The scenario is relatively common. Whether in the Foreign Corrupt Practices Act context or otherwise, an individual acts contrary to the law and when his or her conduct is discovered various business organizations impacted by the illegal activity conduct an internal investigation.
The question arises: if the individual engaged in the illegal activity is convicted, may the impacted business organizations recover from the individual internal investigation expenses under the Mandatory Victims Restitution Act (MVRA) and, if so, under what circumstances? In recent years, circuit courts have split on the relevant issues.
Last week though the Supreme Court provided clarity in Lagos v. U.S. In the unanimous decision authored by Justice Breyer, the court concluded that the words “investigation” and “proceedings” in the MVRA are limited to government investigations and criminal proceedings. After excerpting the case, this post highlights how business organizations can best position themselves for MVRA restitution in certain FCPA matters by not voluntarily disclosing.
As to the relevant factual background, the opinion states:
“The petitioner, Sergio Fernando Lagos, was convicted of using a company that he controlled (Dry Van Logistics) to defraud a lender (General Electric Capital Corporation, or GE) of tens of millions of dollars. The fraud involved generating false invoices for services that Dry Van Logistics had not actually performed and then borrowing money from GE using the false invoices as collateral. Eventually, the scheme came to light. Dry Van Logistics went bankrupt. GE investigated. The Government indicted Lagos. Lagos pleaded guilty to wire fraud. And the judge, among other things, ordered him to pay GE restitution. The issue here concerns the part of the restitution order that requires Lagos to reimburse GE for expenses GE incurred during its own investigation of the fraud and during its participation in Dry Van Logistics’ bankruptcy proceedings. The amounts are substantial (about $5 million), and primarily consist of professional fees for attorneys, accountants, and consultants. The Government argued that the District Court must order restitution of these amounts under the Mandatory Victims Restitution Act because these sums were “necessary . . . other expenses incurred during participation in the investigation . . . of the offense or attendance at proceedings related to the offense.” The District Court agreed, as did the U. S. Court of Appeals for the Fifth Circuit. Lagos filed a petition for certiorari. And in light of a division of opinion on the matter, we granted the petition.”
As to the relevant legal background and issue presented, the opinion states:
“The [MVRA] of 1996 requires defendants convicted of a listed range of offenses to “reimburse the victim 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.”
[…]
The [MVRA] is one of several federal statutes that govern federal court orders requiring defendants convicted of certain crimes to pay their victims restitution. It concerns “crime[s] of violence,” “offense[s] against property . . . , including any offense committed by fraud or deceit,” and two specific offenses, one concerning tampering with a consumer product and the other concerning theft of medical products. It requires, in the case of property offenses, return of the property taken or its value; in the case of bodily injury, the payment of medical expenses and lost income; in the case of death, the payment of funeral expenses; and, as we have said …. in all cases, “reimburse[ment]” to “the victim 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.” (emphasis added).”
The opinion then states:
“We here consider the meaning of that italicized phrase. Specifically, we ask whether the scope of the words “investigation” and “proceedings” is limited to government investigations and criminal proceedings, or whether it includes private investigations and civil or bankruptcy litigation. We conclude that those words are limited to government investigations and criminal proceedings.
Our conclusion rests in large part upon the statute’s wording, both its individual words and the text taken as a whole. The individual words suggest (though they do not demand) our limited interpretation. The word “investigation” is directly linked by the word “or” to the word “prosecution,” with which it shares the article “the.” This suggests that the “investigation[s]” and “prosecution[s]” that the statute refers to are of the same general type. And the word “prosecution” must refer to a government’s criminal prosecution, which suggests that the word “investigation” may refer to a government’s criminal investigation. A similar line of reasoning suggests that the immediately following reference to “proceedings” also refers to criminal proceedings in particular, rather than to “proceedings” of any sort.
Furthermore, there would be an awkwardness about the statute’s use of the word “participation” to refer to a victim’s role in its own private investigation, and the word “attendance” to refer to a victim’s role as a party in noncriminal court proceedings. A victim opting to pursue a private investigation of an offense would be more naturally said to “provide for” or “conduct” the private investigation (in which he may, or may not, actively “participate”). And a victim who pursues civil or bankruptcy litigation does not merely “atten[d]” such other “proceedings related to the offense” but instead “participates” in them as a party. In contrast, there is no awkwardness, indeed it seems perfectly natural, to say that a victim “participat[es] in the investigation” or “attend[s] . . . proceedings related to the offense” if the investigation at issue is a government’s criminal investigation, and if the proceedings at issue are criminal proceedings conducted by a government.
Moreover, to consider the statutory phrase as a whole strengthens these linguistic points considerably. The phrase lists three specific items that must be reimbursed, namely, lost income, child care, and transportation; and it then adds the words, “and other expenses.” Lost income, child care expenses, and transportation expenses are precisely the kind of expenses that a victim would be likely to incur when he or she (or, for a corporate victim like GE, its employees) misses work and travels to talk to government investigators, to participate in a government criminal investigation, or to testify before a grand jury or attend a criminal trial. At the same time, the statute says nothing about the kinds of expenses a victim would often incur when private investigations, or, say, bankruptcy proceedings are at issue, namely, the costs of hiring private investigators, attorneys, or accountants. Thus, if we look to noscitur a sociis, the well-worn Latin phrase that tells us that statutory words are often known by the company they keep, we find here both the presence of company that suggests limitation and the absence of company that suggests breadth.
