A current corruption investigation being conducted by state prosecutors in New Jersey is producing two unintended results. The first highlights the potential for misuse and the manipulation of the internal investigation process in order to benefit a client. The second indicates how even the appearance of a conflict of interest should be avoided in the conducting of internal investigations.
There is no doubt that the business of conducting internal investigations has become a very lucrative practice area for law and consulting firms. Virtually every large- or medium-size firm has added corporate internal investigations as a practice area.
At the first sign that an internal problem has reached the potential to become a very public scandal, many organizations make a very public demonstration of announcing that they have commissioned an internal investigation. The organization then calls a press conference and announces that the investigation will be fair and balanced, and to ensure that result, the internal investigation will be conducted by a very well-known firm using a team of former prosecutors, or by a respected former public official.
Given their importance, corporate internal investigations have the potential to generate fees in the millions of dollars. Even a relatively minor internal investigation can generate $500,000 in fees. Profits can be further increased through manipulation. As one senior partner of a prominent law firm stated at a corporate governance seminar, their "internal investigations are conducted exclusively by fourth-year associates and paralegals" while strongly hinting the work was billed at a partner's hourly rate.
When dealing with profit margins of this magnitude the temptation to "tweak" a report in favor of a client is significant. Unfortunately some investigative reports that have been produced on a client's behalf while having the length of War and Peace, in reality have the substance of Alice in Wonderland.
What is particularly troubling is that while the companies that conduct legal training seminars are quick to promote the benefits of internal investigations, they are relatively silent on their potential for abuse.
Morrison & Foerster LLP did publish a very detailed white paper on this subject in 2008 entitled Ethics of Internal Investigations. In their report Morrison highlighted several examples of improperly conducted corporate internal investigations including:
- "The Arthur Anderson federal criminal trial, the now (in) famous Vinson & Elkins Report on the Sheron Wakins allegations at Enron was termed a 'whitewash'."
There is no easy way to conduct internal investigations. History is replete with examples of internal investigations more reflective of Inspector Clouseau than those conducted by professionals. In May of this year, the law firm of Brooks Pierce published an article entitled "Keeping Internal Investigations Independent and Conflict-Free." In the article they cite the Le-Nature, Inc., criminal prosecution. In describing the company conducted internal investigation they stated, "The scheme was missed by an internal investigation that was hopelessly conflicted and had no real chance of identifying the financial irregularities that ultimately sank the company."
In 2011, the Newark Star-Ledger started a far-reaching investigative report on the administration of the school lunch program by the Elizabeth, New Jersey Board of Education, an organization which allegedly is no stranger to allegations of corruption and improper political influence. With all the allegations of corruption and misconduct emanating from their actions, some have likened the Board to a racketeering enterprise rather than an educational organization.
The Star-Ledger's investigative reporting uncovered significant examples of improper conduct ranging from nepotism, conflict of interest, cronyism and fraud. Among the Star-Ledger's findings was the example of the Board of Education president having been charged with fraudulently manipulating the free school lunch program to allow her children to obtain free lunches.
The Elizabeth BOE maintains a history of arrogance and flexible ethical principles. How the Board chose to address their latest scandal typifies this arrogance. While the government investigation was ongoing and school records were under subpoena, another Board member was allegedly engaged in the same alleged criminal conduct. In the hopes of avoiding detection of their alleged criminal conduct the Board member and her husband allegedly enlisted the help of two Board attorneys to conceal this matter from the government. The two attorneys were recently charged with pulling the Board member's free lunch application from the subpoenaed files, sending the incomplete documents to the government and then replacing the missing documents into the files and switching the couple's children from the free to the paid lunch program. How these great legal minds thought their alleged actions would escape detection is the subject of another article.
With this scandal swirling around them, the Board hit upon a solution to their perception problem, they decided to commission an internal investigation. The Board retained retired NJ State Supreme Court Justice Gary Stein, Special Counsel at the law firm of PashmanStein, to conduct an investigation involving the allegations detailed by the Star-Ledger. On their website, PashmanStein state, "The significant prosecutorial and judicial experience of our lawyers has led to our firm being chosen to conduct internal investigations for public institutions, private organizations and corporations."
With the recent published examples of misuse of the internal investigation process readily available you would think that conducting an internal investigation that creates even the appearance of impropriety would be avoided however, that was not the case. Once more arrogance and the lure of hefty fees won out.
At the time the internal investigation was commenced Judge Stein's son, a name partner at PashmanStein, was outside counsel to the Board making him and his firm potentially a target of any investigation, thus creating a potential conflict of interest. Actually there appears to be two distinct types of conflicts stemming from Judge Stein's and Pashman's involvement in the internal investigation. One conflict being relational and the other subject-matter based. At the very least Judge Stein's and the firm's role in this investigation could lead to the appearance of impropriety.
Judge Stein's investigation investigation for which he was paid $500,000 reportedly consisted of sending a survey to approximately 500 district employees. However, he actually interviewed only 131 of them because they were the only ones who chose to respond to his survey. Out of the 131 interviewed, only one stated that he may have felt pressured to donate to a political campaign.
As a result of this "exhaustive" investigation, Judge Stein concluded that there existed no culture of corruption and for good measure he chastised the Star-Ledger for going after the Board and "its hardworking people." Judge Stein's investigation did absolutely nothing to address the problems facing the Board of Education. If anything the investigation has opened the Board and his firm to potential embarrassment and ridicule. Quite frankly, he never should have accepted the assignment and placing himself and the firm in a no-win situation.
Corporations now operate in a complex regulatory environment. Even minor regulatory infractions often compel companies to undertake an internal investigation. Best practices dictate that when the integrity of an organization is attacked, a well-conducted investigation allows the organization to learn the facts, allowing it to formulate a response and devise and implement appropriate remedial measures if necessary. It is better to know the good, the bad, and the ugly than not know.
Corporate internal investigations if conducted correctly play an important part in corporate governance. A competent internal investigation has the potential to mitigate an organization's liability exposure by providing the government with persuasive evidence allowing the organization to argue that either no violative conduct took place or that the matter does not warrant further government involvement. Consequently, due to their importance, all internal investigations particularly those that tend to exonerate an organization are met with public and official skepticism. In the end only a well-conducted investigation can overcome this skepticism and establish an organization's reputation as a good corporate citizen to both the government and its core constituencies.