Originally published in The D&O Diary by Kevin M. LaCroix.
The US Department of Justice released a directive last week restating and reinforcing the agency’s commitment to targeting corporate executives in cases of corporate wrongdoing. The cornerstone of the agency’s new policies is the specification that in order for a company to qualify for any cooperation credit in connection with a DoJ investigation, the company must provide the agency with all relevant facts about the individuals involved in the misconduct. As discussed below, the agency’s new directive could pose added challenges for companies involved in DoJ investigations, and it could represent a significant new threat to the executives of the companies involved. As also discussed below, the directive raises some important D&O insurance issues as well.
Deputy Attorney General Sally Quillian Yates announced the new directive in a Sept. 10, 2015, speech at New York University, the text of which can be found here. The agency’s Sept. 9, 2015, memo describing the new directive can be found here. A Sept. 10, 2015, memo from the Wilmer Hale law firm describing the new directive and its implications can be found here.
Background
The directive specifies six specific steps the agency intends to take in order, as Yates said in her speech, to try to “hold more corporate wrongdoers accountable.” Some of the six steps describe institutional policy shifts in the way the agency investigates, charge and resolve cases. Some address the way the agency conducts its internal operations, while others describe the way the agency will interact with the targets of an investigation.
The first of the six guidelines, the one The Wall Street Journal described as “the most striking element of the guidance,” specifies that in order for companies targeted in investigations to gain any credit (the word is underlined in the agency’s memo) for cooperation, the companies must turn over evidence of wrongdoing by specific individuals. Previously companies would receive credit for disclosing improper practices even if they did not identify individuals responsible for the wrongdoing. As Yates said in her speech, the company must identify the individuals “regardless of their position, status or seniority in the company and all relevant facts about their misconduct.” She said, with respect to the cooperation credit, “it’s all or nothing.” This requirement will apply to both criminal and civil investigations.
The first of the six guidelines describes what the agency expects from companies; the second and third guidelines describe what the agency expects of itself. In the second guideline, the memo instructs the agency’s attorneys that going forward they are to focus on individuals from the start of an investigation. The third guideline directs the agency’s criminal and civil attorneys to cooperate with each other to the full extent permitted by law at all stages of the investigation.
The fourth and fifth of the six guidelines apply to how the agency resolves cases. The fourth guideline specifies that the agency’s attorneys may not agree to a corporate case resolution that includes an agreement to dismiss charges against, or provide immunity to, individual officers and employees. The fourth guideline also applies to the release of civil claims against individuals. The fifth guideline specifies that corporate cases should not be resolved without a clear plan to resolve the related individual cases before the statute of limitations expires.
The sixth and final guideline specifies that the agency’s civil attorneys should focus on individuals as well as the company and evaluate whether or not to bring suit against individuals based on considerations beyond the individual’s ability to pay any damages, fines or penalties that may result. The individuals’ ability to pay should not dictate whether a case is filed, as prosecutions have other values beyond the amount of money the agency might recover.
Discussion
The agency’s new directive is clearly a response to frustration and political pressure arising from the perceived failure of the government to hold Wall Street executives accountable for the problems that led to the financial crisis. There is no doubt that the agency is trying to put corporations and notice and to try to set the tone for white-collar investigations. At a minimum the agency is doing what it can to remove internal barriers and to ensure that it is utilizing all of its resources and focusing all of its efforts on trying to hold corporate executives accountable.
However, commentators are already asking whether the new directive will actually produce any real changes, particularly with respect to criminal prosecutions. In a Sept. 10, 2015, article, The New York Times Dealbook blog asserted (here) that even under the new guidelines the government would struggle to indict Angelo Mozillo and the Lehman executives and the other high-profile executives involved in the circumstances that led to the financial crisis.
Moreover, the commentators suggest that even if the new policy results in increased numbers of indictments of corporate executives, the government will still struggle to secure convictions. The difficulty prosecutors face is proving that the individuals acted with the requisite knowledge and intent. Indeed, Yates acknowledged that individual cases will continue to be difficult to prosecute, owing to their complexity of the factual circumstances typically involved and the intricacy of corporate hierarchies, which can allow executives to distances themselves from the specifics of their company’s operations. Another concern is that investigative resources within the government have shifted. The FBI has actively reallocated its resources toward investigating terrorism and cyber crime. This resource reallocation may hobble government efforts to marshal resources in order to secure more individual convictions in white collar crime prosecutions.
