What You Don't Know Can Hurt You: The Case for “Special Counsel” Investigations

Lawyers have often performed analogous services for government agencies and other public bodies. For example, the Watergate era made the role of “special prosecutor” a familiar one to the public. Federal law now provides for the appointment of special prosecutors (renamed “independent counsel”) when certain conditions are present. 28 U. S. C. § 591 et seq. State and local governments have also employed “outside” counsel in a wide variety of contexts to conduct or oversee investigations. A recent example was the State of Maryland's appointment of Baltimore attorney William D. Preston, Jr. as special counsel in charge of an investigation concerning the Maryland savings and loan industry.

See, e.g., Spiegel David R. , “Enforcing Safety Laws Locally,” New York Times, March 23, 1986, p. C11 (discussing Los Angeles District Attorney's program to launch criminal investigation of industrial accidents); Mokhiber Russell , “Criminal Law and the Shuttle; Scrutiny is Due Managers Who Expose Others to High Risk,” Los Angeles Times, March 12, 1986, p. 5 (Metro); Schatz Robin , “Focus on Corporate Boards; Directors Feel the Legal Heat,” New York Times, December 15, 1985, p. C12.

Spiegel , op. cit.

E.g., Mintz Morton , At Any Cost: Corporate Greed, Women, and the Dalkon Shield (New York, NY: Pantheon Books, 1985).

See Jacoby Neil H. , Corporate Power and Social Responsibility (New York, NY: MacMillan Publishing Co., Inc., 1973), pp. 3–15. This book contains a history and typology of social criticism of American business.

The disaster at Union Carbide's Bhopal, India chemical plant is one example of the international implications of modern corporate activities that go awry. Union Carbide's president was briefly detained by Indian authorities when he visited the site, and there was considerable litigation, as well as public commentary, over whether damage claims should be heard in American or Indian courts. Further public controversy between Union Carbide and Indian authorities followed the company's disclosure that it suspected sabotage by a local Indian employee as the cause of the fatal release of poisonous chemicals. See, e.g., Diamond Stuart , “India Says Carbide Withheld Its Findings on Bhopal Case,” New York Times, August 12, 1986, p. A3.

The 1979 accident at the Three Mile Island nuclear plant, for example, stimulated a continuing nationwide debate about the role of nuclear energy. In this debate, which often takes on a moralistic and partisan tone, highly technical issues of nuclear engineering are mixed in with economic, political, and philosophical considerations. Doubts about the safety of nuclear installations affect the viability of a major industry as well as the health and economic vitality of entire communities. Not surprisingly, a special counsel report concerning safety issues at the Three Mile Island plant took over a year to prepare and, with exhibits, was more than 12,000 pages long. Stier Edwin H. , TMI-2 Report: Management and Safety Allegations, November 18, 1983. Similarly, the Maryland savings and loan crisis of 1985 involved a complex mixture of insider dealing and other abuses in the industry, coupled with the failure of government agencies to prevent the crisis. The savings of thousands of persons were threatened and public confidence in the savings and loan industry severely eroded. A special counsel report concerning the crisis was presented to a joint session of the Maryland General Assembly amid great fanfare. Kenworthy Tom Melton R. H. , “Owner's Greed Blamed in S&L Crisis,” The Washington Post, January 10, 1986, p. A1.

Steckmest Francis W. with a Resource and Review Committee for the Business Round-table (hereinafter “Steckmest”), Corporate Performance: The Key to Public Trust (New York, NY: McGraw-Hill Book Co., 1982), pp. 67–68.

Ibid., p. 193. See also Nader Ralph Green Mark Seligman Joel , Taming the Giant Corporation (New York, NY: W.W. Norton & Company, 1976), pp. 123–128.

Dierkes Meinolf Antal Ariane Berthoin , “Whither Corporate Social Reporting: Is It Time to Legislate?” California Management Review, 28/3 (Spring 1986): 106.

Hauserman Nancy R. , “Whistle-Blowing: Individual Morality in a Corporate Society,” Business Horizons, 29/2 (March/April 1986): 4.

Barrett Paul M. , “Doing Good and Doing All Right: Investors Applying Ethical Values,” Wall Street Journal, August 5, 1986, p. 33.

For an in-depth analysis of the uses and limits of legal controls over corporate behavior, and the need for other forms of control, see Stone Christopher D. , Where the Law Ends: The Social Control of Corporate Behavior (New York, NY: Harper & Row, 1975), pp. 35–69, 93–110. Stone points out, for example, that enforcement of society's rules and values depends heavily on the psychological “internalization” of those values by individuals, as well as upon notions of deterrence that may apply to natural persons, but not necessarily to corporations. Corporations, being artificial “persons” have no “conscience” as such, and the individual values of the persons who manage them often become submerged in a distinct “corporate culture.” Efforts to internalize values in a corporation—i. e., to devise mechanisms that function as a conscience does in natural persons—must aim at this “culture,” and not simply at key managers or the corporation's economic self-interest.

