Unfortunately, businesses occasionally need to investigate potential criminal conduct by employees, vendors, or others supporting the business. These occasions may increase in the wake of the COVID-19 pandemic, especially as enforcement activities concerning pandemic-related fraud increase.
Most businesses do not realize that they can often seek reimbursement for the costs of investigating these situations. However, businesses must be aware of the legal mechanism through which the reimbursement is sought. The U.S. Supreme Court’s decision in Lagos v. United States illustrates the consequences of the incorrect legal mechanism being used.
Background
In this case, the reimbursement issue arose after the conviction of Sergio Fernando Lagos. Lagos was convicted of wire fraud for using his company, Dry Van Logistics, to defraud its lender, General Electric Capital Corporation (“GE Capital”), of tens of millions of dollars. Specifically, Lagos created invoices for services that his company did not provide and used those false invoices as collateral for borrowing significant sums of money.
After Lagos’s crime was discovered, Dry Van Logistics went bankrupt, and GE Capital investigated the situation. GE Capital’s investigation was both thorough and costly. In fact, they incurred approximately $5 million in expenses – primarily on professional fees for attorneys, accountants, and consultants. Eventually, GE Capital shared its investigation with government prosecutors.
After Lagos pled guilty to wire fraud, the District Court entered a restitution order requiring Lagos to reimburse GE Capital for its investigation expenses under the Mandatory Victims Restitution Act of 1996, 18 U.S.C. § 3663A(b)(4), (the “MVRA”).
SCOTUS Weighs In
The Fifth Circuit Court of Appeals agreed that Lagos must reimburse GE Capital under the MVRA. SCOTUS then accepted the case for review to address the specific question of “whether the scope of the words ‘investigation’ and ‘proceedings’ [in the MVRA] is limited to government investigations and criminal proceedings, or whether it includes private investigations and civil or bankruptcy litigation.”
The SCOTUS decision rests on a fairly technical linguistic analysis of the statute. Simply put, SCOTUS opined that the MVRA “says nothing about the kinds of expenses a victim would often incur when private investigations . . . are at issue, namely the costs of hiring private investigators, attorneys, or accountants.” As such, GE Capital could not recover its expenses. The fact that GE Capital shared its investigation with government prosecutors did not alter the conclusion.
Practical Impact
While SCOTUS held the MVRA is not the pertinent statute for obtaining reimbursement for the costs of a corporate victim's investigation, there are several other restitution statutes a victim may be able to use. The applicability of any given restitution statute, however, depends on the specific circumstances in which reimbursement is sought. And, unsurprisingly, victims can seek damages in civil lawsuits – as did GE Capital against Lagos to the tune of over $30 million.
SCOTUS’s decision in the Lagos case is obviously not ideal for companies investigating potential misconduct of their vendors and employees. Foreclosing the relatively efficient process of seeking reimbursement under the MVRA means corporate victims will be required to bear the investigation costs, find another applicable restitution statute, or resort to civil litigation in an attempt to collect. Despite the disappointing impact, SCOTUS's decision appears to be a correct and reasonable interpretation of the MVRA.
Consequently, it is important for companies to consult with knowledgeable legal counsel--specifically counsel with experience in internal investigations and the capability of guiding clients through the reimbursement process.
The case referenced above is Lagos v. United States, 138 S. Ct. 1684 (2018).
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Disclaimer: This post is for general information purposes only and is not intended to be and should not be taken as legal advice.