Backstory: Piling On: A Simple Matter of Injustice

Tuesday, May 10, 2016 - 22:39

Perhaps for some prosecutors, justice isn’t the primary motivation.

The following statement is from Lisa A. Rickard, president of the U.S. Chamber Institute for Legal Reform. She can be reached at 202.463.5724, www.instituteforlegalreform.com.

All the great things are simple, and many can be expressed in a single word,” Winston Churchill once noted and cited “justice” as a good example.

While the concept of justice may seem simple, actually “doing justice” is often anything but.

Meting out justice to wrongdoers is critical for our democracy and free economy. Law enforcement is obligated to root out bad actors, present a case and seek a punishment that fits the alleged infraction.

In our global economy, however, there is a globe’s worth of enforcers. And thus the “simple” practice of doing justice becomes complicated.

The Great Recession of 2008 gave way to the most aggressive level of enforcement against companies of all shapes and sizes in modern history. The U.S. Department of Justice led an unyielding pursuit, raking in tens of billions of dollars in fines and penalties, all from settlements with companies.

The DOJ was not alone. Many other federal agencies, state attorneys general and regulators joined in – often against the same companies and for the same alleged infractions.

And pursuit didn’t stop at the water’s edge. Governments worldwide joined the rush to penalize companies from banks to insurance to pharma to manufacturing – each seeking its own cut.

But earlier this year, at a London conference of the world’s top financial regulators, the multinational “piling on” effect seemed less like justice and more like a growing problem. According to a Financial Times article, Andrew Weissmann, the U.S. DOJ’s chief of the criminal division’s fraud section, said, “There is a problem with piling up: [T]here is both a fairness issue but it’s also in law enforcement’s interest to do a better job.”

Mark Steward, chief enforcer at the UK’s Financial Conduct Authority and fellow London conference speaker, agreed, saying the world’s governments should discuss the problem of double jeopardy – serial prosecution of a company for the same alleged violation. He called for exploring an international treaty on the practice.

Prosecutorial “piling on” is a problem because the collective result of its multiple “punishments” is grossly distorted justice. 

In the U.S., investigators have no obligation to prove a connection between the misconduct they allege and the settlement they demand. Settlement amounts are picked out of thin air. Multiply that amount by many government agencies, add in global prosecutors, and the dollars get massive.

Some say companies should fight excessive demands. They can’t. A loss in court is too risky and could mean the end for most companies. In addition, heavily regulated industries highly dependent on government licensing must maintain good relations with regulators to stay in business.

Ally Bank recently settled with the Consumer Financial Protection Bureau for $98 million dollars over allegations of auto loan discrimination. CFPB documents recently released by the House Financial Services Committee show that the agency believed its own case was weak but used Ally’s impending bank charter renewal with the Federal Reserve as leverage for a large settlement.

CFPB’s own internal memo said: “As such, Ally may be strongly inclined to reach a timely and robust resolution of this matter if it can potentially result in Ally Financial Institute maintaining its current corporate status.”

At the London conference, the global officials fretted over whether high penalties weighed on banks’ balance sheets, causing them to reduce lending. This is the ultimate irony: Perpetual prosecution of financial institutions to ensure a stronger financial system may actually weaken those same institutions, undermining overall financial stability.

If justice is the primary motivator for these prosecutions, why is the “piling on” effect happening? Perhaps for some prosecutors, justice isn’t the primary motivation.

In 2014, former U.S. Attorney General Eric Holder stated that DOJ recovered more than $24 billion in enforcement actions and that the department’s recoveries dwarfed its $2.91 billion budget. Interestingly, DOJ is allowed to retain a percentage of what they recover in many cases.

Many state attorneys general compete with each other to see who can get the higher settlement, which they leverage for PR headlines that help bolster their political careers. Some even get to keep a large portion of the settlement to fund their offices; a few have even funded pet projects with settlements.

The “pile on” effect is unfortunately not new. But its global spread – and the recognition of harm to the world’s financial markets – may offer hope.

Growing international awareness of the “piling on” problem should be a catalyst to fixing it. This is important considering the international complaints that over-enforcement practices have hurt the U.S.’s business-friendly reputation.

Guidelines for coordination between and among domestic and international prosecutors are necessary. And these guidelines should seek to eliminate perverse economic incentives that are at the heart of too many of the current settlements.

It is high time that we establish fair standards for prosecuting wrongdoing. It’s a simple matter of justice.