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The Yates Memorandum and Government Enforcement Against Individuals

Gallagher ManagementLiability Practice

MAY 2016

Gallagher Management Liability Practice The Yates Memorandum and Government Enforcement Against Individuals 2

Table of Contents

Introduction .......................................................................................................................3

History of Individual Prosecutions ...................................................................................4

What Does This Mean To Our Clients? ............................................................................5

Insurance Issues ................................................................................................................5

Notes .................................................................................................................................7


IntroductionIn September 2015, Sally Quillian Yates, a United States Deputy Attorney General, issued a seven-page memorandum entitled “Individual Accountability for Corporate Wrongdoing,”1 which has attracted an enormous amount of attention.2 The so-called “Yates Memo” sets out six points which Yates says demonstrate the Department of Justice’s (DOJ) attitude in prosecuting individual malefactors. This memo, which applies to both criminal and civil actions brought by the DOJ, states that it is the department’s intention to assure that the individuals responsible for misdeeds are targeted from the beginning of every investigation.

The six steps are:

1. Corporations are eligible for cooperation credit3 only if they provide DOJ with “all relevant facts” relating to all individuals responsible for misconduct, regardless of their level of seniority;

2. Both criminal and civil DOJ investigations should focus on investigating individuals “from the inception of the investigation;”

3. Criminal and civil DOJ attorneys should be in “routine communication” with each other, including criminal attorneys notifying civil counterparts “as early as permissible” when conduct giving rise to potential individual civil liability is discovered (and vice versa);

4. “Absent extraordinary circumstances,” DOJ should not agree to immunity for potentially culpable individuals;

5. DOJ should have a “clear plan” to resolve open investigations of individuals when the case against the corporation is resolved; and

6. Civil, as well as criminal, DOJ attorneys should focus on individuals’ activities, taking into account accountability and deterrence value, in addition to the ability to pay.

Similar standards have been part of the DOJ’s stated objectives for many years.4 Yet prosecution of individuals has been rare.5

No less of an authority than Judge Jed S. Rakoff of the Southern District of New York publicly criticized the government for its failure to jail individuals when warranted.6 Former Federal Reserve chairman, Ben Bernanke, has also publicly stated that more executives should have gone to jail.7 The Office of Inspector General of the Justice Department issued a report criticizing both the FBI and the Department of Justice for not pursuing crimes like mortgage fraud—a staple of the financial crisis—aggressively enough.8 A major concern of pundits who are critical of regulators is the “deferred prosecution agreement.” In this situation, a defendant neither admits nor denies culpability, pays a fine and promises to refrain from wrongdoing for a set amount of time.

It seems only logical that monetary fines paid from corporate funds will not be a sufficient deterrent to corporate misconduct. Corporations act through people, and only when people feel the impact of a law will misconduct be deterred. Further, payment from corporate funds punishes only current shareholders, who are almost certainly innocent of any wrongdoing and may not have benefited, even indirectly, from the misconduct of others.

In broad terms, regulators made a choice to “follow the money” by pressing for large monetary settlements from the corporation rather than punishment of individuals. Regulators have been successful in obtaining multibillion dollar settlements from several large financial institutions. Their reasons for not pursuing individuals are complex, but include the fact that criminal or civil cases against an individual are generally harder to bring and win than cases against a corporation.

For example, corporations are usually motivated to settle cases quickly, pay their fine and move on.9 Individuals, when included with corporations in civil suits, are often indemnified by the corporation or directors and officers liability insurance (D&O) and face little personal risk. When individuals are not the focus of the investigation, their experience, while unpleasant, is a part of doing business.


However, when individuals become the focus of a criminal government investigation, the stakes are higher. There is no insurance policy that protects against jail time and corporate indemnification may be withdrawn if there is a finding of culpability. Even if the corporate indemnification agreements or bylaw provisions apply, the individual may be denied advancement of defense fees. As a result, individuals have little incentive to plead guilty, as it can mean personal financial loss, prison, loss of reputation and regulatory punishments, such as being banned from certain business activities. Trials can go on for a long time, which can be a financial disaster for the defendant, even if he or she is successful. The government also shares the risk of a defendant’s verdict.10

In a highly publicized case, one executive who went to prison for crimes related to the financial crisis, Kareem Serageldin, a Credit Suisse banker, pled guilty early on in the process.11

Moreover, Serageldin, although certainly well-paid by most standards, was neither a chief executive officer, chief financial officer nor even a major player in mortgage-backed securities. We can’t guess what would have happened if Serageldin had forced the government to bring the case to trial, of course, but it probably could not have been worse for him.

