Although the Yates Memo is now ten months old,[1] senior executives and in-house counsel still do not have clarity about how the Department of Justice (“DOJ”) will apply the Memo’s principles to corporate investigations.  On June 9, 2016, Acting Associate Attorney General Bill Baer reiterated that the Yates Memo will be applied in civil corporate investigations, emphasizing that because “[c]ivil wrongs can have damaging consequences, from the significant waste of taxpayer funds, to the loss of jobs, homes and financial security, to consumer overcharges, to fundamental market dislocations and economic crises . . . holding individuals accountable for corporate wrongdoing – even through civil enforcement actions – provides a powerful deterrent against future misconduct.”[2]

As with civil matters, in the criminal context, the Yates Memo will impact corporate investigations conducted across DOJ by emphasizing a focus on individual culpability, from healthcare fraud to export control, from the Foreign Corrupt Practices Act (“FCPA”) to the False Claims Act (“FCA”). But whether the Yates Memo represents a sea change to DOJ’s corporate investigations and prosecutions is yet to be seen. In the midst of this uncertainty, corporations can and should begin to prepare themselves based on the plain language of the Yates Memo. This article will discuss the changes enacted by the Yates Memo, the practical consequences of those changes for corporate investigations over the past ten months, and factors senior executives and in-house counsel should consider before and during an investigation.

What does the Yates Memo require?

The Yates Memo is the latest in a long line of guidance memos extending DOJ’s policy to hold individual wrongdoers accountable in the course of corporate investigations. In 1999, then-Deputy Attorney General Eric Holder issued a memo entitled “Bringing Criminal Charges Against Corporations.” The Holder Memo focused on individual liability, noting that DOJ “is committed to prosecuting both the culpable individuals and, when appropriate, the corporation on whose behalf they acted.” Since 1999, DOJ has offered several other memos—in 2003 (“Thompson Memo”), 2006 (“McNulty Memo”), and 2008 (“Filip Memo”)—to clarify the principles that DOJ Trial Attorneys and Assistant U.S. Attorneys should consider in conducting corporate investigations and prosecutions.

In support of its emphasis on pursuing individual wrongdoers, the Yates Memo outlines six “key steps” that are meant to guide prosecutors and civil attorneys at DOJ in conducting and evaluating corporate investigations:

1) “In order to qualify for any cooperation credit, corporations must provide to the Department all relevant facts relating to the individuals responsible for the misconduct”

The biggest change brought about by the Yates Memo is that corporations may no longer receive partial credit for their cooperation in investigations. And DOJ’s articulated standard —that “corporations must provide . . . all relevant facts” — has not been further clarified by DOJ or tested in the courts.

2) “Criminal and civil corporate investigations should focus on individuals from the inception of the investigation”

Although investigating individual liability has always been a component of government investigations, the Yates Memo highlights the significant role that individuals will now play in the investigation of a corporation as a whole. Traditionally, in some respects, it has been easier for DOJ to bring a case against a corporation because the collective knowledge doctrine allows the government to gather evidence from many different corporate actors to make a combined case against the corporation.  By contrast, when the government focuses on individuals, it may be more difficult to assign intent or culpability to a particular person in the corporation in order to hold him or her accountable for corporate action.  At the same time, by focusing the investigation on senior management, lower-level employees may feel pressured to provide embellished information against higher-ups rather than the less helpful objective information they may possess.

3) “Criminal and civil attorneys handling corporate investigations should be in routine communication with one another”

Government attorneys have always tried to keep open lines of communication when an investigation may lead to both criminal and civil enforcement actions. The Yates Memo is a reminder to line attorneys to look at all angles of an investigation to identify all potential charges. It is also a sign that the government will attempt to find some basis on which to find liability, either civil or criminal.

4) “Absent extraordinary circumstances or approved departmental policy, the Department will not release culpable individuals from civil or criminal liability when resolving a matter with a corporation”

Put simply, DOJ attorneys will no longer agree to any settlement or corporate resolution that dismisses charges or provides immunity for individual officers or employees. The only exception is when DOJ determines that undefined “extraordinary circumstances” are present.