Ibid., p. 193: “The importance of a company's information processes cannot be overstated; they are as vital to the corporation as the nervous system of a human being to the body.”

Gellerman Saul W. , “Why ‘Good’ Managers Make Bad Ethical Choices,” Harvard Business Review, 64/4 (July/August 1986): 85. Gellerman describes how gaps in the upward flow of crucial information can arise from an actual or assumed desire by top executives to “distanc[e] themselves from their subordinates' tactical decisions in order to keep their own hands clean if things go awry.” Ibid., p. 88.

In 1980, the editors of Fortune surveyed 1,043 major corporations and found that 11% of them had been involved in a “major delinquency”—defined to include bribery, criminal fraud, illegal political contributions, price-fixing, and bidrigging—sometime between 1970 and 1980. Ross Irwin , “How Lawless Are Big Companies?” Fortune, December 1, 1980, pp. 56–57.

Gellerman , op. cit., p. 88; Stone , op. cit, p. 62: “[T]he top-level executive himself is afraid of legal trouble, and the organization banks on the unwritten hope that ‘what he doesn't know cannot hurt him.”’

As one commentator has written: “[T]he locus of corporate crime is predominantly at the lower to middle management level. Although public interest groups are vocal in their denunciations of ‘crime in the suites,’ in truth the most shocking safety and environmental violations are almost exclusively the product of decisions at lower management levels.” Coffee John , “‘No Soul To Damn, No Body to Kick’: An Unscandalized Inquiry into the Problem of Corporate Punishment,” Michigan Law Review 79/3 (January 1981): 397.

See 15 U.S.C. § 78 (b) (2).

Bell Griffin , The Hutton Report: A Special Investigation into the Conduct of E.F. Hutton & Company, Inc. That Gave Rise to the Plea of Guilty Entered on May 2, 1985 (September 4, 1985) pp. 156–70. See generally Neumann Frederick L. , “Corporate Audit Committees and the Foreign Corrupt Practices Act,” Business Horizons, 23/3 (June 1980): 62.

E.g., Kaplan v. Wyatt, 484 A.2d 501(Del. Ch. 1984) (report of specially retained outside law firm cited by court as evidencing committee's independence and reasonableness of its conclusions). At least one commentary has recommended that “special litigation committees” routinely hire outside special counsel to conduct an in-depth factual investigation. Payson Robert K. Goldman Michael D. Inskip Gregory A. , “After Maldonado—The Role of Special Litigation Committees in the Investigation and Dismissal of Derivative Suits,” The Business Lawyer, 37/3 (April 1982): 1201–07.

Public Service Electric and Gas Company (Salem Nuclear Generating Station Units 1 and 2), Docket Nos. 50–272, 50–311, Notice of Violation and Proposed Imposition of Civil Penalties (May 5, 1983).

Nash Nathaniel C. , “Bank of America is Told to Pay U.S. $4.75 Million Fine,” New York Times, January 22, 1986, p. A1.

Stone , op. cit., p. 206.

Ibid., pp. 51–53; 201–03. Stone gives the example of a utility operating a nuclear power plant, in which the acts and bits of information mat, collectively, make out a case of civil or criminal liability, are distributed among many different employees and functional groups.

Management's publicly announced commitment to conduct a thorough, objective investigation, make its results available to the public, and take corrective action can, of course, serve the corporation's immediate interests to the extent that it disarms critics and allays public fears and suspicions. Once such a commitment is made, however, the long-term credibility of the organization depends upon its being carried out.

See Silk Leonard Vogel David , Ethics and Profits: The Crisis of Confidence in American Business (New York, NY: Simon and Schuster, 1976), p. 34: “A society cannot function well without public confidence in its institutions and its leaders, and in the United States large business corporations are critical elements in a healthy and stable social order.”

There are, of course, other options, but many of them are either variations of the two courses of action discussed herein—using incumbent staff to conduct an investigation or employing legal counsel—or depend upon substantial reforms in corporate structure or governance. One recent commentary, for example, proposed an independent auditing agency, reporting to “outside” directors, to serve as watchdogs for misconduct. Gellerman , op. cit., p. 89. See also Steckmest , op. cit., p. 193. Even such an agency, however, might on occasion have to employ special investigative counsel from outside the corporation for many of the same reasons that a corporation's regular law firm might find it inappropriate or unwise to conduct such an investigation.

