Hope and Change

DOJ Back in the Business Of White-Collar Law Enforcement?

At DOJ, Obama turned to lawyers ' Eric Holder, David Ogden and Lanny Breuer ' with both public and private experience in business crimes cases. Holder is known to white-collar lawyers as the author of the “Holder Memorandum,” a road map for bringing criminal charges against corporations and the source of much distress in the defense bar and business community for its callous handling of privilege waivers, joint-defense agreements, and indemnification. The Holder Memorandum's aggressive enforcement approach reflects a skeptical attitude toward corporations, executives and lawyers.

As expected, Holder has promised as Attorney General to “wage an aggressive effort against financial fraud and market manipulation,” develop “smart antitrust enforcement to prevent and punish unlawful conduct that hurts markets, excludes competition, and harms consumer welfare,” and “embrace the Department's historic role in preserving the environment” and “ensuring fairness in the marketplace ' ”

Financial-Fraud Focus?

The SEC's inability to detect the Madoff fraud, along with other failures, makes it ripe for reform and desperate to demonstrate new aggressiveness. The selection of Chairperson Mary Schapiro, a career regulator who emphasized enforcement when she worked at the SEC, the Commodities Futures Trading Commission, the Financial Industry Regulatory Authority and the National Association of Securities Dealers, foretells more aggressive enforcement. In her confirmation hearing, Schapiro promised to “move aggressively to reinvigorate enforcement at the SEC” and “deepen the SEC's commitment to investor protection, transparency, accountability and disclosure.”

Schapiro has taken immediate steps to increase enforcement activity by no longer requiring staff attorneys to get approval before negotiating fines and penalties with companies, simplifying the process for issuing subpoenas, and improving the handling of tips and whistleblower complaints.

Ms. Schapiro also signaled that more enforcement is coming by appointing former federal prosecutor Robert Khuzami as the new head of enforcement at the SEC. Khuzami was chief of the securities fraud unit at the U.S. Attorney's Office in Manhattan and prosecuted a $700-million Ponzi scheme, among other things. It remains to be seen, however, whether the Schapiro/Khuzami team can move the SEC to bring more sophisticated cases focused on investor harm or simply a larger number of questionable actions that do little to protect investors, such as many of the options backdating cases pursued under Chairman Cox. Either way, more action seems inevitable, with Obama promising to make financial regulatory reform “one of the top legislative priorities” of his administration.

Antitrust

Candidate Obama criticized the drop in antitrust cases under Bush. In the Clinton years (1996-2000), Obama told the Antitrust Institute, the DOJ and Federal Trade Commission (FTC) had challenged more than 70 mergers per year compared with only 33 per year in 2001-2006. On the campaign trail, Obama also noted that there had been over 400 health care mergers in the past 10 years, that the number of insurers fell by nearly 20% since 2000, and that premiums increased over 87% from 2000 to 2006. Against this backdrop, Obama promised to strengthen antitrust and other anti-monopoly laws. On Jan. 22, President Obama appointed Christine Varney, a former FTC member with a reputation for aggressive enforcement of the antitrust laws, to head the DOJ's Antitrust Division. Antitrust enforcement actions will surely increase.

EPA

Obama's choice to head the EPA was Lisa Jackson, a longtime EPA staffer and most recently Commissioner of New Jersey's Department of Environmental Protection. She echoed Eric Holder in predicting “an extraordinary burst of activity,” not just from the EPA, but “potentially from Congress.” With the DOJ Environmental Crimes Section now stabilized after a period of turnover, cooperation with an aggressive EPA will likely result in more criminal cases.

Increased Resources and Cooperation?

Soon there may be more “boots on the ground” for the coming war on American business practices. Sens. Charles Schumer (D-NY) and Richard Shelby (R-AL) introduced a bill in January that would add hundreds of new investigators and prosecutors to the financial-fraud units at the nation's top law enforcement agencies. Known as the Supplemental Anti-Fraud Enforcement (SAFE) Markets Act, the bill would dedicate an additional $110 million annually for these new hires, providing 500 new FBI agents, 50 new Assistant U.S. Attorneys, and 100 new SEC enforcement division employees. While the full amount is not presently in the appropriations bill and much of the increased funding proposed for DOJ is not targeted at business crime prosecutions, the Schumer/Shelby proposal reflects a widespread view in Congress that may lead to big resource increases. Other resources are targeting fraud in connection with the stimulus package. If the typical estimate of 10% fraud in government programs holds, we can expect stimulus fraud in the neighborhood of $300 billion. The new Special Inspector General for stimulus funds will find plenty of misdeeds to refer for prosecution.

Neil Barofsky, Special Inspector General for the Troubled Asset Relief Program (TARP), has “the right to investigate and audit any TARP dollar, anywhere it goes.” Barofsky recently confirmed that there are several investigations by his office underway in multiple jurisdictions. “Congress told me repeatedly that they want me to be the person who goes after the people who want to steal.”

