by Brian A. Jacobs and A. Dennis Dillon

Cooperating witness Gary Wang provided crucial testimony in the prosecution of Sam Bankman-Fried, by describing (among other things) how at Bankman-Fried’s direction he had coded a means for Alameda Research—the FTX-affiliated hedge fund—to withdraw unlimited funds from FTX.  Mr. Wang’s credibility was enhanced by the fact he already had pled guilty to four felony counts, including conspiracy to commit wire fraud and securities fraud, and had accepted a theoretical maximum sentence of decades in prison.  It is possible, but by no means certain, given Mr. Wang’s cooperation, that he will receive little or no prison time.  Even so, he will carry the burden of a felony conviction forever.  Had the FTX case (and his confession) come just a year later, however, might the outcome have been different? 

The new program’s benefits for early cooperators

The potential difference lies in the “whistleblower pilot program” that the U.S. Attorney’s Office for the Southern District of New York (“SDNY”) revealed this month.  This “new tool,” according to the SDNY’s announcement, was designed to “incentivize individuals and their counsel” to report misconduct voluntarily, by “providing clarity on the requirements and the benefits of such self-disclosure.”  Individuals who voluntarily disclose misconduct and satisfy the program’s other criteria will receive one of the best outcomes possible for individuals with criminal exposure: a non-prosecution agreement (“NPA”). 

The program is limited to criminal conduct “involving fraud or corporate control failures” or that implicates “market integrity “ or “state or local bribery.”  The program also states that individuals hoping to benefit from the program will need to satisfy additional stringent requirements.  First, the conduct disclosed cannot be public or already known to the SDNY.  The disclosure also cannot be in response to a government inquiry (or the result of an obligation to report misconduct).  The individual seeking the benefit must provide full cooperation and substantial assistance in prosecution of “equally or more culpable persons,” and truthfully disclose “all criminal conduct . . . of which the individual is aware.”  The program is not available to violent or repeat offenders.  It also is not available to four categories of person: (1) public officials; (2) law enforcement officials or agents; (3) CEOs, CFOs, and their “equivalent[s]”; and (4) persons who are or are “expected to become of major public interest.”[1] 

Despite these strict conditions, it seems possible that many traditional white-collar cooperators could—if they voluntarily reported their conduct—qualify for an NPA under the pilot program.  Many government cooperators in fraud or securities cases lack criminal histories.  Although they sometimes are prominent in the business community, many also are not CEOs or public figures.  Where state-of-mind issues are critical to the case, moreover—as in many fraud prosecutions—cooperators’ testimony may be essential.  For such cases, the new program offers potential defendants a possible (very) beneficial resolution. 

The new program—at least by its plain terms—appears sufficiently generous, in fact, that even notable recent SDNY cooperators might have qualified for an NPA.  Gary Wang provides a case in point (assuming, of course, that he had decided to come forward before FTX’s collapse).  Mr. Wang’s offense was nonviolent.  He apparently had no criminal history.  He was no more culpable than Mr. Bankman-Fried.  Although he was a senior executive at FTX, he was not a CEO or CFO.  His testimony no doubt constituted substantial assistance in convicting his old boss.  Although it is possible the SDNY would have deemed Mr. Wang a person “expected to become of major public interest,” and thus ineligible for the program, the contours of that category are not well defined.  As footnoted above, Section 9-27.640 of the Justice Manual requires NPAs with such persons to be approved by the Assistant Attorney General, potentially explaining why the new SDNY program excludes them.  Prosecutors may well interpret this exception carefully, so as not to discourage all reports of newsworthy conduct.  Absent a determination he was of “major public interest,” Mr. Wang may well have been able to guarantee himself no jail time under the new program if he had come forward.[2] 

Another SDNY cooperator who might have benefited from the new program is Jordan Fogel, a key witness in the Blaszczak insider trading case.  (The case involved misappropriation of confidential information about changes to Medicare/Medicaid reimbursement rates, facilitated by a former government employee; Mr. Fogel was involved in both communication with the former government employee and the resulting trades.)  Mr. Fogel pled guilty to six felony counts, including securities fraud and conspiracy to defraud the United States.  He then testified against the other defendants, all of whom initially were convicted at trial (and then ultimately entered deferred prosecution agreements or had the charges against them dismissed entirely following successful appeals).  Like Mr. Wang, Mr. Fogel was not evidently more culpable than his co-conspirators, and was not a CEO or equivalent.  After his testimony, Mr. Fogel received a sentence of time served (one day).  Had he come forward under the new program, is it possible that he could have avoided conviction entirely (thus putting him, somewhat ironically, on more equal footing with the defendants he testified against, given how those cases played out)?

As the above examples demonstrate, the SDNY’s new pilot program could seemingly result in individuals whom prosecutors view as culpable (and deserving of felony dispositions under prior policies) receiving NPAs, rather than being required to plead guilty as a condition of cooperation.  Such a shift could be significant, particularly given the general DOJ guidance (expressed in the Justice Manual) that guilty pleas pursuant to an agreement to submit a so-called 5K letter are the “preferred method for securing . . . cooperation,” because “it is certainly desirable as a matter of policy that an offender be required to incur at least some liability for his/her criminal conduct.”  But any change wrought by the new program could have unintended consequences. 

