Internal Investigation: Beware of the Wolf in Sheep’s Clothing

It pains me to acknowledge this fact, but the white-collar defense bar, particularly at the highest levels, is not comprised of committed criminal defense counsel. Rather, it has become the haunt of former assistant U.S. attorneys led by various former-executive level government attorneys, on hiatus between political appointments, who pursue the same prosecutorial goals they pursued while in the employment of the government. Only now, they do so for greatly inflated salaries paid by the Fortune 500 companies that now employ them.

If the only entities to suffer from this juxtaposition of the defense attorney’s role was the mega-corporations that pay tens of millions or hundreds of millions in civil penalties because of these “defense attorneys”, the system could be viewed as “fair”. However, this current approach to white-collar criminal defense comes with substantial collateral damage, often destroying the lives and reputations of loyal corporate officers, directors, and other employees. Too often, people who believe they are working with criminal defense counsel against a common foe—the government—find themselves offered up as sacrificial lambs for the company they served handed over by the attorneys they thought were there to help them.

Corporate executives, directors, and senior managers need to understand what an internal investigation is, who conducts it and why, and what role they play in the investigation. Only then will they be in a position to protect themselves.

The Internal Investigation.

The term “internal investigation” is often used to mean a lot of different things. Some companies might use the term to conduct an HR investigation or an investigation into allegations of embezzlement within a company. Although it may be wise for one who is the subject of one of these investigations to retain counsel, the internal investigations we refer to in this article are those that potentially involve substantial violations of U.S. criminal law (as well as state, foreign, and international laws).

Some of the more common crimes that give rise to internal investigations are: the Foreign Corrupt Practices Act (FCPA), The International Emergency Economic Powers Act (IEEPA) (Sanctions), the False Claims Act (Frauds Against the Government), Healthcare Fraud, Medicare Fraud, Banking Fraud, Money Laundering, and Mail Fraud and Wire Fraud, just to name a few. An internal investigation is undertaken when senior officials in a company discover that the company may have engaged in some form of illegal activity. The purpose of the internal investigation is to discover if a violation or violations have occurred, to identify the individuals responsible for the violation, to take appropriate corrective action, and, in many cases, report the violations to the U.S. Department of Justice (DOJ).

Internal investigations often result in enforcement actions that cost major international corporations hundreds of millions or billions of dollars. Beginning with the passage of the Sarbanes-Oxley Act of 2002, publicly traded corporations were required to report their criminal violations to the government.  The statute changed the role of “defense counsel” in the corporate setting from an attorney who defended companies into one that investigates and reports alleged wrongdoing by the corporation.

In the process of investigating companies and mitigating the consequences of the corporation’s illegal conduct, these “investigating counsel” find it expedient and in their corporate client’s best interest to shift as much responsibility as possible onto certain individuals within the company as a manner of mitigating the damages the corporate client will ultimately need to pay.

This often creates substantial confusion for corporate officers, directors, and managers who are summoned to “answer questions” or “assist” outside counsel in conducting their investigation. There is no requirement that these individuals be told they are suspected of criminal conduct or that they have a right to a lawyer or a right to remain silent. Indeed, the only advice they will receive is the so-called Upjohn[1] warning advising them that corporate investigating counsel does not represent them—although even this warning is frequently forgotten.

[1] Upjohn v. United States, 449 U.S. 383 (1981). Although this case is often cited for the proposition that investigating counsel must advise interviewees that the attorney does not represent the interviewee and that no attorney-client privilege is formed, the case actually stands for the proposition that interview notes with interviewees were privileged (at least in that case).

Instead of receiving any useful advice, officers, directors, and employees are often “ordered” to appear and cooperate. I have seen internal investigations, where investigating counsel or their agents have:

• Threatened employees with prison if they didn’t cooperate, even though they have no authority to determine what will happen in a case.
• Used severance or bonus pay in an attempt to have a witness change his or her witness statement to conform to the conclusion investigating counsel desires.
• Threaten the prosecution of family members, even though they have no authority to charge anyone with anything.
• Promise witnesses nothing will happen to them, even though they have no authority to make any such assurances.
• Threaten people’s continued employment if they did not provide a narrative investigating counsel wanted.
• Misrepresent a witness’ statement to the prosecutor.

Perhaps the worst practice I have witnessed is the referral to “tame” defense counsel, with whom investigating counsel has a long-standing relationship, to “represent” the witnesses if all else fails. Within the investigating white-collar criminal defense bar there are a small circle of attorneys who live off the referrals they receive from friends. Whenever an officer, director, or senior employee asks about counsel, investigating counsel is likely to recommend a friend to handle the case.

The problem is that as a practical matter, the attorney who receives the referral is likely to be reticent to question the conclusions of the attorney who made the referral—if he or she were to do so, then there may not be any further referrals. The recommendation usually comes with an offer, by the corporation, to pay for the individual’s attorney’s fees, at least to a point.[2] This further assists investigating counsel in maintaining control over a witness/target.

[2] The customary practice is to pay attorney’s fees through the investigation but not after an indictment. If the company is willing to pay for counsel, then it should pay for counsel of the employee’s choosing even if it is not the attorney recommended by investigating counsel.

