White Collar Crime Prof Blog

DOJ Ends Third Party Settlement Practice - But What is No Longer Allowed?

Attorney General Jeff Sessions issued a press release today here putting an end to settlements that had payments to third parties as a condition of settlement. The press release says that " [w]ith this directive, we are ending this practice and ensuring that settlement funds are only used to compensate victims, redress harm, and punish and deter unlawful conduct.”  

Will this mean that Chris Christie's agreement as US Attorney with Bristol-Myers Squibb and the University of Medicine and Dentistry of New Jersey, the former of which included an endowment of an ethics chair to Seton Hall Law School, will no longer be allowed in future agreements(see here, here, and here - see para. 20)? 

And will all the groups receiving funds from the BP Plea Agreement find that innovative resolutions will no longer be allowed in the future agreements?  For example the BP plea agreement included $350 million to the National Academy of Sciences for the purposes of Oil Spill prevention and response in the Gulf of Mexico. (see here)  The Court stated there -

"The National Academy of Sciences is required to use the funds to advance scientific and technical understanding to improve the safety of offshore oil drilling, production and transportation in the Gulf of Mexico." 

"Of course, the Court realizes that the fines and other penalties provided by the plea agreement can do nothing to restore the lives of the 11 men who were killed. But in the payment to the National Academy of Sciences, the agreement at least directs money towards preventing similar tragedies in the future. That the bulk of the payments to be made under the plea agreement are directed toward restoring the Gulf Coast and preventing future disasters, contributes to the reasonableness of the plea agreement."

AG Sessions says that "[u]nder the last Administration, the Department repeatedly required settling parties to pay settlement funds to third party community organizations that were not directly involved in the litigation or harmed by the defendant’s conduct.  Pursuant to the Attorney General’s memorandum, this practice will immediately stop."

It remains to be seen what will get included and what will be omitted in future non-prosecution, deferred prosecution, and plea agreements.  The actual memo is here.

(esp) 

2016 ABA White Collar Crime Conference - DAG Sally Q. Yates

Deputy Attorney General Sally Yates was the luncheon speaker at the ABA White Collar Crime Conference. It was a Q and A format, and as one might suspect, the Yates Memo was a key topic - although she preferred not to call it the Yates Memo.

She started by saying that as long as a company acts in good faith, they can still get cooperation credit even if they can't designate a particular culprit.  She stated that they are not requesting a waiver of privilege. She said, "we want the facts." As a matter of fact, she said this several times in answer to questions asked.

She was unable to say whether companies were not disclosing because of this new policy. But she did say that a company would get more credit if they voluntarily disclosed than if there was an investigation and they then disclosed.  She noted that its a question of how quickly you cooperate.  She also spoke about the civil side of investigations - again with an eye toward looking at the individuals. She also spoke about the training conference to educate on this policy.

My takeaway - it's all about throwing the individual under the bus, even if you can't name the specific individual.

(esp)

Extortion, Government Style.

If you  want to know why companies settle with the government, even when they aren't guilty of anything, look no further than Ally Financial LLC's $98 million "no admit or deny" settlement with the Consumer Financial Protection Bureau (CFPB) over alleged racial bias in auto lending. As Wednesday's Wall Street Journal reports here, the CFPB chose questionable statistical methods, had questionable legal authority, and used the threat of unfavorable action by the Federal Reserve and the FDIC in a wholly separate matter, to coerce a settlement. Ally was eager to receive approval from the Fed and FDIC to convert to holding company status, in order to avoid having to shed some of its business units. The Fed was only too happy to oblige CFPB in its bullying tactics. As an internal CFPB memo makes clear, a Fed finding of improper discrimination would "most likely result in the denial of holding company status," but the Fed "also indicated that if Ally takes prompt and corrective action, it would consider such a factor in its determination."   The House Financial Services Committee Report, Unsafe at any Bureaucracy, carefully documents CFPB's sordid tactics . Incredibly, CFPB referred the matter to DOJ. This kind of stuff happens, and dictates business litigation strategy with the government, quite often. So, when people complain that the failure to prosecute corporate insiders is inevitably suspicious in light of large civil settlements, I always want to know the industry, the company and other important details.

(wisenberg)

 

Too Big To Jail: Do Guilty Pleas Matter?

