The changing nature of internal probes: one result of the stringent regulatory environment is a change in the nature of internal investigations, with firms encouraged to conduct probes to uncover wrongdoing and provide that information to the government.

• Author: Levy, Michael N.
• Position: Internal investigations

When even seemingly routine allegations of wrongdoing arise, corporations almost inevitably launch internal investigations. The proliferation of such investigations is a direct result of today's more stringent regulatory environment.

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With fast-moving and competing regulators and the intimidating specter of criminal prosecution of business activities, salient facts must be uncovered quickly so that senior management and the board of directors can make thoughtful and reasoned decisions. Protecting the best interests of the shareholders may mandate the use of an internal investigation to placate the increasing demands of government regulators. Unfortunately, senior executives are often thrown into this maelstrom with little or no guidance or preparation.

The Proliferation of Internal Investigations

Following Enron's initial internal investigation in August and September of 2001--which found no wrongdoing--prosecutors became increasingly skeptical of narrowly-constrained internal investigations performed by lawyers too closely aligned with the matters being investigated, and also of any corporate-directed internal probes that did not root out purported wrongdoing.

The result has been increasing pressures by the federal government, and the Department of Justice (DOJ) in particular, to change the fundamental nature of internal investigations. The hallmark of this governmental pressure was a memorandum issued in 2003 by Deputy Attorney General Larry D. Thompson entitled "Principles of Federal Prosecution of Business Organizations" (known as the "Thompson Memorandum").

This memorandum sets forth the factors federal prosecutors must weigh when deciding whether to seek an indictment against a company, and the U.S. Securities and Exchange Commission (SEC) has adopted a very similar approach.

To avoid the fate of the former accounting firm, Arthur Andersen, companies should take this guidance very seriously. As stated in the document: "The main focus of [the Thompson Memorandum] is increased emphasis on and scrutiny of the authenticity of a corporation's cooperation" with prosecutors. One of the major mechanisms a corporation can use to demonstrate its cooperation, and hence avoid indictment or SEC charges, is to conduct an internal investigation that uncovers wrongdoing and provides that information to the government.

The Thompson Memorandum has generated controversy since its release because, among other things, it identifies...