Congress is putting heat on the new administration to focus on white-collar crime. The FBI promised Congress “a complete scrub of all resources” to find more for prosecution of business crime ' with a focus on lawyers, mortgage brokers, real estate brokers and other “gate keepers.” Deputy Attorney General Ogden promised a “strong, law enforcement response” by DOJ to Wall Street crime.

On the financial-fraud front, enforcement will likely increase with a change in the law requiring more cooperation among enforcement agencies. All federal financial regulatory agencies must now cooperate with the FBI and each other whenever those agencies are “investigating fraud, misrepresentation, and malfeasance with respect to development, advertising, and sale of financial products,” according to the Emergency Economic Stabilization Act of 2008 (EESA). Prior law required cooperation only among a limited number of regulatory entities. EESA, however, expands that cooperation and removes impediments to joint enforcement effects. In the same vein, TARP's Inspector General Barofsky is a member of the inter-agency Corporate Fraud Task Force and has promised coordinated efforts with other law enforcement agencies.

More Enforcement But With a Lighter Touch?

While more cases will likely be brought, the Obama sentencing strategy might be less rigid than before. Obama called repeatedly during the campaign for a re-examination of mandatory minimum sentences and greater use of non-jail alternatives for nonviolent first offenders. The Second Chance Act, which expands use of community confinement and reflects a new congressional focus on cost effectiveness and rehabilitation, suggests support in Congress for more individualized sentencing.

Conclusion

The combination of new people, priorities, resources and coordination ' coupled with public and Congressional outrage ' promises to bring a surge of white-collar enforcement, but perhaps accompanied by some sanity in sentencing.

Joseph F. Savage, Jr. (jsavage@good winprocter.com), a member of this newsletter's Board of Editors, is a partner in the Boston office of Goodwin Procter LLP and a former federal prosecutor. Derek M. Adams is a litigation associate in the same office.

Businesses and executives may be in for increased scrutiny under President Obama. The Department of Justice (DOJ) under President Bush abandoned the focus on white-collar crime prosecution inherited from the Clinton DOJ, especially financial fraud, antitrust enforcement and environmental protection. Despite the economic meltdown and a perceived explosion of corporate misbehavior during the Bush years ' typified by Enron and WorldCom ' white-collar crime enforcement was down 27% from 2000-2007, according to data from the Transactional Records Access Clearinghouse at Syracuse University. Environmental enforcement also faltered, plunging 28% in the same time period. Candidate Obama condemned the politicization of the DOJ and criticized the Bush administration's weak record on financial crimes. At minimum, an Obama administration promises to increase enforcement of financial crimes, antitrust and environmental offenses.

A record number of companies reached settlements in the final weeks of the Bush administration, perhaps a sign that many businesses and defense attorneys forecast a less friendly regulatory and enforcement environment. The Justice Department announced 19 resolutions with companies from November through the end of 2008, up from five in the same months of 2006 and 16 in 2007, according to The Washington Post.

A first sign that President Obama appears poised to expand business crimes enforcement is his move to fill key regulatory positions months earlier than previous administrations. The enforcement team of Mary Schapiro at the SEC, Eric Holder as Attorney General, David Ogden as Deputy Attorney General, Lanny Breuer heading the DOJ Criminal Division, Christine Varny as head of the Antitrust Division and Lisa Jackson at the Environmental Protection Agency (EPA) suggest change is in the offing.

DOJ Back in the Business Of White-Collar Law Enforcement?

At DOJ, Obama turned to lawyers ' Eric Holder, David Ogden and Lanny Breuer ' with both public and private experience in business crimes cases. Holder is known to white-collar lawyers as the author of the “Holder Memorandum,” a road map for bringing criminal charges against corporations and the source of much distress in the defense bar and business community for its callous handling of privilege waivers, joint-defense agreements, and indemnification. The Holder Memorandum's aggressive enforcement approach reflects a skeptical attitude toward corporations, executives and lawyers.

As expected, Holder has promised as Attorney General to “wage an aggressive effort against financial fraud and market manipulation,” develop “smart antitrust enforcement to prevent and punish unlawful conduct that hurts markets, excludes competition, and harms consumer welfare,” and “embrace the Department's historic role in preserving the environment” and “ensuring fairness in the marketplace ' ”

Financial-Fraud Focus?

The SEC's inability to detect the Madoff fraud, along with other failures, makes it ripe for reform and desperate to demonstrate new aggressiveness. The selection of Chairperson Mary Schapiro, a career regulator who emphasized enforcement when she worked at the SEC, the Commodities Futures Trading Commission, the Financial Industry Regulatory Authority and the National Association of Securities Dealers, foretells more aggressive enforcement. In her confirmation hearing, Schapiro promised to “move aggressively to reinvigorate enforcement at the SEC” and “deepen the SEC's commitment to investor protection, transparency, accountability and disclosure.”

Schapiro has taken immediate steps to increase enforcement activity by no longer requiring staff attorneys to get approval before negotiating fines and penalties with companies, simplifying the process for issuing subpoenas, and improving the handling of tips and whistleblower complaints.

