At a conference on white-collar crime in New York this spring, the deputy attorney general of the United States tried to clarify the intent behind a directive that was widely known by her last name, instead of its actual title, the Individual Accountability Policy.
The directive, announced by the U.S. Department of Justice in the fall of 2015, set out a higher threshold for credit for co-operation in cases of alleged corporate wrongdoing. All the facts about individual conduct within a company must be provided to authorities to receive credit, Sally Yates explained in her widely reported speech back in May.
“We just want the facts. Our goal is to uncover the truth,” said Yates. She stressed that it was not, as some had suggested, a pressure tactic to get corporations to waive privilege or offer up a scapegoat — “a vice president in charge of going to jail,” as Yates described the fear.
The policy announcement, widely referred to as the Yates Memo, was issued at a time when there continues to be public sentiment that individual corporate wrongdoers are rarely punished. The potential impact of the Yates Memo has also sparked widespread commentary not only in the U.S. but here in Canada. Even for companies that do not have U.S. operations, there have been questions raised about whether the spirit of the memo will be adopted by regulators and prosecutors in this country.
For companies in the financial services sector, the balancing act is to ensure that if internal investigations uncover wrongdoing, there is compliance with regulators, yet at the same time the risks financially and to reputation are minimized. Added to this mix is a potential divergence of interests between a company and a senior employee if there are admissions of wrongdoing to a regulator.
At a minimum, the context behind the Yates Memo is something that should be looked at by Canadian corporations and their legal departments, says John Jason, of counsel at Norton Rose Fulbright LLP. “It is something that the top of the house should be concerned about. The world is a very different place now. People are angry,” says Jason, who was formerly deputy general counsel and chief compliance officer at a major Canadian bank. There is increased pressure on regulators, both in the U.S. and Canada, to prosecute individuals within major companies “to demonstrate they are hearing people,” Jason suggests.
Even for corporations without U.S. operations, the philosophy behind the Yates Memo might have an impact in Canada, says Janice Wright, a securities defence lawyer at Wright Temelini LLP in Toronto. “I think it would be naïve to believe that the legal trends in the U.S. will not have any influence on what happens in Canada,” she says.
Given this climate, it raises questions about the appropriate steps to take when an internal investigation has revealed that there has been either an inadvertent failure to comply with regulations or intentional wrongdoing.
Co-operation with a regulator at an early stage may often be the best course of action, says John Fabello, a senior member of the litigation and class action defence practices at Torys LLP in Toronto. If the facts support co-operation, then what he calls the “old school” approach of giving just a bit of information to a regulator is unlikely to be effective. “If you do a thorough job, staff will not be inclined to go off on a wild goose chase,” he says. “The overarching rule is to be transparent. Don’t lie in the weeds,” says Fabello. He states that regulators are more likely to agree to narrow the issues under investigation if it appears that a company has been co-operative and upfront about the facts uncovered in its own internal probe.
As well, he says that if a company has been forthcoming, a regulator may be willing to agree to compel certain documents. That would afford more protection under the relevant statutes against the information being obtained by third parties.
Jason, at Norton Rose, agrees that any action that might prevent or reduce the chance of success of other litigation is essential. “Sometimes, the sanction you most fear is the class action. That is another tension,” notes Jason.
That view is shared by Alan Gardner, head of the securities litigation practice at Bennett Jones LLP in Toronto. When deciding to co-operate with a regulator and agreeing to turn over any information that could be subject to privilege, “part of the calculus is whether this document is going to get into the hands of a class action lawyer,” says Gardner. As well, to ensure that there is no suggestion of an implied “subject matter waiver” of privilege during an investigation, Gardner says companies can seek to enter into a “common interest agreement” with a regulator. These agreements are negotiated with staff and help define which documents are provided and the “theory” of what the information shows, he explains.
Two years ago, the Ontario Securities Commission revised its credit for co-operation program, which, among other things, requires officers and directors to be available for interviews and for companies to take action against employees engaged in wrongdoing. The OSC was also the first regulator in the country to introduce the possibility of “no contest” agreements as part of the changes to this program.
There have been some concerns raised in legal commentary about the revised credit program in areas such as its potential impact on privilege and how the wording of the document will be interpreted in investigations by the regulator.
The OSC declined a request for an interview about the program but provided a written statement: “The goal of the credit for co-operation program is so that market participants and others participating in the capital markets are encouraged to self-
police, self-report and self-correct matters that may involve breaches of Ontario securities law. The program sets out guidelines for market participants to follow in terms of internal control of reporting misconduct and asks that market participants promptly and fully self-report to the appropriate regulatory or law enforcement agency.”
