On March 10, the DOJ announced a $4.9 million civil and criminal settlement with a California-based bank. The bank admitted to the DOJ’s allegations that, from December 2011 through July 2013, it ignored warning signs indicating that its third party processor was defrauding hundreds of thousands of consumers by allowing fraudulent merchants to withdraw money from customers’ accounts without consent. The bank chose to ignore the complaints and inquiries it received regarding the third party processor’s activity, failing to terminate its affiliation with the entity or file a Suspicious Activity Report. The DOJ’s complaint alleges that the bank violated FIRREA; the $4.9 million settlement will cover both the criminal and civil charges, however under an agreed deferred prosecution agreement, criminal charges will be deferred for two years contingent upon the bank admitting to wrongdoing and giving up claims to approximately $2.9 million from accounts seized by the government.
On March 16, DOJ Assistant AG Leslie Caldwell delivered remarks at the annual ACAMS anti-money laundering conference regarding the importance of establishing and maintaining robust compliance programs within financial institutions to prevent criminal activity, and recent DOJ enforcement actions taken against financial institutions in the anti-money laundering space. Caldwell outlined the integral parts of an effective compliance program, to include: (i) providing sufficient funding and access to essential resources; (ii) incentivizing compliance and ensuring that disciplinary measures are even handed for low-level and senior employees; and (iii) ensuring that third parties interacting with the institutions understand the institution’s expectations and are serious about compliance management. Caldwell emphasized that the strength of an institution’s compliance program is “an important factor for prosecutors in determining whether to bring charges against a business entity that has engaged in some form of criminal misconduct.” Caldwell highlighted the Criminal Division’s recent actions involving financial fraud and sanctions violations, observing that many have resulted in deferred prosecution agreements or non-prosecution agreements (DPAs and NPAs), enforcement tools the DOJ utilizes in the Criminal Division’s cases. Finally, addressing concerns that the DOJ and other law enforcement authorities have targeted the financial industry for investigation and prosecution, Caldwell stated, “banks and other financial institutions continue to come up on our radar screens because they, and the individuals through which they act, continue to violate the law, maintain ineffective compliance programs or simply turn a blind eye to criminal conduct to preserve profit.”
On February 4, a federal jury found Ross Ulbricht guilty on all seven federal charges brought against him in connection with his role in operating the Silk Road website, including narcotics and money laundering charges. According to the government, Mr. Ulbricht created, owned, and operated the website, which functioned as a criminal marketplace for illegal goods and services until the website was shut down in October 2013. This marketplace allowed individuals to sell controlled substances and illegal services, and included a Bitcoin-based payment system that allowed buyers and sellers to conceal their identities. According to Ulbricht’s attorneys, while Ulbricht did create the Silk Road, he turned over operation of the website to other individuals who eventually grew the site into the vast criminal marketplace. Ulbricht faces a sentence of 20 years to life in prison and is scheduled to be sentenced by Judge Forrest on May 15. Ulbricht’s attorney described the verdict as “very disappointing” and is planning to appeal. U.S. v. Ulbricht, No-14-cr-68 (S.D. NY. Feb. 3, 2014).
On January 13, President Obama visited the National Cybersecurity and Communications Integration Center to announce a variety of legislative and administrative proposals, many of which were updates to his 2011 Cybersecurity Legislative Proposal, designed to confront cybersecurity threats. These updated proposals, he stated, would promote better cybersecurity information sharing between the government and the private sector and enhance collaboration and information sharing within the private sector. To encourage and facilitate such sharing, private companies that share cyber threat information while conforming to privacy protection requirements would receive liability protection. In addition, the President asked that law enforcement be given better tools and authority to fight cybercrime. These tools would include measures that criminalize the overseas sale of stolen financial information like credit card and bank account numbers, updates to the Racketeering Influenced Corrupt Organizations Act that would apply it to cybercrimes, and reforms to the Computer Fraud and Abuse Act to ensure that insignificant conduct does not fall within the scope of the statute, while making clear that it can be used to prosecute insiders who abuse their ability to access information by using it for their own purposes. In addition, the President announced a White House Summit on Cybersecurity and Consumer Protection, to be held at Stanford University on February 13, 2015.
