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At a time when hundreds of corporations are conducting or considering conducting internal corporate investigations into stock option backdating and other problems, it is appropriate to consider the “do’s” and “don’ts” of such investigations. The Hewlett- Packard investigation towers over the landscape as a singular example of how not to conduct an internal investigation. The H-P internal investigation achieved the dubious distinction of being simultaneously too independent and not independent enough. It was too independent in letting the private investigators operate without sufficient supervision. It was not independent enough in failing to hire outside legal counsel with no previous ties to H-P. It is not at all unusual when conducting internal investigations to seek nonlegal professional assistance from forensic accountants, computer experts, e-mail reviewers and private investigators. Any of these professionals are capable of crossing any number of legal lines if they are not closely supervised. Obtaining personal phone records by pretexting crosses any and all legal lines. It will not be an acceptable answer for H-P officials to say that they merely told the investigators what information they wanted, and that how the investigators obtained it was none of the their business. Once they hired the investigators and told them what information they wanted, the H-P officials became responsible for the investigators’ actions. Looking the other way is not a viable defense. Using multiple layers of investigators is evidence that you knew that their actions were illegal and that you were trying to distance yourself from the illegality. This does not come close to plausible deniability. An alternative explanation is that the H-P officials knew exactly what the investigators were doing and may have even directed their actions. If that is the case, the outlook for them is truly bleak. While the investigators cannot be allowed to be too independent, the outside counsel must be truly independent of the company being investigated. Reportedly, legal counsel for the H-P investigation was its principal outside law firm. It is hard to imagine a lawyer being independent or unbiased toward a client that pays his firm millions of dollars a year in fees. Companies hiring outside counsel to conduct an internal corporate investigation should retain a firm that has done no previous work for the company and that does not aspire to do work for it in the future. It is also preferable that the outside counsel have qualifications for his role, such as being a former state or federal prosecutor. Company officials often fear the independence of such an outside counsel. She may well advise the company that it should fire some or all of its top officials. Nonetheless, it is that very independence that causes courts and prosecutors to give credibility to the recommendations of such an outside counsel. These two major shortcomings in the structure of the H-P investigation undoubtedly contributed to the other problems. The tactics of the investigators so completely polluted the investigative process that any evidence they did uncover was completely unusable. One can imagine the following conversation: Director One: “I know you leaked confidential information to the media.” Director Two: “I deny that, and what is the source of your information?” Director One: “I can’t tell you that, but I think you should resign.” Director Two: “You must be joking. I am not going to resign because of an unsubstantiated allegation.” A proper internal investigation can be very useful, although painful and expensive. It can be part of a defense to shareholder derivative suits. It can help position the company to deal with law enforcement. However, when a company breaks all the rules of internal investigations-which it appears H-P probably did-the investigation will likely exacerbate the problem rather than resolve it. Dan Hedges is a partner at Houston-based Porter & Hedges. He is a former U.S. attorney for the Southern District of Texas and has conducted several internal corporate and governmental investigations. He has also written and spoken on the subject previously.

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