Page 7 - American College of Trial Lawyers Federal Criminal Procedure Committee 2020 Update: Recommended Practices for Companies and Their Counsel in Conducting Internal Investigations

RECOMMENDED PRACTICES FOR
COMPANIES AND THEIR COUNSEL IN

CONDUCTING INTERNAL INVESTIGATIONS 1

I. PURPOSE OF THE PAPER

The Federal Criminal Procedure Committee of the American College of Trial Lawyers has
observed counsel implementing a wide variety of procedures and protocols in conducting corporate
internal investigations for public and other companies. This has resulted in variances both in
treatment of officers and employees and in the outcomes of the investigations for such officers and
employees and the companies themselves. The Committee now recommends what it believes to be
the most balanced and effective practices for conducting internal investigations of possible corporate
wrongdoing. Although the principles articulated in this paper are tailored to corporate internal
investigations relating to public companies, when significant allegations of malfeasance are alleged
or suspected, corporate decision-makers and counsel who advise them may apply many of these
principles to other entities and investigations of all breadths.

II. INITIAL ORGANIZATIONAL ISSUES

A. Factors to Consider When Evaluating Whether to Commence an Internal
Investigation When Significant Corporate Malfeasance Has Been Alleged or
When an Independent Auditor Suspects Illegality

Internal investigations typically result from discovery – by the company, the media,
an external auditor, or a whistleblower – of circumstances that raise a serious concern of potential
liability or financial misconduct. The investigations are thus meant to determine the validity and
seriousness of the circumstances alleged or disclosed and what action, if any, the company should
take consistent with the best interests of its shareholders. Among the possible responsive actions
are remediation, market disclosure, and preparation for, and defense of, potential prosecutorial and
regulatory actions or civil lawsuits. Depending on whose conduct is the focus of the investigation,
senior management, the Board of Directors (“Board”), an audit committee, a special committee of
disinterested directors, or some combination of all these decision-makers may decide to commence an
investigation.

Whether to commence an internal investigation may be a discretionary decision or in
limited circumstances may be prescribed by statute. In the latter case, Section 10A of the Exchange
Act requires independent auditors who detect or otherwise become aware that an illegal act has or
may have occurred, whether or not “perceived to have a material effect on the financial statement,”

1 The principal draftsman of this paper when it was originally issued in 2008 was David M. Brodsky (New York City), a Fellow
in American College of Trial Lawyers (“ACTL”). He was at that time assisted by a subcommittee of the Federal Criminal Procedure
Committee (“Committee”) of ACTL. This revised paper was similarly prepared by a subcommittee of the Committee consisting of
Committee Chair William P. Keane (San Francisco), Vice Chair Sharon L. McCarthy (New York City), and Fellows Henry Asbill
(Washington, D.C.), Robert M. Cary (Washington, D.C.), Richard S. Glaser, Jr. (Charlotte), Neil A. Kaplan (Salt Lake City), John J. Kenney
(New York City), and Edward Swanson (San Francisco). The Committee recognizes and thanks Kyle A. McLorg of Farella Braun + Martel
LLP (San Francisco) for his editing and research assistance.

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