Ms. Schapiro also signaled that more enforcement is coming by appointing former federal prosecutor Robert Khuzami as the new head of enforcement at the SEC. Khuzami was chief of the securities fraud unit at the U.S. Attorney's Office in Manhattan and prosecuted a $700-million Ponzi scheme, among other things. It remains to be seen, however, whether the Schapiro/Khuzami team can move the SEC to bring more sophisticated cases focused on investor harm or simply a larger number of questionable actions that do little to protect investors, such as many of the options backdating cases pursued under Chairman Cox. Either way, more action seems inevitable, with Obama promising to make financial regulatory reform “one of the top legislative priorities” of his administration.

Antitrust

Candidate Obama criticized the drop in antitrust cases under Bush. In the Clinton years (1996-2000), Obama told the Antitrust Institute, the DOJ and Federal Trade Commission (FTC) had challenged more than 70 mergers per year compared with only 33 per year in 2001-2006. On the campaign trail, Obama also noted that there had been over 400 health care mergers in the past 10 years, that the number of insurers fell by nearly 20% since 2000, and that premiums increased over 87% from 2000 to 2006. Against this backdrop, Obama promised to strengthen antitrust and other anti-monopoly laws. On Jan. 22, President Obama appointed Christine Varney, a former FTC member with a reputation for aggressive enforcement of the antitrust laws, to head the DOJ's Antitrust Division. Antitrust enforcement actions will surely increase.

EPA

Obama's choice to head the EPA was Lisa Jackson, a longtime EPA staffer and most recently Commissioner of New Jersey's Department of Environmental Protection. She echoed Eric Holder in predicting “an extraordinary burst of activity,” not just from the EPA, but “potentially from Congress.” With the DOJ Environmental Crimes Section now stabilized after a period of turnover, cooperation with an aggressive EPA will likely result in more criminal cases.

Increased Resources and Cooperation?

Soon there may be more “boots on the ground” for the coming war on American business practices. Sens. Charles Schumer (D-NY) and Richard Shelby (R-AL) introduced a bill in January that would add hundreds of new investigators and prosecutors to the financial-fraud units at the nation's top law enforcement agencies. Known as the Supplemental Anti-Fraud Enforcement (SAFE) Markets Act, the bill would dedicate an additional $110 million annually for these new hires, providing 500 new FBI agents, 50 new Assistant U.S. Attorneys, and 100 new SEC enforcement division employees. While the full amount is not presently in the appropriations bill and much of the increased funding proposed for DOJ is not targeted at business crime prosecutions, the Schumer/Shelby proposal reflects a widespread view in Congress that may lead to big resource increases. Other resources are targeting fraud in connection with the stimulus package. If the typical estimate of 10% fraud in government programs holds, we can expect stimulus fraud in the neighborhood of $300 billion. The new Special Inspector General for stimulus funds will find plenty of misdeeds to refer for prosecution.

Neil Barofsky, Special Inspector General for the Troubled Asset Relief Program (TARP), has “the right to investigate and audit any TARP dollar, anywhere it goes.” Barofsky recently confirmed that there are several investigations by his office underway in multiple jurisdictions. “Congress told me repeatedly that they want me to be the person who goes after the people who want to steal.”

Congress is putting heat on the new administration to focus on white-collar crime. The FBI promised Congress “a complete scrub of all resources” to find more for prosecution of business crime ' with a focus on lawyers, mortgage brokers, real estate brokers and other “gate keepers.” Deputy Attorney General Ogden promised a “strong, law enforcement response” by DOJ to Wall Street crime.

On the financial-fraud front, enforcement will likely increase with a change in the law requiring more cooperation among enforcement agencies. All federal financial regulatory agencies must now cooperate with the FBI and each other whenever those agencies are “investigating fraud, misrepresentation, and malfeasance with respect to development, advertising, and sale of financial products,” according to the Emergency Economic Stabilization Act of 2008 (EESA). Prior law required cooperation only among a limited number of regulatory entities. EESA, however, expands that cooperation and removes impediments to joint enforcement effects. In the same vein, TARP's Inspector General Barofsky is a member of the inter-agency Corporate Fraud Task Force and has promised coordinated efforts with other law enforcement agencies.

More Enforcement But With a Lighter Touch?

While more cases will likely be brought, the Obama sentencing strategy might be less rigid than before. Obama called repeatedly during the campaign for a re-examination of mandatory minimum sentences and greater use of non-jail alternatives for nonviolent first offenders. The Second Chance Act, which expands use of community confinement and reflects a new congressional focus on cost effectiveness and rehabilitation, suggests support in Congress for more individualized sentencing.

Conclusion

The combination of new people, priorities, resources and coordination ' coupled with public and Congressional outrage ' promises to bring a surge of white-collar enforcement, but perhaps accompanied by some sanity in sentencing.

Joseph F. Savage, Jr. (jsavage@good winprocter.com), a member of this newsletter's Board of Editors, is a partner in the Boston office of Goodwin Procter LLP and a former federal prosecutor. Derek M. Adams is a litigation associate in the same office.