The Yates Memo and Three Dog Night

Deputy Attorney General Yates

Deputy Attorney General Yates

Unless you have been on a monastic retreat or hidden as carefully as Hillary Clinton’s email server, you have by now likely read reports and analyses of the “Yates Memorandum,” a policy document issued by Deputy Attorney General Sally Yates entitled “Individual Accountability for Corporate Wrongdoing.”

(Here is the document:  Yates-Memo-Prosecution-of-Individuals.pdf ).

In this essay, I focus on one particular aspect that may be crucial for companies, their boards of directors, their audit committees and law department: The timing of potential disclosures to the Government and the degree to which outside counsel needs to have comfort that what he or she is relating to the Government on the company’s behalf is more or less reliable.

The Yates Memo sets out six principles that the Department of Justice intends to apply in a renewed (or apparently renewed) emphasis on the prosecution of individuals in the context of the investigation of corporate wrongdoing.

The key summary paragraph is as follows:

The guidance in this memo reflects six key steps to strengthen our pursuit of individual corporate wrongdoing, some of which reflect policy shifts and each of which is described in greater detail below: (1) in order to qualify for any cooperation credit, corporations must provide to the Department all relevant facts relating to the individuals responsible for the misconduct; (2) criminal and civil corporate investigations should focus on individuals from the inception of the investigation; (3) criminal and civil attorneys handling corporate investigations should be in routine communication with one another; (4) absent extraordinary circumstances or approved departmental policy, the Department will not release culpable individuals from civil or criminal liability when resolving a matter with a corporation; (5) Department attorneys should not resolve matters with a corporation without a clear plan to resolve related individual cases, and should memorialize any declinations as to individuals in such cases; and (6) civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.

There has been considerable criticism of DOJ from politicians, editorialists and judges (see the Southern District of New York’s Judge Jed Rakoff here and a note here and here about Judge William H. Pauley) over the paucity of individual prosecutions arising from the financial crisis.  Assuming that the memorandum is more than a simple public relations effort to deflect that criticism, a number of points come to mind.

Difficult to keep calm, actually.

Difficult to keep calm, actually.

First, if implemented, the Yates Memo will cause more corporate officers and employees to lawyer up, and lawyer up earlier, then at any time since the savings and loan crisis.  As a white-collar and internal-investigations lawyer with looming college tuition to pay for, I have no objection to such an outcome, but it may actually make getting the facts out of an internal investigation more difficult, not less.

Second, the renewed focus on facts pertaining to individuals will potentially make it very uncomfortable for boards of directors, audit committees, chief legal officers and other decision-makers who will more frequently be tempted to throw company officers and employees under the bus than previously.  To cite Three Dog Night from their eponymous 1969 album, “one is the loneliest number.”

Third, although DOJ officials in speeches have said repeatedly that they are not trying to force corporate outside counsel to be police officers, there is more than a whiff of that impulse in the Yates Memo.  Such an approach raises multiple potential conflict of interest problems.

Civil discovery.  Criminal facts?

Civil discovery. Criminal facts?

Fourth, the focus on individual wrongdoing (and disclosure of facts relating to individual wrongdoing) is to apply equally in the civil arena. Companies and businesspeople have far more civil problems then criminal.  The ultimate effect of the Yates Memo may be felt most dangerously (and most expensively) in the civil context.

Fifth, it is unclear (at least to me) whether and to what extent the Yates Memo will require outside counsel conducting an internal investigation to modify a standard Upjohn instruction.  (We have previously discussed Upjohn warnings in these posts).  In other words, does company counsel need to add an explicit statement that, should the witness reveal facts about himself or herself that appear to be a reasonable basis of criminal liability (theirs or the company’s), the lawyer will probably tote those facts over to the Government?

As a practical matter for corporations and those who guide and advise them, as well as for lawyers who represent individual officers and employees, the most delicate task will be trying to figure out at what point in time does one pull the disclosure trigger with regard to evidence of individual wrongdoing.

In other words, when do you know what it is that you know? And, what if you make your early or premature disclosure to the Government but you are wrong?

Off to college? Or, to a meeting at the U.S. Attorney's Office?

Off to college? Or, to a meeting at the U.S. Attorney’s Office?

As I write this, my daughter is a high school senior in the midst of college applications.  These applications come at the tail end of a lengthy period of campus visits, alumni interviews, webpage reading and prayer.  We have been diligent, and the process by turns exhilarating, disappointing and expensive.

