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Government's Focus on Prosecuting Individuals – Both Criminally and Civilly

Health Care Law Note
(July 5, 2016)

The Government's "Individual Accountability Policy" ("The Yates Memo"), published on September 9, 2015, directs both federal criminal prosecutors and civil attorneys to aggressively investigate and prosecute individuals when corporate crimes or misdeeds are suspected. 

The Department of Justice's ("DOJ") theory is that "one of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing." Based on this theory, the Government has amended its policies "in order to most effectively pursue the individuals responsible for corporate wrongs."

The government's suggestion to defense counsel is now: "those who previously believed they could obtain cooperation credit without disclosing relevant facts about culpable individuals, or who advised clients that the department was more interested in a corporate resolution and a large fine rather than accountability for the people responsible for the crime, should hear a new message and see a different approach."1    

What You Need to Know

  1. The government will be focusing on identifying individuals they consider to be possible corporate wrongdoers at the beginning of both criminal and civil prosecutions of a company.
  2. The importance of a corporation's compliance program has been further escalated.   
  3. The Board of Directors will need to engage early and make decisions regarding the scope of internal criminal and civil investigations.
  4. To qualify for cooperation credit, corporations must provide DOJ with all relevant facts relating to individuals responsible for the misconduct.
  5. Internal investigations will be more difficult, expensive, and time consuming.
  6. Companies should consider Directors and Officers ("D&O") Policies for directors, officers, and employees that provide for defense costs during criminal and civil investigations.
  7. Upjohn warnings will probably need to be revised because the company will, in all likelihood, now be providing the results of its internal investigation to the government. 
  8. If the company and the government reach an agreement to resolve an investigation, those agreements will no longer provide protection for individuals from criminal and civil liability. 
  9. The government's civil attorneys are no longer to consider a company's or an individual's ability to pay in determining whether to bring civil charges against them. 

How Did We Get Here?
The government's new focus on holding individual executives responsible for corporate misdeeds is a response to criticisms stemming from its failure to hold individuals accountable for the financial collapse. As the government increases its scrutiny of individuals for corporate misconduct, it also acknowledges that "[i]n large corporations, where responsibility can be diffused and decisions are made at various levels, it can be difficult to determine if someone possessed the knowledge and criminal intent necessary to establish their guilt beyond a reasonable doubt." 

The tension between the government's interest in prosecuting individual wrongdoers coupled with the difficulties of collecting evidence to establish individual liability beyond a reasonable doubt led to the Yates Memo. In essence, the government is now requiring that for a company to get credit for cooperation, it needs to do the investigation and provide evidence to the government that the government can then use to prosecute individuals who work for the company under investigation.  

Summary of the "Yates Memo"
Historically, a company had to cooperate with government investigations if the company was to get any credit for reduced charges or sentencing in a criminal investigation. That cooperation was one of several factors that were considered. 

However, a company's willingness to provide early information regarding individuals is the new touchstone. This is because the government has been frustrated by its perception that past defense practices have consisted of corporations defending themselves by making "‘Mistakes were made,' presentations . . . without identifying who made what mistakes." 

The Yates Memo lists six specific steps that the government criminal prosecutors and civil attorneys are to follow in their "pursuit of individual corporate wrongdoing." 

  • To be eligible for any cooperation credit, corporations must provide all relevant facts to the Department about the individuals involved in corporate misconduct. 
  • "Both criminal and civil corporate investigations should focus on individuals from the inception of the investigations."
  • "Criminal and civil [government] attorneys handling corporate investigations should be in routine communication with one another."
  • "Absent extraordinary circumstances, no corporate resolution will provide protections from criminal or civil liability for any individuals."
  • Government attorneys should not resolve corporate cases without "a clear plan to resolve related individual cases before the statute of limitations expires and declinations as to individuals in such cases must be memorialized."
  • Government "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."


