Watching Your Step: Avoiding the Pitfalls and Perils of Corporate Internal Investigations

Lucian E. Dervan, Belmont University - College of Law
Paul B. Murphy


Since the creation of the Corporate Fraud Task Force in July 2002, the United States Department of Justice and the other member agencies have worked feverishly to ferret out corporate crime and punish wrongdoers. The Task Force, in the three years following the announcement of its formation by President Bush, has instituted hundreds of investigations, secured over five hundred corporate fraud convictions or guilty pleas, and charged over nine hundred defendants. Not to be outdone by federal law enforcement authorities, some state attorneys general have followed suit, pursuing their own well-publicized probes of corporate practices. The stakes in these investigations are enormously high, not just for the individuals whose conduct comes under review, but also for the corporations themselves. Corporations risk substantial criminal fines and civil penalties, and they often must endure a host of investigation-related side effects such as a disruption of business and a diminution of market capitalization. The severity of these consequences, and the ease with which criminal liability can attach to an organization for the acts of employees within the scope of their authority, means that no responsible company can afford to ignore suspected wrongdoing within its ranks. The government’s new focus on corporate America, in turn, has generated a sharp increase in the number of internal investigations. Today, perhaps more than ever, internal investigations are an integral part of the business landscape. In general, a corporation will undertake an internal investigation for one of two reasons. First, an internal investigation may be launched in response to a government inquiry, such as a grand jury subpoena or a letter of informal inquiry by the Securities and Exchange Commission (“SEC”). Second, a corporation may initiate an investigation to address an issue brought to its attention through internal means, such as an allegation of wrongdoing by an employee of the company or an issue identified by the company’s external auditor. As a result of the Sarbanes-Oxley Act of 2002 and the obligations that it imposes on public corporations, these internally-sparked investigations have increased dramatically in the post-Enron business climate, so much so that “internal investigation attorneys are becoming a dreaded necessity for a growing number of public companies.” Regardless of the event that triggers an internal investigation, attorneys engaged to handle this kind of matter for a corporation often confront complex issues unique to this practice area. To navigate these issues successfully requires a basic understanding of the ways in which missteps by counsel can compound the client’s problems and potentially undermine the engagement. This article offers certain key points to keep in mind when conducting an internal investigation, the consideration of which will better prepare counsel for the challenges that may surface and the pitfalls and perils that could lead to problems for both client and attorney.