Ethics in Internal Inves/gaons€¦ · Ethics in Internal Inves/gaons Peter G. Land [email protected] 312-786-6522 Jennifer A. Smith [email protected] 312-786-6589

EthicsinInternalInves/ga/onsPeter G. Land [email protected] 312-786-6522

Jennifer A. Smith [email protected] 312-786-6589

Agenda•  Whatethicalrulesbearoninves/ga/ons?•  Howdoesa:orney-clientprivilegeoverlap?•  Illustra/onofhowtheseconcernsplayoutfromprac/calperspec/ve

SeAngtheStage•  KeyQues/onsList

–  Shouldyouconductaninves/ga/on?– Whatistheinves/ga/on’sscope?– Whomakesdecisionsabouttheinves/ga/on?– Whocanbeinformedabouttheinves/ga/on?

•  Non-A:orneyInves/gators– Anydifferentconsidera/ons?

EthicalRules

EthicalRules•  ModelRulesofProfessionalConduct

–  Rule1.13–Organiza/onasClient–  Rule1.2–ScopeofRepresenta/on–  Rule1.1–Competence–  Rule1.7–Conflicts–  Rule1.6–Confiden/ality–  Others

•  Rule2.1,Rule5.4–AdvisorandIndependence•  Rule3.7–LawyerasWitness•  Rule4.1–TruthfulnessinStatementstoOthers•  Rule5.3–Responsibili/esRegardingNon-LawyerAssistants

•  A:orney-ClientPrivilege/Work-ProductDoctrine

EthicalRules–OrganizingAnalysis•  Whoisinves/gatorworkingforandwith?

•  Organiza/onasClient(Rule1.13)•  Conflicts(Rules1.7)

•  Whatisinves/gatordoingandhowmuchautonomycan/shouldtherebe?•  Scope(Rule1.2)•  Independence(Rule5.4)

•  Whatcan/shouldinves/gatorsharebutkeepconfiden/al?•  Confiden/ality(Rule1.7)•  A:orney-ClientPrivilege/Work-ProductDoctrine

•  Whathelpcaninves/gatoruse?•  Competence(Rule1.1)•  Non-LawyerAssistants(Rule5.3)

•  Howdoesinves/gatorapproachandadvisewitnesses?•  Represented(Rule4.2)•  Non-Represented(Rule4.3)

Whoisinves/gatorworkingfor/with?

Organiza/onasaClient/Conflicts•  Rule1.13(a):Alawyeremployedorretainedbyanorganiza/on

representstheorganiza/onac/ngthroughitsdulyauthorizedcons/tuents.

•  Rule1.7–  Donotrepresentaclientiftherepresenta/oninvolvesaconcurrent

conflictofinterest.–  Aconcurrentconflictofinterestexistsif:thereisasignificantriskthat

therepresenta/onofoneormoreclientswillbemateriallylimitedbythelawyer’sresponsibili/estoanotherclient,aformerclientorathirdpersonorbyapersonalinterestofthelawyer.

–  “Consent”canusuallycureconflicts

Whoisinves/gatorworkingfor/with?•  KeyConcepts:

–  Employerasins/tu/onismyclient–  Don’tinves/gateifpersonallyconflicted/compromised

•  Notalwaysthateasy•  Consider:askedtoinves/gatecomplaintaboutcollegePresidentreceivedbyHRDirector,atsame/mePresidentseekingyouradvicetofireHRDirector

•  Consider:ini/alinves/ga/onoverseenbyBoardChair,butsheunexpectedlybecomesimplicatedinallegedmisconductorpoorini/alreac/ontoallega/ons

Whoisinves/gatorworkingfor/with?•  What“must”or“can”youdoifinternalconflictsdevelop?

