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.”1 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 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.
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.”2
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.”3 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.4 The average prison sentence for antitrust violations increased from 8 months in 1990-1999 to 25 months in 2010-2014.5 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.”6 At the Antitrust Division, then, it will be business as usual under the Yates guidance.
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.7 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.”8 Recent acquittals of executives in jury trials highlight the difficulty the DOJ faces in prosecuting individuals.9
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.”10 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.
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.