Corporate Fraud Penalties Are on the Rise While Criminal Prosecutions Have Decreased

The New York Times  (see also the ABA Journal) recently reported that the federal government is on track to collect as much as $8 billion from corporations this year to resolve charges of defrauding the government. According to the article, this is a record sum and more than twice the amount assessed last year by the U.S. Department of Justice (DOJ). The surge in penalties is due to several factors, including the resolution of long-standing actions against drug makers and military contractors, as well as lawsuits brought against mortgage lenders after the financial crisis. It also reflects a renewed emphasis on corporate fraud, as the DOJ devotes more resources to the issue and demands higher penalties from companies.

The Times noted that while the civil collections are beneficial to the government and taxpayers, they are also resurrecting questions about the relative lack of charges against executives at the companies that are getting the stiffest penalties. Some say the civil prosecutions are lucrative for the government. The Times mentions a Gibson Dunn & Crutcher report to clients that stated that for the first six months of 2012, civil cases filed under the False Claims Act brought in more than $4.1 billion. Criminal settlements and payments amounted to $2.7 billion, according to the piece.

Explained in the article are some of the difficulties that the DOJ faces when prosecuting executives. For example, last week in New York a federal jury acquitted a Citigroup manager who had been involved in selling an exotic financial security involving residential mortgages. The manager was charged with falsely describing Citigroup’s role in selecting the assets in the portfolio and failing to disclose that Citigroup was betting against the investment. The jury cleared the manager in part because the bank had given investors fine-print materials that apparently warned them of the investment’s risks. In a rare move, however, the jury sent a note to the Securities and Exchange Commission after reaching its decision, urging the agency not to give up. “This verdict should not deter the S.E.C. from investigating the financial industry, to review current regulations and modify existing regulations as necessary,” the jury wrote.

Lawyers say the government is more likely to go after companies because of their deep pockets, the Times notes. Civil cases against businesses can often produce substantial financial awards without the risk inherent in a trial. Civil charges also have a lower burden of proof than criminal charges and can reap triple damages. By one estimate, the government recoups $15 for every $1 spent on a civil case against a company. This article confirms that the government is proud of the amount of money it is collecting through these civil fines and settlements. It also shows that the government is not slowing down any time soon.