Here is an unusually sophisticated article about a white collar topic in today's NYTimes. The piece, by Floyd Norris, probes what are essentially debarment waivers obtained by many financial and brokerage institutions as part of their global deals with DOJ and SEC. A guilty plea or deferred prosecution agreement with DOJ, accompanied by an SEC fine and censure, in the past may have been a company's death knell. Now it is just another cost of doing business. Naturally, guilty pleas still look bad and companies want to avoid them. But there's a rather large difference between a short-term public relations nightmare (or even a long-term and expensive monitoring agreement) and a firm's demise. So when government officials say that no companies are too big to jail or too big to fail, it is important to understand the context of the particular global agreement in question. Because a company can't be jailed, and if the company is big and important enough, it won't be allowed to fail.

(wisenberg)

 

Second Circuit Affirms Rajaratnam Case - But Goes A Step Further in Supporting the Government

It's a relatively short opinion issued by the Second Circuit, and 24 of the 29 pages pertain to a summary of the holding, facts, and the wiretap order used in this case.  For background on the issues raised, the briefs (including amici briefs), see here. Judge Cabranes wrote the majority opinion, joined by judges Hon. Sack and Hon. Carney. A summary of the holding states:

In affirming his judgment of conviction, we conclude that: (1) the District Court properly analyzed the alleged misstatements and omissions in the government’s wiretap application under the analytical framework prescribed by the Supreme Court in Franks; (2) the alleged misstatements and omissions in the wiretap application did not require suppression, both because, contrary to the District Court’s conclusion, the government did not omit information about the SEC investigation of Rajaratnam with "reckless disregard for the truth," and because, as the District Court correctly concluded, all of the alleged misstatements and omissions were not "material"; and (3) the jury instructions on the use of inside information satisfy the "knowing possession" standard that is the law of this Circuit.

Some highlights and commentary:

1. The Second Circuit goes further than the district court in supporting the government's actions with respect to the wiretap order.

2.  The Second Circuit agrees with the lower court that a Franks hearing is the standard to be used with a wiretap order where there is a claim of misstatements and omissions in the government's wiretap application. The Second Circuit notes that the Supreme Court has "narrowed the circumstances in which ...[courts] apply the exclusionary rule."  But the question here is whether the Supreme Court has really addressed the wiretap question in this context and whether a cert petition will be forthcoming with this issue.

3. Although the Second Circuit uses the same basic test in reviewing the wiretap, it finds that "the District Court erred in applying the 'reckless disregard' standard because the court failed to consider the actual states of mind of the wiretap applicants."  The Second Circuit then goes a step further and finds that omission of evidence does not mean that the wiretap applicant acted with "reckless disregard for the truth."

4.  The court states that "the inference is particularly inappropriate where the government comes forward with evidence indicating that the omission resulted from nothing more than negligence, or that the omission was the result of considered and reasonable judgment that the information was not necessary to the wiretap application."  - This dicta provides the government with strong language in future cases when they just happen to negligently leave something out of a wiretap application.

5.  Does the CSX Transportation decision by the Supreme Court call into question Second Circuit precedent?  The Second Circuit is holding firm with its prior decisions.  But will the Supreme Court decide to take this on, and if so, will it take a different position.

Stay tuned.

(esp)

Libor: The Regulatory Mind And the Prosecutorial Mind (2)

As I mentioned here last Wednesday:

"By ignoring material financial falsehoods, the regulators and examiners allow frauds to continue and decrease the likelihood of future accountability through the criminal process."

The New York Fed's Friday data dump reveals beyond question that some of its officials, including Timothy Geithner, were aware of intentionally misreported Libors by 2008 at the latest. Today's Wall Street Journal editorial lays out the damning transcripts.

What does this mean? For openers it means that DOJ's announcement of a criminal investigation is a joke. Regulators and government officials at the highest levels knew of the misrepresentation. By not immediately raising bloody hell and putting a stop to it they either sanctioned the conduct, rendering it non-criminal, or themselves became co-conspirators.

Do you really think DOJ is about to investigate Geithner or drag him into somebody else's criminal defense? Get real. These people can't even prosecute robo-signers.

(wisenberg)

Libor: The Regulatory Mind And the Prosecutorial Mind

The news that Barclays officials told the New York Fed in 2007 about potential problems with Libor highlights key differences between the regulatory mind and the prosecutorial mind. It also shows the difficulty in successfully prosecuting white collar fraud in the wake of regulatory incompetence.