–  Repor/ng“up”•  Rule1.13(b),(c):“must”reportviola/onoflegalobliga/on,crime,fraud,or

otherlegalobliga/ontohighestauthoritywithinclientthatcanact–  Repor/ng“out”

•  Rule1.13(c):ifinternalclientauthorityfailstoact,“can”reportoutsidetheorganiza/onwithoutviola/ngconfiden/ality(Rule1.6)

•  ONLYifreasonablybelieveorganiza/onlikelytosuffersubstan/alinjuryandrepor/ngoutnecessarytoavoid

•  Inves/ga/onExcep/on•  Rule1.13(d):repor/ng“out”discre/onruledoesnotapplyifinves/ga/ngthe

allegedcrime,fraud,orlegalviola/onthatcouldotherwisebereported

Illustra/on•  2parallelconcernstoevaluate

1.  EEO/HRprac/cesissue– Work-from-homepolicy–  Gender-basedunfairnessissue–  RaisedbyChiefFinancialOfficer,implicatesChiefOpera/ngOfficer

2.  Fraud/Embezzlementissue–  RaisedbyCOOandimplicatesCFO(maybeothers)–  Inflatedpricing,vendorwithownershipques/ons–  Billedtogovernmentcontract

Illustra/on•  Issue#1:ChiefFinancialOfficercomesbyGeneralCounsel’sofficetochat

lateFridayalernoon.–  ReportsthathehaslearnedthattheChiefOpera/ngOfficerisseekingto

improveefficiencybyimposingrestric/onsonwork-from-homeop/onsavailabletoallemployees,whichhashadnega/veimpactonemployeeswithnewchildren.

–  Evenworse,itseemsthepolicyisbeingenforcedunfairlyandmorestrictlyagainstfemaleemployees(includingtheCFO’sdaughter,whoworksinSales).

–  CFOtriedtotalktotheCOOaboutthisearlierintheweek,buttheyendeduparguing(they’vedislikedeachotherforyears),andCFOnowwantstheGCorsomein-housea:orneytoinves/gatethissitua/onandcorrectit.

Illustra/on•  GCalreadyhadplanstohaveadrinkwiththeCOOthatevening,sohefindsaway

tomen/onthetopicofwork-from-homepoliciesgenerallytotrytoinformallygetasenseoftheCOO’sposi/onwithoutdisclosinganything.

•  Issue#2:COOstaresbackattheGC,indicatesthatwhatshe’sabouttosaymustremaincompletelyconfiden/al,andstartstalkingbeforetheGCcansayaword.TheCOOexplains:

–  UncoveredwhatappearstobeembezzlementandfraudschemeledbytheCFO(“atleastthathigh”)rela/ngtooverchargedexpensesbilledtoandcollectedbythebusinessaspartofalargegovernmentcontract.

–  Phantomexpensesandskimmedprofitsareinvolved,whichseemstohavebeenachievedthroughexcessivepaymentstoavendor,whicharebilledtothegovernment.

–  COOhasheardthatcompanyleadership’sfamilymembersareinvestedinthevendortosomedegree,includingatleasttheCFOandpossiblytheCEO,thoughsheisnotsure.

Illustra/on•  COOwastryingtolearnabitmoreinformallyaboutthesitua/onbefore

confron/nganyone,byhavingherunderlingsputoutsomefeelerstopeopleinthefinancefunc/on.

–  ThinkstheCFOmayhaveheardaboutitbecauseshehadtheoddestdiscussionwiththeCFOaboutwork-from-homepolicychangeswithinthelastweekthathadpreviouslybeenunimportanttotheCFO.COOthinkstheconcernsareblownwayoutofpropor/on,thoughshehasheardthatsomeemployees(par/cularlysomefemaleemployeesinSales)maybeupsetbythechange.

•  Vendorissue:–  Unsureifthevendorissueisrealorhowhighitgoes,butdoesnotfeelrightkeepingthisto

herself.–  AsksGCifsheshouldfileaformalcomplaintinternally,putsomethinginwri/ng,etc.,butalso

expressesconcernaboutgeAngtheins/tu/onintroublewiththegovernment.•  COOsaysshehastoleaveforanotherengagement.

WhoIstheClient/AnyConflicts?Work-from-home: •  COOmaybetooinvolved,but

noten/relyclear•  CFOseemscompromisedby

daughter’sinterest•  DoesGC’sfriendshipwithCOO

createconflictforGC–or“percep/on”ofone?

(Rules1.13,1.7)

Fraud/embezzlement:•  CFOclearlyimplicated•  Governmentrepor/ng

poten/alcreatesmorecomplica/onsandpoten/alconflictsfornearlyeveryone

•  Boardinvolvementpoten/allynecessary???

