- White collar defense attorneys are warning their CEO clients about the potential for stepped up enforcement in the Biden administration.
- The records of Biden's top enforcers, led by Attorney General-designate Merrick Garland, offer few clues about how tough they will be.
- High-profile CEO prosecutions dwindled in the Obama and Trump administrations following a rash of arrests during the George W. Bush years.
Should CEOs be quaking in their Guccis about a crackdown on white collar crime in the Biden administration? Attorneys are bracing themselves and their clients.
"Generally speaking, there is a feeling that when Democrats are in power, there's more activity in the white collar world," said attorney Reid H. Weingarten, whose clients have included former WorldCom CEO Bernard Ebbers and former Enron Chief Accounting Officer Rick Causey.
Weingarten, a former federal prosecutor and a partner at Washington law firm Steptoe & Johnson, told CNBC's "American Greed" there may be some justification for a crackdown given the massive amount of government aid approved in the past year to deal with the Covid-19 pandemic.
"Certainly there's a belief in terms of the money that's already out there for pandemic relief that there's been a tremendous amount of fraud, and this would have happened under any administration," he said. "No doubt the feds will aggressively go after this."
Jacob S. Frenkel, chair of the government investigations and securities enforcement practice at Dickinson Wright in Washington, is also telling clients to expect an uptick in enforcement, more generally, with Biden in the White House.
"It is important to check your P's and Q's. Make sure that your compliance systems are effective and tested, and understand there will be accountability for noncompliant activity," Frenkel said.
Weingarten said the incoming attorney general, Merrick Garland, will have far more important issues on his agenda than "who's going to be the first CEO I take down?"
"He's an utterly competent, smart guy," Weingarten said, adding that Garland is a friend. "What specifically is his attitude towards prosecuting CEOs? I don't know. I think what he brings is credibility, and I think that's why he got picked."
Garland's own record offers few clues about how he is likely to approach white collar crime.
Before his nomination for attorney general last month, he spent nearly three decades as a judge on the D.C. Circuit Court of Appeals, which hears relatively few white collar cases. There, he developed a reputation as a moderate who often leaned in favor of prosecutors and government agencies.
In his most recent opinion in a criminal case, Garland wrote for a unanimous three-judge panel last June upholding the 2018 fraud and tax evasion conviction of Michael Han, 50, founder and CEO of D.C.-based Envion. In the opinion, Garland described the firm as "a recycling technology company that never sold any recycling technology and never earned any revenue."
The panel rejected Han's arguments that — among other things — the prosecution improperly appealed to "class prejudice" when introducing evidence that Han appropriated millions of dollars in corporate loans for his personal use, including buying expensive sports cars.
But Garland has also issued rulings favorable to CEO defendants, at least on the margins. In a 2001 opinion, Garland wrote for a unanimous three-judge panel affirming the fraud and perjury conviction of another recycling company CEO, Joann McCoy, but ordering the district court to reconsider her sentence. The lower court ultimately trimmed her three-year term by four months.
Garland's highest-profile cases as a prosecutor were the domestic terrorism trials of Oklahoma City bombers Timothy McVeigh and Terry Nichols, and Unabomber Theodore Kaczynski.
Before joining the DOJ, Garland represented the state of Maryland as a partner at DC law firm Arnold & Porter in a 1988 civil case against four savings and loan executives, helping to win $112 million in damages for the state's deposit insurance fund.
Beyond that, however, there are few references to corporate fraud in Garland's 107-page response to a questionnaire from the Senate Judiciary Committee, which will question him at his confirmation hearing that hasn't been scheduled yet. In remarks following his nomination last month, Garland did not mention white collar enforcement.
Weingarten said the department will have plenty of firepower when it comes to prosecuting executives. Biden's nominee for deputy attorney general — the number two position in the Justice Department — is Lisa Monaco, who once served on the department's Enron Task Force.
"The attorney general has a particular role. He's more symbolic than in the trenches," Weingarten said.