On January 6, FinCEN released a fact sheet highlighting its Section 314(a) Program of the USA PATRIOT Act. Under the Section 314(a) Program, federal, state, local and foreign law enforcement are able to contact, through FinCEN, over 43,000 points of contact at more than 22,000 financial institutions to locate accounts and transactions of individuals or organizations engaged in, or reasonably suspected of, terrorism or money laundering. According to FinCEN, since its inception, the 314 Program has aided in 1,909 money laundering and 459 terrorism/terrorist financing criminal investigations. In addition, based on feedback from law enforcement, the Program has contributed to 95 percent of 314(a) requests lead to an arrest or indictment.
On December 22, President Obama announced his intent to nominate Sally Yates as the Deputy Attorney General. Since 2010, Yates has served as the U.S. Attorney for the Northern District of Georgia. If confirmed, Yates would be second-highest ranking official at the DOJ.
On December 10, the U.S. Court of Appeals for the Second Circuit overturned, and further, dismissed two of the DOJ’s insider trading convictions. United States of America v. Newman and Chiasson, Nos. 13-1837-cr(L), 13-1917-cr(con) (2nd Cir. Dec. 10, 2014). In a 28-page decision, the Court noted “erroneous” jury instruction, the Government’s lack of evidence that personal benefit was received by the alleged insiders, and the inability to prove the alleged insiders actually knew that they were trading on inside information. The ruling now narrows the scope of what constitutes insider trading and will likely impact other pending insider-trading cases. It is anticipated that the Government will appeal the Court’s decision.
On December 4, Assistant AG Leslie Caldwell delivered remarks at the Cybercrime 2020 Symposium regarding the DOJ’s recent efforts to fight cybercrime. Specifically, Caldwell noted the DOJ’s Criminal Division is (i) increasing its international law enforcement operations; and (ii) creating a committed Cybersecurity Unit to address the growing threat of cybercrime. The Cybersecurity Unit will take on the responsibility of enhancing the DOJ’s public and private security efforts, most notably by working with law enforcement to ensure that “legislation is shaped to most effectively protect our nation’s computer networks and individual victims from cyber attacks.”
On November 10, 2014, the Supreme Court denied Douglas Whitman’s petition for a writ of certiorari in Whitman v. United States, No. 14-29; Justice Antonin Scalia, joined by Justice Clarence Thomas, issued a brief statement specifically highlighting their view of the role that the doctrine of lenity should play in the interpretation of criminal statutes. Whitman asked the high court to review his 2012 conviction for securities fraud and conspiracy under the Securities Exchange Act of 1934. The Second Circuit appeared to defer to the SEC’s interpretation of ambiguous language in the Act—according to Justice Scalia, such an approach would disregard the “many cases . . . holding that, if a law has both criminal and civil applications, the rule of lenity governs its interpretation in both settings.” Justice Scalia further noted that it was the exclusive province of the legislature to create criminal laws, and to defer to the SEC’s interpretation of a criminal statute would “upend ordinary principles of interpretation.” Justice Scalia’s approach may indicate potential adjustments in the ongoing effort to strike the right balance between the due process rights of targets of enforcement actions to know what the law prohibits, and deference to enforcement agencies to interpret federal statutes flexibly. BuckleySandler discussed the tension between lenity and Chevron deference earlier this year in a January 16 article, Lenity, Chevron Deference, and Consumer Protection Laws.
On September 17, Attorney General Holder commented on the DOJ’s efforts to pursue criminal activity against corporate financial fraud. Specifically, Holder argued for Congress to modify the FIRREA whistleblower provision by increasing the $1.6 million cap on awards, possibly to False Claims Act levels, so that there is greater “individual cooperation.” Currently, under the False Claims Act, an individual whistleblower can receive up to 30 percent of a sanction. In addition to Holder’s focus on increasing the award whistleblowers are given, he referenced the significance the DOJ places on investigating the individual executives at financial firms for criminal activity, stating that the department “recognizes the inherent value of bringing enforcement actions against individuals, as opposed to simply the companies that employ them.” Holder identified the following three main reasons for its continued efforts in pursuing both the individuals and the companies: (i) accountability – the department is focused on identifying the “decision-makers at the company who ought to be held responsible” for corporate misconduct; (ii) fairness – the company should not solely endure the punishment when “the misconduct is the work of a known bad actor, or a handful of known bad actors”; and (iii) the deterrent effect – while an individual person found guilty of a fraud crime will likely go to prison, there are few things that discourage a company from performing illegal activity.
