The Yates Memo’s Chilling Effect on Self-Disclosure, Daily Business Review

Reprinted with permission from the November 16, 2015 edition of Daily Business Review© 2016 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. ALMReprints.com – 877-257-3382 - reprints@alm.com.

While the U.S. Department of Justice has long-touted the high premium it places on self-disclosure in Foreign Corrupt Practices Act cases, defense counsel have long doubted the purported benefits.

The DOJ gave defense counsel another reason to doubt with the policy directives prioritizing individual prosecutions. U.S. Deputy Attorney General Sally Quillian Yates issued a memorandum detailing a plan to strengthen the DOJ's pursuit of individual corporate wrongdoers. The Yates Memo reflects an aggressive stance by the DOJ regarding white-collar crime in corporate America and one that may tip the scales against self-disclosure in most FCPA cases.

On Nov. 12, the Washington Post reported that DOJ is actively considering a dramatic change to its approach to resolving FCPA cases in recognition of this chilling effect on self-disclosure.

DOJ is evaluating the issuance of a formal policy that incentivizes self-disclosures by strongly encouraging prosecutors to grant criminal declinations for companies that self-report and cooperate with government investigations, the Post reported. The proposal reportedly would penalize such companies only by requiring disgorgement of profits.

Under Yates, which essentially memorialized the DOJ's long-standing focus on individuals, DOJ attorneys are required to consider the following factors, all of which have the effect of measurably increasing the costs and length of FCPA investigations:

1. All-or-nothing cooperation credit. The DOJ's revised corporate charging guidelines require companies to disclose all relevant facts about individual misconduct to receive any cooperation credit. Such credit is often key in negotiating non-prosecution or deferred prosecution agreements and in mitigating criminal penalties. The memo makes clear that "companies cannot pick and choose what facts to disclose."
2. Individual focus. In both criminal and civil contexts, DOJ attorneys investigating corporate misconduct will focus from the inception on building cases against culpable individuals in addition to the company.
3. Broadening remedies. Civil and criminal attorneys handling corporate investigations must communicate and consult regarding potential individual liability, declinations, and the early pursuit of parallel investigations of individual misconduct.
4. No protection for individuals. Absent extraordinary circumstances, no civil or criminal case resolution between the DOJ and a company may include an agreement to dismiss charges, release claims, or provide immunity for an individual, unless otherwise approved by the relevant Assistant Attorney General or United States Attorney.
5. Clear plan for individual resolution. When seeking authorization to resolve a case against a company before completing the investigation of individual misconduct, DOJ attorneys must present a description of the current status of that investigation and a plan to bring the matter to a resolution before the expiration of the statute of limitations. Where civil or criminal claims are not brought against culpable individuals, the reasons for that declination must be presented to and approved by the relevant Assistant Attorney General or United States Attorney.
6. Deterrence and retribution. Finally, DOJ's new civil enforcement strategy will no longer focus solely on an individual's ability to pay when deciding whether to pursue actions against individuals. The Yates Memo recognizes that deterring individual corporate misconduct and holding individual wrongdoers accountable are as important as recovering money.

Rising Costs

In her Sept. 22, speech, Assistant Attorney General Leslie R. Caldwell stated that the Yates Memo simply reinforced what the criminal division "has been doing for a long time." However, the Yates "all or nothing," black-and-white cooperation standard will necessarily force corporations to "boil the ocean" in their investigations—an approach that Caldwell specifically said was not necessary just months ago.

Defense counsel now have a responsibility to factor into the self-disclosure calculus the likelihood that investigations will be dramatically more expensive and prolonged, raising the question of whether the supposed benefits of self-disclosure outweigh the costs.

To report on all relevant facts, defense counsel must cast a broader net with respect to data collection and review and witness interviews.

Defense counsel may also be more inclined to retain accounting experts to analyze books and records in matters in which they would not have done so pre-Yates. And post-Yates investigations will inevitably lead to the earlier involvement of individuals' criminal defense counsel, whose fees will often be indemnified by the corporation. These factors dictate lengthy and costly investigations.

Yates has the potential to increase post-investigation litigation costs as well.

The Yates Memo raises significant risks of attorney-client privilege waivers as defense counsel walk the tightrope between protecting privileged findings and providing the DOJ with "all relevant facts" concerning individual culpability.

If civil litigation proceeds past the motion to dismiss stage for the 10(b)(5) and derivative actions that follow, savvy plaintiffs counsel will undoubtedly argue that reports to the DOJ are discoverable and possibly that such reports constitute waivers of the attorney-client privilege and work product doctrines. All of this will increase litigation costs.

Ironically, the unintended consequence of Yates may be fewer companies opting to self-disclose FCPA concerns, leading to fewer individual corruption prosecutions. It is apparent that DOJ recognizes this and is working to provide transparent and meaningful benefits in exchange for self-disclosures. The details are not yet known, including the impact and importance of a company's compliance function, as well as the form of resolution that might result in cases that are not self-disclosed yet involve substantial cooperation.