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With an unprecedented wave of scandal plaguing corporate America, the hunt is on for further evidence of mischief and misconduct by top business executives, currently emerging as the nation’s new favorite bad guys. So where are the detectives? Of course, government investigators are on the case, but the large private investigations agencies that gained prominence in the 1980s working side by side with law firms to conduct internal investigations of insider trading and other corporate misconduct now seem curiously absent. They are still at it, say the heads of major investigative outfits, but their roles are changing as many law firms, facing a downturn in corporate practices, are carving out a larger investigative role for themselves and a more specialized one for the detectives. Despite the scandal-ridden environment, Jules B. Kroll, whose Kroll Inc. investigation company is by far the largest in the world and has worked with virtually all major law firms, said white-collar criminal investigations — what he called “the classic Kroll investigations” — are a declining portion of his firm’s business. In recent years, the firm’s investigative group had been focused largely on due diligence work on corporate transactions, the dearth of which has not been remedied by internal investigations work. That many law firms now see a market opportunity in such investigations is not lost on Kroll. “There are times when we overlap,” Kroll said of his agency and the law firms seeking investigative work. “There are also times when [law] firms want to keep all the bills internally and keep all the money.” The downturn in transactional work, he said, has driven some firms — particularly the increasingly prevalent national megafirms — to cut investigators out of the process. “They have thousands of people to keep busy,” he said. The international scale of these firms, he noted, also means they rely less on the global reach of a company like Kroll, which has 2,000 employees in 60 offices around the world. Corporations typically hire law firms to spearhead internal investigations. In their conduct of such investigations, lawyers bring to the table legal expertise and the protections of attorney-client privilege. Law firms then decide whether or not to hire an investigative agency, and what role that agency will play. Terry Lenzner, the head of Washington, D.C.-based Investigative Group International (IGI), said his firm is the busiest it has been in almost a decade. IGI has previously worked on corporate investigations with Wilmer, Cutler & Pickering, the Washington, D.C., firm leading internal probes in the Enron, WorldCom and Tyco matters, among others. He said IGI is currently working on matters with Wilmer Cutler, though he declined to specify the nature of the investigations. HIGH-PROFILE PROBES However, Lenzner said lawyers are less inclined these days to call upon investigators for high-profile work like conducting interviews. Even when they do, he said, difficulties can arise because lawyers frequently do not share useful and pertinent information. The high-profile nature of today’s corporate scandals, he said, has made some lawyers directing investigations both eager to take the credit and nervous about entrusting nonlawyers with highly sensitive information. “There is a tendency for them to draw a line between what the lawyers do and what the investigators do,” said Lenzner. That trend is unfortunate, he noted, given the vast experience of many nonlawyer investigators, who are often former senior law enforcement officials and frequently former lawyers themselves. Of course, most of the lawyers now leading major corporate investigations possess significant law enforcement backgrounds, whether from stints at U.S. Attorney’s Offices, the Securities and Exchange Commission, the U.S. Department of Justice or elsewhere. Indeed, such government experience has become highly prized in the market for lateral partners. “You have to understand the kinds of conclusions that might be drawn or the response a U.S. Attorney might have to certain kinds of events,” said Gregory Wallance, a litigation partner at New York’s Kaye Scholer and a former assistant U.S. Attorney in the Eastern District. Litigators whose sole experience is in commercial disputes are not well-qualified to make these judgments, said Wallance, but neither are nonlawyer investigators. “Investigators can be invaluable,” he said, “but they can never supplant lawyers.” Still, a former U.S. Attorney relying on a platoon of junior litigation associates is hardly in the same position as an active federal prosecutor working with a team of veteran FBI agents, said Tom Sterner, the head of investigations in the New York office of London-based Control Risks Group, another large investigative firm. “There are different skills of intelligence-gathering and knowing how to conduct an interview,” he said. ARKIN GROUP New York defense attorney Stanley S. Arkin is a strong believer in the proposition that specialized investigative and intelligence-gathering expertise can add enormous value to a law firm’s ability to help its clients. To that end, Arkin, the senior partner of Arkin Kaplan & Cohen, co-founded in 2000 the Arkin Group, an investigations and intelligence outfit, with Jack Devine, a former associate director of the Central Intelligence Agency’s directorate of operations. “In many fights, getting that extra piece of information can be of great use,” said Arkin. “That kind of tradecraft doesn’t necessarily inhere within a law firm.” Though it is a stand-alone operation, the Arkin Group performs about a third of its work for Arkin’s law firm. Arkin is emphatic that the Arkin Group is devoted solely to state-of-the-art intelligence-gathering and analysis, making use of a far-flung network of contacts, as opposed to what he called the “Wal-Mart” detective agencies, which offer a broad range of services. Indeed, the larger investigative firms are now seeking the greatest growth in the provision of specialized technical services that law firms do not have the capacity to provide. FORENSIC ACCOUNTING At Kroll, security consulting has been booming since Sept. 11, but the corporate scandal wave has particularly boosted the company’s computer and accounting forensics groups, which are quickly becoming the cornerstones of the detective agency’s operations. Kroll has quietly been building one of the largest forensic accounting practices in the world. The group’s 430 staff accountants, many recently hired from beleaguered Arthur Andersen, now represent the single largest group within Kroll. Forensic accounting work is still dominated by the remaining Big Four accounting firms, but Kroll predicts conflicts will eventually drive more business to his firm and to smaller accounting firms. Computer forensics is another area where Kroll has been building strength. In April, the company acquired Ontrack Data International, a Minneapolis-based data recovery and electronic discovery service, for $140 million. In laboratories in Minneapolis, New York and elsewhere, Kroll technicians maintain a veritable museum of computers — from ancient Kaypros to brand-new Compaqs — to retrieve information secreted on various hard drives. It is largely due to demand for such services that Kroll is returning to profitability after a couple of tough years following an unsuccessful merger with an armored car and security company. Wallance said the ability to provide such direct litigation support would ensure a continuing role for professional investigators. When it comes to directing investigations, Wallance said, there is broad confusion about how internal investigations should be conducted, starting with the lawyers themselves. Wallance has urged the American Bar Association to promulgate guidelines for how internal corporate investigations should be conducted, especially now that so many are under way and so many law firms want to get into the business. However, he cautioned against overstating the value of this practice area for law firms, noting that the inordinate activity in this area was not good for law firms’ economic health in the long run. “Is this going to be a substitute for M&A?” he asked. “Lord help us if that’s the case.”

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