Last fall, Deputy Attorney General Lisa Monaco announced significant changes to Department of Justice policies on corporate criminal enforcement, including the use of monitors, review of prior misconduct, and cooperation. As Monaco stated, "This is a start -- and not the end -- of this administration's actions to better combat corporate crime." These changes and the Administration's formation of a Corporate Crime Advisory Group signal a shift in DOJ's commitment to ferreting out corporate crimes and more rigorous enforcement activities. The U.S. Securities and Exchange Commission (SEC) has announced its own intention to conduct faster investigations, bring bigger cases, and to seek harsher penalties. In his first speech on enforcement, SEC Chairman Gary Gensler quoted the agency's first Chair, Joseph Kennedy, to summarize his own agenda: "The Commission will make war without quarter on any who sells securities by fraud or misrepresentation." Chairman of the Commodity Futures Trading Commission (CFTC), Rostin Behnam, has also requested that Congress expand the CFTC's enforcement powers and professed the agency's readiness to serve as the "primary cop on the beat" for cryptocurrency markets.
Former DOJ prosecutor Luke Cass and Britt Biles, who held former senior legal roles at the SEC, the White House, and the U.S. Small Business Administration will explain these policy shifts and discuss the risks for corporate America under this new era, additional priority enforcement areas for the Administration, and what these new policies mean for the future of corporate compliance.
- Luke Cass, Partner, Womble Bond Dickinson
- Britt Biles, Partner, Womble Bond Dickinson
- Moderator: Nicholas Marr, Assistant Director, Practice Groups, The Federalist Society
As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker.
Dean Reuter: Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group Teleforum calls, become a Federalist Society member today at fedsoc.org.
Nicholas Marr: Welcome everyone to this Federalist Society virtual event. We’re very sorry. We had some technical difficulties over here, and so we’re able to just get started. But thanks very much for your patience and your flexibility. But we’re here to get started. We’ve got the hour to cover this topic. We’re going to be covering "The Biden Administration’s Enhanced Policies on Corporate, Criminal, and Regulatory Enforcement." I’m Nicholas Marr, Assistant Director of Practice Groups here at The Federalist Society. As always, please note that expressions of opinion on our call today are those of our experts.
We’re very pleased to be joined today by two experts on this. They’re both private practice attorneys. We’re joined by Luke Cass. He’s a partner at Womble Bond Dickinson -- pardon me -- and his partner, Britt Biles, also at Womble Bond and Dickinson. I hope I pronounced that correctly. They can correct me if I’m wrong. Of course, we’ll be looking to the audience towards the later portion of the call for your questions. So please submit those via the chat or the Q & A chat, and we’ll get to them as we can. With that, thanks everyone for your patience. And Britt, I’ll give the floor to you.
Britt Biles: Thank you for joining us today for a discussion on corporate criminal enforcement trends under the Biden administration. We will discuss DOJ corporate criminal policies, provide a three-year retrospective on some corporate resolutions at DOJ, and delve into some corporate criminal enforcement policies at the SEC, as well -- well, civil at the SEC. We also will touch upon what we believe will be future enforcement trends. Our hope is that we have a lively discussion and are happy to answer any questions that you may have. Luke let’s kick it off with a backgrounder for the group on the federal guidelines for prosecuting a corporation. What factors does the Department of Justice consider?
Luke Cass: Thanks, Britt. And thank you to The Federalist Society for having us here today. Apologies for the delay and thank you all for -- those in attendance -- for joining us.
There are considerations which are contained in what is called the Justice Manual, which is available online for all federal prosecutors to review. They don’t confer any rights on anyone, but they are intended to set forth DOJ policies on a number of different areas and guidance to prosecutors that they’re considering making charging decisions, including the federal prosecution of business organizations. It requires, among other things, for prosecutors to focus on individual wrongdoing from the beginning of any corporate misconduct investigation. It cautions prosecutors not to treat corporations any more leniently or harshly because of their artificial nature. It also states that when prosecuting a business organization whether a corporation, LLC, or partnership, that is not a substitute for individual prosecution, and you cannot tie resolutions pertaining to an individual to any resolution. Lastly, corporate charges may be appropriate even for minor offense conduct where there’s been a history of wrongdoing or condonation by upper management. It doesn’t have to be criminal misconduct. It can be civil, regulatory, and there’s no time limitation on that.
And while these are general guidelines for consideration, there are also specific factors that go into the charging decision itself. Things like the nature and seriousness of the offense, the pervasiveness of the wrongdoing within the corporation, their history of similar conduct, willingness to cooperate, adequacy of their compliance programs, their disclosure of wrongdoing, remedial actions, collateral consequences, adequacy of remedies of the individual prosecution, as well as the interest of victims. Britt, are these factors similar to how the SEC approaches whether to file a complaint against a corporate defendant?
