New DOJ Policy Revises “Yates Memorandum”

by Michael W. Peregrine and Rebecca Martin

A new Department of Justice policy (the “Policy”) modifies critical elements of the prominent 2015 “Yates Memorandum” on individual accountability. Introduced on November 29 by Deputy Attorney General Rod J. Rosenstein (the “DAG”), the Policy is manifested, in part, by specific revisions to Justice Manual (previously referred to as the U.S. Attorneys’ Manual).

The Policy clarifies the relationship between the scope of a defendant’s disclosures regarding individuals and qualifying for cooperation credit, particularly in the context of civil litigation. In so doing, it also raises critical compliance oversight issues for corporate governance.

The Yates memo sent a tremor through the defense bar and created a cottage industry in prognosticating about the memo’s impact on government investigations and officer/director liability. Two years later, in the fall of 2017, the DAG revealed that the Yates memo was under active reconsideration, and on November 29, 2018, the DAG announced a series of significant changes to DOJ policy on individual accountability in the corporate context.  In short, the Yates principles live on, but are cut down to size in the criminal context and even further downsized in the context of civil (read: False Claims Act) matters. However, while the Policy may lessen certain burdens and inefficiencies, it does not ease government focus on senior management.

The DAG emphasized that under the (revised) Policy, “pursuing individuals responsible for wrongdoing” will continue to be “a top priority in every corporate investigation.”   In the criminal context, revised DOJ policy makes clear that “absent extraordinary circumstances, a corporate resolution should not protect individuals from criminal liability.” 

However, the Policy unquestionably scales back on the level of disclosure previously required by the Yates memo.  As then-Acting Associate Attorney General (“AAAG”) Bill Baer outlined in 2016, for companies to obtain cooperation credit in criminal matters under the Yates regime, DOJ expected companies to disclose “all facts relating to the individuals involved in the wrongdoing, no matter where those individuals fall in the corporate hierarchy.”  As any defense lawyer could have predicted and as the DAG explicitly acknowledged, this concept proved cumbersome and highly problematic to expeditious resolutions.

Now, companies need “only” identify individuals who were “substantially involved” in the alleged conduct.  While this will relieve the burden associated with the investigation, the phrase “substantially involved” will be fertile ground for dispute and create new wrinkles and risks in making disclosures.  Indeed, the DAG expressly noted, “If we find that a company is not operating in good faith to identify individuals who were substantially involved in or responsible for wrongdoing, we will not award any cooperation credit.”

The DAG’s speech also spent substantial time detailing the changes in connection with civil matters.  Significantly, the DAG acknowledge that “civil cases are different” and harkened back to an approach that prevailed prior to Yates, i.e., where civil investigations focused on monetary recoveries and the pursuit of individuals was left to the discretion of the civil fraud attorneys:

Nonetheless, the Yates approach of explicitly tying credit to cooperation persists.  While the Policy no longer requires a defendant to identify all employees involved in the conduct, the Policy keeps a focus on senior management, making explicit distinctions between managerial and non-managerial employees and officers.   At a minimum, to receive any credit cooperating in a civil case, the Policy requires a company to “identify all wrongdoing by senior officials, including members of senior management or the board of directors.”  Further, if a company is seeking “maximum credit” in a civil matter, it must “identify every individual person who was substantially involved in or responsible for the misconduct.” And in an extension of the managerial vs. non-managerial distinction, the DAG outlined scenarios where a company could get “some credit” even without “stipulating about which non-managerial employees are culpable.” 

The Policy made changes in other FCA areas affected by the Yates memo, such as restoring discretion to civil fraud attorneys “to negotiate civil releases for individuals who do not warrant additional investigation in corporate civil settlement agreements.”  This, too, harkens back to a pre-Yates norm, though whether DOJ reverts to the older practice or some variant will be a key factor to monitor. In another relaxation, DOJ attorneys have now been instructed to consider ability to pay in deciding whether to pursue a civil judgment against an individual.

Of the unanswered questions, however, most prominent is the mystery about what “credit” actually means in a dollars-and-cents way.  The Yates memo left practitioners scratching their heads regarding how a company facing an FCA investigation could benefit from “cooperation credit.” Credit, well understood in criminal matters, has not been a comfortable fit in the FCA arena.  Indeed, the only example the Yates memo gave on how cooperation credit might apply in a civil case related to the “reduced damages” provision of the FCA, 31 U.S.C. § 3729(a)(2), which, of course, already provided for reduced damages.  Further, this provision only applied in the tiny minority of FCA cases — where a party discloses the violation before the person had “actual knowledge of the existence of an investigation into such violation.”  In 2016, then-AAAG Baer attempted to provide some guidance in what “credit” meant in FCA cases, but ultimately gave no more than an “assurance” that civil fraud attorneys would use their discretion to reward cooperation in terms of the measure of damages, multipliers and penalties.  The DAG’s speech in November of this year also fails to put any meat on the bones of civil cooperation credit.

In October 2018, the Director of Civil Frauds, Michael Granston (a career DOJ attorney), announced that Civil Frauds would shortly issue guidance to DOJ attorneys regarding: (a) the types of cooperation that qualify an FCA defendant for cooperation credit; and (b) the types of cooperation credit.  (As a welcome side note, he also indicated that the DOJ dismissals of non-intervened cases will likely increase.)  Indeed, the Justice Manual addresses credit in a civil context.  However, while the Manual now promises “credit” in a variety of circumstances, it fails to clarify what “maximum” or “some” cooperation credit means, leaving much to the discretion of the civil fraud attorneys.

The new Policy has implications beyond the sphere of government investigations, to the realm of corporate governance. From a fiduciary duty perspective, the pursuit of cooperation credit must always be a paramount consideration of the governing board in any investigative scenario. But while the revised Policy does serve to make such credit more attainable in the average circumstance, the more important message to governance is the continued emphasis on individual accountability.

This message is likely to be manifested in three areas of board interest. First is the need for the Audit & Compliance Committee to communicate the unchanged emphasis on accountability and the government focus on managerial levels of the corporate heirarchy. Second is the likely increased anxiety level of senior management given that the board continues to be motivated to identify allegedly culpable executives in order to obtain credit. Third is the now explicit awareness that the conduct of individual members of the board of directors may be evaluated for possible accountability.

The new Policy thus has significant implications for corporations, their executive and individual leaders and their board audit committees, as well as the white collar counsel who are called upon to advise them.

Michael W. Peregrine and Rebecca Martin are partners in McDermott Will & Emery, LLP with practice concentrations in corporate governance and white collar defense and internal investigations, respectively.


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