In January, this blog previewed the Supreme Court’s grant of certiorari in Lagos v. United States to resolve a circuit split regarding whether companies could recover costs of internal investigations under the Mandatory Victims Restitution Act (MVRA). At the end of May, the Court issued a unanimous opinion sharply curtailing the ability to recover such costs.
The MVRA allows victims of financial fraud to recoup expenses caused by the criminal activity. Before Lagos, six circuits read the MVRA’s provision mandating reimbursement for “expenses incurred during the participation in the investigation or prosecution of the offense” to apply broadly to costs that were “foreseeable.” Only the DC Circuit disagreed with this interpretation, limiting reimbursement for internal investigations only to those that were directly requested or required by the government. In Lagos, the Fifth Circuit joined the other six circuits holding that the MVRA required a freight company’s CEO to repay a defrauded lender’s costs of conducting an internal investigation to uncover the scheme. The Fifth Circuit also found that the MVRA covered the lender’s attorney’s fees in the freight company’s bankruptcy proceedings.
In an opinion by Justice Breyer, the Supreme Court held that the MVRA “does not cover the costs of a private investigation that the victim chooses on its own to conduct.” In fact, the MVRA does not cover the costs of an investigation conducted before the government’s investigation even if the victim shares that information with the government. Nor does the MVRA cover costs associated with ancillary civil proceedings like a bankruptcy case, human resources review, or licensing proceeding. In fact, while the Court expressly declined to address the D.C. Circuit’s view about whether the MVRA covered the costs of investigation requested by the government, some of its reasoning hinted at an even more restrictive interpretation. In particular, the Court expressed concern about district courts reviewing the results of an internal investigation to determine which witness interviews or document reviews were “really ‘necessary’ to the investigation.”
In light of Lagos, corporate counsel should expect that most internal investigation costs – and certainly any costs for ancillary proceedings – will not be reimbursable under the MVRA. In situations where recovering investigative costs might be a priority, corporate counsel should consider partnering with law enforcement as early in the process as possible. Counsel should carefully document the specific request from law enforcement – and even consider requesting a subpoena – to ensure that each action would be considered a “necessary” component of the government’s investigation.