Upon discovery that employees or third-party agents may be committing a fraud or may be violating anti-corruption, export control, trade sanctions, money laundering, environmental or other laws, corporate officers and in-house counsel might determine that the circumstances allow a gradual withdrawal from the conduct, instead of an immediate termination of the activity. Company officials might be inclined – as a result of often well-placed feelings of loyalty – to preserve a long-established business relationship or to help a long-term employee mitigate his or her error by allowing the misconduct to end gradually over time. Often, the thinking is that this approach will end the problem, avoid detection, and allow the party to repair the damage quietly.
Although a very human reaction in certain circumstances, such a gradual withdrawal from wrongdoing or merely inaction – particularly for government contractors – may result in administrative penalties or even jail time, as recently learned by David Grinstead, the former CEO of the Alabama-based U.S. Defense Department contractor Adams Produce Company.
On October 29, 2013, a federal judge sentenced Mr. Grinstead to 16 months in prison and $450,000 in restitution for fraud against the company, failing to file federal tax returns, and concealing his employees' fraud scheme against the U.S. Defense Department by letting the scheme end slowly rather than ending it immediately so as to avoid raising red flags and better avoid detection by the U.S. government. The last charge against Mr. Grinstead stemmed from Adams Produce's multi-million dollar contract with the Defense Supply Center Philadelphia ("DSCP") to supply fresh fruits and vegetables to military bases, public school systems, junior colleges, and universities. Four employees of Adams Produce conspired to defraud DSCP by creating false invoices and purchase orders which falsely inflated the purchasing costs the company actually paid to a national distributor of fruits and vegetables. Mr. Grinstead did not participate in his employees' fraudulent scheme, and he apparently only learned about the scheme after it was underway. According to the U.S. Department of Justice ("DOJ"), however, Mr. Grinstead nevertheless violated the federal "misprision of felony" statute by joining an effort to withdraw and end the theft by Adams Produce quietly and slowly to lessen the likelihood of detection by the U.S. government.
Under the federal misprision statute, 18 U.S.C. § 4,
"Whoever, having knowledge of the actual commission of a felony cognizable by a court of the United States, conceals and does not as soon as possible make known the same to some judge or other person in civil or military authority under the United States, shall be fined under this title or imprisoned not more than three years, or both."
Historically, federal prosecutors had to show more than a mere failure to disclose. They needed to show suppression of evidence, harboring of a criminal, intimidation of witnesses, or other positive acts designed to conceal from authorities the felony. What makes the Grinstead prosecution and conviction noteworthy is that Mr. Grinstead apparently did not take any of the "affirmative steps to conceal" that traditionally have given rise to a misprision of felony charge.
According to the Criminal Information, the DOJ based its misprision charge solely on the fact that Mr. Grinstead concealed his employees' fraud scheme "by letting the scheme to defraud end slowly rather than ending it immediately so as to avoid raising red flags and better avoid detection by DSCP, and did not as soon as possible make known the same to some judge or other person in civil or military authority under the United States." Based on this description of Mr. Grinstead's criminal conduct, the DOJ appears to have adopted the position that a corporate executive's action to allow a gradual termination of a fraud scheme against the government and to fail to report the fraud to the government may constitute an "affirmative step to conceal." Although the DOJ may have had additional information about the alleged depth and timing of Mr. Grinstead's prior knowledge of the fraud, such information did not expressly factor into the DOJ's criminal charges against him.
The Grinstead prosecution puts corporate decision-makers – even those who learn about their co-workers' or agents' potentially criminal scheme only after the fact – in the position of needing to act decisively to terminate the scheme and, as appropriate, to report it to governmental officials. At the very least, company officers and in-house counsel would be well advised to avoid any conduct or inaction that prosecutors could reasonably interpret as an attempt to allow a fraud scheme to end gradually over time to avoid detection and to allow others to repair the damage covertly. Although allowing employees' or agents' fraud or other wrongdoing to unwind gradually might seem humane or reasonable under certain circumstances or might strike some as a balanced approach aimed at avoiding greater harm to the company, such action by a corporate officer or director may later be labeled a misprision of felony under the DOJ's approach in the Grinsteadprosecution.
