Note to Senate: Ask Mary Jo White About DPAs
posted by Lawrence Cunningham
To show he is getting tougher on Wall Street, President Obama has nominated Mary Jo White, the former head of the U.S. Attorney’s office in New York, as chair of the SEC. White oversaw the prosecutions of John Gotti and the terrorists responsible for the 1993 World Trade Center bombings and is a veteran of white collar criminal prosecutions and defense.
Many Americans applaud such displays of toughness, worried that “too big to fail” means “too big to jail.” That is, criminal indictment of a large financial institution threatens its existence and, along with it, economic recovery.
But prosecutors are getting tough on big banks, evident in the recent LIBOR interest rate rigging cases, such as that against Royal Bank of Scotland announced this week, and the money laundering case at HSBC made at year-end. Prosecutors resolved these cases by obtaining admissions of guilt and large fines in exchange for deferring prosecution under agreements that require good corporate behavior for several years.
Under such deferred prosecution agreements, or DPAs, prosecutors flex their muscles by imposing extensive internal reforms at the company. Their goal is to change corporate culture to promote greater accountability and likelihood of compliance with law. Some terms, however, may go overboard, and there is reason to worry about unintended consequences.
Such deals typically require the company to hire an army of compliance officers to roam the company in search of rogues and to train employees in the best practices of compliance programming. In many cases, DPAs require hiring an outside consultant to direct additional steps to be taken and an independent monitor to watch over all the changes during the probation period.
But installing such personnel and programs is no guarantee of succeeding in promoting any particular culture or result. Corporations differ in their histories, philosophies, and business models, negating the possibility of a one-size-fits-all approach to altering culture in desired ways. (For a dramatic example of the danger, consider the experience at AIG from 2005 to 2008, which I document in the new book The AIG Story, and which is summarized in this week’s review of the book in the Wall Street Journal.) Prosecutors often do not understand corporate governance well enough to direct reforms and they rarely explain their reasons when they impose such changes.
Prosecutors should enforce the law and hold people and institutions accountable for violations. When prudent they should settle a matter on terms that may include internal corporate reforms. But they also must make an effort to assure that the reforms they propose will work with the valid parts of the corporate cultures where they are implanted. Failure to do so can be disastrous. When the Senate evaluates Ms. White’s nomination for SEC chair, Senators would do well to ask what she thinks about using DPAs to reform corporate culture.
February 8, 2013 at 9:26 am
Posted in: Corporate Law, Criminal Law, Criminal Procedure, Current Events, Securities Regulation
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Responses (3)
Henry Levine - February 8, 2013 at 10:12 pm
I acknowledge that the crux of your post is really DPAs, and that I am focusing elsewhere. To the extend that you think DPAs are excessive interference (I think this is your position, yes?), my point directly challenges your subwarrants.
Anyway, I’m very surprised by and skeptical of your premise that the HSBC plea agreement represents ‘tough prosecution’. As a variety of commentators including Glenn Greenwald at the Guardian (see, eg, http://www.guardian.co.uk/commentisfree/2013/jan/23/untouchables-wall-street-prosecutions-obama) have noted, citizens without extensive influence have been (routinely) heavily prosecuted without meaningful plea negotiations for acts much less offensive and much less strongly evidenced. Eg, many Americans of Arabic-language cultures have been jailed for making financial contributions to organizations that they thought were charitable and that are not directly connected to terrorist acts. By contrast, HSBC knowingly and ongoingly laundered money for actual terrorist organizations and no one is going to jail. This is not about serious prosecution, this is about merely nominal law enforcement that shields the powerful from accountability.
mls - February 10, 2013 at 11:11 am
Isn’t the problem here complexity? The banks are complex, the laws are complex and the DPAs are complex. Its difficult to see how Congress, or anyone, is going to be able to monitor this or distinguish “good” DPAs from “bad” ones. Members of Congress, academics and others will just divide into “pro-regulation” (focusing on the bad things that banks do and assuming that regulation will improve things) or “anti-regulation” (focusing on the bad things that regulators do and assuming that regulation does not improve things). In the meantime, regulators and the regulated will work out arrangements over time that will presumably be to their mutual benefit, and probably to the detriment of customers, shareholders, taxpayers and others who lack the ability to see or understand what is going on.
Lawrence Cunningham - February 10, 2013 at 11:32 am
Henry: I’m examining DPAs and note that the HSBC fine of $2 billion is not trivial and the extensive internal governance reforms demonstrate muscular prosecutorial action. My concern is about the unintended consequences of such internal reforms, on everyone, not a comparison to the weak.
mls: Yes, and my suggestion is to develop a practice and expectation that prosecutors publicly articulate the rationales for the reforms they propose. This would require simplifying some of the complexity to equip all the constituents you mention with the tools to see and understand what is going on. It would also help prosecutors learn what is going on too which, alas, sometimes they do not. I have a full law review article on this in circulation this article submission season.
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