Corporate Cooperation: What it Now Means for Companies and Employees

The same day, two other speeches reflected this same perspective. The recently appointed Assistant Attorney General (AAG) for the Criminal Division, Leslie Caldwell, who served on the Enron prosecution team, touted the DOJ's enforcement efforts. She addressed the new procedures for review of False Claims Act (FCA) cases that provided more immediate access to whistleblower complaints so that the DOJ can consider bringing a parallel criminal investigation. AAG Caldwell speech, Sept. 17, 2014, Washington, DC. In a speech on Oct. 1, 2014, the focus was again on individual culpability. Caldwell reiterated that “[c]orporations 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 [DOJ].” For those companies seeking to receive full credit for cooperation and self-reporting, AAG Caldwell explained that the company “must root out the misconduct and identify the individuals responsible, even if they are senior executives.” AAG Caldwell speech, Oct. 1, 2014, Athens, GA.

This message was echoed by the DOJ's Antitrust Division. AAG Bill Baer for the Antitrust Division, in discussing the Antitrust Division's leniency program, focused on two components of corporate cooperation: 1) acceptance of responsibility; and 2) substantial assistance to the DOJ. Baer stressed that “promises to cooperate are not enough,” and companies must “actually help us investigate and prosecute antitrust crimes.” AAG Baer speech, Sept. 10, 2014, Washington DC. Indeed, the DOJ has advised companies reporting the results of an internal investigation to make evidence of individual culpability “the first thing you talk about when you walk in the door.” AAG Miller speech, Sept. 17, 2014, New York.

The DOJ's focus on individual culpability is not new. What has changed is the blunt nature of the DOJ's position of what is needed to secure full credit for cooperation and self-disclosure. It has dispelled any notion of “passive” cooperation with the DOJ as an option. If companies want to mitigate penalties and minimize reputational damage, the DOJ has been emphatic that companies must cooperate proactively, which entails actively finding evidence that can show the role of employees.

'Expansionist' Legal Theories

The emphasis on individual prosecutions reopens the door for two approaches to prosecuting individuals who serve in supervisory roles. Direct individual liability is often based on anti-fraud or conspiracy statutes. Increasingly, the government has attempted to use: 1) the “responsible corporate officer” doctrine; and 2) the “control person” doctrine to expand liability to individuals who did not actually participate in the wrongdoing, in both criminal and civil enforcement actions.

The “responsible corporate officer” doctrine, or “Park doctrine,” stems from the U.S. Supreme Court's decision in United States v. Park, 421 U.S. 658 (1975). Almost 40 years ago, the U.S. Supreme Court reviewed the conviction of Acme Markets CEO John Park, who was charged with violations of the Food, Drug, and Cosmetic Act (FDCA). As discussed in a prior Business Crimes Bulletin article, “Shifting Gears; The Expansion of the Park Doctrine” (vol. 20, Oct. 1, 2012, available at http://bit.ly/1qlrVuy), the Supreme Court upheld Park's conviction because he had the “responsibility and authority either to prevent [the problem] … or, promptly to correct, the violation complained of, and ' he failed to do so.” This decision laid the groundwork for other corporate officers to be prosecuted under the “responsible corporate officer” doctrine.

Since the Park decision, the use of the responsible corporate officer doctrine has increased, although it has remained limited to FDCA cases. For health care and pharmaceutical industry professionals, the consequences of liability are dramatic. A collateral consequence of a conviction can be exclusion from participating in federal health care programs. See United States v. Purdue Frederick Co. , 495 F. Supp. 2d 569 (W.D. Va. 2007); Friedman v. Sebelius , 686 F.3d 813 (D.C. Cir.2012). Under 42 U.S.C. ' 1320a-7(b)(1)(a), the Office of Inspector General (OIG) of the Department of Health and Human Services can exclude a corporate officer even if the officer was convicted for a misdemeanor offense relating to fraud.