When the typical federal prosecutor learns that a financial institution or corporation has lied, his instinct is to prove and charge a crime against the individuals responsible for the falsehood. Virtually any material lie in the context of publicly traded or federally insured entities constitutes a federal crime.

When a regulator learns that he has been lied to, the response is not necessarily the same. A famous example of this occurred during one of the SEC’s many examinations of Bernie Madoff’s shop. Madoff was caught flat out lying to SEC examiners. Did the scope of the examination expand? No. Were prosecutors immediately informed? No. Madoff was given a slap on the wrist. His massive Ponzi scheme continued for several years, claiming thousands of new victims.

While prosecuting S&L fraud twenty years ago, I was appalled to discover repeated instances in which the very fraud I was investigating had been contemporaneously revealed in some format to federal banking regulators and/or examiners who had often done nothing in response. This put putative defendants in the position of arguing that their frauds really weren’t frauds at all, because they had not deceived anyone. They argued that the regulators knew all about their conduct and failed to act, so: 1) it wasn’t deceptive conduct; and 2) they thought they had a green light going forward. Sometimes our targets and subjects were right. Sometimes they had only disclosed the tip of the iceberg.

By ignoring material financial falsehoods, the regulators and examiners allow frauds to continue and decrease the likelihood of future accountability through the criminal process.

But sophisticated fraudsters often reveal their conduct to regulators through a glass darkly. They are hoping that overworked regulators, with whom they are friendly, will miss, or misunderstand, the half-assed disclosures being made. The trick is to disclose just enough, but not too much. The typical regulator, unlike the typical prosecutor, does not distrust mankind or see a fraudster around every corner. The typical regulator has known the institution and executives he is currently monitoring for years. Often his ass has been kissed during that period in perfectly appropriate ways. He has been respected and deferred to. These intangibles, and his workload, may prevent him from noticing or following up on potential red flags.

We don’t have the full story yet on what the New York Fed knew about Barclay’s Libor problems, but the alacrity of the New York Fed’s acknowledgement that it knew something is striking. Timothy Geithner ran the New York Fed at the time, and we know that he has never met a wrist that couldn’t be slapped or a falsehood that couldn’t be excused.

The question remains—how can we bridge the regulatory/prosecutorial mental divide in order to punish real corporate fraud? Here is one answer—by training regulators and examiners to have zero tolerance for misleading or obstructionist behavior. The discovery of any lie or intentionally misleading conduct by a publicly traded or federally insured institution in any context should result in immediate fast-tracking to appropriate civil and/or criminal enforcement officials and/or federal prosecutorial authorities. This does not mean that prosecution should automatically or even usually ensue. It does mean that individuals who actually know something about fraud can take a critical and timely look at red flag behavior.

Once this process is in place, it may create a business climate in which elite corporate and financial institutions, and their officers, directors, and employees, will know that lying in any form will not be tolerated. The success of such a structure depends on the DOJ green-lighting prosecutors fearless enough to investigate and charge the flesh and blood financial elites who commit fraud. Almost every indication to date (outside of the insider trading context) is that current DOJ leadership is not up to the task.

(wisenberg)

Will the SEC's Requiring Settling Parties to Admit Wrongdoing Increase the Number of Trials?

In criticizing Judge Jed Rakoff's refusal to rubber-stamp its proposed settlement agreement with Citibank, the SEC has claimed that if it has to require companies to admit wrongdoing as a condition of settlement, there will be far fewer settlements and more trials.  As a result, says the SEC, its resources would be so strained so that it would bring considerably fewer enforcement actions.  The New York Times on Friday, February 3, cited unnamed "legal experts" as endorsing that view, saying that companies will be less likely to admit facts which could be used against them in shareholder lawsuits.  See here.

There is a certain logic to that argument.  Companies that have committed misconduct now do choose to pay the SEC rather than admit or reveal their wrongdoing to the public (and to class action lawyers).  Companies that believe they have not committed misconduct sometimes decide it is less costly to pay the SEC than fight it.  Few SEC cases go to trial.  This settlement model works well for the SEC, which gets a check with less sweat, and for most defendants, which conceal their misconduct and/or save money.

But is that in the public good?  More trials should lead to more public knowledge, promote more curative government action, and add an additional deterrent to corporate misconduct.  Additionally, it should force the SEC to be more scrupulous in bringing marginal or questionable cases since they would more often be required to justify the charges in court.

