United States: Recent Remarks By Officials Reinforce DOJ’s Focus On Criminal Fraud Investigations And Prosecutions Of Culpable Individuals

In a trio of speeches given at separate events on September 17, 2014, Department of Justice ("DOJ") officials announced new initiatives and points of emphasis in the Government's ongoing efforts to hold corporations and corporate officers criminally liable in the aftermath of the 2008 financial crisis. Among the issues addressed by Assistant Attorney General Leslie Caldwell, Principal Deputy Assistant Attorney General Marshall Miller, and Attorney General Eric Holder were increased coordination between the Civil and Criminal Divisions on qui tam False Claims Act ("FCA") cases, an emphasis on corporations' cooperation in prosecuting culpable individuals, and the importance of whistleblowers and cooperating witnesses in the government's investigations.

Criminal Division To Review Civil Qui Tam Cases Upon Filing

In remarks given to a Taxpayers Against Fraud Education Fund conference in Washington, D.C., Assistant Attorney General for the Criminal Division Leslie Caldwell announced that the Criminal Division will be "stepping up" its review of civil qui tam FCA cases for potential criminal prosecution. "Qui tam cases are a vital part of the Criminal Division's future efforts," Caldwell said after highlighting the Division's "unparalleled experience prosecuting health care fraud, procurement fraud, and financial fraud."

Caldwell said in her remarks that the Criminal Division has recently implemented a procedure so that all new qui tam complaints are shared by the Civil Division with the Criminal Division as soon as the cases are filed. This will allow prosecutors in the Criminal Division's Fraud Section to review immediately the qui tam cases and determine whether to open a parallel criminal investigation. As a result, FCA defendants can anticipate increased and earlier coordination between civil and criminal investigators, including the Criminal Division's full investigative toolbox. According to Caldwell, the Criminal Division has the tools—including search warrants, wiretaps, consensual recordings, undercover operations, confidential informants, and additional evidence-gathering tools unavailable to other enforcement agencies—to help it work "more quickly and effectively to uncover the tracks that sophisticated criminals take such great pains to hide." Caldwell closed her remarks by noting that, "Working together, and along with our Civil Fraud counterparts, U.S. Attorney's Offices, and investigating agencies, we can bring more cases and hold more companies and individuals responsible for the crimes they commit. I very much look forward to doing just that."

DOJ: Corporate Cooperation Means Securing Evidence Of Individual Culpability

In remarks given to the Global Investigation Review Program in New York, Principal Deputy Assistant Attorney General for the Criminal Division Marshall Miller outlined the DOJ's new, tougher stance on corporations' need to cooperate with investigators in not only identifying culpable individuals but also securing evidence against them in order to receive cooperation credit. "Corporations do not act criminally, but for the actions of individuals," Miller said. "The Criminal Division intends to prosecute those individuals, whether they're sitting on a sales desk or in a corporate suite."

In his remarks, Miller discussed the Principles of Federal Prosecution of Business Organizations, or the Filip factors (named after former Deputy Attorney General Mark Filip), on which the DOJ's Criminal Division bases its corporate charging and resolution decisions. Miller focused on the fourth Filip factor, which addresses corporate cooperation. Miller said that this factor is often overlooked and receives insufficient attention when it comes to identifying culpable individuals: "Voluntary disclosure of corporate misconduct does not constitute true cooperation, if the company avoids identifying the individuals who are criminally responsible," Miller said. "Even the identification of culpable individuals is not true cooperation, if the company fails to locate and provide facts and evidence at their disposal that implicate those individuals."

Miller emphasized that the DOJ will not give cooperation credit to companies that merely provide lip service in the name of cooperation. Rather, the DOJ will be looking for cooperating companies to provide "all the available facts and evidence so that the most culpable individuals can be prosecuted." Miller closed with this advice:

When you come in to discuss the results of an internal investigation to the Criminal Division and make a Filip factor presentation – expect that a primary focus will be on what evidence you uncovered as to culpable individuals, what steps you took to see if individual culpability crept up the corporate ladder, how tireless your efforts were to find the people responsible. At the risk of being a little too Brooklyn, I'm going to be blunt. If you want full cooperation credit, make your extensive efforts to secure evidence of individual culpability the first thing you talk about when you walk in the door to make your presentation. Make those efforts the last thing you talk about before you walk out. And most importantly, make securing evidence of individual culpability the focus of your investigative efforts so that you have a strong record on which to rely.