This real-life example may exemplify the problem. A few years ago, I was contacted by a corporate executive who was involved in an internal investigation into alleged violations of the FCPA. Investigating counsel had already concluded the client was guilty of the violation and offered to DOJ to assist in the client’s prosecution. When investigating counsel discovered that the client was retaining me rather than the counsel they recommended, they attempted to dissuade the client from retaining me; however, the client insisted on retaining me.

Over the next eighteen months, I was able to find several substantial flaws in investigating counsel’s internal investigation and ultimately convinced DOJ that the client had done nothing wrong. The position I took with DOJ placed the corporation at risk of greater punishment, but, ultimately, the client was cleared of any wrongdoing. Had investigating counsel been able to “manage” the client’s attorney, things could have turned out much different.

The Role of the Defense Attorney Representing an Individual in an Internal Investigation.

The role of the attorney defending an individual in a criminal investigation is much different than the role of investigating counsel for the corporation. Unless an individual happens to be named Jeffery Epstein and the charges involve the sexual abuse of children, DPAs and NPAs are not going to be available, and the case is going to be resolved either by a guilty plea or a trial.[3] The white-collar criminal defense attorney’s role in representing the individual will be to investigate in order to understand the events leading to the accusation or charges and to zealously advocate for the client. The attorney is not a neutral investigator collecting facts, and only rarely would a white-collar criminal defense attorney encourage an individual to self-report his or her violations.

[3] Ordinarily, individuals are not entitled to Non-Prosecution Agreements; however, the now infamous Jeffrey Epstein was able to enter into an NPA with DOJ. A copy of the NPA is available at: https://www.documentcloud.org/documents/6184602-Jeffrey-Epstein-non-prosecution-agreement.

Unlike individuals, corporations do not suffer the ignominy of criminal charges. Corporations cannot go to prison or have their reputations destroyed.[4] For most people involved in a federal criminal investigation or indictment, their goals are first to avoid charges or a conviction, if possible, and minimize the consequences of a conviction if that is not possible. They have very little interest in the well-being of their employer who, in most cases, eventually fires them anyhow.

[4] Exxon-Mobile, for example, who would be considered a “career criminal” if were an individual. As a corporation, it simply pays fines—intended to not destroy the company—and continues with its operations. A partial “rap sheet” for Exxon-Mobile is available at: https://www.corp-research.org/exxonmobil

The counsel for the individual should conduct an investigation, but the purpose of that investigation is to find evidence useful to the person under investigation. It differs substantially from the government investigation, or the “internal investigation” undertaken by corporate counsel. Counsel for the individual is focused upon finding and securing exculpatory evidence or other evidence favorable to his or her client.

Just as importantly, it will frequently be in the client’s interest to approach the government independently, rather than cooperate with an internal investigation. Early cooperation with the government may mitigate or eliminate the possibility of criminal exposure. It is also better for the client to communicate with the FBI or federal prosecutors without their witness statements being filtered through investigating counsel working for the corporation. In some cases, the client may even qualify as a “whistleblower” receiving the protections offered by that status.[5]

[5] Both DOJ and the SEC operate whistleblower protection programs. For an explanation of whistleblower awards from 2022, see: https://www.justice.gov/opa/pr/false-claims-act-settlements-and-judgments-exceed-2-billion-fiscal-year-2022.

From the very beginning of the white-collar criminal defense counsel’s involvement, the attorney’s goal will be to defend the client, including the preparation of a trial defense. This involves an individualized strategy that varies greatly from case to case, but the strategy will frequently conflict with the goals of investigating counsel for the corporation. Most federal crimes involve a specific intent. For example, in a Foreign Corrupt Practices Act case, a defendant must act “corruptly” meaning that he or she must seek to influence or persuade a foreign official to “act or fail to act contrary to his or her established duty”.  Even if the defendant was involved in providing something of value to a foreign official, that would not violate the law if there is no corrupt intent.

In pursuing a defense strategy designed to protect the individual, the concerns of investigating counsel or the corporation are irrelevant to the white-collar defense counsel. Defense counsel’s only loyalty is to the individual.

There is always an inherent risk of a conflict-of-interest between the individual and the corporation, and this conflict extends to the attorneys for the corporation and the attorney for the individual. The investigating counsel’s interest lies with representing the interests of the corporation (although, under Sarbanes-Oxley, it might be more accurate to say investigating counsel represents the interests of the government). An individual’s white-collar defense counsel represents only that individual.

Conclusion—the Need for an Independent Counsel for the Person being Interviewed.

Many corporate investigating counsel move from the U.S. Department of Justice (DOJ) to large law firms seeking the more lucrative salaries offered in private practice; however, they often bring with them the pro-government mindset that may have served them well at DOJ. When placed in the corporate investigative counsel role, they continue on their quest to ferret out “bad guys” using techniques they learn from federal investigators who are even allowed to lie to potential suspects. If Miranda warnings are mere speed bumps on the road to a confession, Upjohn warnings are a mere ripple in the pavement; they do not dispel confusion over the role of counsel in an internal investigation.

Only truly independent counsel can protect an individual in a corporate investigation. Corporate officers, directors, and executives frequently owe the corporations they work for a fiduciary duty, or at least a duty of loyalty. There should be reciprocity in the relationship. Individuals in internal investigations undertaken on behalf of a corporation should be encouraged to retain independent counsel at the corporation’s expense, but they should have their own counsel whether the corporation pays for it or not.