You know it is going to be a bad day when you are excoriated in public by a sitting federal district judge. It is even worse when the comments of that federal judge make it into one of the most prominent international business dailies around; the UK based Financial Times (FT). Both of the events occurred this week when US District Judge Jed Rakoff spoke to the New York City Bar Association with his thoughts on the use of Deferred Prosecution Agreements (DPAs) by the Department of Justice (DOJ) to resolve criminal matters involving corporations and his speech was reported by Kara Scannell for the FT in an article entitled “Judge says DOJ agreements are ‘morally suspect’”.
As usual Judge Rakoff pulled no punches when he declared that the DOJ’s “Use of deferred prosecution agreements to resolve criminal investigations without holding individuals accountable is technically and morally suspect.” This criticism was levelled as the “DOJ has signaled to leading banks that it will bring civil charges against them for allegedly mis-selling mortgage backed securities in the lead-up to the financial crisis.” Judge Rakoff noted that the DOJ has “not prosecuted any top Wall Street executive in relation to the financial crisis but has struck deals with companies using deferred prosecution agreement over sanction violations and money laundering without charging any individuals.” Judge Rakoff said that if prosecutors can prove a company violated laws “but do not charge individuals then its application is technically suspect.” He then went on to add that it is “morally suspect because a company is made up of sometimes hundreds of innocent employees.” But Judge Rakoff had further criticisms. He charged that DOJ prosecutors no longer have the “experience or resolve” to pursue individuals and that the current DOJ tactic of only going after individuals is “not the best way to proceed.” Pretty strong words, indeed.
This is not the first time that Judge Rakoff leveled charges at regulators for what he believed were practices “which fell short of legal standards.” Indeed, Judge Rakoff was particularly critical about the shift from the criminal prosecution of individuals to the use of DPAs to allow corporations to settle matters as he charged this change “has led to lax and dubious behaviour on the part of prosecutors.” There was much commentary when the Judge “challenged several Securities and Exchange Commission [SEC] deals that allowed companies and individuals to settle civil fraud charges while not admitting or denying wrongdoing.” These comments and court cases (apparently) led the SEC to change its policy and begin to “require admissions in certain cases that were in the public interest.” Scannell’s article concluded by noting that Judge Rakoff’s dismissed the DOJ claims that “it is hard to prove criminal wrong-doing in the packaging of mortgage-backed securities and that charging entities could have a negative effect on the national economy” as simply “excuses”.
The article on Judge Rakoff’s comments indicated that they were only concerning criminal prosecutions against Wall Street executives. But his comments eerily parallel some of the ongoing debate about the use of DPAs in the Foreign Corrupt Practices Act (FCPA) context. The FCPA Professor has consistently criticized both the use of DPAs and lack of individual prosecutions under the FCPA by the DOJ. He has also said that he believes that the DOJ have become “uncomfortable with traditional notions of corporate criminal liability”. Another commentator, David Uhlmann, has agreed with this notion by the FCPA Professor when stating, “This is about a profound ambivalence in parts of the Department about the very notion of corporate criminality.” Yet another commentator, Anthony Barkow, has said that “getting DPAs and NPAs is easy. It’s a lot easier than charging a company.”
Whether they were answering any of these criticisms or not, I think that the DOJ has certainly made clear that it will prosecute individuals who engage in FCPA violation. I agree with Mike Volkov that 2013 may well go down as “Year of the Individual Prosecution” in the FCPA context. Last spring saw prosecutions against individuals from BizJet, BSGR, Willbros and Alstom. This summer there were prosecutions against individuals in the Direct Access Partners (DAP) matter and only this fall was a prosecution against an individual involved in the Maxwell Technology matter. Based on this, at least in the FCPA context, I would have to say that the DOJ has and will continue to prosecute individuals in the context of foreign bribery.
Additionally, in the area of other types of securities fraud cases, the DOJ has very recently shown that it will aggressively pursue companies for criminal sanctions. Recently SAC Capital pled guilty to criminal fraud charges for insider trading and criminal wire fraud. There was a hefty fine of $1.8bn for this conduct.
Interestingly this week the SEC announced that it had entered into its first DPA. In a SEC Press Release, the agency announced that it had entered into a DPA “with a former hedge fund administrator who helped the agency take action against a hedge fund manager who stole investor assets.” This was due to the cooperation by the Administrator; Scott Herckis, even though Herckis aided and abetted the hedge fund at which he worked with securities law violations. The DPA also specified that Herckis “comply with certain prohibitions and undertakings. Herckis cannot serve as a fund administrator or otherwise provide any services to any hedge fund for a period of five years, and he also cannot associate with any broker, dealer, investment adviser, or registered investment company.” He also had to “disgorge approximately $50,000 in fees he received for serving as the fund administrator.”
What does all of the above mean for the compliance practitioner? I think that when a federal judge says there should be more individual prosecutions in a certain area and his reasons echo noted commentators, it engages the debate. In the FCPA context, the debate centers around the use of DPAs and NPAs (Non-Prosecution Agreements) to settle matters with corporations. I am on record as favoring the continued use of such instruments by prosecutors to help raise compliance generally. Others feel that more individuals should be prosecuted. One thing I can say with certainty is that if you take a DPA/NPA for FCPA violations into Judge Rakoff’s court, you had better be ready to defend it, from both sides – the prosecution and the defense.