On September 9, 2015, the United States Department of Justice (DOJ) formally announced a policy consistent with already shifting trends in prosecution: the DOJ will vigorously pursue the prosecution of culpable individuals responsible for corporate wrongdoing. In a memorandum from Deputy Attorney General Sally Yates (the Yates Memorandum), the DOJ asserts, “One of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing.” Pursuant to this guidance, corporations under investigation can expect that culpable executives and employees will be investigated and prosecuted, and potentially serve significant jail time. Additionally, corporations under investigation will be required to provide all relevant facts relating to its own employees, including employees with minimal contacts with the United States, in order to qualify for any cooperation credit.
The DOJ has decided that corporate criminal fines and penalties are insufficient to deter criminal conduct. In doing so, the DOJ is substantially changing the calculus for companies under investigation. Until now, companies largely weighed the cost of an investigation and risk of an adverse ruling against the benefits of cooperation credit and cost of a potential plea agreement or other resolution. The Yates Memorandum complicates this evaluation by adding a significant variable into the equation – the prosecution of executives and employees. Not only must companies consider the immediate and measurable impact of such an investigation, but they must also assess how to value the unquantifiable effects of such investigations on both the company itself and its employees, especially when identifying culpable individuals is now treated as a precondition to any cooperation credit. Companies must therefore decide whether to “turn in” executives – who may have spent their entire careers working at the company – in order to receive cooperation credit for the company itself, thereby exposing those employees to serving prison sentences in the United States.
Moreover, companies won’t be asked to cooperate solely as to employees located or working in the United States. Indeed, under the Yates guidance, DOJ prosecutors will be pursuing executives, regardless of where they are located, even those with minimal connections to the United States. Despite the legal and practical challenges of investigating foreign located employees and executives, companies should expect DOJ to apply its aggressive extraterritorial approach to foreign located employees and executives. Pursuant to the guidance provided in the Yates Memorandum, DOJ prosecutors will likely require companies under investigation to assist in investigations of foreign located company employees and executives.
The DOJ memorandum articulates six “key steps” to which prosecutors should adhere:
- 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;
- Criminal and civil corporate investigations should focus on individuals from the inception of the investigation;
- Criminal and civil attorneys handling corporate investigations should be in routine communication with one another;
- Absent extraordinary circumstances or approved departmental policy, the DOJ will not release culpable individuals from civil or criminal liability when resolving a matter with a corporation;
- The 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; and
- 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.
In many respects, this pronouncement by the DOJ is nothing new. Many prosecutors from across the DOJ have focused their investigations on both corporations and culpable individual executives. Indeed, Deputy Attorney General Yates’ statements mirror those made nearly one year earlier by Assistant Attorney General for the Criminal Division Leslie Caldwell, who stated in a speech on October 1, 2014, “Corporations do not act, but for the actions of individuals. . . . The prosecution of culpable individuals – including corporate executives – for their criminal wrongdoing continues to be a high priority for the department. For a company to receive full cooperation credit following a self-report, it must root out the misconduct and identify the individuals responsible, even if they are senior executives.”
The Antitrust Division, in particular, has been very aggressive – and very public – about its efforts to prosecute individuals, in addition to corporations, for antitrust violations. As stated by then-Deputy Assistant Attorney General for the Antitrust Division Scott Hammond, in a March 26, 2008 speech, “The Division has long emphasized that the most effective way to deter and punish cartel activity is to hold culpable individuals accountable by seeking jail sentences.” The Antitrust Division has been regularly prosecuting individuals alongside corporations for years. For example, as of January 2014, the Antitrust Division had charged 26 executives as part of its auto parts investigation, and 20 had been sentenced to serve time in U.S. prisons. The average prison sentence for antitrust violations increased from 8 months in 1990-1999 to 25 months in 2010-2014.In 2012, then-DAAG Hammond stated that, “Monetary sanctions on corporations, even combining criminal fines with civil damages, are unlikely to be sufficient to deter cartels. Serious sanctions on culpable individuals therefore are required, and they are provided by the imprisonment of convicted individuals.” At the Antitrust Division, then, it will be business as usual under the Yates guidance.
