer, and all parties assisting

should report to legal counsel – if external counsel is engaged, retainer letter should state purpose

for investigation that gives rise to privilege – confidentiality must be maintained – employees and any persons

assisting in investigation should be instructed accordingly – documents should be marked "Privileged and Confidential" – third-party consultants should be retained by counsel with written

retainers – all reporting should be done by counsel

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Case Study: Litigation Privilege • Company's audit committee conducts interviews of top

executives in connection with restatement of financial statements

• Executives have lawyers present taking notes during interviews

• Company later charged with fraud in connection with restatement of financial statements

• At trial, lawyers subpoenaed to give evidence about interviews and bring "all relevant documents"

Are lawyers' notes protected by litigation privilege?

Interviews • Who is client?

– "Upjohn warning" – retaining separate counsel

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Key Elements of Upjohn Warning • Act for company and not for employee • Interview is part of investigation to advise company • Interview is privileged and confidential • Privilege belongs to company, not to employee. Only

company may waive privilege and disclose information provided by employee to authorities

• Interviewee may not discuss content of interview with anyone else

• Interviewee is entitled to seek own legal counsel

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Case Study: Upjohn Warning • Counsel represents company and CFO (as individual) in

civil litigation, while also conducting internal investigation relating to same conduct

• CFO is interviewed by counsel as part of investigation • No documentation indicating counsel gave CFO Upjohn

warning (although counsel claims he or she did) • Company waives solicitor-client privilege and provides

CFO's statements to regulators leading to CFO being charged

• CFO argues he reasonably believed counsel represented both him and company and therefore communications privileged

Did counsel manage investigation appropriately?

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Upjohn: Best Practice • Follow script so warning is consistent and accurate for all

interviewees • Contemporaneous interview notes should reflect that

Upjohn warning was provided – should employee sign written acknowledgement?

• Do what you can to reduce shock factor – provide context – make it routine – this is standard procedure in these situations – make clear that individual not being singled out – provide interviewee opportunity to ask questions – avoid being adversarial – consider written versus oral warnings

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Upjohn: Best Practice (cont'd)

• Be clear and unambiguous. Do not leave wrong impression that you are representing employee

• Separate counsel – be satisfied no conflict exists before commencing interview – be internally clear on company policy if conflict arises (e.g., will

company pay for separate counsel) – if perceive conflict, immediately advise employee and suggest

retaining separate counsel – recommend reputable counsel – retainer letter/joint defence agreement

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Reporting Investigation Outcomes

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• Rule 3.3 of LSUC Rules of Professional Conduct requires lawyer to hold matters disclosed to or discussed with client in strict confidence

• Lawyer's confidentiality obligations are distinct from solicitor-client privilege, which belongs to client and not to lawyer. Ethical rule is wider and applies without regard to nature or source of information or fact that others may share knowledge

• Rule 3.3-1 of LSUC Rules of Professional Conduct permits lawyer to disclose confidential information when required by law or court order, but lawyer shall not disclose more information than required

Reporting Investigation Outcomes - Internally • Ethical obligation to report if conduct is/was/would be

dishonest, fraudulent, criminal or illegal and should be stopped – to person from whom lawyer takes instructions and chief legal

officer, or both chief legal officer and chief executive officer – if CLO or CEO refuse to stop conduct, escalate as prescribed by

LSUC Rule 3.2-8

• LSUC Rules of Professional Conduct – Dishonesty, Fraud etc. by Client or Others (3.2-7)

• LSUC Rules of Professional Conduct – Dishonest, Fraud etc. when Client an Organization (3.2-8)

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Reporting Investigation Outcomes - Externally • Increasingly common to share investigation results with

regulator to obtain more lenient treatment • Waiver of privilege is consideration

– varying privilege rules across jurisdictions

• Implications of international cooperation between regulators/waivers to enable sharing of information – disclosure in one jurisdiction may amount to "disclosure" in another

jurisdiction via agency cooperation

• LSUC Rules of Professional Conduct – Justified or Permitted Disclosure (3.3-1.1)

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Whistleblowers: Statutory Protections

• Criminal Code (s. 425.1): Prohibits employers from retaliating against employees who report to law enforcement officials – wrongdoing must be a criminal or unlawful act

• Competition Act (s. 66): Prohibits employers from retaliating against employees who report to Bureau about offence or who refuse to participate in unlawful conduct

• Environmental/Health & Safety Legislation: Protects employees from reprisals if they report or refuse to participate in unlawful conduct

Whistleblowers • Bounties: Next wave?

