Category Archives: Financial Fraud

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Prosecutorial Discretion

We (Bob Thomas and Suzanne Durrell) were both federal prosecutors in our not so distant past, and we work with federal prosecutors every day.  One of the least understood aspects of criminal law is prosecutorial discretion, the leeway given to prosecutors to make judgment calls that have huge impacts on the lives of people and companies.  On the criminal side, they (prosecutors) get to decide whom to charge with what offense, whom not to charge, whom to immunize, whom to seek the death penalty against, and so forth.

 

On the civil side, where we now operate more frequently with our False Claims Act whistleblower practice, they get to decide whether to intervene in a case, which theories of liability to run with and which to jettison, which individuals to pursue civilly and which to let slip, what amount of money to settle a case for, which companies and individuals to try to exclude from future participation in the Medicare and Medicaid programs, and so forth.

 

The list of areas where prosecutorial discretion surfaces is quite long.  And in fact, it is hard to imagine a job that a person could have in their late twenties or early thirties where he or she could have so much discretionary power over other people’s lives.  It’s one of the reasons young lawyers love being Assistant U.S. Attorneys:  they get to have relevant professional lives that have real impact, at a relatively early stage of their careers.

 

But the dark side of this reality is that prosecutors can do enormous damage in the exercise of their discretion, which is essentially unreviewable.  This New York Times piece yesterday gave a good example.  On the criminal side of the house, the use of the Section 851 mandatory minimum sentencing enhancements can give prosecutors enormous leverage to force defendants to plead guilty when they would otherwise go to trial.  Sometimes the use of this leverage is inoffensive; other times it can be deeply troubling and lead to unjust results.

 

We now incarcerate a higher percentage of our population than any other industrialized nation in the world, with disproportionate numbers of the prison population being people of color.  Congress, in its zeal to show how tough it could be on drug crime, passed many sentencing “enhancement” laws in the 1980’s that caused sentences to go well beyond the structured sentencing schemes put in place by the federal Sentencing Commission and the guidelines it promulgated.  Section 851 was one of those “enhancements,” and one that should be re-evaluated.

 

On the civil side of the house, an area of fertile debate is the government’s discretionary power to settle large cases against companies for monetary fines and civil damages only, without going after the individuals behind the corporate schemes. In the Pfizer case, for example, the then-record $2.3 billion settlement was impressive indeed, but the judge overseeing the case went out of his way to question prosecutors how $2.3 billion worth of fraud could not result in any individuals being held accountable.  Judge Rakoff in the Southern District of New York has also been a frequent critic of these corporate deals, in one instance rejecting a proposed settlement reached between the government and a bank defendant as too friendly to the bank and lacking in any actual admissions of wrong-doing.

 

So prosecutorial discretion is one of the things that makes the job of a prosecutor challenging and fun. But the wide latitude it gives individual lawyers, with relatively little oversight, can also lead to bad outcomes, or results that leave many questions still to be answered.

Is There Fraud in That Blur of Paperwork?

As whistleblower lawyers, we spend a lot of our professional lives trying to get big companies to behave better when it comes to fraud and abuse matters.  Yes, we represent clients, many of them courageous individuals risking their careers and their personal lives to alert the government of ways the taxpayers are being defrauded.  Yes, some of those clients get paid well for doing the right thing, and when that happens, we get paid as well.  But that’s not the main reason we do this work.

 

We do this work in part because we’re offended by systemic patterns of cheating, and we’d rather spend our time exposing those patterns that coming up with excuses for them.

 

Over the years, one of the things we’ve noticed is how the bewildering complexity of our society’s rules, regulations, and laws have created an environment that actually encourages fraud by making it easier to hide things in the great morasses of paper or electronic data that no one actually reads.  Just bury the details in a massive amount of paper, and what are the chances anyone will ever notice that little — or not so little — scam?

 

There are so many examples.  A recent New York Times article detailed a phenomenon with which we are all familiar:  medical and health insurance paperwork can be utterly impossible to make sense of.

 

“Medical bills and explanation of benefits are undecipherable…, even for experts…”

 

The article quotes a professor of health law.  So we as consumers just shrug and do our best to live in a system that we don’t have time or ability to question.

 

How many of those bills contain errors that we can’t see?

