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Why Financial Executives Need to Be Very Worried About the “Yates Memo”


White-collar fraudsters may find it harder to hide behind a corporate shield as a result of a Department of Justice initiative to prosecute executives suspected of financial misconduct.

In a memo issued September 9, Deputy Attorney General Sally Quillian Yates called on federal prosecutors to focus on individual misconduct, and to withhold cooperation from corporations unless they conduct thorough internal investigations and implicate executives suspected of wrongdoing.

“...To be eligible for any credit for cooperation, the company must identify all individuals involved in or responsible for the misconduct at issue, regardless of their position, status or seniority, and provide to the Department all facts relating to that misconduct,” says the so-called “Yates memo.”

The memo further spells out six additional factors designed to help promote consistency in white-collar investigations and to promote accountability among implicated executives:

  • Criminal and civil corporate investigations should focus on individuals from their inception
  • DOJ criminal and civil attorneys handling corporate investigations should collaborate
  • Corporate resolutions should not protect individuals from criminal or civil liability
  • Corporate cases should not be resolved without a clear plan to address related individual cases
  • Civil attorneys should focus on individuals as well as the company, and should evaluate whether to bring suit against an individual.

Shift in Focus

While the memo purports to highlight new thinking on the part of the Justice Department, attorneys with DOJ experience say the Yates memo refines an approach the agency has been pursuing in recent years.

“There have been several policy statements that were made, especially in the last year, that focused on the priority that DOJ was placing on individual prosecutions,” says Kathryn Hellings, a partner with Hogan Lovells and a former prosecutor in the DOJ’s Antitrust Division. “This is the first official statement that really seems to set out that priority clearly, both for prosecutors but also for the business community.”

The memo is believed, in part, to stem from criticism of the department that it has been not been stringent enough in prosecuting executives, particularly following the financial crisis.

“Many people believe that a greater deterrent to this kind of conduct and a more accurate punishment would be to prosecute the individuals who are actually responsible for the conduct, and not allow companies to simply pay a fine as a way of doing business,” Hellings says.

Complex Questions

One of the questions the memo is raising within the business community is how far companies will be expected to go in providing evidence about white-collar crime, which traditionally has been difficult to uncover.

“The memo states on its face that no cooperation credit will be given unless the company identifies who did it and what the evidence is,” says Thomas O. Gorman, a partner with Dorsey & Whitney and a former SEC staff attorney. “That analysis presumes that the company can come to a determination which has bedeviled the Justice Department for years. In some cases, they may be able to say X, Y, and Z did the conduct, in other cases it may not be able to make that determination for a variety of reasons...That’s always a difficult determination for a company to make, and this just complicates it.”

Gorman says part of the Yates memo’s stark assertions that companies aren’t likely to receive partial cooperation credit were mollified somewhat by Assistant Attorney General Leslie R. Caldwell, who said at a New York conference on Sept. 22 that the department would provide cooperation credit following a good-faith effort to uncover individual wrongdoing.

“We understand that some investigations — despite their thoroughness — will not bear fruit,” Caldwell said at the Global Investigations Review Conference. “Where a company truly is unable to identify the culpable individuals following an appropriately tailored and thorough investigation, but provides the government with the relevant facts and otherwise assists us in obtaining evidence, the company will be eligible for cooperation credit. We will make efforts to credit, not penalize, diligent investigations.

“On the flip side, we will carefully scrutinize and test a company’s claims that it could not identify or uncover evidence regarding the culpable individuals, particularly if we are able to do so ourselves.”

Hindering Cooperation

One potential effect of the Yates memo is that it may complicate resolution of suspected misconduct by making executives less willing to cooperate with internal investigations.

“As employees are more aware of the potential for individual prosecution, I think they’re going to be more reluctant to talk to companies about their conduct,” Hellings says. “I think more individuals will likely need separate representation, which is, of course, more expensive and also requires more time for companies when they’re conducting internal investigations.

“Individuals might be concerned about trusting the company and also trusting colleagues who they might fear are trying to rat them out in order to get some sort of credit for that cooperation.”

Given the heightened focus on individual behavior, Hellings says more companies are likely to take a look at their internal controls to reduce fraud risk, and to be prepared to act quickly if fraud is suspected.

“Companies have to take compliance very seriously,” Hellings says. “I think, increasingly, companies are, but they need to take a really strong look at what they’re doing for compliance because the stakes are even higher now. I think they need to really evaluate, is this a compliance program on paper or are they doing enough?

“And I think when there are problems, they need to figure out what those problems are quickly, and then decide what to do with them. [There’s] increasing responsibility on companies to make sure that these things don’t happen — and when they happen, to address them quickly.”