“[T]he adequacy, and indeed integrity, of the self-study report depends above all on the independence of the special counsel conducting it. Dispassionate observers have noticed a major difference between studies conducted by the corporation's own counsel and those undertaken by an independent special counsel (selected in some instances with judicial or agency participation). An investigation by the corporation's own counsel is likely to be far less probing.” Coffee , op. cit., p. 432 (footnote omitted). A recent example of the kinds of problems that can arise if the special counsel has previously dealt with the firm in another capacity occurred with respect to an internal investigation of charges of illegal foreign payments involving an oil company. See Lewin Tamar , “Special Counsel: Ticklish Role,” New York Times, April 8, 1986, p. D1.

Ethical Consideration 5–9 of the American Bar Association's Code of Professional Responsibility states the problem as follows: “Occasionally a lawyer is called upon to decide in a particular case whether he will be a witness or an advocate. If a lawyer is both counsel and witness, he becomes more easily impeachable for interest and thus may be a less effective witness. Conversely, the opposing counsel may be handicapped in challenging the credibility of the lawyer when the lawyer also appears as an advocate in the case. An advocate who becomes a witness is in the unseemly and ineffective position of arguing his own credibility. The roles of an advocate and of a witness are inconsistent; the function of an advocate is to advance or argue the cause of another, while that of a witness is to state facts objectively.”

Stone , op. cit., p. 45.

Steckmest , op. cit., p. 76.

Neumann , op. cit., pp. 63–64.

Letter from DeYoung Richard C. , Director, NRC office of Inspection and Enforcement to Vermont Yankee Nuclear Power Corp. (August 16, 1983), Appendix at 2. The NRC cited as evidence of corrective action the company's investigation of the incident and its disciplinary action against those reponsible.

For a good example of the salutary effects of voluntary disclosure (in this case involving an illegal foreign payment by Levi Strauss), see Steckmest , op. cit., p. 61.

This is not to disparage good public relations work, or to suggest that PR techniques have no place in corporate responses to charges of misconduct. In a recent book, an experienced practitioner of the art describes his approach to handling just such responses. Schmertz Herbert , Good-bye to the Low Profile (Boston-Toronto: Little, Brown and Company, 1986). Even tactics for dealing with short-term PR crises, however, must focus on development of a credible factual basis for the company's position. As Schmertz somewhat facetiously points out, one way to keep information secret is to put it in a press release. Ibid., pp. 126–27.

Upjohn Co. v. United States, 449 U.S. 383, 390–91 (1981).

In an extreme example of an investigation that backfired, a private detective hired by an Ohio public utility company to investigate personnel problems at a nuclear plant became a “whistleblower” against the utility, accusing it of covering up safety violations and calling for NRC and congressional action. See Peterson Iver , “Ohio Nuclear Plant is Once Again Under Scrutiny,” New York Times, September 16, 1982, p. 34.

In many ways the role of special counsel is analogous to that of certain European magistrates, who both conduct independent investigations of alleged criminal activity (e.g., the Italian investigation of the attempted assassination of the Pope) and render findings in written reports. Depending upon those findings, the proceedings may end or the accused may be brought to trial in an adversarial setting, with a prosecutor and defense counsel.

While a full discussion of the attorney-client privilege as it relates to special counsel investigations is outside the scope of this article, it is worth noting that the leading Supreme Court case on the applicability of the privilege to communications with corporate counsel arose from a corporation's internal investigation of questionable foreign payments. Upjohn Co. v. United States, 449 U.S. 383 (1981). The Court in Upjohn did not formulate general guidelines for the application of the privilege, opting instead for case-by-case development. It did, however, suggest that a number of critical factors will likely determine whether a given communication is protected by the privilege, among them: (a) whether the corporation intended the communication with counsel to be kept confidential, and communicated that intention to its employees; (b) whether the employees who made the communications had been instructed to do so by higher management; (c) whether the information was being sought in order to render legal advice to the corporation; and (d) whether the corporation's purpose in seeking the information had been explained to the communicating employees. See generally, Gergacz John W. , “Attorney-Corporate Client Privilege,” The Business Lawyer, 37/2 (January 1982): 461.

There may be great pressure to put too short a time limit on the investigation, especially when there is news media interest. The special counsel appointed by the State of Maryland to investigate the savings and loan crisis there commented on this problem: “In performing our task we have had several handicaps. First and foremost is the time element. An investigation such as this is complete only when the investigator says it is complete. We recognize that it is necessary to have a prescribed completion date given the circumstances faced by the General Assembly, but it did hinder our work. There are enumerable ways to hinder any investigation for some period of time and this is particularly effective when the investigator is known to have a limited life span such as the Office of Special Counsel.” Preston Wilbur D. Jr. , Report of the Special Counsel on the Savings and Loan Crisis (State of Maryland Executive Department; January 8, 1986), p. 6.

