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NYU Law Professor Jennifer Arlen and Off the Record Corporate Crime

What happens if there’s a conference on corporate crime and nobody hears about it?

Did it happen?

It did.

It happened on April 4 and 5, 2014 at New York University School of Law.

The conference — Deterring Corporate Crime: Effective Principles for Corporate Enforcement – was the brainchild of Jennifer Arlen, co-chair of the NYU Law Program on Corporate Compliance and Enforcement. The conference was co-sponsored by the American Law Institute.

Food for the event was provided by Jules Kroll and his firm K2 Intelligence.

Reporters were not invited or allowed in.

As a result, there was no reporting on the conference.

And not that reporters wouldn’t have loved to have been there.

You had some of biggest names in the field.

You had your prosecutors — including Preet Bharara, Benjamin Lawsky, Andrew Ceresney, Denis McInerney, Jeffrey Knox.

You had your defense attorneys — including Lanny Breuer (Covington & Burling), John Buretta (Cravath), George Canellos (Milbank Tweed) Robert Khuzami (Kirkland & Ellis), Scott Muller (Davis Polk), Mythili Raman (Covington & Burling), Bruce Yannett (Debevoise) and John Savarese (Wachtell).

You had your in house counsel — including Bradford Berenson (General Electric), Mark Califano (American Express), Sheila Cheston (Northrop Grumman), Stephen Cutler (JP Morgan Chase), Eric Grossman (Morgan Stanley).

Your had your judges — including Jed Rakoff, Valeria Caproni, John Gleeson, Raymond Lohier, Gerard Lynch.

And you had your academics — including Jennifer Arlen, Brandon Garrett, Miriam Baer, Samuel Buell, Stephen Choi, Kevin Davis, David Engstrom, Brandon Garrett, Michael Klausner, Reinier Kraakman, Julie O’Sullivan, Daniel Richman, Andrew Weissmann, Sara Beale and David Uhlmann.

It was perhaps the first ever off the record corporate crime conference.

But no press allowed.

“I value the press,” Arlen told Corporate Crime Reporter in an interview last week. “I’m from a family of writers and journalists. I’m married to a journalist. But I did conclude that in order to begin the reform effort it was important to start an off the record conversation about reforming the system. We hope to make that conference part of a longer conversation — on and off the record.”

“We didn’t record it and no reporters were allowed to attend,” Arlen said. “We did take notes and will do a report — with names and specific panels removed — as soon as we have a chance.”

“We also are hoping to do a follow up round table later in the fall or winter to discuss many of the key issues raised.”

Actually, it wasn’t technically off the record. It was governed by Chatham House rules — which means that anyone who comes to the meeting is free to use information from the discussion, but is not allowed to reveal who made any comment.

What kinds of things do you hear at an off the record corporate crime conference that you wouldn’t hear at a conference that was on the record?

“I was struck by a regular focus on the failure of the regulatory side,” Arlen said. “Some of that comes from how Congress structured the regulatory agencies. Most of our regulatory agencies were structured as partisan commissions. The SEC has five commissioners from different parties. That almost inevitably leads to the agency being less nimble than it could be and more partisan and less effective than it could be.”

“And while the enforcement side may try, it’s always going to run into the the fact that the SEC is fairly politicized.”

Were there instances of enforcement staff going to the Commission and the Commission saying — no, you can’t bring this enforcement action?

“We did not hear of that at the conference,” Arlen said. “The focus was not always on the SEC, but it was also on financial institution regulators. And there was a sense that when Congress ratcheted up the regulations on financial institutions, Congress didn’t provide good guidance on the standards on reasonable enforcement policy. This has been a problem for both the Department of Justice and the financial institutions.”

“In conversations with enforcement authorities, it is very clear that there has been a funding issue. There were hiring freezes. There were freezes in hiring extra FBI agents to do investigations. And that affected many different parts of the Department of Justice. And it does have an effect.”

“Let’s say you have a deferred prosecution agreement against the firm, and you are completely reforming their compliance program and you are putting in a monitor, and you have done all that — now you have to think about going after the individuals, who will fight you tooth and nail.”

“The prosecutor has to ask — what’s the marginal gain of going after the individuals of that firm compared to going after another firm that may not even be in their sights yet? How do I weigh the marginal costs and the marginal gain? With restricted resources there will be a tendency with good reasons and bad to move on to the next case.”

“You get more public attention when you go after yet another firm. That’s less than ideal. On the other hand, it will be extremely time consuming and resource intensive to go after the individuals. Individuals will fight harder. They may very well win. You will have a difficult time showing mens rea in these cases.”

“That’s on the government’s side. On the other side, you heard people say that many institutions have not been as assertive as they should have been in looking at the question — what does it really mean to deter crime within the organization? It goes beyond a paper tiger approach to compliance and looks at the compensation and promotion policies. Some institutions have done this, but many have compliance programs on the one hand while on the other hand have compensation policies and promotion policies that reward people who generate profits and sales without looking behind the scenes.”

The Justice Department has been criticized for not prosecuting any of the big banks or their executives in connection with the financial meltdown in 2007. Was there any discussion of that?

