Tag: Investigations

Hiring Lawyers for Employees Under Investigation

Your company comes under investigation and specific employees are implicated. What is the right way to get lawyers for those employees? Assuming the company is picking up the cost of the lawyers, the company usually wants to have some input on the selection.

A recent New Jersey case highlighted some of the issues involved for the company and the lawyers involved. In the Matter of the State Grand Jury Investigation (A-80-08) highlighted the ethical issues.

The court laid  it out simply that the Rules of Professional Conduct forbid a lawyer from accepting compensation for representing a client from one other than the client unless six conditions are satisfied:

  1. The client gives informed consent.
  2. There is no interference with the lawyer’s independence of professional judgment or with the lawyer-client relationship.
  3. There is no current attorney-client relationship between the lawyer and the third-party payer.
  4. Information relating to the representation of the client is protected.
  5. The third-party payer must pay the invoices in its regular course of business.
  6. Once the third-party payer commits to pay, they need to get court approval to stop.

In this case Laidlaw International, Inc. was under investigation, with a focus on three employees.  The company hired four lawyers, one for each named employee involved and a fourth for all non-target current and former employees. The retainer agreements provided that the company would be responsible for the lawyer fees, but the lawyers’ professional obligation was to the individual employees only. The lawyers were not required to make disclosures to the company, and payment of the legal fees was not conditioned on the lawyers’ cooperation with the company.

That arrangement is fairly standard. But the state attorney objected and want to disqualify the company-paid lawyers for the employees. “The attorney maintains a sense of loyalty to the party paying him,” said Deputy Attorney General Frank Muroski told the Court at oral arguments. “The lawyer must suspect that the fee payer expects to have its interests protected.”

The court denied that there is an per se conflict. But there should be safeguards in place as outlined in the six conditions.

One key practice tip for the lawyers is that there must be a careful and conscientious redaction of all detail from any billings submitted to the third-party payer.

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Corporate Miranda for Internal Company Investigations

agent_reads_the_miranda_rights_As in-house counsel are often the ones starting an internal investigation, they need to be mindful of the same issues that appear when outside counsel are conducting an internal investigation. I wrote about the referral for discipline in the Ruehle case and the malpractice claim in Pendergast-Holt investigation in Attorney-Client Privilege and Internal Investigations.

It is even more important to clarify that the in-house counsel represents the organization. Employees are often used to dealing with in-house counsel as colleagues and give little regard to who they actually represent. After all, it is natural for employees regularly interacting with with in-house counsel to view them as their lawyer. Under the ABA’s model rules, Rule 1.13 (f) requires:

In dealing with an organization’s directors, officers, employees, members, shareholders or other constituents, a lawyer shall explain the identity of the client when the lawyer knows or reasonably should know that the organization’s interests are adverse to those of the constituents with whom the lawyer is dealing.

It is important to keep notes that you made the disclosure. Part of the issue in the Ruehle case and the Pendergast-Holt investigation is over what was said to the individual employees regarding representation. Treat the clarification statement as a “Corporate Miranda.”

Does the employee then have the right to remain silent? The Miranda rights under the Fifth Amendment are a limitation on the government, not a private company. The employee can remain silent, but you can terminate the employee for not cooperating. Of course it is good practice to let the employee know ahead of time what the consequences are for not cooperating.

Do they have the right to attorney? Again, the Miranda rights under the Fifth Amendment are not a limitation on a private company. There is a practical question about how you want to treat employees and whether the responses will be better if the employee talks with a lawyer before answering. It is probably better to give the employee a reasonable amount of time to get their own lawyer.

One aspect of the Miranda warning does come into play. What the employee says can be used against them.

What if they can’t afford an attorney? Back to the statement that the Miranda rights under the Fifth Amendment are not a limitation on a private company.

