The Justice Department’s new policy on cooperation during corporate investigations can be summed up in one sentence that will probably send a chill down the spine of compliance officers: “If a company wants any consideration for its cooperation, it must give up the individuals, no matter where they sit within the company.”
Those words, spoken last week by Deputy Attorney General Sally Yates, summarize a policy shift at the Justice Department to pursue individual liability when prosecuting corporate wrongdoing. The implications of that policy—on internal investigations, on whistleblower programs, or self-disclosure, and more—could be profound.
Let’s start with the details. A Justice Department policy memo, issued on Sept. 9, details a six-pronged approach to investigations and prosecutions:
To qualify for any cooperation credit, corporations must provide the department with all relevant facts relating to the individuals responsible for the misconduct;
Criminal and civil corporate investigations should focus on individuals from their inception;
Criminal and civil attorneys handling corporate investigations should be in routine communication;
Absent extraordinary circumstances or approved departmental policy, no corporate resolution will provide protection from criminal or civil liability for any individual;
Department attorneys should not resolve matters with a corporation without a clear plan to resolve related individual cases;
Civil attorneys should evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.
“It’s all or nothing,” Yates said last week. “No more picking and choosing what gets disclosed. No more partial credit for cooperation that doesn’t include information about individuals.”
To codify these changes, the Justice Department will revise the U.S. attorney’s manual and the principles of federal prosecution of business organizations known as the Filip Factors (named after a former deputy attorney general in the 2000s).
“It’s all or nothing. No more picking and choosing what gets disclosed. No more partial credit for cooperation that doesn’t include information about individuals.”
Sally Yates, Deputy Attorney General
The memo is a reaction to criticism that the Justice Department has persistently grabbed at the low-hanging fruit of hefty financial settlements rather than pursuing individual prosecutions. That approach evolved from past policy memos by deputy attorneys general Larry Thompson and Paul McNulty, both appointees of President George W. Bush, which encouraged “cooperation credits.”
Now there is an affirmative statement telling corporations, shareholders, and plaintiffs’ lawyers that if a corporation wants to get the cooperation benefits, it has to "focus on individuals from the inception of the investigation," says John Carney, a partner at law firm Baker Hostetler and former enforcement attorney at the Securities and Exchange Commission. “While it is always in their best interest to get rid of bad actors, there could be a tremendous chilling effect inside of corporations as company officials feel they have to go after their own employees.”
During a speech last week at New York University School of Law, Yates told companies suspected of wrongdoing that “if they don’t know who is responsible, they will need to find out” and “provide all non-privileged evidence implicating those individuals.” She compared the approach to encouraging drug dealers to “flip against co-conspirators.”
The potential consequences are many. While federal prosecutors control investigations, companies will be forced to do more of the work. Internal investigations will take longer. Liability exposures and cooperation demands will live on past a resolution with the government. The general counsel’s office may find itself mired in a conflict of interest that forces executives and others to secure independent legal representation.
What Happens to DPAs
For more than a decade now, the government has preferred to punish corporate wrongdoing with deferred-prosecution agreements rather than trials and convictions. “In most cases no individual is ever charged … and companies have an incentive to admit wrongdoing,” says Ross Garber, head of the white-collar investigations practice at law firm Shipman & Goodwin. “Everyone is happy: the government, shareholders, and executives.”
A SHIFT IN ENFORCEMENT PRIORITIES
The following are excerpts from an internal memo issued last week by Deputy Attorney General Sally Quillian Yates. It details a six-pronged approach to increasing individual prosecutions following corporate investigations.
To be eligible for any cooperation credit, corporations must provide to the Department all relevant facts about the individuals involved in corporate misconduct.
In order for a company to receive any consideration for cooperation under the Principles of Federal Prosecution of Business Organizations, the company must completely disclose to the Department all relevant facts about individual misconduct. Companies cannot pick and choose what facts to disclose. To be eligible for any credit for cooperation, the company must identify all individuals involved in or responsible for the misconduct at issue, regardless of their position, status or seniority, and provide to the Department all facts relating to that misconduct.
Both criminal and civil corporate investigations should focus on individuals from the inception of the investigation.
Both criminal and civil attorneys should focus on individual wrongdoing from the very beginning of any investigation of corporate misconduct…By focusing on individuals from the very beginning of an investigation, we maximize the chances that the final resolution of an investigation uncovering the misconduct will include civil or criminal charges against not just the corporation but against culpable individuals as well.
Criminal and civil attorneys handling corporate investigations should be in routine communication with one another.
Early and regular communication between civil attorneys and criminal prosecutors handling corporate investigations can be crucial to our ability to effectively pursue individuals in these matters. Consultation between the Department's civil and criminal attorneys, together with agency attorneys, permits consideration of the full range of the government's potential remedies and promotes the most thorough and appropriate resolution in every case.
Criminal attorneys handling corporate investigations should notify civil attorneys as early as permissible of conduct that might give rise to potential individual civil liability, even if criminal liability continues to be sought.