 

As the article points out, we don’t accept this lack of transparency when we go to the grocery store, or when we get a credit card bill.

 

Would it be so difficult to have health care providers and insurers communicate with their patients with transparency?

 

The problem, of course, is not limited to health care.

 

Take a look at the home loan business.  There is a mortgage service company called OCWEN that has been the subject of many recent investigations and lawsuits, over a whole variety of allegations of misfeasance and non-feasance.  Recent settlements with state regulators in California and New York show that the company, which services millions of mortgages, is virtually incapable of providing homeowners with accurate information on their loans.

 

Here’s from a Consent Order with New York State, language that the company admitted:

 

“Ocwen regularly gives borrowers incorrect or outdated information, sends borrowers backdated letters, unreliably tracks data for investors, and maintains inaccurate records. There are insufficient controls in place— either manual or automated—to catch all of these errors and resolve them.”

 

How’s that make you feel as a homeowner?  (OCWEN paid $150 million to New York on behalf of defrauded homeowners in that state alone.)

 

One would never treat a customer this way in a face-to-face transaction.  But in a world of over seven billion people, and more daily transactions than can be counted, we are awash in data and quite blinded by the volume.  And in that smokescreen, there’s plenty of opportunity for mischief.

 

This is why insiders are so critical to the success of whistleblower statutes like the False Claims Act, or the SEC’s Dodd Frank whistleblower program.  In this vast, overwhelming chaos of data, there are people whose job it is to make sense of it all, to navigate through the mess.  When there’s fraud in that morass, only an insider can enable prosecutors and investigators to find it.

Blowing the Whistle on Environmental Law Violations

Scientists believe 2014 will likely be the warmest year on record; and now Christopher K. Warren, a third year law student at Boston College Law School and a former summer law intern with the Whistleblower Law Collaborative, has written a timely and excellent law review article: “Blowing the Whistle on Environmental Law_ How Congress Can Help“.

 

[SCIENTIFIC AMERICAN article].

 

The Note will be published in Volume 42, Issue 1 of the Boston College Environmental Affairs Law Review and is also available online for download as a PDF.

 

Congress has a history of instituting whistleblower programs to protect and reward individuals who expose wrongdoing to the government, most notably the False Claims Act and more recently the Dodd-Frank Act.

 

In this article, Mr. Warren persuasively argues that the recent whistleblower programs instituted by the Securities and Exchange Commission and the Commodities Futures Trading Commission pursuant to the Dodd-Frank Act should be used as models for an Environmental Protection Agency whistleblower program to expose environmental statutory violations and crimes.

 

The major environmental laws such as the Clean Air Act and the Clean Water Act have been on the books for decades now, but the government needs the help of insiders to adequately address violations just as Congress decided in 1986 that the False Claims Act originally enacted during the Civil War needed to be modernized to address the growing problem of fraud against the government. The amended False Claims Act has been hugely successful resulting in the recovery of over $30 billion to the Treasury. The environmental crisis facing the United States and the world is even more daunting and we need all hands on deck. Let’s hope Congress will consider Mr. Warren’s idea.

Will the Justice Department Get Serious About Prosecuting Executives for Financial Frauds?

As Attorney General Holder prepares to leave the Justice Department, questions about his commitment to prosecuting executives of banks continues. An insightful recent report shows the stark contrast between the way the Justice Department handled the savings and loan crisis of the late 1980’s and how it handled the banks’ role in the financial crisis that nearly brought down the U.S. economy in 2008-2009.

 

The report also highlights how the recent multi-billion dollar settlements with banks are not really so big, and are largely subsidized by the shareholders, bondholders, and the taxpayers, with the responsible executives facing no jail time and indeed not even facing civil penalties or exclusion from working in the industry.

 

Attorney General Holder seems to lay the blame for the lack of criminal prosecutions of executives on problems of proof and lack of whistleblowers, among other things. While we applaud his call for greater incentives/rewards for whistleblowers, and recognize that it is not easy to make a criminal case stick, there are a myriad of criminal statutes that could apply (mail fraud and wire fraud coming first to mind) and virtually every bank settlement involved whistleblowers who came forward with information under the whistleblower provisions of FIRREA passed during the S&L crisis or the False Claims Act or both.

