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From Securities Regulation Daily, September 17, 2014

AG Holder says whistleblower law stingy, backs DOJ finance cases

By Mark S. Nelson, J.D.

U.S. Attorney General Eric H. Holder, Jr. said today that the cap in a key federal law used to reward those who blow the whistle on financial institutions should be raised in order to encourage more individuals to come forward with evidence the Department of Justice (DOJ) can use to prove the financial fraud cases it pursues. Holder made his remarks in a speech at New York University School of Law.

FIRREA cap too low. Holder said the DOJ has increasingly relied on the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) in its cases targeting financial fraud. FIRREA has its origins in the 1980s-era savings and loan crisis. But Holder said it is difficult for the DOJ to persuade whistleblowers to come forward under FIRREA because it caps awards at $1.6 million, a sum he deemed “paltry” given the multi-billion size of the financial industry’s overall bonus pool and median executive pay that nears $15 million.

Holder said the Residential Mortgage-Backed Securities Working Group within the president’s Financial Fraud Enforcement Task Force has used FIRREA to get significant results in cases it helped to bring against JPMorgan Chase, Citigroup, and Bank of America. He also lauded the DOJ’s use of FIRREA to sue banks for defrauding themselves, a theory of liability he said has been upheld by a federal district court in Manhattan.

But Holder said FIRREA’s whistleblower award cap is likely too low to convince many potential whistleblowers to help regulators. Holder said Congress should think about raising FIRREA’s cap so it is more in line with the False Claims Act (FCA), the Civil War-era law that applies to fraud in government-funded programs. A change to the FCA made over two decades ago at the urging of Senator Chuck Grassley (R-Iowa) now permits whistleblower awards of up one-third of the government’s recovery.

Nicholas Woodfield, principal at The Employment Law Group, P.C., commenting on Holder’s remarks, agreed with the proposal to lift the FIRREA cap. “It’s absolutely true that we should scrap the cap on FIRREA whistleblower rewards: As the attorney general says, high-ranking people with direct knowledge of Wall Street fraud may not be strongly affected by the promise of $1.6 million.”

Woodfield added: “But we must bear in mind, too, that financial gain isn’t the primary motivation of most whistleblowers — and that’s just as true on Wall Street as anywhere else. People usually blow the whistle because they don’t want to be associated with wrongdoing, or because their employers have punished them for refusing to play along. Any reward is secondary.”

Woodfield said that although he backs Holder’s legislative proposals, the key feature of Holder’s remarks was his focus on the vital role whistleblowers can play in law enforcement.

According to Holder, revising key federal laws to woo more whistleblowers can help promote the core philosophy of federal laws that corporate responsibility must be located “somewhere” within an organization. He said the Dodd-Frank Act continues the move toward corporate responsibility started by the Sarbanes-Oxley Act, and which is embraced by the Food, Drug and Cosmetic Act’s “responsible corporate officer doctrine.” He also said foreign countries have mirrored the principles girding these laws because they can help to clarify the still foggy lines of authority within corporations that often frustrate regulators’ attempts to impose responsibility for misconduct.

The DOJ, said Holder, also must increase resources available to the Federal Bureau of Investigation (FBI) to investigate financial fraud. Holder said the 9/11 terrorists attacks properly re-focused the FBI on counterterrorism, but the FBI must return to its roots as a premier investigator of white collar offenses.

Systemic risk not a factor. Holder defended the financial cases brought by the DOJ in the wake of the 2008 financial crisis. He said that although all business ventures are inherently risky, industry practices before the financial crisis led to risk taking gone awry by businesses that relied on capital that was insured by the federal government, while taking big profits, even if the ventures failed.

Holder echoed President Barack Obama’s recent concern that some firms have reverted to their pre-crisis ways. A key question going forward, Holder said, is whether some types of conduct that may be lawful now should be made illegal.

The DOJ had been criticized for its perceived view that some financial firms are too systemically important to prosecute. This past May, Holder issued a video message in an effort to counter the DOJ’s critics by saying that no company or individual is “too-big-to-jail.” Today, Holder again tried to counter the DOJ’s critics by reiterating his view that the DOJ can target any firm that engages in misconduct.

Said Holder: “After years of speculation that some firms might be considered too systemically important to face criminal charges, the cases against Credit Suisse and BNP proved that no institution is too large to prosecute. We have put that myth to rest once and for all. We demonstrated in those cases that prosecutors are capable of collaborating with financial regulators to hold banks criminally to account. And going forward, we must harmonize our domestic regulatory scheme with its global counterparts. This will enable us to pursue even more criminal cases against other bad-actor institutions in the future – no matter their size.”

Holder acknowledged ongoing frustrations by some that the DOJ still is not aggressive enough in pursuing financial fraud. But he also emphasized that DOJ policy has always counseled the agency to bring cases it can win in court.

Individual accountability. Holder said the DOJ has recovered nearly $85 billion in the 60 financial cases the agency has brought since 2009. Holder also said it is important to hold individuals accountable in both civil and criminal cases to “enhance” accountability and to promote “fairness” by placing blame with company officials and not just the company, its employees, or its shareholders. Individual accountability also can deter others from engaging in similar misconduct.

“A corporation may enter a guilty plea and still see its stock price rise the next day. But an individual who is found guilty of a serious fraud crime is most likely going to prison,” said Holder.

Earlier in his remarks, Holder recalled the DOJ’s efforts to hold corporations responsible. He said this is needed in some cases because the corporation has let a culture of wrongdoing persist, and holding the corporation itself responsible can help alter its future conduct. Holder said a key feature driving the resolution of many cases against corporations is the DOJ’s insistence that it can still pursue cases against the corporation’s executives.

Companies: JPMorgan Chase; Citigroup; Bank of America; Credit Suisse; BNP

MainStory: TopStory CorporateGovernance DirectorsOfficers DoddFrankAct Enforcement SarbanesOxleyAct

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