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.

 


Why Innocent People Plead Guilty: Judge Rakoff, Eddie Coyle, Albert Camus and Sweet Dreams of Oppression

If they give awards for “Best White-Collar Article of The Year,” I wish to nominate one.  And it’s not even, strictly speaking, an article only about white-collar crime.

Judge Jed Rakoff

Judge Jed Rakoff

Jed Rakoff is a federal district judge in the Southern District of New York (in other words, in Manhattan).  We have mentioned Judge Rakoff before, here and here.  He also famously criticized DOJ’s failure, as he perceived it, to prosecute individual executives in the financial crisis.

Here, he has a thoughtful article on Why Innocent People Plead Guilty.

Portions bear quoting at some length:

The criminal justice system in the United States today bears little relationship to what the Founding Fathers contemplated, what the movies and television portray, or what the average American believes.

To the Founding Fathers, the critical element in the system was the jury trial, which served not only as a truth-seeking mechanism and a means of achieving fairness, but also as a shield against tyranny. As Thomas Jefferson famously said, “I consider [trial by jury] as the only anchor ever yet imagined by man, by which a government can be held to the principles of its constitution.”

The Sixth Amendment guarantees that “in all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury.” The Constitution further guarantees that at the trial, the accused will have the assistance of counsel, who can confront and cross-examine his accusers and present evidence on the accused’s behalf. He may be convicted only if an impartial jury of his peers is unanimously of the view that he is guilty beyond a reasonable doubt and so states, publicly, in its verdict.

The drama inherent in these guarantees is regularly portrayed in movies and television programs as an open battle played out in public before a judge and jury. But this is all a mirage. In actuality, our criminal justice system is almost exclusively a system of plea bargaining, negotiated behind closed doors and with no judicial oversight. The outcome is very largely determined by the prosecutor alone.

Dark WatersJudge Rakoff explains why it is really the prosecutor, rather than the judge, who sets the sentence:

[T]he information-deprived defense lawyer, typically within a few days after the arrest, meets with the overconfident prosecutor, who makes clear that, unless the case can be promptly resolved by a plea bargain, he intends to charge the defendant with the most severe offenses he can prove. Indeed, until late last year, federal prosecutors were under orders from a series of attorney generals to charge the defendant with the most serious charges that could be proved—unless, of course, the defendant was willing to enter into a plea bargain. If, however, the defendant wants to plead guilty, the prosecutor will offer him a considerably reduced charge—but only if the plea is agreed to promptly (thus saving the prosecutor valuable resources). Otherwise, he will charge the maximum, and, while he will not close the door to any later plea bargain, it will be to a higher-level offense than the one offered at the outset of the case.

In this typical situation, the prosecutor has all the advantages. He knows a lot about the case (and, as noted, probably feels more confident about it than he should, since he has only heard from one side), whereas the defense lawyer knows very little. Furthermore, the prosecutor controls the decision to charge the defendant with a crime. Indeed, the law of every US jurisdiction leaves this to the prosecutor’s unfettered discretion; and both the prosecutor and the defense lawyer know that the grand jury, which typically will hear from one side only, is highly likely to approve any charge the prosecutor recommends.

But what really puts the prosecutor in the driver’s seat is the fact that he—because of mandatory minimums, sentencing guidelines (which, though no longer mandatory in the federal system, are still widely followed by most judges), and simply his ability to shape whatever charges are brought—can effectively dictate the sentence by how he publicly describes the offense. For example, the prosecutor can agree with the defense counsel in a federal narcotics case that, if there is a plea bargain, the defendant will only have to plead guilty to the personal sale of a few ounces of heroin, which carries no mandatory minimum and a guidelines range of less than two years; but if the defendant does not plead guilty, he will be charged with the drug conspiracy of which his sale was a small part, a conspiracy involving many kilograms of heroin, which could mean a ten-year mandatory minimum and a guidelines range of twenty years or more. Put another way, it is the prosecutor, not the judge, who effectively exercises the sentencing power, albeit cloaked as a charging decision.

Why should you care about any of this?  You haven’t tried heroin since the 1970s, much less sold it.

