Should You Hire Someone Internally to Handle Your Corporate Investigation?

Should You Hire Someone Internally to Handle Your Corporate Investigation?

Whistleblower complaint alleging procurement fraud hits CEO’s desk at 6:47 AM. Board convenes emergency meeting by noon. General counsel pitches internal investigation: “Our compliance team can handle this – faster, cheaper, and we control the process.” CFO raises the critical question: “Will DOJ accept our internal investigation for cooperation credit?” Board chair asks the million-dollar question: “Do we lose attorney-client privilege if we use our own people?” This decision – made in haste under pressure – determines whether your investigation findings remain protected or become ammunition for plaintiffs’ lawyers in subsequent litigation. The answer isn’t what most general counsels want to hear.

Thanks for visiting Spodek Law Group – a second-generation law firm managed by Todd Spodek, with over 40 years of combined experience including former FBI agents who investigated corporate fraud and former federal prosecutors who handled DOJ cooperation negotiations. This article tells you why internal investigations destroy attorney-client privilege, what DOJ’s 2025 policy updates mean for cooperation credit, and why structural conflicts make internal compliance teams inherently suspect when investigating senior management conduct.

Why Internal Investigations Destroy Attorney-Client Privilege

Internal compliance teams create dual-role privilege destruction that courts increasingly reject. FirstEnergy Sixth Circuit decision (Aug. 7, 2025) provides framework – but only protects investigations where companies “primarily sought and received legal advice” not business guidance. Critical distinction: in-house counsel perform both business and legal functions. Only communications in legal role receive privilege protection. Compliance teams conduct “routine, business, or regulatory-focused” investigations courts refuse to privilege. Four waiver scenarios destroy protection: Broad internal dissemination – sharing findings widely destroys privilege. Outside party disclosure – auditors, regulators see privileged records. Cooperation credit sharing – Federal Rule of Evidence 502 risk means waiver to DOJ may extend to civil litigation. Board presentations – Delaware’s Ryan v. Gifford warning: reporting to board including individuals who become defendants waives privilege.

Practical example illustrates the destruction: Internal compliance director interviews procurement VP about fraud allegations. Writes report for CFO reviewing “compliance with purchasing policies.” Later discovery: court rules this was business advice, not legal advice – no privilege. Report becomes Exhibit A in shareholder derivative suit. The attorney-client privilege isn’t technical formality – it’s constitutional architecture protecting the right to counsel. When companies blur business and legal functions, they forfeit constitutional protection. Your compliance director’s report won’t be privileged – and that means every email, every interview note, every preliminary conclusion becomes discoverable ammunition for plaintiffs who sue your company later. FirstEnergy is binding only in Sixth Circuit, but represents trend: privilege protection requires investigations primarily seeking legal advice, not business assessment. When your compliance team investigates “policy violations” or “internal control failures,” courts see business function. When outside counsel retained expressly “to provide legal advice related to potential legal violations,” courts recognize privileged legal function.

DOJ Cooperation Credit Requires Independent Investigation

DOJ’s May 2025 policy update clarifies cooperation credit requirements – and independent investigations earn credibility internal teams cannot match. Criminal Division Corporate Enforcement Policy revised May 12, 2025. Guaranteed declination pathway requires: voluntary self-disclosure, full cooperation, timely remediation, no aggravating factors. “Near miss” benefits: NPA with less than 3-year term, no compliance monitor, 75% fine reduction. DOJ’s message: “Do the right thing and you will be rewarded.” What DOJ actually requires: timely disclosure of ALL relevant facts, identification of ALL individuals involved regardless of seniority, attribution of facts to specific sources, proactive cooperation not reactive responses, employee availability for interviews. What DOJ explicitly does NOT require: waiver of attorney-client privilege, production of attorney interview notes, disclosure of legal advice – only factual information required.

The independence factor matters for credibility. While DOJ Justice Manual Section 9-28.000 doesn’t formally distinguish between outside and in-house investigations, “the independence and credibility of outside counsel may provide practical advantages.” Maximum cooperation credit – up to 50% reduction off Guidelines range – reserved for companies that “truly distinguish themselves and demonstrate extraordinary cooperation.” When your general counsel investigates allegations against the CFO who sits three doors down, prosecutors notice. Real-world dynamics: companies start at “zero cooperation credit” and must earn it. AUSA reviewing your investigation asks: “Who conducted this? Your compliance officer who reports to the person we’re investigating?” Instant credibility deficit. Independence isn’t aesthetic preference – it’s evidentiary credibility. Government cooperation credit depends on investigation integrity prosecutors can defend to judges. DOJ doesn’t require external counsel – but they reward credibility, and your internal compliance team investigating their own bosses has none. May 2025 policy eliminates one argument for informal internal investigations: DOJ clarified cooperation credit doesn’t require privilege waiver, meaning companies can hire outside counsel, preserve privilege, and still earn maximum cooperation credit by disclosing factual findings.

Internal Conflicts of Interest That Poison Investigation

Structural conflicts make internal investigations inherently suspect when investigating senior management or board conduct. Research finding: “An internal investigation is not credible or appropriate when concerns relate to the conduct of senior management or the board itself.” Delaware courts scrutinize whether boards obtained truly independent advice or used privilege to shield information. Special committees with independent counsel required where board includes majority inside directors or alleged misconduct implicates directors. Three structural conflicts poison credibility: Reporting relationship conflict – general counsel reports to CEO being investigated, compliance officer’s performance review written by CFO under scrutiny, internal auditor’s budget controlled by board members implicated. Career preservation conflict – in-house lawyer investigating boss who controls promotion, compliance team member knows aggressive findings equal career suicide, “independence” becomes theoretical when mortgage depends on executive goodwill. Information access conflict – internal investigators request documents from colleagues they’ll see at next week’s strategy meeting, witnesses wonder whether answers get back to department head, de-confliction with government investigation requires coordination internal teams cannot provide.

