By: Douglas K. Rosenblum
March 5, 2014
Recent pronouncements by the Department of Justice (“DOJ”) illustrate an apparent dichotomy in the Department’s prosecutorial priorities. On one hand, Attorney General Eric Holder has announced several initiatives to move toward more equitable sentencing and to curtail the great number of long prison sentences imposed on those convicted of non-violent drug trafficking crimes. One the other hand, the Department continues to maintain its official stance that white collar prosecutions must reinforce the message that “nobody is above the law.” The Administration’s movement towards a more equitable balance of enforcement effort could have a significant impact on those investigated for financial frauds across several industries, most notably financial and health care. These evolving priorities will also likely impact how counsel advocate on behalf of individuals investigated for these offenses over the next few years.
It is too early to tell how it all will play out, as even those who represent accused drug offenders remain skeptical about how “enlightened” things will be for their clients in the immediate future. Nonetheless, this announced shifting of prosecutorial focus should not be ignored by those representing clients in white collar investigations and prosecutions, particularly when one of DOJ’s major policy changes is based on a concern that too many “non-violent” offenders are spending too much time in jail. At the same time, and as also reflected in DOJ’s priorities, there remains a group of lawmakers and high level policy makers who continue to believe that individuals who commit financial fraud get off too lightly.
DOJ Advocates for More Equitable Sentencing in Certain Drug Offenses
As widely reported, DOJ recently released an initial package of criminal justice reforms, entitled “Smart on Crime,” as its initial step to “shift away from [an] over-reliance on incarceration” and refocus its resources. “Smart on Crime” identifies five areas of focus: (1) prioritize prosecutions to focus on the most serious cases; (2) reform sentencing to eliminate unfair disparities and reduce overburdened prisons; (3) pursue alternatives to incarceration for low-level, non-violent crimes; (4) improve re-entry to curb repeat offenders and re-victimization; and (5) surge resources to violence prevention and protecting the most vulnerable populations. Running parallel to the DOJ reform efforts, a number of bills, aimed to reform sentencing policy have been proposed in Congress, including changes regarding thresholds for mandatory minimum sentencing.
“Smart on Crime” specifically states that “for many non-violent, low-level offenses, prison may not be the most sensible method of punishment.” DOJ also endorses diversion programs and specialty courts as an alternative to incarceration for low-level, non-violent crimes.
Any initiative to reduce the burden on federal prisons should be welcomed by white collar practitioners as additional support in sentencing arguments that a client’s sentence should involve little to no incarceration. Moreover, while much of “Smart on Crime” focuses on reduction in the length of prison sentences, it also encourages the exercise of prosecutorial discretion to avoid, where appropriate, the charging of low-level non-violent offenders. In short, the principles underlying these policies logically add support to arguments on behalf of white collar clients when making the pitch for a declination of prosecution or a deferred prosecution agreement. Accordingly, it makes sense when representing clients in white collar matters to fully explore the opportunities for advocacy presented by “Smart on Crime.”
A Renewed Focus on Individuals Accused of Financial Fraud: A Balancing of Inequities
Having reviewed the potential sunny side of things with “Smart on Crime,” we should also heed Longfellow’s observation that “[I]n every life a little rain must fall.” That “rain” comes in the form of other developments within DOJ that signal the likelihood of increased white collar prosecutions of individuals. Early this year, President Obama re-nominated Leslie Caldwell for the position of Assistant Attorney General for DOJ’s Criminal Division. Once confirmed, it is widely expected that Ms. Caldwell will pursue more prosecutions of individuals in white collar cases. This expectation comes in large part from knowledge of her leadership of the DOJ’s Enron Task Force from 2002 to 2004, as well as the belief that Ms. Caldwell was nominated in response to lingering criticism of DOJ by some for a perceived departure from prosecution of individuals, particularly high level executives in complex fraud cases.
Perhaps the most notable example of this criticism came from Judge Jed Rakoff of the Southern District of New York, who recently published an article in the New York Review of Books, entitled “The Financial Crisis: Why Have No High-Level Executives Been Prosecuted?” In the article, Judge Rakoff questions the value of the government entering into financial settlements and non-prosecution agreements with large companies without any apparent attempt to prosecute those responsible for directing the operations at issue. He further suggests that “the future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures.”
Further, the Department of Justice has announced that financial fraud will receive increased focus in the coming year. In its FY 2014 budget, DOJ requested the resources to strengthen the department’s ability to pursue large-scale financial fraud investigations, all with the stated purpose of protecting those who invest in U.S. financial markets, and securing the federal treasury. The increased budget amounts are to be used to add FBI agents, criminal prosecutors, civil litigators, investigators, forensic accountants and other support positions necessary to investigate and prosecute more complex financial frauds.
While Judge Rakoff has highlighted the absence of “high-level” prosecutions, there have been a significant number of prosecutions of low to medium level executives and managers in financial fraud cases, particularly those involving mortgage and securities fraud. Moreover, the lines between high level and mid level executives continue to blur. When it comes time for sentencing, the threshold for being found to be a manager is relatively low. While there are many professionals and managers serving or about to serve significant prisons sentences for financial crimes, DOJ’s increased effort on financial crimes, including complex schemes, and more aggressive application of the “responsible corporate officer” doctrine, could lead to increased investigations and prosecutions of individuals.