In the first year of the Biden administration, leadership at the U.S. Department of Justice (DOJ), U.S. Securities and Exchange Commission (SEC), and other U.S. government agencies announced expansive efforts to investigate and prosecute white collar crime. These efforts included the creation of task forces and policy changes that grant the government greater resources and powers to pursue white collar criminal enforcement actions.[1] In California, the new year brings with it several noteworthy white collar trials in federal courts around the state as well as expectations that we will see enhanced enforcement actions as the current administration focuses on corporate crime, government procurement fraud, and pandemic-related fraud.
Key Takeaways
DOJ and SEC have made their plans to prioritize regulatory and white collar criminal enforcement clear and we expect to see an uptick of these cases in California. Both agencies have emphasized that the government will pay attention to a company’s proactive efforts to cooperate and self-report. As SEC Director of Enforcement Gurbil Grewal announced last fall, “[f]irms’ cooperation with our investigations, including through voluntary self-reporting of potential violations, benefits all market participants.”[2] Given the importance of cooperation in this new climate, it behooves companies to ensure that they have in place vigorous corporate compliance programs to identify the risks specific to the business and prevent employee misconduct. Companies may also consider implementing measures that will help identify misconduct, such as data analytics and robust whistleblower programs. When issues arise, corporate clients would be well advised to conduct thorough internal investigations to identify the individuals involved in the wrongdoing, any gaps in processes and procedures that may have been exploited, and any necessary remediation measures.
In short, an effective compliance program can prevent, detect, and remediate employee misconduct that can expose the company to legal and regulatory risks.
Developments at DOJ and SEC
The current administration has been extremely vocal about its intent to increase white collar enforcement actions. “Fighting corporate crime is a top priority” for DOJ and SEC, and the leadership of both have introduced numerous policy changes to support this effort.[3] In October 2021, DOJ Deputy Attorney General (DAG) Lisa Monaco and SEC Director Grewal gave speeches announcing the government’s intention to increase its enforcement actions against white collar crimes involving individuals and corporations.[4] DAG Monaco emphasized that “it is unambiguously the department’s first priority in corporate criminal matters to prosecute the individuals who commit and profit from corporate malfeasance.”[5] To demonstrate the government’s more aggressive position on white collar criminal enforcement, DAG Monaco announced three major revisions to corporate enforcement policies.[6] The first revision now requires prosecutors to consider the full criminal, civil, and regulatory records of companies involved in criminal investigations, even if any uncovered misconduct is unrelated to the investigated offense.[7] The second revision announced a return to a more aggressive policy guidance regarding cooperation credit that was previously used by former Deputy Attorney General Sally Yates, requiring companies to disclose all individuals involved in potential wrongdoing rather than just those that were “substantially involved” in criminal misconduct.[8] The third revision rescinded prior guidance suggesting that corporate monitors are disfavored or the exception, and now encourages prosecutors to impose independent monitors where appropriate.[9] In addition to these policy changes, DAG Monaco also announced the creation of a Corporate Crime Advisory Group tasked with reviewing and improving the government’s approach to prosecuting white collar crime.[10] Attorney General Merrick Garland reiterated DOJ’s tougher stance on corporate enforcement at the American Bar Association’s March 2022 white collar crime conference. He announced that DOJ is growing both its attorney headcount and its data analytics capabilities to combat white collar fraud and misconduct.[11]
The SEC has also introduced its own policy changes to strengthen its white collar crime enforcement over the last year, including requiring settling parties to hire independent compliance consultants and make admissions under certain circumstances.[12] At the Annual Securities Regulation Institute, Director Grewal reiterated SEC’s intention to restore the public’s trust through aggressive enforcement efforts and robust penalties against corporate wrongdoers.[13] Like DOJ, SEC has also emphasized the importance of proactive cooperation by companies. For example, in SEC’s recent announcement of a settlement with HeadSpin, Inc., SEC praised HeadSpin’s response and remediation, which included the company conducting an internal investigation, “hiring new senior management, expanding its board, and instituting processes and procedures designed to ensure transparency of deal reporting and associated revenues.”[14] As a result, HeadSpin was able to settle the fraud charges without a penalty.[15]
These new developments have already started to play out in white collar cases around the nation. Two recent resolutions involving NatWest Markets PLC (“NatWest”) and Balfour Beatty Communities LLC (“Balfour”), requiring both to enter guilty pleas, appear to confirm a tougher positioning against corporate crime.[16] In the NatWest resolution, DOJ focused on the company’s prior corporate misconduct and its compliance program.[17] Similarly, in the Balfour resolution, DOJ attributed the criminal resolution to the “state of [the company’s] compliance program and the progress of its remediation, including . . . that [the company’s] compliance program and internal controls have not been fully implemented or tested to demonstrate that they would prevent and detect similar misconduct in the future.”[18] In both cases, DOJ required the companies to appoint independent monitors.
Government Procurement Fraud
California is home to a large number of government contractors. The Pacific Fleet is headquartered in San Diego and includes one of the largest concentrations of military personnel in the world—which brings a significant number of defense contracts to the region and scrutiny by government investigators.