You should care because you likely do not consider yourself a criminal and would be be offended if someone in authority charged you publicly with being one.  As Judge Rakoff puts it:

A cynic might ask: What’s wrong with that? After all, crime rates have declined over the past twenty years to levels not seen since the early 1960s, and it is difficult to escape the conclusion that our criminal justice system, by giving prosecutors the power to force criminals to accept significant jail terms, has played a major part in this reduction. Most Americans feel a lot safer today than they did just a few decades ago, and that feeling has contributed substantially to their enjoyment of life. Why should we cavil at the empowering of prosecutors that has brought us this result?

* * * *

First, it is one-sided. Our criminal justice system is premised on the notion that, before we deprive a person of his liberty, he will have his “day in court,” i.e., he will be able to put the government to its proof and present his own facts and arguments, following which a jury of his peers will determine whether or not he is guilty of a crime and a neutral judge will, if he is found guilty, determine his sentence. As noted, numerous guarantees of this fair-minded approach are embodied in our Constitution, and were put there because of the Founding Fathers’ experience with the rigged British system of colonial justice. Is not the plea bargain system we have now substituted for our constitutional ideal similarly rigged?

Second, and closely related, the system of plea bargains dictated by prosecutors is the product of largely secret negotiations behind closed doors in the prosecutor’s office, and is subject to almost no review, either internally or by the courts. Such a secretive system inevitably invites arbitrary results. Indeed, there is a great irony in the fact that legislative measures that were designed to rectify the perceived evils of disparity and arbitrariness in sentencing have empowered prosecutors to preside over a plea-bargaining system that is so secretive and without rules that we do not even know whether or not it operates in an arbitrary manner.

Third, and possibly the gravest objection of all, the prosecutor-dictated plea bargain system, by creating such inordinate pressures to enter into plea bargains, appears to have led a significant number of defendants to plead guilty to crimes they never actually committed. . . . . [T]his self-protective psychology operates in noncapital cases as well, and recent studies suggest that this is a widespread problem. For example, the National Registry of Exonerations (a joint project of Michigan Law School and Northwestern Law School) records that of 1,428 legally acknowledged exonerations that have occurred since 1989 involving the full range of felony charges, 151 (or, again, about 10 percent) involved false guilty pleas.

When a defendant enters a plea in federal court, the judge asks him or her questions about the defendant’s acknowledgment of guilt. This process is called a “colloquy” under Rule 11 of the Federal Rules of Criminal Procedure.  The court must assure itself that “there is a factual basis for the plea” and that “the plea is voluntary and did not result from force, threats, or promises (other than promises in the plea agreement).”

"Now, you're sure this is voluntary and everything?"

“Now, you’re sure this is voluntary and everything?”

But in a system where, as Judge Rakoff puts it, “it is the prosecutor, not the judge, who effectively exercises the sentencing power, albeit cloaked as a charging decision,” what constitutes “force”?  Who defines “threats”?

Usually, Rule 11 colloquies are perfunctory, although occasionally the pleading defendant balks entirely, and the plea goes out the window.

Rarely, though, you get some actual discussion, as with a former Bechtel executive, accused of taking millions of dollars in kickbacks from energy companies, who entered a guilty plea last week:

During the hearing, Judge Deborah K. Chasanow asked Mr. Elgawhary if he was entering the plea because of threats against him or his family. Mr. Elgawhary laughed. “Not at all,” he said.

“Tell me why that caused that reaction?” the judge asked.

“I just want to…ease the life of my family.” he responded

“So you are pleading guilty because you are acknowledging your responsibility and this is the best you think you are going to do for minimizing impact on other people you care about?”

But had anyone threatened him with harm, the judge asked, or was the pressure he felt just from the charges themselves?

“It’s the fact that the charges are there and I don’t want to pay something more,” he said. “Let us stop here and deal with it”

Pressing further, the judge asked: “The pressure you feel comes from the charges themselves, is that correct, and not because someone else is putting any pressure on you to plead guilty?”

“Most likely, you honor,” Mr. Elgawhary said.

Cooperation, indeed.

