First New Fraud Law: More Money, More Commissions

Congress has taken the first step in its plans to reform corporate governance and crack down on abuses and fraud in Corporate America.

Lawmakers are poised to pass the Fraud Enforcement and Recovery Act, which will bolster the funding and tools available to law enforcement officials to prosecute corporate and other frauds. The House and Senate have both approved versions of the bill with essentially the same language, and the Obama Administration has already indicated it will sign the final bill into law once it hits the President’s desk.

FERA, as the law is being called, does not introduce any significant new anti-fraud statutes on the books. Rather, its punch is in delivering more money to the Securities and Exchange Commission, the FBI, the Justice Department, and other regulators so they have the money to pursue their enforcement priorities more vigorously.

Pollack

After the 9/11 attacks, says Barry Pollack, a member of the white collar and internal investigations practice at Miller & Chevalier, U.S. law enforcement agencies diverted resources to terrorism investigations and “left themselves thin” on resources to go after business crimes. “This is an indicator they intend to beef up that side of the house again.”

According to a statement from Sen. Charles Schumer, D-NY, the bill will include a $40 million appropriation to boost SEC enforcement over the next two years. The money will pay for 60 new enforcement agents and upgrades to the SEC’s antiquated IT systems. Most observers expect the additional funding to translate into an increase in investigations and prosecutions in the near-term.

FERA would also amend the False Claims Act to clarify that it covers any false or fraudulent claim for government money or property, regardless of whether the claim is presented to a government official, whether the government has physical custody of the money, or whether the defendant specifically intended to defraud the government.

“I’m not convinced the False Claims Act changes are going to have a big impact from a compliance standpoint, though they may have some impact on how individual cases get litigated.”

— Barry Pollack,

Lawyer,

Miller & Chevalier

Those changes will make it more difficult, and more expensive, for companies to get some false claims cases dismissed. But Pollack describes the changes as “more fine-tuning than fundamental.”

“I’m not convinced the False Claims Act changes are going to have a big impact from a compliance standpoint, though they may have some impact on how individual cases get litigated,” he says.

FERA would also amend the criminal money laundering statutes to make clear that the proceeds of illegal activity include the gross receipts, not just the profits, reversing a Supreme Court decision that some felt had narrowed the application of the law.

FERA’s other notable provision is the creation of a special commission to investigate the cause of the financial crisis. It establishes a 10-member Financial Crisis Inquiry Commission to examine the domestic and global causes of the crisis, which will report its findings to the president and Congress by Dec. 15, 2010.

According to a statement by House Speaker Nancy Pelosi, the commission will be empowered to hold hearings and to issue subpoenas either for witness testimony or for documents. The commission will also have a wide-ranging purview, including the failure to protect consumers and individual investors; the role of fraud and abuse in the financial sector; tax treatment of financial products; credit rating agencies; lending practices; and corporate governance and executive compensation.

NANCY PELOSI ON LEGISLATION

Speaker Nancy Pelosi’s Statement on House Passage of Anti-Fraud Legislation and Bipartisan Financial Markets Commission:

Washington, D.C.—Speaker Nancy Pelosi issued the following statement today on the Fraud Enforcement and Recovery Act, which will provide critical funding and tools to help law enforcement pursue and prosecute corporate and mortgage fraud that have contributed to the recent economic collapse. The legislation also establishes a bipartisan commission to investigate the causes of the collapse of our financial system and the ensuing recession.

By passing this critical bill today, the New Direction Congress is continuing its commitment to economic recovery with the highest standards of accountability and transparency in the use of taxpayer funds.

This bill takes action now to protect taxpayers by giving the Justice Department more tools to fight possible fraud in the use of TARP and economic recovery funds and in mortgage markets. Congress must protect taxpayers against future fraud that exploits economic assistance initiatives that are intended to restore and rebuild our economy.

This bill will help address the challenges before us while also ensuring that we fully examine the causes and factors that led to the worst financial crisis since the Great Depression. Accordingly, this legislation would establish a 10-member Financial Markets Inquiry Commission— to examine the causes—both domestic and global—of the financial crisis.

Americans must be assured that we are taking every step possible to protect their interests and to prevent the misuse or abuse of their hard-earned dollars.

The Commission will focus on more than 20 areas, including: the failure to protect consumers and individual investors; the role of fraud and abuse in the financial sector; tax treatment of financial products; credit rating agencies; lending practices; and corporate governance and executive compensation.

This Commission will be empowered to hold hearings and to issue subpoenas either for witness testimony or for documents and will report its findings and conclusions to Congress and the American people by December 15, 2010.

As the Commission performs its duties, Chairman Barney Frank and the House Financial Services Committee will continue their work as we strive to stabilize our financial markets, protect consumers, and ensure that this financial crisis never happens again.

Source

Nancy Pelosi on Anti-Fraud Legislation (May 6, 2009).

Swanson

The jury is still out on what the commission’s ultimate impact may be. Richard Swanson, a partner at the law firm Arnold & Porter, likens it to a modern-day Pecora Commission of the 1930s; he predicts it will “give some political cover” for whatever legislation Congress wants to enact to regulate financial institutions, but “I don’t think we’ll learn much more.”

David Brown, a partner at law firm Alston & Bird, agrees. While the Commission “threatens to be interesting,” he doesn’t expect Congress “to slow down the legislative train waiting for it to make its recommendations … I think the financial regulatory reform pieces are already moving down the track, regardless.”

Not Much New Scope

What FERA won’t do: define new forms of corporate fraud or legal liability that could be subject to prosecution. Basically, legal experts say, prosecutors already have all the legal authority they need in current statutes.

Brown

“It isn’t a major re-architecting of the criminal code,” Brown says. “It’s plugging some gaps, tightening the language of the False Claims Act, toughening some penalties, and throwing more resources at investigating financial crimes. It scratches a populist itch.”

Swanson puts it more simply: “We’re in an environment where people are demanding scalps, but we already have all the anti-fraud statutes we need to take them,” he says.

Observers also note that any past conduct that arguably could have played a role in the financial crisis couldn’t be prosecuted under the new statutes anyway, since they wouldn’t apply retroactively. “Essentially every type of conduct that could conceivably violate the new statutes is already prohibited by a statute that’s already on the books,” Pollack says.