Justice Department’s New Focus on Individuals’ Liability in “Yates Memo” Should Impact Qui Tam Whistleblower Cases under False Claims Act

Yesterday the Justice Department apparently responded to the frequent lament, “Why has almost no one gone to prison for the financial crisis?” DOJ signaled that it will now look to hold responsible both culpable individuals and their companies for corporate misdeeds–both criminally and civilly.

If DOJ means what it says, this policy change is profound. It should hit corporate officers whose business models are based on fraud and false claims. It should also snare high level executives who turn a blind eye to wrongdoing, and who typically get away with it.

Corporations can act only through the humans who run them. Sometimes those humans steer the business to corrupt methods.

Until yesterday’s change in DOJ policy, however, the few corporations brought to heel by DOJ for crimes, fraud, or false claims absorbed the consequences, while the individuals who directed the wrongdoing usually escaped responsibility. Those individuals were free to continue their corrupt practices at the same firm or a different one.

New U.S. Deputy Attorney General Sally Yates plans to change that result. As a federal prosecutor in Atlanta, Yates was not afraid of pursuing big cases against individuals and their companies, as I learned from representing clients in some of those cases.

Yesterday Yates issued a Memorandum titled, “Individual Accountability for Corporate Wrongdoing.” It is far-reaching, if implemented. Yates announced “six key steps to strengthen [DOJ’s] 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.”

The new policy expressly applies to cases under the False Claims Act–the nation’s major whistleblower law and chief civil enforcement weapon to fight fraud that targets taxpayer funds. Whistleblowers are the source of most False Claims Act cases by filing suit under the “qui tam” provisions of the law.

In our qui tam whistleblower cases, we name as defendants both individuals and their businesses when we have evidence of the individuals’ involvement and knowledge of the fraud. With smaller corporate defendants, those individuals are sometimes obvious. Joining the individuals as defendants can prevent the wrongdoers from escaping liability simply by shuttering the business.

But with large companies, it is often difficult to identify at the outset all or even some of those culpable individuals. The case begins against the corporation only–and typically ends with a settlement by only the company. Until this policy change, the guilty individuals usually could count on being released from liability with the company’s settlement. And while the government technically could seek to exclude or debar the blameworthy individuals from federal programs, that has been a rare occurrence.

Now, government lawyers are tasked with focusing on individuals’ liability from the start. Yates’s memo directs that “[c]ivil 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.” As the case progresses through discovery, the government learns who those guilty individuals are, and properly can add them as defendants.

Yates correctly observes that deterring fraud is important, and that holding individual wrongdoers accountable aids deterrence:

Although in the short term certain cases against individuals may not provide as robust a monetary return on the Department’s investment, pursuing individual actions in civil corporate matters will result in significant long-term deterrence. Only by seeking to hold individuals accountable in view of all of the factors above can the Department ensure that it is doing everything in its power to minimize corporate fraud, and, over the course of time, minimize losses to the public fisc through fraud.”

Of course, Yates is directing a huge organization of lawyers who are used to doing cases the old way. It remains to be seen how quickly they will implement the new policy.

DOJ’s new policy is a step in right direction for deterring wrongdoing. Corporations violate the law only when individuals direct them to do so. It is past time to hold those individuals accountable.