Britt Biles: Generally, yes. I don’t think the Enforcement Manual is as prescriptive as the Justice Manual is, but one additional factor that the SEC always takes into consideration in making charging recommendations during the Action Memo Process is litigation risk. When I was in enforcement at the SEC, litigation risk and whether a case could be successfully prosecuted was always a consideration because of concerns about programmatic implications of bringing cases that might not be successful. But my sense now, with a more aggressive posture at the SEC, is that the litigation risk factor is taking a backseat to general programmatic concerns. The SEC seems focused on expanding its remit and ensuring the application of its regime to new product. So I think the litigation risk is less of a priority than it once was.
Luke Cass: Interesting.
Britt Biles: But, Luke, there’s also been a lot of talk about corporate monitors coming out of the Department of Justice. That seems to be a slight change of posture from earlier years. Can you tell us about that?
Luke Cass: Sure. Previously, the decision about corporate monitors was made on a case-by-case basis. It was essentially viewed as a reserved remedy that was only implemented after cost versus benefit analysis. That goes back to 2008 and the memo put out by then Acting Deputy Attorney General Morford. A decade later, in 2018, Assistant Attorney General Brian Benczkowski issued a memo that elaborated on that potential benefits analysis. And he said that it requires consideration of four different things: whether the misconduct involved manipulation of corporate books and records, whether it was pervasive, whether the corporation makes significant investments in and improvements to its compliance program, and whether those improvements have been tested to demonstrate prevention. And it also added that monitors should be imposed only when there’s a demonstrated need for it relative to the costs and burdens.
Britt Biles: In recent times, have you seen an expansion of the number of monitors? And how are those monitors being selected?
Luke Cass: Yeah. Like anything, it’s subject to negotiation with the department. But there’s been two recent corporate resolutions in which monitors have been appointed. In one of the agreements, DOJ selected the monitor and in the other the defendant was actually allowed to select the monitor. Going back to 2018 and Mr. Benczkowski’s memo. He had set up a standing committee on the selection of monitors where candidates were nominated, reviewed, and voted upon and then approved all the way up to the assistant attorney general -- to the deputy attorney general. But monitors have oversight and reporting obligations to ensure that the terms of any corporate resolution are being complied with on a specific timetable, among other responsibilities. Typically it means more cost and more time to an ultimate resolution. Britt, when you were at the SEC, and you worked at DSP, I’m sure you collaborated with a number of different agencies. Are they taking a similar approach to corporate resolutions and monitorships?
Britt Biles: I think the SEC has always been active in the monitor space. Maybe not in its formal way, but in various cases under certain circumstances, the SEC has always sought monitors. Going back as early as 2015, for example, I was involved in investigations and cases where the SEC sought undertakings that included monitors in some situations. But we’ve touched on some speaking by DAG Monaco last fall on corporate criminal enforcement. Can we elaborate on that and tell the audience what she said?
Luke Cass: Sure. There’s been a lot of different speeches and a lot of tough talk recently on corporate criminal enforcement. It began last fall, as you said, Britt, when Deputy Attorney General Monaco announced that companies should actively review their compliance programs to ensure they adequately monitor for and remediate misconduct or else it’s going to cost them down the line. She added that, in terms of resolutions, the department will review a company’s whole criminal, civil, and regulatory record, not just a sliver of that record. And for clients cooperating with the government, they need to identify all individuals involved in the misconduct, not just those substantially involved, and produce all non-privileged information about that involvement. And then earlier last month, both the attorney general and the head of DOJ’s Criminal Division reemphasized that the department’s first priority in corporate criminal cases is to prosecute the individuals who commit and profit from corporate malfeasance as that offers the best deterrent to corporate crime.
So we’re seeing DOJ lay down the groundwork for a marker or a line in the sand when it comes to corporate criminal enforcement. A case out of the southern district of New York yesterday involved multiple corporate executives of Archegos Capital Management who are being charged with racketeering, securities fraud offenses, and an alleged multi-billion-dollar scheme involving derivatives and swaps artificially inflate its portfolio using acquired leverage. Deputy Attorney General Monaco was on hand and made similar pronouncements about individual accountability at that press conference. But Britt, tell us, is this a departure from prior guidance? And what was that?