Another bank executive, Gilbert Lundstrom, former CEO of TierOne Bank, was sentenced to 11 years in prison, plus a $1.2 million fine, in March 2016, for securities fraud, wire fraud and conspiracy. Prosecutors said Mr. Lundstrom and other senior officers hid more than $100 million of losses from investors and regulators after the bank boosted exposure beyond its home base to riskier areas such as Las Vegas commercial real estate, and also misled investors about the bank’s financial health at TierOne’s 2009 annual meeting. Lundstrom’s case, although alleging securities fraud, was initiated by the Federal Deposit Insurance Corporation (FDIC), which, unlike other federal regulators, has obtained convictions of, or guilty pleas from, a number of bank executives, including in cases involving Broadway Federal Bank, Voyager Bank, Tifton Bank, The Park Avenue Bank and others.

History of Individual ProsecutionsSome of the most aggressive Justice Department prosecutions occurred during the administration of President George W. Bush, when DOJ Criminal Division head, Michael Chertoff (later Secretary of Homeland Security), brought the Arthur Andersen case, although his trial court win was later overruled by the United States Supreme Court. By then, Arthur Andersen was defunct, and executives of one of its major clients—Enron—were serving jail time, along with executives of WorldCom, Adelphia and others.

It was also during the Bush Administration that the controversial Thompson Memorandum was released. In January 2003, Deputy Attorney General Larry Dean Thompson issued an internal Justice Department document12 to guide federal prosecutors on whether to charge a corporation, and/or individuals within the corporation, with criminal offenses.

The guidelines were harsher than those in the Yates Memo because they required that in order to claim cooperation, companies had to (1) turn over materials from internal investigations, (2) waive attorney-client privilege, and (3) not provide targeted executive with company-paid lawyers. The guidelines were criticized for, among other things, eroding attorney-client privilege.13 These guidelines were eased in December 2006 by Deputy Attorney General Paul J. McNulty.14 The McNulty Memorandum was later replaced by the Filip Memorandum,15 also known as The Principles of Federal Prosecution of Business Organizations, which offered this provision, called The Value of Cooperation.

“In determining whether to charge a corporation and how to resolve corporate criminal cases, the corporation’s timely and voluntary disclosure of wrongdoing and its cooperation with the government’s investigation may be relevant factors. In gauging the extent of the corporation’s cooperation, the prosecutor may consider, among other things, whether the corporation made a voluntary and timely disclosure, and the corporation’s willingness to provide relevant information and evidence and identify relevant actors within and outside the corporation, including senior executives.”16


prompt notice of any claim. Moreover, despite the prevalence of this policy form, many risk management professionals fail to understand that a “claim” can be a “written demand for money or other relief,” but coverage for “investigations” may be limited to those in which an individual insured has been named.

A dilemma arises when the corporation or individuals face a situation which may not be covered. Should the carrier be notified? The short answer: It is almost always better to provide the carrier with all the information currently available, and receive at least coverage for potential claims, as defined by many policies. If, for some reason, full disclosure is not possible, insureds should provide what information they can to the insurer.

Individuals who find themselves a target of an investigation should request copies of relevant management liability insurance policies for their counsel’s review. Most management liability policies contain wording that limits the timeframe which notice must be provided. Many policies contain wording such as “as soon as practicable” and “during the policy period,” or within a defined time after the policy expires. Note the conjunctive “and”; it may not be enough that notice is given during the policy period if it is not also “as soon as practicable.”

The important words here are “may” and “timely and voluntary.” Those two concepts, embodying a fair amount of prosecutorial discretion, are not present in the Yates Memo, which appears to require early, if not immediate, disclosure of all relevant information about all individuals involved in the actions being investigated.

What Does This Mean To Our Clients?While the Yates memorandum is directed to the attorneys of the Justice Department, the message for corporations is clear: where individuals are found to have committed criminal or civil wrongs, they can be targeted.

