How to react when your company is the target of a government investigation Featured

8:00pm EDT June 25, 2010

British Petroleum (BP) has topped headlines for weeks as it continues to struggle with the oil spill in the Gulf of Mexico. However, in addition to destroying BP’s goodwill with the public, the spill has also made BP the focus of a government-originated criminal investigation.

Missteps in the days immediately following the launch of a governmental investigation can have costly and far-reaching consequences for any company, so you need to be prepared.

“Cooperate, be honest and forthcoming, have a complete and total understanding of your company and communicate with your employees,” says Theresa Mack, a senior manager at Cendrowski Corporate Advisors. “You need to have proper procedures and processes in place early on so you’re not scrambling.”

Smart Business spoke with Mack about what to do when your company becomes the focus of a government investigation.

If a company is facing a government investigation, what are the first steps it should take?

A firm often learns it is going to be the subject of an investigation when an agent either serves a search warrant or requests an employee interview. There’s no time to prepare, so firms need to have processes in place to handle these situations.

One of the most important steps after being informed of a governmental investigation is the preservation of documents. Once a firm has been notified of the investigation, its counsel should issue a written directive — a preservation memo — to everyone in the company, telling them not to destroy any documents. This goes for all offices and branches of the company worldwide, not just the physical location where the investigation started.

Do not destroy or delete anything that could be perceived as important to the investigation. If the investigation leads to a trial and the destruction of documents comes to light, there can be dire ramifications. And in these types of investigations, everything comes to light eventually.

Firms must be especially careful about the inadvertent destruction of documents. Many servers automatically delete stale e-mails or documents housed in electronic storage areas. If employees are leaving the company, their records should be maintained rather than deleted. This will likely require informing a firm’s IT staff about the investigation to ensure none of this happens. Firms can go one step further and have IT staff back up everyone’s data, so even if people delete documents on their machines, a copy has been preserved elsewhere.

How do you know where your company stands during an investigation?

First and foremost, cooperate with the investigation. Your counsel should be in contact with the prosecutors. Be responsive and timely, and ask questions. Make sure you ask what your status is in the investigation, as all companies and individuals fall into one of three categories: witness, subject or target.

A witness is not yet under suspicion but may have information of interest. A subject is someone whose conduct is within the scope of the investigation, but it is uncertain that any crime has been committed. A target is someone whom the prosecutor has substantial evidence linking him or her to the commission of a crime and who, in the judgment of the prosecutor, is a putative defendant. You do not want to be a target.

Make sure that the prosecutor is using these terms properly and have your counsel make sure that the prosecutors are properly relaying the status of the investigation. Some prosecutors are more willing to discuss the investigation than others. Some will provide nontarget or nonsubject letters to the individual upon request. This is often a request made before someone will submit to an interview, assuming that he or she is not a target of the investigation.

What else should be considered in an investigation?

If your firm has been notified of an investigation, often a subpoena for testimony, records or documents will be issued. Subpoenas have specified deadlines that need to be adhered to, or recipients run the risk of being held in contempt of court. A recipient, however, can sometimes receive an extension if he or she shows reasonable cause. This is just one reason why subpoena recipients need to be in constant contact with prosecutors.

Depending on the situation, and especially if the government is investigating misconduct or fraud by management or senior executives, consider prohibiting the trade of the company’s stock by the firm’s treasury and by those with knowledge of the investigation.

Also, firms should be aware of applicable state laws. Documents filed in court cases are open to the public in some states and firms should be very careful with communications — a document sent to a prosecutor might be filed in the court case and thus available in the public domain. Additionally, keep in mind that all forms of communication can be discoverable.

Should a company make a public statement if it is under investigation?

Some companies will want to send out a press release right away to show that they’re on top of things, but firm executives and board members should first weigh their options. Will coming out to the public impact the company’s value and/or stock? Are you sure that the investigation will lead to charges? Often, an investigation ends with minimal evidence and the case is closed before it can go to court, so do not speak too soon.

However, if you do decide to disclose the investigation, ensure everyone in the company knows exactly what to say. Don’t lie and don’t deny.

You never know who someone could be talking to — and with the Internet, information is easily leaked — so be sure that everyone says exactly what you want them to say and be sure it is the truth.

Theresa Mack is a senior manager at Cendrowski Corporate Advisors. Reach her at (866) 717-1607 or tbm@cendsel.com, or visit Cendrowski Corporate Advisors’ Web site at www.cca-advisors.com.