Important Case on Investigations

An important update from the world of internal investigations: a federal judge has ruled against two former executives of Cognizant Technologies, who had been arguing that Cognizant had acted as a de facto arm of the government when the company investigated the two about their role in a corruption scheme. 

The ruling came down from a federal district court judge in New Jersey last week, against Gordon Coburn, former president of Cognizant; and Steven Schwartz, former general counsel. The Justice Department indicted both men in 2019 for allegedly masterminding a bribery scheme involving Cognizant’s operations in India. Cognizant itself had settled the FCPA charges just days earlier, paying a total of $25 million in disgorgement and civil penalties. 

Coburn and Schwartz, however, have been fighting their criminal cases ever since. They argued that Cognizant had acted as an agent of Uncle Sam to win that favorable FCPA settlement for itself. Therefore, when the company interviewed them for their roles in the scheme, they should have been entitled to all the usual constitutional protections for anyone subject to criminal prosecution. 

This could have created a big mess had the judge ruled in their favor. Companies would have struggled to conduct effective internal investigations, with employees invoking Fifth Amendment protections against self-incrimination and demanding to review your work in search of exculpatory evidence. That, in turn, would have been a torpedo strike against the Justice Department’s use of corporate investigative work when prosecuting individual offenders. 

Here in our world, however, district court judge Kevin McNulty (Obama Administration appointee) denied the motion from Coburn and Schwartz. In theory they could appeal; in practice they’d probably lose in that court too. 

For now, compliance officers can rejoice that McNulty made a sensible ruling that keeps the current ecosystem of corporate investigations and criminal prosecutions intact. We should also, however, give McNulty’s ruling a close read, to understand when a corporate investigation might run afoul of these issues after all. 

Incentives vs. Incentives

The crucial question here is whether Cognizant acted as an agent of the Justice Department while it investigated Coburn and Schwartz. Specifically: Were the Justice Department’s promises of more lenient treatment for companies that self-report misconduct and then cooperate with ensuing investigations so enticing, that a company participating in that program (now known as the FCPA Corporate Policy) would be a government actor by default? 

Not in this case, McNulty said. He did acknowledge that those Justice Department policies “gave Cognizant an additional incentive to investigate and report corporate wrongdoing.” But those incentives alone, he wrote, “do not render Cognizant a government actor for these purposes.”

Why not? Because the threshold for a private company to qualify as a state actor in internal investigations — a standard defined by the Supreme Court in a decision known as the Garrity Rule — is high. The company’s investigative actions must be “fairly attributable to the government.” 

And how do we define actions as “fairly attributable” to the government? That’s spelled out in another legal ruling, and is worth citing at length: 

[W]hen the state exercises coercive power, is entwined in the management or control of the private actor, or provides the private actor with significant encouragement, either overt or covert, or when the private actor operates as a willful participant in joint activity with the state or its agents, is controlled by an agency of the state, has been delegated a public function by the state, or is entwined with governmental policies.

Now we can bring those standards back to Coburn, Schwartz, and the Cognizant case. 

Cognizant began investigating Coburn and Schwartz in early 2016, well before reporting the corruption issues to the Justice Department and even before the Justice Department first formulated its leniency-for-cooperation standard, which debuted in April of that year. So you can’t really say Cognizant acted as an agent of the Justice Department when it was acting before it had even contacted the Justice Department. 

Indeed, McNulty even wrote: “I first note a significant timing issue. The government did not learn of or become involved in this matter until Cognizant, through [outside counsel], self-disclosed on Sept. 1, 2016.”

That strikes me as important because, yet again, it demonstrates the benefit of a strong corporate commitment to rooting out misconduct. That impulse to do the right thing, from the very start, undercut a crucial part of Coburn and Schwartz’s arguments. 

Now imagine the opposite scenario: a company doesn’t self-report its misconduct, the Justice Department discovers the misconduct through other means, and then the company falls all over itself trying to cooperate with prosecutors. How would that look to a skeptical judge? Much less noble, to say the least. 

A commitment to ethical conduct matters, in all sorts of ways. 

Freedom to Choose

Coburn and Schwartz also claimed that once Cognizant self-reported its misconduct, the company became an agent of the government at that point. The sequence of events is important here, so let’s spell them out:

1. Cognizant begins internal investigation of Coburn and Schwartz.
2. Cognizant conducts interviews with Coburn and Schwartz.
3. Cognizant self-reports its misconduct to Department of Justice.
4. Cognizant conducts follow-up interviews with Schwartz.
5. Schwartz resigns. (Coburn resigned before a follow-up interview with him.)

The issue here is whether Cognizant became an agent of the government between steps 3 and 4. That is, once prosecutors knew about the case, did they offer any guidance to Cognizant about what to ask Coburn and Schwartz in those follow-up interviews? Because if Cognizant and prosecutors had collaborated along those lines, that could indeed make Cognizant a government actor. 

McNulty minced no words in answering that question: “There is literally no document or testimony establishing that the government provided any direction to Cognizant with respect to Schwartz’s second interview.” Cognizant never solicited the Justice Department’s input on interview questions either, the judge added. 

OK, that’s all great — but it does underline the importance of strong investigation protocols to avoid those awkward situations. A company can’t always assume a prosecutor will refrain from suggesting specific questions. Likewise, a general counsel or chief compliance officer can’t always assume that your own investigators won’t try to curry favor by soliciting the Justice Department’s input. 

A good investigations function will have clear, written policies about how to interact with prosecutors (or any other regulator) so that none of your people speak out of turn, and so that you recognize when someone on the other side does. 

The bottom line is that Cognizant acted properly throughout, so Coburn and Schwartz were almost inevitably doomed to lose here. But under somewhat different circumstances, the outcome could have been very different and much worse for corporate compliance functions as a whole. 

We should all remember that, and strive to follow Cognizant’s path.