I also question whether these "experts" are right in their expectation that there would be far more trials.  I am not so sure that many corporate executives want public airings of the factual details of the company's wrongdoing.  "Experts" predicted that the enactment of the Sentencing Guidelines would overwhelm the federal courts with trials since many more criminal defendants would exercise their right to trial because of the perceived (and actual) harshness and rigidity of the Guidelines upon a conviction.  That simply has not happened.  The percentage of cases settled by plea has remained relatively constant, if not increased, since the enactment of the Guidelines.

(goldman)

Not Guilty of OSHA Violations

It is not often that companies are criminally charged, and usually when it happens, regardless of the merits, we see the company enter a guilty verdict or enter into a deferred prosecution agreement (see here).  But not Xcel Energy, Inc. and Public Service Company of Colorado.  They were charged, they exercised their right to a jury trial, and were found not guilty after close to a month-long trial. 

The Justice Department brought criminal charges against this Fortune 250 public company alleging safety violations - OSHA violations - in the deaths of five contractors at a hydro-electric power plant in Colorado.  

Clearly this is an incredibly sad situation, with many families suffering and one cannot help but have the deepest sympathy for each person who has suffered here. 

But one also has to wonder whether our criminal justice system should be used for prosecutions alleging OSHA violations from industrial accidents.  Would these matters be better left for the administrative and civil process? And would our scarce resources be better spent educating companies on how best to keep workers' safe?

The company was represented by Cliff Stricklin, Chair of Holme Roberts & Owen's White Collar & Securities Litigation Group in Denver, Colorado. Stricklin also is an adjunct professor teaching white collar crime at University of Colorado School of Law.

See also John Ingold, Denver Post, Xcel Energy Found Not Guilty in 2007 Deaths of Five Workers in Colorado

(esp)

Khuzami's Complaint

The United Jewish Appeal-Federation of New York has a Criminal Law Group. Wow. I never knew. SEC Enforcement Director Robert Khuzami recently spoke to its members about questionable tactics routinely engaged in by white collar lawyers (and their clients) during SEC Enforcement Division proceedings. Khuzami's Speech is troubling as it reveals clearly unethical and potentially illegal behavior, including: improper signalling to witnesses regarding substantive testimonial responses, representation of multiple witnesses with clearly adverse interests, representation of multiple witnesses who adopt virtually identical and implausible explanations of events, witnesses who "don't recall"  dozens of basic and uncontroverted facts documented in their own writings, scorched earth document production, suspect recantation of damaging testimony after deposition breaks, and window-dressing internal investigations that scapegoat mid-level employees. Khuzami laments these tactics and notes that they often backfire by increasing Enforcement Division skepticism of the entity or person under investigation and by damaging the future credibility of counsel who encourage such behavior. But employment of at least some of these brazen tactics should do more. The people and entities who engage in them should go straight to secondary, as they say at the border. If this had been done in Bernard Madoff's case, after he was caught red-handed lying during a regulatory examination, his fraud would have been uncovered years ago. The message from the SEC should be clear. You don't get to lie or obstruct justice during Enforcement Division investigations or SEC exams. Hat tip to Jonathan Hardt of Wilmer Hale for bringing this speech to my attention.

(wisenberg)

Government Re-Indicts Former GlaxoSmithKline Corporate Counsel

It is interesting to see that the government has issued a press release announcing that it has re-indicted the former pharmaceutical (GlaxoSmithKline) company lawyer with charges of obstruction and making false statements. It is common for the  government to use"short-cut" offenses in white collar cases. (see here).

But shouldn't they have also issued a press release weeks ago when the government's indictment was tossed by a judge (see here).  Why is it that the press releases only tell half the story?  Shouldn't a minister of justice tell both the dismissals and the re-indictments?

More importantly, is this a case that the government should be spending our precious resources for government prosecution. Even if there is a discovery violation here, and I am not convinced that there has been one - does this matter belong in criminal court?    Or, if this conduct did occur, would this better be suited for an administrative or disciplinary matter?   

See also Sue Reisinger, Corporate Counsel, Feds Re-Indict Former Glaxo In-House Lawyer

(esp)

People of the State of New York v. Ernst & Young LLP

Here is the civil complaint filed in New York v. Ernst & Young LLP. The pleading is a well drafted speaking complaint detailing Ernst & Young LLP's auditing actions, and alleged failures to act, in connection with Lehman's Repo 105 transactions. New York is seeking the return of $150 million in auditing fees earned by Ernst & Young on the Lehman account. Assuming that the allegations are true, the complaint is a powerful argument in favor of Dodd-Frank's enhanced whistleblower provisions. Most of the alleged activities occurred after Sarbanes-Oxley was enacted into law. 

