The Ethical Investigator

A thought-provoking column in the Wall Street Journal here that argues in favor of routine changes of auditors got me thinking.

If we should change our auditors on the grounds that they get too close to us and are afraid to displease us for fear of losing our business, why shouldn’t the same thing apply to other professionals we hire over long periods? Say, financial advisors and even lawyers?

The case for firing auditors is that even though companies hire them and are responsible for paying them, auditors are really there to deliver what can often be “bad news” to company management keen to suppress unpleasant facts from public view. When bad decisions get translated from company spreadsheets into annual reports, bonuses get cut and executives get fired.

So instead of giving independent advice, auditors work for the same company for so long that they end up being “co-dependent,” says the Journal’s Jason Zweig.

Would that ever affect a lawyer or a financial advisor? At least with financial advisors, there are independent benchmarks that can compare your investment returns to those of similarly placed individuals. You can see whether or not your annual fee helps you beat an index, and you can shop around to see if your advisor’s fee is excessive.

What about lawyers? They are bound to a code of ethics, but so are accountants. Lawyers can’t just ignore wrongdoing, but accountants too are supposed to blow the whistle on that kind of thing. The problem arises in life’s hundreds of shades of gray, between best possible behavior and reportable criminal activity.

Many a lawyer reading this can easily recall putting down the phone after an uncomfortable call with a major client who has just instructed that lawyer to do something that gives the lawyer pause. The lawyer might think to himself: “Is it ethical to do this?” but then go ahead and do it anyway. If it just passes the smell test, how many lawyers tell their clients they are treading a very fine line? We hope some, but does yours?

Changing auditors can be a real pain, which is why companies don’t like to do it. Barriers to entry can be high because there are only four big firms to service the world’s largest companies, and because it can take a new audit team a long time to get up to speed on a complex set of accounts.

That can be true of personal investment portfolios and legal issues, but often a lawyer is not tasked with taking care of every aspect of a company’s or individual’s set of legal issues.

So if you don’t feel like firing your longtime attorney or other professional, at least do what you might with your trusted physician. Get the occasional second opinion.

This blog takes no position on the merits of a motion filed to disqualify Kasowitz from representing plaintiffs in a lawsuit against SAC Capital Advisors and others.

We haven’t even read the motion, but are relying solely on a report from New Jersey state court on it via Bloomberg.

The fact pattern reads like an ethics exam question in law school, but the stakes are anything but theoretical. If the motion goes against Kasowitz the firm could be thrown off the case. It doesn’t get much worse than that.

The motion reportedly alleges that investigators hired by Kasowitz contacted a represented party, and then misrepresented the identity of their client in attempting to get information during an interview. Kasowitz says the motion if meritless.

If you were Kasowitz, what would you first ask your attorneys to produce when confronted with a motion like this? 

Item one would be the template that any lawyer ought to get from an investigator before the investigator picks up a telephone or talks to anyone outside the firm about a case. That template becomes a roadmap for how the principal (the lawyer) instructs his agent (the investigator) to behave as to the ethical questions that come up during an investigation.

Among the many questions a good template answers are:

• How is the investigator representing himself? If the attorney approves a script that says the investigator will identify himself as the agent of a fictitious company, that’s a problem for the attorney. Or, the attorney could approve a template that gives the investigator’s real name and affiliation and says something like “I’m doing an investigation but I can’t tell you who my client is.” If the investigator then went off-script and got into ethical hot water, the attorney would have some protection.

Note: the more vague the presentation, the less likely it is that some people will talk to you. That’s the price you pay for refusing to lie. Happily, lots of people will still talk to you even if they have no idea who your client is. It’s remarkable but true.

• Has the investigator taken adequate precautions against inadvertently talking to a represented party? Sometimes it’s hard to know if a person you’re talking to is a represented party, and therefore off-limits because of the no-contact rule. In the context of litigation, did the investigator say, “Before we get going I just want to make sure that you’re not represented by an attorney in this case. If you are, I’ll have to terminate this call.” Notes for each interview should clearly reflect that this question was asked and answered.
• The same kind of question goes for privileged or confidential information. Make sure your investigator issues a warning before the interview begins in earnest that he wants no privileged or confidential information divulged. Then if it turns out to be part of the case you can have an argument about excluding that evidence, but ethically the law firm can say it did its best and shouldn’t be punished.
• Last but of course not least, the questions themselves. In addition to inoculating the principal against an agent doing what he’s not supposed to do, it always makes sense to run a proposed list of questions past the attorney. It may be preferable given the facts of the case to start with one kind of question and to move to other subjects later on. Sometimes you may not want to telegraph the amount of information you already have. The way you ask a question and the order in which it’s asked could be critical in sending just the message you wish to send to that particular interview subject.