When a whiff of accounting irregularities at Enron Corp. rocked Wall Street in the fall of 2001, the energy-trading firm's board of directors hired the law firm of Wilmer Cutler & Pickering to do an internal investigation of the company.
Board members expected the lawyers to find a few pieces of dirty laundry that, once aired, might be embarrassing. But they hoped the investigation also would allay investors' worries about widespread fraud, allowing Enron to move out of crisis mode and back to business as usual.
The results of Enron's internal investigation provided information on wrongdoing to prosecutors.
(Richard Carson -- Reuters)
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The Wilmer lawyers weren't as sanguine.
"We didn't know if we would find bodies buried in the basement or simply a broken door latch that could be easily fixed," said William R. McLucas, former head of enforcement at the Securities and Exchange Commission and Wilmer's lead attorney in the investigation.
McLucas cautioned the Enron board that his team would have to follow the investigation wherever it led and that serious problems might be uncovered.
The directors, already facing damage to Enron's viability and their own reputations, decided the risk was worth taking. At least it would forestall an investigation by the SEC, which had opened one but agreed to stand down until the board's review was finished.
As it turned out, the report McLucas handed the Enron board in February 2002 detailed widespread fraud at the company. In doing so, it also provided a guide to wrongdoing for criminal and civil prosecutors -- and investors eager to file class-action lawsuits.
Despite that painful outcome, Enron-style self-initiated internal investigations have become the tool of choice for corporate directors under siege from charges of wrongdoing at the companies they are supposed to oversee.
Boards at Merck & Co., WorldCom Inc., Tyco International Ltd., Adelphia Communications Corp., Riggs Bank, the New York Stock Exchange, Hollinger International Inc. and Freddie Mac all have used them. More recently, mortgage funding giant Fannie Mae, accused of accounting misstatements that could wipe out $9 billion in earnings, has commissioned an independent investigation led by former senator Warren B. Rudman. All have hoped that by baring their souls they would placate regulators and prosecutors, get ahead of bad news and minimize disruption to the companies' -- and their own -- reputations.
"Formal, outside, counsel-driven investigations have become so much more frequent in the last few years that it just spins your head," said former federal prosecutor Jonathan D. Polkes, a partner in the business fraud and complex litigation practice at Cadwalader, Wickersham & Taft LLP. "It's going on all the time, which is consistent with what you would expect given the new focus that the New York attorney general, the SEC and various U.S. attorneys are putting on white-collar crime in general."
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