United States: Individual Liability: What’s Behind the Headlines?

It's been open season on financial institutions since the 2008-2009 financial crisis ("Financial Crisis"). State and federal prosecutors and regulators are competing with each other for press coverage of their latest consent order trophies, which include assessments of unprecedented civil money penalties and restitution orders. This focus on "accountability" has gone beyond the institutions, to the directors, officers, and employees of targeted institutions. The imperative to pursue individuals even became the subject of extrajudicial comments when Judge Jed Rakoff recently asked, "Why have no high-level executives been prosecuted" in the wake of the Financial Crisis?1

Over the past year, the perceived failure to prosecute individuals has been the focus of critics from all quarters, including the press, members of Congress, and federal and state agencies.2 In the current political climate, even astronomically large settlements with major institutions are not enough.3

The rhetoric continues to escalate. But what about the reality? Prosecutors are dusting off old tools, such as the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), and using them to target individuals in new ways. And new entities, such as the Special Office of the Inspector General for the Troubled Asset Relief Program, are working together with existing agencies to assist federal prosecutors in building criminal indictments of individuals.

Much of this increased activity is aimed at individual misconduct — direct involvement by individuals in the wrongful conduct. But some regulators have gone further, pursuing individuals for poor management or for having failed to prevent or detect the wrongdoing due to ineffective oversight.

We focus on both types of risk for directors, officers, and employees of financial institutions and other providers of financial products. First, we discuss the current regulatory focus on the perceived need to hold individuals responsible for corporate wrongdoing, including the renewed energy brought by enforcers at the Consumer Financial Protection Bureau (CFPB). Next, we turn to the authority of the Department of Justice (DOJ) and financial and securities regulators to pursue civil and criminal claims against individuals, and how those agencies have exercised that authority in recent cases. We touch on the efficacy of directors and officers insurance, errors and omissions coverage, and corporate indemnities as mitigants to personal liability. Finally, we provide some observations about how individuals and the institutions they serve may approach risk mitigation in light of actions being brought by government agencies in the wake of the Financial Crisis.


Holding individuals responsible for corporate misconduct is nothing new. As Judge Rakoff recognized, "[c]ompanies do not commit crimes; only their agents do."4 Real deterrence, the theory goes, occurs only when individuals are held accountable. As SEC Chair Mary Jo White explained:

Another core principle of any strong enforcement program is to pursue responsible individuals wherever possible . . . . Companies, after all, act through their people. And when we can identify those people, settling only with the company may not be sufficient. Redress for wrongdoing must never be seen as "a cost of doing business" made good by cutting a corporate check. Individuals tempted to commit wrongdoing must understand that they risk it all if they do not play by the rules. When people fear for their own reputations, careers or pocketbooks, they tend to stay in line.5

Congress created a new enforcement mechanism that allowed regulators to pursue directors and officers of failed federal thrifts in the wake of the savings & loan crisis. We start there to set the stage, and then discuss the renewed focus on the individual in the current punitive enforcement environment.

A. Financial services regulators

1. Response to the last financial crisis

In the late 1980s, the thrift industry experienced unparalleled losses, leading to the failure of 1,043 federal thrifts.6 To stem the tide of failures, Congress passed FIRREA.7 The goal of FIRREA was to "restore public confidence in the savings and loan industry in order to ensure a safe, stable, and viable system of affordable housing finance."8 FIRREA brought several major banking reforms, including broad investigative and enforcement authority to pursue claims against institutions and individuals.

The expanded enforcement power and increased sanctions were designed to "give a clear signal to those who would violate federal banking laws that such conduct would not be tolerated."9 Congress viewed insider fraud as the root cause of the large number of federal thrift failures, estimating that between 33-40% of the thrift failures were caused by corrupt insiders.10 To combat this intentional wrongdoing, Congress included several provisions in FIRREA expanding the DOJ's and the FDIC's ability to investigate, prosecute, and punish gross misconduct directed toward financial institutions.11 The Resolution Trust Corporation (RTC) and the FDIC took advantage of this expanded authority to file over 900 professional liability claims against failed savings & loan officers, directors, and third parties such as accountants and attorneys.12

A similar call for individual liability is being heard today as part of legal and regulatory reforms emanating from the Financial Crisis.


CFPB Director Richard Cordray said in a speech last year that the CFPB is seeking admissions of wrongdoing from individuals: "I've always felt strongly that you can't only go after companies. Companies run through individuals, and individuals need to know that they're at risk when they do bad things under the umbrella of a company."13

Director Cordray repeated and amplified this theme in a speech to the Federal Reserve Bank of Chicago in May of 2014. This time, he appeared to expand the scope of potential targets from actual wrongdoers to individuals who failed to exercise appropriate oversight and management of compliance-oriented controls:

There are legitimate occasions where it is appropriate to sue not only the company that was a party to the consumer's transactions, but also individuals who were decision-makers or actors relevant to that transaction . . . . Under the law, this includes not only a provider of consumer financial products or services, but also, in certain cases, anyone with "managerial responsibility" or who "materially participates in conduct of [its] affairs."14

These comments seem to reflect a view that the Dodd-Frank Act reinforced regulatory authority to go after individuals.

