2007 Issue 1 - New York City Bar Association

L A W Y E R ’ S R O L E I N C O R P O R A T E G O V E R N A N C E
company’s stock value, generating low employee morale, hampering employee
recruitment or the company’s ability to obtain new contracts, and
protracting regulatory investigations. In addition, facts discovered through
the investigation, even where there is no wrongdoing, may serve as fodder
for litigation against the company. None of these factors excuse ignoring
red flags. However, all of these factors should be considered in
determining the proper scope of an investigation.
To be clear, where allegations are serious and appear to have substance
and where, if true, they would have a material effect on the company’s
financial statements, officers and directors are obligated to conduct investigations
that are broad enough to get to the bottom of the issues. In
other circumstances, however, such as where the possibility of serious wrongdoing
appears improbable or speculative, a full scale investigation may
not be necessary. In short, issues regarding the proper scope of the
investigation should be the subject of discussion. The scope of the investigation,
including its limitations, should be clearly expressed to
regulators. 203
Finally, while the client ultimately is responsible for determining the
scope of the investigation, 204 there may be circumstances where a limitation
in scope may violate a duty to the corporation or may be otherwise
illegal. It is possible that the client will determine to limit investigative
scope to prevent implication of a key employee or to cover up the wrongdoing
of senior management. As discussed above, counsel’s duty is not to
the particular director or member of management but to the corporation
as a whole. Upon becoming aware of illegal activity, or even of a decision
that—if implemented—would violate a fiduciary duty and cause harm to
the corporation, counsel under ethical rules should elevate the issue within
the corporation. If such efforts prove unfruitful, counsel has permissive
grounds for withdrawal or even, if the violation is likely to cause substantial
injury, to report client confidences to the SEC. 17 C.F.R. § 205.3(d)(2).
203. Many of the risks inherent in limiting investigative scope were dramatized by the criticism
of Vinson & Elkins’ Enron investigation, the scope of which was severely limited as to
persons interviewed and material reviewed, and was subject to an extremely tight time
deadline. See Timothy E. Hoeffner & Susan M. Rabii, n. 197 above.
An investigation for Qwest by Boies Schiller also received similar poor reviews from some.
Anne C. Mulkern, Internal Probe of Qwest’s Deals Found Few Problems, Denver Post, Oct. 4,
2002, at C-01 (independence of firm questioned); Andrew Backover, Blame Spreads Far in
Telecom’s Fall, USA Today, Aug. 18, 2003, at B (investigation found no problems with
transactions that Qwest later admitted were improper).
204. EC 7-7.
2 0 0 7 V O L. 6 2 , N O. 1
193