The DOJ's emphasis on holding individuals criminally liable should be a major consideration for all companies conducting internal investigations into potential allegations of fraud against the government. As Miller noted in his speech, the DOJ will use its own parallel investigation efforts to "pressure test" a company's internal investigation and "to determine whether the company actually sought to root out the wrongdoing and identify those responsible, as far up the corporate ladder as the misconduct goes, or instead merely checked a box on a cooperation punch list."

Holder: The Buck Needs To Stop Somewhere

Finally, in remarks on financial fraud prosecutions given at NYU School of Law, outgoing Attorney General Eric Holder again emphasized the DOJ's focus on bringing enforcement actions against individuals and outlined several proposals on how to strengthen the Department's "fraud-fighting tools."

Echoing many of the points raised in Miller's remarks discussed above, Holder stressed "the inherent value of bringing enforcement actions against individuals, as opposed to simply the companies that employ them." Holder gave three reasons for why doing so is both important and appropriate. First, it enhances accountability, as Holder noted that "corporate misconduct must necessarily be committed by flesh-and-blood human beings." Second, it promotes fairness, because "it's not right for punishment to be borne exclusively by the company, its employees, and its innocent shareholders." And finally, it has a powerful deterrent effect; whereas "[a] corporation may enter a guilty plea and still see its stock price rise the next day," Holder noted, ". . . an individual who is found guilty of a serious fraud crime is most likely going to prison." However, Holder acknowledged that in many cases, including those involving complex financial transactions, the DOJ faces many obstacles in mounting a criminal prosecution, including the difficulty in establishing materiality and intent.

Holder then outlined three areas to which the DOJ may look to further strengthen its ability to root out and prosecute alleged fraud against the government. These proposals provide a glimpse of potential DOJ initiatives as well as possible policy and legislative changes in the future.

First, Holder discussed whether current laws provide an adequate means to hold corporate decision-makers properly accountable. "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," Holder said. "[T]he buck needs to stop somewhere where corporate misconduct is concerned." Holder drew analogies to legislation that requires a designated company executive to be accountable for misconduct or misrepresentations, including requirements under Sarbanes-Oxley, the Food, Drug and Cosmetic Act, and a financial reform law passed by the British government last year. The new British measure required, for the first time, that financial companies designate a corporate officer who would be accountable for misconduct at the firm.

Second, Holder emphasized the importance of whistleblowers and cooperating witnesses in the DOJ's investigations and the need to be creative in incentivizing these individuals to come forward and cooperate. Holder noted that the FCA incentivizes whistleblowers to come forward with allegations of fraud against the government by providing those whistleblowers with a share of the government's recovery, but he acknowledged that the FCA only applies to fraud on government-funded programs. In recent years, the DOJ has come to rely upon the Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA") to target fraud in the financial industry. However, though FIRREA includes a whistleblower provision, Holder noted that "the amount an individual can receive in exchange for coming forward is capped at $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." Holder called for consideration as to whether the FIRREA whistleblower provision should be modified to FCA levels to increase its incentives for individual cooperation.

Finally, Holder said that the FBI must have the necessary resources "to conduct white-collar investigations; to foster expertise in specialties like forensic accounting; and to help us usher in a new era of aggressive enforcement that keeps pace with a rapidly-changing industry." Noting the "historic transformation" of the FBI after 9/11 in the fight against terrorism, Holder asserted that the FBI also needed support with "the resources and personnel that can be brought to bear in our work to investigate financial crimes – and ensure that the Bureau can sustain a real-time, threat-focused mindset in the world of financial fraud."

Conclusion

These remarks by DOJ officials help illuminate the current landscape of the DOJ's investigation and enforcement activities aimed at prosecuting financial fraud. The DOJ's intent is clear: provide further incentives for whistleblowers to come forward; involve the Criminal Division early to take advantage of its investigative resources; force cooperating companies to gather evidence against their own employees; and hold individuals accountable through serious prison time. Any company conducting an internal investigation or defending against fraud allegations would do well to keep these points in mind.

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