Justice Department Launches a Full-Court Press on Misdeeds at Banks

In the span of less than seven days, four high-ranking Department of Justice officials delivered speeches that focused on renewing efforts to pursue wrongdoing at financial institutions.

Among the ideas floated by officials at various forums: enhancing whistleblower initiatives; increasing cooperation between its civil and criminal divisions; prosecuting more individuals; offering more leniency for firms that maintain a top-notch compliance program, even if that program is improved after the problem occurred; and enhancing international cooperation.

It is not surprising that the Justice Department would want to reassure the public that it is on the case when it comes to bank oversight. Complaints regularly echo in the halls of Congress and editorial pages rail about the failure to bring even a single charge against a culpable or negligent bank executive for failures that led to the financial crisis. The quartet of speeches, however, may go beyond just a mere public relations offensive.

“The Justice Department is sending a message to the business community that it is serious about accountability for corporate officials they believe have broken the law,” says Steven Reich, a partner at law firm Akin Gump who, until recently, served as associate deputy attorney general. “They think it will promote deterrence, and they hope the public will hear the message and conclude that the standard of justice that applies to every day citizens also applies to corporate officials.”

Increasing Whistleblower Awards

During a speech at New York University’s law school, Attorney General Eric Holder urged Congress to amend legislation and allow the Department of Justice to increase whistleblower rewards in cases that involve financial institutions. Where Congress can step in, he said, is by empowering his staff to take full advantage of the Financial Institutions Reform, Recovery, and Enforcement Act, FIRREA, by lifting a statutory cap on whistleblower rewards.

Enacted by Congress in the 1980s, FIRREA empowers federal prosecutors to seek civil penalties for a wide range of offenses—including mail and wire fraud, bank fraud, and false statements made to the government—that specifically affect federally insured financial institutions. The Justice Department has reached several big-money settlements in recent months. In August, it hit Bank of America with a $5 billion FIRREA fine, penalized Citigroup $4 billion, and JPMorgan $2 billion. Like the False Claims Act, FIRREA includes a whistleblower provision, but the amount an individual can receive is capped at just $1.6 million, “a paltry sum in an industry in which, last year, the collective bonus pool rose above $26 billion, and median executive pay was $15 million and rising,” Holder said.

Attorneys who represent whistleblowers see reforming the FIRREA whistleblower program as long-overdue. “The enforcement net has had a significant gap in the banking sector and this a step toward closing that gap,” says Jordan Thomas, a veteran of the Securities and Exchange Commission’s Enforcement Division who now heads the law firm Labaton Sucharow’s  whistleblower representation practice.

“The DoJ is sending a message to the business community that it is serious about accountability for corporate officials they believe have broken the law. They think it will promote deterrence and they hope the public will hear the message …”
Steven Reich, Partner, Akin Gump

Another problem, say attorneys, is that the Justice Department does not guarantee anonymity to tipsters. “I get a lot of calls from people who are interested in reporting banking violations and I have to tell them that there is currently no law by which they can have the protections of other whistleblower programs,” Thomas says. “Perhaps Holder intends to add that provision, but people on Wall Street, particularly those who are high net worth, are concerned about being blacklisted from the industry.”

Others are skeptical of Holder’s proposal. For one, the Justice Department has never actually given a single FIRREA whistleblower award for any amount, says Eugene Goldman, a senior member of the law firm McDermott Will & Emery’s white-collar and securities defense practice group.

Goldman says that a proposal to expand the cap “could take years of review, hearings, and an assessment of the SEC’s relatively new program.” Because the proposed change requires Congressional approval, proponents run the risk that legislators might even decide that the recent expansion of the scope of FIRREA by a handful of courts bears additional scrutiny. “

Individual Culpability

Holder also stressed that civil and criminal investigations into individual executives is an ongoing priority, contrary to critics who complain of little progress on that front. “It’s not right for punishment to be borne exclusively by the company, its employees, and its innocent shareholders,” he said.

Just as prosecutions under the Foreign Corrupt Practices Act often target bad actors, and award leniency when a company helps ferret them out, the Justice Department will “pressure test a company’s internal investigation,” Principal Deputy Assistant Attorney General for the Criminal Division Marshall Miller said in a speech in New York.

“When you come in to discuss the results of an internal investigation to the Criminal Division, expect that a primary focus will be on what evidence you uncovered as to culpable individuals, what steps you took to see if individual culpability crept up the corporate ladder, how tireless your efforts were to find the people responsible,” Miller said. “If you want full cooperation credit, make your extensive efforts to secure evidence of individual culpability the first thing you talk about when you walk in the door and make those efforts the last thing you talk about before you walk out.”

