Article Business Crimes Bulletin

Feds to Corporate America: "The Cops are Coming"

On Jan. 19, the Department of Justice (DOJ) announced the arrest of 22 individuals as part of a "sting" operation aimed at uncovering violations of the Foreign Corrupt Practices Act (FCPA). As intended, the case got a great deal of publicity due to both the large number of individuals arrested and the manner in which the investigation was handled.

The message delivered personally by Lanny Breuer, the Assistant Attorney General for the Criminal Division who oversees FCPA prosecutions, was clear: "We are going to bring all the innovations of our organized crime and drug war cases to the fight against white-collar criminals."

When combined with the use of wiretaps in the Galleon hedge fund prosecutions in New York, a series of large health care fraud "takedowns" (arrests) by a DOJ "Strike Force," and the SEC enforcement chief's public statements about DOJ-like cooperation incentives for individuals, it becomes clear that the government enforcement community is taking a more aggressive approach toward white-collar prosecutions -- one that focuses on large takedowns, individual prosecutions, and law enforcement techniques rather than relying on companies to self-report and conduct internal investigations. As a result, senior company leadership will likely need to refocus the manner in which they deal with DOJ investigations and corporate criminal liability.


On Jan. 19, the DOJ unsealed indictments of 22 individuals, all of whom worked in sales of products for military or law enforcement use. The indictments were the result of a six-month undercover operation in which an FBI agent posed as a representative of the government of Gabon. The agent worked with an informant (who has been reported in the press to be Richard Bistrong) with strong industry ties. Together, they allegedly struck deals with the individuals, in which the defendants agreed to pay the undercover agent a 20% commission, of which 10% was allegedly represented as destined for Gabon's Minister of Defense.

All but one of the defendants were arrested during the industry's biggest trade show, a move that appears designed to maximize the shock factor attending the arrests. Moreover, this takedown occurred during a period when the leadership of DOJ's Criminal Division and Fraud Section has stated publicly that it intends to bring more enforcement actions against individuals. These prosecutions appear aimed in part at turning individual defendants against their corporate employers.


In the Galleon case, the U.S. Attorney's Office for the Southern District of New York has arrested at least 15 individuals. One notable aspect of this prosecution has been the Office's use of wiretaps. That Office has long prided itself on using wiretaps and other aggressive techniques in white-collar cases. For example, in 2000 "Operation Uptick" resulted in the arrest of 120 defendants on charges of securities fraud and related crimes. A large number of the defendants appeared to be typical "white-collar" defendants who worked at financial institutions in New York and around the country; others were alleged to have been corrupt union officials or members of organized crime groups, including at least one reputed "Capo" in the Bonnano family. At the time, the arrests were heralded for their breadth and aggressive techniques, which involved an FBI infiltration of an investment banking firm. Nevertheless, the use of those methods in the Galleon case has garnered a great deal of publicity, and U.S. Attorney Preet Bharara called their use in Galleon "unprecedented." In addition to the Galleon employees who were arrested, the government charged two outside professionals -- a Ropes & Gray associate and a McKinsey consultant -- with violating the federal securities laws.


The DOJ has also been taking an increasingly aggressive approach to health care fraud. In May 2009, it established the Medicare Strike Force, under the leadership of the Fraud Section, to combat fraud against the Medicare program, false claims and improper kickbacks. As part of the program, the government says that it has arrested hundreds of individuals in the health care industry, with charges being brought in Detroit, Houston, Miami, Boston, Louisiana and New York. In a number of the press releases trumpeting these actions, the DOJ stated that the arrests had occurred during "early morning takedowns," indicating that the defendants were taken by surprise, in contrast to the classic model of white-collar enforcement involving lengthy negotiations with the government before charges are filed.


In an Aug. 5, 2009 speech, the SEC's chief of enforcement, Robert Khuzami, announced that his enforcement team would begin offering DOJ-style "cooperation agreements" to individuals, with the goal of giving them incentives to cooperate with division investigations. The incentives could include items like DOJ-style deferred-prosecution agreements or SEC-sponsored immunity applications to the DOJ.

Khuzami's speech was followed up in January 2010 with the SEC's Enforcement Manual, which included specific parameters for the cooperation, including the concept of "substantial assistance" borrowed from the Sentencing Guidelines and the adoption of DOJ-like tools such as proffer, cooperation, deferred prosecution, and non-prosecution agreements. Given Khuzami's background as a DOJ prosecutor (he supervised the investigation of Operation Uptick), as well as his hiring of other former prosecutors from the Manhattan Attorney's Office into top positions (George Cannellos to head up the SEC's New York office and Lorin Reisner to serve as Khuzami's deputy in Washington), it seems clear that the SEC enforcement direction is veering strongly towards criminal prosecution.


The government's most conspicuous recent white-collar successes, including the recent FCPA prosecutions of Siemens, Halliburton/KBR, Daimler Chrysler, BAE Systems and Technip (itself an offshoot of the already massive Halliburton case), which have totaled more than $1.25 billion in penalty payments to DOJ alone and over $3 billion in total penalty payments to U.S. and foreign enforcement authorities, have an important common aspect: None of them were the result of voluntary disclosures by the companies. In addition, these recent successes have led to greater funding for more aggressive traditional investigations. Through this process, DOJ has learned that it does not need to rely on self-disclosures or corporate cooperation to make big cases. This is not just a change in tactics, but a difference in the way the government seeks to prevent and detect white-collar crime.


Over approximately the last two decades, corporate defendants were often able to get out in front of enforcement actions. Once they learned about their employees' misconduct, companies were able to conduct internal investigations, take remedial actions, and make decisions about disclosure to the government. Even in situations where companies elected not to disclose but the government learned of the conduct through its own investigations, the companies were in a position where they knew of the conduct in advance and had likely planned for the eventuality of DOJ discovering it.

Contrast that with the current circumstances, where boards and executive leadership learn of misconduct when their employees are arrested at dawn, often with significant attendant press coverage (as was the case in a number of the arrests described above). Those takedowns may have occurred as the result of aggressive law enforcement techniques, such as wiretaps or undercover agents, allowing the government to obtain "real time" evidence of criminal activity, to which the board or corporate leadership is not privy. The individual defendants are then presented with strong incentives, from both criminal and civil enforcement authorities, to cooperate against their employers. Moreover, the FBI may have executed search warrants (as they did in the January FCPA arrests), which removed evidence from the company's control, preventing its leaders from knowing what evidence is in the government's possession -- a stark difference from the circumstances in which all evidence in the government's possession came via the company's cooperation, allowing the corporation to track carefully what the government knows.


Going forward, corporations may find themselves in positions far more similar to those of their individual employees: forced to make informed guesses as to what the government knows and is doing -- a far more reactive posture. In this environment, proactive compliance programs become even more critical, as those controls are what give corporate leaders the ability to find any soft spots in their employees' corporate ethics. Additionally, companies now need an enforcement response plan for dealing with unexpected arrests and execution of search warrants. Businesses must expect government agencies to seek large penalties from companies caught flat-footed.

With a good compliance team, companies may still be able to stay in front of government enforcers. But the gap seems to be narrowing.