Yates Memo Could Bring Balance to Prosecutions

Much of the response to the memo has focused on the new risks and opportunities for companies and individuals. But the memo may also have a considerable impact on prosecutors, including the potential reduction in the number of corporate settlements when there is no clear evidence of criminal conduct.

Potential Sea Change

In a speech at New York University School of Law announcing the new policy, Yates made a statement that has gotten little attention, but if embraced by the DOJ, would represent a sea change in practice. Acknowledging that the new policy “could mean fewer settlements and potentially smaller recoveries by the government,” Yates said, “Our mission is not to recover the largest amount of money from the greatest number of corporations; our job is to seek accountability from those who break our laws and victimize our citizens. It's the only way to truly deter corporate wrongdoing.”

That statement would represent a marked change in the DOJ's focus. Over the past 20 years, prosecutors' increasing appreciation of the leverage they enjoy over corporate entities, coupled with companies' determinations that a “bad” settlement is likely better than a “good” litigation, has resulted in a growing number of corporate settlements in which the government has extracted billions of dollars in fines and penalties. This has been true even in marginal cases in which the government would be unlikely to prevail if forced to prove its case in court.

But while companies may have reasons to enter into such settlements, even in marginal cases, individuals often do not. In gray-area cases, when the evidence is thin or the legal theory is novel or weak, many individual defendants will risk trial rather than plead guilty even to relatively “minor” charges, to avoid potential incarceration, financial ruin and personal humiliation.

Therefore, if the DOJ determines to prosecute an individual, it knows that its allegations will likely be scrutinized by a neutral fact-finder, which, of course, might result in failure to prove the facts to the satisfaction of a judge or jury ' even in situations in which the company has admitted to those facts as part of its settlement agreement. This fundamental dynamic in which corporations are far more likely to settle a DOJ proceeding than are individuals, is, in this author's view, the principal explanation for the disconnect between the number of corporate settlements and the lack of prosecutions against individuals in those cases.

Up until now, prosecutors have not seemed to care about this disconnect, proudly announcing the record-breaking penalties they have extracted without the need to explain why, if the conduct was egregious enough to justify such a sanction, no individuals have been held accountable. The Yates Memorandum would seem to change that.

By causing prosecutors to focus early ' and, at a minimum, at the time when a corporate resolution is definitively proposed ' on whether and how individuals can and should be prosecuted, the memorandum may restrain the DOJ from some of the more controversial practices of recent years in which prosecutors have extracted large monetary settlements from corporations based on marginal legal or factual theories.

By directing prosecutors not to resolve corporate cases without a clear plan to resolve related individual cases, the Yates Memorandum should lead the DOJ to focus more intently on the reasons why no individuals are charged, including the lack of the kind of evidence necessary to lead a judge or jury to find guilt beyond a reasonable doubt or liability under a civil law standard. If, as Yates said at NYU, the only way to truly deter corporate wrongdoing is to seek accountability from the individuals who break our laws and victimize our citizens, then prosecutors should be extracting settlements from companies only when there is sufficient proof of individuals' criminal conduct.

In such cases, it is hard to argue with the DOJ's position that a company that has benefited from the criminal conduct of its employees should be held accountable and be required to provide information about those wrongdoers, if it is to receive credit for cooperation. But if the DOJ's true desire is to achieve genuine and fair parallel outcomes for employees and the companies for which they work, the flip side should also be the case: The lack of evidence to charge individuals should lead to a conclusion that the company should not be pursued, at least under most laws.

Because, as the Yates Memorandum emphasizes, corporations act through their employees and agents, and, generally speaking, cannot be found guilty or held liable unless at least one director, officer, employee or agent is liable himself or herself, the Yates Memorandum may bring balance back to the world of enforcement against firms, and reduce the number of cases in which companies might be coerced to settle what is otherwise a winnable case.

Matthew E. Fishbein is a litigation partner in Debevoise & Plimpton's New York office. His practice focuses on white-collar criminal defense, internal investigations and complex commercial litigation. This article also appeared in the National Law Journal, an ALM sibling publication of this newsletter.

A new focus on individual corporate wrongdoers might discourage multibillion-dollar settlements. In response to criticism that the Department of Justice (DOJ) had failed to bring criminal prosecutions arising out of the financial crisis of 2008 and high-profile corporate criminal settlements in which the companies admitted to misconduct, then-Attorney General Eric Holder Jr. and other officials gave speeches last year emphasizing that the department would take an aggressive approach toward prosecuting individuals in white-collar cases.

