The Justice Department’s white-collar agenda in 2014 was marked by skyrocketing corporate settlements and continued reliance on deferred and non-prosecution agreements, coupled with compliance monitors. Several significant decisions with long-term implications for white-collar cases also were issued by federal courts in 2014. A look at the Justice Department’s approach and these decisions offer a clue as to what to expect in white-collar cases in 2015.
The Department of Justice: Raking in Significant Sums Outside Judicial Purview
From a white-collar perspective, 2014 may best be remembered as the year of multi-billion dollar settlements between the Department of Justice and multi-national financial institutions. Bank of America BAC +0.77%’s settlement for $16.65 billion in August of last year seemed almost routine following earlier deals byJPMorgan Chase JPM 0% and CitiGroup, for $13 billion and $7 billion respectively, for their involvement in the sale of mortgage backed securities. In May, Swiss bank giant Credit Suisse pled guilty to aiding and assisting United States taxpayers in filing false tax returns pursuant to an agreement that required the bank to pay $2.6 billion.
The Justice Department labeled the recoveries in these cases, which were “part of the ongoing efforts of President Obama’s Financial Fraud Enforcement Task Force,” as historically significant. Even though many of the mortgage-backed securities cases were brought in response to criticism that the government treated banks as “too big to fail,” the landmark settlements sparked a new debate about whether the government insufficiently had responded to the financial crises because of the perceived dearth of prosecutions against individuals.
Not to be outdone by their colleagues who pursued financial fraud, other federal and state regulators and prosecutors have been spurred on to demand and obtain record financial penalties. For example, high-profile Foreign Corrupt Practices Act settlements bookended the year – in January 2014, Alcoa AA +2.85% World Alumina LLC agreed to plead guilty and pay $223 million in criminal fines and forfeiture and an additional $161 million to the SEC to resolve criminal and civil charges that it paid millions of dollars in bribes through an international middleman in London to officials of the Kingdom of Bahrain. In December 2014, the Department obtained its highest ever FCPA criminal penalty when Alstom S.A., a French power and transportation company, pled guilty and agreed to pay a $772,290,000 fine to resolve charges related to a widespread scheme involving tens of millions of dollars in bribes in countries around the world, including Indonesia, Saudi Arabia, Egypt and the Bahamas.
Along with skyrocketing settlement figures, the government’s increased reliance on deferred and non-prosecution agreements continued in 2014. These agreements, in which the government agrees not to prosecute so long as the corporate-defendant agrees to pay a fine, admit to misconduct in some cases, and carry out compliance changes under the watchful eye of government-selected compliance monitors, have become a hallmark of the government’s response to white-collar wrongdoing under the leadership of Attorney General Eric Holder. Holder announced his resignation in 2014 and will be stepping down from the position once his successor is in place.
What remains to be seen is whether the Justice Department’s approach in resolving corporate wrongdoing through high-figured settlements will continue, particularly in light of criticism that deferred prosecution agreements allow for the extraction of billions of dollars from corporate defendants often without the benefit of judicial oversight. Loretta Lynch, President Obama’s nominee for Holder’s position, brings to the job a strong background in private practice and two stints as the United States Attorney for the Eastern District of New York that have provided her with familiarity in the area of corporate prosecutions. Certainly all indications are that she will have an equally voracious appetite for taking bites out of mega-corporations found to have engaged in deliberate wrongdoing.
A number of significant federal court decisions in 2014 also significantly will affect the landscape of white-collar cases. In February, the Supreme Court issued a decision significantly limiting a criminal defendant’s ability to challenge a court’s decision to freeze his assets before trial, even when the freeze restricts a defendant’s ability to hire counsel of his choice. As noted in my prior blogon the case, Kaley v. United States, the decision may wreak unique harm in white-collar cases where the defendant’s ability to hire specialized counsel familiar with his case is critical.
The federal Second Circuit Court of Appeals, located in our nation’s financial capital, also issued some notable decisions in 2014. In June, the Court tackled questions pertaining to the Fourth Amendment’s application in the digital age in United States v. Ganias. In that decision, the Court reversed a tax evasion conviction, finding that the government violated the defendant’s Fourth Amendment rights by its unauthorized two-and-one-half year retention of the defendant’s personal files located on an imaged hard drive lawfully seized in an earlier investigation. The interplay between the Fourth Amendment and digital data has particular significance in the white-collar context where the government frequently seizes, copies and retains computer records for extensive review.
Perhaps the most significant decision in 2014 was the Second Circuit’s December decision in United States v. Newman. At issue in Newman was whether the government must prove that a remote tippee had knowledge not only that the original tipper violated a duty by leaking the material, non-public information on which he traded, but that the tipper did so to receive a personal benefit. Answering the question in the affirmative, the Court narrowed the definition of “personal benefit” – an element of any insider trading case – to exclude those cases where the personal benefit is based on mere friendship between the tipper and tippee. Instead, the federal appellate panel held that the government must offer proof of a “meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable.”
What’s Ahead in 2015?
Whether the decision in Newman will put a damper on the seemingly endless parade of insider trading prosecutions and convictions that have come out of the Southern District of New York in the past few years remains to be seen. The government may seek rehearing or even review by the United States Supreme Court in that case. Even if such review does not occur, Newman’s lasting impact ultimately will be determined by the reaction of lower courts in interpreting the decision. Whether it will be business as usual in the Justice Department after Holder’s departure is an open question as well. Because corporations demonstrated a willingness to pay huge fines and penalties to resolve criminal and enforcement matters in 2014, we can expect federal and state prosecutors to continue to reach for the figurative pot of gold.