Financial institutions must prepare to account for their use of Troubled Asset Relief Program funds.

Most Americans do not know what the SIGTARP is.  For those in the financial community, however, the SIGTARP is perhaps the most important acronym to come along in years.  Otherwise known as the special inspector general for the TARP, the SIGTARP was created by U.S. Congress to monitor and audit the expenditure and use of the $700 billion Troubled Asset Relief Program (TARP).  To date, the U.S. Department of Treasury has distributed just over $350 billion to financial institutions under the TARP program.  And, on February 10, 2008, Treasury Secretary Timothy Geithner rolled out a plan to begin the distribution of the remaining $350 billion.  

The SIGTARP is more than just an acronym.  It is also a man:  Neil Barofsky, a former assistant U.S. attorney for the Southern District of New York.  Appointed by the president and confirmed by the Senate, Barofsky has the authority to oversee, audit and investigate those institutions that have received, and will receive, TARP funds.  By all accounts, Barofsky is bright, capable and aggressive.  He is a former lead prosecutor in the securities fraud unit of the Southern District of New York and is known as the prosecutor who made the former Refco chairman cry on the witness stand.   

Requests for Information from TARP Recipients

To date, Barofsky has shown that he intends to use the powers that Congress has given him.  Like all inspectors general, Barofsky is empowered under the Inspector General Act of 1978, 5 U.S.C. App. 3—an Act that provides him with the power to issue subpoenas for records or documents.  While Barofsky does not have the authority to prosecute for crimes directly, his office has already begun to coordinate with civil and criminal law enforcement agencies, other inspectors general and the New York Attorney General’s Office. 

Of most importance to those that have received TARP funds, however, Barofsky has indicated that he intends to send a letter to each of the 300-plus financial institutions that have received TARP funds.  According to a January 22, 2009, letter from Barofsky to Barney Frank, chairman of the House Committee on Financial Services, the SIGTARP will ask each TARP recipient “to account for their use of TARP funds[.]”  Within 30 days of the request, every financial institution at issue must provide the SIGTARP with the following:

  • A narrative response outlining its use or expected use of TARP funds
  • Copies of pertinent supporting documentation (financial or otherwise) to support such response
  • A description of its plans for complying with applicable executive compensation restrictions
  • A certification by a duly authorized senior executive officer of each company as to the accuracy of all statements, representations and supporting information provided

Although Barofsky intended for the letter to go to recipients sometime within the first week of February 2009, the Office of Management and Budget stepped in at the last minute to delay those letters, because of concerns about compliance with the Paperwork Reduction Act.  Such a delay will not hold up Barofsky’s request long.  At most, if the Paperwork Reduction Act is implicated, the SIGTARP will first have to wait through a 15-day public comment period before the letter can be sent to TARP recipients.   

Potential Pitfalls

Whenever the letters eventually arrive, they nonetheless pose a series of potential pitfalls for TARP recipients.  As with any request from a duly authorized investigative body, TARP recipients will need to proceed with caution in providing the SIGTARP with the information it seeks. 

Responding to requests for information and documents can be costly and time consuming, especially for financial institutions that are strapped for cash.  Nonetheless, in light of the current political climate, cooperation is perhaps the only path.  This does not mean that recipients should merely succumb to unreasonable deadlines or requests.  But, it does mean that they should make every effort to work with the SIGTARP to provide it with the information it needs in a timely fashion.  Failure to get on top of the request and deploy the proper resources to an immediate response could result in further inquiry and potential trouble down the road.

Recipients must also proceed with caution to ensure that they don’t place their institution at risk of civil litigation or criminal prosecution.  For recipients who have U.S. Securities and Exchange Commission (SEC) reporting requirements, for instance, care must be given that information provided to the SIGTARP is accurate and consistent with the information used for the preparation and filing of SEC reports and proxy statements, as well as for certifications required by Sarbanes-Oxley.

The certification requirement also creates the possibility that false claims litigation could arise out of almost every submission.  The False Claims Act provides that those who knowingly submit a false claim for payment to the U.S. government are liable for up to three times the amount of the payment  .  The Act provides that private whistleblowers can pursue false claims actions on behalf of the government, creating the possibility that a disgruntled present or former employer could file suit.  In addition, the U.S. Department of Justice can pursue either civil or criminal charges against a recipient based on the submission of a false certification.

Criminal charges are also a risk under the federal false statements statute, 18 U.S.C. §1001.  Under that provision, it is a crime to “knowingly and willfully” conceal or cover-up any material fact or to make any materially false statement.  The statute applies to almost any response to the SIGTARP, whether it is a formal certification or an informal letter.  Recipients must take care, therefore, to ensure that any response is not only accurate, but also complete.

The threat of civil litigation or criminal proceedings arising from the SIGTARP’s request is a very real one.   At present, the political pressure to find out what TARP recipients did with the money that they received is at its peak.  As Ed Towns, the chairman of the House Oversight and Government Reform Committee, noted during a January 14, 2009, speech, most Americans want to know why the TARP was necessary in the first place and what, exactly, they got for their money.  “All I see,” Towns said, “are institutions sitting on this ‘free’ capital, not lending and not putting those resources in play to help fix the economy.  This is unacceptable.”

For many in Congress, the SIGTARP is the solution to this political problem.  It is the entity that will determine, once and for all, which recipients have used their TARP funds wisely, which have squandered them and which have fallen somewhere in between.  As long as the TARP program remains with us, expect that the SIGTARP will continue to scrutinize every dime that financial institutions have received.  The letters of request set to go out any day now are only the beginning.

Conclusion

It is important that all institutions prepare for these requests.  Adopting a thorough process for gathering information and responding to any request from the SIGTARP is a start.  But TARP recipients must also assemble the proper legal and financial team to master the inquiry, interact with the SIGTARP, and establish a procedure for providing truthful and timely information, while still protecting the legal confidences and privileges of the institution, where applicable.  Not only will this affect the institution’s ability to continue in TARP and other programs rolled out by the U.S. Treasury, but it will also ensure that the institution is adequately protected from the threat of civil litigation, criminal investigation or regulatory action at a time when the political pressure for all three are at an all-time high.