We add a practical fact: A broad reading would create significant administrative burdens. The statute provides for mandatory restitution, and the portion we construe is limited to “necessary . . . other expenses.” The word “necessary” would, if the statute is broadly interpreted, invite disputes as to whether particular expenses “incurred during” participation in a private investigation or attendance at, say, a bankruptcy proceeding, were in fact “necessary.” Such disputes may become burdensome in cases involving multimillion dollar investigation expenses for teams of lawyers and accountants. A district court might, for example, need to decide whether each witness interview and each set of documents reviewed was really “necessary” to the investigation. Similarly, the statute also limits restitution to expenses incurred only during “attendance at proceedings related to the offense,” inviting disputes as to whether, say, a licensing proceeding, a human resources review, an in-house disciplinary proceeding, a job interview, a Consumer Product Safety Commission hearing, or a neighborhood watch meeting qualified as “proceedings” sufficiently “related to the offense” so as to be eligible for restitution.
To interpret the statute broadly is to invite controversy on those and other matters; our narrower construction avoids it. And one begins to doubt whether Congress intended, in making this restitution mandatory, to require courts to resolve these potentially time-consuming controversies as part of criminal sentencing—particularly once one realizes that few victims are likely to benefit because more than 90% of criminal restitution is never collected.
There are, of course, contrary arguments—arguments favoring a broad interpretation. The Government points out, in particular, that our narrow interpretation will sometimes leave a victim without a restitution remedy sufficient to cover some expenses (say, those related to his private investigation) which he undoubtedly incurred as a result of the offense. Leaving the victim without that restitution remedy, the Government adds, runs contrary to the broad purpose of the [MVRA], namely, “to ensure that victims of a crime receive full restitution.”
But a broad general purpose of this kind does not always require us to interpret a restitution statute in a way that favors an award. After all, Congress has enacted many different restitution statutes with differing language, governing different circumstances. Some of those statutes specifically require restitution for the “full amount of the victim’s losses,” defined to include “any . . . losses suffered by the victim as a proximate result of the offense.” The [MVRA], however, contains no such language; it specifically lists the kinds of losses and expenses that it covers. Moreover, in at least one other statute Congress has expressly provided for restitution of “the value of the time reasonably spent by the victim in an attempt to remediate the intended or actual harm incurred by the victim from the offense. Again the [MVRA] has no similar provision. And given those differences between the [MVRA] and other restitution statutes, we conclude that the considerations we have mentioned, particularly those based on a reading of the statute as a whole, tip the balance in favor of our more limited interpretation.
We add that this interpretation does not leave a victim such as GE totally without a remedy for additional losses not covered by the [MVRA] GE also brought a civil lawsuit against Lagos for the full extent of its losses, and obtained an over-$30 million judgment against him. The Government says that GE has largely been unable to collect on that judgment, but there is no reason to think that collection efforts related to a criminal restitution award would prove any more successful.
The Government makes one additional argument. It points out that GE shared with the Government the information that its private investigation uncovered. And that fact, the Government says, should bring the expenses of that investigation within the terms of the statute even if the “investigation” referred to by the statute is a government’s criminal investigation. The short, conclusive answer to that claim, however, lies in the fact that the statute refers to “necessary child care, transportation, and other expenses incurred during participation in the investigation or prosecution of the offense.” It does not refer to expenses incurred before the victim’s participation in a government’s investigation began. And the Government does not deny that it is those preparticipation expenses—the expenses of conducting GE’s investigation, not those of sharing the results from it—that are at issue here. We therefore need not address in this case whether this part of the [MVRA] would cover similar expenses incurred during a private investigation that was pursued at a government’s invitation or request. It is enough to hold that it does not cover the costs of a private investigation that the victim chooses on its own to conduct. (emphasis added).
For the reasons stated, we conclude that the words “investigation” and “proceedings” in the [MVRA] refer to government investigations and criminal proceedings. Consequently Lagos is not obliged to pay the portion of the restitution award that he here challenges. We reverse the Court of Appeals’ judgment to the contrary, and we remand the case for further proceedings consistent with this opinion.”
From an FCPA perspective, the key language in the court’s unanimous opinion is highlighted above in bold. In other words, it will be difficult for a business organization to seek restitution for investigative fees and expenses if those fees and expenses were the result of a voluntary disclosure (in other words, not a pro-active government investigation).
On the other hand, if a business organization incurs investigate fees and expenses after being contacted by the government, a business organization is better positioned for MVRA restitution.
As highlighted in numerous prior posts (see here and here for recent examples), there are many reasons why business organizations should pause before voluntarily disclosing alleged FCPA violations. The Supreme Court’s unanimous decision in Lagos is yet another reason to pause.
FCPA Institute - Zoom (Oct. 10-12, 2023)
Elevate your FCPA knowledge and practical skills. Nine hours of integrated and cohesive instruction led by Professor Koehler (an FCPA expert with teaching experience). Learn more, spend less. Professional credential available.
Learn More and Register