In recent years, the Antitrust Division’s pursuit of individuals has had particularly significant implications for Japanese companies. For example, since 2011, some thirty individuals have pled guilty to antitrust violations in the Antitrust Division’s auto parts investigation alone. At least 22 more individuals have been indicted. The vast majority of these individuals are Japanese nationals, many of whom have never resided in the United States, some of whom have never even stepped on United States soil. The individuals sentenced held various positions within their respective companies, including directors of sales, department managers, general managers, vice presidents, and at least one company president. Sentences for these individuals have ranged from 12 to 24 months of time in U.S. prison. The auto parts investigation is but one such investigation; the Antitrust Division has vigorously pursued foreign nationals. In particular, Japanese nationals have found themselves targets of investigations into airlines, fax paper, and shipping industries as well.
Although criticism has persisted that the DOJ prosecutions have been soft on the actual persons committing crimes, allowing companies to pay substantial fines and allowing the actors to otherwise go unpunished, the DOJ has publicly acknowledged the difficulty in pursuing cases against corporate executives. The Yates Memorandum notes that there are “substantial challenges” in prosecuting individuals for corporate crimes, as “it can be difficult to determine if someone possessed the knowledge and criminal intent necessary to establish their guilt beyond a reasonable doubt. This is particularly true when determining the culpability of high-level executives.” Recent acquittals of executives in jury trials highlight the difficulty the DOJ faces in prosecuting individuals.
What this Means for a Company
A corporate investigation causes significant disruption and cost, but this disruption and cost will only be magnified when company executives, management, or employees are also investigated.
- Impact on Ability to Conduct a Meaningful Internal Investigation – An internal investigation is critical to developing the company’s defense against the government’s allegations.
- Interviews of relevant employees are a necessary step in these investigations. Companies under investigation may find that relevant employees are less willing to agree to interviews when facing the prospect of being “turned in” by the company in order to obtain cooperation credit. In particular, employees specifically identified as subjects, targets, or otherwise under criminal investigation may be understandably hesitant to participate in these interviews.
- The Yates Memorandum announced that tolling agreements “should be the rare exception.” It further adds that “where it is anticipated that a tolling agreement is nevertheless unavoidable and necessary, all efforts should be made either to resolve the matter against culpable individuals before the limitations period expires or to preserve the ability to charge individuals by tolling the limitations period.” This policy against tolling agreements signals that companies will be expected to expediently conduct and conclude their own investigations. Even if the government and the company agree to a tolling agreement, however, should an individual under investigation decline to sign a tolling agreement, the company faces the prospect of an expedited investigation in order to obtain full cooperation credit.
- Disruption of Day-to-Day Operations
- Employees under investigation naturally face significant unquantifiable distractions from their daily responsibilities. Potentially these individuals will be forced to confront any number of questions, including: (1) whether to obtain separate individual counsel; (2) whether and to what degree to partake in the company’s internal investigation, including potentially speaking negatively about supervisors, subordinates, and peers; (3) whether and to what degree to cooperate with the Government; (4) whether to sign a tolling agreement; and (5) if a foreign national, whether to waive any jurisdictional challenges or to challenge extradition. Individuals under investigation may face significant time with their individual counsel, corporate counsel, and government investigators – time that would otherwise be spent fulfilling their job functions.
- Companies also face the risk that an investigation, particularly internal, will breed distrust by its employees, both of the company itself and of other colleagues. Employees may feel pressured to “rat each other out” or blame each other for wrongdoing, and they will likely recognize that any negative information related to the investigation will possibly be reported to the government. Companies under investigation should be particularly aware of any potential conflicts of interest – real or perceived – and may want to consider having the Board of Directors direct the investigation to minimize any such conflicts.
- Of course, the Yates Memorandum increases the likelihood of individuals ultimately being convicted or pleading guilty to charges, meaning companies must face the prospect of long-term or permanent absences by employees and executives. This is particularly problematic in regulated industries where such executives may face debarment.
- Additional Costs to Company
- The DOJ’s guidance in the Yates Memorandum calls for companies to turn in employees in order to get cooperation credit. The memorandum’s acknowledgment of the difficulty of identifying culpable high-level executives suggests that the DOJ will not be satisfied with merely identifying the lower-level actors who carried out the conduct, but also wants to target executives and culpable decision-makers. Indeed, in her announcement of the new memorandum, Yates proclaimed, “We’re not going to be accepting a company’s cooperation when they just offer up the vice president in charge of going to jail.” Yet there is no guarantee that a company conducting a good-faith investigation will be able to identify any culpable executives. In those circumstances, companies may find it challenging to reach a plea deal, and the company may be unable to get a declination for employees, who would face the ongoing threat of future prosecution.
