United States: white-collar crime defence

Overview: future growth and continued internationalisation

After several years of decline, white-collar criminal prosecutions in the US are on the rise. In large part owing to budget cuts, prosecutions and civil enforcement actions slowed during the first part of the Obama administration. This decrease from 2010 to 2013 is confirmed by analyses by various legal publications, universities and law firms, despite some high-profile cases in New York and well-publicised scandals at financial institutions. With reduced resources, the Department of Justice (DOJ) has looked more and more to corporations to investigate themselves. Consequently, more and more white-collar attorneys spend their time doing internal investigation work.

Yet with the economy improving and hiring freezes ending, recent trends appear to show an uptick in the number of cases filed, and we expect this increase to continue for the foreseeable future. In addition to more criminal cases, enforcement actions are being prosecuted outside the traditional criminal setting through civil and administrative actions more frequently than ever before, a trend which we see continuing.

We view the practice as generally breaking down into two tiers of white-collar cases – those involving large national or international corporations (and their officers and employees), and those targeting individuals on the local level engaged in smaller scale conduct. The white-collar attorney representing the largest entities and the wealthiest individuals is increasingly dealing with investigations that cross borders into multiple jurisdictions and involve law enforcement agencies serving different governments.

The internationalisation of significant white-collar investigations is augured not only by ever increasing FCPA investigations and enforcement actions, but also by the prosecutions that have emerged from the Libor scandal, the guilty pleas entered by Credit Suisse and BNP Paribas (both, notably, not US-based banks), and the FATCA rules – enacted in 2010 – that went live in July 2014. The FIFA case shows US law enforcement tackling international corruption and reaching outside American borders on a new scale as well. Meanwhile, the trickle of Bitcoin and related money remitting cases seems to grow monthly, requiring cross-border law enforcement resources and cooperation. ABA-sponsored white-collar crime conferences have gone global. Attendance at recent conferences in Germany and London was high enough that in late 2015 the ABA will hold its first white-collar conference in China, further reflecting a recognition that white-collar practice is increasingly cross-border.

This chapter reviews the most significant developments over the past few years in the US white-collar area by discussing changes at the DOJ and the SEC, forthcoming changes in the US Sentencing Guidelines, and hot cases and topics in the critical white-collar substantive areas.

Recent developments

New chiefs and increased numbers

Changes at the DOJ and the SEC are directly affecting the white-collar practice. Newly installed US Attorney General Loretta Lynch has spent time as a white-collar defence attorney, and previously served on a DOJ task force on Wall Street’s role in the financial crisis. Further, she began her tenure with the FIFA case, one of the highest profile white-collar cases in recent memory. We expect that under her leadership, the DOJ will continue to increase its focus on white-collar crime enforcement. However, it is still hampered in these efforts because its ranks are currently filled with many inexperienced prosecutors who may not quite be prepared for the large-scale investigations of years’ past. Following the lifting of a three-year hiring freeze in February 2014, US Attorney’s Offices around the country went on hiring sprees.

An outlier among its colleagues, the US Attorney’s Office in the Southern District of New York saw a string of high-profile convictions in securities fraud and insider trading cases in 2013 and 2014.  Yet it suffered a resounding defeat in December 2014, when the insider trading convictions of Anthony Chiasson and Todd Newman were overturned because they did not know that insiders were improperly leaking confidential information in exchange for some ‘personal benefit’. That case, in which the SDNY’s aggressive insider trading theories were soundly rejected by the Second Circuit, led to reversals in other cases – including of guilty pleas – and is still reverberating around the country. At the same time, while Newman appeared to add a significant weapon to the white-collar defence lawyer’s arsenal, in the recent case of US v Bassam Yacoub Salman, the Ninth Circuit refused to adopt the Second Circuit’s standard. Writing for the court and sitting by designation, SDNY District Judge Jed Rakoff held that trading on information one knows came from an insider who breached a fiduciary duty was sufficient to sustain a conviction. All of this suggests that the debate over the scope of insider trading prosecutions will continue for the foreseeable future, at least until Congress steps in to clearly define the offence, as recently proposed by Connecticut Representative Jim Himes.

