On March 26, the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (CFPB) issued an interagency statement encouraging financial institutions to offer small-dollar loans to individuals and businesses impacted by COVID-19 [1]. This statement is one of the latest in a series of releases from the federal banking agencies urging financial institutions to support households and businesses impacted by the outbreak. It is also the most recent development in a larger push by the current administration, predating COVID-19, to get banks back into small-dollar lending. Continue reading
What the Hoskins Rule 29 Acquittal Reveals About Contesting “Jurisdictional” Issues in American Criminal Justice
On February 26, 2020, Judge Janet B. Arterton of the federal district court in Connecticut granted a motion under Rule 29 of the Federal Rules of Criminal Procedure to acquit a defendant of seven counts of which he had been convicted by a jury in November 2019. A post-conviction Rule 29 acquittal is uncommon: A prosecutor armed with a jury verdict only rarely is found not to meet the quite lenient standard that the factual evidence, when viewed “in the light most favorable to the government,” provided a basis for a reasonable jury to convict. Even more unusually, the issue on which Judge Arterton found the prosecution lacking did not go to whether the defendant committed the acts of which he was charged or had the requisite state of mind, but whether the criminal statute applied to him at all—an issue that in much of the world is considered to be a question of “jurisdiction” (or, in Europe, of “competence”). The decision raises troubling questions about how threshold issues in criminal cases are resolved under American criminal procedures. Continue reading
Strategies for Complying With Privacy Laws While Collecting Employee Information Regarding the Coronavirus
by Lori E. Lesser, Nicholas S. Goldin, Vanessa K. Burrows, and Andrew M. Kofsky
Most companies must collect and use information about their employees’ travel plans and health conditions to protect their workforce from the spread of coronavirus disease 2019 (“COVID-19”). This memorandum addresses strategies for U.S. companies to comply with various privacy laws in connection with these activities.[1] Continue reading
When Whistleblowers Call: Planning Today for Employee Complaints During and After the COVID-19 Crisis
by Lee Dunst, Jessica Brown, Daniel Weiss, Daniel Rauch, and Peter Baumann
The COVID-19 pandemic has caused unprecedented global economic turmoil and disruption. There are daily reports of massive employee layoffs across all segments of the economy, and millions of people are suddenly out of work. Federal and state governments have stepped in with numerous new, patchwork and ill-defined programs, rules and regulations to address the unemployment crisis and related effects. This is all reminiscent of the days after 9/11 and the 2008 Great Recession. And if what’s past is prologue, companies should expect that current and former employees will unleash an onslaught of allegations about company misconduct, both COVID-19-related and otherwise. Indeed, government regulators and the plaintiffs’ bar are already publicizing various reporting mechanisms for disgruntled employees seeking to raise such claims.
In this context, increased whistleblower complaints are inevitable. While most companies already have policies and processes in place to address those complaints, it is no longer business as usual. Existing programs likely do not account for a displaced and remote workforce, rapid and substantial employee layoffs and furloughs, ongoing work in an environment where health and safety are at the forefront, or any of the countless other disruptions that COVID-19 has caused to a company’s operations. Yet with so many immediate and pressing issues to address during these challenging and unprecedented times, it is understandable that evaluating and updating a company’s whistleblower action plan may not be seen as a mission-critical task. Inaction, however, could have detrimental effects that last long after the pandemic has been contained and the economy has begun to recover. Continue reading
White Collar and Regulatory Enforcement in the Era of COVID-19
by John F. Savarese, Ralph M. Levene, Wayne M. Carlin, and David B. Anders
When we issued our memorandum (PDF: 231KB) on “what to expect in 2020” concerning white collar and regulatory enforcement developments, we certainly did not expect that just two months later, 41 states would effectively be locked down due to the coronavirus pandemic, many courts would be closed, and governments would be intensely focused on adopting measures responsive to the global health crisis. What we’re now seeing in the white collar/regulatory world is that, instead of pushing forward at their usual pace, prosecutors and regulators are adjusting to a new reality in which live testimony is impractical, courts are on pause and most everyone is working from home. It is impossible to predict when the normal cadence of such investigations will resume, but inquiries of all kinds will undoubtedly return to their normal pace and intensity when the crisis abates. Continue reading
Netherlands Welfare Case Sheds Light on Explainable AI for AML-CFT
by Winston Maxwell and Xavier Vamparys [1]
The District Court of the Hague, Netherlands found that the government’s use of artificial intelligence (AI) to identify welfare fraud violated European human rights because the system lacked sufficient transparency and explainability.[2] As we discuss below, the court applied the EU principle of proportionality to the anti-fraud system and found the system lacking in adequate human rights safeguards. Anti-money laundering/countering the financing of terrorism (AML-CFT) measures must also satisfy the EU principle of proportionality. The Hague court’s reasoning in the welfare fraud case suggests that the use of opaque algorithms in AML-CFT systems could compromise their legality under human rights principles as well as under Europe’s General Data Protection Regulation (GDPR).[3] Continue reading
