by Joshua A. Naftalis, Anastasia Cembrovska, Brianna Hills Simopoulos, and Jingxi Zhai
Joshua A. Naftalis, Anastasia Cembrovska, Brianna Hills Simopoulos, and Jingxi Zhai (photos courtesy of Pallas Partners LLP)
The U.S. Attorney’s Office for the Southern District of New York (“SDNY”) has rolled out a first-of-its-kind whistleblower program that offers individuals who self-report financial fraud or public corruption a path to a non-prosecution agreement. U.S. Attorney Damian Williams unveiled the pilot program on January 10, 2024, which provides specific guidance for when the SDNY will enter into a non-prosecution agreement in exchange for an individual’s “early and voluntary self-disclosure of criminal conduct.”
In announcing the pilot program, Mr. Williams reaffirmed the SDNY’s commitment to “rooting out corruption in our financial markets” and added public corruption as an additional enforcement priority. He explained that the SDNY is “always looking for new ways to enhance our effectiveness and stay ahead of the curve,” and that the whistleblower program is a “new tool in our toolkit.” Mr. Williams went on to note that “[b]y providing clarity on the requirements and the benefits of such self-disclosure, we seek to incentivize individuals and their counsel to provide actionable and timely information. . . . Our message to the world remains: Call us before we call you.”
The pilot program is limited to “circumstances where an individual discloses to this Office information regarding criminal conduct undertaken by or through public or private companies, exchanges, financial institutions, investment advisers, or investment funds involving fraud or corporate control failures or affecting market integrity, or criminal conduct involving state or local bribery or fraud relating to federal, state, or local funds.”[1] The program sets forth conditions that an individual’s cooperation must meet to qualify for a non-prosecution agreement:
- The misconduct has not previously been made public and is not already known to the SDNY;
- The individual discloses the criminal conduct voluntarily and not in response to a government inquiry or obligation to report misconduct;
- The individual is able to provide substantial assistance in the investigation and prosecution of one or more equally or more culpable persons, and is prepared to cooperate fully with the SDNY in its investigation and prosecution of the disclosed conduct;
- The individual truthfully and completely discloses all criminal conduct in which the individual has participated and of which the individual is aware;
- The individual is not (a) a federal, state, or local elected or appointed and confirmed official; (b) an official or agent of a federal investigative or federal law enforcement agency; (c) a person who otherwise is, or is expected to become, of major public interest; or (d) the chief executive officer or equivalent or chief financial officer or equivalent of a public or private company; and
- The individual has not engaged in any criminal conduct that involves the use of force or violence, any sex offense involving fraud, force, or coercion or a minor, or any offense involving terrorism or implicating national security and does not have a previous felony conviction or a conviction of any kind for conduct involving fraud or dishonesty.
The program also includes factors that the SDNY will consider in exercising its discretion to offer a non-prosecution agreement, even where the individual does not meet the above requirements.[2]
The SDNY program is the first such Department of Justice (the “Department”) program focused on encouraging self-reporting by individuals (outside of the Antitrust Division). It thus compliments and dovetails with the Department’s corporate self-disclosure and cooperation policies and guidance, including Deputy Attorney General Lisa Monaco’s September 15, 2022 memorandum, “Further Revisions to Corporate Criminal Enforcement Policies Following Discussions with Corporate Crime Advisory Group,” the January 17, 2023 “Criminal Division Corporate Enforcement and Voluntary Self-Disclosure Policy,” the February 22, 2023 “United States Attorneys’ Offices Voluntary Self-Disclosure Program,” and Deputy Attorney General Monaco’s October 4, 2023 announcement of a “New Safe Harbor Policy for Voluntary Self-Disclosures Made in Connection with Mergers & Acquisitions.”
The SDNY program is noteworthy because it provides individuals who self-report financial fraud and public corruption with an articulated path to a non-prosecution agreement. Until now, individuals who were considering self-reporting and cooperating faced considerable uncertainty about the process that prosecutors would follow in considering whether to offer a non-prosecution agreement, as opposed to a cooperation agreement that would require a guilty plea. This uncertainty, and the lack of transparency about the factors that prosecutors would weigh in making such an assessment, were significant considerations in deciding to “go in” and disclose criminal conduct. In assessing whether to self-report, individuals and their counsel were faced with a serious dilemma: whether disclosing misconduct to prosecutors would nonetheless potentially require the individual to plead guilty as part of a cooperation agreement. In certain cases, that risk may have disincentivized the individual from self-reporting to the Department. Similarly, where an individual was considering whether to avail himself or herself of the whistleblower programs operated by, among others, the SEC, the CFTC, and the Treasury Department, he or she may have elected not to do so because of the risk that, if the matter were referred to the Department, prosecutors would require a standard cooperation agreement with a guilty plea.
Notably, the SDNY’s program has certain limits. By specifically exempting CEOs and CFOs, the program is designed to incentivize middle management to self-report on their bosses’ misconduct, rather than giving a CEO or CFO a get-out-of-jail free card. Put another way, the SDNY program is not intended to allow corporate executives to cooperate down.
Moreover, while the SDNY has called its pilot program a “whistleblower” program, it does not offer an individual anonymity or the potential for a monetary payment, both of which are afforded by the programs operated by the SEC, CFTC, and Treasury Department. In practice, it will therefore be advisable for an individual to first file a whistleblower complaint with the SEC, CFTC, and/or the Treasury Department before self-reporting to the SDNY to maintain the option of applying for a monetary award from those agencies.
Individuals and counsel should also consider that the SDNY’s acknowledged motive for being the first U.S. Attorney’s Office to establish this type of program is to attract more corporate fraud and public corruption investigations to the Office.
The question remains: Will this new policy make a difference? The answer is that only time will tell. The policy provides a level of certainty that did not previously exist—a clearer path to a non-prosecution agreement. That is a valuable carrot to an individual considering cooperating and should be carefully considered by individuals and their counsel. It remains to be seen how the SDNY will apply the policy in practice. The SDNY’s first-mover advantage may also be short lived, as the Department’s Criminal Division and other U.S. Attorneys’ Offices can decide to adopt similar policies and follow the SDNY’s lead, as they have in the past.
Footnotes
[1] The policy does not apply to information provided about violations of the Foreign Corrupt Practices Act, federal or state campaign finance laws, federal patronage laws, election corruption laws, or laws prohibiting the bribery of federal officials.
[2] These include: (1) whether and to what extent the criminal conduct had previously been made public or been known to the SDNY; (2) whether the individual disclosed the criminal conduct voluntarily; (3) the extent to which the individual is able to provide substantial assistance in the investigation and prosecution of one or more equally or more culpable persons; (4) whether the individual has truthfully and completely disclosed all criminal conduct; (5) whether the individual occupies any official or leadership position or other position of trust; (6) the adequacy of non-criminal sanctions, including those imposed by civil regulators; and (7) the individual’s criminal history.
Joshua A. Naftalis is a Partner, Anastasia Cembrovska is Counsel, and Brianna Hills Simopoulos and Jingxi Zhai are Associates at Pallas Partners LLP in New York. Before joining Pallas, Mr. Naftalis was an Assistant U.S. Attorney in the Southern District of New York, where he was a senior member of the Office’s Securities and Commodities Fraud Task Force. This post first appeared on the firm’s website.
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