In the Southern District, after obtaining several recent guilty pleas, the government is currently involved in a trial in the wide-ranging and ongoing Glenn Defense Marine Asia bribery case. A number of high-ranking Navy officials have pled guilty over the last several years to accepting expensive meals, fancy hotel accommodations, prostitutes, and other gifts in exchange for help maintaining contracts with the Navy, information regarding ship schedules, and influence over ship movements.[19]
We expect enforcement of government procurement fraud matters in California to only increase. DOJ’s Procurement Collusion Strike Force was formed just prior to the beginning of the COVID-19 pandemic. This interagency partnership was formed to jointly investigate and prosecute procurement-related crimes and includes representatives from a number of U.S. Attorney’s Offices—including two in California. In recent remarks, Strike Force’s director noted that “pursuing procurement collusion has been, and will remain, a top priority for the Division.”[20]
In addition, the U.S. Government Accountability Office (GAO) concluded in an August 2021 report that the U.S. Department of Defense (DOD) “faces numerous types of procurement-fraud schemes” and needs to take additional actions to respond to procurement fraud risks.[21] The audit focused on activities during fiscal year 2020, when the Pentagon spent $422 billion on contracts. The report noted that nearly 20 percent of the 1,716 investigations run by the department’s inspector general were about procurement fraud. The GAO concluded that “[t]he scope and scale of this activity makes DOD procurement inherently susceptible to fraud.” The lawmakers who requested the report expressed dismay about its findings and we expect to see continued focus on fraud connected to DOD contracts.
With such a large number of DOD contracts and military personnel, California defense contractors should be mindful about educating employees regarding the risks and consequences of committing fraud on the government including overbilling, false billing, and bribery.
COVID-19 Related Fraud and Abuse
Finally, pandemic-related investigations will likely contribute to an uptick in California’s white collar cases. Economic pressures accelerated by the pandemic have impacted a wide range of industries, resulting in the commission of a growing number of pandemic-related fraud and abuse crimes. Last year, we saw a significant increase in actions brought by DOJ related to the Paycheck Protection Program (PPP) and other misappropriations of government aid, which have been bolstered by the Department’s creation of a COVID-19 Fraud Enforcement Task Force.[22] Attorney General Garland recently announced that President Biden’s 2022 budget allots $36.5 million to hire over 100 attorneys nationwide to combat pandemic relief fraud.[23] As California has also been one of the hardest hit states with incidents of unemployment insurance fraud, we expect increased scrutiny and enforcement of COVID-19 related fraud and abuse in the coming year.
[1] “White collar defence: Increasing risks and enforcement activity”
[2] “PLI Broker/Dealer Regulation and Enforcement 2021,” SEC.gov.
[3] See justice.gov/dag/page/file/1445106/download.
[4] “Deputy Attorney General Lisa O. Monaco Gives Keynote Address at ABA’s 36th National Institute on White Collar Crime,” OPA, Department of Justice; “New SEC Enforcement Division Director Signals Policy Shifts, Including Potential Emphasis on Admissions of Wrongdoing,” Kramer Levin Naftalis & Frankel LLP, JDSupra.
[5] Id.
[6] Id.
[7] Id.
[8] “Two Recent Corporate Pleas Affirm DOJ’s Pledge to Crack Down on Criminal Enforcement,” Baker Donelson, JDSupra.
[9] Id.
[10] See Corporate Crime Advisory Group and Initial Revisions to Corporate Criminal Enforcement Policies
[11] “Garland Vows DOJ Headcount Surge In White Collar Blitz,” Law360.
[12] “New SEC Enforcement Division Director Signals Policy Shifts, Including Potential Emphasis on Admissions of Wrongdoing,” Kramer Levin Naftalis & Frankel LLP, JDSupra.
[13] “Top 5 SEC Enforcement Developments for January 2022,” Morrison & Foerster (mofo.com).
[14] HeadSpin, Inc. (Release No. LR-25320; Jan. 28, 2022) (sec.gov).
[15] Id.
[16] “Two Recent Corporate Pleas Affirm DOJ’s Pledge to Crack Down on Criminal Enforcement,” Baker Donelson, JDSupra.
[17] Id.
[18] https://www.justice.gov/opa/pr/justice-department-announces-global-resolution-criminal-and-civil-investigations-privatized.
[19] See United States v. Shedd, case number 12-cr-0623, in the U.S. District Court for the Southern District of California; see also United States v. Newland et al., case number 3:17-cr-00623, in the U.S. District Court for the Southern District of California.
[20] Id.
[21] “DOD Fraud Risk Management: Actions Needed to Enhance Department-Wide Approach, Focusing on Procurement Fraud Risks” (GAO-21-309), Sept. 20, 2021.
[22] “Attorney General Announces Task Force to Combat COVID-19 Fraud,” OPA, Department of Justice.
[23] “Garland Vows DOJ Headcount Surge In White Collar Blitz,” Law360.
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