Archives For corporate crime

SUPREMES PRESERVE FRAUD ON THE MARKET (AND BAIL OUT CLASS ACTION PLAINTIFFS) – TIME FOR CONGRESS TO KILL IT

Alden Abbott —  25 June 2014

On June 23 the Supreme Court regrettably declined the chance to stem the abuses of private fraud-based class action securities litigation.  In Halliburton v. EPJ Fund (June 23, 2014), a six-Justice Supreme Court majority (Chief Justice Roberts writing for the Court, joined by Kennedy, Ginsburg, Breyer, Sotomayor, and Kagan) reversed the Fifth Circuit and held that a class action certification in a securities fraud case should be denied if the defendants produce evidence rebutting the presumption that defendants’ misrepresentations had a price impact. EPJ Fund filed a class action against Halliburton and one of its executives, alleging that they made misrepresentations designed to inflate Halliburton’s stock price, in violation of Section 10(b)(5) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. In Basic v. Levinson (1988), the Supreme Court held that: (1) investors could satisfy the requirement that plaintiffs relied on defendants’ misrepresentations in buying stock by invoking a presumption that the price of stock traded reflects all public, material information, including material misrepresentations; but that (2) defendants could rebut this presumption by showing that the misrepresentations had no price impact.  Halliburton argued that class certification was inappropriate because the evidence it introduced to disprove loss causation also showed that its alleged misrepresentations had not affected its stock price, thereby rebutting the presumption. The district court rejected Halliburton’s argument and certified the class, and the Fifth Circuit affirmed, concluding that Halliburton could use its evidence only at trial. Although the Court rejected Halliburton’s arguments for overturning Basic, it agreed with Halliburton that defendants must be afforded an opportunity to rebut the presumption of reliance before class certification, because the fact that a misrepresentation has a price impact is “Basic’s fundamental premise.”

Justice Thomas, joined by Scalia and Alito, concurred in the judgment, but argued that the “fraud on the market” (FOTM) theory embodied in Basic should be overruled, based on logic, economic realities (“market efficiency has . . . lost its luster”), and subsequent jurisprudence clarifying class certification requirements.  Significantly, the Thomas dissent points to a variety of well-recognized motives for the purchase of securities that have nothing to do with a presumption (key to the FOTM theory) that the market accurately reflects the value of a stock in light of all public information:  “Many investors in fact trade for the opposite reason—that is, because they think the market has under- or overvalued the stock, and they believe they can profit from that mispricing. . . .  Other investors trade for reasons entirely unrelated to price—for instance, to address changing liquidity needs, tax concerns, or portfolio balancing requirements. . . .  In short, Basic’s assumption that all investors rely in common on price integrity is simply wrong.”  [citation omitted]

Thomas, Scalia, and Alito are right – the Court’s majority missed a major opportunity to rein in class action opportunism by failing to consign Basic to the graveyard of economically flawed Supreme Court precedents, where it belongs.  Given the costs and difficulties inherent in rebutting the presumption of reliance at the class action stage, Halliburton at best appears likely to impose only a minor constraint on securities fraud class actions.

The FOTM presumption that has enabled a substantial rise in securities class action litigation over the last quarter century makes no economic sense, according to the scholarly consensus.  What’s more, it imposes a variety of social harms on the very groups that were supposed to benefit from this doctrine, as described in a recent study of the political economy of FOTM.  Specifically, longer-term shareholders end up bearing the cost of class action settlements that benefit plaintiffs’ trial lawyers, and to the extent paying and receiving shareholders are fully diversified, FOTM is a wash in terms of compensation that turns into a net loss when costs including attorneys’ fees are included.  Moreover, FOTM’s utility as a fraud deterrent is “much muted” because payments are made by the corporation and its insurer, not the individual culpable agents.  In short, “[w]hen the dust settles, FOTM not only fails to meet its stated goals, it does not even try.”

