In late 2015, Deputy Attorney General Sally Yates issued a memorandum to federal prosecutors—commonly known as the Yates Memo—that emphasizes the accountability of individuals involved in corporate wrongdoing. Consequently, businesses and culpable employees are both targets during federal investigations, which can lead to a number of liabilities for your organization.
The Yates Memo specifies that businesses must identify all culpable individuals during a Department of Justice (DOJ) investigation. This will likely result in frayed relationships with employees, longer investigations and higher defense costs. Additionally, your business will be expected to cooperate during both corporate and individual cases, as many protections for individuals have been removed by the Yates Memo.
To ensure that you are adequately protected, you need to examine your business’s directors and officers (D&O) insurance coverage before an investigation takes place.
Primary Focus of the Yates Memo
The Yates Memo consists of six “key steps” to encourage businesses to focus on individual accountability as well as to encourage federal attorneys to bring civil and criminal charges against culpable employees. Two of these steps are seen as major changes to the DOJ’s policies and will have a large impact on the focus of investigations:
- Businesses must identify all individuals involved in corporate wrongdoing to qualify for any cooperation credit in the resolution of a case.
- Federal attorneys will target individuals during the onset of an investigation, and will not focus solely on the business as a whole.
Because businesses must identify culpable individuals to receive cooperation credit during a federal investigation, the priorities of your business and your employees will likely diverge over the course of a case.
Additionally, the Yates Memo makes it clear that individuals do not have to actively partake in wrongdoing to be a target of investigations. Board members, directors, officers and managers that do not provide sufficient oversight of their respective responsibilities can be found negligent and targeted during a case. This broad range will likely make it more difficult to determine who was and was not involved in any wrongdoing.
While it is in your business’s best interests to conduct thorough internal investigations and find all culpable individuals, employees may be less willing to reveal relevant information and may even request their own legal counsel to represent their best interests. And, if your D&O coverage provides funding for this defense, there will be less funds available to provide protection for your business as a whole.
Protection for Individuals
As the Yates Memo emphasizes individual accountability, it also takes away protections that individuals could previously turn to when resolving cases. The key steps in the memorandum specify the following:
- Corporate cases will not be resolved before there is also a plan to resolve any related cases involving culpable individuals.
- Resolutions between businesses and the DOJ will provide no protection for culpable individuals.
- The ability to pay financial penalties will no longer be considered in the decision to bring civil charges against individuals.
All of these points will serve to lengthen cases, as businesses will be expected to cooperate with individual as well as corporate cases. This means that your business must continue to devote time and resources to internal investigations and provide for legal counsel. As a result, your current D&O coverage is likely inadequate given the new priorities found in the Yates Memo.
D&O Coverage Considerations
To ensure that you have adequate D&O coverage to defend both your business and its employees during an investigation, you should review the following topics:
- Type of coverage: Ensure that your D&O policy will provide adequate protection for all parties involved in a case. Coverage should include funds for your employees’ defense, any additional funds your business provides for their defense and your business’s defense if you are sued by a third party as a result of a federal investigation.
- Investigation coverage: Consider purchasing investigation coverage as an endorsement to your D&O policy. This will help protect you from the financial burden of internal investigations, as they will likely last longer under the Yates Memo.
- Policy limits: Consider raising your policy limits to ensure that you have adequate protection. The need to defend more individuals, as well as your business’s obligations to assist federal prosecutors, will lead to longer cases and higher defense costs.
- Conduct exclusions: Examine your current D&O policy to see if it has conduct exclusions for fraud, dishonesty and other misconduct. These exclusions may also include final adjunction provisions, which prevent carriers from withholding funds until a case has been resolved.
- Balance between indemnification and insurance: Conduct a review of your business’s balance between indemnification and D&O coverage. If you provide for the majority of a case’s defense costs, you may face severe financial hardship once the case has been resolved.
Contact Our Team of Experts
For more information on how D&O coverage can protect you from the consequences of the Yates Memo, contact W.J. Alexander today. We can also provide you with another article that details the content of the memorandum, “Risk Insights: Understanding the Yates Memo.”