NEW YORK: An Introduction to Litigation: White-Collar Crime & Government Investigations

Kaplan Hecker & Fink LLP | Chambers (NY) White-Collar Crime & Government Investigations

2021 was a year of transition; we expect 2022 to be a year of action. Last year, the new Biden administration — operating under many of the now-familiar constraints of the COVID-19 pandemic — filled critical roles and ended the year with a slew of policy announcements. These personnel and policy moves cast a spotlight on substantive and thematic areas from which we expect to garner much of the attention of the white-collar Bar and their clients this year. And while the lingering effects of the pandemic and transition to new leadership correlated with a downtick in certain metrics of enforcement activity last year, we expect the very active enforcement environment of early 2022 to augur for a busy rest of the year across a range of enforcement areas by DOJ, the SEC, the CFTC, and other regulators and enforcement agencies.

Pandemic’s constraints are dissipating 

We have seen significant steps toward a return to pre-pandemic standard operating procedure: There are relatively fewer remote witness interviews and more in-office meetings with prosecutors and enforcement attorneys, and judges tend to be hastening the pace with which they manage their dockets while more frequently ordering in-person conferences and hearings. This return to something like business as usual — in combination with the settling-in of new leadership at key enforcement agencies — does seem to be responsible for an apparent uptick in investigative and enforcement activity in early 2022.

New enforcement leaders re-emphasize focus on individual liability and foreshadow increased corporate exposure

At the end of 2021 and the beginning of 2022, senior federal law enforcement officials previewed key enforcement themes for the coming few years.

At the Department of Justice, several of these themes were echoes of the Obama-era enforcement posture. DOJ has reiterated its emphasis on prosecuting individuals, and has said it will require corporate targets seeking cooperation credit to provide the government with a broader list of individuals. (Under the prior administration’s policy, corporations were expected to provide the names of individuals “substantially involved” in relevant misconduct — the new policy requires the naming of “all individuals involved” in any capacity.) In addition to increasing investigation and defense costs for corporate targets, the new policy may call for the earlier identification of outside counsel for employees or groups of employees.

DOJ officials also foreshadowed an expanded risk of corporate liability. One new policy calls for consideration of all prior alleged or acknowledged corporate misconduct in deciding whether and how to resolve enforcement matters — not just corporate priors with relevance to the subject of the matter to be resolved. Possible consequences include enhanced skepticism of early resolutions, as companies — especially in highly regulated industries — may fear the creation of a record to be counted against them in future unrelated inquiries.

The DOJ also loosened recent restrictions on the imposition of independent monitors, signaling an increased appetite for third-party compliance and remediation oversight in the wake of corporate resolutions.

In March 2022 the leadership of DOJ’s Criminal Division laid out an emphasis on “considering victims” in white-collar cases. The pronouncement focused mostly on encouraging corporate targets to identify in resolution discussions steps taken to address victims of alleged misconduct. But the policy may provide a useful opportunity for individuals implicated in white-collar enforcement actions to emphasize the relative lack of meaningful victims in the government’s theory of its case or investigation. This has been a familiar frustration for individuals and their counsel in cases involving, for example, allegations of misconduct in niche markets for specialized financial products in which participation is limited to sophisticated repeat players. The DOJ’s recent emphasis on considering victims in white-collar cases may benefit not only people who suffer actual losses, but those implicated in an enforcement action in which no obvious harm was inflicted on any identifiable party.

Senior leaders at the SEC and CFTC identified similar priorities for civil enforcement, including a renewed emphasis on extracting admissions of wrongdoing in resolutions and a focus on bringing cases against “gatekeepers” — e.g. individual lawyers and accountants — raising the specter of aggressive enforcement actions that challenge the legitimacy of professional advice.

Expected areas of enforcement attention in 2022 

We expect 2022 to feature a renewed focus on familiar enforcement actions (e.g. insider trading) combined with matters arising out of the present moment (e.g. “pandemic fraud”) and new technologies (e.g. a sustained, cross-agency focus on crypto-related enforcement actions).

COVID-related fraud 

Given the enormous amounts of federal COVID relief funds appropriated with unusual urgency, both DOJ and the defense Bar anticipated an uptick in the number of related investigations and actions concerning fraud and similar spending crimes. We expect a continued focus on bringing these cases while evidence remains fresh and continues to be uncovered even as pandemic-related spending begins to recede. Attorney General Garland, for example, recently announced the appointment of a senior official focused exclusively on so-called “pandemic fraud” matters. We expect the government’s focus also to include enforcement actions concerning allegations of valuation fraud as illiquid assets became more difficult to price (and, from the government’s perspective, easier to purposefully mismark) during periods of pandemic-related market volatility.

Personal/ephemeral communications 

Criminal and civil enforcement agencies have focused intently on corporate policies concerning employees’ usage of personal and ephemeral messaging apps. In addition to investigating corporate practices and holding firms accountable for perceived failures, we expect a sustained increased attention to individuals’ use of increasingly diverse and sophisticated messaging services — including those that permit or require data deletion — in document requests, informal interviews, and testimony.

Crypto/cybercrime 

Major enforcement agencies have all given increased attention to crimes and offenses involving transactions in cryptocurrency or on a blockchain. In February 2022, for example, DOJ appointed a veteran prosecutor to run the newly created National Cryptocurrency Enforcement Team. We see the developing crypto-related investigations and enforcement actions as polarizing into two general camps: traditional enforcement against apparent bad actors (e.g. for classical fraud schemes involving cryptocurrency) and inquiries and actions against the increasingly broad base of mainstream firms and individuals participating in the crypto and blockchain space. In the latter camp, we expect enforcement actions asserting novel interpretations of existing law against crypto/blockchain applications, and episodes of regulation by enforcement as rulemaking agencies increasingly turn to litigation to enforce new or ambiguous provisions against crypto/blockchain participants.

Sustained activity at DOJ’s Fraud Section 

DOJ’s Fraud Section has grown in recent years and we expect their sustained activity on matters ranging from domestic financial crime to the FCPA. The relatively low level of FCPA activity in 2021 should not give comfort to firms and individuals who do business in high-risk jurisdictions. The Fraud Section’s FCPA Unit staffed up last year to its high water mark, and with more prosecutors than ever before, we expect a renewed pitch of activity on this front.

Persistent focus on U.S. enforcement actions targeted at overseas conduct

All indications are that DOJ will continue to take an expansive view of the extraterritorial reach of US law, and continue to bring enforcement actions targeting non-US firms and individuals whose alleged misconduct often has only the most tenuous connection to the United States through the international banking system. Given the correlations between these kinds of enforcement actions and broader US policy initiatives, the intense focus on Russia sanctions and a sustained attention to Chinese government activities adverse to US interests augurs for a heavy clip of US criminal investigations and prosecutions targeted at allegations of international misconduct. Indeed, we have already seen DOJ’s Operation KleptoCapture — formed in the immediate aftermath of Russia’s invasion of Ukraine — bring prosecutions against Russian oligarchs, and we expect to see more expansive enforcement activity follow on from these initial actions.

Financial traders remain frequent enforcement targets

We continue to see aggressive enforcement actions brought against traders of a range of financial products, often based on conduct that is regarded as common or permissible (and sometimes even prudent or mandatory) within the highly specialized markets in which their trading takes place. Both criminal and civil enforcement agencies remain interested in expansive assertions of fraud and manipulation authorities that can ensnare an enormously wide range of conduct that many traders and their employers may perceive as ordinary.