(wisenberg)

Albuferon Insider Trading Criminal Complaint

Here is the Yves Benhamou Criminal Complaint, out of SDNY, alleging insider trading violations (under Rule 10b-5 and 15 U.S.C. Section 78ff) by a French doctor. Doctor Benhamou purportedly tipped off a hedge fund employee about negative results from the Albuferon clinical trial. The WSJ story, by Jenny Strasburg and Jean Eaglesham, is here. The SEC's civil complaint, via the WSJ, is here

(wisenberg)

Dodd-Frank Rules Could Create Multiple Corporate Headaches

Guest Blogger - Philip Hilder

Critics are complaining that a likely downside to the Dodd-Frank Wall Street Reform and Consumer Protection Act will be a tsunami of complaints from gold digging bounty hunters in the workplace, including many false allegations.

Certainly the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission will have a lot more work. Dodd-Frank also means they will have a lot more help in finding fraud and insider trading.

A bigger problem may be that empowered whistleblowers will be encouraged to ignore their corporate ladder, ignore their internal rules and rush to the government with any perceived problem they hope will be the “original information” that can be the foundation of an enforcement action. This race for cash rewards could conflict with internal company compliance and ethics programs, which encourage employees to internally report wrongdoing.

It also could be good for lawyers who get paid to help clean up the mess, but bad for companies that may lose the opportunity to self-correct before a government investigation is launched.

It is foreseeable that such an investigation could trigger shareholder or derivative lawsuits against the company as well.

My client Sherron Watkins, a former Enron vice president, reported accounting problems at that now-dead company by following the internal rules. Under Dodd-Frank, the next person in Watkins’ position will more likely become a true whistleblower, bypassing internal protocol and heading outside the company to grab for the golden ring.

Just as Congress created Sarbanes-Oxley protections in response to Enron, in part because of Watkins' testimony, Congress also created Dodd-Frank in reaction to the Bernie Madoff scandal. Congress created more lucrative bounties and effectively deputized millions of Americans to skip company protocol by telling the government about insider trading, securities fraud, bribery of overseas businesses and governments, and a host of financial crimes that employees may see on the job.

The stakes are higher than when Watkins warned her bosses in 2001. She was rewarded with inquiries about how to fire her. Dodd-Frank would help in that scenario, too. It not only beefs up the payment to those who reveal real crimes, but it also strengthens the protections against retaliation, and doubles the amount someone can recover in a successful retaliation lawsuit.

Before this Act, total awards to whistleblowers were discretionary and only rewarded for certain insider trading tips. Now, successful enforcement exceeding $1 million could bring a whistleblower between a mandatory 10 percent up to 30 percent of what is government recovered.

Now corporations need not worry only about current and former employees but also about folks at subsidiaries and affiliates of publicly traded companies. Even contractors, consultants and sales agents can blow whistles for cash. Those who can’t reap the rewards include someone convicted of a crime related to the information provided to the government, certain auditors and employees of the SEC, CFTC and U.S. Department of Justice.

Prior to Dodd-Frank being passed, the Department of Labor was barely pursuing whistleblower retaliation complaints. It denied awards in about 98 percent of cases and tossed out more than 1,000 claims. Whistleblowers can now skip over the DOL and proceed directly to federal court where they can double their back pay with interest if they prevail in a lawsuit.

Now we’ll see emboldened employees along with companies who need to be more careful with compliance and self-policing. Congress’ empowerment of employees may create a litigation rich environment where a lot more dirty laundry is aired. 

Philip H. Hilder is a former federal prosecutor and founder of Houston-based Hilder & Associates, P.C., who focuses on white-collar criminal defense and whistle blower lawsuits. [email protected]

(php)

Hearing on “Reining in Overcriminalization: Assessing the Problems, Proposing Solutions”

NACDL (Tiffany Joslyn) and the Heritage Foundation (Brian Walsh) wrote a groundbreaking report titled, Without Intent: How Congress Is Eroding the Criminal Intent Requirement in Federal Law, that was the subject of a congressional hearing this past week.  I had the pleasure to provide testimony at that hearing (my testimony). Others testifying included, NACDL President Jim Lavine (testimony), Brian Walsh of the Heritage Foundation (testimony), former head of the Enron Task Force Andrew Weissmann (testimony) and law professor Stephen Smith (Notre Dame)(testimony).  Abner Schoenwetter (testimony) and former race car driver Bobby Unser (testimony) told of their experiences as victims of overcriminalization. The hearing before the House Judiciary Committee, Subcommittee of Crime, Terrorism and Homeland Security was the wonderful work of Subcommittee  Chairman Bobby Scott and Ranking Member Louie Gohmert.  It was also wonderful to see House Judiciary Committee Chairman John Conyers, Jr. participating in this hearing.

