Robert Sanger is a Certified Criminal Law Specialist and has been a criminal defense lawyer in Santa Barbara for over 37 years. He is a partner in the firm of Sanger & Swysen. Mr. Sanger is an Officer of California Attorneys for Criminal Justice (CACJ) and is the Co-Chair of the CACJ Death Penalty Committee as well as a Director of Death Penalty Focus and a Member of the ABA Criminal Justice Sentencing Committee. This originally appeared as a column in the Santa Barbara Lawyer Magazine.
The Dodd-Frank Reform Act and the Criminal Law
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010 as Public Law 111-203.
Given the trend over the last couple of decades, I expected to find the kind of harsh and pervasive criminal sanctions that were a part of the Sarbanes-Oxley Act or the myriad of other statutes relating to federal regulation of business. As we have discussed in prior articles, there has been a confluence of opinion from many points on the political continuum to the effect that the federal government has overcriminalized the doing of business in this country.
Having now had a chance to study Dodd-Frank, it seems that the trend toward criminal enforcement is partially in remission, at least in this iteration of reform legislation. Enforcement seems to be envisioned as primarily through administrative or civil enforcement actions. Nevertheless, there are three parts of the Act that may have a significant impact on criminal justice. First, while there are not many, there are some new criminal statutes in the Act. Second, a new Bureau is created by the Act to enforce those new laws and all of the others relating to consumers and financial transactions. Finally, one of the most controversial aspects of the Act is the system of incentives for whistleblowers. We will look at all these in this month’s column.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
Most business lawyers are acquainted with the Dodd-Frank Wall Street Reform and Consumer Protection Act. Much has been written about it in ordinary newspapers as well as business and law journals. The Act is comprised of 10 constituent Titles and the enrolled version of the Act is 848 ages long in the Government Printing Office version. The impact of the Act will not be know perhaps for years due to the fact that many of the provisions of the Act will be implemented through Regulations yet to be promulgated. The bureaucracy to enforce the Act is, in part, a reorganization of existing entities and, in part, newly created.
The Act is a response, of course, to the financial crisis of the last two years. It addresses, to one extent or another, the lack of regulation of certain previously unregulated financial institutions and schemes. It also seeks to require additional reporting and transparency on the part of the investment industry as a whole. The Act adds or amends countless sections of the United States Code. Regrettably, the Act does not do anything to simplify the argot that makes some of it seem impenetrable and introduces even more terminology that will keep lawyers employed if, for no other reason than to decipher the vocabulary.
Trying to cut through the minutiae and looking to some secondary sources
for guidance, we can make some generalizations. First, there is an effort throughout the Act to reduce risk-taking activities. Second, there is an effort to regulate a broader set of organizations, including the "shadow" banking system. And, third, there is an effort to enhance consumer protections.
Our colleagues who do transactional law and who represent the financial investment community have their work cut out to understand and advise on all the details. In part, this will involve trying to predict the future course of the implementing regulations. For instance, Title IV of the Act, makes a number of changes to the Investment Advisers Act of 1940. In one particular, the prior exemption from registration for advisors with less than 15 clients is eliminated. This change will require investment advisers to hedge funds and other kinds of privately offered investment vehicles to register under the Advisers Act. So, there are not only new rules but an entirely new class of entities and individuals who will be subject to regulations.
In addition, the entire financial industry will have to be aware of compliance requirements in areas and regarding subject matter that has not been so regulated. People within the organizations will have to be trained and compliance personnel retrained to make sure that unlawful risk taking behavior is eliminated and that consumer protection rules are honored. And, of course, everyone will have to be all the more sensitive to possible criminal investigations.
The Criminal Side of Things
The Act does create some new criminal sanctions, some of which are fascinating as we will discuss below. However, unlike many other Acts of recent years, including Sarbanes-Oakely, the Dodd-Frank Act was fairly restrained in the expansion of criminal jurisdiction. What it does do, in addition to promulgating a few new laws, is expand the universe of entities and individuals who are subject to existing laws and to give enforcement powers to new or reorganized bureaucracies.
New Criminal Laws
There are some new criminal sanctions created in stand alone provisions. For instance, Section 202(a)(1)(C) provides for a maximum penalty of 5 years in prison and a $250,000 fine for recklessly disclosing the existence of a negative investigation relating to a financial institution. The purpose behind this is understandable – if the government is going to be more aggressive in identifying institutions that are a risk for failure, the investigations have to be confidential.
It is of interest that an element of this offense as written is recklessness rather than simply willfully or knowingly. Other federal disclosure statutes do not have such a high standard.
Therefore, in defending such an allegation involving recklessness, the mental state of the defendant and the circumstances of the transactions will be critical. Pre-emptively, for the transactional lawyer, this is another situation in which strict compliance is paramount. Employees have to be trained and know these restrictions, there should be strict written guidelines and remedies.
Taking this as an example, a violation of this sort most likely would be committed by an individual or small group. But transactional lawyers have to prepare in advance to defend the corporation or other organization from liability for these acts, including, disgorgement and punitive fines. In other words, under the Organizational Sentencing Guidelines, showing that the organization had proper policies and procedures in place and that they had a strong compliance program might avoid or, at least, mitigate the eventual punishment. Also, it is important that, upon having information that a potential violation occurred, a corporate internal investigation be commenced immediately which may lead to remedial actions including sequestering or firing the offending employees or taking any other action that might partially remedy the situation. This may also mean – although it seems Big Brotherish and antithetical to the American system of justice -- that corporate employees and officers are forced to denounce each other to the government in order to avoid the most severe penalties.
Other examples of new criminal sanctions are the new regulatory provisions under Title VII of the Act which proscribe the conduct but do not provide for a separate scheme of punishment. For instance, Section 723 prohibits persons from engaging in a swap unless they or the transaction is eligible under the regulations. Sections 724, 724(a), 728, 730, 731, 733, 741, 746, 747 and 753 all proscribe other conduct and require compliance with various regulations. These sections are now part of the existing Commodities Exchange Act
and would be punishable under 7 U.S.C. Section 13(a)(5) which provides for a maximum of a $1,000,000 fine and 10 years imprisonment.
Interestingly, however, 7 U.S.C. Section 13(a)(5) has a provision that "no person shall be imprisoned under this paragraph for the violation of any rule or regulation if such person proves that he had no knowledge of such rule or regulation." This means that as to these particular offenses, ignorance of the regulation, is not a defense to the charge but may be a defense to going to prison. This is an unusual shift in the burden of proof in a criminal case.
It also means that a person who violates the regulation once and is warned or written up, let alone prosecuted and fined, can no longer claim the defense. Title IX has similar provisions which amend and are enforceable under the Securities Exchange Act of 1934.
So, all in all, there is not as much outright new criminalization as one has come to expect. On the other hand, these crimes are almost all felonies and may be punished by between five and ten years and a fine of between $250,000 and one million dollars. We will have to see how they are prosecuted and whether additional regulations are promulgated in the near future.