A Critical Requirement Of A Major Internal Investigation — Independence

by Michael Volkov

investigation4There are so many potential pitfalls in conducting an internal investigation.  I always say that there is an “art” to conducting an effective internal investigation.  There are so many ways in which an investigator can be derailed, waste resources, and/or lose focus while conducting an investigation

One of the most common ways in which a company can derail an internal investigation is by failing to ensure that the investigation is not biased, or better said – is independent.

The Justice Department and the Securities and Exchange Commission have stressed the importance of an independent investigation.   DOJ and the SEC will consider leniency when a company conducts an independent investigation.  In order to credit the investigation, there are several questions which the government will ask:

  1. Did the company commit to learn the truth, fully and expeditiously?
  2. Did the company conduct a thorough review of the nature, extent, origins and consequences of the conduct and related behavior?
  3. Did management, the board, or committees consisting solely of outside directors oversee the review?
  4. Did company employees or outside persons perform the review?

These questions are important guides for ensuring an independent investigation.  It is not uncommon for a company to start an internal investigation slowly, and only become committed to the internal investigation, when the facts and circumstances line up in a way which requires the company to conduct an independent investigation in order to survive or avid serious consequences.investigation3

A board committee responsible for an investigation of potential misconduct has to take a proactive approach to conducting and supervising the investigation.   The decision to launch an independent investigation is crucial to learning the full scope of the misconduct.  The board committee has to decide whether to retain independent counsel (usually counsel who has not done work for the company in the past).

A board committee which ignores the importance of independence is only subjecting the company and its directors to increased criminal or civil exposure, along with regulatory scrutiny and serious reputational damage.  Wal-Mart’s current difficulties relating to potential FCPA violations in Mexico have been seriously exacerbated by the failure of Wal-Mart’s board and senior management to ensure an independent investigation of serious bribery allegations.

DOJ and the SEC recognize the importance of a robust, independent investigation, and reward such steps by reducing penalties, or in some cases, not even charging the company for violations of the law.  The US Sentencing Guidelines provide for reduced criminal penalties when a company self-reports an offense, fully cooperates and demonstrates acceptance of responsibility for its conduct.  An effective independent investigation provides a strong defense to shareholder litigation against the board for failing to detect and prevent corporate misconduct.

visionThe need for an independent investigation depends on a number of factors, including: (1) whether senior management is suspected to be involved, knew of the misconduct or should have known about the misconduct; (2) the pervasiveness of the misconduct; (3) the materiality of the misconduct; (4) the possibility of regulatory sanctions; and (5) the need for remediation. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

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Michael Volkov

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