Not included in this litany of FOTM’s shortcomings is the serious issue of error costs, and in particular the harmful avoidance of novel but efficient behavior by corporate officials that fear it will incorrectly be deemed “fraudulent.”  This largely stems from the fact that “fraud” is not precisely defined in the securities law context, which has led to “at least three costs: public and private actions are not brought on behalf of clearly specified regulatory objectives; the line between civil and criminal liability has become unacceptably blurred; and the law has come to provide at best a weak means of resolving vital public questions about wrongdoing in financial markets.”

In light of these problems, Congress should eliminate the eligibility of private securities fraud suits for class action certification.  Moreover, Congress should require a showing of specific reliance on fraudulent information as a prerequisite to any finding of liability in a private individual action.  What’s more, Congress ideally should require that the SEC define with greater specificity what categories of conduct it will deem actionable fraud, based on economic analysis, as a prerequisite for bringing enforcement actions in this area.

Public choice insights suggest this wish list will be difficult to obtain, of course (but not impossible, as passage of the Class Action Fairness Act of 2005 demonstrates).  Public support for reform might be sparked by drawing greater attention to the fact that class action securities litigation has actually tended to harm, rather than help, small investors.

What about even more far-reaching securities law reforms?  Asking Congress to consider decriminalizing insider trading undoubtedly is unrealistic at this juncture, but it is interesting to note that even mainstream journalists are starting to question the social utility of the SEC’s current crackdown on insider trading.  This focus may lead to a serious case of misplaced priorities.  Notably, as leading Federal District Court Judge (SDNY) and former Assistant U.S. Attorney (AUSA) Jed Rakoff has stressed, AUSAs avoid pursuing far more serious frauds arising out of the 2008 Financial Crisis in favor of bringing insider trading cases because the latter are easier to investigate and prosecute in a few years’ time, and, thus, best enhance the AUSAs’ marketability to law firms.  (Hat tip to my Heritage colleague Paul Larkin for the Rakoff reference.)

In Antitrust & Competition, Corporate & Securities Law, Error Costs, Securities , , , , ,
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Decriminalizing agency costs

Larry Ribstein —  6 December 2011

The WSJ reports on comments by former FBI official David Cardona’s on why there haven’t been more prosecutions of financial executives as a result of the recent financial crisis:

“There’s been a realization and a more deliberate targeting by the Department of Justice before we launch criminally on some of these cases” * * * The Justice Department has decided it is “better left to regulators” to take civil-enforcement action on those cases, he said. * * *

Many legal experts have said much of the most controversial behavior likely was a product of poor judgment, not criminal wrongdoing. More than 1,000 bankers went to prison in the wake of the savings-and-loan banking crisis of the 1980s and 1990s. After the financial crisis, “there was an immediate reaction that maybe this was another savings-and-loan type crisis, that we could actually establish criminality in many of these cases,” Mr. Cardona said in the interview. Those hopes eventually faded. * * *

“A lot” of the Justice Department’s criminal investigations, Mr. Cardona said, “hinge on disclosure.…What does adequate disclosure mean? And those are really technical arguments that sometimes get lost with a jury.” * * * U.S. officials also are leery of bringing to trial criminal prosecutions where a jury might decide the losses were due to bad judgment or market conditions, not deceit.

I’ve written on the excesses of corporate criminal prosecutions and on the prosecutorial incentives that drive these excesses.  So obviously I find some satisfaction in the recent prosecutorial caution.

Unfortunately, if the reader comments on the WSJ article are any indication, I may not represent popular opinion.  No doubt many of the Occupiers would feel better about their own economic plight if only the criminal justice system could be used as a vehicle for venting public resentment.  Hopefully prosecutors will continue to keep in mind the potential costs to this system of prosecutions based on public anger rather than careful legal judgments.

In Banking, Corporate & Securities Law, Financial Regulation ,
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UCLA’s Milken gift

Larry Ribstein —  23 August 2011

The NYT discusses a controversy at UCLA (mainly, it seems, involving objections by Lynn Stout) to the $10 million gift it just announced from Lowell Milken, Michael’s brother.  Lowell was accused many years ago in connection with his brother’s securities violations and escaped prosecution because of his brother’s plea deal. Steve Bainbridge comments in response to the NYT story, discussing this ancient history:

Some of us who were active in the field at the time–as I was–remember the story a bit differently. In our view, the government used threats to go after Lowell as one of the ways on which they coerced Michael into taking a plea deal.