The most important point in the memo is the first: corporations will be eligible for cooperation credit only if they provide DOJ with “all relevant facts” relating to all individuals responsible for misconduct. This guideline is designed to encourage not only cooperation with the DOJ, but also an early investigation of potentially culpable individuals. In other words, from the earliest moments of an internal investigation, the corporation will have to decide who the bad actors are, and disclose this information to the DOJ. This determination will have to be made in both criminal and civil cases.

The implicit threat in this provision is that uncooperative corporations may receive no credit for their cooperation at all if they fail to reveal what they have discovered.

Obviously, this can be a dicey situation. The corporation must determine how far up — and down — the organizational chart any wrongdoing has gone at the outset of the investigation. Whether this will even be possible is questionable. Moreover, human nature being what it is, employees may hesitate to point fingers at senior executives in their corporations.

In many instances, it will be prudent to hire outside professionals to conduct the investigation.

Another important facet of the Yates Memorandum is that corporations will not be permitted to immunize individuals retrospectively. This means that corporations cannot indemnify individuals for their defense costs, fines, penalties and damages.

Insurance IssuesThe good news is that insurance can cover the costs of responding to a governmental investigation. Insurance, however, is subject to terms and conditions which should never be taken lightly. Notice to appropriate insurers is a crucial step. Most management and professional liability policies are written on a claims-made basis, with significant penalties for failure to give


Consider the following example: A corporation receives a notice of a federal investigation, and several individuals are subpoenaed. From the wording of the documents, the nature of the activities which prompted the investigation is clear. Sometime after the investigation has begun, a suit is filed against the corporation.

If the insurance policy in question precludes coverage for claims arising from facts known to the insured prior to policy inception, or if the insured is required to warrant it is unaware of any facts or circumstances which could give rise to a claim (a common element of insurance applications), coverage may be in jeopardy long before an actual claim arises.

The policy should be analyzed for specific provisions, including:

• What is a “claim” under the policy? As noted above, a claim may be defined as a written demand for money or other relief. Investigations may be specifically covered or not. It is better to clearly know what the carrier considers a claim than to rely upon assumptions.

• What are the notice provisions? Again, rather than assume how the carrier wants to be notified, it is better to know what the policy requires. Should notice be provided “as soon as practicable,” “no later than 30 days” or some combination of the two? Delay in providing notice can be a fatal defect.

• How are investigations treated? Some policies specifically address how investigation expenses are treated. Others are silent. Find out how your carrier addresses this issue.

• What about potential claims? Most claims-made policies include a provision allowing an insured to notify the carrier of a situation which is not yet a claim, but which may give rise to a claim in the future. In many instances, an insured may lock in coverage under a policy by providing notice of a potential claim, in accordance with the policy’s terms.

• What is the effect of giving notice? Some policies limit who can give notice, or whose knowledge of facts and circumstances will have an impact on coverage. These are not uniform for all carriers. The actual policy language will govern.

Individuals may pleasantly be surprised to discover they have broad coverage for investigations, such as the coverage provided by a Side A Only policy, which covers the unindemnified losses of individuals. These policies differ widely, however. There is no “standard” form.

Gallagher professionals are ready to assist in all insurance-related matters. As with any matter involving corporate liability, counsel should be consulted.


Notes1 https://www.justice.gov/dag/file/769036/download.

2 See, e.g., Recent U.S. Department of Justice Memorandum, “Individual Accountability for Corporate Wrongdoing,” Targeting Individuals May Result in Unintended Consequences, http://globalcompliancenews.com/yates-memorandum-20150923/; “The Yates Memorandum,” http://www.ethic-intelligence.com/?s=yates; USA Today, “New Justice Dept. policy aims to get tough on Wall Street fraud” found at http://www.usatoday.com/story/money/business/2015/09/09/justice-department-wall-street-fraud/71983152/

3 “Cooperation credit” means a reduction or elimination of penalties for cooperating organizational defendants.

4 The notion of targeting individuals for prosecution has been a stated goal expressed by numerous DOJ officials in recent years, including then Assistant Attorney General Lanny Breuer (“I continue to believe that prosecuting individuals – and levying substantial criminal fines against corporations – are the best ways to capture the attention of the business community.” Nov. 16, 2010) ; then Attorney General Eric Holder (“All other things being equal, few things discourage criminal activity at a firm — or incentivize changes in corporate behavior — like the prospect of individual decision makers being held accountable.” Sept. 17, 2014) ; and current Assistant Attorney General for the Criminal Division Leslie Caldwell (“If you choose to cooperate with us, we expect that you will provide us with those facts, be they good or bad. Importantly, that includes facts about individuals responsible for the misconduct, no matter how high their rank may be.” May 12, 2015).