WhoShouldInves/gate?Work-from-home: •  Conflict:needsomemeasureof

independence,perhapscompleteifinvolvementofCFO’sdaughterconsideredimportant

•  Competence:clearlyan“HR-relatedissue,”socouldinvolveHRpersonnel

•  Privileged:ifso,needa:orneytoconduct

•  Inside/External:either

(Rules1.1,1.6,1.7)

Fraud/embezzlement:•  Conflict:clearlyexists,

independenceandappearanceofindependenceCRITICAL

•  Competence:financialrabbitholescanbetricky

•  Privileged:ifso,needa:orneytoconduct

•  Inside/External:almostcertainlyoutsider,probablysomeonewith“gravitas”

WhoShouldDecideHowtoStructure?•  Howmany–combinedortwoseparateinves/ga/ons?

•  Whattype–privilegedornot?

•  Who:•  CEO•  GeneralCounsel•  Board

EthicalRules•  Whoisinves/gatorworkingforandwith?






ScopeofInves/ga/onandAutonomy•  Scope:

–  Rule1.2:Clientdeterminestheobjec/vesofrepresenta/on,andlawyerandclientconsultaboutthe“means”usedtopursuethoseobjec/ves

–  Clientdecideswhattoinves/gate,andlawyerdecideshow.•  Independence

–  Rule5.4(c)–lawyershallnotpermitclient(oranyonepayingbills)todirectprofessionaljudgment

–  Clientshouldnotdirectinves/ga/vejudgments

ScopeofInves/ga/on•  Veryimportantini/alstep•  Thinkcarefullyaboutwhodecidesandhowthatdecisionaboutscopeisdocumented

•  Canhelpdefineabsenceofconflictoriden/fywherepoten/alconflictsmayexistthatwillframemanycommunica/ons

•  Costimplica/onsalwayspresent•  Bereadytoadjustalongtheway

ScopeofInves/ga/onWork-from-home: •  En/reins/tu/on’spolicyand

prac/ce?Limittoprac/ceinSales?

•  Overwhat/meperiod?•  DefinescopebaseduponCFO

reportorfromfirst-handwitness(anemployeeimpacted)?

•  Whodecidesthescope?(CFO?COO?GC?Someoneelse?)

(Rule1.2)

Fraud/embezzlement:•  “Fraud”isdis/nctfrom“embezzlement.”•  Legal,ethical,publicrela/ons,andgov’t

repor/ngissues–reviewallofthemtogether?

•  BasescopesolelyonCOO’sreporttoGC?–  Startwithinves/ga/onastoscope?–  Whoperforms?

•  Whatarefederalrepor/ngorinves/ga/onobliga/ons,andcantheyhelpdeterminescope?

•  Whodecidesthescope?

EthicalRules–OrganizingAnalysis•  Whoisinves/gatorworkingforandwith?






Communica/ngabouttheInves/ga/on

Rule1.6–Confiden/alityofInforma/on•  (a)Alawyershallnotrevealinforma/onrela/ngtothe

representa/onofaclientunlesstheclientgivesinformedconsent,thedisclosureisimpliedlyauthorizedinordertocarryouttherepresenta/on...

•  (c)Alawyershallmakereasonableeffortstopreventtheinadvertentorunauthorizeddisclosureof,orunauthorizedaccessto,informa/onrela/ngtotherepresenta/onofaclient

•  Butagain...whois“theclient”?

A:orney-ClientPrivilege–BasicStandard

•  Protectscommunica/ons– Madeinconfidence– Betweenaclientandaclient’semployees– Andana:orneyac7ngasana9orney– Forthepurposeofobtaininglegaladvice

•  orseeking“legalservices”–recentCaliforniacase

A:orney-ClientPrivilege–Federal/UpjohnTest

•  Communica/onmadeatthedirec/onofemployee’ssupervisors–  Forpurposeofobtaininglegaladviceforemployer–  Informa/onneededtoprovidelegaladvice–  Concernsma:erswithinscopeofemployee’sdu/es–  Employeeknowscommunica/onismadetoenableemployertoobtainlegaladvice

–  Communica/onisintendedtobeconfiden/alandsuchconfiden/alityisnotwaivedbyemployer

A:orney-ClientPrivilege–StateLawTest•  “Controlgroup”test–Consolida7onCoalCo.V.Bucyrus-ErieCo.,89Ill.2d103