If the attorney-client privilege is waived by the corporation it cannot be claimed by individual executives or employees of the corporation. See In re Grand Jury Proceedings, 434 F.Supp. 648 (E.D.Mich 1977) aff'd per curiam, 570 F.2d 562 (6th Cir. 1978). Such individuals may, of course, have other privileges available to them, such as the Fifth Amendment privilege against self-incrimination, which a court might hold to have been waived if the person revealed the privileged information to a special counsel. This possibility is illustrative of the kinds of issues that will confront management in determining the extent to which it will force employees to cooperate with the investigation.

Steckmest , op. cit., p. 78; see also Anshen Melvin , Corporate Strategies for Social Performance (New York, NY: MacMillan Publishing Co., Inc., 1980), pp. 171–209, which discusses the perceptions and values of middle-management and nonmanagement employees as they relate to corporate social performance.

No matter how carefully prepared, special counsel's report and the special counsel himself can also become the target of litigation. For example, an E.F. Hutton employee mentioned in the special counsel report concerning that firm sued both the special counsel and the company, alleging that the publicly disseminated report and statements about it defamed him. Pearce v. E.F. Hutton and Griffin Bell, C.A. No. 86–008 (D.D.C. filed Jan. 3, 1986). This simply underscores the need for care in the report's preparation and in public statements about it.

In this respect, special counsel are like other outside experts and consultants—managers must avoid overreliance. See McFarland Dalton E. , Management & Society (Englewood Cliffs, NJ: Prentice-Hall, 1982), pp. 34–38.

Steckmest , op. cit., p. 55: “Disclosure of corporate information may serve to allay public mistrust or fear and thus reduce the rationale for additional regulation.”

Stone , op. cit., pp. 58–69, discusses the limits of targeting “key individuals” within a corporation as a means of controlling its behavior.

Some courts have recognized a privilege for “self-evaluations” on the theory that to force disclosure of materials gathered during a “self-critical analysis” of corporate activities would discourage organizations from undertaking such analyses. Currently, it would be foolhardy to place much reliance on this privilege as a means of guaranteeing confidentiality; there is simply too much unpredictability about whether and under what circumstances courts will recognize it. See Reed Jean D. , “Corporate Self-Investigations Under the Foreign Corrupt Practices Act,” University of Chicago Law Review, 47/3 (Sumer 1980): 803.

Stone , op. cit., pp. 62–63 (discussing legal defenses which discourage investigation); Steckmest , op. cit., p. 72 (discussing growing tendency to hold executives accountable for failing to oversee compliance with government regulation).

Editorial, Business Week, July 29, 1985, p. 84. A 1985 public opinion survey found that corporate crime was perceived to be just as widespread as organized crime, and was thought by the public to be the most costly form of crime, in terms of dollars and wasted resources. Roper Report, 85–7 (October 1985), pp. 22–23.

Just how expensive and unpredictable litigation can be was illustrated by the recent multi-billion dollar verdict returned by a state court jury against Texaco, a result which, for a time at least, threatened to bankrupt one of the world's largest oil companies. Nor is Texaco the first corporate giant to be threatened with bankruptcy at least partially because of private litigation. Robins A.H. , manufacturer of the Dalkon Shield contraceptive device, was forced into bankruptcy proceedings as a result of nationally publicized multiple litigation and revelations of harm arising from use of the product. Manville Corporation, a large asbestos manufacturer, similarly resorted to bankruptcy proceedings in the face of massive liability claims, investigations, and adverse publicity.

The increased use of special counsel investigations coincides with the search for alternative methods of resolving disputes. Many public and private organizations have experimented with arbitration, various theories of structured negotiation, and novel methods such as mock “mini-trials” and “early neutral evaluation” in an effort to circumvent the costs and inefficiencies of litigation and government regulatory processes. See, e.g., Arthurs Rich , “Neutral Litigators Tabbed to Help Settle Actions,” Legal Times, February 4, 1985, p. 2. Because any effective dispute resolution mechanism needs a reliable means of ascertaining the facts, special counsel investigations can complement or be used in conjunction with these “alternative” methods.

See, e.g., Ingersoll Bruce , “Busy SEC Must Let Many Cases, Filings, Go Uninvestigated,” Wall Street Journal, December 16, 1985, p. 1. Remarking on the inability of government action alone to bring about lasting internal changes even in corporations that have been prosecuted and convicted of crimes, one commentator stated: “How can internal discipline be improved? Again, the best answer seems to lie in the use of an internal investigation by a respected, disinterested counsel whose selection is approved by the court.” Coffee , op. cit., p. 455.