Britt Biles: Absolutely, over the years there’s been a swing at DOJ from the Yates Memo, to the Rosenstein Memo, and now back to the Monaco Memo. And essentially, the Monaco Memo is a revival of the Yates Memo. And the biggest difference is that the Rosenstein Memo and the Trump administration allowed for corporations to receive partial cooperation credit as long as they were meaningfully assisting with the government’s investigation. And that was true even if they were unable to all relevant individuals or provide complete factual information despite their good faith efforts to cooperate. But now, this focus is back on providing information about all individuals as opposed to only those who are substantially involved or responsible.
There’s also been a shift away from the Trump administration Rosenstein Memo policy that looked at corporate resolutions from a whole of government approach. They took into account the totality of fines, penalties, and forfeiture that might have been imposed by various DOJ components or other federal regulatory or law enforcement agencies. And so there’s been a marked shift away from that in corporate resolutions. So essentially, the Monaco Memo is Yates 2.0. But practically speaking, I mean, I think we need to focus on what this means for corporate internal investigations and what companies seeking to cooperate really need to focus on now. What are your thoughts?
Luke Cass: I think the simple answer is that makes cooperating a lot harder to do and the process a lot more complicated in several different ways. First, time is obviously a resource, like anything else. From a corporate perspective, our clients have businesses to run. The reality is that these protracted investigations are distracted from those core concerns of theirs. Second, the length of the investigations is likely to be a lot longer and costs are likely to be higher. One of the reasons that Deputy Attorney General Rosenstein’s revised standards were positively received is that there was a perception based on the guidance that disclosures could be more limited to receive credit and that DOJ would consider the totality of the fines with all regulators in one resolution, which meant less burdensome investigations and one overall resolution, which in turn resulted in faster and more cost-efficient outcomes.
Now, as you said Britt, in order to receive cooperation credit, you’re required to identify all individuals involved, not just those substantially involved, produce all non-privileged information about those individuals’ involvement. So I can see investigations getting bogged down in identifying that lower-level conduct to ensure the client gets full cooperation which translates into longer investigations and unfortunately more costs. When you have a monitor as part of the plea agreement or deferred prosecution agreement, that only lengthens the process. And Britt, this notion of providing all non-privileged information -- DOJ memorializes this in the Justice Manual, of course -- but that’s often something that’s more complex in reality, isn’t it?
Britt Biles: Yes. And also, I think that DOJ, based on some things that we’ve discussed before, is, I think, line prosecutors are maybe in a position to either seek or pressure for waivers, even though the policy may not be for that. So I think, practically speaking, a company that’s seeking cooperation may feel like they’re in a bind and need to make a waiver in order to receive that cooperation credit. And now, the case law in the majority of circuits is that there is no selective waiver. It’s waive it, or you don’t. So that makes the decision much harder for corporations. But what’s the feedback that you’re hearing from others like us in the white-collar bar?
Luke Cass: Well, it’s aggressive, to be sure, the rhetoric coming from the department, especially from the top echelons, the attorney general, the deputy attorney general, the chief of the criminal division. And we’ve heard other comments, “We won’t shy away. We won’t be afraid to lose.” So that’s certainly not lost on most folks, but I’m not sure it’s the right messaging for all types of cases. Obviously, a determination has been made that corporate criminal enforcement is a top priority for the administration. And for many companies, there’s no choice when it comes to cooperation. If they believe it’s in their best interest to cooperate, they’ll do so. But for others, that may not be as true. And I think it’s in everyone’s interest to incentivize cooperation. You want companies to be comfortable coming forward as soon as they learn about something. Certainly, many of the different types of cases could not and would not be made absent that cooperation. But I think there’s a sense or a fear that this overly aggressive rhetoric could dissuade certain companies from doing that. If the cooperation process is as arduous as fighting the case on the merits, some companies are going to do their own cost versus benefit analysis and choose to fight, at the end of the day.
Britt Biles: And I think that’s true in SEC enforcement, as well, not just in the cooperation space but just in the sense of the settlements that may be offered. If the company is being provided terms that they can’t agree to, they’re going to be much more willing to litigate to try to put themselves in a better situation. But fortunately, compliance programs are a really key part here, and if companies have well designed and operational compliance programs, hopefully they can avoid some of these pitfalls.
So let’s talk about what the Department of Justice has said on effective compliance programs. DOJ put out a memo in June 2020 that spelled out some requirements and considerations for corporate compliance and they focused on: “Is your compliance program well designed? Is it risk based and integrated? Does it have appropriate controls? Does it manage relationships and real actions and consequences? Is it applied in good faith with a commitment by senior and middle management? Does it have appropriate resources?” One thing that I know the SEC has said is that they frown upon companies who may have saved money during the pandemic by cutting their compliance departments. And then, the alternate question is, “Does the components firm actually work in practice. Is it continuously being approved and tested and monitored? Is misconduct being investigated and remediated?” And the SEC has been vocal in this area too, and they have spoken a lot about risk-based programs. Is the compliance program something that is designed to meet the specific risk of the business, or is it an off the shelf policy that isn’t tailored to the specific concerns?