The doctrine has also been recently invoked in a civil enforcement case, United States v. N.Y. Fish Inc., 10 F. Supp. 3d 355 (E.D.N.Y. 2014). In that case, a federal judge in New York held three individuals liable for FDCA violations at a seafood company, and granted the government's injunction. According to the court, the individuals ' the company president, Vice President and plant manager ' had the power to prevent or correct their company's violations, but failed to do so. Relying on the Park decision, the court stressed that liability attached to “'persons whose failure to exercise the authority and supervisory responsibility reposed in them by the business organization resulted in the violation' of the statute.” I . at 373.

The Securities and Exchange Commission (SEC) has also sought to expand liability of responsible corporate officers through the “control person” doctrine ( see 15 USCS ' 78t). Under this doctrine, the SEC can bring actions against directors, officers, and other company executives for securities laws violations committed by their subordinates. The SEC has used the “control person” doctrine to bring civil actions against a former CEO and CFO for violations of the FCPA. See Final Judgment as to Defendant Douglas Faggioli, SEC v. Nature's Sunshine Products Inc., No. 09-cv-0672 (D. Utah 2009)).

The willingness of the SEC to push the limits of the control person doctrine is underscored by a recent action against a local municipal officer. In November 2014, the SEC charged the former mayor and former city administrator of Allen Park, MI, for making false statements about the city's financial condition in connection with a movie project in the city. It was the first time the SEC charged a municipal official under the theory of “control person” liability. According to the SEC's complaint, former mayor Gary J. Burtka was a “control person” because he “possessed the practical ability to direct the actions of both the City and the City Administrator while he was the Mayor of Allen Park.” SEC v. Gary J. Burtka, 14-cv-14278, Complaint, Nov. 6, 2014.

A final judgment required Burtka to pay a fine and barred him from participating in any municipal bond offerings. Days after the final judgment was entered, however, the federal district judge vacated the judgment, finding that it was “improvidently entered,” and stating he needed more information about the role of the financial advisers, underwriters and law firms involved with the alleged wrongful conduct. SEC v. Gary J. Burtka, 14-cv-14278, Order Vacating Final Judgment (Doc. 3), Nov. 7, 2014. Whatever the final outcome of the Burtka case may be, it is illustrative of the expansive mindset of the SEC.

Conclusion

The DOJ's recent speeches underscore its point of view that cooperation entails developing cases against employees or individuals in order to receive maximum credit for voluntary disclosure. While this places companies in a difficult position, the DOJ's view may reinvigorate efforts to extend the scope of the responsible corporate officer doctrine and other supervisory liability theories against executives. In light of this attention to individual prosecutions, companies of all sizes, and across industry sectors, should consider ways to bolster their compliance programs and communicate the DOJ's new emphasis on individual accountability.

These recent policy statements also have ramifications for internal investigations. Counsel should focus carefully on Upjohn warnings to ensure that employees understand the scope of the attorney-client privilege and the possibility of disclosure to the government. Corporate counsel conducting internal investigations will have to re-evaluate the timing of, and the need for, separate counsel for individual employees. In addition, they should make sure that the distinction between representation of the individual and the company are made clear so that there can be no confusion about the role of the attorney as counsel for the company. As the DOJ policy is refined and more resolutions are made public, counsel for both companies and employees will have to carefully monitor their strategies.

Jonathan S. Feld ([email protected]), a member of this newsletter's Board of Editors, is a Partner at Dykema Gossett PLLC, where he focuses on civil and criminal enforcement matters. Kara B. Murphy is an associate in the firm's Business Litigation group.

The U.S. Department of Justice (DOJ) has achieved record-setting penalties. In August 2014, the DOJ announced a nearly $17 billion settlement with Bank of America relating to the financial problems of 2008 ' the largest civil settlement with a single company in American history. Unprecedented penalties were imposed also on: 1) BNP Paribas ' $8.9 billion for money laundering; 2) Alcoa World Alumina ' $384 million for Foreign Corrupt Practices Act (FCPA) violations; and 3) Lloyds Banking Group ' $86 million for antitrust violations. Despite these results, the DOJ has been criticized for a lack of individual prosecutions, particularly in the financial sector and for FCPA violations. A recent series of speeches from senior DOJ officials responded with a renewed emphasis on the prosecution of individuals responsible for corporate misconduct. These speeches are a signal to corporate counsel to stress the importance of, and actions needed for, corporate cooperation and self-disclosure.

