Know the mission: a lawyer's duty to a nonprofit entity during an internal investigation.

• Author: Valenti, Joseph Anthony

1. INTRODUCTION A. SCOPE AND DEFINITIONS B. PREVIEW OF SECTIONS II. INTERNAL INVESTIGATIONS GENERALLY AND ADDITIONAL NONPROFIT CONSIDERATIONS A. DECIDING TO OPEN AN INTERNAL INVESTIGATION B. CONSIDERING INDEPENDENT OUTSIDE COUNSEL C. INFLUENCING HOW THE ATTORNEY GATHERS EVIDENCE D. PRIVILEGES PROTECTING THE ATTORNEY'S WRITTEN REPORT E. DECIDING TO DISCLOSE THE RESULTS OF THE INVESTIGATION III. GENERAL DUTIES OWED TO NONPROFIT ENTITIES IV. CONCLUSION A. GUIDING PRINCIPLES FOR NONPROFITS CONSIDERING OR CONDUCTING AN INTERNAL INVESTIGATION B. GUIDING PRINCIPLES FOR ATTORNEYS CONDUCTING AN INTERNAL INVESTIGATION AT A NONPROFIT ENTITY C. BRINGING THEORY INTO PRACTICE: THE REALISTIC HYPOTHETICAL I. INTRODUCTION

   Neither Black's Law Dictionary nor Merriam-Webster's Dictionary defines the term internal investigation. (2) Practitioners note that "[t]here is no standard definition of the term 'internal investigation.'" (3) Without knowing what an internal investigation is, how can one define who conducts them and where they are conducted?

   1. SCOPE AND DEFINITIONS

      For the purposes of this writing, an internal investigation is the nonpublic portion of any activities undertaken by any organization to mitigate any harm to that organization previously or currently being caused by one or more of that organization's fiduciaries. (4) While this broad definition would allow anyone to conduct the inquiries on behalf of the organization, this writing only addresses attorneys participating in these inquiries, as other professionals may be governed by different rules. (5) This writing addresses all possible attorney relationships with the organization, as the hypothesis found in this writing theorizes that all of any investigating attorney's duties flow from the same source. Thus, burdens upon in-house counsel are not differentiated from burdens on attorneys working out of regularly-consulted law firms or attorneys working out of any entirely independent association that is only related to the original organization by virtue of conducting the internal investigation of that organization.

      Additionally, the focus herein will be on nonprofit entities. Nonprofit entities must be differentiated from tax-exempt organizations because the crux of this writing centers on the difference between protecting shareholders at for-profit corporations and the mission integrity of a nonprofit entity. "Not all nonprofit entities are tax exempt." (6) Thus, a wider net must be cast to include a nonprofit entity--with duties to a mission found in its charter or articles of incorporation, rather than shareholders--that has not pursued or otherwise qualified for tax-exempt status.

      Some case law and other material addressing for-profit internal investigations will be included. (7) These materials are provided for comparison purposes and to illustrate differences. While some of the substantive law concerning duties owed to a corporation applies to nonprofit entities, most of that law needs to be reconsidered when those duties center upon the profit-seeking motivation of a corporation. To avoid clutter, a corporation in this writing should always be presumed to be a for-profit corporation. An entity (as well as a nonprofit and a nonprofit entity) is presently defined as one run for a purpose other than profit-making. As noted above, the tax code classification and the tax exempt status of these entities is irrelevant. When organization or association is used, the term includes both corporations and entities.

   2. PREVIEW OF SECTIONS

      Part II offers a general primer on internal investigations. (8) This primer steps through the various decisions that are made in initiating and conducting an internal investigation using the available guidance from practitioners that investigate for-profit corporations. (9) As each decision and its considerations are explained, this writing notes additional considerations that nonprofit entities must evaluate when making each corresponding decision. (10)

      Part III details the duties that the directors of nonprofits owe to those entities. (11) Relying largely on case law, this part both notes the known duties imposed on nonprofit directors, and postulates the manner in which those duties transfer to various subagents of those directors. (12) Again, cases involving for-profit corporations are noted in an effort to draw comparisons and distinctions to show how those case outcomes would or would not change if the organization was a nonprofit.