Luke Cass: Britt, you recently sat down with the SEC’s Director of Enforcement, Gurbir Grewal, did he offer any valuable insights into corporate resolution policies or has the CFTC?
Britt Biles: Yeah. So I had a good conversation with Director Grewal where he talked about a number of these things. He talked about compliance programs and the need for them to be risk based, tailored, and not off the shelf. But, in terms of corporate enforcement, the SEC -- and Grewal reiterated this -- has always put a focus on individuals. And when you’re talking about causing and aiding and abetting violations, those are really focused on executives and senior officials within companies who may be responsible for a company’s violation. So the SEC is continuing its focus on holding individuals accountable, and you will see lots of corporate actions where individuals are also charged and may face officer and director bars and the like. So I think that’s going to continue at the SEC. And he’s also indicated that they will continue to be aggressive in the use of admissions in appropriate cases and officer director bars and other things that really fit with the idea of protecting the public. So I think that’s just going to be more of the same, but it’s deployed in a much more aggressive way than it may have been in the past.
I think a good example of that is how Director Grewal indicated they are treating penalty amounts in past settlements. I think most of us in the SEC defense bar is familiar with the concept of going into enforcement and saying, “Here’s the rubric of past settlements for this type of conduct and the penalty was ‘X,’ the disgorgement was ‘Y,’ and here’s where we fit on that continuum.” Director Grewal actually said that could boomerang in many cases because the SEC is now looking at that as being a sign that the past settlements were not actually deterrents. If you’re coming in and saying a prior settlement involving your company or similar companies with “X,” amount of dollars, and he indicated the SEC might think “X,” amount of dollars is no longer good enough
Luke Cass: Britt, often upon learning of their wrongdoing, most companies will decide to do a privileged internal investigation, either before cooperation actually begins, maybe in tandem with some form of DOJ interface. Can you give our audience a sense of the potential outcomes for that type of inquiry?
Britt Biles: Yeah. So there’s many different ways that things can go. I mean, I think at the outset, people are focused on doing a privileged internal investigation and seeing where it leads. If there are no adverse findings, then generally, that’s the end of it and there’s no disclosure obligation. Or there could be things that need to be reformed with the compliance program. Or there might be instances where wrongdoing or some sort of violation is found and then, you get to a situation where you’re maybe making a self-report to the SEC or DOJ. And the self-report question’s always a difficult one to analyze and answer on whether it’s appropriate and whether the company can expect to get some sort of meaningful cooperation credit. But then, the outcome could be anything from an administrative action to a consent decree to a litigated civil action to criminal charges. And obviously, DOJ’s in the criminal charging business, but they can decline charges or they can enter into NPAs or DPAs, and the SEC is using those tools as well. So there’s a variety of outcomes when a company is suspecting that they may have a problem.
Luke Cass: And Britt, in terms of corporate resolutions with DOJ, can you just walk us through a snapshot of the last three years? Let’s start with 2019.
Britt Biles: Yeah. So over the past three years, there’s been a meaningful number of corporate resolutions. They’ve primarily been in the FCPA, market integrity, major fraud spaces. So you’ll see in 2019, there were 15 total. And they were bringing in around three billion dollars in monetary amounts globally -- around three billion in the US. And about two billion of those dollars were going through the criminal system. But the FCPA violations made up the lion’s share of those enforcement actions and dollars. In 2020, the number dropped to 13. That 15 to 13 could be a blip. It could be pandemic related, but it still ends up the same way -- FCPA violations taking up the majority of the dollars in resolutions with major -- market integrity and major frauds making up the rest. And then, 2021, it was down to eight, and no, three plus six does not equal eight, but that actually means that there was a joint resolution that was both FCPA and MIMF. So that’s why there were eight resolutions but three and six of each category. But the dollars were right around three billion dollars, again. But the FCPA piece of it wasn’t as large in 2021 as it had been in prior years. What does that mean going forward? I think we’ll still see lots of FCPA enforcement as we’ll see.
Luke Cass: And Britt, as you said, the numbers are obviously down due to the pandemic. I imagine they will continue to significantly increase as the department makes its push, as the resources that they brought to bear start producing. Let’s shift gears a little bit, Britt. What’s currently happening with pandemic fraud? It seems like everyday there’s a new PPP fraud case coming out.
