Emphasis on Individual Accountability:

During the past few years there has been increasing scrutiny and criticism of government regulators for failing to take action against individuals in several financial fraud cases brought solely against corporate entities.  In a strong reaction to this criticism, DOJ has announced a new policy that places emphasis on holding individuals, particularly high level corporate employees, personally accountable for the role they play in corporate misconduct.  This is to be accomplished by shifting the focus of its policy on corporate cooperation agreements to compel companies, as a condition to entering into a corporate cooperation agreement, to assist in DOJ efforts to hold individuals liable.

This is not just rhetoric: Deputy Attorney General Sally Yates has advised the US Attorneys in every district of their obligation to strictly enforce the new policy and the policy has already been credited with the recent indictment of a former president of drug maker Warner Chilcott and three of its former directors.

Conditions for Eligibility for Cooperation Credit and Cooperation Agreements:

The new Yates policy sets forth six principles to guide resolution of DOJ enforcement actions.  The principal thrust of this new guidance is the requirement that a cooperating company seeking cooperation credit for a more lenient resolution, make a full disclosure to the DOJ of all facts and circumstances concerning the individuals involved in the corporate misconduct.

First:  Corporations will not be eligible for cooperation credit unless they supply the DOJ with "all relevant facts about the individuals involved in corporate misconduct." 

Second:  All corporations will be required to focus on individuals from the inception of the investigation.

Third:  Civil and criminal DOJ attorneys conducting corporate investigations should be in routine contact with each other.

Fourth:  Absent extraordinary circumstances neither the DOJ nor corporate resolution will provide protection from criminal or civil liability for any individuals.

Fifth:  Corporate cases should not be resolved without a clear plan to resolve related individual cases before the statute of limitations expires.

Finally:  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.

Impact of the New Policy:

  • It will change the way in which corporations and their counsel have traditionally negotiated corporate resolution agreements.
  • The new policy increases the risk to companies that they may be denied cooperation credit on the basis that the company did not go far enough; or should the company determine not to cooperate under certain circumstances it could lead to enhanced penalties.
  • It could lead to more cumbersome and less efficient internal investigations as it complicates attorney-client privilege and attorney work product doctrine issues when corporations decide to turn over the results of its investigative efforts, along with findings and analysis--these venerable protections may be waived. 
  • The policy may make it more difficult for companies and their counsel to secure unfettered cooperation from executives in internal investigations. The risk for employees to cooperate with an internal investigation that will turnover information to DOJ may present an early conflict that necessitates an early assessment of the need for   separate legal representation for the individual. 
  •  The policy may also have implications for D&O coverage for those individuals.
  • It places added emphasis on the need for companies to re-evaluate their compliance program to ensure that it is effective and consistent with Yates, Caremark oversight obligations and the revised federal sentencing guidelines.  This is particularly important given that DOJ has now appointed "compliance counsel" within its fraud division who will scrutinize corporate compliance programs to determine whether they have been "effective and maintained in good faith."
  • It could impact advancement and indemnification for affected employees.

Guidance To Clients:

The new DOJ initiative raises the threshold for companies to receive maximum cooperation credit while attempting DOJ resolution.  In order to best position itself, companies should take the opportunity to review and assess their policies and procedures. The implications of the Yates policy should be communicated to senior management and the governing board.  It has now become foolhardy to not proactively investigate individuals who have been discovered to engage in corporate misconduct.  Moreover, a robust focus on corporate compliance should be undertaken, as it is generally the best way to prevent and mitigate risk from misconduct.