Other members of the Biden regulatory team are also likely to bring new priorities to white collar enforcement, but observers and defense attorneys are still trying to read the tea leaves about what those might be.
Gary Gensler, nominated to head the Securities and Exchange Commission, previously ran the Commodity Futures Trading Commission and is a former Goldman Sachs banker. At the CFTC, Gensler led an overhaul of regulations involving over-the-counter derivatives, which were widely blamed for exacerbating the 2008 financial crisis.
His reforms were central to the Dodd-Frank law passed in the wake of the crisis. Previously, as a congressional staffer, Gensler helped write the post-Enron Sarbanes-Oxley law that included accounting reforms, greater disclosure and stiffer penalties for offenders.
A former Gensler associate, speaking on the condition of anonymity, expects he will take a similar approach at the SEC, focusing on regulation and market reform, while taking a more indirect role in enforcement.
Frenkel, a former senior counsel in the SEC's Enforcement Division, said the recent market volatility that played out in the Reddit and GameStop frenzy will make for a busy start for Gensler, with pressure on its regulatory and enforcement arms to act fast.
"While Chairman Gensler's background suggests a likely focus on regulation, the White House and Congress may play an influential role in setting short-term priorities for the SEC," Frenkel said.
The agency has no authority to bring criminal charges — it can only file civil and administrative actions. But it typically works closely with the Justice Department, and SEC investigations can often lead to criminal cases.
The Treasury Department also plays a key role in white collar enforcement. Treasury Secretary Janet Yellen is an economist and former Federal Reserve chair. She convened a meeting Thursday with the nation's top financial regulators, including the acting heads of the SEC and CFTC, urging the SEC to conduct "a timely study" of last week's market events, the department said in a statement.
"Secretary Yellen believes it is imperative to uphold the integrity of these markets and ensure investor protection," the statement said.
The Office of the Comptroller of the Currency — an independent agency within Treasury — is the nation's chief banking regulator along with the Federal Reserve. Biden is widely expected to nominate Michael Barr, a former assistant Treasury secretary in the Obama administration, to lead the office, which oversees the nation's 1,153 national banks.
The OCC was instrumental in enforcement actions following the housing crisis and could play a central role in the rapidly changing world of fintech and nonbank financial institutions.
Like Gensler at the SEC, Barr's focus has been on regulation, helping to craft the banking-related provisions in the Dodd-Frank law. Currently the dean of Public Policy at the University of Michigan, Barr has been critical of deregulation under the Trump administration.
"We need to undo the damage caused by the last four years of policy," Barr said at a July forum marking the 10th anniversary of Dodd-Frank.
Rohit Chopra, a favorite of progressives, has been nominated to head the Consumer Financial Protection Bureau. Chopra helped launch the CFPB following the 2008 financial crisis. The agency is likely to become more active in the Biden administration after being largely sidelined during the Trump years.
Prosecutions of chief executives have varied from one administration to the next and often haven't followed traditional political lines.
The Trump administration oversaw the high-profile prosecution of Insys Therapeutics founder and CEO John Kapoor, convicted of racketeering conspiracy in 2019 in a scheme to boost the sales of his company's opioid painkiller Subsys with little regard for the harm it caused patients.
"John Kapoor had an obsession, an obsession with return on investment. Everything and anything came down to did we get a return on investment, yes or no?" former Insys vice president Alec Burlakoff told "American Greed."
Burlakoff pleaded guilty to racketeering conspiracy in 2018 and testified against his former boss.
Last year, a judge sentenced Kapoor, 77, to 5½ years in prison in what prosecutors said was the first instance of a pharmaceutical company chairman convicted in the opioid epidemic.
"I hope that the message being sent here is that the government is going to go after the people in the boardroom," Assistant United States Attorney Fred Wyshak told "American Greed." "It's not just going to be the bad doctors anymore."