- In practice, the DOJ will often identify to the company the names of individuals that potentially need separate counsel due to a perceived conflict of interest. The company, for any number of reasons, might also self-identify individuals who require individual representation. This could be because the company has actual evidence of the individual’s involvement with the relevant conduct or because of the employee’s seniority within the company. The government might also subpoena records or testimony from specific individuals, necessitating separate counsel in at least some cases. In some cases, companies decide to assist the individual employees in obtaining individual counsel, and in certain circumstances, companies indemnify the individuals for that counsel, subject to various conditions. Many corporate bylaws dictate the circumstances and conditions under which the company will indemnify an individual employee for legal representation. As the numbers of individuals under investigation increases, related fees from indemnification can skyrocket for the company, particularly in circumstances where conflicts of interest impede the ability of the same lawyer representing multiple individuals. These costs only multiply – in scope, time, and money – for overseas companies, as, for example, multiple offices may fall under suspicion globally, employees or lawyers must fly internationally and work across time zones, and translators must be hired.
- Unique Challenges Faced by Non-U.S. Companies – Companies headquartered outside the United States must consider numerous external factors and pressures that may challenge their ability to fully cooperate with DOJ, as defined in the Yates Memorandum.
- Local laws and regulations may add further risks or costs to companies cooperating with DOJ. For instance, many countries have strict data protection laws that restrict the distribution overseas of various records and communications. DOJ does not typically excuse companies from providing information based on data privacy issues. Now, under the Yates Memorandum, prosecutors are going to likely be even more unwilling to entertain arguments relating to data privacy. They will need these documents to build the individual cases that they are now required to pursue. Overseas companies must weigh the risk of disclosing such documents against the benefits of cooperation, while prosecutors will expect production of these documents as part of corporate cooperation.
- A company’s perceived cooperation with DOJ may be impacted by whether its employees choose to cooperate with investigators. Sometimes – whether out of a sense of loyalty or because their interests align – employees under investigation will cooperate fully with the DOJ, thereby assisting the company in receiving full cooperation credit. But individuals are independent actors and they might not always cooperate. In the event that DOJ charges a company’s foreign located employee- something that companies under investigation should expect under the Yates guidance – that employee’s case can cause massive disruption and cost to the company. This can manifest at various stages of the investigation:
- Investigation phase: Employees will often be asked to travel to the United States to be interviewed by DOJ. Employees can refuse to do so. This may limit DOJ’s ability to investigate both the company and individuals, thereby potentially impacting the company’s cooperation credit.
- Jurisdictional Challenges: An employee, particularly one with limited U.S. contacts, can assert a jurisdictional challenge if DOJ charges him individually. Such a challenge can lead to prolonged, expensive litigation, potentially increasing costs to the company and frustrating DOJ.
- Trial Complications: An employee could decide to submit to U.S. jurisdiction and go to trial, which will take potentially years to wind-up and potentially cost the company significant money, not to mention the potential embarrassment of a public trial. Additionally, that employee may be unable, or at least severely restricted, in his or her ability to work during these proceedings.
- Extradition: Finally, the employee could simply decide to avoid the jurisdiction of the US. This could be costly because the employee will not be able to travel, for fear of getting caught on a red notice. In some countries, such as Japan, the employee could face extradition.
When a company’s employee declines to cooperate with the DOJ at any stage of the investigation, the company faces very real additional costs. As a practical matter, those individuals subject to the investigation will be unable to travel to the United States and face real risks of detention if traveling anywhere outside of Japan. This can therefore directly constrain their ability to fulfill ongoing work obligations. Further, as part of the company’s promise of ongoing cooperation with DOJ – particularly following the Yates Memorandum – companies may be expected to pressure culpable employees into waiving any such challenges. Companies may feel pressure (whether real or perceived) not to continue to employ individuals who are simultaneously contesting prosecution by the same prosecutors with whom the company has promised to cooperate.
It remains to be seen whether this formalization of policy signals a significant paradigm shift or merely signals a continuation of business-as-usual for the DOJ. Recent investigations have focused on individuals; however, an increased effort to prosecute high-ranking executives would result in significant changes in how investigations impact companies and how companies therefore respond to government investigations.