I have more perspective in my paper, Imagining Wall Street.  There I note that Oliver Stone’s film Wall Street

may have helped create an environment that became increasingly unfriendly to takeovers.  In the year following the film’s release, Drexel and Milken were prosecuted, eventually culminating in the fining and jailing of Milken along with many others in the takeover game, and the demise of Drexel Burnham. Milken pleaded guilty and was sentenced to ten years in jail.68 [United States v. Milken, No. (S) 89Cr.41(KMW), 1990 WL 264699 (S.D.N.Y. Nov. 21, 1990)]  * * * It is hard to say how much of that attitude was based on actual events reported in the media, and how much on the fiction Wall Street helped create. Milken was prosecuted not for insider trading, but rather for technical violations of the Williams Act—that is, using Boesky to accumulate non-disclosed positions in target shares.69 [Id. at 4]

In short, there is a big question whether Lowell’s history is such as to taint UCLA by his gift.

But I am not unsympathetic with the idea that law schools are supposed to be teaching their students that ethics trumps money, and so should be careful about whom they take money from, and more generally the company they keep. Indeed, for that reason I wrote critically last year about Bill Lerach’s foray into law teaching.

The real question here is where you draw the line and who decides.  Is the decision to turn down a gift based on ethics or politics?  More to the point, would the same people who oppose the Milken gift also object to an association with Lerach?

And how do you balance those considerations against the institution’s needs?  Interestingly, Professor Stout has written extensively about the need to take the interests of all constituencies into account in corporate decision-making.  Where would UCLA’s students stand in the decision Professor Stout favors to reject the Milken gift?

In Corporate & Securities Law , , , , , ,
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Remedying Skilling

Larry Ribstein —  15 August 2011

The WSJ comments on bills in Congress to “remedy” the Supreme Court’s decision in U.S. v. Skilling by explicitly criminalizing agent conduct that doesn’t involve bribery or kickbacks:

The biggest objection to such laws is their injustice, but they also harm the economy by introducing legal uncertainty that deters or delays business investment. A Congress that claims to care about job creation would drop these attempts to undermine a wise and unanimous Supreme Court decision.

I would also call attention to the significant prosecutorial misconduct that has been associated with these bringing these cases. As discussed in my Agents Prosecuting Agents, it is difficult to effectively discipline this misconduct.  We should therefore consider another option: being more careful about what gets criminalized.  Our politicians should balance the significant costs imposed by the public’s agents (i.e., prosecutors) against the benefits of adding criminal sanctions to the many other ways of disciplining breach of fiduciary duty by corporate agents.

Congress clearly has better things to “remedy” than Skilling.

In Corporate & Securities Law ,
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The AIG-General Re reversals

Larry Ribstein —  2 August 2011

A Second Circuit panel knocked over yet another federal prosecution, this one of General Re and AIG executives who were convicted of propping up AIG with an allegedly sham reinsurance transaction.

As summarized by a WSJ editorial, the abuses that sent this prosecution down the tubes “include prejudicial evidence, botched jury instructions and “compelling inconsistencies” suggesting that the government’s star witness “may well have testified falsely.””

Tom Kirkendall, who has been following these prosecutions closely, comments:

The deal did not affect AIG’s net income and was the type of transaction that AIG — and many other companies in the insurance industry – had done for years without any adverse market reaction, much less a criminal investigation. Moreover, the transaction in question was disclosed to and approved by AIG and General Re’s independent auditors.

That made no difference to avaricious prosecutors, who proceeded to pursue a dubious prosecution because any executive even vaguely associated with AIG after the Wall Street meltdown of 2008 were easy marks. They were right – the four Gen Re executives and the AIG executive were all convicted of conspiracy, mail fraud, securities fraud, and making false statements to the Securities and Exchange Commission

Tom notes that the court rejected other arguably sound bases for reversal and that

It’s never easy being an appellant, even after a trial that is chock full of prosecutorial misconduct. That’s why there shouldn’t be criminal trials in this type of case in the first place. Let the civil justice system allocate any damages resulting from any wrongdoing that can be proved among all of the responsible parties, not just a few sacrificial lambs.