 

Perhaps some of the problem stems from the admission earlier this fall that the Criminal Division of the Justice Department has apparently not been systematically reviewing whistleblower complaints; in a recent speech, the Assistant Attorney General for the Criminal Division announced that “We in the Criminal Division have 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. Experienced prosecutors in the Fraud Section are immediately reviewing the qui tam cases when we receive them to determine whether to open a parallel criminal investigation. “ (emphasis added). This is welcome but puzzling news: since at least 1990 (including while now AG Holder was Attorney General Janet Reno’s Deputy with oversight of the Criminal Division), official Justice Department policy has been the opposite and parallel criminal and civil proceedings the expected approach to an investigation of a whistleblower complaint. Perhaps equally revealing is how little of the speech by the Criminal Division Assistant Attorney General touts financial fraud successes (as opposed to health care fraud for example).

 

With the changing of the guard at the top of the Department of Justice, it will be worth watching to see if anything about the Justice Department’s approach to financial fraud really changes or if the criminal side of the Department simply lacks the will, the leadership, or the vision to prosecute individual executives who cross the line. It is a good bet that there are sophisticated financial frauds going on right now, in real time—it is imperative to stop them and to punish the perpetrators. To do that, courageous whistleblowers are needed—and so is a committed Justice Department.

U.S. Scores Big Win Against Bank of America and Countrywide for Bank Fraud

The U.S. District Court Judge has ordered that Bank of America, Countrywide and one individual pay a bank fraud penalty of $1.3.  In his opinion, Judge Rakoff adopted the United States’ interpretation (see brief 1 and brief 2) of the penalty provisions of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, 12 U.S.C. § 1833a  (“FIRREA”), and rejected the argument by defendants.  FIRREA is a powerful weapon passed by Congress in response to the savings and loan crisis of the 1980’s. Using a tip from a whistleblower, prosecutors dusted off the law and used it to great success in this case.  Under FIRREA, a successful whistleblower shall be entitled to a reward of “20 percent to 30 percent of any recovery up to the first $1,000,000 recovered, 10 percent to 20 percent of the next $4,000,000 recovered, and 5 percent to 10 percent of the next $5,000,000 recovered.” 12 U.S.C. § 4205.  In calculating that award, the Attorney General may consider the size of the overall recovery and the usefulness of the information provided by the whistleblower. Id.  This means that in this case, the whistleblower is entitled to an award of between $850,000 to $1.6 million of the government’s $1.3 billion recovery. Unlike the False Claims Act, FIRREA caps the whistleblower’s reward; in other words, he or she only shares in the first $10 million of any recovery.  Presumably the defendants will appeal the jury verdict on liability and the judge’s order on penalty so this saga is not yet over.

United States’ Bank Fraud Case Against Standard & Poor’s Enters Crucial Phase with Big Money on the Line

A year ago, we wrote about the United States’ complaint against Standard & Poor’s, which was filed under the Financial Institutions Reform and Recovery Act of 1989 (“FIRREA”). The case is now in the discovery phase with key depositions of as many as nine current and former employees of S&P upcoming. See article. E-mails implicate members of the rating agency in a scheme to protect client relationships by inflating subprime security ratings. See internal emails.  The clients, who include large investment banks, pay S&P to rate debt securities so that the clients can better account for risk. The government argues that the firm engaged in a scheme to defraud these financial institutions by making false representations about the worthiness of AAA rated securities, while also committing mail and wire fraud. The case presents an opportunity for the government to expose systemic practices that contributed to the nation’s most recent financial collapse.

 

The stakes continue to be high with the government seeking as much as $5 billion in civil penalties stemming from accusations that the rating agency lied about potential conflicts of interest. S&P has every incentive to protect both its reputation and its wallet. Thus, the rating agency will endeavor to show it did not act with the law’s requisite level of intent and that the government is merely seeking retribution for the firm’s decision to lower the U.S. credit rating.

 

It appears there is no whistleblower at the heart of this action. Had a person with knowledge of this type of fraud come forward early on, some financial losses may have been prevented. Further, if the person had come forward prior to the government uncovering the fraud, they would have the potential to recover an award of $1.6 million on a $10 million recovery by the U.S. government. While this is a mere fraction of the penalty sought in the current action, FIRREA (unlike the False Claims Act) has a dollar cap on the whistleblower’s reward, which may discourage some individuals from taking the risk of blowing the whistle.