(1982)•  Protectscommunica/onsbetweendecisionmakersandthosewho

substan/allyinfluencecorporate/organiza/onaldecisions–  “topmanagementwhohavetheabilitytomakeafinaldecision”–  “whoseadvisoryroletotopmanagementinapar/cularareaissuchthatadecision

wouldnotnormallybemadewithouthisadviceoropinionandwhoseopinioninfactformsthebasisofanyfinaldecisionofthosewithactualauthority”

•  Caveats:–  Individualsuponwhomafinaldecisionmakermayrelyforsupplyinginforma/on

areNOTmembersofthecontrolgroup–  Focusisonactualdu/esorresponsibili/es,notjob/tles

A:orneyWorkProduct–Federal•  Documentsandtangiblethingspreparedinan/cipa/onofli/ga/onorfor

trial--byorforanotherpartyoritsrepresenta/ves(includingtheotherparty’sa:orney,consultant,surety,indemnitor,insurer,oragent)

•  Discoverable:–  ifpartyshowsithassubstan/alneedandcannotobtainsubstan/alequivalent

withoutunduehardship–  But:Mentalimpressions,conclusions,opinions,orlegaltheoriesofa:orney

orotherrepresenta/ve“concerningtheli/ga/on”neverdiscoverable•  Independentprivacyinterestofa:orneys•  Notwaivedbysharinginforma/onwithclient

A:orneyWorkProduct–State(IL)•  Narrowerthanfederalprivilege:limitedto“opinion”workproduct

•  Protectsana:orney’stheories,mentalimpressions,orli/ga/onplans

•  Knowyourstatelaw– Designsystemofcrea/ngdocumentswithinyourinves/ga/ontomaximizeprotec/ons

SandraT.E.v.SouthBerwynSchoolDist.100,600F.3d612(7thCir.2009)

•  Schoolboardretainedlawfirmtoconductinves/ga/onintoallegedsexualabusebyteacher•  Reviewcriminalcharges,inves/gateschool’sresponsetoallega/onsofsexualabuse,address

whetheranyemployeeshadfailedtocomplywithapplicablepoliciesorlegalobliga/ons,andanalyzetheeffec/venessoftheschool’sexis/ngcomplianceprocedures

•  Engagementle:erstatedthatlawfirmwasbeingretainedto“providelegalservicesinconnec/onwith”theinves/ga/on

•  Lawfirminterviewedmanycurrentandformeremployeesandsomethirdpar/esandpreparedmemorandaofthoseinterviews

•  Lawfirmdeliveredoralreportofthefindingsatclosedexecu/vesessionofschoolboardandsentawri:enexecu/vesummarydesignatedasana:orney-clientcommunica/onandworkproduct

What’sProtected?•  Verba/mwitnessstatements?•  Non-verba/mwitnessinterviewsummaries?•  A:orneymemorandathatincludecounsel’simpressionsofawitness?•  Informa/onregardinginterviewsconductedbyHRprofessional?Atcounsel’srequest?Aler

li/ga/onisfiled?(Carterv.CornellUniv.,173F.R.D.92(S.D.N.Y.1997))•  Doesitma:erifthewitnesshashadtheopportunitytoreviewandsign?•  Inves/ga/onreport?•  Communica/onsbetweeninves/gatorandcounsel?•  Counsel’scommentsregardingdralinves/ga/onreport?•  Documentscollectedduringinves/ga/on?•  Waiver

–  Failuretoassert–  Voluntarywaiver–  Inadvertentdisclosure

HowtoProtectPrivilege?•  Engagementle:er•  Warningstowitnesses•  Limitcircula/onofinterviewsummariesandreport•  Labelprivilegeddocumentsassuch•  Privilegelog•  Mo/ontoquash•  Appeal

–  Collateralorderdoctrine–  Contempt

ShouldInves/ga/onBePrivileged?Work-from-home: •  Yes

–  Unsureifresultwillfindproblemsand,ifso,whoisthesource

•  No–  Maywantresultasevidencetousein

poten/alli/ga/on–  Policies–probablyrequire

inves/ga/on•  Ques/on

–  CanthereportbyCFOthatstartsinves/ga/onitselfbeprivilegedanyway?