The WSJ editorial also calls attention to the fundamental misdirection of blame at the heart of the AIG prosecutions:

The collapse of this case renders even more appalling the way that prosecutors used it to force both companies to fire their CEOs—Joseph Brandon at Gen Re and Hank Greenberg at AIG. In the latter case, the resulting loss of shareholder wealth—and creation of taxpayer risk—has been staggering.

Indeed, I noted two years ago, that the Eliot Spitzer-engineered firing of Hank Greenberg may have been what gave AIG’s Joe Cassano free reign to engage in the trading that brought AIG down.  As I said then:

if Joe Cassano was the “man who crashed the world,” [as Michael Lewis said] Spitzer was the guy who gave him the keys to the car. And all this for [Greenberg’s] supposed non-fraudulent responsibility for a barely material (if that) accounting mistake, plus, of course, the boost to Spitzer’s then career.

This makes it especially ironic that one of the prosecutorial misdeeds that led to the recent Second Circuit reversal was the prosecution’s use of a misleading stock price chart to try to blame all of AIG’s decline on the defendants’ reinsurance transaction.  As the court said [footnotes omitted]:

the government exploited [the evidence of AIG’s stock price decline] to emphasize the losses caused by the transaction. For example, the government reminded the jury during rebuttal summation that:

 [B]ehind every share of [AIG] stock is a living and breathing person who plunked down his or her hard-earned money and bought a share of stock, maybe [to] put it in their retirement[] accounts, maybe to put it in their kids’ college funds, or maybe to make a little extra money for the family.

* * *

The charts suggested that this transaction caused AIG’s shares to plummet 12% during the relevant time period, which is without foundation, and (given the role of AIG in the financial panic) prejudicially cast the defendants as causing an economic downturn that has affected every family in America.

In other words, the reversals went directly to the scapegoating for the financial crisis that lies at the heart of many of these and other misguided financial prosecutions.  This scapegoating is especially egregious in a case in which the arrow of blame points directly at prosecution itself.

In Corporate & Securities Law, Securities
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Overcriminalization in action: the FCPA

Larry Ribstein —  1 August 2011

I have written about the problems of criminalizing corporate agency costs and the intersection between these agency costs and the agency costs of the government agents who prosecute the crimes.

Joe Yockey, in his recent paper Solicitation, Extortion, and the FCPA, shows that Foreign Corrupt Practices Act prosecutions provide a particularly acute illustration of these issues.  Here’s the abstract:

The U.S. Foreign Corrupt Practices Act (FCPA) prohibits firms from paying bribes to foreign officials to obtain or retain business. It is one of the most significant and feared statutes for companies operating abroad. FCPA enforcement has never been higher and nine-figure monetary penalties are not uncommon. This makes the implementation of robust FCPA compliance programs of paramount importance. Unfortunately, regardless of whether they have compliance measures in place, many firms report that they face bribe requests and extortionate threats from foreign public officials on a daily basis. The implications of these demand-side pressures have gone largely unexplored in the FCPA context. This Article helps fill that gap. First, I describe the nature and frequency of bribe solicitation and extortion to illustrate the scope of the problem and the costs it imposes on firms and other market participants. I then argue that current FCPA enforcement policy in cases of solicitation and extortion raises several unique corporate governance and compliance challenges, and ultimately poses a risk of overdeterrence. Though these concerns can be partially addressed through enhanced statutory guidance, I conclude by urging regulators to shift some of their focus from bribe-paying firms in order to directly target bribe-seeking public officials. Confronting the market for bribe demands in this way will help reduce corruption in general while also allowing employees and agents to spend less time worrying about how to respond to bribe requests and more time on legitimate, value-enhancing transactions.

I note in my article that “[i]t can be particularly hard to define when corporate agents’ behavior crosses the line into criminal conduct.” These problems seem especially acute in FCPA cases. The inherent difficulty of drawing the line between bribery and extortion is exacerbated by the fact that, as Yockey says, “[i]n many countries, payments made in response to subtle hints by foreign officials do not breach obvious social norms in the same way that behaviors like theft or assault do.”