The Yates Memorandum

On Sept. 9, the DOJ issued a memorandum ' now being called “the Yates Memorandum” ' by Deputy Attorney General Sally Yates, detailing how officials expect prosecutors to hold individuals accountable for criminal wrongdoing. In particular, the memo emphasizes that corporations will be eligible for “cooperation credit” only if they identify culpable individuals and provide all relevant factual information about their misconduct. It states that corporate cases should not be resolved without a clear plan to resolve related individual cases.

Much of the response to the memo has focused on the new risks and opportunities for companies and individuals. But the memo may also have a considerable impact on prosecutors, including the potential reduction in the number of corporate settlements when there is no clear evidence of criminal conduct.

Potential Sea Change

In a speech at New York University School of Law announcing the new policy, Yates made a statement that has gotten little attention, but if embraced by the DOJ, would represent a sea change in practice. Acknowledging that the new policy “could mean fewer settlements and potentially smaller recoveries by the government,” Yates said, “Our mission is not to recover the largest amount of money from the greatest number of corporations; our job is to seek accountability from those who break our laws and victimize our citizens. It's the only way to truly deter corporate wrongdoing.”

That statement would represent a marked change in the DOJ's focus. Over the past 20 years, prosecutors' increasing appreciation of the leverage they enjoy over corporate entities, coupled with companies' determinations that a “bad” settlement is likely better than a “good” litigation, has resulted in a growing number of corporate settlements in which the government has extracted billions of dollars in fines and penalties. This has been true even in marginal cases in which the government would be unlikely to prevail if forced to prove its case in court.

But while companies may have reasons to enter into such settlements, even in marginal cases, individuals often do not. In gray-area cases, when the evidence is thin or the legal theory is novel or weak, many individual defendants will risk trial rather than plead guilty even to relatively “minor” charges, to avoid potential incarceration, financial ruin and personal humiliation.

Therefore, if the DOJ determines to prosecute an individual, it knows that its allegations will likely be scrutinized by a neutral fact-finder, which, of course, might result in failure to prove the facts to the satisfaction of a judge or jury ' even in situations in which the company has admitted to those facts as part of its settlement agreement. This fundamental dynamic in which corporations are far more likely to settle a DOJ proceeding than are individuals, is, in this author's view, the principal explanation for the disconnect between the number of corporate settlements and the lack of prosecutions against individuals in those cases.

Up until now, prosecutors have not seemed to care about this disconnect, proudly announcing the record-breaking penalties they have extracted without the need to explain why, if the conduct was egregious enough to justify such a sanction, no individuals have been held accountable. The Yates Memorandum would seem to change that.

By causing prosecutors to focus early ' and, at a minimum, at the time when a corporate resolution is definitively proposed ' on whether and how individuals can and should be prosecuted, the memorandum may restrain the DOJ from some of the more controversial practices of recent years in which prosecutors have extracted large monetary settlements from corporations based on marginal legal or factual theories.

By directing prosecutors not to resolve corporate cases without a clear plan to resolve related individual cases, the Yates Memorandum should lead the DOJ to focus more intently on the reasons why no individuals are charged, including the lack of the kind of evidence necessary to lead a judge or jury to find guilt beyond a reasonable doubt or liability under a civil law standard. If, as Yates said at NYU, the only way to truly deter corporate wrongdoing is to seek accountability from the individuals who break our laws and victimize our citizens, then prosecutors should be extracting settlements from companies only when there is sufficient proof of individuals' criminal conduct.

In such cases, it is hard to argue with the DOJ's position that a company that has benefited from the criminal conduct of its employees should be held accountable and be required to provide information about those wrongdoers, if it is to receive credit for cooperation. But if the DOJ's true desire is to achieve genuine and fair parallel outcomes for employees and the companies for which they work, the flip side should also be the case: The lack of evidence to charge individuals should lead to a conclusion that the company should not be pursued, at least under most laws.

Because, as the Yates Memorandum emphasizes, corporations act through their employees and agents, and, generally speaking, cannot be found guilty or held liable unless at least one director, officer, employee or agent is liable himself or herself, the Yates Memorandum may bring balance back to the world of enforcement against firms, and reduce the number of cases in which companies might be coerced to settle what is otherwise a winnable case.

Matthew E. Fishbein is a litigation partner in Debevoise & Plimpton's New York office. His practice focuses on white-collar criminal defense, internal investigations and complex commercial litigation. This article also appeared in the National Law Journal, an ALM sibling publication of this newsletter.