What struck me is how different things look now than when we began.  At some point, one must “land the plane” – that is, make a decision – whether one is in the midst of a college search process or an internal corporate investigation.  Yet, had my daughter been forced to apply very early in the process to, say, what were her top five choices then, we would have been in an artificially different (and most likely more disadvantageous) situation from the one in which we find ourselves today.

The Yates Memo will put boards of directors, audit committees and chief legal officers is in a similar position of having to make a call unnaturally early in an internal investigation in hopes of reaping the harvest of cooperation.  As most anyone who is been through an internal investigation can attest, the factual landscape and legal conclusions are often different (but more accurate) late in the day.  The next months and years under the Yates Memo will tell, but it would be a shame if, in order to grasp at cooperation’s life jacket, American businesses and their legal advisers are put in a situation that helps neither the legitimate aims of Government prosecutions nor those companies’ shareholders and stakeholders.

SIDEBAR: In the context of governmental policy, it is easy to talk about the prosecution of individuals without putting a face (and a life) to a name.  With faceless defendants, we sometimes forget what investigations and trials can do to individuals and their families.

Tom Hayes and wife Sarah Tighe

Tom Hayes and wife Sarah Tighe

In this five-part series in the Wall Street Journal, David Enrich lays out the prosecution of LIBOR trader Tom Hayes.  “The Unraveling of Tom Hayes” bears a careful read.

 


The Agatha Christie School of Cooperating Witnesses

Tyrone Power, Jr. in Witness for The Prosecution (1957)

Tyrone Power, Jr. in Witness for The Prosecution (1957)

From Lawrence S. Goldman and our friends at White Collar Crime Prof blog, a summary of a Second Circuit decision  addressing (1) the extent to which prosecutors can “bolster” cooperating witnesses’ testimony by relying on their cooperation agreements and (2) whether or not the tardy production of Brady and Jencks material matters.   (Answer: it doesn’t).  In particular:

The opinion also excuses, but does not condone, the improper failure of the government to turn over handwritten notes by a testifying agent which were discovered in the later examination of another agent and belatedly revealed to the defense.  The notes should have been revealed earlier, says the Court, not only since they included evidence favorable to the defense, but also pursuant to Fed. R. Crim. Pro. 16(a)(1)(B)(ii), a discovery rule, and 18 U.S.C. 3500, the Jencks Act.  However, since the notes were, however belatedly, turned over and the defense had an opportunity to review them, examine the later-testifying agent about their content, and recall the earlier witness if it chose, and since their timely disclosure would not have changed the verdict, in any case there was no Brady violation.  The opinion thus demonstrates that late provision of Brady (or Rule 16 or Jencks) by the government during trial will virtually never be grounds for reversal, at least not in the Second Circuit.

The well-dressed Government witness.

The well-dressed Government witness.

We have written before about cooperation agreements before here and here, and Brady non-disclosure abuse here.  And here is the trailer for Billy Wilder’s 1957 film Witness For The Prosecution (starring Tyrone Power, Jr. and Charles Laughton).


For Corporate Counsel || Stalking Horses, Pitchfork Crowds, Narrow Neckties, Mr. Rogers’s Slippers and Indicted Employees: 6 Steps To Dodge Being Deweyed

" . . . brave, clean and reverent.  And, cooperative in the civil investigation."

” . . . brave, clean and reverent. And, cooperative in the civil investigation.”

You may (or may not) recall the Boy Scout Law:

“A Scout is trustworthy, loyal, helpful, friendly, courteous, kind, obedient, cheerful, friendly, brave, clean and reverent.”

Your corporate employees, officers and colleagues may exhibit all, some or none of those characteristics.  Even if one masters all the peculiars of the Boy Scout Law, however, strict adherence is no shield against indictment in the situation where one moves from “witness” to “target” for reasons outside the control of the “Scout.”

So: herewith 6 lessons to heed if you wish to avoid ending up like a young man named Zachary Warren.

 

Mother's Day.

Mother’s Day.

It is unusual for the government to indict leaders of a major law firm, as the Manhattan District Attorney’s office indicted three of the leaders of the now very-defunct Dewey & LeBoeuf.  What has caused the most discussion, controversy and even introspection is the indictment of a fourth defendant, one Zachary Warren, a 29 year-old “client relations manager”  — apparently, a glorified internal bill collector with a distinguished resume, both before and after Dewey.

