When Are Insular Investigations Not Enough?

By Carl W. Hittinger and Tyson Y. Herrold

Questions to ask when deciding if in-house counsel can handle wrongdoing charges

Late last year, Wal-Mart Stores Inc. said it reserved $283 million as part of a tentative settlement with the U.S. Department of Justice and Securities and Exchange Commission in connection with possible Foreign Corrupt Practices Act violations. The investigation lasted for more than a decade and cost $870 million in attorney fees.

It’s a cautionary tale on many levels, including when and when not to keep such investigations insular.

Indeed, one of the most senior legal officers at the company, then general counsel of Wal-Mart International, criticized management’s decision to keep the investigation in-house instead of hiring “professional, independent investigative resources,” explaining “[t]he wisdom of assigning any investigative role to management of the business unit being investigated escapes me.” She admonished: “Given the serious nature of the allegations, and the need to preserve the integrity of the investigation, it would seem more prudent to develop a follow-up plan of action, independent of [Wal-Mart de Mexico’s] management participation.”

As was reported, a former executive of Wal-Mart de Mexico tipped off company personnel that the subsidiary had systematically bribed officials to expedite building permits for stores in Mexico. As the former construction permit attorney, the tipster provided names, dates, and payment amounts. Wal-Mart opened an internal investigation and discovered “hundreds of suspect payments totaling more than $24 million” and concealed with fraudulent accounting.

Wal-Mart’s investigators recommended expanding the probe to explore the magnitude of the conspiracy. External counsel urged an “independent, spare-no-expense investigation.” However, Wal-Mart rejected the recommendations and emphasized damage control, apparently worried the investigation would implicate upper management and impede the company’s ambitious growth. One executive “rebuked internal investigators for being overly aggressive,” and the investigation was eventually entrusted to Wal-Mart’s de Mexico’s general counsel – the very person who allegedly authorized the suspect bribes. Predictably, the investigation stalled.

While corporations routinely face allegations of misconduct, in-house counsel and regular external counsel are generally capable of conducting competent, independent investigations.

For example, isolated discrimination against an employee, while serious, usually does not call for a board-level inquiry conducted by independent counsel. But conflicts arise when corporations face allegations of systemic, high-level misconduct such as bribery, antitrust, or securities violations that threaten to implicate C-suite executives.

In fulfilling their fiduciary duties, boards of directors should ask the following questions when deciding whether in-house and regular external counsel can handle the investigation:

  • Could the allegations implicate executive-level employees? As illustrated by the Wal-Mart case, maintaining the independence of internal investigations conducted by in-house counsel is virtually impossible when high-level executive employees are potential targets of the investigation. Corporate counsel develop close working relationships with these employees and may even report to them, raising the possibility of retaliation – real or perceived – if the investigation gets close to powerful people. Self-conducted investigations are less likely to engender credibility with government agencies or the public due to suspected interference or manipulation by the perpetrators of the misconduct.
  • Is the corporation likely to face a government investigation or shareholder litigation? Corporations facing serious allegations of misconduct frequently become the target of investigations by government regulators.  Whistleblowers have strong incentives to report misconduct to government agencies instead of their superiors. Enforcement agencies are more likely to regard self-conducted investigations with suspicion, which can lead to disruptive and expensive follow-up inquiries. Moreover, shareholder derivative suits and securities litigation frequently piggyback on government investigations, which can have severe implications for the attorney-client privilege. As one federal appeals court held in a shareholder derivative case, the privilege usually does not protect in-house counsel’s communications from disclosure to the owners of the corporation.
  • Do in-house counsel have significant non-legal responsibilities? Corporate counsel usually do not focus exclusively on legal issues, instead advising the corporation on the business implications of the law. This raises thorny attorney-client privilege problems that have exacerbated more than a few cases. The privilege protects legal advice, not business advice. In most jurisdictions, the privilege will only apply when the primary or predominant reason for the communication was to obtain legal advice. But courts often struggle to apply this test in practice and routinely reject application of the privilege even where there was a substantial legal purpose for the communication. In fact, mixing business and legal advice is one of the most cited reasons by courts for ordering the disclosure of attorney communications.  

Carl W. Hittinger is a senior partner in Baker & Hostetler's antitrust group and litigation group coordinator in Philadelphia.

Tyson Y. Herrold is an associate in the firm’s Philadelphia litigation group.



Published date: February 21, 2018