At the SEC, Mary Jo White was confirmed as chairwoman in April 2013. In June 2013, she announced that defendants in SEC enforcement actions will no longer be allowed to settle such actions while ‘neither admitting nor denying’ the wrongdoing. Nonetheless, she later clarified that this new policy only applies to ‘cases involving egregious conduct’, a category which in practice does not seem to encompass the vast majority of actions brought by the SEC. Judge Rakoff also refused to approve a US$285 million ‘neither admit nor deny’ settlement of SEC charges against Citigroup. On 4 June 2014, the Second Circuit Court of Appeals vacated Judge Rakoff’s decision as an abuse of discretion. Whether Ms White’s May 2014 announcement regarding the SEC’s plans to dust off section 20(b) of the Securities Exchange Act of 1934 – which, under the ‘innocent instrumentality’ doctrine, provides a way to hold responsible those who use others to engage in wrongdoing without committing the violation themselves – will have more bite and is a true signal of a more muscular SEC, remains to be seen.

In 2013/2014 the SEC also suffered a string of high-profile losses and mixed verdicts at trial, including in insider trading cases against maverick billionaire Mark Cuban, hedge fund manager Nelson Obus, STEC Inc founder Manouchehr Moshayedi, and Texas tycoon Sam Wyly Jr. Facing calls to reassess its policies and procedures in the wake of those cases, it would not be surprising if the SEC seeks to file more of its enforcement actions as administrative proceedings, where the SEC faces an easier road to victory. Administrative proceedings offer the SEC the benefits of limited discovery, a bench trial by an administrative law judge, significantly less time before trial, and a more difficult appeals process.

Sentencing

With strained budgets, overcrowded prisons, and increasing criticism of the advisory US Sentencing Guidelines, there have been more calls for reform, including progress in efforts to reform the United States Sentencing Guidelines related to financial crimes. New Guidelines for white-collar cases come into effect in November 2015, adjusting the ‘loss table’ to account for inflation, changing the emphasis on how victims of fraud offences influence sentencing, and limiting intended loss to that which a defendant ‘purposely sought to inflict’. The impact of these changes is a subject of debate and will only be known once the new Guidelines come into effect. Meanwhile, judges throughout the country continue to question whether the Guidelines – as they stand – provide accurate pathways to appropriate sentencing decisions. Attorneys preparing clients’ sentencing positions will find a growing body of work by eminent legal professionals that supports the notion that the Guidelines in their current form should not be a reliable indicator of where ultimate sentence should lie, and a growing number of judges receptive to such arguments.

Forfeiture

Prosecutors gained a significant advantage over defendants and their lawyers in 2014, with the Supreme Court’s decision in Kaley v United States. There the Court held that indicted defendants cannot challenge the seizure of their assets prior to trial if a judge finds that the assets may be subject to forfeiture, even if they are needed to pay lawyers to defend them at trial. As forfeiture efforts increase – certain US attorney’s offices have entire sections dedicated to asset forfeiture litigation – clients may find themselves without expected resources to pay for the attorney of their choice. Further, with Kaley promising a prosecutor an easier path to conviction by denying a defendant the ability to afford qualified counsel and effective pretrial preparation, we can expect the government to be even more aggressive in seeking to freeze assets. This increasingly leaves private counsel in the difficult position of having to verify the source and availability of funds for post-indictment representation before making promises to a client that may be difficult to keep.

Securities

There are two legal developments in the securities area we wish to highlight.

Above we noted an increase in insider trading prosecutions, and the recent opinions in Newman and Salman that will continue to impact such prosecutions. A second area of legal dispute is over the reach of securities laws to overseas conduct. As prosecutors try to extend their reach abroad, defence lawyers often respond that US statutes do not catch some of the conduct being charged. This issue came up in the Second Circuit in US v Mandell. Following up on the Supreme Court’s 2010 Morrison decision – which limited the extraterritorial reach of section 10(b) of the Securities and Exchange Act and SEC rule 10(b)-5 – Mandell expanded that reach by holding that even if securities are traded on a foreign exchange, if purchases or other transactions related to those securities take place in the United States, American courts have jurisdiction. The Mandell opinion will bolster prosecutors to use any conduct in the United States to potentially form the basis of a securities fraud prosecution, no matter where the security may actually be traded or held. Persons doing business in Europe or Asia may find themselves on the receiving end of a prosecutor’s subpoena or indictment if they take even minimal steps to offer or trade foreign securities in the United States. Yet prosecutors must be careful not to attempt to extend extraterritorial jurisdiction too far: District Court Judge Charles Breyer excoriated the US Attorney’s Office in San Francisco in the Sidorenko matter for ‘using the resource of your office to go after criminal activity that occurs [entirely] in foreign countries’, before dismissing the case in April of this year.