Company's Board of Directors Must Be Engaged at the Start

Going forward, federal prosecutors will be focused on pursuing individual accountability for corporate criminal conduct. That will mean that the CEO, CFO, CIO, President, Vice-Presidents, and line managers could all be evaluated as to what they knew about the situation.

As the company conducts its investigation, it will need to try to interview these individuals. In conducting those interviews, counsel for the company will need to give Upjohn warnings to preserve the company's privileges. However, in this new environment, a tension arises because the company will probably be turning over the results of those interviews to the government and, therefore, new "enhanced" Upjohn warnings will be needed.

These enhanced Upjohn warnings will probably result in at least two "fallouts." First, the individuals that the corporation seeks to interview may be less likely to agree to be interviewed. Second, those individuals will increasingly need their own counsel, and that counsel will less often be able to be a "pool" attorney who is representing a group of individuals.

As a result, investigations will probably become slower, more expensive, and less productive than in the past. The government acknowledges this problem:

We recognize, however, that a company cannot provide what it does not have. And we understand that some investigations – despite their thoroughness – will not bear fruit. When a company is truly unable to identify the culpable individuals following an appropriately tailored and thorough investigation, but provides the government with the relevant facts and otherwise assists us in obtaining evidence, the company will be eligible for cooperation credit.2  

Therefore, the Board must be in charge of the decisions that are made regarding conduct of internal investigations and have adequate records to show the company's efforts to discover relevant facts and identify particular individuals.  

Internal Investigations
The government indicates that it understands that investigations cannot be too broad, but those investigations still must be tailored to be thorough in the particular circumstance—an "appropriately tailored and thorough investigation." If the company is unsure as to the proper scope of an investigation, the government's new guidance is simply—"ask us, we will tell you what we need."   

As in the past, the government will not be outsourcing its investigation. While the company is conducting its internal investigation, the government will still be conducting reviews. If the government identifies culpable individuals or adverse evidence when the company itself did not do so, the government will assess whether the evidence was truly unavailable to the company. 

Finally, the new "rule" will be that an internal investigation cannot end with a conclusion of corporate liability, while stopping short of identifying those who committed the criminal conduct. 

Case Study—Riverside General Hospital
Riverside's website describes the hospital as a community-based non-profit acute care facility the provides Inpatient and Outpatient hospital care through an 88-bed Acute Care facility and a Residential Care facility with over 100 beds. The government's press releases related to this case report that individuals at Riverside operated a scheme to defraud Medicare by submitting claims for partial hospitalization program ("PHP") services that were not medically necessary and, in some cases, never even provided. Some individual defendants entered guilty pleas before trial, and others were convicted following a 5-week jury trial. Some results are listed below:

  • Eleven individuals were convicted for their roles in a $158 million Medicare fraud scheme involving Houston's Riverside General Hospital. 
  • Six individual defendants pled guilty.
  • Five individual defendants, including the former hospital president/CEO and CEO, were found guilty at trial.
  • The hospital president/CEO testified at trial that he did not have knowledge of the fraud that was going on at levels below him and that he never authorized any fraudulent behavior. 
  • Individual defendants were sentenced to prison terms ranging from 12 years to 45 years for the former president/CEO.
  • In addition to the prison terms, some of the individual defendants were personally ordered to pay restitution in the amounts of: $46,753,180; 46,255,893; and $7,518,480.

Smith Moore Leatherwood LLP is a full service law firm with experience in civil and criminal defense of healthcare matters, internal investigations, and corporate compliance issues. 

Steve Petersen assists hospitals and other business entities with internal investigations and defends them in civil, criminal, and other administrative litigation matters. In addition, he represents physicians, dentists, and other health care licensees before their respective professional licensing boards. 

1 Speech by Assistant AG Leslie R. Caldwell, Sept. 22, 2015.

2 Speech by Assistant AG Leslie R. Caldwell, Sept. 22, 2015.

Stephen W. Petersen
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