3. New York Department of Financial Services and New York Attorney General

New York Attorney General Eric Schneiderman does not miss an opportunity to stress that "individuals in the financial services industry who perpetrate fraud, no matter how wealthy or powerful, must be held publicly accountable."15 Not to be overshadowed, New York Department of Financial Services Superintendent Benjamin Lawsky recently encouraged regulators to "publicly expose—in great detail —the actual, specific misconduct that individual employees engage in . . . . [And] where appropriate — individuals should face real, serious penalties and sanctions when they break the rules."16

4. FinCEN

Director Jennifer Shasky Calvery of the Financial Crimes Enforcement Network (FinCEN) has echoed the same tone adopted as of late by other financial services regulators. In January 2014, Director Calvery spoke about the importance of "financial institutions tak[ing] responsibility when their actions violate the Bank Secrecy Act (BSA)."17 Director Calvery noted that accepting responsibility "is not just about admitting to the facts alleged in FinCEN's assessment. It is also about acknowledging a violation of the law."18

She also indicated that a number of FinCEN's recent enforcement actions have led the agency "to begin thinking more broadly about how the culture of compliance impacts financial institutions . . . ." She elaborated that

[f]or the culture of compliance to be strong within an institution, the business side of the organization needs to take [anti-money laundering] controls seriously. And it needs to begin with the institution's leadership . . . . A financial institution's leadership – to include the board of directors, executive management, and owners and operators – is responsible for performance in all areas of the institution, including compliance with the BSA. The commitment of an organization's leaders should be clearly visible, as the degree of that commitment will have a direct influence on the attitudes of others within the organization.19

Director Calvery specifically highlighted "calls for more accountability on the business side of an organization when [anti-money laundering] compliance fails. This is where a focus on individuals, as well as institutions, might come into play."20

B. Securities regulators

Although both the SEC and the Financial Industry Regulatory Authority (FINRA) have a history of taking action against individuals, the agencies' actions over the past year portend increased risks for individuals.

Statistics released by FINRA indicate that, although the overall number of regulatory actions decreased from 2012 to 2013, the number of individuals barred from association with a broker-dealer increased by 46% from 294 to 429, and the number of individuals suspended increased by 22% from 549 to 670.21 Indeed, these same statistics demonstrate that FINRA has consistently increased the number of actions filed against individuals since 2010 and, with few exceptions, the number of individuals barred and suspended has grown steadily since that time. For example, in 2010, FINRA barred or suspended 706 individuals. In 2011, that number rose to 804; in 2012, 834; and 2013, 1,099. These numbers paint a clear picture that FINRA enforcement efforts against individuals are on the rise, with no reason to expect that they will taper off in 2014.

The SEC's statistics on enforcement actions brought as a result of the Financial Crisis show the same trend.22 As a result of the Financial Crisis: the SEC has charged 169 entities and individuals, including 70 CEOs, CFOs, and other senior corporate officers; 40 individuals have received officer and director bars, industry bars, or commission suspensions; and total penalties, disgorgement, and other monetary relief have reached $3.02 billion.23

New leadership at the SEC also has made it clear that companies can expect increased scrutiny for their officers and employees. Speaking in May of 2014, Mary Jo White, the Chairwoman of the SEC noted:

The simple fact is that the SEC charges individuals in most cases, which is as it should be. A recent Harvard survey shows that since 2000, the SEC has charged individuals in 93% of our actions involving nationally listed firms in which we charged fraud or violations for books and records and internal controls rules. An internal, back-of-the envelope, analysis the staff did recently indicates that since the beginning of the 2011 fiscal year, we charged individuals in 83% of our actions. Under either calculation, those percentages are very high—which means that the cases where individuals are not charged are by far the exception, not the rule.24

Chair White also described the enforcement approach that would yield an increased level of actions against individuals: "the staff should look hard to see whether a case against individuals can be brought." She wants to be sure that the SEC is "looking first at the individual conduct and working out to the entity, rather than starting with the entity as a whole and working in."25

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1 Jed S. Rakoff, The Financial Crisis: Why Have No High-Level Executives Been Prosecuted ("Rakoff Article"), The New York Review of Books (Jan. 9, 2014), available at http://www.nybooks.com/articles/archives/2014/jan/09/financial-crisis-why-no-executive-prosecutions/ .

