Should You Hire Someone Internally to Handle Your Corporate Investigation?

Should You Hire Someone Internally to Handle Your Corporate Investigation?

Thanks for visiting Spodek Law Group – a second-generation law firm managed by Todd Spodek, with over 40 years of combined experience defending corporations in federal investigations. The question “should we investigate this internally or hire outside counsel?” seems like a cost-benefit analysis. It’s not. It’s a choice between conducting an investigation that’s protected by attorney-client privilege versus creating a roadmap for prosecutors to indict your executives. Our former federal prosecutors have built cases using companies’ internal investigation files – because those companies used HR personnel or in-house counsel without understanding privilege requirements, then watched helplessly as courts ordered production of everything to the government.

This article explains why internal investigations often destroy the privilege protections they’re meant to preserve, when in-house counsel creates more liability than protection, and how to determine whether your investigation requires outside counsel. Whether you’re investigating employee misconduct, regulatory violations, or fraud allegations, understanding privilege isn’t a technical legal issue – it’s the difference between controlling investigation findings and handing them to prosecutors as exhibits.

The Privilege Problem Internal Investigators Create

HR personnel conducting investigations rarely receive attorney-client privilege protection, because privilege requires the investigation’s primary purpose to be obtaining legal advice, not business decision-making. When your HR director interviews employees about suspected fraud, those interviews aren’t privileged – they’re business records subject to subpoena, discovery, and government production demands.

That creates a fundamental problem: The investigation you conduct to assess legal exposure becomes evidence of that exposure. HR interviews where employees admit to improper conduct, emails analyzing potential violations, investigative reports concluding fraud occurred – all discoverable, all admissible, all usable by prosecutors to build cases against your company and its executives.

I’ve defended corporations where HR conducted “thorough internal investigations” of Medicare billing fraud. Employees admitted to systematic upcoding during interviews. HR documented the admissions, quantified the fraudulent billing, calculated repayment amounts. When DOJ opened a parallel criminal investigation, they subpoenaed the HR investigation file. Every employee admission became a prosecution exhibit. Every HR email analyzing fraud exposure became evidence of corporate knowledge. The company’s own investigation became the government’s case-in-chief.

Why In-House Counsel Isn’t the Solution You Think It Is

Companies avoiding HR investigations often turn to in-house counsel, assuming legal department involvement creates privilege. It doesn’t – or at least, not reliably. The problem is in-house counsel’s dual role: They perform both legal and business functions, and only communications in their legal role are privileged.

When your in-house general counsel investigates alleged procurement fraud, are they providing legal advice or making business recommendations about contract compliance? Courts look at the purpose of the investigation, the nature of the communications, and whether the investigation primarily serves legal or business objectives. If the investigation informs business decisions – whether to terminate employees, revise compliance programs, exit contracts – courts often find the investigation wasn’t primarily for legal advice, destroying privilege.

The Cognizant case demonstrates how easily privilege collapses. Company counsel conducted employee interviews during an FCPA investigation, then provided oral “downloads” to government investigators summarizing interview contents. The court ruled those oral summaries waived attorney-client privilege and work product protection as to entire interview contents – not just what counsel told the government, but everything employees said during privileged interviews. One cooperation decision destroyed privilege over the entire investigation.

The Independence Problem: You Can’t Investigate Yourself

Beyond privilege issues, internal investigations face credibility problems that external investigations don’t. In-house staff face bias toward the employer – they’re investigating their own employer, their colleagues, sometimes their supervisors. When the investigation concludes misconduct occurred, they’re reporting findings that could destroy careers of people they work with daily.

That creates subtle but powerful pressures to minimize findings, interpret evidence charitably, accept explanations without rigorous testing. I’ve seen in-house investigations where employees accused of fraud were interviewed once, given opportunities to explain away evidence, and cleared based on their denials. External investigators would have tested those explanations against documents, interviewed corroborating witnesses, analyzed financial records. Internal investigators accepted denials at face value because aggressive investigation would have destroyed workplace relationships.

Government agencies know this. When companies respond to SEC or DOJ inquiries by citing internal investigations that found no wrongdoing, prosecutors discount those findings as self-serving. But when external counsel conducts investigations and reaches similar conclusions, the findings carry weight – because external counsel has no employment relationship creating bias, no career advancement depending on executive satisfaction, no workplace relationships to preserve.

