Two closely-watched and ongoing scandals, Chris Christie’s Bridgegate and, more recently, GM’s Ignition-Switch Recalls are both being handled in a similar fashion. Both Governor Christie and General Motors’ Chief Executive Mary Barra have called for internal investigations.
In fact, it is difficult to find a significant organizational scandal today that does not at some point entail an internal investigation. There are a number of reasons to pursue internal inquiries when a scandal erupts. At a minimum, they can provide a shield while also gaining understanding of the nature of the problem(s) and at a maximum, this undertaking might provide a potential solution.
The cynicism that followed Christie’s call for an internal investigation did not surprise me, for such is politics. But the similar critical doubts that followed Mary Barra’s announcement, I did find surprising. Many internal investigations do resolve scandals. And when they do not solve the problem, they can quarantine it. Thus, I took a closer look at internal investigations.
A Brief History of Internal Investigations
Undoubtedly, the internal investigation has been around forever, but only in recent years have they gained prominence. A Nexis search of major American newspapers finds no use of the term itself before the 1960s. For example, The New York Times had only 20 stories with the term “internal investigation” from 1850 to 1960, with all in the 1960s, but 113 stories with the term between 1970 and 1980. The concept began growing when the Securities and Exchange Commission authorized such investigations as a part of an effort to reduce the costs of government supervision of publicly-traded companies. They expanded even further in the mid-1970s, when the federal government adopted the Voluntary Disclosure Programs, which encouraged such investigations.
In 1977, Congress passed the Foreign Corrupt Practices Act (FCPA), and as the Department of Justice began more aggressively enforcing this law, major law firms discovered a high-paying cottage industry in conducting such investigations. (The National Association of Criminal Defense Lawyers (NACDL) has prepared an insightful overview of the “more art than science” skills involved in conducting internal investigations, from which I have drawn in this look.) As NACDL reports that Wal-Mart paid $157 million for internal investigations relating to FCPA violations in 2013, and Siemens A.G. paid a staggering sum exceeding $1 billion on internal investigation costs and fees regarding FCPA problems.
In short, internal investigations are big legal business, particularly for attorneys with government and prosecutorial experience. And given the very recent ruling in United States ex rel. Harry Barko v. Halliburton Company, et al., No. 1:05-CV-1276 (D.D.C. Mar. 6, 2014),that business can only get bigger, since the most logical way for anyone to have such an inquiry undertaken will be with an attorney to preserve the attorney-client privilege. (For an analysis of Barko v. Halliburton’s impact on attorney-client privilege, see Banks) While internal investigations can be lucrative for lawyers, this is not easy money. Such investigations are difficult and tricky for they demand that the investigator think like a government prosecutor, while acting as a fiduciary responsible to the entity that requested the investigation. In short, internal investigations can be ethically delicate and challenging assignments.
The current thinking, which is surprisingly negative, on internal investigations has been greatly influenced by the failed inquiries of Enron in 2001, from which such investigations have never fully recovered. When Sherron Watkins, an Enron finance officer, reported that the company could “implode in a wave of accounting scandals,” her superiors called in their lawyers for an internal investigation, which was later called a “whitewash.” Today, NACDL reports, many federal officials dealing with internal investigations find a “troubling” trend, for such investigations are often less than “objective and searching,” and too often contain “overly broad assertions of attorney-client privilege” for the underlying documents relating to the private probe.
Current news commentary shows similar doubts about high-profile internal investigations, more particularly, those being undertake for New Jersey’s Governor, and for General Motors.
The Bridgegate and General Motors Internal Investigations
Governor Christie announced on January 16, 2014, that he was retaining attorney Randy Mastro of Gibson Dunn in Manhattan, a former federal prosecutor, to represent the Governor’s office in the still-unfolding scandal stemming from the closure of Fort Lee, New Jersey access lanes to the George Washington Bridge, and the now-additional scandal relating to the distribution of federal money sent to New Jersey in the aftermath of Hurricane Sandy. But it seems that a primary assignment for Mastro will be to conduct an internal investigation for Christie.
Consistent with the general climate of skepticism about internal probes, the Bridgegate investigation was met with widespread media doubt. As a typical example, the Huffington Post said: “Christie has commissioned this investigation on behalf of the Governor’s office and he will have the ability to review Mastro’s final report before its public release. In keeping with regular practice for these types of internal investigations, the governor will likely have the ability to decide the final contents of the report. With Christie already concluding that he has had no involvement in Bridgegate and has not done anything unethical or illegal, it is highly doubtful that the taxpayer-funded investigation he commissioned will contradict him.”
