It has now been seven months since the U.S. Department of Justice announced — in the form of a September 9, 2015 memo from Deputy Attorney General Sally Yates — that it was adopting a policy focused on individual accountability for corporate wrongdoing. The keystone of the policy embodied in the Yates memo is that for companies to receive cooperation credit, they must completely disclosure “all relevant facts about individual misconduct.” As discussed below, the Yates memo is having an impact in a number of ways. However, according to an April 22, 2016 publication from the Clifford Chance law firm (here), the Yates memo may be having unintended consequences – it may actually be deterring companies from divulging information.
Conflicts of interest
The policies in the Yates memo obviously are important to companies involved in government investigations. The policies also obviously are of significant concern to corporate executives at the involved companies. The increased focus on individual accountability means that these individuals have to be concerned about their own potential personal liability – which in turn raises the possibility of potential conflicts of interest between companies (who may be eager to seek cooperation credit) and individuals (who clearly have an interest in avoiding individual prosecution).
As a result of this potential conflict of interest between the company and individual employees, employees, according to the Clifford Chance law firm memo, are “now more keen to seek independent legal advice during internal investigations.” The involvement of multiple, separate counsel can “significantly increase the costs for the company.”
Document Production and Individual Representation
Another impact that the increased risk of individual prosecution can have is with respect to document productions in response to government subpoenas or document requests. As discussed in an April 25, 2016 memo from the Hogan Lovells law firm (here), if concerned individuals have not already retained separate counsel, the document production stage will be a point at which individuals may well want separate legal advice, particularly with respect to their work emails and other documents. Again, the involvement of individual counsel likely will increase the company’s costs, and create possible tensions as the company seeks to avoid the appearance that by coordinating with individuals’ separate counsel that the company is not being fully cooperative.
The individuals interests could well diverge from those of the company. As the Clifford Chance law firm’s memo notes, “it would not be surprising if independent legal counsel were to advise their client not to cooperate with their respective employer on the grounds that evidence provided could be used by the company to obtain cooperation from the government to the detriment of the individual.”
The Unintended Consequences
The diverging interests between the individuals and their companies may be having another impact as well, an impact the Clifford Chance memo describes as the “unintended consequences” of the government’s new policy. As the Clifford Chance memo notes, the Yates memo’s requirement that the companies must provide information about individual involvement in order to receive any cooperation credit may actually be deterring companies from divulging information about wrongdoing. The companies are concerned about providing information “even when they cannot be certain whether those employees are in fact involved in the wrongdoing,” which companies generally “appear reluctant to do.”
Other complications arise from the increased tendency toward cross-border cooperation of governmental regulators and enforcement authorities. If a company voluntarily reports to the authorities in one country, authorities in other countries may be automatically alerted. The divulgence of information could potentially trigger legal requirements in these other countries; for example, depending on the nature of the information disclosed, the disclosure could trigger data protection or privacy laws in other countries. In addition, labor laws in some jurisdictions may impose requirements that could hinder or significantly delay the ability of an employer to identify to the DOJ the employees engaged in wrongdoing. As a result of these concerns, “the decision of whether or not to self-report warrants careful consideration with targeted advice provided across jurisdictions.”
One obvious enforcement arena where these cross-border issues could be of particular concern is whether respect to enforcement actions under the Foreign Corrupt Practices Act. The DOJ has made it clear that it is putting a priority on encouraging companies to self-report. In an April 5, 2016 statement (here) the agency’s fraud unit announced a number of initiatives, including a new one-year “pilot program” based on a goal to promote great individual accountability. The criteria involved for obtaining cooperation credit in this pilot program are based on the requirements identified in the Yates Memo. The potential benefits to companies cooperating in compliance with the requirements of the pilot program could be substantial, including among other things the possibility of the reduction of fines imposed by as much as 50%. (The DOJ Fraud Unit’s new FCPA enforcement plan is detailed in an April 6, 2016 memo from the Fried Frank law firm, here)
The policies reflected in the Yates memo clearly present a number of challenges for companies involved in governmental investigations. As I discussed in a prior post (here), these challenges have important implications for companies and their senior officials, including, in particular their boards of directors.
In addition, the obvious interest that concerned individuals will have in retaining separate counsel, and the associated expense, in turn has implications as well. Among other things, as discussed here, the individual’s interest in retaining separate counsel presents questions concerning corporate advancement and indemnification.
As I have previously noted, the cooperation requirements embodied in the Yates memo may cause companies to try to evade their advancement and indemnification obligations. It is also possible that a company that is the subject of a DOJ investigation may also be financially unable to honor its advancement and indemnification obligations.
For that reason, as a result of the DoJ’s new directive companies’ D&O insurance protection could become more important than ever. If an individual has been targeted as result of the agency’s new directive, or an individual finds himself or herself unable to extricate themselves from a prosecution or civil action even after the company has managed to resolve the case against the corporate entity, the D&O insurance may represent the individuals’ last line of defense.
The possibility that multiple individuals could require separate counsel has important implications about limits selection and limits adequacy questions. Because the limits may have to go further, companies may want to consider buying increased insurance limits.
PLUS D&O Event in Montreal: On May 18, 2016, I will be participating as a panelist at a Professional Liability Underwriting Society (PLUS) Canadian Chapter Workshop in Montreal. The title of the panel is “A Look Beyond the Border: Understanding the Implications of US Exposure for Canadian Insureds.” Participating with me on the panel will be Mylène Côté of Liberty International Underwriters; John Trefry of Travelers; and François Jean of Forum Risk and Insurance. The panel discussion will take place from 3:30 pm to 5:30 pm and will be followed by a reception. Information about the event, including registration instructions, can be found here.