UK Solicitors Regulation Authority published guidance (November 2024) specifically addressing independence concerns for in-house lawyers conducting investigations. Global trend toward recognizing structural conflict problems. Conflicts of interest aren’t character defects – they’re institutional architecture that predetermines investigation outcomes. No amount of good faith overcomes structural bias. Your compliance director can’t investigate the CFO who approves her bonus – and prosecutors know it, judges know it, and plaintiff’s lawyers will make sure juries know it. When FirstEnergy reached Sixth Circuit, 39 leading law firms filed amicus briefs arguing for privilege protection. Why such industry concern? Because companies understand investigations lose value when privilege destroyed. But even with privilege protection, investigation credibility matters. Board presents internal investigation findings to DOJ. Prosecutor asks: “Who conducted this investigation?” Answer: “Our compliance director.” Follow-up: “Who does your compliance director report to?” Answer: “The executive we’re investigating.” Investigation conclusions dismissed as self-serving before prosecutor reads first page.

When Internal Investigation Might Work

Limited scenarios exist where internal investigations make strategic sense – but only with rigorous privilege safeguards. Four qualifying scenarios: Low-level misconduct with clear boundaries – individual employee theft or harassment allegations, no senior management involvement, no anticipated criminal exposure, limited civil litigation risk. Preliminary assessment before external engagement – initial fact-gathering to determine investigation scope, deputized employees under outside counsel direction, proper Upjohn warnings to preserve privilege, clear documentation that assessment serves legal advice function. Routine compliance monitoring – regular policy violation reviews, no specific fraud allegations, business function not privilege-protected, understand this information is discoverable. Hybrid model with external counsel oversight – outside counsel retains and directs investigation, internal resources deployed as “deputized” fact-gatherers, 2025 emerging “deputization doctrine” provides privilege protection if properly documented, training for non-lawyers on privilege requirements.

Critical safeguards if using internal resources: engagement letter expressly notes counsel retained “to provide legal advice related to the matter” not merely factfinding, Upjohn warnings to all interviewed employees, minimize internal dissemination of findings, document legal advice purpose throughout. The exception proves the rule – even limited internal investigations require constitutional-grade privilege protections. If you’re thinking about using internal investigators, ask yourself: Would this approach survive cross-examination by a plaintiff’s lawyer who’s made privilege waivers their specialty? Most companies discover the answer is no – after privilege is waived and documents are produced in civil litigation. FirstEnergy litigation took years to reach Sixth Circuit. During that time, company fought disclosure of internal investigation materials in shareholder derivative suit. District court ordered production. Only Sixth Circuit reversal saved privilege. If your circuit hasn’t adopted FirstEnergy standard yet, you’re litigating privilege protection in uncharted territory. Better approach: structure investigation to meet highest privilege protection standards from day one.

Why Spodek Uses Former FBI Agents for Independence

True independence requires investigators without institutional loyalty or career dependency. Spodek investigation model: former FBI agents with federal investigative experience, no reporting relationship to company management, no career advancement dependent on investigation findings, credibility with DOJ prosecutors who value investigative pedigree. Three independence advantages: Institutional credibility – prosecutors respect former federal agents, courts recognize investigative expertise, shareholders see structural independence. Operational capability – experience conducting complex white-collar investigations, knowledge of DOJ cooperation expectations, ability to de-conflict with government investigation, understanding of what makes investigations defensible in subsequent litigation. Privilege protection framework – outside counsel engagement preserves attorney-client privilege under FirstEnergy standard, investigation conducted “to provide legal advice” not business assessment, clear documentation of legal advice purpose, minimized waiver risk in subsequent civil litigation.

Client value proposition: investigation findings DOJ takes seriously, privilege protection that survives discovery challenges, board can defend investigation integrity to shareholders. Independence isn’t luxury – it’s evidentiary foundation that determines whether investigation conclusions carry legal weight. We use former FBI agents because when the AUSA asks “Who investigated this?”, the answer needs to be someone whose credibility they respect – not your compliance director who’s worried about their Q4 bonus. When Spodek former FBI agent interviews company employees, witnesses understand: this isn’t internal HR matter that disappears if they stay quiet, this is federal-level investigation with real consequences, cooperation expected and lack of cooperation noted. That dynamic produces truthful testimony internal compliance teams never obtain. When we present investigation findings to DOJ, prosecutor knows: investigator has no career reason to minimize executive culpability, findings won’t change if CEO applies pressure, conclusions reflect investigative judgment prosecutors trust. That credibility translates directly into cooperation credit companies using internal investigations never receive.

Question isn’t “Can we afford external counsel?” Question is: “Can we afford to lose privilege protection and DOJ cooperation credit?” The real cost calculation: Internal investigation costs $50,000-100,000, creates potentially waived privilege, produces questionable DOJ credibility. External investigation costs $200,000-500,000, protects privilege, earns maximum cooperation credit. Cost of getting it wrong: privilege waiver in civil litigation worth millions, reduced DOJ cooperation credit, regulatory skepticism. Board facing investigation decision needs external counsel assessment within 24 hours. Privilege preservation requires immediate engagement letter. DOJ voluntary disclosure deadline ticking – companies have limited window to self-disclose and earn cooperation credit before government discovers misconduct independently. Your board is facing this decision right now – and you have approximately 48 hours before internal steps potentially destroy privilege protection. Call us at 212-300-5196. If whistleblower complaint arrived, if auditor flagged irregularities, if employee reported potential fraud – engage external counsel before internal compliance team starts interviews that waive privilege. Available 24/7 because investigation decisions don’t wait for business hours.