Justice Department, SEC investigations often rely on companies’ internal probes

May 22, 2011

As the U.S. government steps up investigations of companies suspected of paying bribes overseas, law enforcement officials are leaving much of the detective work to the very corporations under suspicion.

The probes are so costly and wide-ranging that the Justice Department and Securities and Exchange Commission often let the companies investigate themselves and then share the results.

The strategy is especially common in cases of foreign corruption but also extends to domestic investigations involving issues as varied as health-care fraud and shady accounting.

The corporations, sometimes at the request of the government, hire teams of lawyers and accountants to interview employees, gather electronic records and sift through documents. The government reviews the results and decides whether further legwork is warranted — and, ultimately, whether to pursue charges.

The private investigators help determine what evidence the government sees. They typically turn over only a small subset of the many documents they collect. Sometimes the lawyers who conduct the investigation are the same ones who represent the company in negotiations with the government over charges and penalties.

According to lawyers and accountants involved in internal investigations, current and former government officials, and records of cases in which internal probes have played a role, the practice is widespread.

For the government, the approach is a way to save money and claim relatively easy victories, corporate lawyers say.

For the companies under investigation, it is a way to win credit for cooperating, which can translate into lesser charges or lighter penalties.

For the people who conduct the internal investigations — many of them former Justice and SEC employees — it is a big business. An ongoing investigation for Diebold, which makes ATMs, has cost the firm about $16 million, a company spokesman said. Avon has confirmed spending more than $130 million.

And a global bribery probe performed for Siemens cost about $950 million, according to a company accounting. That was almost triple the $324 million annual budget of the SEC’s enforcement division when the case was resolved in December 2008.

Some companies launch internal probes after the government has begun an official investigation. That was the case with Daimler, the big automaker and former parent of Chrysler, which came under SEC scrutiny when a former employee told the government that Daimler was keeping secret accounts to bribe foreign officials. Daimler agreed to pay the government $185 million last year in a settlement that allowed it to avoid criminal prosecution.

Other companies open internal investigations on their own initiative and essentially blow the whistle on themselves. That was the case with Johnson & Johnson, which settled bribery and other charges in April by agreeing to pay $70 million. As the Justice Department noted, the company was given credit for conducting a “thorough and wide-reaching self-investigation.”

The private investigation is “a very important tool that we use to leverage the resources we have to be as efficient and as effective as we can,” said Lanny Breuer, head of the Justice Department’s criminal division.

Law enforcement officials say they don’t just take the company’s word. Asked how the government knows the company’s investigators are providing a complete and objective account, Breuer said, “Well, that’s why I have smart prosecutors to test and probe.”

When government officials have confidence in an internal investigation, they may do little investigating of their own, lawyers involved in such cases say.

What prevents the internal investigators from airbrushing the facts or, say, omitting evidence that might implicate the chief executive?

“You mean other than integrity?” one former federal prosecutor replied. “Very little.” The former prosecutor, who now works on internal investigations, spoke on the condition of anonymity to avoid having his comments used against him in future cases.

Siemens investigation

In December 2008, the government accused Siemens of engaging in a systematic effort to win business by paying bribes. The company maintained “slush funds” at offshore banks and “cash desks” where employees “typically brought empty suitcases to fill,” according to a court filing.

The Justice Department cited $805.5 million of “corrupt payments to foreign officials.”

The allegations were based largely on an internal investigation that Siemens, an engineering company based in Germany, began in 2006 after German authorities raided company offices and employees’ homes. The U.S. government got involved because Siemens, which does extensive business in the United States, was listed on the New York Stock Exchange.

The company hired the New York-based law firm Debevoise & Plimpton to lead the internal probe, and Debevoise enlisted the accounting firm Deloitte &
Touche, among other contractors.

The U.S. government has cited the company’s investigation as a model.

According to court records, it was a vast undertaking spanning 34 countries, with private investigators conducting more than 1,750 interviews and gathering more than 100 million documents. They reviewed approximately 14 million of those documents and gave the Justice Department and the SEC a small subset, about 24,000, according to a Siemens tally.

The Justice Department and the SEC would not say how many documents their own staff reviewed or how many interviews they conducted, either in the Siemens case or in several others.

In court, the government provided an example of how the Siemens probe worked, saying the Justice Department and the SEC identified people and subjects “for more extensive debriefings by Siemens.”

Siemens routinely provided English translations of its documents, the Justice Department said in a court filing, “thereby saving the Department very significant time and expense.”

German prosecutors were initially skeptical about the internal investigation, “mistrustful that a law firm hired by the company could be relied on to do a thorough job,” Siemens general counsel Peter Y. Solmssen said. But they agreed to go along with it.

