White Collar & Criminal Law News

INSIGHT: DOJ Policy to ‘Flip’ Corporate Defendants Catches Eye of D&O Underwriters

Jan. 9, 2019, 9:00 AM

The practice of allowing criminal defendants to cooperate, or “flip,” and get reduced punishment in exchange for testimony against others is a valuable, commonly used tool in a prosecutor’s tool box. Recent Department of Justice policy changes enforce that strategy and now have the attention of underwriters of corporate reputation and liability insurance policies that can serve to protect companies and corporate leadership.

We have noted for some time that, today, the risks to individual reputations by events in the court of public opinion and the financial damage those risks pose are uncovered, unmitigated and leave corporate leaders dangerously exposed. DOJ’s new policy heightens this issue and likely will make finger pointing and individual blame far more common.

As Deputy U.S. Attorney General Rod Rosenstein explained in a late November 2018 memo, “pursuing individuals responsible for wrongdoing will be a top priority in every corporate investigation.” When a company honestly did meaningfully assist the government’s investigation, “our civil attorneys now have discretion to offer some credit even if the company does not qualify for maximum credit,” Rosenstein said. To claim that credit, companies will have to tell the investigators a persuasive story of otherwise pristine corporate virtue sullied by subversive rogues.

Underwriters of corporate reputation and liability insurances both stand to potentially gain as companies turn to reputation risk insurance carriers to buttress their cases for integrity-in-governance, while liability risk insurance carriers may be able to claw back from convicted directors’ and officers’ derivative litigation losses.

It’s a Judgment Call for Prosecutors

When DOJ says companies can get credit for cooperation if they “honestly did meaningfully assist” and their attorneys now have “discretion to offer some credit,” it is setting criteria that are essentially a judgment call for prosecutors.

For Directors and Officers, third-party warranties and validation of their actions will go a long way toward establishing their credibility, which may create an additional demand for reputation insurers to offer a full spectrum of products to provide protection not only to the corporate entities but also to individuals in these leadership positions.

The corporate financial incentive to identify individuals to whom we can assign criminal guilt or civil liability comes at a time when our social media driven society also seems intent on personifying blame for corporate missteps. It doesn’t take more than one congressional hearing—or one activist investor waging a campaign for board seats—to tarnish the reputations of individual executives and board members, sometimes irreparably.

While D&O coverage may insulate against direct litigation-related costs, it offers no protection against the millions of dollars in future lost income these individuals inevitably suffer as a result of sullied reputations.

Now, DOJ is encouraging companies to put individual faces to their problems, to assign blame to those most culpable in order to protect the entire enterprise. When a legal crisis hits, every board member and every member of the leadership team is now going to have to ask themselves not only: “Did I do anything wrong?” but “Am I vulnerable? Will others point their finger at me? Can I make a convincing case that I did everything reasonable to prevent this situation from occurring—or to facilitate its being uncovered?”

If they can’t answer those questions in the affirmative, they could be in trouble—legally, financially and reputationally.

Protecting Reputations is a Board Level Responsibility

Protecting individual reputations needs to become a board level responsibility, just as protecting the reputation of the company is—just as developing enterprise wide systems of risk management, compliance and accountability are. Board members who can point to their engagement of objective third party underwriters to validate their systems and processes will have a built-in defense against accusations that they hadn’t adequately done their jobs.

While this evidenced-based story will likely be useful in a court of law down the road, it will be even more useful in the short term in both the court of public opinion and in discussions with the DOJ for credit under the new policy.

President Trump doesn’t like incentives for flipping. Directors and Officers are unlikely to be too keen, either, especially if they are inadvertently caught in a dragnet. But the policy is now nearly two months old, and it is time that boards empower corporate counsel and risk managers to work together to develop enterprise level solutions that protect the company and its leadership in the event that legal and reputational jeopardy befalls them.

Author Information

Nir Kossovsky is CEO of Steel City Re, which analyzes the reputational strength and resilience of companies and provides tools including insurance to protect those companies, their officers and directors against financial losses when reputational crises occur.

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