5) “Department attorneys should not resolve matters with a corporation without a clear plan to resolve related individual case, and should memorialize any declinations as to individuals in such cases”

A decision to resolve a corporate case, without simultaneously settling individual liability, will require the DOJ attorney to demonstrate, to his or her supervisor, a clear plan for resolving any related individual cases promptly and before the statute of limitations expires. Further, if the decision is made not to proceed against individuals, the justification for such a decision must be memorialized and approved by the relevant U.S. Attorney or Assistant Attorney General overseeing the investigation.

6) “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”

According to Mr. Baer’s June 9 statement, there are reasons the government may pursue an individual beyond recovering money: “Holding accountable the people who committed the wrongdoing is fundamental to ensuring that the public has continued confidence in our justice system.”  Mr. Baer’s comments are another warning that the DOJ will not shy away from pursuing individuals through civil enforcement actions, even when they do not have an ability to pay a potential judgment.

The Yates Memo in Practice

Although the Yates Memo was primarily a response to the lack of prosecutions within the financial services sector after the 2008 recession, its principles apply across all sectors. In fact, as a result of the Yates Memo, two executives are currently on trial in Boston for alleged securities fraud and crimes related to the sale and distribution of medical devices.[3]  They are alleged to have promoted a medical device for sale for uses not approved by the Food and Drug Administration (“FDA”) to boost company profits to make the company attractive to buyers.  This is but one example of how DOJ investigations will focus on individuals in both civil and criminal actions after the Yates Memo. Any executive in any industry may be the target of these kinds of investigations.

Internally, DOJ revised the United States Attorney’s Manual to conform it to the Yates Memo, particularly making individual culpability the primary focus of corporate investigations. In turn, the various sections within DOJ are also revising their procedures to reflect this change. One area that each section within DOJ will likely consider is the language included in cooperation clauses, which are statements by the government included in plea agreements, deferred prosecution agreements (“DPA”), or non-prosecution agreements (“NPA”) regarding what constitutes cooperation by a defendant that has settled a criminal or civil enforcement matter.  Generally, if a corporation cooperates according to the language of the clause, it will receive credit toward fewer criminal or civil penalties.  Cooperation clauses included in corporate resolutions in the last ten months have required the settling entity to:

• Fully cooperate with investigations relating to the settlement allegations, including investigations into “individuals and entities not released” from liability in the settlement;
• Make “former directors, officers, and employees available for interviews and testimony”; and
• Produce nonprivileged documents to the government concerning the conduct covered in the settlement.

According to a May 2016 Bloomberg BNA article, 46% of False Claims Act settlements in 2016 included a cooperation clause compared with 17 – 32% of similar settlements since 2008.[4] This marked increase is clearly a response to the Yates Memo, and it is likely that the trend will continue as DOJ seeks to hold more individuals accountable for wrongdoing.

What this Means for Corporate Executives and In-House Counsel

Senior executives and in-house counsel can and should prepare now for future investigations based on how government attorneys will conduct civil and criminal investigations in light of the Yates Memo.

The most striking change dictated by the Yates Memo is the all-or-nothing nature of cooperation credit. That is, a corporation is now expected to “identify all individuals involved in or responsible for the misconduct at issue . . . and provide to the Department all facts relating to that misconduct.” From now on, given the growing prevalence of cooperation clauses, companies will be required to continue this same level of cooperation as a term of any settlement or plea agreement.  Indeed, according to Yates, “A company’s failure to continue cooperating against individuals will be considered a material breach of the agreement and grounds for revocation or stipulated penalties.”[5]

In light of the requirements to receive cooperation credit, a corporation should analyze its ability to meet this heightened bar. Further, given the more stringent standard for cooperation credit, the assessment of whether to voluntarily disclose potential wrongdoing becomes more difficult.  In making this assessment, it remains critical for businesses to develop as full and thorough a set of facts as possible when responding to government scrutiny.

