Justice of the One Percent


Law Enforcement Losing War on White Collar Crime

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends most of her time in India and other parts of Asia researching a book about textile artisans. She also writes regularly about legal, political economy, and regulatory topics for various consulting clients and publications, as well as writes occasional travel pieces for The National.

It’s always a reliable sign that things have spun too far out of control when the New York Times Dealbook column gets around to highlighting them. And so it’s now the turn of white collar crime.

From yesterday’s NYT– note in particular the use of the waffly quotation marks enclosing ‘not winning’ in the headline, Law Enforcement ‘Not Winning’ War on White Collar Crime:

The record of combating economic crime is so woeful that governments need a new approach. That was the view of many at a gathering of about 1,600 delegates from academia and the legal and compliance profession here on Monday.

Delegates from over 90 countries convened for the week-long Thirty-Fourth International Symposium on Economic Crime at Jesus College of the University of Cambridge beginning on September 4.

Some Numbers

Since 2001, PricewaterhouseCooper’s (PwC) has conducted a global survey of economic crime. During that time PwC has seen “no significant decrease in the prevalence of fraud. Regulatory regimes have been tightened and billions of pounds have been spent, but economic crime is as tough to tackle as it has ever been.” Instead, in its most recent 2016 survey, Old Dogs, New Tricks, PwC concludes that “UK economic crime figures show both fraudsters and fraud schemes are maturing”.

From the PwC survey:

This year, over half of the respondents to our survey in the UK reported experiencing economic crime, 50% more than the global average of 36%. While the prevalence of traditional frauds such as asset misappropriation, bribery and procurement fraud has fallen since 2014, there has been a huge rise in the number of organizations reporting cybercrime and digital technology is now driving almost every other area of economic crime as well.

While the majority of economic crimes are committed by external parties, a significant percentage of frauds are still being carried out by employees. We’re also seeing that the ‘typical’ fraudster is getting older and more senior, making it more diffcult than ever to detect wrongdoing.

In particular, PwC reports that over half of UK organizations– 55%– have experienced economic crime. Cybercrime is becoming more significant, with 44% of respondents who had experienced economic crime in the last two years also reporting they had experienced cybercrime. PwC found that 18% of fraud is now committed by senior management.

Problem Not Confined to the UK

The Dealbook reporter, Anita Raghavan, quotes stateside practitioner John H. Moscow, the former chief of the frauds bureau and the deputy chief of the investigations division at the New York County district attorney’s office on the prevalence of the problem in the United States:

“We have lost most of the major battles and all of the wars,” said [Moscow]. “The number of people benefiting from large-scale, economic crime is immense, the number of victims is immense, but the number of prosecutions is limited by small and declining budgets.”

Mr. Moscow, who is now in private practice at Cleveland law firm BakerHostetler, said that frequently in large organizations, “the buck stops three levels lower” than where the criminal decision is made. He said it was therefore important “to impose serious fines and penalties on corporations.”

His recommendation squarely repudiates the approach pursued by the Department of Justice (DoJ) during the tenure of Obama’s first attorney general, Eric Holder. During that time, the DoJ instead followed the “Holder doctrine” and eschewed corporate charges against companies and executives, instead opting for negotiated settlements (often imposing de minimis, slap-on-the wrist penalties that were significantly undersized compared to the magnitude of damage done, especially by TBTF banks and other financial predators, to name just a few).

The DoJ under Obama’s second AG, Loretta Lynch, originally followed the Holder doctrine, until that was superseded when Deputy Attorney General Sally Quillian Yates authored a memo outlining a new approach in September 2015. Under this approach, the DoJ intended to increase accountability for corporate wrongdoing, and this included an increased focus on pursuing criminal charges against responsible individuals. The DoJ sought to drive a legal wedge between individuals and the corporations for whom they worked by only allowing corporations to receive “cooperation credit” that would reduce their potential exposure (including penalties) if the corporation cooperates in surrendering as early as possible comprehensive detailed information concerning the individual misconduct.

This shift is summarized in another Dealbook article, Justice Dept. Shift on White-Collar Crime Is Long Overdue. I can’t resist repeating a line I dropped in a recent comment thread here, as I can’t come up with a more apt way of expressing the thought. Note that in this summary, Dealbook calls the doctrine “horribly misguided” and you can bet your pension, savings, and the title to your house that, if anything, that’s an understatement.

Despite the release of the Yates memo in September 2015, to date, there’s been no significant upsurge in corporate prosecutions. Now, to be sure, we might expect it to take time for the DoJ to develop cases that apply the new doctrine. But as we’ve learned from past bait-and-switch maneuvers by the Obama administration– closing Guantanamo, anybody?– there’s a particularly tenuous relationship between rhetoric and reality in this administration. So it’s at the moment unclear how significant in reality the announced DoJ policy shift will prove to be.

