White collar crime prosecutions surged this year following the financial crisis, but it’s only the beginning.
Government lawyers under political pressure and armed with strong mandates are expected to aggressively pursue suspect financial behaviour with the same zeal and resources used on terrorism in the previous administration.
Law firms like McKool Smith are responding to the expected “explosive growth” by opening or expanding their white collar practices.
We spoke with Principals Jack Cooney (l) and Tom Engel (r) — both former New York federal prosecutors — about trends in white collar crime and the business they expect it to bring the firm. Their message for the financial community? Brace yourself.
Among areas they expect prosecutors will focus on — against both companies and individuals — include accounting fraud, insider trading by hedge funds and private equity groups, international bribes, and public fund pay-to-play cases. Our lightly edited conversation with Engel and Cooney follows:
What trends do you expect in white collar crimes?
Tom Engel: Well, certainly two of the issues we’ve been talking about are the Foreign Corrupt Practices Act and the growth of that interest in the Justice Department to areas where it perhaps has never been seen before, like China for example. Then we see a continued interest in the so-called pay to play investigations, which is both a function of the state attorney generals’ offices, particularly New York, and the SEC, and they are working in tandem. After all, there are 50 different states, 50 different retirement funds, and a lot of middle men and others who try to work both sides of that street.
Jack Cooney: You know, you do see every day in the newspaper the efforts by Congress to further regulate the financial industry and the financial markets, and I don’t think it’s strictly civil. There is an interest in civil regulation, to be sure, but I think there’s a real interest in making sure that there’s aggressive criminal enforcement on the markets also. The indication so far from the administration, especially with some of their appointments, is they’re looking for people who are going to be enforcing present law and enforcing the laws which I expect will be coming forth. We expect that the Obama administration will be highlighted by Department of Justice and regulatory enforcement as perhaps the last administration was not.
What we have talked about is the Madoff situation, with a few other related Ponzi schemes, and there’s no question that the Government is going to continue to be focused on the existing investigations, but I’m sure they will also be very interested in penetrating into an area where they’ve indicated interest in the past, and that’s certainly private equity. The papers are replete with references to scrutiny that they appear to be ready to apply. Part of it will be the question of are these people really that good or do they have the benefit as did Raj — allegedly as did Raj — have some inside information.
TE: It’s sort of an irony that the proliferation of private equity has occurred in part by reason of the greater regulation by the federal government of public companies and banks and the disclosure requirements that have been required of the larger public companies. A lot of money has been put into so-called private equity so it wouldn’t offend some of the statutes and standards that the government wished to apply. Now that’s going to come around and bite private equity because it is largely perceived that much of the financial meltdown was the result of a lot of unregulated money. Now that the Obama administration says that there is no more War on Terror, there is a devotion of resources that is clearly going to be more centered on the white collar, including something in [the December 16] paper in reference to the Federal Deposit Insurance Corporation hiring 1600 more people. Hiring is also going up at the Department of Justice and at the SEC.
JC: I think that just going back to the Foreign Corrupt Practice Act I want to just say again, we do see the Siemens investigation as a seminal event in that area. The Act has been on the books for a long time, but it has not been successfully prosecuted that often since it was enacted in [the late 1970’s]. What you are seeing now is a great deal more of cooperation between countries and their criminal laws. I think the Siemens investigation was remarkable in that it was only possible because of a great deal of international cooperation with countries all over the world who were willing for the first time willing to encourage or compel compliance with requests for information, access to evidence and the idea that the border now makes you safe as a commercial briber is not a good idea. The entire EU has bought on to the idea that commercial bribery is and should be a crime and prosecuted. It is no longer tax-deductible in some of these countries, and I expect there will be a continuation of major investigations and prosecutions here and abroad for commercial bribery and Foreign Corrupt Practice Act.
TE: The investigative methods too that the government is using have been internationalized, and there is a lot more cooperation between the EU and the Justice Department, particularly in the antitrust area. I think the antitrust area is going to be a very fertile enforcement area. And one thing that we touched upon is that the investigative methods of the Justice Department and other law enforcement agencies will be relying on may include as it did in the Galleon case, wire taps and other listening devices. To the extent that those are implicated, they may create huge issues for the government in terms of trying to cut square corners on the applications and the continuations of the wire taps.
What other prosecutions or areas of focus from regulators do you see still stemming from the financial crisis?
JC: Every time there’s a meltdown, and I don’t think we’ve really seen this yet but we will see it, one of the areas that the government always focuses on is basically accounting. Have you overstated the value of the assets? That has not yet been the focus, and I think its interesting that it has not been, because after Enron there was a real close scrutiny of some of the accounting issues out there. Here, it might be partly because some of the companies that might have been under investigation are now defunct. But it is sort of one of the first steps that the government often takes under the securities law umbrella, is have you accurately described to the public what your accounting values are. I mean, are your earnings realistic, are your assets realistic, did you know that you had a balance sheet that showed assets in this amount worth much much less than that? Have you overstated your income? And there hasn’t been quite the same scrutiny on that and I think there will be.
TE: I think that one of the reasons there will be is that you’re going to have a lot of bankruptcies, particularly in the financial institutions and the smaller banks. And bankruptcy is almost by definition turning a company inside out. In large part, particularly with small or medium size banks, the FDIC will come in, and their brief is to investigate what went wrong. I fully see a repetition of the Resolution Trust Company as we discussed earlier which after the savings and loan crisis in the late 80s, came in and did just that. I think we’re just on the cusp of seeing that again.
Do you see the SEC targeting more individuals?
JC: I think the SEC will be responsive to Rakoff’s concerns. Rob Khuzami is now running enforcement. He’s a former Southern District prosecutor, and the idea of going after individuals is sort of ingrained in him, and I do think the SEC — certainly there are pressures from a number — from the bench and the Hill for the SEC to get a lot tougher on individuals, and so do I expect they will go after more individuals, yes I do. Especially as you say, some of the easy institutional targets that they might have had coming out of this are defunct, so if you want to have an up-to-nonexistent company come in and sign a consent decree and call it a victory you could do that I guess, but I don’t think they’re going to be satisfied by that.
TE: Philosophically if you look at it, the corporation is to some extent the shareholders, and if you go after the shareholders, the shareholders are supposed to be the victims anyway, and they largely are the victims because their shares aren’t worth anything, and when they did go after for example an institution, like Arthur Andersen, and they did so only to have Arthur Andersen eventually vindicated in the Supreme Court long after it was defunct. The dubious wisdom of going after an entity of that kind, where the stockholders’ or the employees’ interests are implicated far more than others’ makes the wrongdoers, the individual wrongdoers, a much more attractive target.
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