There have been four no-contest agreements since the policy was implemented and in each case there were financial penalties agreed to by the companies under investigation. No individuals were sanctioned.
The largest settlement was a $164-million agreement between the OSC and CI Investments Inc. earlier this year. The company admitted that $156 million in interest in certain investment funds had not been marked as an asset for nearly five years.
CI self-reported to the regulator, and the settlement stated that it was a fund control and supervision error with no dishonesty or intentional misconduct by the company. CI agreed to fully compensate its investors and make a voluntary payment of $8 million to the OSC as well as $50,000 to cover its investigation costs.
The Investment Industry Regulatory Organization of Canada also issued new sanction guidelines last year. The guidelines require “proactive and exceptional assistance” to receive credit for co-operation at the time a penalty is imposed.
The goals of these regulators and some of the language used is similar to that of the Yates Memo, observes Fabello. Still, he believes there are mutual interests in reaching an agreement with a regulator. “They don’t want contested hearings. They want to encourage settlements,” he says.
“Settlements give you finality and you move on,” says Jason. At the same time, it is often difficult for regulators to prove intentional wrongdoing, he suggests, so that is their incentive to reach a deal.
All of the lawyers agree that seeking to reach a settlement is very fact specific and is unlikely to apply when there has been a clear “bad actor” and evidence of intentional misconduct.
In those types of cases, there are additional complexities for corporations in their dealings with a regulator, says Wright. “Lots of times, companies will want to offer them up, although it depends on the seniority of the employee,” she states. “If it is someone who is more senior, then there are more difficulties and the potential for corporate culpability.”
If an internal investigation uncovers intentional wrongdoing, then co-operation with a regulator may still be the best course of action, says Gardner. “If the actions are clearly improper, the company is not offering up a scapegoat,” he states.
“In these types of circumstances, the company’s name is going to get out there anyway,” Gardner observes, adding that the reputation of a corporation will not be improved by minimizing internal wrongdoing.
Along with the requirement for an Upjohn warning to advise an employee under investigation that corporate counsel’s client is the company and not the individual, Gardner says other measures may be appropriate in an internal investigation. “We may agree to let them have their lawyer there.
Sometimes, we prefer that,” says Gardner. An employee is required to co-operate during an internal investigation or be terminated, but having counsel present could make the interview more effective for the company as well, he explains.
Generally, co-operation is the best course of action when there is evidence of misconduct, either through inadvertence or intentionally, says Gardner. “The question is how you get there.”
The directive, announced by the U.S. Department of Justice in the fall of 2015, set out a higher threshold for credit for co-operation in cases of alleged corporate wrongdoing. All the facts about individual conduct within a company must be provided to authorities to receive credit, Sally Yates explained in her widely reported speech back in May.
“We just want the facts. Our goal is to uncover the truth,” said Yates. She stressed that it was not, as some had suggested, a pressure tactic to get corporations to waive privilege or offer up a scapegoat — “a vice president in charge of going to jail,” as Yates described the fear.
The policy announcement, widely referred to as the Yates Memo, was issued at a time when there continues to be public sentiment that individual corporate wrongdoers are rarely punished. The potential impact of the Yates Memo has also sparked widespread commentary not only in the U.S. but here in Canada. Even for companies that do not have U.S. operations, there have been questions raised about whether the spirit of the memo will be adopted by regulators and prosecutors in this country.
For companies in the financial services sector, the balancing act is to ensure that if internal investigations uncover wrongdoing, there is compliance with regulators, yet at the same time the risks financially and to reputation are minimized. Added to this mix is a potential divergence of interests between a company and a senior employee if there are admissions of wrongdoing to a regulator.
At a minimum, the context behind the Yates Memo is something that should be looked at by Canadian corporations and their legal departments, says John Jason, of counsel at Norton Rose Fulbright LLP. “It is something that the top of the house should be concerned about. The world is a very different place now. People are angry,” says Jason, who was formerly deputy general counsel and chief compliance officer at a major Canadian bank. There is increased pressure on regulators, both in the U.S. and Canada, to prosecute individuals within major companies “to demonstrate they are hearing people,” Jason suggests.
Even for corporations without U.S. operations, the philosophy behind the Yates Memo might have an impact in Canada, says Janice Wright, a securities defence lawyer at Wright Temelini LLP in Toronto. “I think it would be naïve to believe that the legal trends in the U.S. will not have any influence on what happens in Canada,” she says.
Given this climate, it raises questions about the appropriate steps to take when an internal investigation has revealed that there has been either an inadvertent failure to comply with regulations or intentional wrongdoing.
