Employer Investigations into Misconduct and Fraud

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August 23, 2018
Author: Julie A. Proscia
Organization: SmithAmundsen LLC

I. How to Select an Investigator
Fraud and misconduct in a business by its executives, managers, employees and others who have knowledge regarding the Company’s business has increased in the spotlight over the past few years. Companies are aware that such fraud can wreak havoc on their Company as well as exposing the Company to liability and financial penalties.

Before selecting an investigator, the Company must assess who is alleged to have acted wrongly, what is the alleged violation, and is an investigation necessary. There is no one size fits all investigation and the investigation will need to be tailored based on the facts and circumstances. Next, the Company must decide if there is a need for immediate action and should consider the following: (1) stop/minimize future injury hazard to people or the Company, (2) separate employees or appoint a different supervisor, (3) remove someone from the workplace during the investigation, or (4) conduct a workplace search. Does the matter need to be escalated within the Company because it deals with special issues regarding the Sarbanes-Oxley Act of 2002 (“SOX”) compliance or ethics? Are there union issues? Are there documents or electronic data that must be preserved immediately at the outset of the investigation to ensure no loss of evidence? The Company must ensure that confidentiality is addressed at the outset to protect the investigation.

Next, the Company will consider whether the Company will do an internal investigation or whether they will seek the assistance of outside counsel. Outside counsel is recommended for serious fraud allegations that could have SOX or criminal implications on the Company. Once this determination has been made, the Company can assess who from the Company is proper to investigate the matter or whether the investigation will be turned over to a third party to conduct.

II. Who is in the Control Group?
In a corporation or company, the attorney-client privilege attaches to the entity and not the individual employees who communicate with counsel. Similarly, the decision whether to waive the privilege belongs to the corporation, and not to its employees. Thus, in order to be in the control group and have conversations and communications with counsel regarding the investigation be privileged the employee must be one who communicates directly with counsel and who is in a position to control, or take a substantial role in the determination of, the course of action a corporation may take based on the legal advice received.

The Illinois Supreme Court has established that a person is deemed within the control group if: (1) the agent served as an advisor to top management of the corporate client; (2) this advisory role was such that the corporate principal would not normally have made a decision without the agent's advice; and (3) the agent's opinion or advice in fact formed the basis of the final decision made by those with actual authority within the corporate principal. Consolidation Coal Co. v. Bucyrus-Erie Co., 89 Ill. 2d 103, 432 N.E.2d 250 (1982). Thus, in order to determine who is and who is not in control group courts will look at the role that the individual played in the organization and not that individual’s title.

III. Best Practices for Conducting Interviews
The fact-finding process of an investigation will be multi-faceted and will include the following: conducting interviews, gathering and reviewing information and evidence and preparing reports regarding the fact finding information and results.

The information regarding the investigation should be contained in a limited group of individuals involved in the investigation. A list should be developed of who is entitled to know about the investigation. Make a communication plan for how information is going to be communicated within this group and who will be responsible for keeping the group apprised of the developments of the investigation. Create an investigation plan which will be a fluid document that will change as the investigation moves forward. Having a plan at the start will ensure that the team is on the same page and the investigation moves forward succinctly. An important part of the plan will be determining how evidence will be preserved. It is important to address this early in the investigation as to not lose key documents or evidence. Those individuals who are deemed to have information that is pertinent to the investigation must be alerted to preserve relevant documents, including electronic evidence.

After a plan is in place, a chronology of the facts known and allegations made should be compiled along with a witness list of employees or outside persons who may have relevant information to the investigation. Additionally, the relevant documents will need to be reviewed. This will be an ongoing process as witnesses are interviewed, and as more information is discovered, additional documents may come to light. The chronology of facts should be a fluid document that is updated as the facts of the matter develop. Next, the team will need to decide who should be interviewed and in what order the interviews should be conducted. Based on the severity of the allegations, the person accused of the fraud may need to be put on notice immediately that the investigation is proceeding if they are not one of the initial interviewees. Additionally, the Company should consider whether the fraud and/or misconduct is allegedly conducted by one individual or multiple individuals and determine whether collusion may be going on among a group of individuals.