Targeting individuals in the complex world of banking has been difficult for enforcement agencies. And some efforts to pressure companies to turn them over have backfired. In 2006, for example, a Federal court struck down a Justice Department policy to pressure firms to cut off legal support to employees facing charges. Judge Lewis Kaplan ruled that the Department could no longer consider whether a company pays the legal fees of employees as a factor in whether to indict the company itself.

STRESSING COOPERATION

The following are selections from a speech delivered by Principal Deputy Assistant Attorney General for the Department of Justice’s Criminal Division on Sept. 17.
Voluntary disclosure of corporate misconduct does not constitute true cooperation, if the company avoids identifying the individuals who are criminally responsible. Even the identification of culpable individuals is not true cooperation; if the company fails to locate and provide facts and evidence at their disposal that implicate those individuals.       
This principle of cooperation is not new or unique to companies. We have applied it to criminal cases of all kinds for decades. Take, for example, organized crime cases. Mob cooperators do not receive cooperation credit merely for halting or disclosing their own criminal conduct. Attempted cooperators should not get reduced sentences if they refuse to provide testimony or fail to turn over evidence against other culpable parties. A true cooperator—whether a mobster or a company—must forthrightly provide all the available facts and evidence so that the most culpable individuals can be prosecuted.
In assessing how to treat corporations, the Criminal Division carefully considers whether its law enforcement interests have been—or can be—met by the prosecution of culpable individuals.  Conversely, in some cases, when prosecutions of culpable individuals are prevented, the government’s interest may only be vindicated by prosecuting the corporation itself. This is one of the lessons that should be drawn from the BNP Paribas and Credit Suisse cases. Through parent-level guilty pleas and multi-billion dollar penalties, BNP Paribas and Credit Suisse paid a historic price not only for their criminal conduct, but also for their insulation of culpable corporate employees.
Just as importantly, if a corporation wants credit for cooperation, it must engage in comprehensive and timely cooperation; lip service simply will not do.
We seek the cooperation of corporations where criminal conduct occurred, but we will not wait for it. We will reward with cooperation credit companies who identify criminal wrongdoers and provide evidence that assists in their prosecution. And we will be looking long and hard at corporations who purport to cooperate, but fail to provide timely information and available evidence about the criminal misconduct of their executives and employees.
Source: Marshall Miller’s speech.

Increasing Cooperation

Holder and Marshall stressed the importance of cooperation and coordination with their regulatory counterparts abroad. “Corporations are often too quick to claim that they cannot retrieve overseas documents, e-mails, or other evidence regarding individuals due to foreign data privacy laws,” Marshall said. “A company that tries to hide culpable individuals or otherwise available evidence behind inaccurately expansive interpretations of foreign data protection laws places its cooperation credit at great risk.”

The officials also suggested greater cooperation inside the Justice Department. Expect the doors separating the Justice Department’s criminal and civil divisions to swing open more freely in the months ahead. Leslie Caldwell, assistant attorney general for the Criminal Division, said in a speech at the Taxpayers Against Fraud Education Fund Conference that a new policy is now in place where qui tam complaints are shared by the Civil Division with the Criminal Division as soon as they are filed. Officials will then determine whether to open a parallel criminal investigation.  “Merely as a result of giving that speech, she may source new work for the criminal side,” David Massey, a partner with the law firm Richards Kibbe & Orbe and former prosecutor with the U.S. Attorney’s Office for the Southern District of New York, says.

Why Now?

Why such a full-court press by Justice Department officials, and why now? One likely catalyst is that unrest about a perceived lack of post-financial crisis prosecutions has evolved into a bipartisan concern in Congress.  The speeches also coincided with the sixth anniversary of the Lehman Brothers collapse. One former Justice Department official posited that Marshall and Caldwell, both new to their posts, may be setting the tone for their tenure. The rumored departure of Holder by the end of the year may also factor in.

While he agrees that financial institutions need to foster a culture of ethics and compliance, Gregory Keating, co-chair of law firm Littler Mendelson’s whistleblower practice group, isn’t sold on what the government’s response has been. “There are two ways to change behavior,” he says. “One is through a system of sticks and penalties, and that has been the approach the Obama Administration has taken and it is evident in all of these new initiatives with onerous penalty provisions, bounties, and lifting caps. Instead, there should be more, clear guidance from the government agencies as to what is an effective compliance solution and if an employer does it right, they should be given something of a ‘carrot’ when there is a rogue actor.”

He may get his wish. In a speech delivered during a compliance workshop held by the International Chamber of Commerce and the U.S Council of International Business in New York, Brent Snyder, deputy assistant attorney general for the DoJ’s antitrust division, said they are considering ways to offer credit and leniency for companies that adopt or strengthen compliance programs after coming under investigation. “Although we have not finalized our thinking in this area, any crediting of compliance will require a company to demonstrate that its program or improvements are more than just a façade,” he said.