The Right Way To Hire An Investigator

THE RECENT FUROR at Hewlett- Packard has focused attention on public companies' use of private investigators—a practice far more widespread than may be commonly understood. Public companies engage private investigators for a variety of reasons: background checks on potential key hires; due diligence for investments or acquisitions; scrutinizing suspicious claims and claimants in litigation; tracking down a debtor's concealed assets; counteracting business espionage or theft of corporate assets or intellectual property; and obtaining information on participants in a proxy contest or unsolicited takeover.

The HP outcry and the ensuing criminal charges by the California attorney general against HP's chairman and a senior internal counsel, among others, call for a reappraisal of companies' procedures in using private investigators. In appropriate circumstances, this is a legitimate and sometimes necessary practice. Accordingly, focus should be on applying the lessons of HP: first, by ensuring that corporate directors and officers understand the risks involved when hiring a private investigator; second, by selecting a reputable, qualified firm to conduct the investigation; and third, by conducting and supervising the investigation in a way that protects the interests of the company and its directors and officers.

The principal risks are now broadly understood. They involve the possibility of criminal or civil charges if the investigation is conducted improperly, as well as the risk of negative publicity. They also involve the potential for aggressive countermeasures by targets of the investigation, which in some cases may include hiring their own investigators.

However, the HP scandal underscores the difficulty of determining the legality of specific investigative techniques. The core activity at the heart of criminal charges in HP is "pretexting"— the use of trickery to obtain third parties' personal information. Although there are few laws specifically prohibiting pretexting, the California attorney general filed charges under an obscure public utility law, as well as various other criminal fraud laws. (In response to HP, California has passed an anti-pretexting law that will take effect in 2007.) Yet even if an investigative technique is not demonstrably illegal, it may offend common- sense notions of ethical behavior. In that circumstance, prudence dictates extreme caution.

While the risk of negative publicity cannot be disregarded, the extent of this risk will depend upon the parties involved, the purpose of the investigation, and the manner in which the investigation is carried out. The public reaction to the HP investigation may well have been greatly muted had the purpose been to prevent insider trading or to expose corporate wrongdoing rather than to prevent leaks to the media.

What do you need to consider in hiring and overseeing an investigative firm?

Make sure the firm is reputable and licensed. The private investigation industry is replete with people unsophisticated in the legal, ethical and public relations issues faced by large corporations. Major law firms and accounting firms are experienced in dealing with investigators and can provide recommendations.

Proceed only with a written engagement letter. The letter should detail the scope of the work and contain provisions that make clear the investigative firm's obligation to comply with the law. The engagement letter also should include provisions to limit the common practice of subcontracting to other firms without the client's consent and ensure that any subcontractors are subject to the same obligations as the primary firm.

Have a full understanding of the process. Discuss the scope and nature of the investigative techniques with the investigator. Ask for a written plan of investigation. Having a written plan that has been reviewed by outside counsel should provide significant protection to the client, a benefit that far outweighs any burden on the investigator.

Hire outside counsel to oversee the investigation. After HP, few internal counsel will relish the role of principal legal counsel in this situation. Moreover, depending upon the nature of the investigation, it may be advisable to use a law firm other than the company's regular outside counsel. If there are issues concerning the investigative techniques to be used or the objectives sought, the involvement of outside counsel should provide an important safeguard to the integrity of the investigative process. In addition, having outside counsel hire the investigator may allow for protection of the investigator's work as attorney work product.