The Yates Memo: United States Department of Justice Requires Individual Accountability for Corporate Wrongdoing

Sep 29, 2015   

Tuesday, September 29, 2015

There has always been a tension between the legal interests of companies and the individual employees who work for them. Often when companies seek to minimize their legal exposure they does so at the expense of their employees who are pressured into waiving their Fifth Amendment right against self-incrimination.  This blog explores a recent change to the legal landscape in the United States that has wide-reaching implications for all employees of regulated businesses.

On September 9, 2015, the United States Department of Justice (“DOJ”) issued a memo from Sally Quillian Yates, the Deputy Attorney General.  The Yates Memo details the Justice Department’s policy regarding corporate fraud and other misconduct that was typified in the years that led up to the “Great Recession.”  This new policy is effective for all future and on-going investigations. A copy of the Yates memo is available here.

The Yates Memo sets forth the modernized policy of the Justice Department as it relates to individual employees of corporations under investigations. The policy may be summarized by reference to the following six critical points:

  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;”
  1. “Criminal and civil corporate investigations should focus on individuals from the inception of the investigation;”
  1. “Criminal and civil attorneys handling corporate investigations should be in routine communication with one another;”
  1. “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;”
  1. “[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
  1. “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.”

The Yates memo is explicit –

In order for a company to receive any consideration for cooperation under the Principles of Federal Prosecution of Business Organizations, the company must completely disclose to the Department all relevant facts about individual misconduct. Companies cannot pick and choose what facts to disclose. That is, to be eligible for any credit for cooperation, the company must identify all individuals involved in or responsible for the misconduct at issue, regardless of their position, status or seniority, and provide to the Department all facts relating to that misconduct. If a company seeking cooperation credit declines to learn of such facts or to provide the Department with complete factual information about individual wrongdoers, its cooperation will not be considered a mitigating factor pursuant to USAM 9-28.700 et seq. Once a company meets the threshold requirement of providing all relevant facts with respect to individuals, it will be eligible for consideration for cooperation credit. The extent of that cooperation credit will depend on all the various factors that have traditionally applied in making this assessment (e.g., the timeliness of the cooperation, the diligence, thoroughness, and speed of the internal investigation, the proactive nature of the cooperation, etc.).

Yates memo at 3 (emphasis added).

Thus, any company under federal investigation must provide information relating to any potential misconduct of its employees or independent contractors.  The information must be provided without regard to the type of employee, so all employees from the rank and file all the way to the CEO and board members are now required to be disclosed.  Failure on the part of the company to fully disclose such information may be a basis for the government to deny the company mitigation or even, under the appropriate circumstances, to criminally prosecute the company.  As the Yates memo makes clear – the stakes to the company could not be higher.

Moreover, federal prosecutors must “proactively investigat[e] individuals at every step of the process -before, during, and after any corporate cooperation.”  Yates memo at 4.  And government attorneys (both criminal and civil) “should focus on individual wrongdoing from the very beginning of any investigation of corporate misconduct.” Yates memo at 4.  This is so, according to the Yates memo, “[b]ecause a corporation only acts through individuals, investigating the conduct of individuals is the most efficient and effective way to determine the facts and extent of any corporate misconduct.”  Yates memo at 4.

The Yates memo goes on to address global resolutions, i.e. settlements resolving corporate and individual liability, and provides that “[b]ecause of the importance of holding responsible individuals to account, absent extraordinary circumstances or approved departmental policy such as the Antitrust Division’s Corporate Leniency Policy, Department lawyers should not agree to a corporate resolution that includes an agreement to dismiss charges against, or provide immunity for, individual officers or employees.”  Yates memo at 5.  Although not impossible, for an individual to now obtain a release from criminal and/or civil liability, such a resolution will have to personally approved, and be in writing, by either an Assistant Attorney General or United States Attorney.  Finally, an individual’s ability to pay, in civil cases, no longer will dictate whether the Federal Government brings suit.  Yates memo at 6.