Unintended consequences—in the courtroom and beyond

Potentially better outcomes for the defendants who qualify are the most obvious impacts, but the structure of the new program also raises several additional questions about its practical effects.  One question is how juries will react to highly culpable cooperators who testify pursuant to an NPA, rather than having pled guilty.  A related issue is the jury’s (and the public’s) perception of the kinds of defendants who are most likely to benefit from the program.  Finally, the program may encourage defendants to come to SDNY first, possibly causing disparate treatment or tension with other prosecutors’ offices.

First, the courtroom impact, in particular, may be significant.  The testimony of cooperators in criminal trials tends to follow a familiar sequence.  First, the government attempts to demonstrate the cooperating witness’s credibility to the jury by having him admit to the jury in open court his previous offenses.  Defense counsel then cross-examines the witness on his motive to fabricate his testimony in exchange for leniency from the prosecutors.  The implication of some typical lines of cross examination is that a cooperation agreement is a “get-out-of-jail-free” card. 

How would cooperation pursuant to an NPA, rather than a felony plea, change this dynamic?  Defense counsel could argue that cooperators under the new program have an even greater motive to implicate the defendant falsely, because by self-reporting the alleged conduct they could entirely avoid any adverse consequences themselves.  Prosecutors, in turn, will be able to point in response to the voluntary disclosure as a mark of credibility.  It remains to be seen whether jurors will assess the credibility of cooperators under the new program differently than cooperators who got more traditional deals. 

Another potential unintended (and unfortunate) consequence is that the new program could benefit primarily individuals with access to sophisticated counsel who are aware of the SDNY’s new program, familiar with its complex requirements, and knowledgeable about how to meet those requirements.[3]  Considering also that the program also does not appear to require participants to forfeit the proceeds of their conduct or make restitution (although such requirements may well be imposed anyway), the possibility jurors (or the public) will perceive unfairness could be significant. 

Yet another potential unintended consequence may stem from the lack of geographic limitations to the program.  Consider, for example, two friends in Boston, one of whom is a vice president at a public company.  Assume that during a casual meet-up, the vice president tells her friend valuable inside information about an upcoming merger, with the expectation he will trade, and he then trades through a broker in the Southern District of New York.  In the ordinary case, that conduct might be identified by the SEC, the exchange, or the broker.  That entity may well then would refer the case to the U.S. Attorney’s Office for the District of Massachusetts.  Now, under the new SDNY program, the vice president (for example), if well-counseled, could choose to self-report her conduct to the SDNY and try to obtain an NPA under the new program.  In other words, she could attempt to forum-shop her way to avoiding a conviction entirely.[4] 

In this scenario, the SDNY program still has its intended public benefit.  It has encouraged someone to reveal her own misconduct and that of an equally culpable person.  That gain, however, comes at potential cost to comity among law enforcement and regulatory bodies.  If the SDNY (despite the lack of any related language in the program) does enforce an informal geographic limit on NPAs given under the new program, then otherwise similarly situated cooperators could either receive NPAs or be required to accept felony pleas depending on the district in which they committed their offense and the SDNY’s willingness to stretch venue requirements.  Such differences could worsen the existing disparity across districts in charging and sentencing practices.  

In short, the new whistleblower program may well increase the incentives for early—indeed, preemptive—cooperation by potential white-collar defendants.  That this program represents a potentially major change in the dispositions available to even highly culpable actors is apparent by looking to cases such as Gary Wang’s and Jordan Fogel’s (provided, again, that such actors come forward before their conduct is detected).  This enormous potential benefit to individuals with criminal exposure, however, could carry unintended consequences for the SDNY and other law-enforcement offices around the country that could well influence how broadly the new program gets applied in the coming years.

Footnotes

[1] Three of these four categories appear to reflect administrative restrictions set forth in the Justice Manual, which requires Assistant Attorney General approval of NPAs with government and public officials, law enforcement officials or agents, and persons of “major public interest.” 

[2] By contrast, Caroline Ellison, another cooperator in the Bankman-Fried case, was the chief executive of Alameda Research, and thus likely would not be eligible for an NPA under the express terms of the new policy, which excludes CEOs. 

[3] The policy also sets out guidance on when NPAs may be available to putative whistleblowers who do not satisfy these criteria, but in substantially more discretionary language. 

[4] While the policy notes that it “does not apply to any other United States Attorney’s Office or any other litigating component of the Justice Department,” any SDNY plea agreement or NPA typically already advises the defendant—consistent with DOJ policy—that the agreement does not bind other law enforcement agencies or offices.  It is rare, however, once a U.S. Attorney’s Office has entered an NPA with a potential defendant, to see another office pursue a case against that person for the same conduct.  In exceptional cases—such as that of Jeffrey Epstein, where the Southern District of Florida had entered an NPA with Epstein a decade before he was charged in the SDNY—another office nevertheless may bring charges. 

Brian A. Jacobs is a Principal and A. Dennis Dillon is an Associate at Morvillo Abramowitz Grand Iason & Anello PC.  Brian previously served as an Assistant U.S. Attorney in the Criminal Division of the U.S. Attorney’s Office for the Southern District of New York, where he was Deputy Chief of Appeals. 

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