Accountability and Enforcement Under the CARES Act: What to Expect from the Act’s Oversight Provisions
by Joon H. Kim, Jonathan S. Kolodner, Elizabeth Vicens, and Natalie Noble
On Friday, March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (PDF: 472 KB) (“CARES Act”) became law, marking the third phase of government aid to combat the COVID-19 pandemic. This $2 trillion stimulus package, the largest in American history, will be accessed by wide swaths of the economy, with similarly widespread potential for fraud. Consequently, the accountability and oversight provisions built into the CARES Act, especially of the $500 billion corporate relief fund, warrants attention. Taking its cue from—and seemingly modeled after—the 2008 Troubled Asset Relief Program (“TARP”), the CARES Act establishes a three-part oversight structure, including a Special Inspector General for Pandemic Recovery (“SIGPR”) with far-reaching authority to monitor the $500 billion fund. Based on the experience with TARP oversight and the enforcement actions taken by the Special Inspector General of TARP (“SIGTARP”) over the years, we can expect a high level of scrutiny by SIGPR and the other overseers, as well as potentially years of investigations into fraud and misuse of CARES Act funds resulting in substantial monetary penalties and criminal referrals. Continue reading
Accounting Fraud 2.0: Increased Enforcement Activity Based on Non-GAAP Metrics
by Arthur Greenspan, James Walker, David Massey and Jakob Sebrow
Accounting fraud has long been a staple of the enforcement program at the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ), as corporate officers and employees continue to engage in efforts to improperly enhance financial results. Based on the widespread use of “non-GAAP” financial metrics by public companies and recent SEC and DOJ emphasis on such measures, we believe that non-GAAP metrics will feature prominently in the government enforcement priorities that are likely to follow the significant market correction caused by COVID-19.
As we discuss below, companies and their senior executives risk SEC and criminal fraud charges based on misuse of non-GAAP metrics, and audit committee members risk scrutiny for failure to maintain adequate internal controls concerning non-GAAP metrics. United States v. Carroll, a criminal case currently pending before Chief Judge Colleen McMahon in the Southern District of New York, is an important example of the government’s expansive theories of materiality and the real risks faced by companies and executives who emphasize non-GAAP measures in their public disclosures and comments. Indeed, a confluence of factors—including the prosecutors’ core theory that the defendants sought to “smooth” an ancillary non-GAAP metric, their reliance on qualitative materiality, and their willingness to bring criminal charges notwithstanding the conclusion of the outside auditors that the misstatements were immaterial—makes Carroll a striking and novel prosecution. Continue reading
New York Department of Financial Services Emergency Regulations — Mandatory Forbearances for Residential Mortgage Loans
by Mylan L. Denerstein, Matthew L. Biben, James L. Hallowell, Mitchell A. Karlan, Arthur S. Long, and Emil N. Nachman
On March 21, 2020, New York Governor Andrew Cuomo issued an Executive Order relating to 90-day forbearances for borrowers that are suffering financial hardship as a result of the COVID-19 pandemic. In part, this Executive Order called on the New York Department of Financial Services (DFS) to promulgate emergency regulations in furtherance of the Governor’s directive. On March 24, 2020, the New York Superintendent of Financial Services, Linda A. Lacewell, promulgated regulations implementing the Executive Order (Emergency Regulations). Importantly, the Emergency Regulations clarify ambiguities in the Executive Order and demonstrate a focus on consumer and individual forbearances. Continue reading
How the SEC Enforcement Division Responds to a Crisis
by Martine M. Beamon, Robert A. Cohen, Joseph A. Hall, Gary Lynch, Neil H. MacBride, Stefani Johnson Myrick, Paul J. Nathanson, Annette L. Nazareth, Linda Chatman Thomsen, and Kenneth L. Wainstein
As markets react to the spread of the coronavirus (COVID-19), the SEC has expressed its intent to respond proactively to the impact the crisis has had on capital formation, secondary trading, and investors. Risks can become heightened during a market downturn, and we expect that the Enforcement Division will concentrate resources on certain types of investigations, including potential: (1) material misrepresentations and omissions about the impact of the coronavirus on public companies and investment products; (2) trading based on material nonpublic information about changes in the financial performance of public companies; (3) errors in the operation of trading platforms being stressed by high trading volume and volatility; (4) misuse of investor assets, and (5) frauds seeking to take advantage of investor anxiety. In the coming weeks and months, public companies should be vigilant regarding their disclosure practices and management of material, nonpublic information, and industry professionals similarly should be cautious when describing the impact of the pandemic on their investment services and products. Continue reading