Extraterritorial conduct

The prosecution of top FIFA officials shows that notwithstanding the Sidorenko debacle, the DOJ intends to lead the charge on international cases even where much of the criminal conduct occurs in foreign jurisdictions. In the FIFA case, the DOJ was very careful to draft an indictment that emphasises US-based conduct and the use of US-based banks. That alone should allow prosecutors to avoid the problems they confronted in Sidorenko. But while much of the world has cheered the effort to clean up the world’s largest and most powerful sports organisation, in at least some quarters the question of whether this case really belongs in the United States still lingers. Nonetheless, given that the case was begun under the leadership of then US-Attorney and now-Attorney General Loretta Lynch, the FIFA case should be a signal that DOJ prosecutions of international conduct beyond the securities realm will continue over the coming years.

Financial institutions

Contrary to expectations, few high-profile mortgage fraud cases emerged out of the 2008 financial crisis. Rather, criminal prosecutions generally were limited to individuals at the low levels of the relevant financial institutions, local loan brokers, and those who took advantage of the fallout from the crisis. After the US government salvaged AIG, and the collapse of Lehman, some suggested that the large Wall Street financial institutions were ‘too big to fail and too big to jail’. Nonetheless, we believe we will see a growth in cases under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), which gained international attention in early 2013 when the US Attorney’s Office in Los Angeles filed a civil suit against Standard & Poor’s Financial Services LLC and its parent, McGraw-Hill, using the statute in place of normal enforcement mechanisms to address some of the consequences the mortgage crisis. In February 2015, S&P settled the case for US$1.375 billion. Prior to that, the DOJ secured other victories in this arena, including a July 2014 settlement with Citigroup where it agreed to pay a US$4 billion FIRREA penalty as part of its US$7 billion settlement with the government. This came on the heels of JP Morgan Chase paying a US$2 billion FIRREA penalty as part of its record US$13 billion settlement. The government has also used FIRREA in several other high-profile cases, including against Bank of America and SunTrust Mortgage. The government is likely taking encouragement from these settlements and recent court victories, and considering the expanded use of FIRREA to address those situations where it cannot meet the beyond-a-reasonable-doubt standard but nonetheless seeks to prove fraud and obtain significant financial penalties.

The shockwaves from the now multi-year Libor investigation continues to be felt in 2015, as Deutsche Bank agreed to the largest settlement in the scandal, with its London-based branch pleading guilty and the bank paying US$2.5 billion to US and European regulators, bringing its total amount of fines to US$3.5 billion. Trial of various individuals with roles in the case will continue through 2015, with cases perhaps dragging into 2016 as well. The investigation is a joint effort by US and UK enforcement agencies. Reports of manipulation in other financial arenas are likely to generate additional investigations of international investors.

Tax

FATCA-based prosecutions are likely to expand in 2015 and into 2016. FATCA legislation was passed in 2010, but only took effect in July 2014. In the interim, according to Forbes, approximately 77,000 financial institutions have signed on and registered with the Internal Revenue Service (IRS), and approximately 80 countries have signed intergovernmental agreements. Even traditional tax havens like Switzerland and ‘unfriendly’ countries such as Russia and China are participating. In this new world, the IRS is able to reach across borders to more easily find assets with the help of international law enforcement cooperation. Foreign financial entities and governments are increasingly becoming ‘watchdogs’ for the US government, required to disclose foreign assets held by US persons. Those who fail to comply with FATCA rules will face the prospect not only of a 30 per cent withholding of funds, but also potential criminal charges. Likewise, those whose foreign assets are suddenly disclosed may well find themselves in prosecutors’ cross-hairs (not to mention the IRS’s). In parallel, UK inquiries about tax affairs in 2013 almost doubled those made in 2011 and 2012 combined.

