While participating in internal investigations has always come with a warning that what is said may not remain confidential, there is an increased likelihood that what is said during these investigations not only will be turned over to the government should a company choose to cooperate but also will be used by the government against the cooperating individual. The resulting landscape puts corporate executives in a difficult position when asked to participate in internal investigations: cooperate knowing that what you say almost certainly will be passed on to the government or stay silent knowing that you will be terminated with no recourse and no severance.
In the September 2015 memorandum authored by Deputy Attorney General Sally Quillian Yates, Yates emphasized a Department of Justice (DOJ) focus on prosecuting culpable individuals and an expectation that companies seeking cooperation credit should identify potentially culpable employees and provide all facts to support their culpability. The Yates Memorandum followed a long line of pronouncements from the DOJ regarding the importance of holding individuals accountable,1 but was viewed as raising the pressure on companies to provide cooperative corporate executives.
"Post-Yates Memorandum, a corporation may choose to cooperate, turn over all relevant facts from its investigation, and identify potentially culpable individuals."
Commentators have speculated on the strain the Department's position will naturally put on the relationship between companies motivated to cooperate with DOJ investigations and their executives, who have heightened reasons for wanting to avoid incrimination. For example, the Yates Memorandum emphasizes that "absent extraordinary circumstances... the Department will not release culpable individuals from civil or criminal liability when resolving a matter with a corporation." In practice, prior to the Yates Memorandum, the release of individuals was almost a routine component of the resolution of corporate investigations. Post-Yates Memorandum, a corporation may choose to cooperate, turn over all relevant facts from its investigation, and identify potentially culpable individuals. Yet in resolving the matter on behalf of the company, those individuals may still face individual liability. Thus, while an executive may not be thrilled at the prospect of termination for failure to participate in an investigation, termination may be preferred compared to submitting to an investigation that will likely be turned over to governmental authorities that are facing increased pressure to pursue charges against individuals.
The United States Court of Appeals for the Second Circuit recently addressed this conflict and found that it was reasonable for a company to terminate for cause executives who refuse to cooperate with an internal investigation and remain "silent" even with the specter of criminal prosecution looming. Gilman v. Marsh & McLennan Cos. Inc., 2016 WL 3348553 (2d Cir. June 16, 2016). This decision has serious implications for corporate executives and key employees as they evaluate their participation in corporate internal investigations, particularly in light of last year's Yates Memorandum.
The Gilman case was brought by former managing directors of Marsh & McLennan, William Gilman and Edward McNenney Jr., who sought to recover employment benefits they lost as a result of their termination for failing to consent to be interviewed in an internal investigation. Marsh was under investigation by then-New York Attorney General Eliot Spitzer regarding alleged bid-rigging between several insurance carriers, including Marsh. Gilman and McNenney had been identified as co-conspirators by an AIG government cooperator, and AIG had filed a civil complaint against Marsh for alleged fraudulent business practices and antitrust violations.
Both Gilman and McNenney had given interviews to Marsh's counsel at an earlier stage in the investigation, before the bid-rigging allegations or the identification of the executives as co-conspirators. Following the filing of the AIG civil suit and Marsh's expansion of its internal investigation, Marsh suspended Gilman and McNenney with pay. As part of the expanded internal investigation, Marsh's counsel asked Gilman and McNenney to sit again for interviews and warned that "failure to comply would
result in termination." Neither Gilman nor McNenney complied with requests to sit for interviews, and ultimately both communicated refusals to cooperate, citing the looming criminal investigation being conducted by the New York Attorney General. Shortly thereafter, Marsh's Chief Executive Officer met with Attorney General Spitzer, and the Attorney General issued a press release announcing that there would be criminal prosecutions against individuals arising out of the alleged bid-rigging scheme but that Marsh itself would only face civil liability.
Marsh terminated Gilman and McNenney. At the time of the refusal to be interviewed, Gilman had attempted to effectuate an early retirement rather than face potential termination, but Marsh did not accept the offer and considered Gilman terminated. Marsh took the position that both terminations were "for cause," which led to the denial of employment benefits including deferred compensation and severance. Gilman and McNenney subsequently filed a civil suit against Marsh seeking reinstatement of their employee benefits and alleging violations of ERISA, breach of contract, and breach of the implied covenant of good faith and fair dealing. The district court granted summary judgment in favor of Marsh, concluding that the company's interview requests were reasonable and that the former executives had been fired for cause and were thus ineligible for their severance benefits.
The Second Circuit recognized that "Marsh's demands placed Gilman and McNenney in the tough position of choosing between employment and incrimination (assuming of course the truth of the allegations)." However, the court found that Gilman and McNenney were not immunized from the "collateral consequences" of exercising their right not to sit for the investigatory interviews, including the consequence that Marsh was left "with no practical option" other than to terminate the executives' employment when they refused a reasonable interview request. In the absence of Gilman and McNenney offering "exculpatory explanation, Marsh needed to assume the worst: that the bid-rigging allegations were true and that Marsh was vicariously liable for their criminal conduct."
The Second Circuit also rejected an alternative argument advanced by the terminated executives that Marsh's interview demands constituted state action because of Marsh's active cooperation with the New York Attorney General's investigation. The court held that there was "no evidence that the [Attorney General] `forced' Marsh to demand interviews" or otherwise influenced how those interviews were requested or conducted. Thus there was no state action in requiring participation in the investigatory interviews.
Neither the Yates Memorandum nor the Gilman opinion go as far as requiring the termination of employees who choose not to sit for an interview--that remains a business decision of the company. Specifically, the Yates Memorandum states that "in order to qualify for any cooperation credit, corporations must provide to the
"The Gilman decision makes clear that cooperation with a governmental investigation is not enough to deem a corporation's action a `state action.'"
Department all relevant facts relating to the individuals responsible for the misconduct." The "all relevant facts" language has garnered attention as counsel and commentators evaluate whether the Yates Memorandum requires more comprehensive investigations before a company receives cooperation credit for providing information from its own investigation. The Gilman decision makes clear that cooperation with a governmental investigation is not enough to deem a corporation's action a "state action."
The Gilman decision may impact how companies and organizations handle internal investigations--and particularly the role of executives in those investigations. Given the implications for both companies and executives, there is heightened importance for the Board of Directors and/or the Chief Legal Officer to be kept apprised of who is on the interview list during an investigation and whether or not a company may potentially lose key executives who opt to leave rather than be interviewed. Before requesting the interviews, counsel should review the proposed list of interviewees with whoever is overseeing the investigation --the Special Committee or General Counsel--so that the decision of whom to interview and why is made with the necessary consideration and attention.
In turn, individuals who are asked to cooperate in an internal investigation should consider whether to engage counsel to represent them during the investigation and whether to seek advice of counsel on whether to participate in the investigation at all. Counsel will be able to assist in processing the implications of the Second Circuit's decision and the Yates Memorandum for individual executives and employees asked to cooperate in an internal investigation. An "attorney proffer," for example, may serve as a valuable alternative to an interview that still allows for cooperation with an investigation. Individuals who do engage counsel may seek advancement of legal fees from their employers, and in turn companies may look to applicable insurance policies--such as directors and officers liability coverage-- to cover the costs of such representation.
Companies will experience practical consequences from the use of separate counsel for key employees or executives. Along with the added cost, companies may see a constraint on the free flow of information created by the additional representations.