December 04, 2015 Practice Points

Recent DOJ Memos and Investigations into Corporate Wrongdoing

Since 1999, the Department of Justice (DOJ) has issued a series of memoranda outlining the contours of criminal liability for corporate wrongdoing.

By David N. Mahler

Since 1999, the Department of Justice (DOJ) has issued a series of memoranda outlining the contours of criminal liability for corporate wrongdoing. The evolution of these memos over time, culminating with several recent developments, puts extra pressure on corporations to turn on its employees allegedly involved in the wrongdoing.

This article examines these recent developments and provides some general considerations for corporations if they become the focus of a DOJ investigation.

History of DOJ Policy Regarding the Prosecution of Corporations
The timeline below traces the evolution of the DOJ memos on corporate wrongdoing:

  • 1999:  Then-Deputy Attorney General, Eric Holder writes “Bringing Criminal Charges against Corporations.”

  • 2003: Deputy Attorney General Larry Thompson writes “Principles of Federal Prosecution of Business Entities.”  It is generally known as the “Thompson Memo.”

  • 2006: Deputy Attorney General Paul McNulty writes a memo titled “The Principles of Federal Prosecution of Business Organizations.”  It is generally known as the “McNulty Memo.” 

  • 2008:  Deputy Attorney General Mark Filip writes a memo also titled “The Principles of Federal Prosecution of Business Organizations.”  This is generally known as the Filip Memo. It gives guidance regarding the prosecution of business entities and how such entities could receive credit for cooperating. The 2008 memo mentions the importance of corporate cooperation in holding individuals liable. However, despite corporate settlements increasing in number and size, individuals have historically been able to avoid liability. The DOJ has claimed that this was largely due to the difficulty in proving a specific individual’s intent.

Recent Developments in DOJ Investigations into Corporate Wrongdoing
A September 2014 speech by Deputy Assistant Attorney General Marshall L. Miller signaled that the DOJ was going to be more aggressive in pursuing individuals for corporate wrongdoing. In a September 9, 2015, memo written by Deputy Attorney General Sally Yates titled “Individual Accountability for Corporate Wrongdoing,” the DOJ definitively announced that it will aggressively pursue the individuals allegedly responsible for corporate wrongdoing.

Before the memos, a company that wanted to receive cooperation credit had to provide any information requested, be forthcoming about its wrongdoing, and terminate the guilty employees. Under the new policies, a company must also provide all relevant facts, including any available evidence, and fully cooperate in federal criminal and civil actions against the individual wrongdoers to receive cooperation credit. A company must investigate the facts early in the process and accurately, reasonably, and promptly disclose those facts to the DOJ. According to the new policy, a company can no longer settle a case with favorable terms unless it assists in the prosecution of the individual wrongdoers from the beginning of the investigation. In light of the new policies, corporations should give thought to how they will deal with the DOJ if they become the subject of an investigation.

Corporate Response to a DOJ Investigation
All corporations should already have a requirement that the board of directors be notified if they become the subject of a DOJ or any other governmental investigation. The directors have a fiduciary duty to the corporation and are obligated to do what is in the best interest of the corporation regardless of their relationship with officers or even other directors that may have personal liability.

Because the board cannot know the full scope of wrongdoing and all of the corporate participants before an investigation takes place, it is prudent to have an independent law firm promptly do a full investigation of the facts and report those facts back to the board. Doing the investigation internally risks the investigation becoming tainted, or—even worse—sabotaged by one or more wrongdoers if they are in a position to affect the investigation. If any members of the board are implicated, that member or those members should be recused from hearing the report while the investigation is ongoing and when making any decisions. Any implicated directors or employees should always retain their own independent counsel. Clearly there is a conflict between a corporation whose best interest may be to provide evidence against its employees and the employees themselves.

Once an investigation has been completed, the board must decide on a course of action. In most cases, full cooperation is a good idea for the corporation so that it receives cooperation credit and prevents a long battle that can be costly in terms of both money and reputation. However, in some cases, the wrongdoing may be far greater than the DOJ realizes, or the corporation may believe that it will be difficult for the DOJ to prove its case. Then a decision arises: cooperate, defend the case, or try to settle without the benefit of cooperation credit? If it appears that the DOJ knows most or all of the wrongdoing and that it likely can prove its case, there is very little downside for the corporation to cooperate. The only downside would be the loss of the guilty employees. Of course, the consequences for the employees are great.

Despite the benefits of cooperating, there is usually a knee-jerk reaction to protect the company and go into a defensive mode. However, if a corporation decides that it will defend a case, it takes the risk of a long, public battle with great monetary and reputational risks. Even if the case is won or damages and legal costs are less than a settlement, the corporation may suffer significant reputational damage. Whatever the corporation was trying to avoid coming out may be exposed anyway and in a much more public way. The corporation will receive no cooperation credit and may cause greater damage to its reputation. It also risks further prosecution by administrative regulators (e.g., the SEC) and private litigation.

Corporations should have robust compliance programs to help keep them out of the DOJ’s crosshairs. The DOJ has developed new policies that will require a corporation to provide evidence and assistance in prosecuting individual wrongdoers for the corporation to get cooperation credit. Corporations under investigation by the DOJ need to consider how to respond to such investigations in light of the new DOJ policies. Providing evidence and cooperation against its employees will frequently be in the corporation's best interest, even if it is not in the best interest of the employees.

Keywords: securities litigation, corporate wrongdoing, individual accountability, DOJ, internal investigations

David N. Mahler, the Bates Group, Miami, FL

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David N. Mahler – December 4, 2015