– CRA's Offshore Tax Informant Program: An informant who reports to CRA an international non-compliant taxpayer that owes $100,000 or more is entitled to between 5% and 15% of outstanding amount

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Whistleblowers: Best Practice • Discourage external whistleblowing by ensuring integrity

of internal whistleblowing processes – create accessible and reliable channels to report wrongdoing – ensure disclosures by whistleblowers are properly and

appropriately assessed and acted upon – preserve confidentiality and anonymity

• How company reacts to internal whistleblowers will often be seen by employees as good barometer of corporate culture

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Whistleblowers: Best Practice (cont'd)

• Do not retaliate by – disclosing whistleblower's identity internally – disciplining/suspending/reassigning/demoting whistleblower – intimidating/coercing whistleblower – subjecting whistleblower to marginalization/hostile work

environment

• Does not mean whistleblower is now immune from legitimate measures relating to performance; but company will have to establish that any steps taken are objectively justifiable and not related to whistleblowing

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Case Study: Whistleblowing • Former in-house counsel expresses concern to CEO

that pricing conduct may violate anti-kickback legislation • CEO instructs counsel to work with outside counsel to

"find a way around" • Counsel obtains opinion from outside counsel but no

other action taken; in-house counsel did not report concern to board

• In-house counsel soon "frozen out" by management, then replaced as general counsel

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• Former in-house counsel then brings action alleging violations by company of anti-kickback legislation – legislation includes anti-retaliation rules to protect whistleblowers – share of recovered funds goes to whistleblowers

Can in-house counsel use confidential information to blow whistle on employee?

What are implications for privilege and confidentiality obligations?

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Case Study: Whistleblowing (cont'd)

Questions?

Appendix: Rules of Professional Conduct • When Client an Organization: Notwithstanding that the

instructions may be received from an officer, employee, agent or representative, when a lawyer is employed or retained by an organization, including a corporation, in exercising the lawyer’s duties and in providing professional services, the lawyer shall act for the organization. (3.2-3)

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Appendix: Rules of Professional Conduct (cont'd)

• Justified or Permitted Disclosure: When required by law or by order of a tribunal of competent jurisdiction, a lawyer shall disclose confidential information, but the lawyer shall not disclose more information than is required.(3.3-1.1)

• Courtesy and Good Faith: A lawyer shall not use any device to record a conversation between the lawyer and a client or another legal practitioner, even if lawful, without first informing the other person of the intention to do so.(7.2-3)

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• Duty to Avoid Conflicts of Interest: A lawyer shall not act or continue to act for a client where there is a conflict of interest, except as permitted under the rules in this Section. (3.4-1)

• Consent: A lawyer shall not represent a client in a matter when there is a conflict of interest unless there is express or implied consent from all clients and it is reasonable for the lawyer to conclude that he or she is able to represent each client without having a material adverse effect upon the representation of or loyalty to the other client…. (see full text in 3.4-2)

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• Confidential Information: A lawyer at all times shall hold in strict confidence all information concerning the business and affairs of the client acquired in the course of the professional relationship and shall not divulge any such information unless (a) expressly or impliedly authorized by the client; (b) required by law or by order of a tribunal of competent

jurisdiction to do so; (c) required to provide the information to the Law Society;

or (d) otherwise permitted by rules 3.3-2 to 3.3-6. (3.3-1)

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• Dishonesty, Fraud, etc. by Client or Others: A lawyer shall not knowingly assist in or encourage any dishonesty, fraud, crime, or illegal conduct or instruct a client or any other person on how to violate the law and avoid punishment.(3.2-7)


• Dishonesty, Fraud, etc. when Client an Organization: A lawyer who is employed or retained by an organization to act in a matter in which the lawyer knows that the organization has acted, is acting or intends to act dishonestly, fraudulently, criminally or illegally, shall do the following, in addition to their obligations under rule 3.2-7: (a) advise the person from whom the lawyer takes

instructions and the chief legal officer, or both the chief legal officer and the chief executive officer, that the conduct is, was or would be dishonest, fraudulent, criminal, or illegal and should be stopped;

(cont'd…)

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(b) if necessary because the person from whom the

lawyer takes instructions, the chief legal officer or the chief executive officer refuses to cause the conduct to be stopped, advise progressively the next highest persons or groups, including ultimately, the board of directors, the board of trustees, or the appropriate committee of the board, that the conduct was, is or would be dishonest, fraudulent, criminal, or illegal and should be stopped; and

(c) if the organization, despite the lawyer’s advice, continues with or intends to pursue the wrongful conduct, withdraw from acting in the matter in accordance with rules in Section 3.7. (3.2-8)

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Internal Investigations : Ethical Issues and Best Practices

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