X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
The collapse of Enron Corp. was such a seismic event that every major American corporation and accounting firm has, or undoubtedly will, re-evaluate its corporate governance, financial disclosure and/or auditing policies. The legal profession has been slower to assess the implications of the Enron scandal for lawyers. Such an assessment appears unavoidable because the conduct of both outside and in-house attorneys has been questioned in connection with Enron’s collapse. “The Report of the Special Investigative Committee of the Board of Directors of Enron Corporation” criticized a law firm that conducted an internal investigation of Enron’s accounting practices and, just months before Enron imploded in a firestorm of public outrage, reported that it found no substantive problems in those practices. The media and congressional investigators, among others, focused on an in-house attorney at Enron’s accounting firm because the attorney had written to Enron’s auditors reminding them of the accounting firm’s document-destruction policy. Subsequently, the recipients destroyed documents relating to Enron audits and later claimed that they were following the advice of the in-house attorney. Enron is a reminder that internal investigations are like running an obstacle course on a minefield. As a result of Enron, any law firm engaged in an internal investigation will have to balance more carefully than ever a variety of competing considerations against a background of vaguely framed ethical rules. Lawyers will have to re-evaluate document destruction in light of its potential to invite charges of obstruction of justice. Here is a list of questions that in-house counsel and law firms should be asking themselves as they conduct internal investigations and administer or give advice on document destruction. INTERNAL INVESTIGATIONS 1. Have I adequately defined the scope of the investigation? At the outset, the lawyer and the organization must agree on the scope of the investigation, that is, what the lawyer is authorized and expected to investigate. The lawyer should seek authority sufficient to conduct a credible and competent investigation of the issue troubling the organization. The agreement on the scope of the investigation should be memorialized in a writing executed by both lawyer and organization. Internal investigations need defined boundaries because they are not fishing expeditions, but lawyers must be careful not to accept limits that preclude them from performing the agreed task competently and thoroughly. Above all, the outside lawyer should take pains to ensure that the results of the investigation are not predetermined by the investigation’s scope and methodology. The duty to represent a client zealously is no less applicable in an internal investigation than in litigation. In negotiating the scope of investigation, the lawyer can explain to the organization’s representative that an internal investigation which lacks credibility because of too many restrictions will cause as many problems as the failure to conduct one at all. 2. Have I done a conflicts check? Conflicts check in this sense does not simply mean the standard check for adversity between two or more of the law firm’s clients. Part of the controversy over the Enron internal investigation is that the law firm had some involvement with the financial transactions that were being investigated. From the organization’s perspective, there are good reasons for using a longtime outside law firm to conduct an internal investigation. Familiarity with the organization and the matters under investigation will allow the firm to conduct a more efficient and speedier investigation than if it had no prior relationship. In light of the Enron controversy, however, both the organization and law firm will have to proceed cautiously if the investigation may include matters on which the law firm has previously provided legal advice. Here, the ethical rules create a dilemma. Rule 1.7 of the Model Rules of Professional Responsibility governs conflicts of interest in general. Rule 1.7 (b) states that a “lawyer shall not represent a client if the representation of that client may be materially limited by � the lawyer’s own interests” unless the lawyer reasonably believes that the representation will not be adversely affected and the client consents after consultation. “Client” in this case is the organization, which the lawyer represents as an entity distinct from its directors, officers, or employees. SeeRule 1.13 (a) (“Organization(s) as Client(s)”) (an attorney “represents the organization acting through its duly authorized constituents.”); see alsoNew Jersey Rules of Professional Conduct 1.13 (a) (2000 version) (organization’s lawyers are deemed to represent not only the organizational entity but also the members of its litigation control group, who are defined to include agents or employees with responsibility for defining the organization’s legal position). The Comment to Model Rule 1.7 states that loyalty to a client is impaired when “a lawyer cannot consider, recommend or carry out an appropriate course of action for the client because of the lawyer’s other responsibilities or interests.” The Comment then states that the “critical questions” are the “likelihood that a conflict will eventuate” and, if it does, “whether it will materially interfere with the lawyer’s independent professional judgment in considering alternatives or foreclose courses of action that reasonably should be pursued on behalf of the client.” Thus, before even conducting an investigation, the outside firm must form a judgment as to whether the nature of its prior legal work for the organization may become of sufficient concern during the investigation as to materially interfere with the outside firm’s independent professional judgment. In effect, the law firm must second-guess its own legal work in light of the circumstances giving rise to the investigation, a near superhuman task. Indeed, by advising the client that the nature of its prior work may give rise to a conflict of interest, the law firm risks leaving