On August 12, Manhattan District Attorney (DA) Cyrus Vance, Jr. announced the indictment of twelve payday lending companies and related individuals for allegedly engaging in criminal usury by making high interest payday loans to Manhattan residents. According to the DA’s press release, between 2001 and 2013, one of the indicted individuals allegedly created multiple companies, including establishing one as a website and offshore corporation, to accept and process online applications for payday loans. The DA also indicted the payday lending business’ chief operating officer and legal counsel. The DA charged the defendants with 38 counts of felony first degree criminal usury and one count of conspiracy in the fourth degree. The defendants are also accused of continuing to extend such loans to New York residents for years, even after, according to the DA, they had been repeatedly warned by New York State officials of the loans’ illegality.
On July 24, House Oversight Committee Chairman Darrell Issa (R-CA) sent a letter to Attorney General Holder raising questions about the DOJ’s “inclination to enter into settlement agreements with respect to mortgage securities fraud” claims. The Chairman notes that large RMBS settlements to date have been predicated on violations of FIRREA, which allows the DOJ to initiate lawsuits seeking civil money penalties. The letter suggests the DOJ’s decision not to litigate or secure a criminal plea diverges from the agency’s strategy in other contexts. Chairman Issa asks the DOJ to produce, by August 14, all documents and communications since January 2011 referring or relating to two recent major RMBS settlements, as well as any policies in effect during that time governing the decision to conclude pre-suit negotiations.
On July 18, FinCEN published SAR Stats—formerly called By the Numbers—an annual compilation of numerical data gathered from the Suspicious Activity Reports (SARs) filed by financial institutions using FinCEN’s new unified SAR form and e-filing process. Among other things, the new form and process were designed to allow FinCEN to collect more detailed information on types of suspicious activity. As such, FinCEN describes the data presented in this first SAR Stats issue as “a new baseline for financial sector reporting on suspicious activity.” The primary purpose of the report is to provide a statistical overview of suspicious activity developments, including by presenting SAR data arranged by filing industry type for the more than 1.3 million unique SARs filed between March 1, 2012 and December 31, 2013. In addition, the redesigned annual publication includes a new SAR Narrative Spotlight, which focuses on “perceived key emerging activity trends derived from analysis of SAR narratives.” The inaugural Spotlight examines the emerging trend of Bitcoin related activities within SAR narrative data. It states that FinCEN is observing a rise in the number of SARs flagging virtual currencies as a component of suspicious activity, and provides for potential SAR filers an explanation of virtual currencies and the importance of SAR data in assessing virtual currency transactions.
On July 3, the DOJ announced the resolution of a multi-agency criminal investigation into the way a large mortgage company administered the federal Home Affordable Modification Program (HAMP). According to a Restitution and Remediation Agreement released by the company’s parent bank, the company agreed to pay up to $320 million to resolve allegations that it made misrepresentations and omissions about (i) how long it would take to make HAMP qualification decisions; (ii) the duration of HAMP trial periods; and (iii) how borrowers would be treated during those trial periods. In exchange for the monetary payments and other corrective actions by the company, the government agreed not to prosecute the company for crimes related to the alleged conduct. The investigation was conducted by the U.S. Attorney for the Western District of Virginia, as well as the FHFA Inspector General—which has authority to oversee Fannie Mae’s and Freddie Mac’s HAMP programs—and the Special Inspector General for TARP—which has responsibility for the Treasury Department HAMP program and jurisdiction over financial institutions that received TARP funds. This criminal action comes in the wake of a DOJ Inspector General report that was critical of the Justice Department’s mortgage fraud enforcement efforts, and which numerous members of Congress used to push DOJ to more vigorously pursue alleged mortgage-related violations. In announcing the action, the U.S. Attorney acknowledged that other HAMP-related investigations are under way, and that more cases may be coming.
On June 18, the U.S. Attorney for the District of Maryland announced that a federal judge ordered a bank to forfeit $560,000 in drug proceeds laundered through the bank on which the bank failed to file currency transaction reports. The DOJ claimed that a member of a drug trafficking organization asked a teller at a Maryland bank branch to convert the proceeds from the sale of illegal drugs from small denomination bills to $100 bills, and paid the teller a one percent fee for each transaction for making the exchange without filing a currency transaction report. The government filed a civil action in February 2014 seeking forfeiture and alleging that the money was subject to forfeiture because the bank failed to file currency transactions reports on bank transactions in amounts in excess of $10,000, as required by law. The teller admitted that on each occasion she converted the bills without filing or causing anyone else at the bank to file a currency transaction report. She was sentenced to a month in prison followed by eight months of home detention for failing to file currency transaction reports on suspected drug proceeds, and must perform community service and forfeit the $5,000 she was paid in the scheme.