DoJ pursuit of financial crime declines amid shifting priorities

Attorney General Alberto Gonzales and the Justice Department (DoJ) remain beleaguered by allegations concerning politicization of legal policy, as a result of the controversial firing of eight United States attorneys — the principal Justice Department officials in the regions in which they operate. New government data now suggests that the DoJ’s emphasis on counter-terror operations may have hampered its ability to prosecute other offenses — particularly financial fraud — and that political priorities may have affected investigation and enforcement strategies. Federal enforcement resources have been directed away from areas including financial fraud, white-collar criminal investigations, and civil rights enforcement, toward homeland security priorities. This contradicts the perception that corporations and their executives remain subject to excessive regulatory burdens.

Enforcement priorities

A recent investigation by the Seattle Post-Intelligencer highlighted the DoJ’s redirection of resources to homeland security and away from other priorities, particularly in investigations by the FBI. More than 2,000 FBI agents have been redeployed to anti-terrorism efforts since 2001. Requests made to Gonzales and his predecessor, John Ashcroft, to make available additional necessary resources to pursue the additional targeted objectives while maintaining attention to other priorities were not granted. Currently, more than half of FBI agents focus on anti-terrorism and counterintelligence efforts.

Impact on financial fraud

This reallocation of resources has negatively affected the government’s ability to pursue other criminal offenders, especially in financial fraud cases. In particular, the Post-Intelligencer investigation and government data revealed that:
The overall number of federal cases presented by the FBI to federal prosecutors has declined by nearly 35 percent from 2000 until 2005, and produced a corresponding fall in federal convictions.

Financial fraud, including cutting-edge issues such as identity theft and Internet fraud, is now a lower priority. Furthermore, no other state or federal agency commands the resources or expertise of the FBI to mount investigations of complex fraud issues.

White-collar criminal investigations sent to federal prosecutors have plunged — the 2005 total of approximately 3,500 investigations was about one-third of the figure in 2000.

Civil rights policy enforcement actions (a traditional FBI priority) have also declined significantly.

Anti-conventional wisdom

The conventional view promoted by Wall Street is that government enforcement actions against financial-services firms increased substantially after the 2002 financial downturn. Corporate accounting requirements were certainly tightened under the Sarbanes-Oxley Act of 2002, the DoJ pursued some high-profile cases against senior executives (using controversial prosecution guidelines), and several state attorneys general aggressively investigated prevailing industry practices. However, the latest government data contradicts the impression that federal authorities have been particularly aggressive in pursuing financial fraud cases. In fact, the opposite may have been the case.

Reducing business burdens

The administration of President Bush has consistently sought to reduce burdens on business, particularly the threat of onerous litigation.

• Class action reform. Two years ago, the administration succeeded in securing passage of the Class Action Fairness Act.
• Business-friendly rulings. Furthermore, judges appointed by Bush and his Republican predecessors have largely succeeded in tilting jurisprudence in a more business-friendly direction. For example, a Supreme Court decision bolstered a previously novel legal theory that limits the punitive damages juries may award on the grounds that such damages conflict with the Constitution’s due-process clause.

• Pursuing plaintiffs’ firms. Despite corporate perceptions to the contrary, the evidence contradicts a widespread sense that the United States is over-regulated, and subject to onerous “regulation by litigation” at both the state and federal levels. In addition to enacting policy changes that discouraged private litigation, the Justice Department pursued criminal charges against a leading plaintiff’s-side law firm, Milberg Weiss Bershad and Schulman, under a Justice Department policy that allows indictment of an entire entity for the misdeeds of a few individuals. So far, Milberg Weiss has survived the Justice Department’s indictment, but bringing the case may have inhibited other members of the plaintiffs’ bar from pursuing aggressive legal tactics in securities actions and other types of civil litigation.

Countervailing state action

However, the administration’s light approach to financial regulation and enforcement has met opposition in the states. In fact, the lack of attention to traditionally customary federal regulatory priorities initially created a “regulatory gap” on certain issues, such as financial and securities litigation.

• Spitzer’s role. This helped stimulate former New York State Attorney General Eliot Spitzer (now New York governor) to fill that gap by investigating various financial-sector issues, including conflicts of interest in the provision of investment research; mutual fund trading violations; questionable insurance company practices; and executive compensation practices at the New York Stock Exchange. Many of these cases would once have been primarily federal concerns.

• Further state action? Spitzer’s example raises the possibility that states may step in to fill the gap in investigations and enforcement that has arisen by the shift of federal priority towards homeland security concerns:

So far, states have yet to pick up the slack and assume responsibility for investigating the types of violations that the federal government has largely abandoned. Even if states had the willingness to assume this burden, they largely lack the statutory authority, resources and investigatory experience to fill this gap. In addition, anti-terrorism priorities have also strained scant state and local resources.

Even if states were to pursue the currently ignored violations assiduously, the result would likely be less effective than previous federal enforcement efforts, since state laws comprise a patchwork of different priorities, and mesh together in a way that creates its own gaps. Moreover, the average level of state penalties is lighter than the corresponding federal penalties (which, in the long term, may result in a lesser deterrent effect).

Oxford Analytica is an international consulting firm providing strategic analysis on world events for business and government leaders. See www.oxan.com.