by Walt Pavlo
Since the financial crisis of 2008, government prosecutors have come under fire for not prosecuting some of the top bank executives who, many say, were responsible for the financial crisis. To remedy that perception, Assistant Attorney General Sally Quillian Yates announced the DOJ’s new policy on “Individual Accountability For Corporate Wrongdoing (PDF: 449 KB)” (Yates Memo) last year. Its purpose was to hold individuals accountable for bad (illegal) behavior rather than just have corporations pay big fines. In effect, corporations would be tasked with serving up their former employees if they had done something wrong. The DOJ wanted to put a face on the criminal misconduct both to: 1) deter corporate bad behavior and; 2) show the general public that individuals were not getting away with criminal acts without punishment. We were all optimistic. However, the Yates Memo is not the first attempt at shedding more light on the real perpetrators of fraud within corporations.
It is still common for companies to settle by paying fines for their bad behavior by entering into settlements with regulators, like the Securities and Exchange Commission, without “admitting or denying” any wrong doing. In a notable case, Citigroup was accused of selling $1 billion worth of securities in a mortgage fund that it believed would fail so that it could bet against its customers and profit when values declined. In 2011, the SEC and Citigroup asked U.S. District Judge Rakoff to approve a $285 Million settlement without admitting that any malfeasance occurred. Judge Rakoff denied the settlement citing his concern that there was no transparency to the public and that the settlement amounted to, “… pocket change to any entity as large as Citigroup,” and was just “… a cost of doing business.” Despite Judge Rakoff’s attempt at holding the bank and individuals accountable, an appeals court would overrule him in 2014 and approve the settlement.
Then there are Deferred Prosecution Agreements (DPAs), which effectively allow corporations to admit wrongdoing, and atone for their behavior through fines, reforms and cooperation with authorities. For example, Fokker Services agreed in June 2014 to pay a total of $21 million to resolve U.S. government allegations that the company made shipments of aircraft parts to countries under U.S. sanctions. U.S. District Judge Richard Leon denied the settlement, stating that such a settlement would undermine public confidence by allowing such a small penalty for such a major crime. Judge Leon’s attempts to hold companies and individuals more accountable would also be overruled. Not only were there no employees of Fokker indicted, some remained with the company.
So that brings us to Deputy Attorney General Yates and the DOJ’s attempt to hold someone, anyone, accountable. There are many test cases for the Yates Memo policy of holding individuals responsible for corporate wrongdoing rather than having corporations continue to shield their executives with opaque settlements. One of those is Valeant Pharmaceuticals, in which the company stated earlier this year that about $58 million in revenues previously recognized in 2014 should have been booked in subsequent periods. Usually, this is called accounting fraud, but maybe that’s just me. While an investigation by the SEC is ongoing, no individual has yet been named. That said, there is still time.
Then there is Deutsche Bank, which is under investigation in both the U.S. and U.K. over its alleged $10 Billion scandal involving the secret movement of Russian rubles from Russia to other countries. Authorities have named a few individuals but, none of them were high ranking executives at Deutsche. It was the intent of Yates Memo to get to the top, the decision makers who not only call the shots, but who were highly compensated for calling them.
This leads us to Wells Fargo and its cross account scandal, where millions of unauthorized accounts were opened for its unsuspecting customers. In all, 5,300 low level employees lost their jobs for the fraudulent acts. Meanwhile, the executive who oversaw the business unit, Carrie Tolstedt, left the company with high praise from the bank’s CEO (now former CEO), John Stumpf, with a payout of $125 Million. Stumpf would announce a settlement with the government after Tolstedt’s decision to leave. The CEO would ultimately resign himself after the public backlash that ensued when Senator Elizabeth Warren grilled Stumpf at a hearing in September. Stumpf too left with high praise from the incoming CEO, and a $100+ Million pay package. We should not jump to a conclusion about the executives’ roles in this fraud, and it is fraud. But wasn’t this the type of situation we were so hopeful the Yates Memo would address?
It may sound oversimplified, but the public’s perception of the Yates Memo was that we were going to see Enron, Worldcom and Adelphia-type prosecutions of top executives — that is real “individual accountability.” A year after that memo, we’re still waiting. . . .
Walt Pavlo is President of Prisonology and co-author of “Stolen Without A Gun,” which he co-wrote with Neil Weinberg (Bloomberg).
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