Absent extraordinary circumstances, no corporate resolution will provide protection from criminal or civil liability for any individuals.
There may be instances where the Department reaches a resolution with the company before resolving matters with responsible individuals. In these circumstances, Department attorneys should take care to preserve the ability to pursue these individuals.
Absent extraordinary circumstances or approved departmental policy such as the Antitrust Division's Corporate Leniency Policy, Department lawyers should not agree to a corporate resolution that includes an agreement to dismiss charges against, or provide immunity for, individual officers or employees.
Corporate cases should not be resolved without a clear plan to resolve related individual cases before the statute of limitations
If the investigation of individual misconduct has not concluded by the time authorization is sought to resolve the case against the corporation, the prosecution or corporate authorization memorandum should include a discussion of the potentially liable individuals, a description of the current status of the investigation regarding their conduct and the investigative work that remains to be done, and an investigative plan to bring the matter to resolution prior to the end of any statute of limitations period.
If a decision is made at the conclusion of the investigation not to bring civil claims or criminal charges against the individuals who committed the misconduct, the reasons for that determination must be memorialized and approved by the United States Attorney or Assistant Attorney General whose office handled the investigation, or their designees.
Civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual's ability to pay.
The fact that an individual may not have sufficient resources to satisfy a significant judgment should not control the decision on whether to bring suit. Rather, in deciding whether to file a civil action against an individual, Department attorneys should consider factors such as whether the person's misconduct was serious, whether it is actionable, whether the admissible evidence will probably be sufficient to obtain and sustain a judgment, and whether pursuing the action reflects an important federal interest.
Source: Justice Department.
That all changes if DPAs and civil settlements require that a company helps build criminal cases against executives. “While a company may be willing to roll over and admit wrongdoing simply to end an investigation, individuals are much more likely to mount a defense,” Garber says. “A DPA becomes less attractive if a company must still endure the expense, disruption, and embarrassment of an investigation.”
Garber also wonders whether outside counsel for conduct investigations—who are often former federal prosecutors themselves—might be inclined to portray a client company’s leaders as culprits, especially if they interpret the Yates memo as a mandate to help the government rack up criminal convictions. “It has never been more important that organizations take care to engage outside counsel with good judgment and an understanding of both business and human dynamics,” he says.
Expect gridlock even for routine internal investigations. “Individuals may want and need their own counsel right from the start," Carney says. “Complicating matters is that the attorney-client privilege belongs to the corporation, not to the individual. If a person is later discharged or prosecuted, he can’t say the general counsel said something was OK, because the privilege is only held by the corporation.”
Managers and staff could be pressured to incriminate themselves from their employers, without the Fifth Amendment protections a person can exercise when facing inquiry from the government.
“If executives and other company personnel read the Yates memo and think rationally about its implications, they will be less likely to cooperate in internal investigations,” Garber says. “Certainly, anyone who agrees to an interview in an internal investigation without individual counsel is either uninformed or very, very unwise.”
The new dynamic exacerbates existing concerns about internal investigations. “On one hand, the employee may lose his job if he doesn’t cooperate with the internal investigation,” says Sergio Acosta, a partner with law firm Hinshaw & Culbertson. “On the other, it may be a situation where they are making incriminating statements that can come back to bite them. Any attorney who is conducting an internal investigation needs to tell the employee that they are not his lawyer, that there is no attorney-client privilege between them, and what that employee tells the investigator is something the company can always choose to share with law enforcement.”
On the Other Hand
Justice Department officials have signaled this policy shift in recent speeches, says Michael Gottlieb, a partner with Boies, Schiller & Flexner. “As a practical matter it’s not clear how much this really changes anything,” he says. “But, if implemented fully and across the board, it could create situations where companies become less likely to cooperate and more likely to assert their rights and defend their interests.”
Individuals whom a company wants to interview might just take their chances at getting another job than risk getting prosecuted. “I’m going to lawyer up and if you want to fire me for that, fire me,” Gottlieb says. “Companies may find it more difficult to conduct thorough and effective internal investigations because individuals have an incentive not to cooperate.”
New hires will also have concerns. “Nobody is going to take a position with a public company in this climate—especially when Yates is out there saying, ‘Let’s go after executives’—unless they know they are going to be covered in case an over-zealous prosecutor comes after them,” says Marc Mukasey, a partner with law firm Bracewell & Giulianani and a former federal prosecutor in New York.
That protection, especially for indemnification and insurance, is costly. “Ask BP how much money they have shelled out representing and indemnifying certain individuals; ask JPMorgan and Bank of America,” Mukasey says. “When you are taking on tremendous responsibility inside a corporation, you deserve the comfort that if somebody sues you, you get protection.”
The one silver lining? It once again shows that “Compliance has to become a bigger part of corporate culture,” Carney says. “To the extent that this can be used as leverage by the GC and compliance officers to convince the corporation to focus sufficient resources on compliance and compliance testing, that is a good thing.”