Reimbursements for Costs Incurred in Internal Investigations

Nicholas C. Harbist

Internal investigations have become commonplace in corporate America. From Fox’s Bill O’Reilly to the General Motors investigation, companies often hire law firms as a signal to shareholders that they are taking a crisis seriously, as well as a signal to the government that they are able to clean house. Apart from these high profile scandals, internal investigations are routinely done in order to ferret out wrongdoing within companies which have been victimized by employees. In cases where companies are victims, they often use internal investigations to root out the mechanics of the fraud as well as the responsible employees in order to turn them over to the authorities. In these instances, the provisions of the Mandatory Victims Restitution Act (“MVRA”), 18 U.S.C. § 3663A(a)(2) require a court to order restitution for a victim’s “actual loss directly and proximately caused by the defendant’s offense of conviction.” A recent case from the Fifth Circuit demonstrates the reach of the MVRA.

In United States v. Lagos, No. 16-20146 (5th Cir. Mar. 17, 2017), the Fifth Circuit upheld the District Court’s restitution award for the legal and consultant costs incurred by General Electric Capital Corporation (“GECC”) in its internal investigation. Lagos and his co-conspirators “misled GECC about the value of their accounts receivable to induce GECC to increase the amount of the revolving loan and to provide [them] with uncollateralized funds.” GECC hired forensic experts, consultants, and lawyers to investigate the magnitude of the fraud and to provide legal advice relating thereto. Judge Higginson’s concurring opinion suggested that the MVRA allows reimbursement for expenses incurred during participation in the investigation of the offense, participation in the prosecution of the offense, and attendance at proceedings related to the offense.

Nevertheless, some courts disagree on the outer limits of what “other expenses” can be recovered. While the Ninth Circuit allows recovery of investigation costs including attorneys’ fees incurred as the direct and foreseeable result of the defendant’s wrongful conduct, the Second Circuit has questioned this broad approach, focusing more on the link between the expenses and the victim’s participation in the investigation and prosecution than on the offense itself. Compare United States v. Gordon, 393 F.3d 1044, 1057 (9th Cir. 2004) with United States v. Amato, 540 F.3d 153, 162 (2d Cir. 2008).

The boards of directors of corporations should be aware that they may be able to recover the costs of an internal investigation when they are victimized by employees or outsiders.

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