On September 9, 2015, the DOJ released a game-changing memorandum (“Yates Memo”) to prosecutors nationwide, with a stated goal of addressing “Individual Accountability for Corporate Wrongdoing.” This effort was the direct spawn of the global financial crisis, an event which produced widespread public outrage as corporations pled guilty to misconduct and paid billions of dollars in fines to the DOJ and the Securities and Exchange Commission (“SEC”), while very few of the individuals who perpetrated the wrongdoing were ever convicted.
Now the U.S. government is shifting its approach to both civil and criminal corporate investigations and prosecutions. In prepared remarks for a speech given at New York University on September 10, the author of the memorandum, Deputy Attorney General Sally Q. Yates, noted that the DOJ will limit or decline to provide “cooperation credit” unless the corporation “completely disclose[s] to the Department all relevant facts about individual misconduct.” (See here for the video of the speech.)
The new policy prioritizes the prosecution of individual employees — not just their companies — and puts pressure on corporations to turn over evidence against their executives. It is designed to undermine any corporate defense strategy of laying the blame on one rogue or low-level employee by forcing companies to identify all the individuals responsible for corporate misconduct. As Yates herself stated in an interview with The New York Times, “The public needs to have confidence that there is one system of justice and it applies equally regardless of whether that crime occurs on a street corner or in a boardroom.”
The Yates Memo
The Yates Memo identifies six “key steps” to enable DOJ attorneys “to most effectively pursue the individuals responsible for corporate wrongs.”
- In order to qualify for any cooperation credit, corporations must provide to the DOJ “all relevant facts” relating to the individuals responsible for the misconduct, regardless of their position, status or seniority.
- Criminal and civil corporate investigations should focus on individuals “from the inception of the investigation”.
- Department attorneys in the criminal and civil divisions handling corporate investigations should be in “routine communication” with one another.
- “Absent extraordinary circumstances,” the DOJ will not release culpable individuals from civil or criminal liability when resolving a matter with a corporation.
- DOJ attorneys should not resolve matters with a corporation without a “clear plan” to resolve related individual cases and should memorialize any declinations as to individuals in such cases.
- Civil attorneys should consider bringing suit against culpable individuals, even where an individual does not have sufficient resources to satisfy a money judgment.
Recent SEC Guidance
The Yates Memo is in line with recent SEC initiatives, emphasized in the prepared remarks for a speech given by Andrew Ceresney, director of the SEC’s Enforcement Division, on May 13, 2015 at the University of Texas School of Law’s Government Enforcement Institute. According to Ceresney, in certain cases, his staff will now present evidence supporting actions against individuals at an earlier stage in an SEC investigation. He cited the prepared remarks of Leslie R. Caldwell, Assistant Attorney General for the Criminal Division, at New York University Law School’s Program on Corporate Compliance and Enforcement (April 17, 2015), “Perhaps most critically, we expect cooperating companies to identify culpable individuals – including senior executives if they were involved – and provide the facts about their wrongdoing.”
How You Can Prepare
An organization’s best defense remains a proactive response to actively fostering a climate that encourages ethical conduct and a commitment to compliance with the law, including:
- Implementation and maintenance of an “effective ethics and compliance program” that conforms to the amended Organizational Guidelines of the United States Sentencing Commission;
- Active oversight of the compliance program by executive management and the board;
- Prompt and appropriate resolution of issues brought to management’s attention;
- Documentary evidence that will allow the company and its executives to demonstrate that they are exercising due diligence, reasonable care, and good faith to operate the company in an ethical and compliant fashion.
Additionally, companies and their boards should take a fresh look at their D&O insurance in light of the Yates Memo. An organization’s ability to indemnify or hold harmless its executives is controlled by the law of the state where the company is based or incorporated. It is more important than ever that directors and officers have robust and ample “Side A” insurance covering defense costs, settlements, and judgments for potentially “non-indemnifiable” losses – that is, losses for which the company does not indemnify them, either because applicable law prohibits it, or because the company refuses or is financially unable to do so.
When faced with a potential civil or criminal issue, the early involvement of legal counsel experienced in dealing with the SEC and DOJ is essential.
Please contact us with any questions you may have. With our extensive experience in the regulatory compliance space, we can provide additional insights and practical assistance on the next best steps to take for your organization.