The FCPA turns the screws by forcing firms to record all payments while increasingly failing to appropriately distinguish bribes from excusable responses to extortionate threats. As Yockey points out, “[t]his dynamic can confuse firms that are legitimately trying to comply with the law and limit their ability to provide instructions that will give agents and employees clear direction.”

Why, you might ask, is FCPA liability escalating?  Yockey suggests one possible explanation is that “[t]he rise in FCPA enforcement has produced a cottage industry of FCPA experts, including lawyers, accountants, and consultants at prestigious firms, which DOJ and SEC personnel often join after leaving their federal jobs for considerably higher compensation.”  Of course more prosecutions mean more jobs.  This nicely illustrates the “revolving door” problem I discuss in my article (which Yockey cites).

The article paints a classic picture of over-criminalization in action and how a poorly designed and over-enforced law is crippling U.S. firms ability to compete internationally.

In Corporate & Securities Law, Justice Department ,
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Morgenson’s DPA scandal

Larry Ribstein —  8 July 2011

It’s not easy coming up with scandals all the time.  Some days there just isn’t a new scandal to report.  But that space has to get filled somehow. 

The NYT’s Gretchen Morgenson often finds herself in this position.  Her scandal for yesterday, reported as usual with Louise Story (I’ll just start calling them Morgenstory), was about how prosecutors are letting evil banks off with deferred prosecution agreements.  This, they say, “helps explain the dearth of criminal cases despite a raft of inquiries into the financial crisis.”  And:  “This approach, critics maintain, runs the risk of letting companies off too easily.” And “[t]his “outsourcing” of investigations . . . has led to increased coziness between the government and companies, some critics say.” In other words, the banks are getting away with murder. 

“Critics” here means a law professor and former AUSA, who opines for Morgenstory:

If you do not punish crimes, there’s really no reason they won’t happen again. I worry and so do a lot of economists that we have created no disincentives for committing fraud or white-collar crime, in particular in the financial space. The legal representatives will argue that since recoveries can be had by using civil measures, even private litigations, there’s no need to bring criminal measures. I disagree with that very much.

We don’t get to hear why she “disagree[s] with that.”

This is all very puzzling since we do read some pretty good reasons for the DOJ’s approach.  A DOJ spokesperson tells Morgenstory (“defending” the DOJ’s approach) that dpas collect penalties and restitution and get firms to amend their behavior, and “achieve these results without causing the loss of jobs, the loss of pensions and other significant negative consequences to innocent parties who played no role in the criminal conduct, were unaware of it or were unable to prevent it.” This does sound better than putting them out of business like Arthur Andersen (which was vindicated too late by the Supreme Court).  Indeed, that case helped lead the DOJ to reexamine its policies for prosecuting corporate crime. 

Morgenstory have some supposedly damning details about the development of DOJ’s new approach.  The then deputy attorney general, James Comey, “surprised some attendees” at a 2005 private meeting when “he cautioned colleagues to be responsible.”  Morgenstory quote an anonymous attendee as labeling this shocking call for responsibility “a total retrenchment. It was like we were going backwards.”

Here are some of the horrible results of this new leniency, according to Morgenstory:

  • The companies talk to each other and exchange information.  (Hell, that makes them almost like multiple government agencies pursuing the same crime!).  The terrible consequence, according to Morgenstory, “has often been that banks walk into prosecutors’ offices well-prepared to rebut allegations.”  Yikes, we can’t have that.
  • “One assistant United States attorney, who requested anonymity because he is not allowed to speak with the news media, said many inquiries had been tabled because banks had such good answers.” Nor that either.
  • This AUSA says:  “They’ll hire a counsel who is experienced. They often come in and make a presentation: ‘We’ve looked at this and this is how we see it.’ They’re often persuasive.” OMG. We can’t have the government dealing with well-prepared defendants.