Fraud/embezzlement:•  Yes

–  Unsureifresultwillfindproblemsand,ifso,whoisthesource

–  Poten/alforpublicrela/onsissues,needtocontrolinforma/onflow

•  No–  Poten/alforfederalagencyrepor/ng

obliga/ons,needfortransparencyaboutinves/ga/vesteps

•  Ques/on–  Candecisionaboutscopebeprivileged,

evenifinves/ga/onitselfisnot?

IfIni/allyPrivileged,CouldItBePrudenttoPlantoWaiveIt?

Work-from-home: •  Preserveprivilegeunlessissueis

li/gated,thenplantouseinves/ga/onresult

•  Becarefulthata:orneyinvolvedwithinves/ga/onorwhoreceivesresultscanlimitwaiverfromspreadingintorelatedsubjects

•  Hardtocontrol–maynotbeworthriskofbroadwaiverhereiflikelytoneedtodefendli/ga/on

Fraud/embezzlement:•  Fraud–ifrepor/ngobliga/ons

applytoeventualfindingsifsubstan/ated,mayknowthatprivilegewaiverispossible.

•  Embezzlement–“facts”revealingstolenfundsmaybeobjec/ve,socoulduseforemploymentdecisionsevenifprivilegedwithoutwaiver?

Confiden/ality–InternalRepor/ngExpecta/ons

•  CRITICALatoutset•  EstablishescredibilityofInves/ga/on•  Preservesprivilege•  Avoidsconflicts

•  SmallgrouptomanageInves/gatorusuallybest(“embodimentofTheClient”)

•  Sufficientauthority(cloakinves/gatorwithhigh-levelsupport)•  Provideins/tu/onalknowledge•  Helpdecideinterimpersonnel/policyadjustments•  Helpdetermineevolvingscopeofinves/ga/on

•  ShouldNOTbeleaderofimplicatedgroup

(Rules1.6,1.7,1.13)

Confiden/ality–InternalRepor/ngExpecta/ons

•  WhattoreportasInves/ga/onunfolds•  Overviewoffacts•  Informa/onthatimpactsscope(Rule1.2)•  Informa/onthatmayrequireinterimadjustments•  NOT–conclusions,recommenda/ons

•  “Summary”reportbeforeFinalReport?•  Canhelpdeterminelevelofdetailneededwithclientinput•  Canhelpcontaincost•  SHOULDNOTINFLUENCEconclusionsorrecommenda/ons(Rule5.4)

Confiden/ality–InternalRepor/ng?Work-from-home: •  InternalManagementTeam

–  GC–  HRhead–  CEO?

•  Whatreportalongtheway?–  Employeecomplaints?–  Poten/alsolu/ons?

•  InterimConclusions–  Genderbiaspossible?–  NeedtoexpandbeyondSales?

(Rule1.6,5.4)

Fraud/embezzlement:•  InternalManagementTeam

–  CEO–  MaybeGC(ifprivileged)

•  Whatreportalongtheway?–  Vendorownershipfacts–  Embezzlementbasics–  CEOimplicated?Others?

•  InterimConclusions–  Sufficientevidenceforrepor/ngto

government?–  Anypoten/alwhistleblowers?







Whathelpcaninves/gatoruse?•  Competence:

–  Rule1.1:Competentrepresenta/onrequiresthelegalknowledge,skill,thoroughnessandprepara/onreasonablynecessaryfortherepresenta/on

–  Comments:•  Exper/semayberequired•  Inves/gatorcanlearnanewarea

•  Non-LawyerAssistance:–  Rule5.3–canuseconsultantshiredbythelawyer,buthavedutytosupervise

WhoInves/gates–“Consultant”too?•  Alwaysatleastconsider

•  Canbeprivileged(evenifnota:orney)

•  Limitedsubjectma:er?•  Canbeessen/al•  Notalwayscostly

(Rule5.3)

WhoInves/gates–“Consultant”too?

•  Forensicanalysis–  Technology–  Physicalevidence

•  Partofthe“scope”decisionat/mes

(Rule5.3)







WitnessCommunica/ons•  Rule4.2–representedbycounsel

–  ...alawyershallnotcommunicateaboutthesubjectoftherepresenta/onwithapersonthelawyerknowstoberepresentedbyanotherlawyerinthema:er,unlessthelawyerhastheconsentoftheotherlawyerorisauthorizedtodosobylaworacourtorder

•  Rule4.3–unrepresentedperson–  Lawyershouldnotclaimtobedisinterested.–  Lawyermustmakeeffortstocommunicateherrole.–  Lawyer’sonlylegaladviceshouldbetosecurecounsel.

