A recent U.S. Supreme Court ruling could significantly affect how corporate victims handle internal investigations. On May 29, the Court handed down its decision in Lagos v. United States, resolving a circuit split concerning the recoverability of funds for victims of fraud. Lagos v. United States, 138 S. Ct. 1684 (2018). In Lagos, the defendant was convicted of using his company to defraud a financial lender out of millions of dollars. After Lagos’s conviction, the lender sought to recover the funds it had spent on an independent investigation into the fraud, pursuant to the Mandatory Victim’s Restitution Act (MVRA).
The MVRA requires that those convicted of various crimes, including theft of property through fraud or deceit, pay restitution to their victims. See generally, 18 U.S.C. § 3663A. One provision in particular mandates that fraud defendants reimburse the defrauded for “lost income and necessary child care, transportation, and other expenses incurred during participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense.” 18 U.S.C. § 3663A(b)(4). For years, prosecutors and businesses alike have interpreted this provision to mean that companies could recoup the money spent on independent investigations undertaken before the government’s criminal investigation. However, in Lagos, the Supreme Court held that the “investigations” and “proceedings” referred to in the statute are limited to government investigations and criminal proceedings. Lagos, 138 S. Ct. at 1688.
In deciding this case, the court looked primarily at the language of the statute and employed basic principles of statutory interpretation. Writing for a unanimous Court, Justice Breyer noted that the word “investigation” is grammatically connected to “prosecution.” According to the Court, this connection suggests that the two words should be similar in nature, and because only the government can commence a prosecution, it stands to reason that the investigations should be similarly government-prompted.
The Court also analyzed the expenses that were specifically enumerated in the statute: lost income, child care, and transportation. As Justice Breyer reasoned, costs are naturally incurred when a fraud victim “misses work and travels to talk to government investigators, participate[s] in a government criminal investigation, or testif[ies] before a grand jury or attend[s] a criminal trial.” The statute fails to include costs typically incurred during independent corporate investigations, such as hiring outside counsel. A simple application of noscitur a sociis–which defines an ambiguous term based on the words around it—allowed the court to conclude that any expenses recoverable under this provision must have been incurred strictly by participating in a governmental investigation. Fees for independent corporate investigations are incurred before government intervention, and are therefore not included under the Court’s interpretation.
The Court also justified its holding by noting the difficulty that would arise if courts were forced to determine what corporate expenses were actually necessary to an investigation. The opinion also called into question whether Congress intended to make costly and complicated independent investigations recoverable, especially considering that more than 90 percent of criminal restitution is considered “uncollectable.”
The Court’s reasoning may be supported by a strict textual analysis, but it raises additional questions, and may have unintended consequences for the business community. First and foremost, this ruling does not address the recoverability of costs incurred during a government-prompted investigation. For example, if during a criminal investigation, the government requests that a corporation provide extensive financial statements, are the costs of hiring an accounting firm covered under the MVRA? Such costs do not resemble the expenses outlined in the MVRA, though they are incurred by a fraud victim during a government investigation.
If a corporation can in fact recover the costs of government-prompted investigation, then the Lagos ruling may disincentivize companies from investigating fraud until after the government has begun criminal proceedings. This potential consequence of course is because a company now has no clear option for recovering funds spent on an independent investigation, but at least has a chance of recovery if it waits until those expenses are “incurred during participation in the [government] investigation.” 18 U.S.C. § 3663A(b)(4).
While a company also is incentivized to prevent itself from being defrauded, particularly cost-sensitive corporations may opt for a “wait and see” approach. Not only will such an approach limit positive efforts to minimize corporate fraud, but it will also reduce internal investigatory information on which government prosecutors have historically relied. Without this evidence, criminal proceedings could take significantly longer to resolve, and corporations may lose the ability to learn from an investigation before it reaches the government level. Corporations may also lose the ability to minimize allegedly bad conduct if they wait for government intervention.
An additional question arises from the court’s decision in Lagos: How might cooperation credits from the Department of Justice (DOJ) be affected? Cooperation credits are reductions in penalties or fines that an individual or entity can receive for providing useful information to the government during an investigation. To see how cooperation credits may factor into the court’s decision, let us consider the following: Company A suspects that its employee, B, is defrauding both it and a client, C. Employee B has worked for Company A for decades, and as such, checking all of his deals for instances of fraud would be extremely costly. Company A could begin an investigation immediately, knowing that even though it is also a victim of Employee B’s fraud, it will probably not recover any of its investigation costs under the MVRA. However, if the government later begins an investigation, Company A may be able to receive a cooperation credit by sharing the information it has gathered during its independent investigation. In that way, Company A may avoid paying corporate fines or reduce its financial responsibility to Client C.
Conversely, Company A may decide that preemptively investigating is too expensive. The company may not take action until a government investigation has begun, at which point, it has substantially less information to offer in exchange for cooperation credit. Independent investigations are expensive, and without the possibility of recovering their costs, some companies may have to make difficult decisions. While the Supreme Court’s decision in Lagos does not signal the financial end of days for corporate entities; it does make recovery for internal investigations a bit more difficult, the cost-benefit analysis somewhat more complex, and the realities of life as an internal compliance officer or general counsel slightly more daunting.
Destiney Randolph is a JD candidate at Vanderbilt School of Law, and Eileen H. Rumfelt is a member with Miller & Martin, PLLC in Atlanta, Georgia.