Internal Investigations into Violations of Securities Laws

Any internal investigation calls upon the lawyer to negotiate between Scylla and Charybdis: the risks of exposing the corporation to increased liability by failing to inquire sufficiently into possible wrongdoing, and the risks of exposing the company to increased liability by developing evidence of that wrongdoing that can later be used against the corporation. Internal investigations into violations of securities laws add two twists that heighten the challenge:

1. the complexities created by various obligations to disclose wrongdoing, and
2. the pressures generated by the likelihood of parallel proceedings.

The existence of these two twists means that internal investigations into potential violations of the securities laws put a premium on the speed and accuracy that is desirable in all internal investigations.

Of all the cases in which internal investigations are conducted, violations of the securities laws are perhaps the most likely to lead to parallel proceedings. In addition to the active plaintiffs securities bar, any willful violation of the securities laws is a crime, and the SEC possesses and exercises considerable jurisdiction to review violations. There may be a narrow window within which the corporation can conduct its internal investigation before parallel proceedings begin and make that investigation more difficult. Such events can include subpoenas or interviews of individuals that cause them to retain separate and potentially uncooperative counsel, or seizures of documents necessary to prepare a defense. While the investigation must be conducted swiftly, it must also be conducted with an eye toward three issues that are likely to arise as parallel proceedings develop and progress:

1. maintaining work product and other privileges protecting the information gathered in the investigation, either from the government or, more likely, from third-party plaintiffs;
2. managing the risk of potential assertions by employees of their Fifth Amendment privileges; and
3. assessing the possibility of staying either the SEC investigation and/or the private securities action.

From Internal Corporate Investigations, Second Edition

Edited by Brad D. Brian and Barry F. McNeil
ABA Section of Litigation

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