NACDL Press Release here

(esp)

NACDL's 6th Annual Defending the White Collar Case Seminar – “An SEC Makeover: Restructured, Refocused, and … Back in the Game?,” Friday, October 1, 2010

Guest Blogger: Chris Hall, Saul Ewing LLP (Philadelphia, PA)

Moderator: Gerald B. Lefcourt

Panelists: Susan Brune, Pamela Rogers Chepiga, Robert Khuzami, Eliot Spitzer and Richard M. Strassberg

What a panel.  Susan Brune kicked off the discussion with thoughts on whether the SEC’s new cooperation policy will work.  In her view, Bob Khuzami, as the SEC enforcement chief, will have to figure out how to make the SEC a bit more like a federal prosecutor’s office.  One of his new big weapons, however, gives her pause.  The SEC’s new cooperation scheme differs from the federal prosecution process, and some of the differences will impact the SEC’s effectiveness.  AUSAs, in her experience, have much more autonomy than SEC staff attorneys.  While they have to get supervisory approval to grant immunity or decline prosecution, the front office rarely reverses a line Assistant’s recommendation.  With the SEC, in contrast, you never know until the staff attorney completes a long, formal, and inscrutable process that ends with the Commission itself weighing in, and often with political factors at play.  And even then you don’t know.  The SEC’s practice of including lengthy recitations of alleged conduct in its Consent Orders—facts to which the defendant does not agree—risks inflaming the judge, inciting Article III activism, and prompting Courts to reject carefully crafted agreements.  This contrasts markedly with a sentencing hearing with a 5K motion by a USAO, where the federal prosecutor stands with your client shoulder to shoulder.

Rich Strassberg took the baton at that point and addressed the pitfalls of representing a client who has exposure to both the SEC and DOJ.  Most clients who work in the securities industry cannot, as a practical matter, assert their 5^th Amendment right and also keep their jobs.  Clients may feel compelled to give testimony and effectively provide both the SEC and DOJ a roadmap for their investigations.  Rich also touched on the public’s clamor for enforcement action in the wake of the Commission’s failure to anticipate the perils from credit default swaps and derivatives.  The SEC’s perceived need to respond to the public’s furor with immediate action presents huge risks to clients.  Wall Street has moved way beyond the stock market.  The SEC needs to take the time to understand new markets, in Rich’s view, and to reflect on how complex industry norms inform the issue of criminal intent.  A rush to respond to perceived enforcement lapses will deprive market participants of the benefit of a fair investigation that reveals the true context in which market participants worked.  In short, the SEC has to work hard not to act too slowly, or too quickly, but to strike the balance just right.

Pam Rogers Chepiga then took the audience on a tour of the Dodd-Frank Act’s whistleblower provisions, the SEC’s prior rewards program--$159,000 paid out over 20 years—and the rulemaking process for the new rewards process on which the Commission will now embark.  She then posed the following big questions for the audience: do securities fraud allegations lend themselves to whistleblower programs due to the heightened intent requirement that applies?  Will the time and energy it takes to filter through leads drain agency resources from more important enforcement programs?  Will the financial incentives undermine well thought out corporate compliance programs?  And finally, how will defense attorneys counsel clients who have a choice between laying low and seeking a financial windfall?

Bob Khuzami attempted to address the concerns raised by the other panelists.  Judicial scrutiny is what it is.  The SEC, in his view, should be prepared to defend its charging decisions.  While he doesn’t relish headlines, and is concerned a bit sometimes that judges don’t fully understand how a case evolved, he calmly accepts the scrutiny as part of the job.

Cooperation and whistleblowers offer fundamental intelligence that brings forward higher quality information sooner.  The entire Commission supports these new initiatives and will not bog down approvals.  They have already agreed on the basic parameters:  wrongdoers won’t continue to work in industry; they also won’t keep the financial benefits they have wrought.  As to interactions with DOJ, he expects better communication at an earlier stage between the two agencies.

