The million-dollar question—often a multi-million dollar one—for companies to ask amid a civil law enforcement investigation or enforcement action: What does, and what does not, constitute meaningful cooperation?
During a speech this week at the Society of Corporate Compliance and Ethics’ annual conference in Chicago, Bill Baer, a principal deputy associate attorney general at the Department of Justice, offered fresh perspective on how his agency would answer that question. The bottom line: merely responding to a subpoena is hardly enough to claim meaningful cooperation.
As a backdrop for his comments, Baer reminded the audience of events leading up to the Great Recession, in particular systemic abuses by banks in the packaging and sale of residential mortgage backed securities. RMBS abuses “exposed a stunning breakdown in the ethics, the training, and the in-house compliance efforts of financial institutions here and around the world.”
For years the financial industry peddled hundreds of billions of dollars of securities consisting of residential mortgage loans, he explained. Investors bought the securities, falsely assured that they held quality mortgages even though the demand for RMBS and their profitability increasingly tempted banks to include—without disclosure or with false disclosures—home loans of ever decreasing quality. That practice, in turn, encouraged even more aggressive generation of mortgages that should never have been issued.
“Unfortunately, this was not a situation limited to a small group of rogue actors within the financial sector,” Baer said. “Institution after institution failed themselves and the American public. They disregarded laws; they abandoned internal controls; they misrepresented—indeed, some flatly lied—about the RMBS products they were selling.”
The government response to this misconduct, Baer said, is still a work in progress. Enforcement efforts have, nonetheless, secured nearly $46 billion in penalties, compensation, and consumer relief.
“We could have resolved many of these RMBS cases more quickly if the financial institutions involved in the conduct had decided early on to cooperate with the working group investigations,” he said. “For the most part that did not happen. The government built these RMBS cases from the ground up: reviewing millions of emails, texts, and business records; transcribing recorded audio; talking to hundreds of witnesses; and deciphering dense and technical tomes of financial information.”
No company is obligated to cooperate in an investigation, settle potential charges, or surrender the right to trial. But, in Baer’s view, the uncooperative banks in question merely postponed inevitable penalties, incurring significant legal costs in the process and prolonging uncertainty over the course of several years. “Each paid a lot more than it would have if it had cooperated early on,” he said.
“Whether to cooperate with the government in these matters is a choice companies need to make. The RMBS banks chose not to,” Baer said. “And yet, when some of these financial institutions approached us about settlement, they, through their lawyers, claimed to have cooperated fully with our investigation. They argued for some sort of significant cooperation credit. We dismissed the arguments quickly because they so lacked merit.”
An ex post facto effort to claim to have cooperated with a Department of Justice civil investigation is not unique to banks and to RMBS matters, he said. The argument is as common as it is unsuccessful.
Recent, internal, guidance within the Justice Department on cooperation in civil enforcement matters makes it clear that productive self-disclosure and cooperation from would-be defendants in civil enforcement matters should be encouraged. It often has latitude to determine the contours of an appropriate resolution—discretion that can and will be exercised to credit significant and timely cooperation. There is, however, a baseline for determining adequate cooperation.
“Defendants that want credit for their cooperation must disclose all facts relating to the individuals involved in the wrongdoing, no matter where those individuals fall in the corporate hierarchy,” Baer said. This is core to individual accountability principles articulated by Deputy Attorney General Sally Yates last fall, with the so-called Yates Memo.
Cooperation should be proactive. “The company should materially assist us, including by disclosing facts that are relevant to the investigation, even when not specifically asked to do so,” Baer said. “It may involve, in part, the company describing its own conduct and pointing us to inculpatory documentary evidence, such as emails and text messages.”
Cooperation may also involve providing documents or access to witnesses that the Department might not have obtained through a compulsory process. This might include: providing information that the government did not know about or did not recognize would be significant, and therefore did not subpoena; providing summaries of evidence prepared specifically to assist the government’s investigation; providing reports that compile data in a manner that is helpful for the department and that it could not readily do on its own; encouraging individuals with knowledge of the relevant conduct to cooperate with the investigation; and/or providing information that might otherwise not have been discovered in the ordinary course of the investigation.
Value also depends on timeliness. “Cooperation that calls our attention to a problem that we previously did not know about at the early stages of an investigation is substantially more helpful than cooperation after we have invested significant time and energy in exposing problematic conduct,” Baer said. Little or no cooperation credit will be afforded in situations where the supposed cooperation occurs after the Department has completed the bulk of its investigation.
“A company should come in as early as it possibly can, even if it has not completed an internal investigation,” Baer stressed. “A company will not be disqualified from receiving cooperation credit simply because it doesn’t have all the facts lined up on the first day. Under those circumstances, we expect that cooperating companies will simply continue to turn over the information to our lawyers as they receive it.”
Additionally, a company or individual will be considered for credit when they enable the government to pursue conduct that might not otherwise have been addressed. This type of cooperation may involve detailing relevant conduct by a different party (or parties) participating in the same or similar scheme or that enables the Department to net greater recoveries.
Although it may take many forms, not every interaction between the government and a party under investigation will constitute cooperation. “As we told the RMBS banks, mere compliance with legal requirements such as subpoenas, or one-sided presentations urging the department to decline an enforcement action, do not measure up,” Baer said. “The Department may view some such activities—including the belated provision of information that an entity was legally obligated to produce—as impediments to investigative work, rather than genuine examples of cooperation…A company that offers meaningful cooperation and timely victim relief should be afforded a more favorable resolution than a company that fights kicking and screaming until the end.”
“We know meaningful cooperation when we see it,” he added.