Policy Announcements from the DOJ

In the past months, when senior DOJ officials discussed self-disclosures and cooperation with investigations, the common theme has been increasing prosecutions of individuals. In a Sept. 17, 2014, speech, Principal Deputy Assistant Attorney General for the Criminal Division Marshall Miller said that “[v]oluntary disclosure of corporate misconduct does not constitute true cooperation, if the company avoids identifying the individuals who are criminally responsible. Even the identification of culpable individuals is not true cooperation, if the company fails to locate and provide facts and evidence at their disposal that implicate those individuals.” AAG Miller speech, Sept. 17, 2014, New York.

The same day, two other speeches reflected this same perspective. The recently appointed Assistant Attorney General (AAG) for the Criminal Division, Leslie Caldwell, who served on the Enron prosecution team, touted the DOJ's enforcement efforts. She addressed the new procedures for review of False Claims Act (FCA) cases that provided more immediate access to whistleblower complaints so that the DOJ can consider bringing a parallel criminal investigation. AAG Caldwell speech, Sept. 17, 2014, Washington, DC. In a speech on Oct. 1, 2014, the focus was again on individual culpability. Caldwell reiterated that “[c]orporations 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 [DOJ].” For those companies seeking to receive full credit for cooperation and self-reporting, AAG Caldwell explained that the company “must root out the misconduct and identify the individuals responsible, even if they are senior executives.” AAG Caldwell speech, Oct. 1, 2014, Athens, GA.

This message was echoed by the DOJ's Antitrust Division. AAG Bill Baer for the Antitrust Division, in discussing the Antitrust Division's leniency program, focused on two components of corporate cooperation: 1) acceptance of responsibility; and 2) substantial assistance to the DOJ. Baer stressed that “promises to cooperate are not enough,” and companies must “actually help us investigate and prosecute antitrust crimes.” AAG Baer speech, Sept. 10, 2014, Washington DC. Indeed, the DOJ has advised companies reporting the results of an internal investigation to make evidence of individual culpability “the first thing you talk about when you walk in the door.” AAG Miller speech, Sept. 17, 2014, New York.

The DOJ's focus on individual culpability is not new. What has changed is the blunt nature of the DOJ's position of what is needed to secure full credit for cooperation and self-disclosure. It has dispelled any notion of “passive” cooperation with the DOJ as an option. If companies want to mitigate penalties and minimize reputational damage, the DOJ has been emphatic that companies must cooperate proactively, which entails actively finding evidence that can show the role of employees.

'Expansionist' Legal Theories

The emphasis on individual prosecutions reopens the door for two approaches to prosecuting individuals who serve in supervisory roles. Direct individual liability is often based on anti-fraud or conspiracy statutes. Increasingly, the government has attempted to use: 1) the “responsible corporate officer” doctrine; and 2) the “control person” doctrine to expand liability to individuals who did not actually participate in the wrongdoing, in both criminal and civil enforcement actions.

The “responsible corporate officer” doctrine, or “Park doctrine,” stems from the U.S. Supreme Court's decision in United States v. Park , 421 U.S. 658 (1975). Almost 40 years ago, the U.S. Supreme Court reviewed the conviction of Acme Markets CEO John Park, who was charged with violations of the Food, Drug, and Cosmetic Act (FDCA). As discussed in a prior Business Crimes Bulletin article, “Shifting Gears; The Expansion of the Park Doctrine” (vol. 20, Oct. 1, 2012, available at http://bit.ly/1qlrVuy), the Supreme Court upheld Park's conviction because he had the “responsibility and authority either to prevent [the problem] … or, promptly to correct, the violation complained of, and ' he failed to do so.” This decision laid the groundwork for other corporate officers to be prosecuted under the “responsible corporate officer” doctrine.