Conflicts of Interest That Destroy Attorney-Client Relationships

In-house counsel investigating corporate misconduct face another problem: potential conflicts of interest when the investigation implicates senior management. In-house counsel may find themselves in situations where their actions create potential joint representation of the company and individual employees – representing both creates conflicts when their interests diverge.

Here’s how that works. Your general counsel investigates allegations that the CFO manipulated revenue recognition to meet earnings targets. During the investigation, the GC interviews the CFO about accounting decisions. The CFO treats those interviews as privileged attorney-client communications – which they arguably are, since the GC has provided legal advice to the CFO previously. But the company needs that interview information to assess corporate liability and cooperation obligations.

Whose privilege controls? The CFO’s individual privilege or the company’s corporate privilege? If the GC discloses interview contents to government investigators over the CFO’s objection, has the GC violated the attorney-client relationship with the CFO? If the GC refuses to disclose, has the GC breached duties to the company? External counsel avoids these conflicts by representing only the company, making clear from the outset that employee interviews aren’t individually privileged.

When Government Disclosure Waives Privilege for Everyone

Companies cooperating with government investigations face brutal privilege rules: Six courts of appeals have ruled that disclosing privileged communications to the government waives privilege as to all parties – not just the government, but private litigants, shareholders, qui tam relators, everyone. Once you disclose to government, privilege is gone permanently.

That means when your in-house counsel provides DOJ with interview summaries, investigative findings, or privileged legal analysis to demonstrate cooperation, you’ve waived privilege. Every employee you interviewed can now be deposed about what they told your attorneys. Every privileged email analyzing legal exposure is discoverable in shareholder lawsuits. Every legal memo assessing criminal liability is admissible in civil proceedings.

External counsel structures government disclosures to avoid these waivers – providing factual summaries without revealing privileged sources, disclosing ultimate facts without discussing legal analysis, using proffer agreements that limit disclosure waiver. In-house personnel conducting investigations rarely understand these nuances, making broad disclosures that waive privilege they didn’t realize existed.

When Internal Investigation Might Work

Internal investigations aren’t always wrong. If allegations involve lower-level personnel, are relatively confined, don’t threaten significant civil or criminal liability, and don’t implicate prior legal advice, internal investigation may be appropriate. Minor employee misconduct, isolated policy violations, routine HR matters – these don’t require external counsel.

But the moment investigation reveals potential criminal exposure, regulatory violations, or widespread misconduct implicating senior management, external counsel becomes necessary. The question isn’t “how serious is this?” – it’s “could this become a federal investigation?” If the answer is yes or maybe, external counsel is required.

I’ve represented companies that started with internal HR investigations of “expense account irregularities,” only to discover systematic embezzlement exceeding $2 million. By the time they engaged external counsel, HR had already interviewed the perpetrators without Miranda warnings, collected evidence without preserving chain of custody, and documented findings in emails discoverable by government subpoena. We couldn’t undo that damage – we could only try to limit it.

The External Counsel Advantage Prosecutors Understand

When federal prosecutors receive credible allegations of corporate fraud, they assess whether the company’s internal investigation is trustworthy. Investigations conducted by external counsel carry weight; investigations conducted by HR or in-house counsel don’t. Hiring outside counsel lends credibility to investigations and can result in more leniency from government agencies if violations are proven.

That’s not speculation – it’s DOJ policy reflected in the Principles of Federal Prosecution of Business Organizations. DOJ evaluates cooperation based on investigation quality, independence, thoroughness. External counsel investigations satisfy those criteria; internal investigations raise skepticism about whether the company actually wanted to find misconduct or preferred plausible deniability.

At Spodek Law Group, our former federal prosecutors conduct corporate investigations the way government expects them to be conducted – independent, privileged, thorough, and credible. We’ve supervised investigations that identified significant fraud, self-disclosed findings to regulators, negotiated reduced penalties based on cooperation credit that internal investigations never receive. When we tell DOJ our investigation found no criminal conduct, they believe it – because we have no incentive to whitewash findings, no employment relationships creating bias, and no conflicts compromising independence.

The cost of external counsel seems expensive until you calculate the cost of privilege waiver, government prosecution, shareholder litigation based on discoverable internal investigation files. We’re available 24/7 to help you determine whether your investigation requires external counsel – and to conduct investigations that protect privilege while satisfying regulatory expectations.