Misprision of felony is not the only vehicle for punishing those who fail to report a violation of U.S. law. Another high-profile example is the Federal Acquisition Regulation ("FAR") Mandatory Disclosure Rule, which took effect in 2008. Under that Rule, federal contractors on contracts and subcontracts with a value in excess of $5 million and involving performance longer than 4 months are contractually obligated to report to the U.S. government any credible evidence that an employee, agent, or subcontractor has committed a violation of federal law involving fraud, conflict of interest, bribery, or gratuity under Title 18 of the U.S. Code or a violation of the civil False Claims Act in connection with the award, performance or closeout of a federal contract. See 73 Fed. Reg. 67091 (Nov. 12, 2008); 48 C.F.R. §§ 3.1004 and 52.203-13. A government contractor's knowing failure timely to report credible evidence of any of the above violations of the law may result in what amounts to the government contractor's death penalty: suspension or debarment from federal procurement programs. 48 C.F.R. § 3.1003(a)(2). Significantly, this potential suspension or debarment punishment for failure to make a timely report is applicable even if the relevant government contract does not incorporate the FAR Mandatory Disclosure clause at 48 C.F.R. § 52.203-13 (e.g., because the contract value is less than $5 million).
Additionally, perhaps the most compelling reason company officials should think twice before declining to investigate and, where appropriate, self-report fraud or potential criminal conduct is the array of state and federal laws that provide whistleblowers with monetary awards and protection from employer retaliation. For example, on October 1, 2013, the U.S. Securities & Exchange Commission ("SEC") awarded $14 million dollars to an individual whistleblower whose information led to an SEC enforcement action that recovered substantial investor funds. This $14 million award marked the largest to date under the Dodd-Frank Act Whistleblower Program, which awards eligible whistleblowers between 10% and 30% of SEC enforcement action sanctions of over $1,000,000. Such a large, high-profile bounty will undoubtedly prompt other putative whistleblowers to lean even more heavily toward reporting perceived corporate wrongdoing.
The DOJ also highlighted the U.S. government's active courtship of whistleblowers in a November 6, 2013 press release about the ongoing fraud and bribery investigation that has rocked the U.S. Navy. After announcing the charges brought against a senior U.S. Navy official for allegedly accepting prostitutes, luxury travel, and cash from a foreign defense contractor in exchange for classified U.S. Navy information, the press release concluded with an open invitation to whistleblowers: "Those with information relating to fraud, corruption or waste in government contracting should contact the [Naval Criminal Investigative Service] anonymous tipline at . . . ." Such anonymous email and phone tiplines, which serve as a crowdsourcing means of detection and leads for alleged violations, are now commonplace within regulatory and law enforcement agencies, providing whistleblowers a growing number of avenues for reporting potential frauds and other alleged violations.
The DOJ's strategy is clearly paying off, as evidenced by the fact that lawsuits initiated by whistleblowers resulted in $2.9 billion in recoveries under False Claims Act in 2013.
In summary, as 2014 unfolds, corporate officers and in-house counsel have more reasons than ever to act decisively to terminate and investigate alleged wrongdoing and, where appropriate, to self-report actual wrongdoing, particularly in the context of government contracting. Unless unique and extremely compelling reasons to the contrary exist, prudent company decision-makers should avoid action which – after the fact – may be viewed as allowing an ongoing fraud or another criminal offense to end gradually over time such that governmental detection is made less likely. In those instances in which a corporate compliance program has failed to deter or prevent such misconduct, immediate action to end the alleged wrongdoing, to remediate the wrongdoing, and, as appropriate or required, to report the matter to the relevant regulatory or contracting agency will serve a company and its officials well in avoiding the fate of Mr. Grinstead.