Regarding exactly which executives, managers, or employees a corporation must identify for DOJ, the Yates Memo does not provide clear guidance; instead, it states broadly that “the company must identify all individuals involved in or responsible for the misconduct at issue, regardless of their position, status or seniority.” But companies must be careful about who they identify and why. As Ms. Yates quipped in an interview with the New York Times, “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.”[6]  Thus, companies, as a general rule, should begin by focusing on  executives who are high enough in the organization to have knowledge of general business goals and strategies and who also exercised operational control and management within the affected business unit (i.e., those who DOJ is likely to point to as having combined knowledge and misconduct).

In addition to this new individual-centric paradigm, senior executives and in-house counsel also must keep in mind other consequences the Yates Memo will have on the nature of internal investigations. The most obvious issue is how the attorney-client privilege will apply. Now that DOJ requires “all information,” it may be more difficult for a corporation to maintain the privilege while at the same time disclosing the quantum of information demanded by the government. Even if a corporation is only disclosing “facts” to the government in the course of an investigation, it may effectively have to waive the privilege, at least partially.

Ultimately, the best defense to the new requirements set forth in the Yates Memo is a proactive business response to possible violations.  In that regard, corporations should review their existing policies and procedures to both avoid violations that may lead to an investigation and to be prepared if and when an investigation begins.  Although the existence of a compliance program is not a bar to prosecution or investigation, companies should review their existing ethics and compliance policies and, if necessary, bolster them to deter possible violations.  In assessing compliance programs, DOJ considers “whether the program is adequately designed for maximum effectiveness in preventing and detecting wrongdoing by employees and whether corporate management is enforcing the program or is tacitly encouraging or pressuring employees to engage in misconduct to achieve business objectives.”[7]  Ultimately, companies should create a robust compliance policy and devote sufficient resources to it to train employees and provide executives and the board direct oversight. This close supervision will allow management to respond quickly to issues and remedy them before they become significant or to adapt the compliance program to address new issues not previously considered. Equally important, companies should maintain documentation demonstrating that executives and others in management are following the ethics and compliance policies as stated.

Conclusion

Despite the continuing uncertainty the Yates Memo has created regarding corporate investigations, senior executives and in-house counsel can and should be aware of its impact, and prepare themselves for a future investigation.

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[1] The Yates Memo, a memorandum addressing “Individual Accountability for Corporate Wrongdoing,” was issued by Deputy Attorney General Sally Yates to all Department of Justice components and United States Attorney’s Offices on September 9, 2015.

[2] Acting Associate Attorney General Bill Baer Delivers Remarks on Individual Accountability at American Bar Association’s 11th National Institute on Civil False Claims Act and Qui Tam Enforcement, June 9, 2016, https://www.justice.gov/opa/speech/acting-associate-attorney-general-bill-baer-delivers-remarks-individual-accountability.

[3] See Ed Silverman, “Former Execs Charged With Securities Fraud at Device Maker Bought by J&J,” Wall Street Journal (Apr. 13, 2015), available at http://blogs.wsj.com/pharmalot/2015/04/13/former-execs-charged-with-securities-fraud-at-device-maker-bought-by-jj/

[4] Eric Topor, “DOJ Increasingly Demanding Corporate Cooperation in FCA Settlements After Yates Memo,” Bloomberg BNA Health Care Daily Report (May 25, 2016), available at http://www.bna.com/doj-increasingly-demanding-n57982072932/.

[5] Deputy Attorney General Sally Quillian Yates Delivers Remarks at New York University School of Law Announcing New Policy on Individual Liability in Matters of Corporate Wrongdoing, Sept. 10, 2015, available at https://www.justice.gov/opa/speech/deputy-attorney-general-sally-quillian-yates-delivers-remarks-new-york-university-school.

[6] Matt Apuzzo, “Justice Department Sets Sights on Wall Street Executives,” New York Times (Sept. 9, 2015), available at http://www.nytimes.com/2015/09/10/us/politics/new-justice-dept-rules-aimed-at-prosecuting-corporate-executives.html?_r=0.

[7] USAM 9-28.800(B).