But corporate law does come into play for attorney costs. Under Delaware corporate law, a Delaware corporation must indemnify an officer or director who is successful on the merits or otherwise in the defense of a qualifying claim. (see §145 (c) of the Delaware General Corporation Law) In addition to the required indemnification, a Delaware corporation may indemnify individual employees for expenses incurred “if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful.” (see §§145 (a) & 145 (b) of the Delaware General Corporation Law) Then there are often contractual arrangement with senior management for indemnification and a D&O insurance policy that may trigger the payment of defense costs. Other types of entities and other states’ laws that may have different treatment of defense costs and indemnification.

It is important to set up guidelines and protocols for investigations. Has your organization put together its own Corporate Miranda?

See also:

Image is from Wikimedia Commons:CBP Border Patrol agent reads the Miranda rights

Conducting C-Suite Investigations

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EthicsPoint presented a webinar on conducting C-Suite Investigations, with Sally Rhys, BA, MS, CCEP of Business Ethics Focus.  No-one wants to believe that allegations against the C-suite (Senior Executives) could be true. But with daily news reports of more cases of illegal and unethical transgressions by senior leaders, we all know that every organization is potentially at risk. It can happen at any time, even in your own organization. Are you prepared to handle such a crisis? These are my notes from the presentation.

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Sally Rhys started off with a fraud scenario involving the CFO: A call from someone that she thinks the CFO is overstating earnings and has convincing reports.” What do you do now?

Investigating C-suite involves bigger risks. There are also psychological barriers involving loyalty to the organization and its management. Sally points out the need for a plan:

  1. Secure a sponsor.
  2. Engage a a stakeholder team to act as a sounding board.
  3. Identify the positions which require an investigation protocol.
  4. Create plans for each position that needs a protocol. You may want to have an outside investigator for some positions. You may also want to have a PR plan and methods for dealing with clients, employees and other stakeholders. You also want to well document the steps and the investigation. You also want to be clear about the non-retaliation policy.
  5. Seek board approval. Craft a persuasive message to convince the board to approve a C-suite protocol.
  6. Publish the protocol. Write it down, publish it in the code and make it accessible. Only do this if you are actually going to follow the protocol.

It is good to have some method for quickly determining if there is some basis for the claim. You need to show that take the allegation seriously, but you want to move quickly to respond appropriately.

It is important to show the board where executives go wrong.

The attendees said the most likely chilling effect on a C-Suite investigation is the concern that you will not be supported.  Of the attendees, 46% picked this choice out of the four.

It is important to protect yourself. Make sure you have support of the board or other key stakeholders. Be professional and leave emotions at the door. be respectful and thorough. You need to stay credible.

Sally thought it was important to separate the role of general counsel and the compliance officer/investigator. Of course, you need to have a protocol for yourself/your position.

See also:

Investigating Suspected Financial Accounting Irregularities

I watched the webinar from EthicsPoint and Kroll on Investigating Suspected Financial Accounting Irregularities. Jed Davis is the Managing Director in the Business Intelligence and Investigations Division of Kroll and Dave Hess is the Managing Director of the Forensic Accounting and Litigation Consulting Division of Kroll.

Dave emphasized the need to have a plan in place to deal with an investigation.

In Planning the investigation:

  • Establish an independent team with required expertise:
  • Identify and preserve relevant documents and evidence
  • Determine the scope and timing of investigation
  • Develop work plan and approach
  • Establish internal communication protocol

Some key objectives and considerations are:

  • to ensure and maintain rigor and credibility of investigation
  • to work with outside counsel to establish and maintain procedures to protect attorney‐client privilege
  • communicate with the investigating parties and stakeholders.
  • Establish procedures to avoid “scope creep”
  • Determine if alleged misconduct was an isolated act or a systemic problem
  • Establish verifiable chronology of policies, decision‐making and actions in issue
  • Identify internal control deficiencies and make recommendations for improvements
  • Report investigation results to stakeholders

Presentation slides for Investigating Suspected Financial Accounting Irregularities.(.pdf)