Britt Biles: Well, this is an issue that’s close to my heart because I was the general counsel of the SPA during the pandemic, so PPP and EIDL are things that I’m very well familiar with. But the pandemic fraud is, I actually think, a growing priority. I think early in the pandemic there were lots of low hanging fruit types of cases that were brought. Someone got a Lamborghini with a PPP loan, that kind of example. But now, it seems that the focus is shifting into more complex cases and frauds. For example, the attorney general mentioned three areas in his speech earlier in the month, obviously, they involve PPP, EIDL, and the provider relief fund. And I think this will continue.
But the appointment of Kevin Chambers as this director for Covid 19 fraud enforcement -- there were some clues in the announcement of his appointment that suggest that different types of cases may now be the focus, more complex cyber based cases, more complex cases involving identity thieves and organized criminal organizations. So the bigger complex cases seem to be the direction this is going. But there was also a reference to strike team. So it may be that DOJ approaches this the way they have the healthcare strike force teams in the past. And there’s certainly been an effort by DOJ to increase its resources. The attorney general’s requested budget increase is to hire 120 attorneys and 900 FBI agents. And obviously, this is on top of all the resources that were already dedicated during the enactment of the CARES Act for the PRAC and the SIGPRA and those various organizations that had been working on pandemic fraud.
But one area that I think hasn’t gotten as much attention that may be getting more attention is the unemployment insurance schemes. According to DOJ, there were 860 billion in funds for unemployment benefits. And many of those funds may have been siphoned off by international organized crime groups, identity thieves, street gangs, and even prison inmates. So there may be a push by DOJ to take on some of those issues as well.
Luke Cass: I think we’re going to see these cases for years to come.
Britt Biles: So here are some current and future enforcement areas that we think are going to be priorities for DOJ going forward, and we’re going to tick through these one by one. And Luke, let’s start with foreign corruption.
Luke Cass: So foreign corruption and the Foreign Corrupt Practices Act will continue to be a focus area, particularly in Latin America. 2021 was a slow year for FCPA enforcement actions and resolutions. Out of the limited number of resolutions, two of those involved companies in South America, specifically in Brazil. Both were charged with alleged violations of the anti-bribery, books and records, and internal control provisions of the Foreign Corrupt Practices Act. Both cases involved the alleged payment of bribes. And, in the case of one matter, the parent company was accused of failing to promptly and adequately respond to warning signs of corruption over control failures in one of its subsidiaries.
In 2020, there were four FCPA actions. Again, three of the four were in South America, two in Brazil, one in Peru. So FCPA enforcement will continue to focus on South America. In addition, recently disclosed FCPA investigations involved companies in the northern triangle which is El Salvador, Guatemala, Honduras, which shows a narrowing focus on the region. DOJ created an anti-corruption taskforce focused on the northern triangle with different representatives from various criminal division components including the FCPA unit of the fraud section as well as the Kleptocracy Asset Recovery Initiative which is part of the Money Laundering Asset Recovery section at DOJ. So, in terms of resources, there is a Latin America Corruption Task Force in the FBI office in Miami, and a number of FBI agents have been detailed to the fraud section at main justice embedded to work side by side with FCPA prosecutors. So look to those to certainly continue.
Britt Biles: Interesting. What about anti-trust? Hasn’t there been a resurgence there?
Luke Cass: Yeah. The division appears to be reinvigorated. Last year, the division brought 25 criminal cases against 29 individuals and 14 corporate defendants. It now has 146 open grand jury investigations -- the most in 30 years, according to Attorney General Garland’s speech. They’re now preparing to try 18 indicted cases against 10 companies and 42 individuals, including the eight c-suite executives – so very, very busy. The division has had two setbacks recently involving allegations of employment related anti-trust crimes. These cases were styled as anti-poaching conspiracies, and companies and executives were charged with conspiracy to suppress competition in the labor market. There was an acquittal in Texas, and then, later that same week, there was another acquittal in Colorado. So a few setbacks for the division, but these are novel theories that haven’t been tried before. Britt, what about market manipulation and financial fraud?
Britt Biles: Well, financial fraud offenses are always going to be a high priority, whether it’s insider trading, other types of securities fraud, those are things the DOJ prosecutes in parallel with the SEC. There’s also going to be more work coming out of the CFTC, I believe, because they’ve launched a new division of data that relies upon existing CFTC reporting market intelligence and surveillance to better identify trends and potential violations and pursue certain division enforcement program priorities. So I think that we might see more collaboration between the DOJ Criminal Division and COTC going forward. In particular, spoofing is an area where data analytics is going to be important, and we’ve seen DOJ dedicate new resources to commodities fraud prosecutors. And there have been several spoofing prosecutions already over the last few years since Dodd-Frank criminalized spoofing. But I think this is an area of increasing trends, and we’re seeing some of this in a particular case involving energy pricing benchmarks in the Platts publication. So I expect there will be more of that going forward.