Similarly, when General Motors recently announced an internal investigation regarding the events leading up to its recall of some 1.4 million of its cars that had an ignition-switch problem that reportedly has lead to at least thirteen reported deaths. Former U.S. Attorney Anton Valukas, who heads the Chicago law firm Jenner & Block, along with GM’s general counsel, Michael Millikin, and attorneys from the Atlanta-based law firm of King & Spalding are undertaking this internal investigation. The reaction of the media was: Yeah, yeah, we’ve heard that before.
Or, as The New York Times reported: “Hiring outside counsel in these cases is part investigation, part public-relations gambit and part legal strategy. In most cases, the goal isn’t to publicly flog a company or its top executives, but rather to limit damage to an institution’s reputation or to contain the financial harm to shareholders of a publicly-traded company. And it does so under the protection of the attorney-client privilege. From the point of view of the company, a well-done internal investigation can shape the accepted story of what happened—and produce findings that allow the company to negotiate for lower penalties from prosecutors or regulators down the road.”
Frankly, I think internal investigations are getting a bad rap. It might be wise to withhold judgment. Savvy law firms cannot be bought, and many internal investigations of this nature often work.
Successful Internal Investigations
The internal investigation and public report by Louis Freeh and his law firm, Freeh Sporkin & Sullivan, LLP, into the facts and circumstances at Pennsylvania State University relating to the child-abuse scandal involving Jerry Sandusky was the beginning of the end of that scandal.
While the investigation is ongoing, the NFL is hiring Tom Wells of Paul, Weiss, Rifkind, Wharton & Garrison LLP to conduct an internal investigation “into issues of workplace conduct at the Miami Dolphins,” has already given the public confidence that Richie Incognito can no longer bully his teammates without consequences, and has thus stilled the scandal.
A good example of what works and what does not is found in Rupert Murdoch’s whitewash internal investigation, which was replaced by a thorough internal examination in News Corp’s UK phone-hacking scandal. Rebekah Brooks, former editor of the now defunct News Of The World (NOTW), once Rupert Murdoch’s most successful London newspaper, is currently on trial for her role in the long-running scheme to gather news from mobile-telephone surveillance of celebrities, and then going totally over the top when they hacked the voicemail of a missing and murdered schoolgirl, Milly Dowler.
To deal with this scandal, Brooks and her boss, Les Hinton, ordered an internal investigation. And Brooks had a plan for that internal investigation, which has surfaced during her trial. She would simply blame others: “Our internal investigations were woeful and limited and we failed to hold the right people accountable,” Brooks wrote in a draft document that she sent to Murdoch’s son James, who headed UK operations. She added, “it will be written as a slippery slope for me but I hardly have any reputation left.” Needless to say, the plan did not work. Investigators knew the internal investigation was rubbish, and ignored it.
But the board of directors and key company officers realized that they dare not play games, for the UK scandal has always had the potential of crossing the Atlantic and damaging this publicly- traded, and successful, American company, News Corp. As I wrote for the UK’s Guardian back in 2011, Murdoch assembled a remarkably powerful legal team to stanch his losses. He hired a top London commercial lawyer, Lord Grabiner, who reportedly bills at £3,000 per hour; Murdoch retained the London office of the Washington law firm Arnold & Porter—whose London partner, Kathleen Harris, is extremely well-connected; he assigned Joel Klein (Harvard Law, US Supreme Court law clerk) who served as deputy White House counsel during Bill Clinton’s Whitewater scandal, and as the assistant attorney general for antitrust to oversee the situation. Klein, in turn, reported to Viet Dinh, a former assistant attorney general in George W. Bush’s Department of Justice, a law professor at Georgetown University, and a member of the News Corp board of directors. Viet Dinh (another Harvard Law graduate and US Supreme Court law clerk) is well-connected in conservative legal circles. Klein and Dinh retained another powerful Washington law firm, Williams & Connolly, with the skilled criminal-defense partner Brendan Sullivan to assist with the criminal investigation. Klein and Dinh next retained Mark Mendelsohn, who until recently had been the deputy chief, fraud section, criminal division, of the US Department of Justice. Finally, Murdoch also hired Bush II’s former attorney general Michael Mukasey and former Manhattan US Attorney Mary Jo White, both of Debevoise & Plimpton, to assist with the investigation.
The internal investigation of this high-powered collection of attorneys has never been published, but the News Corp hacking scandal has not spread, and it appears that the last chapter is playing out in a London courtroom. While News Corp’s second internal investigation was undoubtedly extremely expensive, the best money could buy, it must have been good too, for it appears to have worked.
So do not discount internal investigations.