[co-author: Kayley Sullivan]

On April 29, we hosted a webinar on fraud and government enforcement during the COVID-19 pandemic, focusing on lessons learned from past crises.[1] We drew on our collective decades of experience as U.S. Department of Justice (DOJ) prosecutors handling enforcement and policy resulting from major economic events such as the 2008 financial crisis and the string of corporate failures in the early 2000s, as well as from past hurricanes and other natural disasters. We discussed ways companies can focus on the risks arising from the current crisis, and proactively enhance their compliance programs to prevent or mitigate potential government enforcement actions in the current COVID-19 environment.

COVID-19 is unprecedented and in many ways unique, but the crises and the pattern of government enforcement that is resulting from it is not. Companies can use the lessons learned from past crises to avoid repeating pitfalls and being subject to a government enforcement action during and following this pandemic.

DOJ Response to Prior Crises

Task forces formed by DOJ in response to crises include the Enron Task Force in 2001, the Hurricane Katrina Task Force in 2005 and the Financial Crimes Enforcement Task Force in 2009, among others. These task forces share many commonalities.

• Joint Efforts. In addition to the collaboration of many federal agencies, there is often an effort to work with state and even local enforcement agencies. There are certain areas, such as price gouging and mortgage fraud, where state and local laws, both civil and criminal, better addressed misconduct that arose from past crises.
• Information Sharing. Task forces allow for coordination among federal and state agencies and will frequently set up mechanisms for communication and outreach to the public, including hotlines for citizens to report suspected fraud.
• Establishing Task Force Priority. Task forces are a good indicator of resource priorities and what areas will command the attention of government resources and can influence the exercise of prosecutorial discretion in terms of which investigations deserve focus.

DOJ Response to This Pandemic

The government response to the current pandemic has been rapidly developing and changing each day. The DOJ immediately created a Coronavirus Response Page on its website, highlighting its coronavirus-related news.[2] On March 16, Attorney General (AG) William Barr issued a memorandum redirecting enforcement priorities for U.S. Attorneys to turn to COVID-19-related fraud and misconduct.[3] AG Barr ordered all offices to “prioritize the detection, investigation, and prosecution of all criminal conduct related to the pandemic.”[4] AG Barr mentioned some examples that were already occurring at the time, including phone applications promising assistance related to the pandemic that instead put malware on consumers’ phones.[5]

The DOJ has also emphasized efforts to crack down on hoarding and price gouging. This is new, as there is no specific federal price gouging law on the books. Although in the face of natural disasters, such as Hurricane Katrina, price gouging was an area of focus and enforcement, the federal role has remained limited, with enforcement falling primarily under state price gouging laws.[6] In the case of COVID-19, several things came together to make hoarding and price gouging federal offenses and a current focus of the DOJ. A March 23 Executive Order invoked the Defense Production Act (DPA), making it a federal crime for an individual to accumulate certain scarce products in excess of his or her reasonable needs or for the purpose of selling it in excess of prevailing market prices.[7] Although AG Barr clarified some aspects of the Executive Order in a subsequent speech and memorandum, he and the DOJ have not yet spelled out what is meant by “prevailing market prices.”[8] AG Barr also announced a COVID-19 Hoarding and Price Gouging Task Force, led by the U.S. Attorney for the District of New Jersey with assistance from the Antitrust Division’s Criminal Program and the U.S. Attorneys’ offices.[9]

The DPA’s hoarding and price gouging prohibitions have begun to be enforced at the federal level, with the first case against an alleged price-gouger coming on April 24. A Long Island man was charged with violating the DPA by selling N95 masks for $3.99 and $4.99, a less-than-100% markup from the price the defendant had paid for the masks.[10]

Another challenge in pricing that companies must navigate is state price-gouging laws. Thirty-four states and the District of Columbia have some sort of price-gouging legislation in place, with a huge variance in what the laws prohibit.[11] Unlike many past crises, natural disasters in particular, the COVID-19 pandemic affects the entirety of the country. Companies are forced to now navigate an intricate web of both federal and state price-gouging restrictions, making it difficult for even well-meaning companies to make pricing decisions.

Key Areas of Risk

With a rapidly developing and changing landscape, all companies face new and increased risks related to the COVID-19 pandemic. Companies in certain industries are more likely than others to come under greater scrutiny by DOJ and other law enforcement agencies.