What does this mean for corporate employees, officers, and board member? Starting immediately, if there is a governmental investigation or potential governmental investigation, each employee must be keenly aware that his/her interests now are potentially adverse to his/her employer.  This is so because every company, in order to obtain leniency from the DOJ in both criminal and civil (including parallel criminal and civil investigations), must disclose all facts regarding its employees potential misconduct.  As the U.S. Attorney’s Manuel clearly states:

when the government investigates potential corporate wrongdoing, it seeks the relevant facts. For example, how and when did the alleged misconduct occur? Who promoted or approved it? Who was responsible for committing it? In this respect, the investigation of a corporation differs little from the investigation of an individual. In both cases, the government needs to know the facts to achieve a just and fair outcome.

USAM at 9-28.720.

Failure to provide a full disclosure of the employee’s actions could result in the prosecution of the company – a virtual corporate death sentence. Thus, given the potentially disastrous result of a federal prosecution, companies will have little choice but to but to sacrifice their employees for the better interests of the company.

Should corporate employees be worried? Undoubtedly. However, beyond worry, employees must be cognizant of the fact that information taken in isolation or out of context (e.g. emails) often can be viewed by governmental investigators as evidence that individuals committed illegal acts. Additionally, because investigations can often take years to resolve (the statute of limitations for most federal crimes is five years), memories can and will fade, resulting in the necessary testimonial evidence to provide context to the documentary evidence being lost.

In the current legal environment, companies facing a governmental investigation will typically turn to an outside law firm to investigate any irregularities.  However, these attorneys represent the company, and do not represent the employees.  Thus, these outside attorneys are under no obligation to inform the company’s employees that their interest may be adverse to the company’s interests, and rarely inform the employee that she has the right to have her own legal representation.  This should come as no surprise, since based on the Yates memo, in order for the company to obtain leniency “the company must completely disclose to the Department all relevant facts about individual misconduct.”

In the past, the DOJ’s position was that prosecutors were required to inquire “whether the corporation appears to be protecting its culpable employees and agents [and that] a corporation’s promise of support to culpable employees and agents, either through the advancing of attorneys fees, through retaining the employees without sanction for their misconduct, or through providing information to the employees about the government’s investigation pursuant to a joint defense agreement, may be considered by the prosecutor in weighing the extent and value of a corporation’s cooperation.” Indeed, in the DOJ’s investigation of KPMG for the illegal sale of tax shelters, the DOJ did just that – it pressured KPMG to condition the advancement of legal fees with the employee’s cooperation with the DOJ’s investigation.  See United States v. Stein, 541 F.3d 130 (2d Cir. 2008)(holding that the dismissal of a criminal indictment was appropriate when the Government interfered with the criminal defendants constitutional right to counsel). A copy of theStein slip opinion is available here.

As the New York Times has reported, Ms. Yates minced no words when she said: “We mean it when we say, ‘You have got to cough up the individuals.’”  A copy of the NY Times article is available here. Additionally, Ms. Yates provided additional detail in a recent speech at the New York University School of Law. In that speech, Ms. Yates reiterated that “Crime is crime.  And it is our obligation at the Justice Department to ensure that we are holding lawbreakers accountable regardless of whether they commit their crimes on the street corner or in the boardroom.  In the white-collar context, that means pursuing not just corporate entities, but also the individuals through which these corporations act.”  Ms. Yates’s prepared remarks are available here.

What should an employee do in light of the Yates memo? We will discuss all of this in future articles and blog entries. Suffice it to say for purposes of this entry that at a minimum, if at all possible, the terms of the employment should be amended to address the following critical points:

  1. Under what circumstances is the company required to pay for the legal representation of the employee?
  2. Can the employee choose for his own lawyer?
  3. Under what circumstances can monetary fines, penalties and forfeitures be indemnified by the company?
  4. Does the company have director and officer (“D&O”) insurance? If so, does it provide for coverage in both civil and criminal investigations?

In any case, employees must be aware of the new enforcement environment in which they work and proactively seek out independent legal counsel who will zealously represent their, as opposed to the company’s, best interests. Independent legal counsel should be engaged as soon as possible to assist with navigating the investigation and to shape the dialogue between the employee and the DOJ.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in governmental investigations and litigating both criminal and civil cases against the U.S. Department of Justice. You can reach an attorney by emailing us at contact@fidjlaw.com  or by calling us at 305.350.5690.