FCPA

FCPA cases continue to be an area of extensive activity, with aggressive enforcement by the DOJ and the SEC. A record 74 actions were filed or settled in 2010, and while that year was an outlier, the number of enforcement actions filed in 2014 – 26 between the DOJ and the SEC – almost matched the 27 they brought in 2013. Enforcement actions at the mid-point of 2015 are significantly fewer, with only eight in total being brought by the agencies. In 2014, two notable FCPA settlements involved Alcoa (which agreed to pay US$384 million to settle SEC charges and a parallel criminal case) and HP (which agreed to pay US$108 million to do the same). These large settlements reflect the growing cost of settling FCPA actions, with at least one source estimating that it cost four times more to settle an FCPA case in 2013 than it did in 2012. While the number of enforcement actions in 2015 may seem to be down, there is little doubt this area of international enforcement which involves cross-border cooperation will continue to be a focus for government agencies for the foreseeable future.

Economic espionage

Prosecutions for thefts of trade secrets – whether for the benefit of a foreign government, instrumentality, or agent, or simply for economic gain – are on the rise. Recent cases include the charges filed against six Chinese citizens, including two professors, related to the alleged theft of sensitive wireless technology, and separate charges against Chinese military hackers. Both cases were brought with great fanfare and publicity. Economic espionage cased have been filed in aerospace, defence, technology, renewable energy, agribusiness and the financial services sectors. There are a host of possible defences to such charges, including challenges to jurisdiction, service of process, whether the item in question is a trade secret, and whether the defendant knew the information to be proprietary. Moreover, prosecutors face the real-world problems of charging persons where they and the evidence are located in countries with limited or no evidence gathering or extradition agreements. Nonetheless, in 2013 the DOJ had a string of convictions in cases such as US v Nosal (related to Korn/Ferry International’s trade secrets), US v Jin (Motorola) and US v Liew (DuPont), and the DOJ has repeatedly signalled that such prosecutions will continue and expand.

Exports

A related but distinct area are enforcement actions related to US export laws. Commercial exports are regulated primarily by the Department of Commerce, but exports of products that have solely military or dual-use capabilities are regulated primarily by the Department of State, and there are a host of other agencies that often get involved in criminal export cases, including divisions of the Department of Homeland Security, the Department of Defense, and the Treasury. Export laws generally split into two categories: laws designed to protect, and in some cases promote, commercial exports; and laws designed to limit, and in some cases prevent, the dissemination of technology with military capabilities. US laws require exporters to know not only your customer, but also the end-user. The laws also require the exporter to identify and disclose the end-use. Most cases involve US companies selling to intermediaries, such as joint venture partners or distributors. The decision to prosecute often comes down to whether the exporter made good faith efforts to comply with the regulations, whether the technology was advanced and not yet in the public domain, and whether US authorities can gather the information they need from overseas sources.

Most export violations are dealt with administratively. When export cases are filed criminally, they tend to focus on export of military products to our clearest enemies, namely Iran, Syria, North Korea, and to our strongest potential adversaries, such as China. Public policy considerations make it difficult for the government to follow a clear and coherent enforcement practice. A conviction of a major defence contractor, for example, can result in suspension or debarment from government contracts – something that our military often has just as strong of an interest in avoiding as does the private enterprise. Mere investigations can kill or cripple an entire industry. The political debate between those who are more focused on trade versus those more focused on restricting other countries from obtaining advanced technology and weaponry will continue to impact the number and nature of export prosecutions as the political pendulum swings back and forth.

Health care

On the more local level, enforcement actions in the health care arena saw a precipitous rise in 2014 and into 2015, and show no signs of waning. The DOJ and HHS have set up special, joint task forces that are aggressively pursuing both individual and corporate defendants, including targeting individual officers and key employees even where their employers may be able to negotiate non-prosecution or deferred prosecution agreements. Both agencies are bragging of record fines and restitution orders and promising more to come. An explosion in health care qui tam actions has only bolstered the enforcement efforts, with private citizens doing the initial legwork for the government. Readers should look out for a possible Supreme Court review of the specificity required in qui tam FCA complaints that could potentially limit such cases and the associated financial consequences. As more individuals and entities move into the health-care arena to serve an ageing US population, there will likely be no let-up in enforcement actions to ensure compliance with the complex web of statutes and regulations on federal and local levels.