• Companies involved in government procurement and bidding. In 2019, the DOJ Antitrust Division announced the formation of the Procurement Collusion Strike Force.[12] This, combined with the focus on procurement fraud during past crises, should indicate that a large amount of government support is likely to be allocated to these efforts. When the government has large pots of money available, it often opens the door to fraud, waste and abuse. Any company receiving government subsidies, grants or loans should consider potential civil liability under the False Claims Act (FCA).
• Companies receiving and issuing CARES Act funds. After seeing this time and time again, such as fraud arising out of the Troubled Asset Relief Program in the wake of the financial crisis,[13] the government will be vigilant in looking out for these issues. The CARES Act establishes a Special Inspector General for Pandemic Recovery (SIGPR) that can conduct its own investigations, audits and reviews and refer matters to the DOJ. Companies receiving CARES Act relief should therefore make sure they have implemented internal mechanisms to comply with all CARES Act requirements as well as other applicable regulations. Lenders are also at risk, as they may be in the middle of FCA and criminal CARES Act fraud inquiries as either witnesses or defendants. Bankers will be interviewed about the bank’s role in the application and certification processes and the nature of its review of borrowers’ information and certifications. The SIGPR’s office also has the authority to investigate fraud in the “sale of loans” in the secondary markets. Presumably, this could include inquiries into representations made as part of securitizations or the sale of loan participations.
• Crisis Cartels. Unfortunately, desperate times often incentivize desperate measures. Corporate executives facing downturns may consider discussing with their competitors how to limit the impact on their businesses so they can survive. Competitors might, for example, consider agreeing not to undercut each other’s prices or agreeing on how to reduce excess capacity while facing considerably reduced demand; they may even agree to limit wages. However, antitrust authorities do not typically treat crisis cartels any differently than other types of cartels ‒ meaning there remains a risk of an antitrust violation with significant fines and other penalties, including potential criminal exposure. The general position is that businesses must continue to act independently and compete even during a crisis. Corporations facing these issues should seek antitrust counsel.
• Disclosure for public companies. Announcements from the Securities and Exchange Commission (SEC) on March 23 and April 8, urging companies to be mindful of their disclosure obligations and insider trading prohibitions, signal that this is likely to be an area of focus for SEC enforcement moving forward.[14]

Honing Your Compliance Program to Address COVID-19-Related Risk

A civil or criminal enforcement action ‒ or the threat of one ‒ will have serious repercussions. In addition to the reputational damage and the cost of defending an investigation and potential enforcement action, corporate penalties regularly involve restitution, forfeiture or disgorgement, plus substantial fees. Executives may also face criminal exposure and significant jail time. In light of all this, how can companies best tailor their compliance programs to address COVID-19-related risk?

Even the most sophisticated compliance program cannot avoid all potential improper conduct. Compliance programs should have two main goals in mind: 1) to prevent fraud and misconduct and 2) when it does happen, to be able to demonstrate that the company made its best efforts as a good corporate citizen. The government will expect a risk-based approach to compliance. Many companies make the mistake of responding to these risks by creating a detailed, ironclad paper policy for their compliance program, irrespective of the business realities and resources necessary for such a program. By doing this, however, a company is setting itself up to fail its own standards. It is unrealistic to try to address all risks equally, and companies must engage in continuous, meaningful review of the risks specific to their business.

In times of crisis, it may be tempting for companies forced to take austerity measures to have their compliance programs take a backseat and allocate fewer resources to compliance than usual. However, as discussed earlier, desperate times often incentivize desperate measures, and corporate compliance must be robust and vigilant in times of crisis to address these risks. Additionally, changing environments, such as having employees working remotely, brings new risks. Compliance in the face of the COVID-19 pandemic is more important than ever.

The good news is that recent DOJ compliance documents give greater guidance on what prosecutors expect from companies, including 17 pages of sample questions that the DOJ uses in evaluating corporate compliance programs.[15] Companies are urged to focus on three main questions:

1. Is the corporation’s compliance program well designed?
2. Is the program being applied earnestly and in good faith? Is the program being implemented effectively?
3. Does the corporation’s compliance program work in practice?

The Antitrust Division released similar guidance, also giving insight into what prosecutors will consider in evaluating a corporation’s antitrust compliance program.[16] It additionally announced that for the first time, the Antitrust Division will take into account compliance at both the charging and the sentencing stages, a departure from previous Antitrust Division policy. Leaders within corporations who oversee multiple lines of business need to feel that it is their responsibility to spot red flags and know how to respond and work with the compliance officer or team. When companies must meet with competitors, they should ensure that there is a legitimate legal reason to do so, an agenda is made for the meeting, and everything is well documented so they are able to prove that all communications were aboveboard.

Conclusion

Companies must be aware of increased risks related to the COVID-19 pandemic. With the past as prologue, government enforcement responses to various historical crises can act as a valuable guide to how enforcement priorities will be directed now. Outside counsel can help companies tailor their compliance programs to address the specific risks that the company faces in light of the pandemic, and to design a crisis management response to any potential government inquiry.

