Executives Beware: The DOJ and SEC Have Set Their Sights on Individual Wrongdoing

Troutman Pepper

The DOJ’s Yates Memo makes individual prosecutions a higher priority and makes a company’s own identification of potentially culpable individuals an explicit factor in assessing cooperation credit.

In the last several years, the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have levied billions of dollars in fines against corporations in a wide variety of industries for corporate misconduct, largely in out-of-court settlements. At the same time, there have been very few prosecutions of individual executives who are responsible for the corporate misconduct. Critics ranging from federal judges to members of Congress on both sides of the aisle have argued that shareholders were left to pay the price for these hefty fines out of corporate earnings, while the responsible executives escaped personal accountability.

Enter new Attorney General Loretta Lynch. In a memorandum to federal prosecutors and investigators dated September 9, 2015 (the Yates Memo), Deputy Attorney General Sally Quillian Yates has made clear that the DOJ now intends to focus on targeting individuals who are responsible for corporate wrongdoing and will force corporations themselves to identify culpable individuals in order to obtain “any” credit for cooperation. The DOJ’s policy announcement follows the SEC’s recently announced focus on pursuing corporate officers and directors.

The Yates Memo

The Yates Memo provides federal prosecutors and investigators with “six key steps” to strengthening the DOJ’s pursuit of individual actors in order to hold them accountable for corporate misconduct.

First, and most notably, the DOJ will now require that companies seeking cooperation credit identify all individuals responsible for possible misconduct, regardless of their position with the company, and completely disclose to the DOJ all relevant facts relating to the conduct of those individuals. The policy is designed to undermine any corporate defense strategy of laying the blame on one rogue employee by forcing companies to identify all involved actors — ranging from the C-suite to an intern — who may be responsible for misconduct.

In prepared remarks for a recent speech given at New York University on September 10, Yates noted that “there would be no partial credit for cooperation that doesn’t include information about individuals.” This policy will pressure companies to cast a wider net for potentially responsible officers and employees in internal investigations. By the same token, targeted officers and employees may be well advised to seek separate legal counsel early in an investigative process. This dynamic increases the importance of carefully considering the lines of engagement of investigative counsel. Where the investigation is being run by the board, it is sure to cause friction between boards of directors leading internal investigations and corporate managers in the hot seat.

Second, the DOJ has instructed all criminal and civil prosecutors to focus on individuals from the very beginning of any corporate investigation. In the past, the DOJ has complained that companies insulate employees by withholding inculpatory evidence until after the statute of limitations expired. Now, the DOJ will expect companies to promptly and thoroughly disclose individuals’ misconduct at an early stage of the investigation. As a result, companies conducting internal investigations ahead of the government’s investigation should aim to discover not only if there was misconduct, but who knew about it and when.

Third, the DOJ memo instructs federal criminal and civil attorneys handling corporate investigations to be in routine communication with one another to effectively pursue individuals. This policy is not particularly new, as criminal prosecutors at the DOJ have, for several years, worked on investigations parallel to civil enforcement attorneys.

Fourth, absent extraordinary circumstances, the DOJ states that it will no longer agree to a corporate resolution that includes an agreement to dismiss charges against or immunize individual officers or employees. Thus, for instance, companies hoping to protect their employees from prosecution cannot agree to a larger corporate fine to avoid individual liability.

Fifth, the memo instructs prosecutors not to resolve cases against a corporation unless they have a clear plan to also resolve individual cases before the statute of limitations expires.

Lastly, the memo instructs civil attorneys to consider bringing suit against culpable individuals for monetary recovery, even where an individual does not have sufficient resources to satisfy a money judgment. This policy aligns with the DOJ’s emphasis on holding wrongdoers criminally accountable, regardless of their position in the company. As a practical matter, by going after low-level wrongdoers, the DOJ often gains cooperators who provide information against individuals higher up in the corporate hierarchy.

Recent SEC Guidance

The Yates Memo is in line with recent SEC initiatives, speeches by SEC officials and other public statements signaling that the top securities regulator is also sharpening its focus against individuals. Many expect these parallel efforts will lead to an increase in cases against company insiders, as well actions seeking director and officer bars. A closer look reveals these efforts against individuals will be tied to cases brought against larger companies.

The SEC’s renewed focus on individuals was emphasized in a speech given by Andrew Ceresney, director of the SEC’s Enforcement Division, on May 13 at the University of Texas School of Law’s Government Enforcement Institute. Ceresney discussed the Enforcement Division’s increased use of reverse proffers, which the enforcement staff typically present in the later stages of enforcement lawsuits. According to Ceresney, in certain cases, his staff will now present evidence supporting actions against individuals earlier, most likely the during Wells Notice stage of an investigation. Ceresney stated that this use of early reverse proffers would be tailored for individuals who are on “the bubble” or in a position to assist staff with future complex enforcement lawsuits. Ceresney pointed to why individuals and their defense counsel should give this new tactic serious consideration: the enforcement division’s track record over the last five years of negotiating charging decisions, monetary relief, and bars against individuals by way of settlements, rather than prosecutions.

Whether individual cooperation in SEC investigations and enforcement actions actually has resulted in better outcomes for targeted individuals is a topic of wide debate. What is clear, however, is that the SEC has been looking to aggressively pursue individuals as part of an ongoing effort to handle larger cases more efficiently, using fewer resources. Ceresney’s statements in May echo initiatives dating back to 2010, including the Cooperation Program, which introduced the use of deferred prosecution and nonprosecution agreements; the SEC’s whistleblower program; and guidance issued in September 2014 that the SEC was monitoring compliance officers more closely. This strategy of pursuing and leveraging individual cooperation is likely to strengthen in the next several years as the SEC’s recently assembled financial fraud task force makes headway. The stated mission of the task force is to renew the agency’s pursuit of disclosure and accounting fraud cases, which are notoriously large and involve multiple individuals.


Although the Yates Memo serves as formal guidance concerning the pursuit of individuals by the DOJ, like the SEC, the DOJ has repeatedly announced in recent years that it intends to more actively pursue individuals involved in misconduct leading to corporate settlements. Indeed, over the last two years, we have seen an uptick in the number of individuals charged in cases brought under the Foreign Corrupt Practices Act (FCPA). What the Yates Memo appears to do is make these individual prosecutions a higher priority and make the company’s own identification of potentially culpable individuals an explicit factor in assessing cooperation credit. Time will tell how the application of the Yates Memo will work in practice, but, on paper at least, companies will be pressured to assess individual culpability early on in an investigation, before all the facts are thoroughly known and understood.

The tough guidance set forth in the Yates Memo and the SEC guidance may have a silver lining for companies. The DOJ’s and SEC’s reliance on corporate settlements, particularly in the area of the FCPA, has resulted in a dearth of case law interpreting key provisions of federal laws on which government prosecutors and attorney rely. Given the fact that individuals have greater incentive to litigate (as opposed to settle), we expect to see more challenges to the DOJ’s and the SEC’s interpretation of law. A recent example of this was seen in United States v. Hoskins, where a district court rejected the government’s long-held view on the application of accomplice liability to foreign nationals. (For more information on the Hoskins case, read our Client Alert, “Federal Judge Rejects Government's Accomplice Theory of FCPA Liability,” available at http://www.pepperlaw.com/publications/federal-judge-rejects-governments-accomplice-theory-of-fcpa-liability-2015-08-26/.)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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