What can inside counsel, or those who advise them, learn from the path that led these four men — but young Mr. Warren, in particular — to being charged and perp-walked?  More remains to be told of this tale: as in all such white-collar sagas, there are likely at least two sides to every side.  I do not know Mr. Warren, nor do I have any special insight into what he, the investigating agents and the prosecutors were or might have been thinking.

Nevertheless, I can at least provide six lessons on how to minimize the likelihood that you — inside corporate counsel, risk manager or chief compliance officer — will have to explain to the boss or the board how your own Mr. or Ms. Warren got himself in a criminal fix.

Some background is unavoidable.  The best places to start are an article by James B. Stewart in the New York Times (A Dragnet at Dewey & LeBoeuf Snares a Minnow); an Atlantic article by Stewart (In Dewey’s Wreckage, Indictments); and a post by David Lat at Above The Law (What Dewey Know About Zachary Warren, Defendant No. 4 In The Criminal Case?).  Read the articles in full, but here are some relevant portions:

From James B. Stewart in the Times:

“You’ve been indicted,” an assistant Manhattan district attorney, Peirce Moser, told Zachary Warren, a 29-year-old magna cum laude graduate of Georgetown Law School with a prestigious clerkship on the Federal Court of Appeals for the Sixth Circuit in Memphis.

“Can you say that again?” a stunned Mr. Warren asked when he received the call two weeks ago Friday.

Almost as surprised as Mr. Warren himself were Mr. Warren’s cellmates before his arraignment a week ago — the top managers of Dewey & LeBoeuf, the global law firm that imploded in 2012. Although some of them had trouble remembering who Mr. Warren was, the indictment claims that all four were co-conspirators in a major accounting fraud. The firm’s chairman, executive director and chief financial officer, ages 60, 57 and 55, had long known that they were the subjects of a criminal investigation. All had prominent criminal lawyers, while Mr. Warren had hired a lawyer only after the phone call that Friday.

Alone among the defendants, Mr. Warren was charged in two separate indictments, one accusing him of a “scheme to defraud” and falsifying business records and the other charging him with six felony counts of having “made and caused” false entries in books and records. Mr. Warren pleaded not guilty and was released on $200,000 bail. His once-bright future has now been threatened.

How did a 29-year-old with an impeccable record, someone who had never even taken an accounting course, end up as an accused mastermind of what the Manhattan district attorney, Cyrus Vance Jr., called “a massive effort to cook the books” of the once-giant law firm? And how did he get there without realizing he should hire a lawyer?

From Mr. Lat:

I fall somewhere in between the extremes of “naive youngster ambushed by the DA’s office” and “arrogant lawyer full of hubris.” Here’s my theory as to why Zachary Warren didn’t bring a lawyer with him to the interview: he didn’t see himself as one of “those people,” i.e., a potential criminal defendant.

And now for the 6 lessons.

And now for the 6 lessons.

Lesson Number 1: Recognize that the danger is not innocence or naivete on the one hand, nor guilt or arrogance on the other, but rather the conviction that “I” am not one of them.

What’s the tag line of the blog you’re reading?  Don’t read us because you’re a criminal.  Read us because, some time or other, someone may think you are.  In his Above The Law post, Mr. Lat alludes to the problem, which is perhaps the most common trait among people charged with white-collar offenses.  No employee, colleague, officer or director thinks that he or she is a criminal.  Ready to do what you have to do for your family and future?  Absolutely.  Willing to throw an elbow?  When needed, sure.  Holding your nose through something unethical?  Well, there was that one time, back in 1990.

But something criminal?  Nope.  No way.  Criminals are people who break the law.  They steal stuff and hurt people.

The Government point-of view (via New Line Cinema).

The Government point-of view (via New Line Cinema).

The task that arises from lesson number 1 is to convince those you are guiding that their assessment of their culpability (or lack of culpability) is irrelevant to how agents, investigators, prosecutors, regulators and politicians will view their culpability.  Indeed, some of the facts that your employee trumpets as an emblem of innocence may, in the government’s eyes — or “Eye,” if you’re a Lord of the Rings fan — be just as likely a badge of fraud.

Lesson Number 2: The civil case is always a stalking horse for the criminal case.

Not very sporting.

Not very sporting.

Of course, “always” is not “always,” but it is often enough to make it reliable.  If a person believes he or she is part of a civil inquiry only, he or she will conclude — wrongly — that the exposure is limited.  An employee or officer being interviewed by law enforcement or prosecutors should assume that there is a shadow criminal investigation and that he or she is at least a “subject” of that investigation.

We'd like a word.

We’d like a word.