Luke Cass: Britt, do you think the infrastructure bill will have an effect on enforcement trends?
Britt Biles: I would expect so. I mean, whenever 1.2 trillion dollars is flowing into the economy, I think there will be an increase in criminal activity and regulatory violations associated with it. And certainly, the federal regulatory agencies and law enforcement authorities are going to be looking for potential violations to pursue. So, if you look at the areas where the capital will be flowing in the infrastructure bill, pipe replacement, high speed internet, road and bridge repair, public transit, clean energy -- those are things that intersect with procurement. So I would suspect that there’s going to be some procurement fraud prosecutions down the line, maybe some anti-trust cases, which we’ve already talked about. And then bid regain is also in play. And whenever you’re dealing with any sort of government dollars, there’s always the False Claims Act area.
Luke Cass: That’s right, and they’re putting resources in place likely for that reason. The Department of Justice announced a procurement inclusion strike force which is an interagency partnership dedicated to investigating and prosecuting anti-trust crimes related schemes that target procurement fraud specifically including grants program funding at the federal, state, and local level. It’s the fraud section of DOJ as well as the anti-trust division and various US attorneys’ offices in strategically important locations, as well as other national law enforcement partners. Britt, what about environmental -- you mentioned clean energy before.
Britt Biles: Yes. So the infrastructure bill invests 21 billion dollars to clean up superfund and brownfield sites, reclaim abandoned mines, and cap oil and gas wells. So there is money moving in that direction, and also, obviously, this administration is very focused on environmental issues. So I would suspect there would be more environmental crime investigations, and AG Garland has stated the Environmental and Natural Resources Division at Justice, ENRD, is prioritizing the investigation and prosecution of individuals who commit corporate environmental malfeasance. So I think this is going to be an ongoing area, and they’re already trying 11 indicted cases against 11 companies and 34 individuals. So I think this will continue to grow.
Luke Cass: Some DOJ officials recently -- I think it was earlier this week -- made reference to criminal enforcement on climate change specifically. So look to that to be sort of a new category of enforcement – pollution, waste crimes, environmental justice. And President Biden’s executive order devoted 44 million in the budget to this specific issue of climate change offenses.
Britt Biles: And I think that’s an area where cooperation and settlements resolutions will be particularly difficult because there are so many different views on policy in that area. So I think if those areas are pursued, then that will be a very hot litigation topic going forward.
Luke Cass: That’s right. And another thing to keep in mind, in terms of infrastructure funding, is that it’s likely to come in a variety of different ways – grants, pilot projects, R&D programs, tax, tax credits, and other incentive mechanisms. And the DOJ’s criminal tax division will likely be a key enforcement partner in an effort to protect the integrity of those funds. The division handles or supervises most federal criminal tax prosecutions broken down into three regional areas – northern, southern, and western. Another area likely to be implicated in infrastructure is public corruption. Many of the infrastructure bill provisions will require companies to interface with local, state, and federal public officials on a number of different issues. And these are even areas that you would not immediately think about in this context --campaign finance, campaign contributions may be affected by this curve ball of infrastructure projects. Some companies are already preparing for this and reviewing policies and training employees about the best practices and red flags when dealing with public officials. Britt, what about virtual currencies or data analytics?
Britt Biles: Yeah. So virtual currencies and cyber are both areas where there’s a lot of focus. The infrastructure bill provided some direct funding to promote cyber resilience within certain infrastructure areas, but there’s also False Claims Act implications for this. At a recent event, The Aspen Cyber Summit, Deputy Attorney General Lisa Monaco said that DOJ is poised to sue government contractors and other companies who receive government funding if they fail to report breaches of their systems or misrepresent their cyber security practices. So that, I think, is definitely a new area for the False Claims Act space, and that’s aimed at government contractors and entities who provide cyber security products. But I think it’s just part of the bigger focus on cyber. As many of you know, the SEC has a cyber rule making going on right now about what companies have to disclose when they have been the victim of a cyber breach.
