The Assistant U.S. Attorney for the Southern District of New York (“SDNY”), Marc Litt, described this period in time as an era of heightened enforcement for the Department of Justice (“DOJ”). In a presentation at the Practicing Law Institute 2010 Corporate Compliance and Ethics Institute held in New York City on June 10, 2010, Litt explained that a combination of increased resources, cooperation, coordination and information has resulted in a run of higher criminal penalties. This has helped the DOJ fulfill its mission to investigate, prosecute and punish crime.

Litt noted that the SDNY has had a securities law task force for more than 50 years that has resulted in bringing significant cases against securities transgressions. More recently, DOJ has been using tools normally reserved for other types of criminal cases, such as wiretapping, in securities violation cases such as insider trading violations. This approach has helped bring about noteworthy cases. However, Litt noted that he also wanted to talk about the cases that don’t make the newspapers because they end in deferred prosecutions agreements and non-prosecution agreements or as Securities and Exchange Commission (“SEC”) civil settlements. These cases often are resolved without a criminal prosecution because the company involved has an effective compliance program.

Resources and Results

According to Litt, the DOJ has obtained more than 1,300 corporate fraud convictions since 2002, including the convictions of more than 200 corporate chief executives or presidents, more than 120 vice presidents, and more than 50 chief financial officers. He said that the sharing of resources has led to more convictions, and noted that two colleagues from the SEC worked with DOJ to bring about a conviction in the Duane Reade accounting fraud case.

Litt discussed the significant rise in Foreign Corrupt Practices Act (“FCPA”) cases in the last five years. In 2004, there were three FCPA convictions and, by 2009, there were 34 cases. This year there are 150 open criminal investigations so the figures are destined to grow. Litt observed that when more resources are devoted to an area, more and more cases are brought. He said that one case begets another when an area of law gets a lot of attention because people start to report things.

Litt said there were 473 securities and corporate convictions in 2009 and the Federal Bureau of Investigation currently reports 2,200 pending corporate securities fraud investigations. After the Madoff case, Litt said many people began checking on their money and this led to an increase in Ponzi scheme cases.

Recent successful cases involving securities fraud include Galleon Management LP, an insider trading case that led to a $20 million loss; Credit Suisse, a securities fraud resulting in a $1 billion loss and a Tempur-pedic International, Inc. insider trading case that brought about a $5.5 million loss. With regard to Ponzi schemes, successful cases were brought against Madoff, who ran a $13+ billion scheme; against Thomas Petters, who ran a $3.65 billion scheme, and others.

Litt mentioned four FCPA cases which brought in significant fines: ABN—$500 million criminal penalty; Daimler AG—$185 million in civil and criminal penalties; BAE Systems Plc.—$400 million in criminal fines, and Innospec, Inc.—$40.2 million global settlement.

In addition to criminal fines and civil settlements, Litt noted that there has been a rise in the sentencing of individuals, including: a seven-year sentence imposed on a principal outside counsel for the individual’s roles in Refco Group Ltd.’s $2.5 billion fraud scheme; a five-year sentence for a former Credit Suisse broker for fraud involving auction rate securities; a four-year sentence for a former AIG vice president for his role in manipulating financial statements, and an 87-month sentence for an FCPA violation. Litt said that sentencing of individual wrongdoers is important as a general deterrent.

With regard to increased resources, Litt noted that DOJ hired Denis McInerny as the criminal division fraud chief. The Department also hired 14 new fraud prosecutors and is in the process of hiring more. For fiscal year 2009, the U.S. Attorneys Offices (“USAO”) added 59 line prosecutors and 17 support positions. For fiscal year 2010, DOJ added five criminal division prosecutors and 35 Assistant U.S. Attorney positions. DOJ will be seeking five fraud positions and 109 USAO prosecutors in fiscal year 2011. In addition, the executive office of the U.S. Attorneys has requested a financial fraud coordinator for each USAO.

According to Litt, the coordination and cooperation between DOJ and the SEC has always been good but has become even better in the past few years. He noted that the SEC’s new enforcement chief, Robert Khuzami was formerly a prosecutor for the SDNY. He has been making use of enforcement tools he learned there. That accounts for the SEC’s use of criminal techniques such as wiretapping. The cooperation between DOJ and the SEC has led to cooperation agreements, deferred prosecutions, referrals, parallel investigations and working groups.