5 The exception has been the Federal Deposit Insurance Corporation. As of March 2016, the FDIC has brought enforcement actions against over 1,200 directors and officers. https://www.fdic.gov/bank/individual/failed/pls/.

6 Rakoff, Jed S., “The Financial Crisis: Why Have No High-Level Executives Been Prosecuted?” New York Review of Books, January 9, 2014, found at http://www.nybooks.com/articles/2014/01/09/financial-crisis-why-no-executive-prosecutions/?printpage=true. Judge Rakoff presided over several cases arising from the financial crisis of 2008, and refused to approve an SEC-Citicorp settlement because the parties had failed to provide the Court with sufficient evidence that the agreement was fair, adequate, reasonable and in the public interest. The Second Circuit Court of Appeals disagreed. United States SEC v. Citigroup Global Mkts., Inc., 827 F. Supp. 2d 328, vacated and remanded, 752 F.3d 285(2d Cir. 2012), 34 F. Supp. 3d 379, (S.D.N.Y. 2014).

7 Bernanke: Some Wall Street executives should’ve gone to jail over financial crisis, http://www.latimes.com/business/la-fi-bernanke-jail-20151005-story.html; see also, http://www.usatoday.com/story/news/politics/2015/10/04/ben-bernanke-execs-jail-great-recession-federal-reserve/72959402/, http://www.usatoday.com/story/news/politics/2015/10/04/ben-bernanke-execs-jail-great-recession-federal-reserve/72959402/

8 https://oig.justice.gov/reports/2014/a1412.pdf

9 “Justice Department Collects More Than $24 Billion in Civil and Criminal Cases in Fiscal Year 2014,” https://www.justice.gov/opa/pr/justice-department-collects-more-24-billion-civil-and-criminal-cases-fiscal-year-2014; “The Tab for the Financial Crisis,” showing payments of $130 billion by six financial institutions: Bank of America, J.P. Morgan Chase, Citibank, Wells Fargo, Morgan Stanley and Goldman Sachs, http://graphicsweb.wsj.com/documents/legaltab/.

10 For example, in November 2009, the Brooklyn office of the United States Attorney lost a criminal case against two Bear Stearns executives accused of misleading investors. “The Bear Stearns Verdict: A Blow to E-Mail Prosecutions,” http://content.time.com/time/business/article/0,8599,1938544,00.html.

11 New York Times Sunday Magazine, “Why Only One Top Banker Went to Jail”, April 30, 2014, found at http://www.nytimes.com/2014/05/04/magazine/only-one-top-banker-jail-financial-crisis.html?_r=0

12 Larry D. Thompson (January 20, 2003). “Principles of Federal Prosecution of Business Organizations” (PDF). American Bar Association. http://www.americanbar.org/content/dam/aba/migrated/poladv/priorities/privilegewaiver/2003jan20_privwaiv_dojthomp.authcheckdam.pdf.

13 See, e.ge.g., Meese, Edwin, The Thompson Memorandum’s Effect On The Right To Counsel In Corporate Investigations, http://www.heritage.org/research/testimony/the-thompson-memorandums-effect-on-the-right-to-counsel-in-corporate-investigations; The Thompson Memorandum: Why You Should Know What It Is, http://www.faegrebd.com/the-thompson-memorandum-why-you-should-know-what-it-is

14 Principles of Federal Prosecution of Business Organizations, https://www.justice.gov/sites/default/files/dag/legacy/2007/07/05/mcnulty_memo.pdf.

15 https://www.justice.gov/sites/default/files/dag/legacy/2008/11/03/dag-memo-08282008.pdf

16 9-28.700 The Value of Cooperation, Ibid, at p. 8.

Two Pierce Place Itasca, IL 60143-3141

About the AuthorDonna Ferrara, Esq. is a Senior Vice President in Arthur J. Gallagher & Co.’s Management Liability Practice. This group focuses on providing insurance and risk management solutions related to executive and management liability issues.

For more information, contact:

Donna Ferrara, Esq.Gallagher Management Liability [email protected]

www.ajg.com/mlp

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