On September 9, 2015 Sally Yates, the Deputy Attorney General, released a memorandum entitled "Individual Accountability for Corporate Wrongdoing," which was addressed to all federal prosecutors.

The so-called "Yates Memo" emphasizes that fighting corporate fraud and wrongdoing is a top priority for the Department of Justice ("DOJ"), and that the DOJ will seek accountability from the individuals that perpetrate such wrongdoing. The Yates Memo further acknowledges that achieving this goal requires the DOJ to leverage its full resources. The guidance applies to both civil and criminal matters.

The memo identifies six key steps that the DOJ will follow to strengthen the pursuit of individual corporate wrongdoing:

  1. The DOJ will not give any credit for cooperation to companies unless they provide all relevant facts about individuals responsible for wrongdoing.
  2. Both criminal and civil investigations should focus on individuals from inception.
  3. Criminal and civil attorneys handling corporate investigations should be in routine communication with one another.
  4. Absent extraordinary circumstances the DOJ will not release culpable individuals from civil or criminal liability when resolving a matter with a corporation.
  5. DOJ attorneys should not resolve cases with a corporate entity without a clear plan for resolving related individual cases.
  6. Civil attorneys should consistently focus on individuals as well as companies and evaluate whether to bring suit against an individual based on considerations beyond an individual’s ability to pay.

Key Considerations in Dealing with the Yates Memo

There has been widespread commentary on the consequences of this memo and to what extent it will impact regulatory investigations of companies and their directors and officers. What should be the key takeaways for corporate executives? We suggest that corporate executives should at least consider the following:

  1. There is no doubt that the DOJ will use the full extent of its power to investigate and prosecute wrongdoing by corporate executives. The recent economic crisis created a climate of public distrust and widespread demands for executives to be held accountable. Regulators are acutely aware of this expectation.
  2. The scope of any investigation will be broad and will include senior executives at the involved companies, including directors and C-suite officers.
  3. Companies are motivated to provide full cooperation with the DOJ in order to minimize enforcement consequences to the company itself.
  4. Companies and their executives should re-examine the protection afforded by their D&O policy to ensure that it is adequate to cover the expenses of an investigation.

D&O Insurance Issues

A standard D&O policy often will not cover the costs of a response to a governmental investigation. This can often be determined by looking at three key definitions:

  1. A "claim" (often framed as a written demand for monetary or non-monetary relief)
  2. "Defense costs" (often broadly summarized as fees, costs and expenses arising from the defense of a covered claim)
  3. "Wrongful act" (often broadly defined as any actual or alleged breach of duty, neglect, error, misstatement, misleading statement mission or act by an insured person)

Some insurers, however, are willing to provide an element of coverage for investigation costs by amending the definition of "claim" to include investigations. On the face of it, this would appear to ensure coverage, as an investigation would trigger the definition of "claim" and consequently costs incurred would fall within the definition of "defense costs." However, a recent decision by a federal court highlighted the need to ensure that the provisions of the policy reflect the practical realities of an investigation.

In MusclePharm Corp. v. Liberty Insurance Underwriters Inc., No. 1:15-cv-00555 (D. Col. Aug. 4, 2016), an insured unsuccessfully sought coverage under its D&O insurance policy for attorneys' fees and costs it incurred in responding to an investigation by the Securities and Exchange Commission ("SEC").

The SEC investigation began with an inquiry. On May 16, 2013, the company received a letter from the SEC Enforcement Division requesting documents. The letter did not specify any violations and, indeed, specifically stated that the inquiry "should not be construed as an indication that the Commission or its staff believes any violation of law has occurred, nor should you consider it an adverse reflection on any person, entity, or security." Two months later, on July 8, 2013, the company received a Formal Order of Investigation, which stated that the SEC had "information that tends to show" various "possible violations" of the federal securities laws by MusclePharm and/or its directors and officers. The Order authorized an investigation to "determine whether any person or entities have in engaged in, or are about to engage in" any prohibited acts. On February 13, 2015, the SEC Enforcement Division served two former executives of MusclePharm with Wells notices, which advised them that the staff was preparing to recommend that the Commission institute charges against them.

MusclePharm submitted all of these matters to its D&O insurance carrier and sought to have its defense expenses and other costs incurred in responding to be paid for by the insurer. The relevant provisions of the policy required the carrier to pay for loss resulting from "claims" that arose out of a "wrongful act." The insurer denied coverage for all of the expenses except of the expenses of the two individuals incurred after they were served with the Wells Notices.

The court agreed with the insurance carrier. The court found that the key provision of the policy only provided for coverage where there is an allegation of a "wrongful act." The Court found that the SEC did not allege a wrongful act in its Formal Order of Investigation, and therefore the insurer had no duty to reimburse MusclePharm for the fees and costs it incurred prior to the issuance of the Wells Notices.

This case is important because, realistically, most government investigations are fact finding missions to determine whether or not any wrongful act has occurred and, if so, who perpetrated the illegal conduct. Consequently, there is generally no allegation of a wrongful act at the onset of a regulatory investigation. In such a case, as in MusclePharm, the investigation cover under the D&O extension described above may not be triggered if the definition of a "claim" requires a "wrongful act."

Even if the D&O policy is written to ensure that an investigation triggers coverage, there are some other issues that merit consideration:

  1. If an investigation is covered under the definition of claim there could be a potential coverage issue if notification of the investigation is not deemed to be made timely, which may impact coverage for the investigation and any subsequent claim.
  2. Many investigation coverage extensions only apply to the individual insureds. This may present an allocation problem when the investigation also includes the entity, as is often the case. How are costs of responding to the investigation allocated amongst the various constituents?
  3. Some insurers offer investigation cover for the entity. Although this may appear to provide a comprehensive solution, the danger is that it will also accelerate erosion of policy limits. Should the investigation expand to target individual directors or officers, or worse, lead to a claim against them, there may be no insurance left to protect them.
  4. Even if the language of the policy provides for coverage, the company must consider whether any of the exclusions set forth in the policy will apply.


The U.S. government has made clear that it intends to vigorously investigate and prosecute corporate wrongdoing, and that it will charge both entities and the individuals it holds responsible. This pattern of aggressive investigation and stern enforcement raises a host of complex issues, not least of which is who will bear the costs of responding to an investigation launched by the U.S. government. Companies are well advised to pay close attention to the D&O insurance coverage – especially the precise definitions that trigger coverage – and ensure that the coverage is adequate to meet the company's needs in a time of crisis. The time to do this is now, not after a company receives a letter or a subpoena from a regulator. Moreover, companies should ensure that their D&O policy reflects the practical realities of how investigations are conducted. Thinking ahead and realistically appraising the company's needs will enable the board and senior management to sleep better at night.