A plea often comes with a Government price-tag known as “cooperation.”  The Economist makes a similar point about prosecutors-on-steroids and “cooperating” witnesses in The kings of the courtroom: How prosecutors came to dominate the criminal-justice system:

Another change that empowers prosecutors is the proliferation of incomprehensible new laws. This gives prosecutors more room for interpretation and encourages them to overcharge defendants in order to bully them into plea deals, says Harvey Silverglate, a defence lawyer. Since the financial crisis, says Alex Kozinski, a judge, prosecutors have been more tempted to pore over statutes looking for ways to stretch them so that this or that activity can be construed as illegal. “That’s not how criminal law is supposed to work. It should be clear what is illegal,” he says.

The same threats and incentives that push the innocent to plead guilty also drive many suspects to testify against others. Deals with “co-operating witnesses”, once rare, have grown common. In federal cases an estimated 25-30% of defendants offer some form of co-operation, and around half of those receive some credit for it. The proportion is double that in drug cases. Most federal cases are resolved using the actual or anticipated testimony of co-operating defendants.

Co-operator testimony often sways juries because snitches are seen as having first-hand knowledge of the pattern of criminal activity. But snitches hoping to avoid draconian jail terms may sometimes be tempted to compose rather than merely to sing.

As Robert Mitchum said in The Friends Of Eddie Coyle (1973): “If I give you this, I can’t do no time.”

Here is an excerpt from our earlier take on all things Eddie Coyle, the worn-out cooperator (or snitch):  George V. Higgins and the Archeology of White-Collar Crime:

In popular culture, business-crime is presented cartoon-fashion. In movies, on television or in novels, businesspeople who are corporate targets of government investigations come across as Snidely Whiplashes with French cuffs.  This practice is predictable, its results boring.  Not so with the work of the late Boston-based novelist and one-time Assistant United States Attorney George V. Higgins (1939 – 1999).

(Read the rest of the post here).

A grubby world, plea-bargaining.

A grubby world, plea-bargaining.

If plea-bargaining and press-ganged cooperation are two legs of the devil’s stool for white-collar defendants, the third leg is the evaporation of the presumption of innocence, a point we made in a post about Independence Day:

[T]he “presumption of innocence” about which we all learned (or, at least, used to learn) in civics class has been translated into a presumption of guilt.  Most citizens, most of the time, believe that when a person or company is charged with a criminal offense, they are guilty (or perhaps guilty of something pretty close to the charged offense).  (We have discussed presumption problems here and here).

In real life, how do I tell a client to not put very many eggs in the presumption-of-innocence basket?

To a businessperson or a professional, I say something like this:

“Imagine that you’re at breakfast one morning and see a news item.  The news item says that someone has been arrested and charged with running a meth lab.  To the extent you think about it at all, what do you think?  You think the guy’s most likely guilty and was in fact running a meth lab, or do you think that he’s most likely innocent and is being falsely charged?”

I pause, watch it sink in and go on:

“Now, consider the guy who runs the meth lab. He sees a news item at breakfast that a banker has been charged with fraud; or a doctor has been charged with taking kickbacks; or a defense contractor has been charged with false billing.  To the extent he thinks about it all, does he think that the banker or the doctor or the defense contractor is most likely innocent or most likely guilty?”

I realize that “most likely” is, technically speaking, not the standard in a criminal case.  A discussion about the presumption of innocence cannot meaningfully proceed, however, without an appreciation of what I’ve come to realize over the years: jurors did not really apply (and sometimes do not even understand) the “beyond a reasonable doubt” standard.

Rather, jurors apply what I call “preponderance plus.” By “preponderance plus,” I mean that they apply the “more likely than not” standard used in civil cases, and then they tighten it.  In everyday conversation, we and they use “most likely” constantly, and the words mean something.  When was the last time you used the phrase “beyond a reasonable doubt” outside of a legal discussion?

So what, if anything, is to be done?

I love Judge Rakoff’s proposal to involve judges in the plea-bargaining process, but that is unlikely to happen.

The Fall

The Fall

Perhaps the tonic needed is the self-knowledge articulated by Clamence, the protagonist of Albert Camus’s The Fall (1956): “I was a lawyer before coming here. Now, I am a judge-penitent.”

The truth is that every intelligent man, as you know, dreams of being a gangster and of ruling over society by force alone. As it is not so easy as the detective novels might lead one to believe, one generally relies on politics and joins the cruelest party. What does it matter, after all, if by humiliating one’s mind one succeeds in dominating every one? I discovered in myself sweet dreams of oppression.