In terms of virtual currency and digital assets, that’s a space where the DOJ has become more active and the SEC is very active as well, which we’ll touch on in a minute. But DOJ recently created a cryptocurrency enforcement team and appointed former AUSA, Eun Young Choi as the director. She’s also coming from the deputy attorney general’s office. So she’s charged with promoting government investigations and enforcement of the responsible use of cryptocurrencies and really ferreting out actors who may be facilitating or using digital assets to bring about criminal activity. So I think we’ll see more activity from there both from a prosecution standpoint and from a policy making standpoint. But the task force appears to have a very broad mandate to work within the US government and abroad.
Luke Cass: And Britt, how is the SEC dealing with virtual currencies?
Britt Biles: Well, the SEC is very active right now in the crypto space. And the SEC is working very hard to maintain its relevance as the markets change. Very recently, the SEC chair Gary Gensler spoke, and he indicated that SEC regulation is tech neutral and that digital assets that are securities will be regulated like securities. Obviously, things like the Howey test date back to the 1940s and did not contemplate something like crypto and digital assets. So the SEC is working very hard to prove that those standards that have long existed are adaptable going forward. So his words were, “There’s no reason to treat the crypto market differently just because different technology is used.” So I think we will continue to see more of that from the SEC.
And here’s what the SEC’s thinking appears to be on the crypto markets. They appear to be breaking down the market into three buckets, the platforms, the stable coins, and the tokens. So Gensler has said publicly that most crypto tokens, in his view, are securities. There are a few that may be commodities or a few that are maybe currencies, but, at the end of the day, most of them, he believes, either satisfy the Howey test or the Reves test. So, from the standpoint of the platforms, the SEC’s view is, if you’re a crypto platform, then you inevitably must be a securities platform because you couldn’t be trading that many different tokens and not have some of them be securities. So the SEC is focused on registering crypto platforms that trade securities as exchanges, and they’re working with the CFTC to develop a regulatory scheme for platforms that are a mix of commodities and securities. And within the context of these platform issues, the SEC is evaluating custody and market making issues for crypto platforms.
And, in the stable coin space, they’re asset based. So they implicate financial stability. So there are many F stock type of considerations that the SEC is focused on in that area because they’re viewed as being similar to money market accounts. So the concerns are with loss of pegs or inability to redeem. And then, from the standpoint of criminal enforcement, which is something I’m sure the DOJ crypto task force is focused on, is that stable coins can move without intercepting with fiat currency and traditional banking systems. So they are viewed as being a mechanism for illicit activity, but even without the illicit activity component there’s concerns about investor protection because investors typically don’t own the stable coins, the platforms do. So there may be market integrity redemption or conflicts of interest issues in play.
But the tokens, I think, is the area where the SEC is doing the most. You’re seeing it in a lot of their Section 5 cases involving Ripple and the like because the issue is whether a particular crypto token is a security. And the SEC’s analysis is based on the facts and circumstances for each type of token, which is problematic for people who are trying to understand where they might fit. But the current SEC initiatives are focused on getting crypto token issuers to register the offerings and sales and submit to the SEC’s regulatory regime for disclosure compliance with anti-fraud provisions and the like. Obviously, there could be ones that may be eligible for registration exemption. But really, the focus there is on registration of the tokens and issuances.
And Director Grewal has said that, if you want to understand the SEC’s enforcement stance on crypto to read the BlockFi order. The BlockFi order is a recent settled action involving BlockFi Lending, which was a crypto lending platform that ended up settling with SEC for violations of Section 5. And, in that settled order, the SEC laid out its analysis of the crypto tokens and why they were securities, and they talked about them being notes under the Reves test. And you can see the excerpt of the section -- the order there. And they also talked about them as being investment contracts under the Howey test, and this next slide shows the analysis and the order under the Howey test because, at the end of the day, the SEC’s view is that the crypto tokens are sort of beside the point. They’re a tangible -- or well, technically not tangible – concept, but they’re really not the purpose. Like, people aren’t really buying crypto. They’re really buying the right to profit from the investment in some sort of ongoing enterprise that will produce an ecosystem that they can someday make money off of.
Luke Cass: This may be an obvious question, but does a virtual currency company deal with SEC compliance any differently than another type of company?
Britt Biles: Well, I think the issues can be a bit different depending on the maturity stage of the company. The SEC is encouraging crypto entities to engage with the SEC to come into compliance with federal securities laws. So how that might be depends on whether it’s a company that has already come to market or whether it’s a company that may be coming to market. If you’re in the early stages of maybe coming to market, there’s an opportunity to engage with FinHub to potentially work out whether you may be a security and how you could avoid being a security. But, for existing companies who have been in the market, and now, they realize they may be violating the securities laws, then you get into thorny issues of self-reporting. And that’s exacerbated in the crypto context because the SEC is focused on future compliance, but it’s not granting amnesty for past violations. So there’s going to still be consequences even if a self-report is made and the company is being viewed as cooperative. Like BlockFi Lending is touted by the SEC as a model of cooperation, and cooperation credit was awarded, and favorable consideration was made for remedial efforts notwithstanding. BlockFi Lending still paid the SEC a 50-million-dollar penalty and was forced to stop the line of business and is still working to come into compliance with the securities laws.