In fact, in a May speech at the New York City Bar Association White Collar Crime Conference, Yates suggested that punishment was not the DoJ’s primary focus– and this implies that no upsurge in corporate prosecutions (or for corporate individuals) should be expected:

We’ve affirmatively been hearing that our new approach is causing positive change within companies. Compliance officers have said that our focus on individuals has helped them steer officers and employees within their organizations toward best practices and higher standards. That’s exactly what we had hoped for. After all, it is much better to deter bad conduct from happening in the first place than to have to punish it after the fact.

The question remains how effective that deterrence can be without a credible threat of punishment to back it up.

A Digression on the Red Team, the Blue Team, and Justice

One additional point I want to make is that some readers are all too well aware of the scandal that arose during the tenure of George W. Bush’s AG Alberto Gonzales over the political vetting of non-political DoJ personnel, including assistant US attorney candidates. Recall that a report by the DoJ’s Inspector General in conjunction with the Office of Professional Responsibility found in July 2008 that senior officials Gonzales’s office had flouted DoJ policy and federal civil service laws by, among other things, quizzing candidates about their political, religious and social views.

Now, this is all a matter of public record. Yet as politically corrupted as the DoJ was under Gonzales, when the dotcom bubble burst, this same politically-corrupted DoJ successfully prosecuted corporate executives from Adelphi, Enron, and WorldCom, among others, and sent some away to do serious jail time. We saw nothing even remotely similar under Obama’s DoJ, despite the far higher level of economic losses that occurred when the housing bubble collapsed and financial markets followed.

The guidelines set out by Yates are supposed to be significantly tougher and move the system back closer to the status quo ante the adoption of the Holder doctrine. This discussion of what guidelines the DoJ uses may seem horribly recondite and inside-baseball. Yet understanding the implications of what I’ve very briefly summarized here, IMHO, is at least as important as whether prosecutors play for the red or the blue team.

Incentivize Lawyers and Investigators to Offset the Public Sector’s Lack of Resources

Moving away from the US for a moment, I’d now like to return to the Dealbook NYT account of the Jesus College, Cambridge symposium, quoting a prominent QC, Alison Levitt (of Mishcon de Reya), on another tactic the UK could pursue for fighting economic crime:

[She] offered a novel solution to the problem that strapped governments face in allocating resources to fighting economic crime. She recommended that government involve the private sector. For instance, in Britain, there are nearly £2 billion, or $2.66 billion, in uncollected confiscation orders. The government, she said, could sell these claims to private law firms and investigators at a discount, and they, not the resource-challenged government departments, could work at recovering the money and giving back a portion of it to the state.

Ms. Levitt’s recommendations are most likely to be heard at the highest echelons of government.

Though in private practice today, Ms. Levitt occupied an important position in Britain’s criminal justice system. Before joining Mishcon de Reya, she was the principal legal adviser to the director of public prosecutions, advising on some of the most significant cases of the time and appearing as counsel in the Court of Appeal.

As I wrote last week, SEC Takes Victory Lap for Pathetic Performance of Whistleblower Program the US has long used a bounty system to recover monies that have been inappropriately taken from the federal government, with whistleblowers playing a central role in the process:

Incentives for private parties to spill the beans are a hallowed component of the US legal system, dating back to the Civil War-era False Claims Act (FCA) and extended by Congress in 1986. This statute includes “qui tam” provisions permitting individuals to sue on behalf of the government– and to receive a bounty if they prevail. The phrase qui tam is an abbreviation for the Latin “qui tam pro domino rege quam pro se ipso in hac parts sequitur”, which means “[he] who sues in this matter for the king as well as for himself.”

The system Levitt seems to be advocating does not hinge on whistleblowers per se, because in the UK instance, the Crown has prevailed on its claim and is turning to private lawyers to recover monies due. Yet the US qui tam system also depends on incentivizing private attorneys, in this instance to bring qui tam claims on behalf of clients.

Again referring to my post from last week, these private attorneys:

expand the resources that can be devoted to such cases. IIRC, the Department of Justice (DoJ) in DC has 60 lawyers who take on FCA cases, as compared to several hundred members of the private bar who bring these cases (and sometimes, both DoJ and private attorneys work in tandem). Private lawyers typically get contingency fees of up to one-third of any amounts that they recover on behalf of their clients; the FCA also allows fee shifting to the whistleblower meaning that if these cases go to trial and the whistleblower wins, the losing side pays the whistleblower’s legal fees.

Closing Thoughts

I should point out that there are many significant differences between UK and US legal system. In general, the UK system rejects the use of contingency fees. So it would reflect a significant shift to allow private attorneys to play a much more prominent role in what seems to me to be a performance-based fee contingent on recovery of monies due to the Crown.

It is perhaps a measure of the frustration of ethical public and private attorneys alike with the deteriorating situation with respect to economic crime that such far-reaching changes are being seriously mooted.


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