Appellate Court Boosts Internal Investigations

A federal appeals court just gave compliance officers valuable insight into the limits of the Yates Memo—the Justice Department’s policy that if a company under investigation wants to win any credit for cooperation, it must turn over all information it can find about employees suspected of misconduct.

The case, Gilman v. Marsh McLennan, is a victory for compliance and legal officers wanting freedom to investigate wrongdoing forcefully. Whether that’s a good thing for corporations overall, I’m still not sure.

The case centers on two former employees of Marsh McLennan, William Gilman and Edward McNenney. In 2004 they were under investigation by then-New York Attorney General Elliot Spitzer for possible kickbacks in the insurance business. That led to Spitzer suspecting the two were part of a bid-rigging scheme—a much more serious charge, where Marsh McLennan faced its own criminal liability on antitrust grounds.

Marsh’s legal department asked Gilman and McNenney to sit for interviews to get to the truth, and warned them that failure to cooperate could result in termination. Several days later, Marsh reached an understanding with Spitzer’s office that if it cooperated fully, the firm could avoid criminal trouble and face only a civil penalty. Meanwhile, Gilman and McNenney stonewalling corporate investigators, so Marsh followed through on its threat and fired them.

Gilman and McNenney sued, arguing that Marsh was acting as an investigative agent of the government and putting them in an impossible situation: either cooperate and incriminate themselves, or refuse to cooperate and be fired. Since getting fired also meant they would lose deferred compensation awards, refusing to cooperate would cost them large sums of money.

This has always been my question about the Yates Memo: Does it essentially turn a company into an instrumentality of the Justice Department, and let federal prosecutors evade constitutional protections against self-incrimination?

Given the set of facts here—and that may turn out to be an important caveat—the 2nd Circuit Court of Appeals sided with Marsh. The company had already warned Gilman and McNenney that they had to be interviewed, before Spitzer and Marsh cut a deal on cooperation. Their employment contracts clearly stated that termination for cause included refusal to “obey a direct, unequivocal, reasonable order of the employer,” and ordering someone to explain their role in misconduct is reasonable.

The court’s coup de grace came in the last paragraph of its decision:

Gilman and McNenney urge that we adopt, in effect, this categorical rule: acts that are taken by a private company in response to government action, and that have as one goal obtaining better treatment from the government, amount to state action. But a company is not prohibited from cooperating, and typically has supremely reasonable, independent interests for conducting an internal investigation and for cooperating with a governmental investigation, even when employees suspected of crime end up jettisoned. A rule that deems all such companies to be government actors would be incompatible with corporate governance and modern regulation.

The key is in that last sentence: a rule that deems all such companies to be government actors would be incompatible with corporate governance. That’s true. But in the name of common sense, let’s admit that some companies might fall into this category.

Respecting Reality, Culture & Compliance

First, the appeals court agreed that sometimes the government can strong-arm companies in ways that might violate employees’ rights. That issue came up 10 years ago in United States v. Stein, where the feds were investigating several KPMG partners for peddling bogus tax shelters. As part of its case, the Justice Department insisted that KPMG stop paying the legal fees of those partners facing prosecution. The courts slapped down that idea pretty hard.

guiltyThe Marsh case is different because Gilman and McNenney were already risking termination before Spitzer cut his deal with the company. The next question, then: what if a company doesn’t threaten to fire non-cooperating employees until after the feds tell the company to do everything it can to find culpable individuals?

For example, say an anonymous whistleblower alerts the Justice Department to a bribery scheme. Your first notice of the problem is a prosecutor telling you, “We have evidence of anti-bribery violations, and John Doe and Jane Smith are possible targets. Per the Yates Memo, we want everything you can find about their business overseas.”

How close is that scenario to the pressure prosecutors applied in the Stein case, where the government did overstep and coerce KPMG to do its bidding? It’s in the ballpark. As the appellate court noted, KPMG’s decision to cut off legal fees “was a direct consequence of the government’s overwhelming influence” that would not have happened but for the prosecutors’ conduct.

The Yates Memo certainly qualifies as government influence. The second part of court’s logic, however, raises a headache about corporate policy: the Stein case became A Big Deal because KPMG reversed its policy of covering employees’ legal fees. Therefore, if you want to avoid Stein-like trouble, don’t go reversing yourself midway through an investigation—take a hard line from the start, that stonewalling an investigation into misconduct will get an employee fired.

Ethics officers will applaud that idea, and in theory it’s a good one. In practice, however, employees are human beings. They get scared at the prospect of loss: loss of employment, loss of reputation, loss of money. Taking such a hard line will scare them, especially if they are only peripheral to the investigation or were somehow coerced into wrongdoing by a guilty supervisor.

My fear is that such a strong approach will telegraph to employees that as soon as you see trouble ahead, consider resigning. That message will do compliance officers no favors.

Or executives might demand employment contracts that do include the right to counsel in an internal investigation—and if you’re important enough, you’re going to get it. That might lead to resentment at double-standards within your workforce, and that message will do you no favors either.


  1. […] June 21, 2016 | Appellate Court Boosts Internal Investigations […]

  2. […] all information it can find about the persons responsible for the misconduct in question. And as a federal appeals court affirmed this summer—yes, a company can demand full cooperation from an employee, even if that means the employee […]

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