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Internal investigations: No longer optional

  • February 09, 2012

What common thread binds a college football team, a media empire and a pharmaceutical company?

  • In November 2011, News Corporation CEO James Murdoch was called back to testify before British Parliament a second time to face accusations that he lied about when he became aware of illegal activities committed by News Corp's reporters. Murdoch then admitted he had seen a "smoking gun" email as early as 2008, long before the scandal became public in July of 2011. Although News Corp executives appear to have been aware of the illegal activities, they either did not investigate them thoroughly enough, condoned them or covered them up. News Corp has removed Murdoch and his father, Rupert, as News Corp executives, shut down its News of the World tabloid and paid millions to settle claims by victims of a cell phone voice mail hacking scandal. Several executives have been arrested.
  • In March of 2011, Ohio State's head football coach Jim Tressel admitted during a press conference that he had been aware of NCAA rules violations committed by his players nine months before the school learned of them from another source. Rather than elevating the issue to compliance counsel and launching a formal investigation in a timely manner, Tressel is alleged to have covered up the violations in order to protect his players. This decision has resulted in continued violations, suspensions of players, loss of scholarships, loss of bowl eligibility, loss of reputation and ultimately the loss of Tressel's job.
  • In July 2011, the U.S. Food and Drug Administration launched a formal investigation into Cetero Research, Inc. for allegedly falsifying research results used by numerous drug manufacturers. Although Cetero had conducted an internal investigation, it only did so two years after concerns were raised to senior management by a whistleblower. The FDA specifically cited the inadequacy of scope and the late timing of the internal investigation as the reason that over four years worth of Cetero's data was suspect (the four years was recently reduced to two). Cetero's reputation has been severely tarnished and may expose the company and its officers to civil, regulatory and criminal liability.

In all three instances, had the entities conducted a timely and thorough internal investigation upon learning of the allegations, each might have been spared enormous legal costs, potential civil, criminal and regulatory penalties and reputational risk.

Federal law rewards whistleblowers.   Under the newly-minted Dodd-Frank Act (effective as of August 12, 2011), insiders who report securities violations receive from 10-30% of the government's recovery from the company.  In the first seven weeks that Dodd-Frank was in effect, the SEC received 334 whistleblower tips.  Whistleblower - initiated qui tam lawsuits are also on the rise, particularly in the health care and defense industries.  Therefore, it  is more important than ever that companies investigate and address allegations of wrongdoing that may be reported to the government by insiders.

What prompts an investigation? There are many reasons that companies decide to conduct internal investigations.  Although each allegation of wrongdoing has its own unique characteristics, certain factors weigh in favor of investigation.  A few examples are:

  • Anticipated Lawsuit or Government Investigation:  Conducting an internal investigation prior to a lawsuit or governmental investigation allows a company to learn the facts of the case before an opposing party and take appropriate corrective action. 
  • Suspected Criminal or Regulatory Violations:  An internal investigation can help management determine whether it should file a voluntary disclosure or help the company respond to any existing government investigation.
  • Media Reports of Wrongdoing:  An internal investigation can provide the company with the tools to respond to incorrect or misleading media reports.
  • Reporting Requirements:  Certain regulatory and criminal statutes mandate reporting to law enforcement of particular activities of employees unrelated to their employment.  An internal investigation can help ensure accurate reporting, thereby avoiding defamation actions by suspected employees.
  • Crimes Against the Company:  Companies should consider investigating when employees are alleged to have committed crimes against the company, such as embezzlement.
  • Allegations Against Others in the Same Industry:  Government agencies often investigate entire industries when one or more participants are alleged to have committed illegal practices. 

Why investigate? There are many reasons to investigate:

  • Failure to investigate can lead to criminal sanctions, civil lawsuits and even bolster a claim of "willful" behavior. 
  • A quick and thorough investigation may garner more lenient treatment from investigating agencies.
  • Public perception often weighs in favor of a swift response to public allegations of wrongdoing
  • Investigations help identify problems within an organization, determine whether wrongdoing has occurred and prevent future wrongdoing.
  • Investigations help gather information for responses to the government, provide legal defenses to lawsuits and government investigations and minimize liability.
  • Investigations provide companies with the factual basis to determine whether disclosure of employees' behavior to law enforcement or other government agencies is necessary or warranted.

Please contact our Government Investigations Team with any questions that you may have regarding whether an internal investigation makes sense for your company.

Richard S. Glaser, Jr. - Group Leader