Carrot Replaces Stick: Corporate Crime Enforcement In the Trump Administration

Policymakers' words led to action or, more precisely, inaction. In November 2018, the New York Times reported a marked drop in penalties imposed and restitution ordered by both the DOJ and the SEC when comparing the enforcement activity of the two agencies in the first 20 months of the Trump administration with the last 20 months of Obama administration. It found a 62% drop in penalties imposed and illicit profits ordered returned by the SEC, to $1.9 billion under the Trump administration from $5 billion under the Obama administration; and a 72% decline in corporate penalties from the DOJ's criminal prosecutions, to $3.93 billion from $14.15 billion, and a similar percent drop in civil penalties against financial institutions, to $7.4 billion.

The number of white collar prosecutions are also down. A May 2018 analysis from Syracuse University's Transactional Records Clearinghouse (TRAC) reports that the volume of federal white-collar fraud prosecutions is at its lowest levels in 20 years. A November 2018 report from TRAC found that white-collar crime prosecutions continued to decline throughout fiscal year 2018. This number is especially significant when taken together with the general 34.8% increase in overall prosecutions for fiscal year 2018. Similarly, according to the Financial Industry Regulatory Authority's (FINRA's) online database, enforcement actions decreased almost 40% from 2017 to 2018 along with milder sanctions imposed for those firms pursued. And, elsewhere, administration officials faced sharp congressional questioning in mid‑March of this year when defending the current DOJ Civil Rights Division's pursuit of 60% fewer cases than under the Obama Administration and 50% fewer than under President George W. Bush's Justice Department.

FCPA and Crypto Currency Enforcement, Exceptions That Prove the Rule?

Comparing FCPA prosecutions over the past two years to certain years under the Obama administration points would reflect a current decline, but overall the number of FCPA prosecutions appears to have increased. The nature of the increase, however, is entirely consistent with the change in DOJ priorities — it is almost entirely driven by a policy change to pursue aggressively individual foreign national bribe recipients — which reflects the DOJ's emphasis on prosecuting people over entities. Corporations faired far better.

Cryptocurrency enforcement trends are somewhat muddled but, ultimately, understandably so. The SEC has started bringing crypto currency cases where none existed and claims it has "emerged as a global leader in addressing misconduct relating to digital assets." In September 2018, the SEC brought its first-ever enforcement action against a crypto-asset hedge, Crypto Asset Management LP (CAM), a hedge fund manager that raised over $3.6 million while falsely claiming to have filed a registration and to be regulated by the SEC. The SEC imposed a cease-and-desist order and censure and imposed a $200,000 penalty.

In November 2018, the SEC issued cease-and-desist orders against initial coin offerings (ICOs) issuers, CarrierEQ Inc. (Airfox) and Paragon Coin Inc., finding that the initial coin offerings were unregistered securities offerings. The SEC imposed civil penalties on the two companies, totaling to $250,000 each. These cases are likely the start of a sustained enforcement effort by the SEC to lay down the law in this somewhat unregulated corner of the business community.

Despite the apparent enforcement spike, the policies leading to reduced corporate penalties generally were apparent in other crypto cases where corporate cooperation was significantly rewarded. In December 2017, Munchee, Inc., a company selling digital tokens to raise capital for its blockchain-based food review service, halted its ICO and agreed to an order in which the SEC found that its conduct constituted unregistered securities offers and sales. However, the SEC did not levy fines because, according to its press release, "the Commission recognized that the company stopped the ICO quickly, immediately returned the proceeds before issuing tokens, and cooperated with the investigation."

Similarly, in February 2019, the SEC chose not to impose penalties on Gladius Network LLC, a cybersecurity company, for conducting an unregistered ICO with the SEC's Cyber Unit Chief Robert A. Cohen noting, "today's case shows the benefit of self-reporting and taking proactive steps to remediate unregistered offerings."

The expected enforcement surge in the crypto currency area is a direct result of its uniquely unregulated environment, as the SEC is candidly using enforcement actions as an alternative to official guidance. In a speech titled, "Regulation: A View from Inside the Machine," SEC Commissioner Hester M. Peirce acknowledged "the Commission also has spoken indirectly through a number of enforcement actions." The SEC staff's enforcement efforts provide "some supplemental guidance to help people think through whether their crypto-fundraising efforts fall under the securities laws." While Peirce described a standing offer for companies to come in for so-called no-action relief in connection with a particular token or project none of the projects actually submitted for SEC consideration have been approved, with enforcement actions appearing to be the educational tool of choice.

The lack of clear guidance leads to more enforcement actions both because there are more potential violations in an ambiguous environment and because enforcement can serve the necessary process of clarifying the rules. These twin considerations will likely lead to continued aggressive crypto enforcement, at least for the short run. As the regulatory ambiguity decreases, SEC enforcement actions will be less necessary for line drawing purposes and thus may subside, consistent with the administration's approach (although this may be accompanied with higher penalties per case as the "ambiguity defense" disappears). As other agencies, such as the Financial Crimes Enforcement Network (FinCEN), get more involved in this space in the short run, enforcement actions will likely crop up in other contexts. In addition, while not mentioning crypto prosecutions, in mid-March of this year, the incoming U.S. Attorney in San Francisco announced a corporate fraud task force of eight Assistant U.S. Attorneys who will use non-traditional law enforcement tools to target business crime.

Beyond the idiosyncratic world of crypto, the message from today's enforcement agencies appears to be clear, indeed Rod Rosenstein was explicit in a recent speech, that corporate America and DOJ are now allies because most American companies "want to do the right thing." Counsel for companies can remind regulators of that early and often.

*****

Joseph F. Savage, Jr. ([email protected]), 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. Marielle Sanchez ([email protected]) is an associate in the Boston office of Goodwin Procter LLP.