an impression that its legal work was flawed. Nonetheless, the ethical rules require such second-guessing, and discretion for a law firm may be the better part of valor. The firm must carefully consider the nature and extent of its prior work for the organization and the likelihood that its legal work could be at issue in the investigation or any resulting proceedings. In every internal investigation, the investigating lawyer must bring a critical eye to the information he receives from potentially self-interested officers or employees; here, relevant information may need to come from the investigator’s own law partners. Even if the firm initially concludes that its prior legal work would not adversely affect the internal investigation, the law firm must continually re-evaluate the nature and extent of any limitations on the investigation resulting from the prior work. If facts emerge such that an objective, reasonable attorney would conclude that his judgment may be materially affected, then the ethical rules require him to terminate the representation. SeeGeoffrey C. Hazard & W. William Hodes, “The Law of Lawyering,” 11.8 at 11-25 (3d ed. Supp. 2002); seeUtah Bar Ethics Advisory Opinion No. 99-05 (July 30, 1999). 3. Do I have all the necessary expertise to conduct the investigation? A lawyer has a duty to represent his client competently. The duty necessarily requires that the lawyer not undertake a representation unless he has the legal skills and experience necessary to meet the client’s specific needs and obtains assistance from experts in relevant nonlegal fields. In an increasingly complex world where legal judgments depend on a firm grasp of business, financial and accounting concepts, a lawyer conducting an internal investigation must have available competent and disinterested experts. DOCUMENT-DESTRUCTION POLICIES 1. Does my document-destruction policy protect the organization from obstruction of justice charges? After Enron, document-destruction policies must contain “fail safe” procedures that will ensure that document destruction is halted once administrative, congressional or judicial proceedings have begun, even if no subpoenas have been issued to the organization. Sec. 1503 of Title 18 makes it a felony for anyone to corruptly influence or “endeavor to influence” the administration of justice, which is defined to include a pending judicial proceeding — such as a grand jury investigation. Courts have held that an obstruction of justice is committed when documents are destroyed by employees who were aware of grand jury proceedings and feared that the grand jury would seek the documents that were destroyed, even though the organization had yet to receive any grand jury subpoenas. See U.S. v. Gravely, 840 F.2d 1156 (1988) (“the documents do not have to be under subpoena if the defendant is aware that a grand jury will likely seek the documents in its investigation”). Sec. 1505 of Title 18 essentially follows � 1503 except that it applies to administrative and congressional proceedings, including investigative ones. Therefore, a document-destruction policy must ensure that destruction is halted as soon as the organization receives notice of a judicial, administrative or congressional proceeding that might conceivably seek the organization’s documents otherwise slated for destruction. This requires centralized procedures for employees to sound the alarm as soon as any investigation or proceeding comes to their attention, and then a means for the organization’s counsel to rapidly halt destruction of documents that might conceivably be sought by investigators. 2. Have I clearly communicated the document-destruction policy to employees? Attorneys advising organizations on document destruction should assume that employees will destroy documents unless specifically instructed otherwise. Most employees probably believe that, if investigators have not yet subpoenaed the documents, then they are free to destroy them. Therefore, the organization’s attorney, having learned of a proceeding involving the organization, must communicate in clear language that any document destruction must immediately halt until further notice in writing from an appropriate official, take appropriate steps to secure and safeguard documents relevant to the proceeding, and immediately remove from the premises any employee who is unwilling to follow, or violates, the direction to preserve documents. The communication must clearly list the categories of documents to be preserved and convey the seriousness of failure to comply with the non-destruct directive. 3. Have I safeguarded the documents? The documents should then be retrieved by at least two persons, or teams of two, one of whom should be an attorney, and maintained in a secure location. Consideration must be given to electronic files, documents in off-site storage locations, and documents at both domestic and foreign branches and subsidiaries. The limitations on destruction of documents are quite clearly set out in the federal criminal code, but no such concrete rules exist to guide attorneys in defining the scope of an internal investigation or evaluating conflicts under Rule 1.7. Since there are remarkably few ethics opinions addressing conflicts in internal investigations, the investigating attorney is usually left to rely on his instincts and common sense. Given the importance of internal investigations to troubled organizations, their directors, officers and employees, and investors, it would be worthwhile for the American Bar Association, and other relevant supervisory bodies, to address these issues expressly in guidelines for the conduct of internal investigations. Gregory J. Wallance ( [email protected]), a former federal prosecutor in the Eastern District of New York, is a partner at Kaye Scholer in New York, www.kayescholer.com/hires_index.html, and a member of the recently formed Ad Hoc Advisory Committee to the U.S. Sentencing Commission on the Organizational Sentencing Guidelines. He gratefully acknowledges the assistance of Anthony Michael, a first-year associate at Kaye Scholer.

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.