[1] BakerHostetler, “Webinar: Fraud and Government Enforcement in Times of Crisis” (April 29, 2020), available at: https://www.bakerlaw.com/events/webinar-fraud-and-government-enforcement-in-times-of-crisis.
[2] Department of Justice, “Coronavirus Response,” available at: https://www.justice.gov/coronavirus.
[3] Office of the Attorney General, “Memorandum from Attorney General William Barr to United States Attorneys: COVID-19 Department of Justice Priorities” (March 16, 2020), available at: https://www.justice.gov/ag/page/file/1258676/download.
[4] Id.
[5] Id.
[6] See, e.g., Press Release, “18 Gas Stations to Settle, Make Payments to Charity in the Wake of Gas Price Investigation,” Attorney General of Illinois, Lisa Madigan (January 13, 2006), available at: https://illinoisattorneygeneral.gov/pressroom/2006_01/20060113b.html.
[7] The White House, “Executive Order on Preventing Hoarding of Health and Medical Resources to Respond to the Spread of COVID-19” (March 23, 2020), available at: https://www.whitehouse.gov/presidential-actions/executive-order-preventing-hoarding-health-medical-resources-respond-spread-covid-19/. The Department of Health and Human Services designated which products are to be considered scarce for purposes of the DPA. Department of Health and Human Services, “Notice of Designation of Scarce Materials or Threatened Materials Subject to COVID-19 Hoarding Prevention Measures Under Executive Order 13910 and Section 102 of the Defense Production Act of 1950” (March 25, 2020), available at: https://www.hhs.gov/sites/default/files/hhs-dfa-notice-of-scarce-materials-for-hoarding-prevention.pdf.
[8] Office of the Attorney General, “Memorandum for All Heads of Department Components and Law Enforcement Agencies…Department of Justice COVID-19 Hoarding and Price Gouging Task Force” (March 24, 2020), available at: https://www.justice.gov/file/1262776/download.
[9] Id.
[10] Complaint at 12, United States v. Singh, 20-MJ-326 (SIL), available at: https://www.justice.gov/usao-edny/press-release/file/1271156/download. See also, Complaint at 7, United States v. Bulloch & Young, 20-MJ-327 (alleging that defendants were selling KN95 masks for $4.18, representing a 300% to 400% increase in prices of these items as compared to their price in the market prior to the COVID-19 pandemic) available at: https://www.justice.gov/usao-edny/press-release/file/1271741/download.
[11] See, e.g., Edwin Torres, “New Jersey Declares State of Emergency to Curb Price Gouging,” NewsRoom (March 11, 2020) NJ Spotlight (page unavailable online), available at: Westlaw.com 2020 WLNR 7173389.
[12] Press Release, “Justice Department Announces Procurement Collusion Strike Force: a Coordinated National Response to Combat Antitrust Crimes and Related Schemes in Government Procurement, Grant and Program Funding,” Department of Justice (November 5, 2019), available at: https://www.justice.gov/opa/pr/justice-department-announces-procurement-collusion-strike-force-coordinated-national-response; BakerHostetler, Attention Government Contractors! Department of Justice Antitrust Division Announces Interagency Strike Force to Combat Public Procurement Collusion (November 7, 2019) available at: https://www.bakerlaw.com/alerts/attention-government-contractors-department-of-justice-antitrust-division-announces-interagency-strike-force-to-combat-public-procurement-corruption.
[13] E.g., Press Release, “Jury Delivers Guilty Verdicts in Fraud Scheme to Secure Bailout Funds,” Department of Justice (April 27, 2016), available at: https://www.justice.gov/usao-edpa/pr/jury-delivers-guilty-verdicts-fraud-scheme-secure-bailout-funds.
[14] Public Statement, “Statement from Stephanie Avakian and Steven Peikin, Co-Directors of the SEC’s Division of Enforcement, Regarding Market Integrity, Securities and Exchange Commission,” Securities and Exchange Commission (March 23, 2020), available at: https://www.sec.gov/news/public-statement/statement-enforcement-co-directors-market-integrity; Public Statement, “The Importance of Disclosure ‒ For Investors, Markets and Our Fight Against COVID-19,” Securities and Exchange Commission (April 8, 2020), available at: https://www.sec.gov/news/public-statement/statement-clayton-hinman. See also, BakerHostetler, “Webinar: Corporate Disclosure and Enforcement Impact of COVID-19 on SEC Filings” (April 14, 2020), available at: https://www.bakerlaw.com/events/corporate-disclosure-and-enforcement-impact-of-covid-19-on-sec-filings.
[15] Department of Justice, Criminal Division, “Evaluation of Corporate Compliance Programs, Guidance Document” (April 2019), available at: https://www.justice.gov/criminal-fraud/page/file/937501/download.
[16] Department of Justice, Antitrust Division, “Evaluation of Corporate Compliance Programs in Criminal Antitrust Division” (July 2019), available at: https://www.justice.gov/atr/page/file/1182001/download.