Morgenstory let the reader assume that the dpas are a massive get out of jail free card for firms.  But there’s another way to look at them.  As I discuss in my Agents Prosecuting Agents, they are a way of helping the government put individuals in jail whether or not they belong there:

[P]rosecutors can pressure corporate agents through their firms.  Like individual defendants, firms face strong incentives to plead guilty to avoid even worse penalties at trial.  These penalties could include fatal sanctions for firms that must stay clean to continue in business, like those imposed on Arthur Andersen.  Unlike individuals, firms can negotiate for deferred prosecution agreements (DPAs) in which the firm agrees to governance arrangements in order to avoid prosecution.

[FN: See James R. Copland, Regulation by Prosecution: The Problem with Treating Corporations as Criminals, Civ. Just. Rep. No. 13 (December, 2010); Richard A. Epstein, The Deferred Prosecution Racket, WALL St. J., Nov. 28, 2006, at A14.] 

The firm’s ability to get a DPA depends on its cooperation with the prosecution which, in turn, may require the firm to induce its agents to cooperate with investigators.  Accordingly, firms seeking DPAs have strong incentives to deny agents advancement or indemnification of expenses and to waive the attorney–client privilege.

[FN: With respect to privilege waivers, see Michael Seigel, Corporate America Fights Back: The Battle Over Waiver of the Attorney-Client Privilege, Social Science Research Network (March 3, 2010), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1564270.]  

Employees may find themselves having to talk to corporate attorneys without the protection of an attorney–client privilege.  Given the high defense costs discussed above, indemnification and advancement can mean the difference between a defendant’s ability to mount a defense and having to plead guilty.  These issues surfaced in the KPMG case, in which the government pressured the defendant accounting firm, which faced the possibility of following Arthur Andersen to extinction, to deny its employees advancement and indemnification.

[FN: See Harvey A. Silverglate, Three Felonies a Day:  How the Feds Target the Innocent, 138-52 (Encounter Books, 2009); Sarah Ribstein, A Question of Costs:  Considering Pressure on White-Collar Criminal Defendants, 58 Duke L. J. 857, 870-73 (2009); United States v. Stein, 495 F. Supp. 2d 390 (S.D.N.Y. 2007), aff’d United States v. Stein, 541 F.3d 130 (2d Cir. 2008) (The trial court ruled that the government’s pressure violated defendants’ Fifth and Sixth Amendment rights and dismissed several of the indictments).]

All of this is not to say that Morgenstory don’t report some problems.  One of them is the nice way these very costly proceedings dovetail with the interests of white collar defense bar — one of the more lucrative preserves remaining to Big Law. 

The other is the DOJ’s secrecy about its decision-making.  Morgenstory make it look like DOJ is cloaking a pro-corporate conspiracy.  But DOJ secrecy also hid DOJ’s process of deciding which corporate executives to send up the river in its prosecution spree of in the early 2000s. I discussed a few years ago some questions raised by those decisions.

The “scandal” in the Morgenstory story is, at most, the DOJ cleaning up after the real scandal of excessive criminalization of agency costs, and maybe not even that.  Nevertheless, watch for the followup hearings on the “dpa scandal,” followed by a return to the good old days of excessive prosecutorial behavior.

In Corporate & Securities Law, Justice Department ,
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Banning Executives

Josh Wright —  6 July 2011

From the WSJ:

The Department of Health and Human Services this month notified Howard Solomon of Forest Laboratories Inc. that it intends to exclude him from doing business with the federal government. This, in turn, could prevent Forest from selling its drugs to Medicare, Medicaid and the Veterans Administration. If the government implements its ban, Forest would have to dump Mr. Solomon, now 83 years old, in order to protect its corporate revenue. No drug company, large or small, can afford to lose out on sales to the federal government, a major customer.

….

The Health and Human Services department startled drug makers last year when the agency said it would start invoking a little-used administrative policy under the Social Security Act against pharmaceutical executives. This policy allows officials to bar corporate leaders from health-industry companies doing business with the government, if a drug company is guilty of criminal misconduct. The agency said a chief executive or other leader can be banned even if he or she had no knowledge of a company’s criminal actions. Retaining a banned executive can trigger a company’s exclusion from government business.