In the end, the Justice Department credited Siemens with providing valuable assistance, including help tracing international transactions.

“It was only through the extensive, worldwide investigative efforts of the internal investigators that these complex criminal activities were uncovered,” the Justice Department said in a 2008 court filing.

Though Siemens could have been fined as much as $2.7 billion in the criminal prosecution, the Justice Department and SEC settled for a combined U.S. total of $800 million.

The Justice Department has not prosecuted any of the company’s executives or employees for the violations.

Based partly on Siemens’s cooperation in the case, the U.S. government decided that the firm could remain eligible for federal contracts, a priority for Siemens.

Few documents revealed

In 2009, when the California-based valve manufacturer Control Components Inc. pleaded guilty to charges that it paid bribes to win contracts, CCI’s British parent company, IMI, issued a news release saying that no current employees were prosecuted.

But several former executives were charged with crimes, and some of them have protested that the internal probe served to make them scapegoats while protecting the companies and current executives.

The CCI case shows how the reliance on internal investigations can leave the fairness and credibility of law enforcement open to question.

Several defendants said in a court filing that the indictment of the former executives “recites almost verbatim” findings from the internal investigation.

To conduct that probe, IMI hired the law firm Steptoe & Johnson, which in turn enlisted the accounting firm Ernst & Young.

While the internal investigation gathered more than 5.5 million pages of documents, Steptoe turned over fewer than 1 percent of them to the government, the defendants said, complaining that the limited disclosure stacked the deck in favor of the companies and against the former executives.

“The government apparently relied primarily on the 42,000 pages handpicked by IMI and CCI in tailoring its investigation and securing the Indictment against Defendants,” they argued in a court filing.

The former executives contended that other documents might help prove their innocence. They asked a judge to force the Justice Department to get them those documents.

IMI and CCI opposed that request. In court papers, they said they gave the government all the documents that were relevant. They said many were protected from wider disclosure by attorney-client privilege.

The companies said in a court filing that Steptoe not only conducted the internal investigation but also represented them and negotiated CCI’s plea deal. That included securing the Justice Department’s agreement not to prosecute the parent company based on any information the companies provided, Steptoe lawyer Brian M. Heberlig told the court.

In the battle over the records, the judge sided with the government and the companies.

A spokesman for IMI declined to comment for this story.

Probes overseas

Robert Khuzami, the SEC’s director of enforcement, said there are instances in which the SEC does the investigation on its own.

Other times, “you permit the company to conduct an internal investigation and provide you with the results,” Khuzami said in an interview. “And we test and probe and verify to see whether or not that investigation is thorough and independent.”

The government is especially likely to rely on internal probes in cases involving the Foreign Corrupt Practices Act, which prohibits companies from paying bribes to win business abroad. Those crimes almost by definition take place overseas, where culture, language and distance are just some of the many obstacles federal investigators would confront.

The U.S. Chamber of Commerce, a major business group, has said the government’s heightened enforcement of the FCPA includes “the effective outsourcing of investigations by the government to the private sector.”

In a recent proposal explaining how it plans to act on tips from corporate insiders and other whistleblowers, the SEC said that, “in appropriate cases . . . our staff will, upon receiving a whistleblower complaint, contact a company, describe the nature of the allegations, and give the company an opportunity to investigate the matter and report back.”

“This has been the approach of the Enforcement staff in the past, and the Commission expects that it will continue in the future,” the agency said.

Lawyers involved in internal investigations say that if the government trusts them and has confidence in the way they have approached the task, it may proceed on the basis of their information instead of re-plowing the same ground.

“If the SEC does bring charges, it will oftentimes be based on the work the company did itself,” said Susan Muck, a lawyer at Fenwick & West who specializes in internal FCPA investigations. There are many instances in which, at the end of its review, the SEC decides not to bring charges, she added.

Muck said lawyers conducting internal investigations have a good reason not to withhold smoking-gun evidence: They can’t be sure the government wouldn’t obtain it elsewhere.

Nonetheless, some companies are determined to protect themselves from shareholder lawsuits and to shield key executives, and those objectives can influence the internal investigation, at least subtly, lawyers said.

A former government official said he and his colleagues have been asked to help conduct investigations for companies that stated they were looking for someone to exonerate them. The former official, who spoke on the condition of anonymity out of deference to colleagues, said he has turned down those requests.

Lawyer Nathan J. Muyskens of the firm Shook, Hardy & Bacon said internal investigations cannot be a complete substitute for federal probes.

“I can’t issue grand jury subpoenas. I can’t compel witnesses to testify truthfully in front of me. And, frankly, I can’t get documents from third parties,” such as the alleged recipients of bribes, he said.

“The government is often far better situated to collect evidence,” he said.

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