In recent years, the number of government investigations spawned by whistleblowing employees has spiked dramatically. The federal government’s recoveries in suits alleging fraud under the False Claims Act (FCA) have totaled more than $17 billion during the past five fiscal years-nearly equal to the entire amount the government recovered in the preceding 22 years combined. Further, the Dodd-Frank Act of 2010, which includes whistleblower provisions related to violations of securities laws and the Foreign Corrupt Practices Act, budgeted in excess of $452 million to compensate prospective whistleblowers.
One reason the trend in whistleblower suits continues to gather momentum is that statutes like the FCA and Dodd-Frank award a significant percentage of the government’s eventual recovery to successful whistleblowers. Specifically, FCA whistleblowers can receive 15% to 30% of the government’s total recovery, while Dodd-Frank whistleblowers can receive between 10% and 30%. Not surprisingly, this creates an incentive for company employees (as well as enterprising plaintiffs’ lawyers) to bring suit, even under circumstances in which improper conduct or disputed issues could be adequately addressed within the organization without resorting to litigation.
Whistleblower complaints can come to a company’s attention through a variety of avenues. For instance, a company may be served with a civil complaint filed by a whistleblower, or it may learn about the existence of a government investigation that the company suspects was triggered by a whistleblower. It also may become aware of a complaint through internal channels, such as an employee hotline or a report submitted by an employee to his or her supervisor. In those situations, it can be difficult to predict whether a third party, such as a government agency, the media or a plaintiff’s attorney, will ever learn about the complaint and the company’s subsequent response. In fact, it may be that internal and external complaints were made simultaneously and are proceeding on separate but parallel tracks. Thus, regardless of how a whistleblower issue arises, a company can seldom assume that a credible whistleblower issue will remain confidential forever.
Regardless of the particular course pursued by a whistleblower, corporations commonly react to a complaint by initiating an internal investigation. Then the company must decide how to respond to the facts it uncovers and whether to disclose the investigation and its results to the appropriate government agency. Generally speaking, the gravity and veracity of the allegations will determine the appropriate response.
After becoming aware of a whistleblower complaint, the company must quickly and thoroughly analyze the underlying facts and circumstances. Determinations regarding the scope of the investigation and the proper party to conduct the inquiry must be made early on, with the understanding that those decisions may change as the company learns more about the situation. One factor affecting those initial decisions is how credible and serious a complaint appears, such as the plausibility of events described, the background of the complainant (if known), and the potential legal and financial ramifications if the allegations are ultimately proven true.
Less-serious complaints and those aimed at lower-ranking figures in a company can be handled by in-house counsel or even human resources. (However, investigations conducted without the involvement of counsel will not be subject to the attorney-client privilege and will likely be discoverable in any related litigation.) More serious complaints and those implicating senior management typically require the involvement of outside counsel. The most serious allegations may call for independent outside counsel—counsel with no previous relationship with the company and no involvement in the events at issue. Independent counsel may be especially useful in investigations where the issues rise to the highest levels of a company because they project an air of objectivity and impartiality, lending credibility to their investigatory process and ultimate conclusions. Independent counsel is also seen as less likely to feel pressured to sugarcoat their conclusions for the sake of maintaining a positive relationship with the company’s management.
No matter who conducts the investigation, it is always important to remember that the investigating attorney’s duty of loyalty is to the corporation. While it is possible for a lawyer to represent both a corporation and its employees, there are a number of strategic issues to consider with a dual representation of that nature. First and foremost, the investigating attorney’s duty of loyalty to an employee might prevent him or her from sharing with the corporation any information learned in communications with that employee. Second, the employee will become a joint holder of the attorney-client privilege, meaning that the employee can prevent the corporation from sharing information with the government or another third party, even if it is in the corporation’s best interests to do so. Third, given the dearth of knowledge that most investigating attorneys possess at the beginning of an investigation, it is often difficult to tell when a conflict of interest will arise. The investigating lawyer can avoid all of these problems by choosing to represent only the corporation under investigation and not its officers, directors or other related parties (or, in turn, to represent an individual and not the corporate entity).
Conducting an Investigation
After the investigation team has been assembled, investigating lawyers usually focus their fact-finding efforts on two tasks: collecting and reviewing relevant documents and interviewing witnesses. The team should begin its fact-finding efforts as quickly as possible so that it can interview witnesses while the events at issue are still fresh in their minds. Fast-moving, proactive investigations also show the whistleblower and other interested parties, including anyone from government regulators to shareholders, that the complaint is being taken seriously and that the investigation is being handled competently.