Debarment is obviously a very serious remedy.  The increased use of debarment in this context has been controversial, especially in cases in which the executive has not demonstrated that the debarred individual is actually complicit.  The WSJ story discusses the Forest Laboratories example along these lines in more detail:

According to Mr. Westling, “It would be a mistake to see this as solely a health-care industry issue. The use of sanctions such as exclusion and debarment to punish individuals where the government is unable to prove a direct legal or regulatory violation could have wide-ranging impact.” An exclusion penalty could be more costly than a Justice Department prosecution.

He said that the Defense Department and the Environmental Protection Agency, for example, have debarment powers similar to the HHS exclusion authority.

The Forest case has its origins in an investigation into the company’s marketing of its big-selling antidepressants Celexa and Lexapro. Last September, Forest made a plea agreement with the government, under which it is paying $313 million in criminal and civil penalties over sales-related misconduct.

A federal court made the deal final in March. Forest Labs representatives said they were shocked when the intent-to-ban notice was received a few weeks later, because Mr. Solomon wasn’t accused by the government of misconduct.

Forest is sticking by its chief. “No one has ever alleged that Mr. Solomon did anything wrong, and excluding him [from the industry] is unjustified,” said general counsel Herschel Weinstein. “It would also set an extremely troubling precedent that would create uncertainty throughout the industry and discourage regulatory settlements.”

The issue of debarment also arises in the antitrust context as a weapon in the toolkit of antitrust enforcement agencies prosecuting cartels.  Judge Ginsburg and I have argued, in Antitrust Sanctions, that the debarment remedy in that context, along with a shift toward individual responsibility and away from ever-increasing corporate fines, would result in a shift toward efficient deterrence.   In our case, we discuss debarment for the executive actually engaged in the price-fixing as well as officers and directors who negligently supervise the price-fixers (e.g., with failure to institute an antitrust compliance program).   Without safeguards to ensure that debarment is imposed in cases of actual wrongdoing or negligent supervision, and also in the cases of settlement, that there is a factual basis for debarment, imposition of these penalties runs the risk that enforcement agencies will have arbitrary power to banish executives that are disfavored for whatever reason.  If its application is properly constrained, however, debarment can be a more effective tool in prosecuting antitrust offenses and potentially other white-collar crime than ever-increasing corporate fines which are largely borne by shareholders.  I’ll refer interested readers to the Ginsburg & Wright link above for the more detailed case in favor of adding debarment to the cartel-enforcement toolkit, including a discussion of its application in the antitrust context in a variety of other countries as well as non-antitrust settings in the U.S.

 

In Antitrust & Competition, Cartels, Corporate & Securities Law, Google, Health Care, Pharmaceuticals, Platforms , ,
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Strauss-Kahn saved by Brady

Larry Ribstein —  1 July 2011

From the White Collar Crime Blog:

Dominique Straus-Kahn has received from the district attorney what most defendants never get — early  Brady material. * * *

The District Attorney should be commended for the early disclosure of the purported victim’s credibility problems. I cannot help wonder, however, whether such disclosure would have been made — certainly so early — in a case where the defendant did not have such considerable legal and investigative firepower that it could be predicted that his team would itself eventually discover at least some of the victim’s credibility problems. * * *

Experienced prosecutors know that they can almost always get away with Brady violations. * * * There are certainly generally well-meaning prosecutors who would have withheld the exculpatory information here to increase their chances of achieving what they believe is the just result. And there are others less well-meaning, and far fewer, who would have withheld the information to advance their own careers.

Yup.  For an examination of these prosecutorial incentives see my Agents Prosecuting Agents.  The system worked this time, but the revelations in the DSM case vividly illustrate the potential need for stronger constraints on prosecutors where they are not subject to the constraints that existed in this highly public case with international ramifications and a wealthy defendant.  My article suggests redefining the crime in white collar cases — not an obvious solution for the DSM case.

