Conducting the Internal Investigation

1. Conducting the Internal Investigation Lessons from the Pedernales Experience

2. Conducting the Internal Investigation I. Background of the Pedernales Investigation Pedernales Electric Cooperative, Inc.�large member-owned electric cooperative Static management for many years Class action law suit filed in 2007 Management change �reform objectives Dual basis for conducting an internal investigation Navigant Consulting, Cox Smith Ten-year scope for investigation

3. Challenges of the PEC Investigation-Competing Interests: New Management Activist Members Newly elected directors Incumbent directors Media attention Legislators Criminal investigation Texas Legislative Committees Congressional hearing Outside auditors Plaintiffs� lawyers/ criminal lawyers Public Utility Commission

4. Conducting the Internal Investigation Balance in openness versus confidentiality Areas of investigation by Navigant Consulting: Executive/Director compensation, expenses Affiliated entities Consultant/contractor retenion, compensation Severance packages to former employees, directors Procurement of land, property, equipment Patronage capital retirement policy The Texland project Acquisition of adjacent cooperative Business process recommendations

5. Conducting the Internal Investigation Informational scope of the Navigant investigation Final assessment of the key problem Reception of the investigation report Investigation aftermath Lessons for Application to the MOU Experience

6. Conducting the Internal Investigation Triggers prompting an Internal Investigation Whistleblower allegations Self Discovery�compliance programs, audits Governmental inquiry into corporate conduct Media reports implicating corporate wrongdoing Define the purpose of the investigation Key question: Can I defend my organization�s response to an allegation or problem? May need a preliminary investigation of allegations

7. Conducting the Internal Investigation Goals of the internal investigation: Gather and evaluate information quickly Respond appropriately to problems disclosed Protect privileged information Appropriately manage communications Determine scope of the investigation Risks of too narrow versus too broad Distinguish an internal investigation from an �audit�

8. Conducting the Internal Investigation Who should conduct the investigation? Lawyer as an element due to: liability/compliance issues, privilege protection, threatened litigation. Advantages/Disadvantages of in-house counsel, regular outside counsel, special outside counsel. Is there a need for an investigative consultant? Yes, if accounting, finance, investigative, forensic skills needed. Need for clear understanding as to who the client is.

9. Conducting the Internal Investigation Critical steps in an internal investigation: Determine the nature of allegations, initial scope. Prepare a memorandum initiating the investigation. Prepare a written investigative plan as a road map. Develop the facts through document review, interviews. Keep an updated working chronology. Develop the legal issues. Preserve, identify, gather, organize and control the documents, including electronic documents. For MOUs, additional issue of Open Records. Interview appropriate witnesses.

10. Conducting the Internal Investigation Investigation report Function of the report How many? How comprehensive? Insurance issues Review and evaluate organization�s policies �claims� under D&O coverage Duty to indemnify employees for legal fees?

11. Conducting the Internal Investigation Lessons from the PEC experience: Designate a core team to manage and monitor the investigation. Have a communication plan in place. Establish clear lines of reporting for the management team. Have a crisis response plan in place. Realize that unexpected findings and facts may be uncovered that may alter the course and schedule of the investigation.

12. Conducting the Internal Investigation Questions