Inves/ga/on–ThingsChange•  Bepreparedtoreviewvariousethicalconsidera/onsalongtheway

•  PreparetheInternalManagementTeamforthisprobabilityinadvance

Inves/ga/on–Update•  Work-from-homeInves/ga/on:•  Inves/gatedbyoutside,non-lawyerunderdirec/onofDeputyGeneralCounsel.

–  Learnfromhigh-levelmanagersfrom95%ofthecompany(morethanhalfwomen)thattherearenoproblemswiththenewpolicy,ithasbeenimplementedappropriatelyandequallywithregardtomaleandfemaleemployees.Documenta/onaboutdaysoffforthosegroupsofemployeesbacksupthemanagers’perspec/ve.

–  Oneroguemanager(Sales)withmostlyfemaleemployeesrepor/ngtohimhadbeenopera/ngunderastricterversionofhowhethoughtthepolicyshouldbeimplemented.TheCFO’sdaughterworksinthatarea.Salesmanagerisalsopronetomakingsexistremarks,includingabouthowpeoplecomplainedaboutthestricterwork-from-homepolicy.

•  TheInves/gatorandDeputyGeneralCounselpreparedareportoftheirresults,includingtheirdirec/ontotheroguemanagertocomplywithhowthepolicyisimplementedbytheother95%ofthecompany’smanagers.Theyplantofollowupwith10employeeswhowereinterviewedinthenext30-60daystoensurecompliance.

Work-From-HomeQues/ons•  IfRogueManagerorCFO’sdaughtersoughtowna:orneyfor

interview:•  Howdealwithsuchrequest?•  Doesitma:erInves/gatorisnota:orney?

•  ShouldCFObeallowedtoseefinalreport?•  IftheRogueManager’s“sexistremarks”warrantdiscipline,who

shoulddecide?•  Inves/ga/onManagementGroup?•  HisDirectSupervisor(evenifthatistheCOO)?

(Rules1.6,1.13,4.2.4.3)

Inves/ga/on–Update•  Fraud/EmbezzlementIssue:

–  2ndInves/gatorhiredforprivilegedreview–  ReportstogroupcomprisedofGCandCEO–  Externalinves/gatorhiresanaccountanttoreviewtransac/onswithandrela/ngtothevendor,focusingonthedocumentandfinancialtrail,withresultsbeingsharedonlywiththeExternalInves/gator.

Ques/onsFraud/EmbezzlementIssue:•  GCfacilitatesini/alintroduc/onofExternalInves/gatortotheCFObye-

mail,withoutexplainingwhatthescopeoftheissueunderreviewwillbe.–  CFOcallstoaskGCwhoelsewillbea:endingthemee/ng,whetherhehas

anypersonalrisk,andwhetherCFOneedstofindana:orney–  GCthenexplainsthatthereisallega/onoffraudandembezzlementbutdoes

notexplainanydetails–  CFOsayshewillonlymeetifhecanbringhisownlawyerandwantsthe

ins/tu/ontopayforthata:orney’s/me•  ShouldGChavedoneanythingdifferently?

(Rules4.1,4.2,4.3)

Confiden/ality–Repor/ng“Up”or“Out”Work-fromhome:

•  Inves/ga/onrevealsthatpolicyhasbeenimplementedunfairlyandrecommendschanges

•  COOrefuses,sayingitwillcosttoomuch•  CEOagrees

•  Whatdoyoudonow?

(Rule1.13)

Confiden/ality–Repor/ng“Up”or“Out”Embezzlement:

•  Inves/ga/onrevealsthatfundswereimproperlypaidinwaysthatharmedthecompany,butnoharmtoanythirdparty

•  CEOisembarrassed,wantstosweepthisundertherug,nottelltheBoard

•  Whatdoyoudonow?(Rule1.13)

Confiden/ality–Repor/ng“Up”or“Out”Fraud:

•  Inves/ga/onrevealsthatfederalgovernmentwasverylikelydefrauded

•  CEOisnotinterestedinrepor/ngbutpreferstostopworkingwiththevendor,eliminateanyissuesmovingforward

•  Whatdoyoudonow?

(Rule1.13)

Ques/ons?