Fear not, moreover.  There will be no shortage of process; no rush to judgment under his watch.  Bob also credited the talented and sector-focused divisions within the SEC; they all will weigh in with their expertise on cooperation agreements and whistleblower rewards. 

The whistleblower program will not drain resources; it will serve as corollary to the SEC’s established office of market intelligence.  The program will also not undercut the need to encourage employees to “report up” via their in-house compliance programs.  The SEC will fashion financial incentives in a way that supports this valuable corporate compliance function, though Bob did not explain why (we will have to wait for the rules).

Eliot Spitzer then grabbed the microphone. Wall Street is rife with conflicts of interest, he noted.  The SEC cannot and should not wait for information to come in.  The Commission instead should anticipate.  The recent financial collapse, in his view, reflects an intellectual failure by regulators.  The solution?  Smart people at the SEC should think about problems before the public suffers.  Eliot cited mutual fund fees as a perfect example.  We know that these fees—suggested to amount to billions of dollars each year--hurt the middle class.  We have democratized investing through these funds; now the regulators have to make them transparent and fair.

No shortage of practical insight and forward looking thoughts from this group!

(ch)

Dodd-Frank FCPA Whistleblowers: The Coming Wave

Take the FCPA, add in expansive new whistleblower protections, start employing the willful blindness doctrine with abandon, and presto! You've got a real growth industry on your hands.

The new whistleblower provisions in the Dodd-Frank Act should significantly increase federal civil and criminal fraud enforcement actions in the coming years. Whistleblowers will now be able to reap potentially huge monetary rewards for the timely reporting of corporate fraud to the SEC and CFTC, if recoveries of over a million dollars are made by those entities, the DOJ, or other regulators. Under Dodd-Frank, the pool of qualified whistleblowers has been enlarged and there is no requirement that whistleblowers file qui tam actions in order to be compensated for their information.

Expect to see exponential growth in the already burgeoning area of FCPA enforcement, fueled by new whistleblower activity. Recall that the FCPA is a creature of the securities fraud statutes, and is therefore within the SEC's purview. 

All of this and more is detailed in my friend Michael E. Clark's excellent new article in the September issue of ABA Health eSource, Publicly Traded Health Care Entities at Risk from New SEC Whistleblower Incentives and Protections in Dodd-Frank Act. Clark is with Duane Morris's Houston office. As with all ABA publications, Mike's article may not be copied or disseminated, in whole or in part, in any form or by any means, or downloaded or stored in an electronic database or retrieval system, without the express written consent of the American Bar Association.

(slw)

Tourre's Answer

Fabrice Tourre's Answer has been filed in SEC v. Goldman, Sachs & Co. and Fabrice Tourre. Among other things, Tourre contends that neither he nor Goldman "had a duty to disclose any allegedly omitted information" and that the ABACUS 2007-AC1 offering materials "expressly disclosed that no one was purchasing notes in the equity tranche of the transaction."

(slw)

Chicken Feed: Goldman's Nuisance Payment

I was thinking last night about the criminal law implications of the Goldman-SEC settlement. The settlement only confirms what has been fairly apparent from the get-go--this was never a strong fraud case. The SEC extorted a nuisance payment from Goldman and simultaneously sent a signal to the markets that it is serious about its new proactive role.

If the SEC thought that it had a winner, it never would have settled on these terms. Goldman essentially pays 14 days in first quarter profits, admits to a mistake, and agrees to strengthen some aspects of its corporate governance. Goldman avoids lengthy, costly, profit-threatening, and Pandora's Box-opening litigation. And no big shots are forced to resign. When you have to caution your employees not to whoop, holler and smirk in the wake of such a settlement, you know you have made a good deal.

Oh yeah. Goldman agrees to cooperate in the SEC's probe of Fabrice Tourre. All this means is that Goldman's people will come in and talk to SEC attorneys. Tourre has already done plenty of talking himself to Congress, in public and under oath. This was foolish, in my view, for somebody in his position. But it is unlikely that any prosecutor will go after Tourre alone. Goldman was a market-maker here, the parties were sophisticated, and Tourre was hardly off the reservation. Some player's misunderstanding of John Paulson's position, even if caused by a Goldman mistake, is not the same thing as an intentional effort to deceive and defraud.