One of the first steps in conducting a whistleblower investigation is finding and preserving all pertinent materials. Document preservation orders must be issued, and any routine document destruction practices affecting relevant documents halted until the investigation is completed. Electronic document recovery experts are typically engaged to ensure that all relevant documents are available to the investigating team. In addition to being a prerequisite for conducting a thorough investigation, a robust document preservation process gives credibility to the investigation if the company later decides to disclose information to the government.
Furthermore, taking document preservation seriously helps avoid potential charges of obstruction of justice. If an overt government investigation is ongoing, the company likely is aware that it must retain all documents germane to the investigation. Companies should remain mindful that Sarbanes-Oxley makes it a crime-punishable by up to 20 years in federal prison-to destroy documents even “in contemplation” of a government investigation.
The second key part of the fact-finding process is to conduct interviews with any employees or third parties who may have information about the events from which the complaint has arisen. The complaint itself (if available for the team’s review), the information received from or requested by the government, and the documents that the team has reviewed typically provide names of potential interviewees.
It is essential for the questioning lawyers to administer an “Upjohn warning” (also known as a corporate Miranda warning) to all interviewees who are current or former employees of the company. This warning contains three important admonitions: first, that the attorney represents the corporation and not the employee/interviewee; second, that the interview is protected by the attorney-client privilege, with the privilege belonging to the corporation and not the employee/interviewee; and third, that the corporation has sole discretion to decide whether to waive its privilege and to disclose information from the interview to the government, the whistleblower, or other third parties. In other words, the Upjohn warning allows the investigators to cloak the interview with the attorney-client privilege and to ensure that the privilege is retained by the corporation. The warning also allows investigating counsel to meet its ethical responsibility of not misleading the interviewee to believe that counsel represents him or her rather than the corporation itself.
After completing the fact-finding phase of the investigation and developing its conclusions, the team must decide how to communicate its findings to management, the board of directors, the audit committee, or any other appropriate entity by whom it was engaged as counsel. While the results of the document review, interviews, and related legal research and analysis are sometimes incorporated into written or oral reports, some companies and investigatory teams shy away from written reports because they may be requested in discovery if litigation arises from the events under investigation.
As an important aside, companies should remember that the fact-finding effort and related discoveries must not result in retaliation against the whistleblower, if the whistleblower remains employed by the company. Comprehensive protections under the FCA, Dodd-Frank and the criminal statutes governing obstruction of justice prohibit retaliation against whistleblowers. Demoting employees, reducing hours or curtailing responsibilities could all result in retaliation claims that multiply a company’s problems.
To Disclose or Not to Disclose?
At the conclusion of the inquiry, the corporation and investigating counsel will be faced with an important question: should the investigation and its results be shared with the government? Before disclosing anything to the government, the company must have the utmost confidence in the procedure employed by its investigators and the thoroughness of the investigation, as disclosures that the government deems incomplete or misleading can be cited as evidence that the company has been uncooperative, or compound the company’s issues in a number of other ways.
Even when an investigation reveals wrongdoing, the company may still decide to make a disclosure, especially if it has taken steps to correct such wrongdoing or if the wrongdoing violated company policy. Both the Department of Justice’s Federal Principles of Prosecution of Business Organizations, which prosecutors consider when deciding how to resolve a case against a corporation, and the Federal Sentencing Guidelines, which govern the sentences to which convicted corporations will be subject, provide that corporations that disclose misdeeds and cooperate with the government will receive more favorable treatment than those that do not.
Disclosure carries significant risks. Making the results of an internal investigation public can result in a waiver of the attorney-client privilege, which may open the door to lawsuits from private plaintiffs—including shareholder derivative and class action suits—by making the results of the investigation subject to discovery in those suits. Some companies have argued that disclosures to the government only amount to a “limited waiver,” and that any information disclosed is still privileged, but courts generally have not been receptive to this argument.
While disclosure can forestall or alleviate the impact of a government inquiry, it can also have the effect of pointing a spotlight on a company’s misconduct or its compliance issues. Moreover, disclosure can create new legal problems for a company by alerting the government to issues of which it was not previously aware. Finally, a disclosure that the government deems inadequate or misleading is often worse than no disclosure at all. Accordingly, a company should consult with experienced counsel to understand both the potential benefits and the potential risks of disclosure before moving forward.
Even for companies that have not yet encountered a whistleblower, steps can be taken to minimize the potential exposure to such complaints. For instance, companies that operate in highly-regulated industries, such as finance or health care, should ensure that their compliance manuals are up-to-date and employees are aware of and in compliance with all relevant regulations.
Conducting regular audits of key business processes and engaging attorneys, accountants or other professionals to assist as necessary can also be useful for detecting any improprieties while they are still manageable. These preventative measures, as well as early and thoughtful consideration of some of the related strategic issues, may help companies grapple with the reality that the increase in whistleblower suits and the corresponding explosion in recoveries won by whistleblowers show no signs of abating.