A Lesson in Investigation

Employer, a Delaware corporation based in California, hears rumors that its Japanese branch is having “accounting” issues. So it conducts an investigation and hires a private investigator firm to handle it.

During this investigation, the company’s CEO flies to Japan to see how things are going. He raises questions about how the investigation is being conducted and questions the wisdom of retaining a law firm with close ties to the company’s general counsel to oversee the entire operation.

Quick question: Can the company force the CEO to resign and not owe him any damages?

Before you answer, let me give you a few more allegations from the CEO. (What follows is what comes from a court opinion and is based on the CEO’s allegations, not on established facts.)

“The investigators conducted interrogations during which they physically intimidated employees at International Rectifier Corp., or IR for short, a Japanese subsidiary, lied to these employees in an attempt to coerce inconsistent statements, and failed to advise these employees that they could, or should, retain independent counsel, despite the possibility that the employees could be criminally prosecuted based on the statements they gave during the interrogations,” the CEO claimed.

As a result of the investigators’ aggressive and coercive tactics, employees at the Japanese subsidiary filed multiple complaints and threatened to resign in mass numbers. Productivity at the Japanese subsidiary came to a halt.

The interviews were apparently conducted in English, even though the people being questioned only spoke Japanese.

CEO Alexander Lidow went to Japan to see what was happening. When he discovered the mess, he tried to implement some changes and he tried to get the major law firm, Sheppard Mullin, taken off the case. He also questioned how well the company’s audit committee was overseeing things.

Word somehow leaked about all of the issues, which resulted in IR being the target of a class action securities lawsuit. IR then hired Sheppard Mullin for representation in that lawsuit, also. Lidow, perhaps predictably, criticized this decision.

Things worsened. Sheppard Mullin issued a report that suggested Lidow was the person either causing the accounting problems or, at a minimum, was turning a blind eye to them. The Audit Committee told Lidow that if he didn’t resign within seven days he’d be fired. So, he quit and sued IR.

IR tried to use the defense that since it’s a Delaware corporation, different laws apply to it. Its bylaws, IR asserted, allowed it to take the action it did. The California Court of Appeal (in the recent case of Lidow v. Superior Court) ruled that if Lidow had been fired for poor performance or not meeting profitability expectations, then the so-called “internal affairs doctrine” would apply and IR’s actions would not have been subject to review.

This was a different case, however. As the court said, “This case, however, presents an entirely different set of allegations. Removing an officer in retaliation for his complaints about possible illegal or harmful activity (e.g., witness intimidation, physical threats to employees, etc.) and breaches of ethical conduct (e.g., defending a client against allegations of accounting irregularities and conducting an independent investigation in the same irregularities) goes beyond internal governance and touches upon broader public interest concerns that California has a vital interest in protecting.”

So, going back to my original question, the answer is, “It depends.” But one thing is clear — if your company has to conduct any similar types of investigations, keep the juror perspective.

In other words, how will the way you handle the investigation look to independent third parties who have no knowledge of or history with your company? Remember, your goal is to protect the company, not particular individuals or interest groups.©

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