      Part IV synthesizes Parts II and III into a general guide for nonprofits considering an internal investigation. (13) Additionally, specific strategies are suggested to attorneys undertaking internal investigations at nonprofit entities to allow those practitioners to define their duties, and carry out those duties in the most effective way possible. (14) Finally, this writing concludes with practical, yet hypothetical, fact patterns that show how a situation would be handled differently based solely on whether the organization was run for profit or as a nonprofit. (15)

2. INTERNAL INVESTIGATIONS GENERALLY AND ADDITIONAL NONPROFIT CONSIDERATIONS

   Very well-written primers on corporate internal investigations already exist, (16) and this writing does not seek to duplicate those documents. This writing, rather, mirrors those documents in structure, offering relevant summaries of, and citations to, key issues in internal investigations, but emphasizes the different or additional considerations that nonprofit entities must evaluate when dealing with these corresponding issues. (17)

   1. DECIDING TO OPEN AN INTERNAL INVESTIGATION

      When the government has launched an investigation into an organization, the decision is clear: conduct an internal investigation to ensure preparedness and responsiveness. (18) When private litigation is imminent, the decision is also clear. (19) Where no external discovery of the wrongdoing forces the organization's hand, however, the decision is more difficult.

      Practitioners note that "[a] corporation should consider conducting an internal investigation when it becomes aware of credible allegations of wrongdoing." (20) However, corporations are reluctant to authorize internal investigations for the following reasons:

      Internal investigations can have a number of negative consequences to a company. They can be expensive and disruptive. They can distract the energy of management and create morale problems. They can uncover wrongful conduct that might otherwise never have become known. Moreover, the process of conducting an internal investigation can increase the likelihood that information regarding possible misconduct will reach the government and/or the press. (21) Despite these negative consequences, the key argument for authorizing an internal investigation at the slightest hint of wrongdoing is, of course, the avoidance of personal liability. (22) Directors that are shown to have failed to adequately protect the company from internal wrongdoing face fines and shareholder suits. (23)

      Beyond the personal interest directors have in shielding themselves from liability, an internal investigation may also be dictated by company policy, or be undertaken for containment or informational purposes. (24) Where corporate compliance programs exist, internal investigations are undertaken to both deter employees from misconduct, and to show future government investigators that such programs are stringently followed. (25) Finally, a corporation always has the motivations of preparedness and responsiveness that would require an investigation when government or private action is threatened. Such action is foreseeable, if not already secretly underway, and, out of an abundance of caution, a corporation may conduct an internal investigation in anticipation of a government investigation. (26)

      In the nonprofit sector, the decision to conduct an internal investigation is also forced upon a board of directors when a government is investigating misconduct. (27) However, with no shareholders, the threat of private litigation is reduced--although still present. (28) The possible negative consequences of an internal investigation may be weighted differently as well. (29) For instance, the expense of an investigation could be much harder to bear if a nonprofit entity has very little excess revenue. Furthermore, donors to a nonprofit may object to their funds being used to pay lawyers for a lengthy investigation. Of course, the counterargument to these concerns is simply that a nonprofit still must run as a business, and must expect to use some of its funds to pay lawyers and manage its internal problems.

      Arguably, a key concern for most corporations is how its investors, its customers, and the government will react to a disclosure that an internal investigation is afoot, or that wrongdoing has been uncovered. Significant advantages can be had by avoiding a full-scale investigation that, as noted above, may uncover even more problems within the company. However, in the case of nonprofit entities--organized for a public purpose--the following question must be posed: is there a duty to discover and disclose internal wrongdoing to the public?

      While nonprofits that qualify for tax-exempt status must disclose various financial records to the public, (30) no readily available answer exists to the overarching question of whether all wrongdoing must be disclosed. Presumably, a nonprofit entity, as an artificial person, has the same rights (31)--or lacks the same rights (32)--as a corporation. "A corporation, like any other 'client,' is entitled to the attorney-client privilege." (33) Thus, a nonprofit can conceal the internal investigation and ensure that its findings are privileged--a decision with additional considerations that will be discussed later. (34)

   2. CONSIDERING INDEPENDENT OUTSIDE COUNSEL

      As noted earlier, this writing presumes lawyer involvement with any internal investigation. (35)...