Five key things you need to know about internal investigations to mitigate securities litigation risk

May 1, 2024

Internal investigations present an opportunity for a company to get ahead of and reduce securities, criminal and class action risk. However, there are many ways in which these investigations could be easily mismanaged. Here are five things corporations should be aware of to mitigate risk.

1. Privilege: Investigations into violations of securities or criminal law should generally be overseen by legal counsel. It's essential to engage counsel from the outset and utilize them to engage any external experts. This approach ensures that the investigation is conducted as far as possible under the umbrella of solicitor-client privilege, protecting sensitive material from compelled disclosure.
2. Independence: The investigation should be structured to ensure its independence from any individuals within the organization who may have a conflict of interest. A best practice is for counsel to report to the audit committee or a special committee of the Board of Directors. This arrangement helps maintain the integrity of the investigation.
3. Self-reporting: Companies should carefully weigh the pros and cons of self-reporting established or suspected violations of securities or other regulatory or criminal laws. Enforcement authorities may provide credit or offer leniency for self-reporting, either through formal or informal programs and mechanisms. However, self-reporting often entails a complex exercise of weighing legal and reputational risks. In addition, the company's evaluation of self-reporting should occur at an early juncture, as enforcement authorities often have expectations or requirements around promptness of reporting, and the decision as to whether to self-report may also impact the approach to certain aspects of an internal investigation.
4. Communications and reputation management: Depending on the nature of the violation, it may be necessary to engage specialists in crisis communications. This engagement should be done through counsel to ensure that the sharing of information is covered by privilege. Effective communication can help manage the narrative and mitigate damage to the company's reputation.
5. Whistleblower programs: A robust internal whistleblower program encourages employees and others to raise issues within the company first. This gives the company an opportunity to investigate the matter and self-report before a regulator becomes involved. A well-managed whistleblower program can serve as an early warning system, enabling the company to address issues proactively.

In conclusion, internal investigations are a critical component of reducing litigation risk and liability. Understanding these five points-privilege, independence, self-reporting, communications and whistleblower programs-can help companies prepare themselves to deal with allegations of misconduct that can have significant reputational and legal implications.

For more information on this topic, please contact the authors, Anthony Cole or David Konkin.