Obama administration’s enforcement priorities and regulatory tendencies
With the first 100 days of the Obama administration in the books, it is an apt time to examine the legislative, regulatory, and enforcement changes on the horizon that will impact the business community. President Barack Obama has already made consequential appointments and taken aggressive actions as the nation’s chief executive, so “change we can believe in” can officially be deemed “change we must assess.” This Alert highlights the administration’s enforcement priorities and regulatory tendencies, as well as some new legislative proposals being considered by Congress.
While the number of corporate fraud cases pursued by the Department of Justice (DOJ) has decreased in recent years, Attorney General Eric Holder plans to use additional funding proposed in President Obama’s budget to increase the number of those prosecutions. Expect white collar prosecutions generally, and Foreign Corrupt Practices Act (FCPA) investigations in particular, to be given heightened priority amid calls by lawmakers and other critics for a more aggressive crackdown on allegations of financial wrongdoing that have sent Wall Street reeling.
In fact, FBI Deputy Director John S. Pistole recently testified before the U.S. Senate Judiciary Committee that the FBI has opened investigations into more than 500 cases of alleged corporate fraud, and that he sees the number of corporate fraud investigations linked to the financial crisis “potentially rising into the hundreds.” Pistole also testified that the number of mortgage fraud cases investigated by the FBI has risen from 881 in fiscal year 2006 to 1,600 in fiscal year 2008.
Further signaling that the increase in investigations will not be short-lived, the Obama administration recently beefed up the DOJ Corporate Fraud Task Force, with the aim of prosecuting mortgage crimes and safeguarding the federal financial bailouts. The task force, which has traditionally consisted of officials from the SEC, the FBI, and U.S. Attorneys’ offices, is now being joined by the Federal Reserve, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Department of Housing and Urban Development, and the Troubled Asset Relief Program’s (TARP) special inspector general. According to DOJ officials, “The new member agencies represent a continuing focus by the task force to crack down on mortgage fraud, particularly with regard to ongoing investigations into securitization fraud.”
Despite complaints that that the “public corruption” offense is already too broad and ill-defined, the Senate Judiciary Committee passed a little-noticed bill on March 12 that would further expand the reach of a key “public corruption” offense and would provide prosecutors with more money, resources, and power to investigate and prosecute these cases. The legislation, titled the “Public Corruption Prosecution Improvements Act,” would boost funding for federal public corruption investigations by $100 million over four years, and increase the penalties for violations of the public corruption laws.
More alarming, however, is the fact the legislation seeks to reverse the United States Supreme Court’s unanimous decision in United States v. Sun-Diamond Growers of California, which held that in order to establish a federal gratuities violation, prosecutors had to prove “a link between a thing of value conferred upon a public official and a specific ‘official act’ for or because of which it was given.” In other words, the legislation would amend the federal gratuities statute to cover not only instances where a public official (or former official or person selected to be an official) is given anything of value linked to an official act, but also where anything of value is given simply “for or because of the official’s or person’s official position.” In Sun Diamond, the Justice Scalia Court criticized such a statute, stating that criminalizing gifts given to a public official simply because of that official’s position would produce “peculiar results” and “would criminalize a high school principal’s gift of a school baseball cap to the Secretary of Education, by reason of his office, on the occasion of the latter’s visit to the school.”
The proposed legislation provides no safe harbor to former public officials or persons recently elected to public office, or to anyone who – however innocently – gives them anything because of their former or future office. If passed, the Public Corruption Prosecution Improvements Act is destined to create “peculiar results” and prosecutorial excesses by overzealous prosecutors while further fueling the Washington “gotcha” politics that propagate and sustain politicized witch hunts. Businesses, especially entities that engage in lobbying or the political process, should continue to monitor the legislation to ensure that their activities are not impacted by the legislation’s broadened definitions and scope.
Securities and Exchange Commission
New Securities and Exchange Commission (SEC) Chairman Mary Schapiro has pledged a crackdown on fraud and has already announced changes aimed at speeding up inquiries and reaching tougher settlements. In her first speech as SEC chief, Schapiro announced that she is ending a pilot program started under former Chairman Christopher Cox that required SEC staff to seek approval from the five commissioners before negotiating corporate penalties. This rule is considered by many SEC lawyers to be an impediment to effective enforcement, and fines levied against corporations have fallen 85 percent since the requirement was put in place. Schapiro also announced a plan to provide more rapid approval of formal orders of investigation authorizing the staff to issue subpoenas.
Although these changes affect only the internal procedures of the SEC, it appears that Schapiro intends to make good on her promise to reinvigorate the SEC’s enforcement program. In addition to these changes, Schapiro’s specific initiatives include:
Addressing the heavy caseload carried by lawyers in the Enforcement Division, possibly by redirecting open SEC slots to the Enforcement Division and seeking additional funds from Congress for new enforcement hires;
Improving the handling of tips and whistle-blower complaints and focusing on areas where investors are most at risk;
Making further improvements to ensure swift and vigorous enforcement;
Forming an Investor Advisory Committee to ensure that the commission hears first hand about the issues of most concern to investors;
Improving the quality of credit ratings by addressing the inherent conflicts of interest that credit rating agencies face as a result of their compensation models and limiting the impact of credit ratings on capital requirements of regulated financial institutions;
Reducing systemic risk to investors and markets by promoting – and regulating appropriately – centralized clearinghouses for credit default swaps;
Strengthening risk-based oversight of broker-dealers and investment advisers;
Improving the quality of audits for nonpublic broker-dealers, and promoting the safe and sound custody of customer assets by any broker-dealer or investment adviser; and
Working closely with Congress to ensure that legislative restructuring of our financial regulatory system will preserve and strengthen our commitment to transparency; accountability; disclosure; and most of all, investor protection.
On the campaign trail, Obama vowed to “reinvigorate antitrust enforcement” against corporations that use their market dominance to elbow out competitors or keep them from gaining market share. He criticized the Bush administration for having the weakest record of antitrust enforcement of any administration in the last half century, citing statistics showing that, between 2001 and 2006, the antitrust agencies challenged mergers at less than half the rate that they did during the prior four years of the Clinton administration. Obama also promised to step up review of mergers and stop or restructure those likely to harm consumers, and he has further criticized the DOJ for not bringing a single monopolization case in seven years.
Obama appears to have taken a major step in fulfilling that vow by appointing Christine Varney to head the Department of Justice’s Antitrust Division. Varney, who earned a reputation as an especially aggressive enforcer of antitrust law as a member of the Federal Trade Commission (FTC) during the Clinton administration, recently withdrew a controversial Bush administration report that sought to clarify antitrust guidelines on illegal monopoly conduct. The policy reversal, which more closely aligns American antitrust policy on monopolies and predatory practices with the views of antitrust regulators at the European Commission, could severely impact heavyweights in the tech industries, such as Google and Microsoft.
Under the Bush administration, companies had experienced an enforcement policy within the United States that was based on the assumption that market forces, not government action, will correct most anti-competitive consequences. With the prospect of more rigorous enforcement, companies should anticipate how this increased scrutiny might affect their operational and strategic plans. Specifically, expect the DOJ to take a hard line on mergers that could create entry barriers, raise rivals’ costs, or facilitate price collusion, resulting in more frequent challenges to mergers in innovation-focused industries and mergers involving vertical integration.