Since the Park decision, the use of the responsible corporate officer doctrine has increased, although it has remained limited to FDCA cases. For health care and pharmaceutical industry professionals, the consequences of liability are dramatic. A collateral consequence of a conviction can be exclusion from participating in federal health care programs. See United States v. Purdue Frederick Co. , 495 F. Supp. 2d 569 (W.D. Va. 2007); Friedman v. Sebelius , 686 F.3d 813 (D.C. Cir.2012). Under 42 U.S.C. ' 1320a-7(b)(1)(a), the Office of Inspector General (OIG) of the Department of Health and Human Services can exclude a corporate officer even if the officer was convicted for a misdemeanor offense relating to fraud.

The doctrine has also been recently invoked in a civil enforcement case, United States v. N.Y. Fish Inc. , 10 F. Supp. 3d 355 (E.D.N.Y. 2014). In that case, a federal judge in New York held three individuals liable for FDCA violations at a seafood company, and granted the government's injunction. According to the court, the individuals ' the company president, Vice President and plant manager ' had the power to prevent or correct their company's violations, but failed to do so. Relying on the Park decision, the court stressed that liability attached to “'persons whose failure to exercise the authority and supervisory responsibility reposed in them by the business organization resulted in the violation' of the statute.” I . at 373.

The Securities and Exchange Commission (SEC) has also sought to expand liability of responsible corporate officers through the “control person” doctrine ( see 15 USCS ' 78t). Under this doctrine, the SEC can bring actions against directors, officers, and other company executives for securities laws violations committed by their subordinates. The SEC has used the “control person” doctrine to bring civil actions against a former CEO and CFO for violations of the FCPA. See Final Judgment as to Defendant Douglas Faggioli, SEC v. Nature's Sunshine Products Inc., No. 09-cv-0672 (D. Utah 2009)).

The willingness of the SEC to push the limits of the control person doctrine is underscored by a recent action against a local municipal officer. In November 2014, the SEC charged the former mayor and former city administrator of Allen Park, MI, for making false statements about the city's financial condition in connection with a movie project in the city. It was the first time the SEC charged a municipal official under the theory of “control person” liability. According to the SEC's complaint, former mayor Gary J. Burtka was a “control person” because he “possessed the practical ability to direct the actions of both the City and the City Administrator while he was the Mayor of Allen Park.” SEC v. Gary J. Burtka, 14-cv-14278, Complaint, Nov. 6, 2014.

A final judgment required Burtka to pay a fine and barred him from participating in any municipal bond offerings. Days after the final judgment was entered, however, the federal district judge vacated the judgment, finding that it was “improvidently entered,” and stating he needed more information about the role of the financial advisers, underwriters and law firms involved with the alleged wrongful conduct. SEC v. Gary J. Burtka, 14-cv-14278, Order Vacating Final Judgment (Doc. 3), Nov. 7, 2014. Whatever the final outcome of the Burtka case may be, it is illustrative of the expansive mindset of the SEC.

Conclusion

The DOJ's recent speeches underscore its point of view that cooperation entails developing cases against employees or individuals in order to receive maximum credit for voluntary disclosure. While this places companies in a difficult position, the DOJ's view may reinvigorate efforts to extend the scope of the responsible corporate officer doctrine and other supervisory liability theories against executives. In light of this attention to individual prosecutions, companies of all sizes, and across industry sectors, should consider ways to bolster their compliance programs and communicate the DOJ's new emphasis on individual accountability.

These recent policy statements also have ramifications for internal investigations. Counsel should focus carefully on Upjohn warnings to ensure that employees understand the scope of the attorney-client privilege and the possibility of disclosure to the government. Corporate counsel conducting internal investigations will have to re-evaluate the timing of, and the need for, separate counsel for individual employees. In addition, they should make sure that the distinction between representation of the individual and the company are made clear so that there can be no confusion about the role of the attorney as counsel for the company. As the DOJ policy is refined and more resolutions are made public, counsel for both companies and employees will have to carefully monitor their strategies.

Jonathan S. Feld ([email protected]), a member of this newsletter's Board of Editors, is a Partner at Dykema Gossett PLLC, where he focuses on civil and criminal enforcement matters. Kara B. Murphy is an associate in the firm's Business Litigation group.