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The Dodd-Frank Reform Act and the Criminal Law Part 2 by Robert Sanger, Sanger & Swysen

Part 2

The Dodd-Frank Reform Act and the Criminal law Part 2 by Robert Sanger, Sanger & Swysen

New and Reorganized Enforcement Agencies

What may be of more significance to the enforcement of not only these new provisions but to the enforcement of all of the provisions of existing law that may pertain to financial regulations is that there is a reorganization of certain enforcement bureaucracies and the creation of a new one.

Dodd-Frank creates the Consumer Financial Protection Bureau (CFPB)

10 which is established within the Federal Reserve System. The CFPB is given regulatory, supervisory, and enforcement authority over "covered persons" and "service providers." The agency, though created under the Dodd-Frank Act, is given authority to enforce:

The Electronic Funds Transfer Act

The Equal Credit Opportunity Act

The Fair Credit Reporting Act

The Fair Debt Collection Practices Act

The Home Mortgage Disclosure Act

The Real Estate Settlement Procedures Act

The Secure and Fair Enforcement for Mortgage Licensing Act

The Truth in Lending Act

The Truth in Savings Act

In other words, if the transaction involves a consumer or agents or representatives acting on behalf of a consumer and some sort of (non-exempted) financial transaction, the CFPB will have jurisdiction. This means that there is a specific agency now ready to investigate and, potentially, prosecute, what are perceived to be violations of the new provisions or violations of the many other provisions that already exist in federal law to protect consumers in financial transactions. There are also provisions requiring other agencies to coordinate and cooperate in their enforcement efforts to avoid redundancy. However, the reality is that over the last few decades there has been an exponential increase in federal investigative agencies and federal enforcement officers. Although we can keep a good thought, there is not much reason to think that this new bureaucracy will not become involved in the law enforcement interagency turf wars.

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Whistleblower Provisions

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One of the most significant aspects of the Dodd-Frank Act on its impact on criminal law is that fact that it includes extensive whistleblower provisions. Section 748 provides for whistleblower incentives and protections under the Commodities Exchange Act. Under 748(b), the rewards to a whistleblower are set at between 10 and 30 percent of the monetary sanctions recovered by the government.

11 This amendment also includes enforcement of some of the existing provisions of the Sarbanes-Oxley Act and other aspects of existing law.

Section 922 of the Act provides for a similar whistleblower scheme to be added to the Securities Exchange Act of 1934.

12 Again, the bounty is from between 10 to 30 percent of the sanctions recovered by the government.

The way the Act is drafted, it does not appear that the whistleblower under either the Commodities Exchange Act or the Securities Exchange Act of 1934 could participate in criminal fines. However, there is a provision that recovery can pertain to related actions. Also, there is a provision that the recovery can be based on penalties and disgorgements. The big consequence for the defense of criminal prosecution – or the attempt of transactional lawyers to keep their clients from being prosecuted – is that the whistleblower incentive will be a source of referrals to the criminal investigators and, eventually, the United States Attorney’s Office for parallel criminal prosecutions.

There is also something unsettling about whistleblower incentives, especially these which may result in multi-million dollar awards. We are already contending with corporate rules, influenced by the Organizational Sentencing Guidelines, that require corporations, generally through their officers, to report wrongdoing to the government. In practice, this is done after a corporate internal investigation and upon some reflection. Nevertheless to avoid the worst consequences of disgorgement and draconian penalties – and sometimes to avoid corporate prosecution entirely – one set of officers has to inform on other officers or employees.

Here there is an incentive for any employee to break ranks immediately and be the first through the government door to provide information that will qualify for the big pay-day. This means that, instead of going to the supervisor and allowing the company to correct the problem or instead of allowing the corporation to conduct a proper corporate investigation, the employee has every incentive to denounce his fellow employees or supervisors directly to the government as soon as possible. This will lead to additional criminal prosecutions of corporations and key employees which might have otherwise been resolved internally or through pre-indictment negotiations with the government.

There is also the problem that the rewards are so great, employees will undoubtedly run to the government with whistleblower information that is based more on wishful thinking than fact. Presumably there will be many unsubstantiated cases which are eliminated before costly civil enforcement actions are brought or before they are submitted to the United States Attorneys Office to be presented to the Grand Jury for indictment. But there is little doubt that more weak claims will end up resulting in actual prosecutions under this system than without it.

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Conclusion

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Overall, the Dodd-Frank Wall Street Reform and Consumer Protection Act is an admirable effort on the part of its drafters and the current Administration to take serious steps to avoid the kind of risk-taking and unfair advantage that allowed this country to get into the financial crisis of the last couple of years. Something had to be done and this 848 page Act is a start. Like any complicated reform, the ramifications will not be known until the regulations are in place and the provisions are tried in place for a few years. It is good that this Act has reduced the proliferation of as many new criminal sanctions as have accompanied such acts in the past and that there seems to be a nod toward those who have been alarmed by the overcriminalization of business.

On the other hand, the criminal justice system – and more importantly, CEO’s, officers and corporations – may feel the impact of some of the consequences of the Act, including some of the unintended consequences. These are things to watch and to fix before they get out of hand. As we saw, there is a new Bureau and there are both new and old criminal laws that they can seek to enforce. And, as we have also seen, there are two major sections creating whistleblower incentives.

So, as we often conclude, time will tell.

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