By: BRG Expert
The now historic National Football League (“NFL”) scandal involving the inflation levels of the footballs used by the New England Patriots during the 2014 AFC Championship Game – “Deflategate” – attracted national attention and filled countless hours of debate amongst friends, colleagues and perfect strangers. While early watercooler discussions centered on the intersection of weather, science and professional football, later dialog had been around more nuanced legal issues, such as the interpretation of collective bargaining agreements, tampering with or destroying evidence, and the role of judges in reviewing, what was essentially an arbitration ruling.
Supporters of the Patriots remained steadfast that neither the organization nor its players had done anything wrong, citing cold temperature as the reason for their underinflated footballs, while critics of the Deflategate report challenged the independence of Paul Weiss, the report’s authors. It is the latter notion that highlights an important legal and regulatory topic involving corporate internal investigations. That is, “who” is chosen to undertake an independent investigation really does matter, when the perceived lack of independence could adversely impact the credibility of the findings or be made an issue in future legal proceedings or disputes.
Unfortunately, who conducts the investigation and why, are not always the first considerations when launching an internal inquiry, and frequently take a backseat to cost, convenience and expediency. Therefore, the default choices for many corporations are in-house counsel or regular outside counsel who have worked with the entity and are familiar with their operations, personnel and culture. However, as more fully discussed below, independence is one of the most critical factors in determining who should conduct an internal investigation, and the key to the investigation’s acceptance as the “final say” on a controversy or disputed factual issue.
When selecting an investigator, it is critical to thoroughly understand the intended audience. The reaction of judges, the media, shareholders, employees, and regulators frequently hinges on the independence of whoever undertook the inquiry. As in the case of Deflategate, often equally important is the general public’s response. For example, former United States Senator George Mitchell’s investigation into the use of steroids by professional baseball players has given rise to few challenges. The report has nevertheless suffered from lingering public skepticism because of Mitchell’s close association with the Boston Red Sox, and links between his assisting lawyers and senior baseball officials. While Richard Breeden’s investigation into Conrad Black’s activities at Hollinger International would seem to caution against the opposite; that is, having an ax to grind. What started as a $400 million dollar fraud or “corporate kleptocracy,” eventually turned out to be an improperly papered $285,000.
Corporate entities may benefit from retaining public figures of recognized probity to conduct sensitive internal or regulatory investigations. This possibly began in the 1980s with E.F. Hutton’s hiring of former Attorney General Griffin Bell to investigate check-kiting allegations. Since then, the practice has grown. In the 1990s, Nike retained Ambassador Young and Mitsubishi hired Secretary of Labor Lynn Martin to conduct public inquiries into alleged corporate misconduct. The knowledge that these efforts would be independent and unsparing of guilty executives made them all the more valuable. Due diligence, however, is important when selecting a prominent investigator. Judge William Webster resigned from monitoring the Public Company Accounting Oversight Board after disclosing that the Chief Executive Officer of a company upon whose board he sat was under investigation for fraud.
Lawyers’ codes of conduct complicate the selection of an investigative team. For example, the ABA Model Rules of Professional Conduct prohibit members from engaging in representation when there is a “significant risk” of potential conflicts of interest. This possibility is most obvious with lawyers who have worked for the company being investigated: precisely the people previously most likely to be chosen to do the inquiry. For example, Enron’s usual corporate counsel was initially selected to examine the company’s off-the-books partnerships, which it had helped to create. While nobody called the investigation unethical or improper, its effectiveness suffered from the law firm’s perceived lack of objectivity.
In the instance of Deflategate, the authors’ independence became an unfortunate and misguided distraction. Unhappy with the findings, detractors argued that because the Paul Weiss team led by Ted Wells was retained by and paid for by the NFL, and Paul Weiss had previously done work for the NFL, the investigation could not possibly be independent. Those who know the authors of the Deflategate report however, understand that any efforts to impugn their credibility, integrity, and diligence is nothing less than a desperate attempt to detract from the underlying issues.
Nevertheless, as the list of high-profile scandals grows, so does the attention paid to ensuing internal inquiries. Recent regulatory actions indicate that who conducted an investigation, and how, are becoming as much a matter of interest as the results. The key to a successful internal investigation is its acceptance by its intended audience and this is frequently contingent upon the perceived independence of the effort.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.