Luke Cass: And Britt, we hear a lot of concerns from clients in two other areas -- cyber as well as sanctions in light of what’s happening in Ukraine. What’s important to know about those areas?
Britt Biles: Well, I mean, I think cyber is the same thing that we talked about because I think cyber hacks are a concern in the current environment and so are crypto -- it’s a way to potentially evade sanctions. But I think, in general, we’re going to see increased sanctions and export control enforcement. There was already 150 open sanctions and export control cases before the invasion of Ukraine, and they were involving Iran, China, Russia, and North Korea. So I think those numbers will increase in an absolute sense and the proportion will probably skew towards Russia. In addition, obviously, there’s other issues involving foreign entities that we will see increasing. But, on the whole, I think we’re going to see a continuing uptick in all areas of white-collar criminal and civil regulatory enforcement. What do you think?
Luke Cass: I think that’s right I mean the ten percent increase last year sort of proves it. The last administration focused more on immigration and opioids. Violent crimes was its priority areas, at least before the pandemic hit. So I think what we’re seeing now is a shift back to the traditional areas of white-collar enforcement, and, on the sanctions point specifically, in recent remarks in New York, Deputy Attorney General Monaco said sanctions is the new FCPA, so I think you’re going to see a lot more of those types of cases.
Britt Biles: Right, and there seems to be tax coming out of DOJ is another area where we may see continuing work, and health care fraud is the old favorite priority. So I’m sure that will continue. What do you think about that?
Luke Cass: Yeah. There was just a take down actually this past week -- over 20 defendants across nine federal districts involving Covid 19 testing which was used for false billing during the pandemic. That’s always -- leads the numbers in the department statistics. But I know we’ve thrown a lot of information at our audience. Britt, what can they do to stay ahead of some of these regulatory curves in the near term?
Britt Biles: Yeah. We’ve obviously touched on a lot of areas and just the scale of it can seem overwhelming. But, at the end of the day, I think the fundamental consideration is on compliance programs and compliance officers stepping up and being able to demonstrate to DOJ that they’re doing everything they can to empower employees to respond appropriately to ethical challenges providing appropriate training, providing appropriate remedies and discipline as necessary. And I think they want to see the tone at the top. The companies are putting people in charge who are walking the walk and modelling ethical behavior.
Luke Cass: Right. You hear a lot about the cultures of compliance which seems like sort of a fuzzy concept, but at its basic level it’s whether a company has a system in place that can immediately detect, remediate, and discipline wrongdoing and then adapt to ensure that these types of discrepancies or errors don’t happen in the future. With that, we have our final slide here. If you point your phone at the QR code there, it’ll have our contact information. Nick, do we have any questions from the audience with our remaining seven minutes here? Again, apologies for starting late.
Nicholas Marr: Well, we do have a question about predictions on the potential use of monitors by DOJ. I’m not sure. Maybe we addressed that a little bit but --
Luke Cass: Do you have any predictions on the potential use of monitors by DOJ? They’ve already had two cases, so it seems like they’re using them, for sure. In two recent resolutions on very different areas of enforcement as well. One was on a False Claims and the other one was on -- or procurement fraud -- and then, the other one was on a financial fraud matter. So it seems like it’s going to be a tool that’s going to be used much more frequently than it has in the past. And Joe Whitley would be an outstanding choice as a monitor. I second that. I second that.
Nicholas Marr: Well, good. For the audience members remaining, if you’d like to get a question in here in the last five minutes, please submit your written question via the chat, and we’ll take it now. Well, I don’t see any questions now. If we get one, I will let you know, but I will give you a chance for any closing remarks you’d like to make this afternoon.
Britt Biles: Sure. Thank you for listening, and we are happy to answer any questions that may come up offline. So feel free to reach out.
Luke Cass: Thank you. Thanks for attending today.
Nicholas Marr: Great. Thank you both very much. And on behalf of The Federalist Society, I want to thank you Luke and Britt for the benefit of your valuable time and expertise this afternoon. Thank you to our audience for dialing in and for your patience while we figured out our technical difficulties. As always, keep an eye on your email and our website for announcements about upcoming events like this one. But until that next event, we are adjourned.
Dean Reuter: Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.