“There was quite a lot of discussion of the more general issue of individual liability and the public perception that there has not been as much individual liability as corporate liability and why that might be,” Arlen said. “I did not target the discussion on the financial crisis, because I wanted to target it on issues that would be more general going forward.”

Why wasn’t there a criminal prosecution of a major bank or executives at the major banks in connection with the financial crisis?

“These cases at the individual level would be very hard to prove,” Arlen said. “You would have to prove willfulness. And in many of the cases that you could bring you would have to prove fraud. And that would be very hard to prove, particularly against a major executive. There is a real concern about bringing a case and losing. If federal enforcement authorities are doing this right they should bring quite a number of cases and they should lose a good number of them.”

“With proof beyond a reasonable doubt, you will lose some. When the SEC or the Department brings a case and loses, the press will criticize the SEC as if the case should not have been brought. That has made many enforcement agencies a bit risk averse to what cases they bring.”

“Leave aside entities like Countrywide, where you get the sense that there was a certain amount of genuine bad behavior. If you go way up the chain the chain to the executives of the major financial institutions, we are looking at trading complex derivatives. And for a lot of this activity, you have the involvement of regulators, directly or indirectly. And the regulators probably should have been more proactive. And the regulators bear some of the blame for what happened.That makes it a bit more politically tricky to turn around and bring prosecutions for activity that should have been deterred through ex ante regulation. Finally, in many of these cases, you have sophisticated parties on all sides.”

What about Countrywide. Why wasn’t there a criminal prosecution in that case?

“I don’t know,” Arlen said.

Many people conclude that there was no will to prosecute. That there is the revolving door between prosecutors and defense law firms and this has fatally compromised the system. You had Jeffrey Knox at your conference, who has just last week went through the revolving door to one of the largest defense law firms. That happens all the time. Isn’t the system compromised?

“We have a system that is compromised in many ways,” Arlen said. “Perhaps, it’s just my contrarian nature, but I’m less inclined to embrace the revolving door story of compromise, at least when it applies to federal prosecutors.”
“It’s because many prosecutors can do very well in their legal careers by being known as very effective prosecutors. Preet Bharara is considered a genuinely effective prosecutor. His reputation as an effective prosecutor would not hurt him if he were to turn around and seek a position as general counsel to a major bank.”

What was the nature of the conversation on deferred and non prosecution agreements?

“There were repeated conversations about these agreements,” Arlen said. “It’s clear that one of the problems with these agreements is that the Department of Justice has not announced a clear goal as to what is the purpose of corporate criminal liability. One hears Department officials in public talking as if the corporation is the criminal and should be punished. If that’s your view, it’s hard to defend these agreements. If that is your view, these firms should be convicted.”

“On the other hand, you hear the Department of Justice taking the view, which is the view I take, that a public company’s shareholders didn’t commit a crime. People within the firm committed a crime. And we need to use deferred and non prosecution agreements as a reward to firms that genuinely self report and help the Department of Justice identify and go after the individuals who did the crime. That’s a very different view. If that’s your view, these agreements could be a good thing.”

“And then the problem with them is is something else that was identified by many at the conference — outside of areas such as the FCPA, where there is some centralized oversight, there is not clear guidance from prosecutors on when to use these agreements or what should go into them. And it’s far from clear that prosecutors have the expertise to design compliance programs or know how to oversee them. They have been moving away from monitors, toward simply reporting to prosecutors. And yet it is not clear that the prosecutors have the time or expertise to continue to keep up with the reporting and to do the kind of checking that a monitor would do.”

The fear of driving a major corporation out of business with a criminal prosecution is overblown, right?

“Obviously you can convict a corporation without it imploding,” Arlen said. “We’ve seen a couple of recent cases. But we live in a world in which regulatory authorities have adopted these mandatory and permissive exclusion provisions. If the criminal authority believes the corporation should be indicted but not killed, it becomes difficult for the criminal authority to moderate the sanction. It’s difficult to negotiate the guilty plea and get the regulators to agree not to exclude.”

It was just done with two major banks.

“It was just done,” Arlen said. “And that shows it can be done. But it’s very difficult to do. It’s expensive to do. And one of the issues that came up at the conference was how difficult it was to do, particularly when you have multiple regulators. It depends on the type of firm and type of regulator. You have political pressures on the regulator. There was a lot of discussion on the political pressures on the regulators, the difficulties regulators have in agreeing when so many of them are partisan.”

“The amount of resources that went into the Credit Suisse and BNP Paribas guilty pleas — it was remarkable. This is very difficult to do in case after case after case. It would also have to be the right thing to do.”

“One of the issues that came up at the conference was that firms that come in and self-report, they detect something that they didn’t encourage. They come in and self-report it. And they have to sweat over whether they are going to get hit with a deferred or a non prosecution agreement. And sometimes they get a declination. And sometimes they get hit with something when they had an effective compliance program. The program worked. They caught the problem. They went after the person.”

(For the complete q/a transcript of the Interview with Jennifer Arlen, see page 28 Corporate Crime Reporter 35(12), September 15, 2014, print edition only.)

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