When interviewing the witnesses, think about the big picture including the issues, allegations, documents, parties and implications of the investigation. The interviewer should be familiar with the allegations and the fact chronology prior to conducting the interview so they are in the best position to gather the relevant data from the witness. Gather information regarding your interviewee, including background information, and know what information you are trying to gather from that interviewee prior to starting the interview. Having a plan of what you want to obtain from the witness prior to the interview will assist in keeping the interview on track. Establish a set of interview questions for the witness prior to the interview to ensure you do not miss key topics necessary to be addressed during the interview.

Consider conducting the interviews with two investigators present. One investigator would ask the interviewee the questions and the other investigator would take the notes from the interview. This helps to ensure that information is properly captured. If two investigators are involved in the interviews, take a break before the interview is concluded and consult if any additional questions should be asked of the interviewee. If two investigators are not necessary for the scope of investigation, then the investigator will conduct the interview and take notes during the interview. Make sure the interviews are conducted in a private location and free from distractions. Try to have the interviews conducted in an area this is discrete so as to not highlight the investigation is being conducted. If you believe collusion may take place, you may consider scheduling interviewees you believe are in concert back-to-back or have their interviews take place at the same time by two separate interviewers.

Note, the decision makers heading up the investigation should review the severity of the situation early on to determine (along with outside counsel) if they believe the matter could lead to litigation or governmental sanctions. If so, an outside consultant or expert may be necessary to bring in during the early stages of the investigation.

IV. Whistle?Blower and Retaliation Allegations
A. Illinois
In Illinois, employees are at-will and can be terminated for any reason or no reason at all. Illinois courts have recognized, as a narrow exception to the at-will doctrine, claims for retaliatory discharge under the Illinois Whistleblower Act and common law tort of retaliatory discharge.

The Illinois Whistleblower Act prohibits employers from retaliating against an employee for “disclosing information to a government or law enforcement agency, where the employee has reasonable cause to believe that the information discloses a violation of a State or federal law, rule, or regulation.” The Illinois Whistleblower Act only provides a cause of action to an employee who can allege that he or she refused to participate in an illegal activity, or who alleges that he or she reported the alleged unlawful activity to a government or law enforcement agency. The common law tort of retaliatory discharge does not require an employee to allege that he or she reported an alleged unlawful activity to a government or law enforcement agency.

Instead the employee must show that he or she was (1) discharged, (2) the discharge was in retaliation for the employee’s activities, and (3) that the discharge violates a clearly mandated public policy.

Courts have generally held that to establish a clearly mandated public policy, an employee specifically identify a constitutional or statute that establishes the public policy that was allegedly violated.

B. Federal
The Sarbanes-Oxley Act of 2002 (“SOX”) contains significant protections for corporate whistleblowers. Unlike most whistleblower laws, the SOX’s whistleblower protection provisions are not limited to providing a legal remedy for wrongfully discharged employees.

SOX requires publicly traded corporations to create internal and independent audit committees, establish procedures for employees to file internal whistleblower complaints, and create confidentiality provisions. The law contains an employee protection provision which permits whistleblowers to file a complaint before the U.S. Department of Labor alleging unlawful retaliation in which the employee may receive compensation for initiating a successful lawsuit.

Under the Occupational Safety and Health Act (OSH Act), employees may file  complaints with OSHA if they believe that they have experienced discrimination or retaliation for exercising any right afforded by the OSH Act, such as complaining to the employer union, OSHA, or any other government agency about workplace safety or health hazards; or for participating in OSHA inspection conferences, hearings, or other OSHA-related activities.

Under the Consumer Product Safety Improvement Act (CPSIA), employees of manufacturers, private labelers, distributors, and retailers may file complaints with OSHA if they believe that they have experienced discrimination or retaliation for reporting alleged violations of any law or regulation within the jurisdiction of the Consumer Product Safety Commission (CPSC) to the employer, the federal government, or a state attorney general; or for refusing to perform assigned tasks that the employee reasonably believes would violate CPSC requirements.

V. What Are Our Reporting Requirements?
At the outset of an investigation, the Company and the team tasked to perform the investigation must review the severity of the situation and determine whom the results of the investigation may be reported to within the company and outside the company. This will differ depending on the size of the company and whether the company is privately or publically held.

The company may seek voluntary disclosure to law enforcement agencies if monetary fraud is committed and the company is seeking to obtain restitution or a criminal action against the fraudulent employee.

Under Illinois law and OSHA, there are generally no reporting requirements for employers under most of the Whistleblower Protection provisions. Under SOX, there are financial reporting responsibilities if the fraud is going to financially impact the Company and shareholders.

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