On September 9 2015 the US Department of Justice (DOJ) formally announced a policy that is consistent with shifting trends in prosecution: the DOJ will vigorously pursue the prosecution of culpable individuals who are responsible for corporate wrongdoing. In a memorandum from Deputy Attorney General Sally Yates, 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 that are under investigation can expect that culpable executives and employees will be investigated and prosecuted, and will potentially serve significant jail time. Additionally, corporations that are under investigation will be required to provide all relevant facts relating to their 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 that are under investigation. Until now, companies largely weighed the cost of an investigation and the risk of an adverse ruling against the benefits of cooperation credit and the cost of a potential plea agreement or other resolution. The Yates Memorandum complicates this evaluation by adding a significant variable to the equation – the prosecution of executives and employees. Companies must not only consider the immediate and measurable impact of such an investigation, but also assess how to value the unquantifiable effects of such investigations on both the company itself and its employees – especially as identifying culpable individuals is now treated as a precondition to any cooperation credit.
The Yates 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 who are responsible for the misconduct;
- Criminal and civil corporate investigations should focus on individuals from the inception of the investigation;
- Criminal and civil attorneys that are 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;
- DOJ attorneys should not resolve matters with a corporation without a clear plan to resolve related individual cases and should memorialise any declinations as to individuals in such cases; and
- Civil attorneys should consistently focus on individuals as well as companies 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, 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 that:
"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, 20 of whom were sentenced to serve time in US prisons.(4) The average prison sentence for antitrust violations increased from eight months from 1990 to 1999 to 25 months from 2010 to 2014.(5) In 2012 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 Memorandum.
Although criticism has persisted that the DOJ prosecutions have been soft on the individuals committing crimes, allowing companies to pay substantial fines and allowing the actors otherwise to 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 that the DOJ faces in prosecuting individuals.(9)
A corporate investigation causes significant disruption and cost, both of which will be magnified when company executives, management or employees are also investigated.
Ability to conduct meaningful internal investigation
An internal investigation is critical to developing a company's defence 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 who are specifically identified as subjects or targets, or who are otherwise under criminal investigation, may be understandably hesitant to participate in these interviews.
In addition, the Yates Memorandum provides that tolling agreements "should be the rare exception". It 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 a company agree to a tolling agreement, however, should an individual under investigation decline to sign the 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 who are under investigation face significant unquantifiable distractions from their daily responsibilities. These individuals may be forced to confront any number of questions, including:
- whether to obtain separate individual counsel;
- whether and to what extent to partake in the internal investigation, including potentially speaking negatively about supervisors, subordinates and peers;
- whether and to what extent to cooperate with the government;
- whether to sign a tolling agreement; and
- if they are a foreign national, whether to waive any jurisdictional challenges or to challenge extradition.
Individuals under investigation may need to spend 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 among employees – both of the company itself and of other colleagues. Employees may feel pressured to turn each other in or blame each other for wrongdoing, and will likely recognise that any negative information relating to the investigation will possibly be reported to the government. Companies that are 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 minimise any such conflicts.
The Yates Memorandum increases the likelihood of individuals ultimately being convicted or pleading guilty to charges, meaning that 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 Yates 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 that it also wants to target executives and culpable decision makers. 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) However, 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 may be unable to get a declination for employees, who would face the ongoing threat of future prosecution.
In practice, the DOJ will often inform a company of the names of individuals who potentially need separate counsel due to a perceived conflict of interest. A 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 in 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 instances, companies will assist individual employees in obtaining individual counsel and, in certain circumstances, indemnify them 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 number of individuals under investigation increases, related fees from indemnification can skyrocket, particularly where conflicts of interest impede the ability of the same lawyer to represent multiple individuals.
It remains to be seen whether this formalisation of policy signals a paradigm shift or merely 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 to how investigations affect companies and how companies therefore respond to government investigations.
For further information on this topic please contact Kathryn Hellings at Hogan Lovells US LLP's Washington DC office by telephone (+1 202 637 5600) or email (email@example.com). Alternatively, contact Ethan Kate at Hogan Lovells' Tokyo office by telephone (+81 3 5157 8200) or email firstname.lastname@example.org).The Hogan Lovells US LLP website can be accessed at www.hoganlovells.com.
(2) Leslie R Caldwell, assistant attorney general, Department of Justice – Criminal Division, "Remarks at the 22nd Annual Ethics and Compliance Conference" (Oct 1 2014), available at www.justice.gov/opa/speech/remarks-assistant-attorney-general-criminal-division-leslie-r-caldwell-22nd-annual-ethics.
(3) Scott D Hammond, deputy assistant attorney general, Criminal Enforcement, Department of Justice – Antitrust Division, "The Evolution of Criminal Antitrust Enforcement Over the Last Two Decades" (Feb 25 2010), available at www.justice.gov/atr/speech/evolution-criminal-antitrust-enforcement-over-last-two-decades.
(4) Bill Baer, assistant attorney general, Department of Justice – Criminal Division, "Reflections on Antitrust Enforcement in the Obama Administration" (Jan 30 2014), available at www.justice.gov/atr/file/517761/download.
(5) Criminal Enforcement Fine and Jail Charts (2014), available at www.justice.gov/atr/criminal-enforcement-fine-and-jail-charts.
(6) Gregory J Werden, Scott D Hammond and Belinda A Barnett, Department of Justice – Antitrust Division, "Deterrence and Detection of Cartels: Using All the Tools and Sanctions" (March 1 2012), available at www.justice.gov/atr/file/518936/download.
(7) See, for example, Matt Apuzzo and Ben Protess, "Justice Department Sets Sights on Wall Street Executive", New York Times, Sep 9 2015, available at www.nytimes.com/2015/09/10/us/politics/new-justice-dept-rules-aimed-at-prosecuting-corporate-executives.html?_r=0; Jed S Rakoff, "The Financial Crisis: Why Have No High-Level Executives Been Prosecuted?", The New York Review of Books, Jan 9 2014, available at www.nybooks.com/articles/archives/2014/jan/09/financial-crisis-why-no-executive-prosecutions/; Glenn Greenwald, "The Real Story of How 'Untouchable' Wall Street Execs Avoided Prosecution", Business Insider, Jan 23 2013, available at www.businessinsider.com/why-wall-street-execs-werent-prosecuted-2013-1.
(9) See, for example, United States v Farmer, Case 3:13-CR-162-01-DRD, Doc 460 (DPR May 8 2015); United States v Lin, Case 3:09-CR-00110-SI-5, Doc 1256 (ND Cal Oct 10 2013); United States v O'Shea, Case 4:09-CR-00629, Doc 179 (SD Tex Jan 17 2012).
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