The Trump Justice Department also indicted Theranos founder and CEO Elizabeth Holmes and her partner Ramesh "Sunny" Balwani in 2018 for running an alleged scheme to defraud doctors, patients and investors in the blood testing company. The pair have pleaded not guilty. Holmes' trial is scheduled to start in July, with Balwani's starting after hers wraps up.
The Obama administration frequently came under criticism for a perceived lack of CEO prosecutions on its watch, which began amid the wreckage of the 2008 financial crisis.
No major Wall Street executives faced criminal charges despite the implosion of the housing and mortgage markets on their watch.
Richard S. Fuld Jr., who presided over the largest bankruptcy in U.S. history as CEO of Lehman Brothers, was not charged with wrongdoing, even though a court-appointed bankruptcy examiner — Anton R. Valukas — concluded that there were "colorable claims" against Fuld and other Lehman executives "who oversaw and certified misleading financial statements."
The Justice Department also decided against pursuing criminal charges against Angelo R. Mozilo, co-founder of Countrywide, one of the nation's largest subprime lenders. Mozilo agreed in 2010 to pay $67.5 million and accepted a lifetime ban from serving as an officer or director of a public company to settle civil fraud and insider trading charges with the SEC. Mozilo's employment agreement meant Bank of America, which bought Countrywide, paid most of that fine. More recently, Mozilo has said he has been unfairly blamed for the financial crisis.
Obama Attorney General Eric Holder drew fury from both sides of the aisle when he testified in a 2013 Senate Judiciary Committee hearing that some banks had become so large that it was "difficult for us to prosecute them."
"We are hit with indications that if you do bring a criminal charge, it will have a negative impact on the national economy," Holder said.
Holder would later insist that no bank or individual was "too big to jail," and the Obama Justice Department secured record fines against several companies and financial institutions. But with no major CEOs criminally charged, the criticism stuck.
In a scathing 2014 article in the New York Review of Books, none other than sitting U.S. District Judge Jed Rakoff of the Southern District of New York, which includes Wall Street, asked why no high-level executives had been prosecuted.
If there was intentional fraud, Rakoff wrote, "the failure to prosecute those responsible must be judged one of the more egregious failures of the criminal justice system in many years."
By contrast, CEO "perp walks" were a staple of white collar enforcement during the George W. Bush administration, with top executives of companies like Enron and WorldCom paraded in handcuffs in front of the cameras. The strategy infuriated defense attorneys, who said the staged scenes destroyed their clients' chances for a fair trial. But in an era of wavering investor confidence, the images of executives seemingly held to account were indelible.
The Biden administration is likely to face calls to again get tough on CEOs, particularly from an increasingly vocal progressive wing in Congress.
Sen. Elizabeth Warren, D-Mass., previously proposed legislation to make it easier to jail "negligent executives." She is promising to really get tough now that Democrats are in control.
"It's long past time for the SEC and other financial regulators to wake up and do their jobs — and with a new administration and Democrats running Congress, I intend to make sure they do," she said last week.
Frenkel worries about a fixation on court cases and perp walks.
"The big problem, in my view, is that enforcement has become a game of numbers," he said. "I think qualitative enforcement is far more compelling than quantitative enforcement."
Weingarten said it will be important to look beyond the leadership of the various agencies. Biden has yet to begin installing his own slate of U.S. attorneys, for example.
"There are 125,000 employees in the Department of Justice. There are 94 U.S. attorney's offices," he said.
Perhaps most important, many observers say, is the prospect of more predictability in the enforcement world, after four tumultuous years in the Trump administration.
"There's a total and complete expectation we're getting back to normal here," Weingarten said. "There will be competent AUSA's who will report to normal U.S. attorneys. They won't be Trumpies. Everything will not be a cult of personality."
But that may also mean more CEOs in the crosshairs.
See how CEO John Kapoor put profits over patient safety and helped fuel a nationwide epidemic of addiction. Watch an ALL NEW episode of "American Greed," Monday February 8 at 10pm ET/PT only on CNBC.