Holder On Too Big to Jail: For Some Big Companies, The Buck Stops Nowhere

Why no criminal prosecutions of big Wall Street banks in connection with the 2007 financial crisis?

Why no criminal prosecution of executives at those banks?

Attorney General Eric Holder sought to address those questions today at NYU Law School.

“When it comes to more complex transactions that involve more sophisticated traders – as opposed to run-of-the-mill “liar loan” cases or out-and-out Ponzi schemes – a criminal prosecution of an individual can be difficult, more complicated, to mount,” Holder said.

“This is true for any number of reasons – from possible advice-of-counsel defenses, to the adequacy or inadequacy of written disclosures, to the difficulty to establish materiality and intent.”

“And in some instances, it is simply not possible to establish knowledge of a particular scheme on the part of a high-ranking executive who is far removed from a firm’s day-to-day operations.”

“This has been a source of frustration for the public for a long time,” Holder acknowledged.  “I understand and share that frustration. But despite the commitment and tireless work of our prosecutors, we cannot bring cases unless, based upon the facts and the law, we believe that we are likely to succeed in court. That is consistent with the department’s long-standing principles of federal prosecution.”

“We must look deeper at these questions and several thoughts come to mind.”

“First, in an age when corporations are structured to blur lines of authority and prevent responsibility for individual business decisions from residing with a single person, we ought to consider whether the law provides an adequate means to hold the decision-makers at these firms properly accountable.”

“The Dodd-Frank Act took important steps to restore transparency and accountability in the banking industry; to curtail abusive practices targeting consumers; and to limit systemic risks posed by individual companies.”

“But it remains true that, at some institutions that engaged in inappropriate conduct before, and may yet again, the buck still stops nowhere. Responsibility remains so diffuse, and top executives so insulated, that any misconduct could again be considered more a symptom of the institution’s culture than a result of the willful actions of any single individual.  This is a problem that the British government sought to address with a financial reform law it passed last year. For the first time, this measure required financial companies to designate an officer who would be accountable for misconduct at the firm.”

“This is the same principle behind the Sarbanes-Oxley requirement that a designated company executive must sign its accounting forms and bear liability for misrepresentations.  Similarly, the Food, Drug and Cosmetic Act provides for the Congressionally-sanctioned ‘responsible corporate officer doctrine,’ which – in the event that illegal activity is uncovered – allows for a criminal charge against the people in charge who were in a position to do something about it.”

“All of these approaches get at the same core concept: that the buck needs to stop somewhere where corporate misconduct is concerned.”

“We ought to consider this further and modify our laws where appropriate.  It would be going too far to suggest reversing the presumption of innocence for any executive, even one atop the most poorly-run institution.  But we need not tolerate a system that permits top executives to enjoy all of the rewards of excessively-risky activity while bearing none of the responsibility.”

“Second – since no financial fraud case is prosecutable unless we have sufficient evidence of intent – we should seek to better equip investigators to obtain this often-elusive evidence.”

“This means, among other things, thinking creatively about ways to incentivize witness cooperation and encourage whistleblowers at financial firms to come forward.”

“As I indicated a moment ago, where the Justice Department’s prosecutions against individuals have been successful, we’ve been able to uncover sufficient evidence to prove intent to deceive on the part of a responsible person.  But this evidence is often extremely difficult to come by.  Many financial criminals are savvy enough to avoid using email, which may leave a trail for investigators to follow.”

“And intent may only be evidenced sometimes in the form of verbal instructions – evidence that can provide the sort of “smoking gun” that is needed to secure a conviction, but that can only be attained from a cooperating witness.”

“For example, in a 2011 insider trading case brought by U.S. Attorney Bharara and his colleagues, two defendants saw media reports suggesting that federal authorities were closing in.  In response, they destroyed evidence – deleting files, shredding documents, and even ripping apart a flash drive and scattering pieces into garbage trucks across New York City.  It was only because the government had a cooperating witness inside the company – a witness who had agreed to wear a wire – that the department was able to record a verbal account of these actions, to illuminate other obstruction, and to uncover illegal conduct that otherwise might never have come to light.”

“Similarly, in our full-court press to investigate and prosecute the ongoing LIBOR matter – which is being led by the Criminal and Antitrust Divisions, and involved a wide-ranging scheme to rig one of the world’s benchmark interest rates – witnesses from inside some of the world’s leading financial firms have played important roles.”

“They have strengthened our ability to follow leads; to obtain guilty pleas from subsidiaries of major banks like UBS and RBS; and to pursue individual charges against nine former traders and managers at these institutions.  Our ongoing investigation into the manipulation of foreign exchange rates has relied on similar investigative techniques involving undercover cooperators, as well.”

“Under an important law known as the False Claims Act, or FCA, the Justice Department has recovered more than $22 billion – since 2009 – from people who have defrauded the government.”

“Many of these recoveries resulted from a strong whistleblower amendment – authored more than 25 years ago by Senator Charles Grassley – which allows citizens who provide evidence of fraud to receive, in some cases, up to about a third of the funds recovered by the government.  Thanks to this robust provision, the FCA has also sometimes led to criminal charges against company executives.”

“These cases – and other investigations that are currently pending – illustrate the unique ability of cooperating witnesses to help federal authorities uncover sufficient evidence to meet a high burden of proof.  But the FCA only applies to fraud on government-funded programs. Financial fraud, by contrast, typically also affects other banks, shareholders, or consumers.”

“To pursue these types of fraud cases, the Justice Department has come to rely on a statute known as the Financial Institutions Reform, Recovery, and Enforcement Act – or FIRREA – a little-used law passed after the savings and loan crisis of the 1980s.  Over the last few years, the Residential Mortgage-Backed Securities Working Group – a part of the President’s Financial Fraud Enforcement Task Force – has been aggressive in using this law to develop the types of cases that have resulted in major settlements with JPMorgan, Citigroup and Bank of America, among many others.  Our use of this measure – to accuse financial institutions of committing fraud against themselves – was recently upheld in U.S. District Court here in the Southern District of New York, by Judge Jed Rakoff, among others.”

“Like the False Claims Act, FIRREA includes a whistleblower provision.  But unlike the FCA, the amount an individual can receive in exchange for coming forward 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.”

“In this unique environment, what would – by any normal standard – be considered a windfall of $1.6 million is unlikely to induce an employee to risk his or her lucrative career in the financial sector.”

“That’s why we should think about modifying the FIRREA whistleblower provision – perhaps to False Claims Act levels – to increase its incentives for individual cooperation.  This could significantly improve the Justice Department’s ability to gather evidence of wrongdoing while complex financial crimes are still in progress – making it easier to complete investigations and to stop misconduct before it becomes so widespread that it foments the next crisis.”


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