The new cooperation credit requirements undoubtedly will affect the way corporate investigative targets conduct themselves. One likelihood is that internal corporate investigations, undertaken in order to demonstrate cooperation, may become even more comprehensive–and costly. On the other hand, the new directive may also, as one commentator quoted in the Dealbook column said, cause companies to “think twice before settling.”
All of these skeptical comments do not change the fact that the purpose of the DoJ’s directive is to target individuals. The agency has made it clear that it intends to focus its efforts on prosecuting individuals. It has also made it clear that the agency will not allow companies to try to protect their executives as part of the process of resolving agency criminal or civil actions against the companies. These new policy directives certainly increase the likelihood that individuals will be targeted and that individuals could remain as targets of criminal or civil actions even after companies have been able to negotiate the resolution of the actions against companies themselves. The implications for executives are disconcerting, to say the least.
There are several practical implications for corporate executives. First and foremost, corporate executives will want to ensure that their corporate advancement and indemnification rights are mandatory, triggered automatically, and are set up to ensure that the company must honor its obligations to the maximum extent permitted by law. Unfortunately, the DoJ’s policies are structured in order to encourage companies to sacrifice the individuals in order to protect the companies. A practical consequence of this may be that the company will feel compelled to step away from its obligations to its executives to advance defense expenses. Moreover, there is always the possibility that a company beset with a criminal investigation may be having financial problems as well, and therefore simply be unable to honor its advancement and indemnification obligations.
All of this suggests that as a result of the DoJ’s new directive companies’ D&O insurance protection could become more important than ever. If an individual has been targeted as result of the agency’s new directive, or an individual finds himself or herself unable to extricate themselves from a prosecution or civil action even after the company has managed to resolve the case against the corporate entity, the D&O insurance may represent the individuals’ last line of defense.
There are a number of insurance implications from all of this. First and foremost, the DoJ’s new guidelines suggest that prosecutions and civil cases could become more protracted, as companies become unable to negotiate resolutions that conclude cases for both the company and for the individuals. This could be an important consideration for companies in thinking about limits adequacy issues. Because the limits may have to go further, more companies will want to consider buying increased insurance limits.
Second, if the D&O insurance is to be the last line of defense for increasingly embattled individuals, it is going to be more important than ever that the policies’ conduct exclusions, which could preclude coverage for criminal or fraudulent misconduct, are structured in a way that ensures that the coverage will not be withheld at the very moment the corporate executives need it most. That means, among other things, ensuring that the coverage preclusive effect of the conduct exclusions will be triggered only when and if there has been a final, non-appealable adjudication adverse to the insured person in the underlying proceeding. These restrictions to the exclusion ensure that the coverage will remain available in order to allow individuals to pursue appeals even if they have been convicted criminally.
Third, as Charles Edwards of the Barnes & Thornburg law firm pointed out in a Sept. 10, 2015, memo about the DoJ’s new directive (here), the agency’s new policies could make the inclusion in companies’ D&O insurance programs of an excess Side A/DIC policy an even more important consideration for all companies and their executives. These policies, which provide a measure of catastrophe protection for corporate executives, would be triggered if the company wrongfully withheld advancement or indemnification from its executives. The excess coverage would also add an extra measure of protection in the event that the company is financially unable to indemnify its executives or to advance defense expenses. Indeed, in light of the increased likelihood that the government will be targeting individuals, companies that already have Side A/DIC insurance as a part of D&O insurance structure may want to consider whether to increase their limits of liability under their Side A/DIC insurance program.
It may be some time before we know for sure whether or not the DoJ’s new policies will result in further prosecutions or convictions of corporate executives. It is, however, clear now that the agency intends to target individuals. In light of this, it is important now for companies to take steps now in order to ensure that if their executives are the subject of one of the agency’s newly aggressive campaigns, that the companies’ insurance is structured in a way to maximize the likelihood that the executives will have the insurance resources needed in order to be able to defend themselves.
