Federal Regulatory Practice of Resolved Actions without Admission of Guilt

[Sinaptics]

It's common practice, at least in the financial sector, that any action brought by a regulatory agency that concludes to the detriment of the defendant almost invariably involves a punitive fine or other measures, but without any admission of guilt.

In a hearing last week titled, "Examining the Settlement Practices of U.S. Financial Regulators” it was stated by Federal Reserve General Counsel Scott Alverez that only 7 of roughly 1000 enforcement actions concluded without consent (thus leading to a finding of facts, trial, and subsequent decision by a judge as opposed to a pre-trial settlement agreement).

The hearing is in response to a 2009 case in which Judge Rakoff declined to accept a settlement agreement between the SEC and Citibank because without admission of guilt and without facts, Judge Rakoff is unable to determine if the settlement is in the public's interest.

Well, he say's it better than I'm able. He states that he was "forced to conclude that proposed Consent Judgment that asks the Court to impose substantial injunctive relief, enforced by the Court's own contempt power, on the basis of allegations unsupported by and proven or acknowledged facts whatsoever, is neither reasonable, nor fair, nor adequate, nor in the public interest." A summary of the action can be found here.

Mr. Alverez's explanation for the practice of not requiring an admission of guilt is thus, "Requiring admission of fact and legal conclusions as a condition of entering into a consent action is likely to have a deleterious effect on our supervisory efforts by causing more institutions and individuals to challenge the requested relief in contested administrative proceedings, which typically takes years to reach final resolution, and which could delay implementation of necessary corrective action."

William Black, a lawyer, academic, author, and former bank regulator states that the reasons to compel a guilty plea are these, "(1) It demonstrates that what has occurred was a fraud (otherwise they deny it after the fact and insist they were simply being extorted), (2) the plea of guilty (as opposed to nolo contender) can be used by civil plaintiffs (and in administrative enforcement actions) to invoke “collateral estoppel.”” The defendant is estopped from denying their guilt in the civil action. This makes it immensely easier for victims to recover, (3) offenders, particularly multiple offenders, are treated differently under the laws and rules. The pleas can be used under RICO to establish a pattern of racketeering, under the sentencing guidelines to secure a tougher prison sentence, and to argue in favor of punitive damages and asset freeze orders."

I, myself, am of two minds. I can see both sides of the argument. I work in the legal field and have been involved in at least two cases that have spanned more than a decade. That's a long time to wait for injunctive relief. However, there are many large corporations who break the same rules over and over and over without a pattern of action clearly being established because the cases are settled, then purged down the memory hole.

Is one option better than the other as a routine measure? Should discretion be given to the regulatory agencies on when to require an admission of guilt? Is there another option beside and either/or/both approach?

[AuntPam]

The problem with requiring a corporation admit to its guilt is that it causes the punishment to be grossly disproportional to the offense.

One needs to remember that it is very rare that an entire company (especially a large one) or even a significant fraction of the employees or rarely, the upper management are actually involved in or even aware of the criminal actions.

Think about a large financial services company that employs, say, over 75,000 persons. When a crime occurs, a thorough investigation very frequently shows that maybe five employees, one of whom was fairly senior, conspired to violate the law--and also violate every line in the company's Code of Conduct and usually many specific procedures or check processes set up to prevent such violations from occurring.

That's a typical pattern for a securities fraud (I sometimes call it the Big Fish, Little Schnook pattern -- the Big Fish tells a couple of Little Schnooks to break the internal rules slightly. Sometimes the Big Fish is able to order two separate Little Schnooks to violate the rules at different ends of a transaction, so each little Schnook thinks "Oh well, no BFD." Meanwhile the Big Fish is busy with the really scaly bits:insider trading, or fraudulent documents, or selling really risky securities to innocents, whatever.)

The company has internal police (called "Compliance Officers") and internal auditors who have a host of duties, including some really silly ones generated by nitpicking regulations that do very little to protect anyone but give regulators a chance to impose major fines for ordinary clerical errors. Those compliance officers and internal auditors are doing their talented best to stop bad behavior, or at least, catch it in the very earliest stages. Sometimes they fail.

But nobody ever suggest that we fire ALL the police because they don't catch EVERY crook.

However, making a corporation plead guilty -- or convicting it -- can have exactly that effect. The best example is the now-defunct accounting firm of Arthur Andersen which, it appears, did have some bad guys who were complicit in the Enron fraud. AA asserted that those employees had violated internal standards and were not acting for the company. But the company itself was found to have aided and abetted and was forced out of business in the US, where most corporations and governments cannot or may not, by law, hire an auditor that has been found guilty of a felony. Thousands of innocent employees, employees who had never had anything to do with Enron, lost their jobs and sometimes pensions, and had to re-start their careers.