A key early sign that this was not going to be some slam-dunk fraud action was the SEC's press conference statement, on the day it filed suit, effectively clearing Paulson & Co. of wrongdoing. The SEC, unlike private litigants, can sue, under Rule 10b-5, based on aider and abettor liability. According to the public record, Paulson & Co. took part in several key discussions between Goldman and ACA Capital Management during the time period that the Abacus 2007-ACI CDO deal was being structured. If the SEC seriously believed that big-time fraud was afoot in the Abacus 2007-ACI CDO transaction, it is hard to believe that Paulson & Co. would have been treated in this fashion. If I were a government attorney and thought I had the fraud of the century on my hands, I would want to rope in every potential aider and abettor, and would think very carefully before giving a significant player in an allegedly fraudulent transaction a publicly announced clean bill of health. This is not to say that Paulson & Co. engaged in any wrongdoing. It is instead to suggest exactly the opposite. 

So, I do not expect any criminal cases to come out of Abacus 2007-ACI. Of course I have been wrong before. In 1972 I thought McGovern would kick Nixon's ass. But here I will go out on the limb. 

(slw)

Ouch, That Hurts! Judge Koeltl Pulverizes SEC in Rorech Case

GUEST BLOGGER-SOLOMON L. WISENBERG

Attached is SDNY U.S. District Judge John G. Koeltl's Opinion and Order in SEC v. Jon-Paul Rorech and Renato Negrin, issued last Thursday. With the exception of Koeltl's ruling that the VNU credit default swaps at issue are covered under Section 10(b) of the Exchange Act and Rule 10b-5, the holding was a total defeat for the SEC. For those not wanting to read the entire 122-page opinion, here is the SEC v. Rorech-Introduction and Conclusions of Law portion.

The case centered around Negrin's purchase of VNU credit default swaps from Deutsche Bank's high-yield bond salesman Rorech. Negrin was a portfolio manager for Millennium Partners hedge fund. The case was brought under the misappropriation theory of insider trading. The SEC alleged that Rorech misappropriated confidential information from his employer Deutsche Bank and provided it, during two cell phone calls, to Negrin. The allegedly confidential information was that VNU, a Dutch media holding company, was going to restructure a bond offering and that another Deutsche Bank customer had placed a $100 million indication of interest in such an offering. The restructured bond offering would provide "deliverable instruments" for VNU credit default swaps that were being traded at the time.

Judge Koeltl concluded that:

1. The inside information about the restructured bond offering did not yet exist when Rorech allegedly passed it to Negrin.

2. The information that Rorech did possess at the time of the calls was not material. Rorech's knowledge about a potential restructuring of the bond offering was speculative in nature and already widely shared in the marketplace. Rorech's knowledge regarding another customer's indication of interest was not materially different from information already in the market regarding substantial investor demand for deliverable VNU bonds, through a restructured bond offering. 

3. Rorech did not breach any duty of confidentially owed to Deutsche Bank because Deutsche Bank did not consider Rorech's ideas or opinions or, any general information, about a possible VNU bond offer restructuring to be confidential. Rorech was expected by Deutsche Bank to share such information with prospective customers and this was standard practice in the high-yield bond market. The same went for sharing information regarding other customers' indications of interest.

4. Courts cannot infer that inside information was passed from phone calls followed by trading, without something more. Additionally, Negrin's trades were consistent with his past investment practices.

5. There was no evidence of scienter. Rorech and Negrin had no prior personal relationship, there was no quantifiable or direct personal benefit to Rorech from any tip, and there was no deception by Rorech of Deutsche Bank. (This lack of deception is also relevant to the "disclose or refrain from trade" principle of insider trading. Judge Koeltl found that Rorech had in fact disclosed his interactions with Negrin to Deutsche Bank supervisors.) Moreover, Negrin did nothing to hide his dealings with Deutsche Bank.

There is considerably more in the Opinion and Order. The decision is worth reading alone for Judge Koeltl's succinct recapitulation of governing Rule 10b-5 case law, and for his analysis of why the credit default swaps at issue here fall under the purview of Rule 10b-5. Rule 10b-5 often forms the basis of criminal securities fraud charges brought under the Exchange Act (through 15 U.S.C. Section 78ff), and the civil case law, although not identical to the criminal case law, can be highly relevant.

The facts were obviously important here. The SEC didn't have any.

(slw)