In Corporate & Securities Law
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Levin and Goldman

Larry Ribstein —  8 June 2011

Pandering and scapegoating are not new activities for politicians, but Carl Levin has perfected these dark arts.  Most recently the Senator’s game has been to demonize Goldman, culminating in accusations that its ceo, Lloyd Blankfein, engaged in criminal behavior.  Per WaPo last April, Levin

said federal prosecutors should review whether to bring perjury charges against Goldman Sachs Chief Executive Officer Lloyd Blankfein and other current and former employees who testified in Congress last year. Levin said they denied under oath that Goldman Sachs took a financial position against the mortgage market solely for its own profit, statements the senator said were untrue.

A spectacular show trial for perjury, complete with perp walks, would have been a great distraction from public questions concerning the government’s and Levin’s own role in creating the financial crisis and their floundering and inept regulation in its wake. 

Levin had plenty of help from kindred spirits in film and journalism and even in the executive branch.  And the underlying story played into the longstanding narrative of evil shorts.

But fortunately not everybody played along. Holman Jenkins and Andrew Ross Sorkin have now exposed gaping holes in the Senate subcommittee report that launched Levin’s accusations. Turns out Goldman didn’t have a “massive short” on the mortgage market after all, just as Blankfein had said.

So Levin is quietly slinking away from his current ploy, no doubt to hatch another one. In the meantime he’s demonstrated that politicians can misbehave even when they keep their pants on.

In Corporate & Securities Law, Financial Regulation , ,
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The Galleon prosecution: hoist by its own petard?

Larry Ribstein —  4 May 2011

Dave Zaring asks whether the Rajaratnam trial, now doomed by a sick juror to start deliberations all over again, is headed for a hung jury. 

Dave suspects the jury is more likely hung 11-1 to convict than vice versa.  But there’s another possibility:  there are a lot of charges in this cases which occupy a wide space in terms of likelihood of illegality.  The jury may be divided every which way on these charges.

As I discussed last week, the case is complex because the government wanted it this way. But this leaves a lay jury with the huge task of sorting out legal theories, mountains of factual evidence, skilled expert testimony and a sophisticated defense by a top trial lawyer.  Now we see why the government prefers to frighten defendants into caving in.  This tactic didn’t succeed with a billionaire defendant who had little to lose from a trial. 

Before this is over, the government may come to regret its approach to insider trading prosecutions.

In Corporate & Securities Law, Securities ,
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Prosecutorial liability and prosecuting corporate agents

Larry Ribstein —  4 May 2011

Retired Justice Stevens has some interesting comments on  Connick v. Thompson, reported here. Connick, by a 5-4 conservative/liberal vote, reversed the Fifth Circuit’s affirmance of a $14 million verdict to a man imprisoned on death row for 14 years after prosecutors failed to turn over exonerating evidence.  The Court held that you need a pattern of misconduct to hold the prosecutor’s office responsible, and in this case it wasn’t enough to show a single instance.

Stevens notes prosecutors’ political incentives to convict, which he argues need to be disciplined by vicarious liability — just like in the private sector. 

This interested me because my paper, Agents Prosecuting Agents, raises similar questions about dissonance between the over-prosecution of private sector agent misconduct by prosecutors who are subject to similar misincentives.

But I doubt this problem will be solved by more litigation. Even if the Court had affirmed in Connick, this still would have left a pretty restrictive rule against entity liability of prosecutors’ offices.  It is unlikely courts will come to place the same restrictions on government that government routinely places on businesses.

In crimes like the one defendant Thompson allegedly committed — robbery — this leaves us in the unfortunate position of having to choose between maintaining robust government incentives to prosecute and diluting the criminal law in a situation in which it’s clearly appropriate.

But as I argue in my paper, this is not necessarily the case with respect to the criminalization of corporate agency costs.  Here civil liability and other mechanisms may be enough, and criminal prosecutions involve several problems that are unique prosecutions in complex business organizations.

Thus, my paper suggests that one way to address the problem is to reduce the criminalization of agency costs.  In other words, as my paper concludes, “we should not assume that it is socially valuable to use the criminal laws to ensure totally loyal corporate agents unless we are ready to demand similar perfection from our prosecutors.”

In Corporate & Securities Law ,
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