Lesson Number 3: The company’s civil case and the individual officer or employee’s criminal case are on two different planets because of the current pitchfork mentality about putting “somebody” in jail. 

Corporations are not natural persons and cannot be imprisoned.  When very bad things happen, the natural impulse is to determine (or shift) blame.  The fruit of that impulse is to hope someone goes to jail — even where the civil and criminal standards are different; where “knowledge” and “intent” must be discerned differently; and where the rules of evidence and Constitutional principles apply to individuals in ways that differ from the manner in which they apply to corporate entities.  Judges are not immune from such sentiments, as where a federal judge publicly urges the Department of Justice to prosecute individuals:

U.S. District Judge William H. Pauley approved the auto maker’s settlement with prosecutors Thursday, saying it “painted a reprehensible picture of corporate misconduct.” But he added that ultimately individuals are responsible for corporate misconduct and urged the Manhattan U.S. attorney’s office, which conducted the investigation into Toyota, to continue its probe.

“I sincerely hope that this is not the end but rather the beginning to seek to hold those individuals responsible for making these decisions accountable,” Judge Pauley said during a roughly 20-minute hearing in Manhattan federal court.

When asked if prosecutors would pursue individuals during a news conference Wednesday, Manhattan U.S. Attorney Preet Bharara said he wasn’t “foreclosing anything” but believed the settlement is the “final resolution” of the case.

“[T]he rules of evidence sometimes do not allow you to use certain kinds of evidence and certain documents against individuals, although they might be admissible against the company itself,” said Mr. Bharara. “And so although there is an admission that there were individuals who engaged in conduct which provides for a basis to bring a case against the company, they are not charged here.”

The comments add to a growing chorus from judges who have criticized prosecutors for settling claims of wrongdoing with companies while not bringing charges against executives or others who actually made the decisions.

 

Lesson Number 4: Government agents and investigators lie to you.  They deceive you all the time; it is ethical for them to do so; and there is little you can do about it.

Many employees think that, in general, law-enforcement agents do not lie (or, at least, that law-enforcement agents do like lie to people like them).

Not so forbidden, actually.

Not so forbidden, actually.

Surprisingly large numbers of otherwise savvy, well-educated people profess shock and dismay when they find out that an agent has misled them, told them an untruth or left out an important fact that might have changed their answer to a question.

However heartfelt, such dismay is misplaced.  Much of what we expect law-enforcement to do — especially with regard to undercover operations, searches-and-seizures and interrogations — is premised on not being forthcoming.  Like any other witness, an FBI agent or a sheriff’s deputy must testify truthfully in court proceedings, and is subject to perjury and other sanctions if he or she fails to do so.  By the time we reach that stage of an investigation and prosecution, however, our employee or colleague has already spoken with the agents out of a desire to cooperate; from fear of being perceived as not cooperating; or from embarrassment at being associated with particular events, even by implication.

This compulsion to speak leads us to the next lesson: avoid the Efrem Zimbalist, Jr. Syndrome.

Lesson Number 5: Teach your employees and colleagues to avoid the Efrem Zimbalist, Jr. Syndrome.

Getting carded, back when there was no casual Friday.

Getting carded, back when there was no casual Friday.

I’ve spoken before on why businesspeople talk to agents without having their lawyer or the company lawyer present.  I call it the “Efrem Zimbalist, Jr. Syndrome,” named after the star of the old television series The FBI.  Watch this 140-second video on the Efrem Zimbalist, Jr. Syndrome, then keep reading.

(An aside: I’ve written before on the relationship between crime and narrow neckties: Criminals In Ties: Contract Law and Reservoir Dogs)

 

 

 

Lesson Number 6: Tell the truth in response to questions you understand, and demand a new question if you don’t understand the old one, but don’t put on Fred Rogers’s slippers.

If your employee or colleague decides to cooperate in an investigation, they need to meditate on the old chestnut “in for a penny, in for a pound.”  Lying is the quickest path to indictment.  In complicated, expensive, protracted business-crime or regulatory investigations, false-statement or obstruction charges are easier and cheaper to prove that the underlying, substantive conduct.  And, judges and juries jump to conclusions about liars and document-shredders.

Foot powder and an immunity letter.

Foot powder and an immunity letter.

On the other hand, answering “truthfully” does not mean answering “cuddly.”  Assume that the agent knows the answer (or has a decent guess about the answer, or has a preconceived notion about the answer) to every question that he or she poses.  Further, assume that each question, and therefore each answer, is at best a “neutral” event from the perspective of the person being questioned.

Good luck.