Later, the conviction of Arthur Andersen was REVERSED.

So I think the current discretion is about right. I do agree that when an entire company is a criminal enterprise that there should be no "neither admits nor denies" nonsense. And I think the penalties for guys like Dennis Koszlowski or Bernie Madoff are a signal that the courts are no longer letting the Big Fish get away with "Well, it's not like I murdered anybody...." In fact, when you think about a cancer patient facing medical bills who suddenly learns that his entire life savings have disappeared, it is exactly like murder.

But even in those cases, where the head of the organization is guilty, guilty, guilty, there are people who operated with full honesty and no idea what the Big Fish was up to. They may already be saddled with having to answer uncomfortable questions for the rest of their career "You say you spent ten years at Madoff Securities? EXACTLY what did you do for them?"

Anyway, that's my point: People commit crimes. Rarely do corporations commit crimes. If the crooks sometimes outsmart the internal police, it's fair to impose monetary penalties that spur the company to add better internal police and better surveillance systems. But it's not clear that simply crippling the company will accomplish the goal of more honest corporations.

[picker]

It seems to me that if corporations are people, then they can be found guilty. Just because my spleen had no part in knifing that guy in the alley, doesn't mean it won't go to jail with the rest of me.

Don't want to be part of it? Don't work for that corporation. Personal responsibility and all that.

Rules go both ways.

[Sinaptics]

Do you agree even when the firms are repeatedly engaging in unlawful behavior?

http://www.nytimes.com/2011/11/08/bu...yatt&st=Search

In the above NYT article, examines the issue of repeat offenders. Two choice excerpts:

A New York Times analysis of enforcement actions during the last 15 years found at least 51 cases in which 19 Wall Street firms had broken antifraud laws they had agreed never to breach.

And

"In 2005, Bank of America was one of several companies singled out for allowing professional traders to buy or sell a mutual fund at the previous day’s closing price, when it was clear the next day that the overall market or particular stocks were going to move either up or down sharply, guaranteeing a big short-term gain or avoiding a significant loss.

In its settlement, Bank of America neither admitted nor denied the conduct, but agreed to pay a $125 million fine and to put $250 million into a fund to repay investors. The company also agreed never to violate the major antifraud statutes.

Two years later, in 2007, Bank of America was accused by the S.E.C. of fraud by using its supposedly independent research analysts to bolster its investment banking activities from 1999 to 2001. In the settlement, Bank of America without admitting or denying its guilt, paid a $16 million fine and promised, once again, not to violate the law.

But two years later, in 2009, the S.E.C. again accused Bank of America of defrauding investors, saying that in 2007-8, the bank sold $4.5 billion of highly risky auction-rate securities by promising buyers that they were as safe as money market funds. They weren’t, and this time Bank of America agreed to be “permanently enjoined” from violating the same section of the law it had previously agreed not to break.

In fact, the company had already violated that promise, according to the S.E.C when it was accused last year of rigging bids in the municipal securities market from 1998 through 2002. To settle the charges, Bank of America paid no penalty, but refunded investors $25 million in profits plus $11 million in interest. And, the bank promised again never to violate the same law."

To me these show a pattern of conduct. They willfully do things that they know are against the law and pay the fine later if necessary. What it doesn't seem to do is stop them from future transgressions of the law.

Unfortunately, we can't tell if the settlements are just due to the fact that the SEC doesn't disclose how it comes up with a settlement number.

Perhaps they are just a few isolated bad apples. But without public fact-finding and judgement, all the public usually gets to see is a summary of what happened and the fine the accused party will have to pay.

[David42]

Originally Posted by picker

It seems to me that if corporations are people, then they can be found guilty. Just because my spleen had no part in knifing that guy in the alley, doesn't mean it won't go to jail with the rest of me.

Don't want to be part of it? Don't work for that corporation. Personal responsibility and all that.

Rules go both ways.

Of course there are people who do not know something illegal is going on. Your spleen has no ability to have intent.

[David42]

Nor will I work for someone who repeatedly demonstrates they are criminal and it's public knowledge; if I do, I know I am helping them some way; I'm some form of enabler or accomplice.

Just as it's not illegal to buy a roll of duct tape, it is illegal if I buy it knowing that someone else will use it for a kidnapping.