Legal Intern, Manhattan Institute's Center for Legal Policy
Given the recent slew of negative press (e.g. Daily Beast, Frontline) about the government's failure to prosecute executives for their alleged role in the 2008 financial crisis, it is unsurprising that the Justice Department is making high profile moves against big banks. However, the strategy the Justice Department is pursuing, as recently reported by Ben Protess of the New York Times' Deal Book, raises serious concerns. Many of those concerns are all too familiar, especially to those following the ongoing saga of the Foreign Corrupt Practices Act and its enforcement.
The Justice Department's new strategy more or less consists of the old strategy of fines and reforms but with the added twist of encouraging guilty pleas from the companies accused of wrongdoing. In recent years, the Justice Department was hesitant to push for guilty pleas or actual court proceedings for fear of irreparably injuring companies, and as a result, the economy at large. However, under this new strategy, the Department is attempting to avoid this pitfall by eliciting the guilty pleas out of subsidiaries as opposed to the parent banks. The idea is that focusing on the subsidiary will not destroy the entire company, yet still allows the Justice Department to take meaningful action.
It is easy to criticize this strategy on multiple fronts; however, the most common criticism leveled against this approach is that it amounts to little more than a PR campaign by the Justice Department to make it seem like they are doing something. It is much easier for the Department to point to a guilty plea than a deferred prosecution agreement or a non-prosecution agreement. A guilty plea is something that can be easily sold to the press and an angry public. This sentiment is perfectly expressed by former federal prosecutor Evan T. Barr in Protess' article, "Extracting a guilty plea from a wholly owned subsidiary finally enables the Justice Department to look tough on financial institutions while sparing them from the corporate death penalty." The idea that "looking tough" is the actual goal of this strategy is worrisome for both those looking for actual punishment and those seeking meaningful reform.
That being said, there are very real monetary consequences for the companies involved in agreements and guilty pleas. According to Gibson Dunn reports as of December 2012, the DOJ has entered into agreements (consisting of NPAs, DPAs, and the new guilty plea model) with accused wrongdoers amounting to roughly nine billion dollars. These monetary penalties are what some critics, including James Copland of the Manhattan Institute's Center for Legal Policy point to when describing these agreements as little more than a legal shakedown of major corporations by the DOJ. When presented with a potential prosecution, risk averse corporate councils will simply opt for the often-affordable fine and avoid the potentially devastating prosecution. By simply accusing a company of wrongdoing, the DOJ can extract a guilty plea and a fine even when the accusation is meritless. Instead of fighting a potentially meritless claim, companies simply view these agreements and the associated fines as a cost of doing business. The problem with this model is it creates a "pay the fine and keep doing what you want" mentality amongst businesses all the while incentivizing the DOJ to make PR and monetary-based prosecutorial decisions.
All of this is of course eerily familiar to anybody involved in the world of the Foreign Corrupt Practices Act and the DOJ's enforcement actions related to it. This new DOJ strategy really is just an expansion of the FCPA strategy and is of course subject to many of the same criticisms. Paul Enzinna excellently explores those criticisms in his recent report for the Manhattan Institute. In part, Enzinna's major concerns are that there are no trials, so there is very little judicial oversight of these agreements and by extension there is very little guidance for those companies who wish to avoid breaking the law. Both of these criticisms can easily be applied to the DOJ's new strategy to go after big banks. In turn, it is easy to argue that such a strategy is the last thing an already unstable financial sector needs in an uncertain regulatory and enforcement scheme that seems by in large to be aimed at little more than making sure the public knows the DOJ is doing something about big banks.