Co-operation with a regulator at an early stage may often be the best course of action, says John Fabello, a senior member of the litigation and class action defence practices at Torys LLP in Toronto. If the facts support co-operation, then what he calls the “old school” approach of giving just a bit of information to a regulator is unlikely to be effective. “If you do a thorough job, staff will not be inclined to go off on a wild goose chase,” he says. “The overarching rule is to be transparent. Don’t lie in the weeds,” says Fabello. He states that regulators are more likely to agree to narrow the issues under investigation if it appears that a company has been co-operative and upfront about the facts uncovered in its own internal probe.
As well, he says that if a company has been forthcoming, a regulator may be willing to agree to compel certain documents. That would afford more protection under the relevant statutes against the information being obtained by third parties.
Jason, at Norton Rose, agrees that any action that might prevent or reduce the chance of success of other litigation is essential. “Sometimes, the sanction you most fear is the class action. That is another tension,” notes Jason.
That view is shared by Alan Gardner, head of the securities litigation practice at Bennett Jones LLP in Toronto. When deciding to co-operate with a regulator and agreeing to turn over any information that could be subject to privilege, “part of the calculus is whether this document is going to get into the hands of a class action lawyer,” says Gardner. As well, to ensure that there is no suggestion of an implied “subject matter waiver” of privilege during an investigation, Gardner says companies can seek to enter into a “common interest agreement” with a regulator. These agreements are negotiated with staff and help define which documents are provided and the “theory” of what the information shows, he explains.
Two years ago, the Ontario Securities Commission revised its credit for co-operation program, which, among other things, requires officers and directors to be available for interviews and for companies to take action against employees engaged in wrongdoing. The OSC was also the first regulator in the country to introduce the possibility of “no contest” agreements as part of the changes to this program.
There have been some concerns raised in legal commentary about the revised credit program in areas such as its potential impact on privilege and how the wording of the document will be interpreted in investigations by the regulator.
The OSC declined a request for an interview about the program but provided a written statement: “The goal of the credit for co-operation program is so that market participants and others participating in the capital markets are encouraged to self-
police, self-report and self-correct matters that may involve breaches of Ontario securities law. The program sets out guidelines for market participants to follow in terms of internal control of reporting misconduct and asks that market participants promptly and fully self-report to the appropriate regulatory or law enforcement agency.”
There have been four no-contest agreements since the policy was implemented and in each case there were financial penalties agreed to by the companies under investigation. No individuals were sanctioned.
The largest settlement was a $164-million agreement between the OSC and CI Investments Inc. earlier this year. The company admitted that $156 million in interest in certain investment funds had not been marked as an asset for nearly five years.
CI self-reported to the regulator, and the settlement stated that it was a fund control and supervision error with no dishonesty or intentional misconduct by the company. CI agreed to fully compensate its investors and make a voluntary payment of $8 million to the OSC as well as $50,000 to cover its investigation costs.
The Investment Industry Regulatory Organization of Canada also issued new sanction guidelines last year. The guidelines require “proactive and exceptional assistance” to receive credit for co-operation at the time a penalty is imposed.
The goals of these regulators and some of the language used is similar to that of the Yates Memo, observes Fabello. Still, he believes there are mutual interests in reaching an agreement with a regulator. “They don’t want contested hearings. They want to encourage settlements,” he says.
“Settlements give you finality and you move on,” says Jason. At the same time, it is often difficult for regulators to prove intentional wrongdoing, he suggests, so that is their incentive to reach a deal.
All of the lawyers agree that seeking to reach a settlement is very fact specific and is unlikely to apply when there has been a clear “bad actor” and evidence of intentional misconduct.
In those types of cases, there are additional complexities for corporations in their dealings with a regulator, says Wright. “Lots of times, companies will want to offer them up, although it depends on the seniority of the employee,” she states. “If it is someone who is more senior, then there are more difficulties and the potential for corporate culpability.”
If an internal investigation uncovers intentional wrongdoing, then co-operation with a regulator may still be the best course of action, says Gardner. “If the actions are clearly improper, the company is not offering up a scapegoat,” he states.
“In these types of circumstances, the company’s name is going to get out there anyway,” Gardner observes, adding that the reputation of a corporation will not be improved by minimizing internal wrongdoing.
Along with the requirement for an Upjohn warning to advise an employee under investigation that corporate counsel’s client is the company and not the individual, Gardner says other measures may be appropriate in an internal investigation. “We may agree to let them have their lawyer there.
Sometimes, we prefer that,” says Gardner. An employee is required to co-operate during an internal investigation or be terminated, but having counsel present could make the interview more effective for the company as well, he explains.
Generally, co-operation is the best course of action when there is evidence of misconduct, either through inadvertence or intentionally, says Gardner. “The question is how you get there.”