Antitrust

The DOJ’s Antitrust Division has been active in the past few years with major cases against different sectors of the automotive parts industry. The most significant trial involved a price-fixing prosecution of AU Optronics and executives in the LCD display industry. Following conviction of the company and three executives, AUO was fined US$500 million. The convictions of the executives – two of which were recently affirmed on appeal – were the DOJ’s first convictions at trial of foreign nationals on antitrust charges, and set the stage for a possible test of one of the DOJ’s most frequently used threats in antitrust cases: exclusion of individuals from the United States for committing a crime of moral turpitude, as antitrust violations have been labelled since 1996. Normally such exclusion is waived by the government as part of a plea deal, and it remains to be seen whether the DOJ will seek to test the exclusion theory in front of an immigration judge in this case.

On a separate note, the Antitrust Division revised its policy involving ‘carve-out’ letters. When the DOJ settles with a company, it used to publicly state the names of those company executives who may still be prosecuted which harmed the reputations of those who never actually were prosecuted. Now, the DOJ only identifies by name those individuals who actually are prosecuted. 

Public corruption

These cases are, in the words of the Wall Street Journal, ‘soaring’. Mayors, state legislators, and even governors are being regularly targeted by the FBI, and it appears that every few months brings a new round of charges. In 2015, the conviction of former Virginia governor Robert McDonnell by a jury of 11 counts of corruption was affirmed on appeal. Before that, the highest-profile case over the past few years was in Detroit, where 17 people were prosecuted and former mayor Kilpatrick was convicted and sentenced to 28 years in prison. In Louisiana, former New Orleans mayor Nagin was sentenced to 10 years in prison for crimes related to Hurricane Katrina. Even Congress, which seemed largely immune from corruption prosecution after the Supreme Court refused to overturn a lower court’s ruling that the FBI violated separation of powers provisions when they raided then-Rep. William Jefferson’s office, saw former New York Representative Michael Grimm sentenced to eight months in prison after pleading guilty to tax fraud in July 2015. It was also recently revealed that the FBI is investigating Illinois Representative Aaron Schock regarding allegations of improper spending from his office and campaign accounts. It is clear that the DOJ is highly vigilant in this area and we should expect more highly publicised cases in the coming months.

Environmental crimes

Prosecutions in this area in recent years have been notably uneven. Certain discharges of pollutants that were not illegal at all in the 1960s became subject to civil remedies, became misdemeanors in the 1970s, and then became felonies in the 1980s. Enhanced resources were devoted to bringing environmental prosecutions in the 1990s. By the 2000s, however, criminal prosecutions flattened or receded. Part of the reason for this has been because the actions relating to an environmental violation are often diffuse among different actors within a corporation; it is not unusual to find that no one person has an evil intent. Even though many environmental statutes have lower intent requirements, there has been some shift away from filing criminal cases under strict liability or negligence statutes. Other reasons for reduced federal criminal statutes and filings include tighter regulations, more responsible corporate behaviour, and a preference to use civil statutes to handle many cases which could be prosecuted either way.

Nevertheless, a few large cases involving major catastrophes have grabbed international headlines. These have been primarily fallen under the Clean Water Act and involved major oil spills, such as the Exxon Valdez case and more recently cases arising out of the BP oil spill in the Gulf of Mexico. That disaster led to guilty pleas by BP, Halliburton and Transocean Deepwater Inc in 2013, deals which yielded US$4.4 billion in criminal fines and penalties. Prosecutions of individuals for conduct related to these events are continuing into 2015, though with limited success. Former BP executive David Rainey was recently acquitted on charges of making false statements to investigators in connection with the spill, and a new trial has been ordered for former BP-engineer Kurt Mix after jury irregularities were found following his conviction. Pending another disaster on the scale of the Deepwater blowout, the EPA and other relevant agencies appear to generally prefer administrative and civil actions to address environmental cases.

Conclusion

With the end of the hiring freeze at the DOJ and the instalment of Loretta Lynch, readers can expect white-collar prosecutions to grow in number. While internal investigations will remain a large and important part of the practice, we expect white-collar attorneys will also see more time in the courtroom defending criminal, civil, or administrative enforcement actions. As the DOJ continues to expand its cooperation with countries around the globe, white-collar attorney will continue to rock up miles. We believe that some areas such as economic espionage and health care will continue to grow across the board. Other areas, such as FCPA and banking, should remain a large part of the practice area of more sophisticated and international practitioners. Finally, we expect the government’s use of forfeiture and freeze actions to cut into the ability of medium-sized and smaller clients to be able to afford private counsel.