Six years ago this week, investment bank Lehman Brothers filed for bankruptcy, observed Attorney General Eric Holder at New York University Law School during a speech Wednesday. This marked “the culmination of a period of deregulation, excessive risk-taking, questionable lending practices, and defective underwriting that heralded the worst financial crisis since the Great Depression,” he said.
In his talk on Corporate Crime and Compliance, Holder credited “measures like the Dodd-Frank Act” as having restored stability to the system as a whole and having rebuilt the kind of “commonsense regulatory environment that was gradually eroded by special interests” over the last few decades.
Yet, “despite the progress we’ve seen and the safeguards we’ve implemented, we are already witnessing a troubling return to some of the very same profit-driven risk-taking that contributed to the 2008 collapse,” Holder said.
As this type of conduct re-emerges on Wall Street, it is important to instill the expectation that there will be tough enforcement of all applicable laws, Holder indicated. “All business enterprises naturally involve a degree of risk-taking,” he said. “That’s both necessary and healthy. But when companies place exceedingly risky bets relying on federally insured capital—and when they reap massive financial benefits regardless of whether those bets pay off—all Americans should be concerned. When those outsize returns rely on false representations to investors or counterparties, it may well entail fraud.”
The Justice Department, whenever it has resolved cases against financial institutions, typically has reserved the right to continue its investigations against individuals at the firm, for three reasons, according to Holder: It enhances accountability, it promotes fairness, and it has a powerful deterrent effect. “A corporation may enter a guilty plea and still see its stock price rise the next day,” he said. “But an individual who is found guilty of a serious fraud crime is most likely going to prison.”
For a financial fraud case to be successful it is necessary to prove intent to deceive, Holder noted.
“But this evidence is often difficult to come by,” he said. He cited the False Claims Act and its whistleblower amendment under which the Justice Department has recovered more than $22 billion since 2009 from people who have defrauded the government. “But the FRA only applies to fraud on government-funded programs,” he said.
To combat financial fraud, the Justice Department has come to rely on the Financial Institutions Reform, Recovery, and Enforcement Act, or FIRREA. However, the whistleblower provision in FIRREA is capped at just $1.6 million, which Holder said was a “paltry sum in an industry in which, last year, the collective bonus pool rose above $26 billion, and median executive pay was $15 million and rising.” The cap should be modified to False Claim Act levels, to increase its incentives for individual cooperation, he suggested.
The FBI’s white collar fighting ability was somewhat diverted after the attacks of September 11, 2001, Holder suggested. “While we justifiably continue to devote valuable resources to the fight against terrorism, we will also need to support the FBI with resources and personnel that can be brought to bear in our work to investigate financial crimes—and ensure that the Bureau can sustain a real-time, threat-focused mindset in the world of financial fraud.”
Holder said that investigations are open “right now that are focused on the conduct of individuals at specific financial institutions.” While he did not go into specifics, he indicated that “good progress” was being made in these cases, which involve conduct that has undermined the integrity of our markets.” Charges are expected to be made in the coming months.
