Corporate crime defense attorney and former federal prosecutor Michael Volkov is out with a new podcast – Too Big to Fail, Too Big to Jail — The Department of Justice’s Outsourcing of Criminal Investigations and Prosecutions.
Michael Volkov
That would be outsourcing as in – outsourcing to the big corporate defense law firms representing the corporations being investigated.
Volkov says that the outsourcing led to a dilution of federal investigations — what he calls “the kiss of death” — and the Department of Justice’s “darkest hour” — the failure to establish an effective centralized task force to investigate the 2008 financial crisis.
“A company may discover a safety, bribery, fraud, antitrust cartel or other significant issue,” Volkov explains. “A whistleblower may report a violation internally or to the government, or internal audit, compliance or legal may discover and report a violation.”
“The government has created incentives for company to self-report such violations, or a company in response to publicity or report of government investigation may seek to cooperate with the government’s investigation. Rarely these days does the company challenge the government’s investigation. Rather, the company seeks to cooperate and head off a criminal prosecution of the company.”
“After contacting the government, the company conducts its own internal investigation, typically by outside counsel with the goal of unearthing the facts and reporting back to the government on the results. This is what I would term as the outsourcing of a government’s traditional criminal investigation.”
“This was the new model that developed and flourished during the Obama Administration under the leadership of Eric Holder and the head of the Criminal Division Lanny Breuer.”
“This model was successful if your goal was to seek large corporate fines and major headlines against companies, and reflected a focus on securing large fines without in-depth, grind it criminal investigations and prosecutions.”
“Along the way, companies and prosecutors were not focused on building cases to present evidence of individuals who may be liable. In addition, the Justice Department’s model included use of non-prosecution and deferred prosecution agreements. Companies were not forced to plead guilty in many cases, but accepted such agreements, that typically included compliance improvements, retention of monitors and other governance improvements.”
“The motivation behind this model was the Arthur Anderson case, a criminal case brought against Arthur Andersen in Houston Texas in the early 2000s, which resulted in the conviction and demise of the company for accounting and obstruction of justice violations. The fear was that companies, if indicted and if convicted would fail and go out of business, putting people out of work.”
Volkov contrasts this current model with what he calls the traditional model.
“The traditional model is the model that I was taught and applied during my career,” Volkov says. “A prosecutor working with law enforcement would build a criminal case by targeting members of an organization for criminal prosecution using a variety of strategies – wiretaps, undercover operations, historical information, cooperating witness testimony and other sources. The prosecutor would build cases, initiate prosecutions and seek to flip defendants to obtain information, develop witnesses many of whom would have plea agreements, and who cooperated in the hopes of reducing their sentences. It is painstaking work, requires vision and commitment.”
“In the early 2000s, after the financial accounting and reporting scandals of WorldCom, Enron and others, this traditional model was applied to white-collar cases. The companies in these cases were inextricably tied to offending leaders and senior executives. Many of whom – Bernie Ebbers, Kenneth Lay, Jeffrey Skilling, and others – were prosecuted individual for massive corporate frauds and financial reporting irregularities.”
“Perhaps the last white collar case prosecuted in this traditional manner was the Enron cases, where individuals were prosecuted and cases built eventually leading to the prosecution of Ken Law and Jeffrey Skilling.”
“Corporate interests pushed back on this model and found an intriguing issue to politically push against aggressive prosecution of white collar crimes – the requirement that companies waive attorney-client privilege to get cooperation credit in a criminal settlement.”
“Everything was upended again when the financial crisis of 2008 hit the country. Companies like Bear Stearns, Lehman Brothers, AIG and others floundered and prosecutors scraped the surface for potential cases, but instead of focusing the Department’s response through a centralized task force or unit, the responses were diluted by delegating responsibilities for these supposed investigations to local US Attorney’s Offices.”
“It was the kiss of death, and no one had any interest or understanding on the need to centralize the response, as was done with the Enron Task Force.”
“Unfortunately, this would turn into the Justice Department’s darkest hour. No consistent effort was put into a real response. An initial prosecution in Brooklyn against two Bear Stearns traders resulted in acquittals and the Criminal Division turned into a nervous nelly from that point on – no one understood the implications of avoiding prosecutions of individuals and fear of losing became the mantra and unspoken code. Criminal Division political staff reviewed cases, questioned prosecutors and slowed down the pace of investigations, leading eventually to a desire for public relations hits with large corporate settlements, and outsourcing to company internal investigations, which were never really pressure tested or pushed to develop cases against culpable higher ups.”
“The lasting legacy of the Justice Department in the Obama Administration may sound good on paper – ever increasing fines but few culpable individuals sent to jail.”
“In the end, many have argued that deferred prosecution agreements, non prosecution agreements, and large firm internal investigations have watered down corporate criminal enforcement to fines that only harm company shareholders and permit board members and senior executives to escape liability.”
Volkov says that towards the end of the Obama Justice Department’s Administration, the Department of Justice sought to repair or address this issue – but it was too little too late.
“First, Department of Justice prosecutors started to seek criminal pleas from corporations. For years, the argument for financial institutions had been that a criminal plea could have regulatory implications like a loss of license that would cause the financial institution to go out of business. The Department feared such a consequence for years, but in an attempt to address this issue they started to require financial institutions and other companies to plead guilty to a criminal offense. To accomplish this, the Department met with regulatory agencies and received assurances at the same time that the subject companies would not lose the ability to continue – in other words, a criminal conviction now just became a cost of doing business or a reputational harm. There were no other consequences.”
“Second, the Justice Department refocused prosecutors’ attention on culpable individuals and issued the Yates Memorandum in 2015, which required companies seeking cooperation credit to turn over evidence of individual culpability in order to earn cooperation credit so that individuals could be identified for prosecution.”
“The impact of the Yates Memorandum to date has been minimal at best – only in two significant criminal cases has there been any evidence of impact – the Takata airbag safety case, which resulted in three individuals being prosecuted, and the VW emissions cheating case, which included six individuals.”