Another Reason Why Corporate Executives Will Be Scapegoats in Internal Investigations

Cropped shot of two businessmen shaking hands while money passes hands under a table

Shell Oil and Shell International (collectively “Shell”) have been named in a defamation action by a former employee which relates to a criminal investigation. The employee claimed that Shell made defamatory statements in its report to the Department of Justice of an internal investigation about possible FCPA violations at the company. The case made its way to the Texas Supreme Court, and the company won.

The issue in Writt v. Shell Oil Company was whether Shell’s statements in the report are privileged. Privilege is an affirmative defense to a defamation claim and there are certain narrowly-defined absolute privileges (for example, statements made by a witness in court) and qualified/conditional privileges (for example, the fair reporting privilege for journalists).

The lower court had held that the statements were conditionally privileged. The Texas Supreme Court went one step further and held that the statements were absolutely privileged as a result of their intimate relationship to the ongoing DOJ investigation. In doing so, the court recognized the continued expansion of FCPA prosecutions and bolstered the incentive for large corporate defendants to cooperate with enforcement bodies by naming its executives as wrongdoers.

Shell’s Alleged FCPA Violations

If you want to read more about the facts, you can find my last post on this case here.  A brief recap: In February of 2007, one of Shell’s contractors was convicted of bribing Nigerian officials. The following July, the DOJ sent a letter to Shell informing the company that it was under investigation for FCPA violations.

In response to the letter, Shell began an enormous internal investigation. Shell interviewed its employees and executives and prepared a report on possible leads in the DOJ investigation. Once Shell had completed the report, the DOJ requested information on a number of Shell employees it suspected of having a role in the bribery scheme.

Enter Robert Writt

One of the employees that the DOJ asked about was Robert Writt. In 2009, Shell turned over the results of its investigations, including the information concerning Mr. Writt. Shell identified Mr. Writt as the employee in charge of approving bogus reimbursement requests that ended up paying the Nigerian officials. Mr. Writt, the report alleged, had seen several “red flags” concerning the bribery scheme. Nevertheless, he never reported any of the suspicious transactions or requests.

The report also alleged that Mr. Writt had given inconsistent answers over the course of Shell’s internal investigations. After disclosing the results of its investigation to the DOJ, Shell fired Mr. Writt for “significant, substantial, and unacceptable” violations of Shell’s employee Code of Conduct.

Mr. Writt then sued Shell for defamation. In response, Shell moved for summary judgment. The company claimed that its statement to the DOJ was made in connection with a criminal judicial proceeding and, as such, entitled to absolute privilege. While the summary judgment motion was pending, the DOJ filed an information against Shell for FCPA violations. Shell and the DOJ then entered into a deferred prosecution agreement.

The Lower Court Decision

The district court granted Shell’s motion for summary judgment, agreeing that the company’s disclosure was absolutely privileged. The Texas Court of Appeals reversed.

Its decision stated that evidence failed to show that there was a criminal proceeding against Shell that was underway, “actually contemplated,” or had been given “serious consideration.” At most, Shell’s disclosure should be given conditional privilege. According to the Court of Appeals, the important question to ask was one of timing: was there a threat of prosecution at the time that Shell made the disclosure to the DOJ?

The court of appeals said that the evidence was not sufficient to merit summary judgment. To avoid defamation liability, Shell would need to show that the DOJ gave “serious consideration” to its prosecution at the time Shell handed over the report on Mr. Writt.

The Supreme Court Reversal

The Supreme Court disagreed with the Court of Appeals and granted summary judgment for Shell. The Court held that Shell made the disclosure to the DOJ in serious contemplation of a judicial proceeding and that this contemplation was reasonable.

In sum, the summary judgment evidence is conclusive that when Shell provided its internal investigation report to the DOJ, Shell was a target of the DOJ’s investigation and the information in the report related to the DOJ’s inquiry. The evidence is also conclusive that when it provided the report, Shell acted with serious contemplation of the possibility that it might be prosecuted.

The decision cited the fact that Shell was the target of a DOJ investigation and made its disclosures pursuant to that investigation. Supporting this point, the Court noted that the report was not particularly flattering. It did not paint Shell in a good light and even admitted that the company may have crossed the line and violated the FCPA.

The Court also pointed to the fact that Shell took its internal investigation very seriously. If there was no real contemplation of criminal judicial action, it is unlikely that Shell would have undertaken such a massive investigation. The company enlisted internal monitors, outside counsel, and forensic consultants, all at a cost of more than $10 million over 18 months. Moreover, the company took action as a result of its findings. Shell initiated a number of disciplinary actions, some of which (like Mr. Writt’s) resulting in termination.

DOJ Wants Your Cooperation

On April 17, 2015, Assistant Attorney General Leslie Caldwell made clear that DOJ wants companies to name names. During a speech about corporate compliance, she said:

The mere voluntary disclosure of corporate misconduct—by itself—is not enough.  All too often, corporations expect cooperation credit for voluntarily disclosing and describing the corporate entities’ misconduct, and issuing a corporate mea culpa.  True cooperation, however, requires identifying the individuals actually responsible for the misconduct—be they executives or others—and the provision of all available facts relating to that misconduct.

There have been several recent statements by DOJ and SEC officials about the need for companies to cooperate in investigations and identify wrongdoers. The Writt opinion is remarkably timely.

The government has boxed companies into a corner and essentially forced them to cooperate and name the supposed wrongdoers. The Texas Supreme Court, for example, pointed to a sharp uptick in FCPA prosecutions in the last 10 years and noted the severe penalties involved (including one penalty exceeding $800 million in 2008).

What Next For Defamation Cases?

Coupled with the DOJ and SEC’s recent exhortations to companies to name wrongdoers when they cooperate and self-disclose, this opinion creates a perfect storm for corporate executives. Companies now feel greater pressure to name them as wrongdoers—even if the evidence is weak—and they can do so without fear of a defamation lawsuit in return.

It’s already true that companies have the upper hand over executives in an internal investigation. The company gets to decide what is disclosed and when. It determines the tone of the disclosure about an employee or executive’s conduct—was it intentional wrongdoing or an oversight? And it generally holds all of the documents and evidence that the executive would need to defend himself.

On the other side, a company may hope to resist DOJ pressure to name executives as wrongdoers by arguing that it could face defamation liability for doing so when the evidence is not strong. Opinions like this one weaken this argument and place corporate executives in even greater peril during an internal investigation.

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