2 See, e.g., Neil Irwin, This is a complete list of Wall Street CEOs prosecuted for their role in the financial crisis, The Washington Post (Sept. 12, 2013), available at http://www.washingtonpost.com/blogs/wonkblog/wp/2013/09/12/this-is-a-complete-list-of-wall-street-ceos-prosecuted-for-their-role-in-the-financial-crisis/ ; Letter from Elizabeth Warren to Ben Bernanke, Mary Jo White, and Thomas J. Curry dated October 23, 2013 ("we also must look back to ensure that those who engaged in illegal activity during the [financial] crisis and its aftermath are held accountable"), available at http://www.warren.senate.gov/files/documents/SIGTARP%20Letter%202013-10-23.pdf.

3 See, e.g., Letter from Elizabeth Warren to Attorney General Eric Holder dated August 21, 2013 (expressing concern that the historic $25 billion national mortgage settlement was "yet another example of the federal government's timid enforcement strategy against the nation's largest financial institutions"), available at http://www.warren.senate.gov/files/documents/EW%20Ltr%20to%20DOJ%20on%20Mortgage%20Settlement%202013-8-21.pdf .

4 Rakoff Article at 10.

5 Opening Speech, Deploying the Full Enforcement Arsenal, Council of Institutional Investors Fall Conference (Sept. 26, 2013), available at http://www.sec.gov/News/Speech/Detail/Speech/1370539841202 .

6 Timothy Curry & Lynn Shibut, The Cost of the Savings and Loan Crisis: Truth and Consequences at 26, FDIC Banking Review, available at http://www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_2.pdf .

7 Pub. L. No. 101-73, 103 Stat. 183 (1989).

8 H.R. Rep. No. 54(I), 101st Cong., 1st Sess. 291, reprinted in 1989 U.S. Code Cong. & Admin. News 86, 307.

9 Id. at 107.

10 Id. at 260.

11 See Pub. L. No. 101-73 §§ 101(9), (10), 103 Stat. 183, 187 (purposes of FIRREA include "strengthen[ing] the enforcement powers of Federal regulators of depository institutions;" and "strengthen[ing] the civil sanctions and criminal penalties for defrauding or otherwise damaging depository institutions and their depositors.")

12 The FDIC and the RTC Experience, Managing the Crisis, Professional Liability Claims, Ch. 11 at 270, FDIC (1998), available at http://www.fdic.gov/bank/historical/managing/history1-11.pdf.

13 Emily Stephenson, U.S. consumer watchdog says committed to stiff penalties, Reuters (October 23, 2013), available at http://mobile.reuters.com/article/idUSBRE99M1K520131023?irpc=932 .

14 Prepared Remarks of CFPB Director Richard Corday, Federal Reserve Bank of Chicago at 4, Consumer Finance Protection Bureau (May 9, 2014) (emphasis added), available at http://www.consumerfinance.gov/newsroom/prepared-remarks-of-cfpb-director-richard-cordray-at-the-federal-reserve-bank-of-chicago-2/ .

15 Edvard Pettersson, Schneiderman Won't Seek Damages From Ex-AIG CEO Greenberg, Bloomberg (April 26, 2013), available at http://www.bloomberg.com/news/2013-04-26/schneiderman-won-t-seek-damages-from-ex-aig-ceo-greenberg.html .

16 Remarks of Superintendent Benjamin Lawsky, Exchequer Club at 8 (Mar. 19, 2014), available at http://www.dfs.ny.gov/about/speeches_testimony/sp140319.pdf.

17 See Remarks of Director Jennifer Shasky Calvery, Securities Industry & Financial Markets Association Anti-Money Laundering & Financial Crimes Conference, Financial Crimes Enforcement Network (January 30, 2014), available at http://www.fincen.gov/news_room/speech/pdf/20140130.pdf .

18 Id.

19 Id.

20 Id.

21 See FINRA Statistics & Data, available at http://www.finra.org/Newsroom/Statistics/.

22 See SEC Enforcement Actions Addressing Misconduct That Led to or Arose From the Financial Crisis, Key Statistics, Securities Exchange Commission, available at http://www.sec.gov/spotlight/enf-actions-fc.shtml .

23 Id. 24 See Remarks Chair Mary Jo White, Three Key Pressure Points in the Current Enforcement Environment, NYC Bar Association's Third Annual White Collar Crime Institute (May 19, 2014), available at http://www.sec.gov/News/Speech/Detail/Speech/1370541858285 .

25 See Remarks Chair Mary Jo White, Deploying the Full Enforcement Arsenal, Council of Institutional Investors Fall Conference (Sept. 26, 2013), available at http://www.sec.gov/News/Speech/Detail/Speech/1370539841202.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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