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When a company learns it is the focus of a government investigation, the first step is to start an internal investigation to figure out what happened. To determine any potential exposure for wrongdoing, it needs the cooperation of its employees who were involved with the conduct.
Most workers will tell the internal investigators what they know, perhaps in the naïve belief that the company will look out for their best interests. But if they do not cooperate, a recent decision by a federal appeals court makes it clear that the company can fire them with little fear that the termination will be considered improper.
The case arose out of an investigation of Marsh & McLennan Companies in 2004, when Eliot Spitzer was the New York attorney general. Seeking to take on the mantle of Wall Street’s top cop, Mr. Spitzer started headline-grabbing inquiries into a number of companies for real and perceived misconduct. One issue that came under his scrutiny involved “contingent commission” arrangements in which brokerage firms like Marsh steered clients to certain insurance companies in exchange for larger payments from them, as The New York Times described in a 2004 article.
As part of the company’s internal investigation, two executives, William W. Gilman and Edward J. McNenney Jr., were interviewed by an outside law firm retained to look at the commission payments. A few months later, it emerged that there were allegations of bid-rigging by agents at different insurance brokers. Two employees of the American International Group pleaded guilty to state antitrust charges in September 2004, with one identifying Mr. Gilman and Mr. McNenney as co-conspirators.
At that point, Marsh’s lawyers shifted the focus of their inquiry to the bid-rigging and tried to arrange new interviews with the two executives. With Mr. Spitzer breathing down the company’s neck, it was crucial to complete the inquiry and turn over the results quickly to appear as cooperative as possible.
Rather than submit to questioning, Mr. Gilman and Mr. McNenney refused to speak with investigators. Mr. Gilman even tried to retire before meeting with them so that he could not be fired for refusing to cooperate. That was a good strategy from a legal standpoint because their statements were sure to be given to prosecutors, who could use them to build a case against the two executives.
But their refusal resulted in Marsh immediately firing the two men “for cause,” refusing to accept Mr. Gilman’s retirement. That meant the executives lost stock awards and severance pay they would have received if there had been an ordinary termination.
Marsh reached a civil settlement with Mr. Spitzer’s office before the men were fired, but it continued its internal investigation to show continuing cooperation, something that is often a condition of any settlement.
Mr. Gilman and Mr. McNenney were later convicted of one count of fraud while being acquitted of a number of other charges. Their conviction was later overturned because the government failed to turn over 700,000 pages of documents, and New York prosecutors decided in 2011 to dismiss the case rather than retry it.
The two executives sued Marsh in 2010 to recover employment benefits denied to them because of the firing. They claimed that the company breached its contract and that it was acting as an agent of Mr. Spitzer’s office when it sought to force them to speak with investigators, violating their constitutional right to silence.
The United States Court of Appeals for the Second Circuit in Manhattan agreed with the conclusion of a federal district judge that their termination was not a breach of contract because the company had good reason to demand that they provide information or face the consequences of their refusal. The appeals court found that when a company finds itself under scrutiny for potential violations, “it did what any other company would do, and (arguably) what any company should do. Marsh’s interview demands were reasonable and it had cause to fire Gilman and McNenney for refusing to comply.”
That language effectively recognizes a broad right for companies to use the threat of termination to obtain information from employees because of the potential for shareholder lawsuits and government enforcement actions.
The power to fire an employee is rarely an effective method to gather evidence because employees who possibly engaged in misconduct will expect to pay a price at some point, and speaking with investigators will provide little protection from dismissal.
What the power to terminate an employee does give a company is a means to show the government that it has tried to obtain evidence of wrongdoing and took measures to punish those unwilling to cooperate.
Adopting an aggressive approach with a recalcitrant employee has become even more important since the Justice Department announced a new policyin 2015 that conditions any credit for corporate cooperation on providing information about misconduct by individuals in the company. Sally Q. Yates, the deputy attorney general of the United States who issued the policy directive, said in a recent speech before the New York City Bar Association that “our goal is not to collect corporate heads.”
That may not be the government’s goal, but showing that a few heads were lopped off for refusing to cooperate in an internal investigation can go a long way toward making the case that a company tried its best to provide the information that the Justice Department policy demands. If a company cannot furnish all the information the government would like, it can at least show it got rid of anyone who did not help its investigation.
The appeals court also refused to find that a company’s decision to conduct an internal investigation in response to government scrutiny turns it into an agent of the prosecutors, and therefore subject to important constitutional limitations, such as the Fifth Amendment privilege against self-incrimination. Corporations have good reasons to investigate potential violations, and so the appeals court concluded that “a rule that deems all such companies to be government actors would be incompatible with corporate governance and modern regulation.”
The decision makes life even more difficult for employees who are caught up in investigations. Few anticipate they will ever be involved in potential wrongdoing, so they are unlikely to take steps in advance to protect themselves. Instead, employees often find themselves being squeezed, as was the case with Mr. Gilman and Mr. McNenney at Marsh.
The appeals court’s message is clear in corporate internal investigations: cooperate or else. If you ever wondered who has the upper hand in the employment relationship, you don’t need to think long to come up with the answer.
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