He also emphasized the coordination and cooperation between the U.S. and the European Union which has led to streamlined mutual legal assistance agreements bringing about better and quicker access to books and records. Efforts at cooperation have also brought about streamlined extraditions, increased access to overseas bank documents and referrals.

Litt outlined the history of the ethics and compliance movement, beginning with the Organization Sentencing Guidelines in the early 1990s and DOJ’s Principles of Federal Prosecution of Business Organizations issued in 1999, which was revised a number of times, most recently in 2008. He also referred to the OECD good practice guidelines for corporations. These guidelines, which have been endorsed by 38 countries, are not U.S.-centric and are generally accepted as the gold standard, according to Litt.

What DOJ Looks for in an E&C Program

Litt emphasized that an effective ethics and compliance program should develop and promulgate a clearly articulated and visible corporate policy against criminal law violations. It should set a strong tone and example from the highest levels of the corporate structure. He said the tone must filter down from the highest levels involved and can not remain static but must constantly evolve.

Litt said the organization should have strong, explicit and visible support and commitment from senior management to the company’s internal controls, E&C programs or measures for preventing and detecting accounting violations, securities violations, foreign bribery or other fraudulent/criminal violations. Litt noted that companies should focus on training on the issue of insider trading which can occur at all levels of a company.

He stressed the need for effective controls. An E&C program should be designed to reduce the prospect of violations and should include appropriate measures to encourage and support the observance of E&C standards at all levels of the company, and should apply to all directors, officers and employees. Standards should include policies regarding gifts; hospitality, entertainment and expenses; customer travel; political contributions; charitable donations and sponsorships; facilitation payments, solicitation and extortion.

Litt explained that compliance standards and procedures, including internal controls and E&C programs should be developed on the basis of a risk assessment addressing the individual circumstances of the company, including but not limited to, geographical organization, interaction with governments and the industrial sector of operation. He stressed the importance of tailoring the E&C program to the particular risks the corporation faces.

In order to provide sufficient oversight, he recommended that an organization assign responsibility to one or more senior corporate executives for implementation and oversight of compliance with policies, standards and procedures. Litt said these executives should have an adequate level of autonomy from management, as well as adequate resources, and authority. These corporate executives also should have direct reporting obligations to independent monitoring bodies including internal audit, the board of directors, or any appropriate Board committee to ensure adequate autonomy.

Litt said that DOJ expects a company to have adequate internal controls with a system of financial and accounting procedures, including a system of internal controls reasonably designed to ensure the maintenance of fair and accurate books, records and accounts. The internal controls should ensure that the books and records cannot be used to facilitate or commit crimes by inflating assets or revenues, hiding losses, or improper payments such as kickbacks, foreign bribery or payments made to hide the bribery.

Companies need to establish effective systems to provide guidance and advice to directors, officers, employees and, where appropriate, business partners on complying with the company’s E&C program or measures, including when they need urgent advice on difficult situations in foreign jurisdictions, according to Litt.

He also advised the encouragement of internal and, where possible, confidential reporting by and protection of, directors, officers, employees and, where appropriate, business partners not willing to violate professional standards or ethics under instructions or pressure from hierarchical superiors. Reporting should also be encouraged by directors, officers, employees and, where appropriate, business partners willing to report breaches of the law or professional standards or ethics occurring within the company, in good faith and on reasonable grounds. In response to these reports, the company must take appropriate action.

With regard to training, Litt said that the company should implement measures designed to ensure periodic communications, and documented training for all levels of the company on the E&C program or measures regarding risks of particular significance in the company’s industry, including bribery. These measures should be taken where appropriate for subsidiaries. He said that a company also should include annual certifications by all levels and, where necessary and appropriate, agent and business partners, certifying compliance with the training requirements.

Litt advised that a company should have appropriate disciplinary procedures to address, among other things, violations at all levels of the company, accounting rules, securities laws, laws against foreign bribery and the company’s E&C program or measures regarding these types of issues.

A company should conduct due diligence on individuals and third parties, according to Litt. The company must institute properly documented risk-based due diligence pertaining to the hiring and appropriate and regular oversight of business partners and agents. The company also should inform business partners of its commitment to abide by the laws on the prohibition against foreign bribery, and of the company’s E&C program or measures for preventing and detecting bribery. In addition, the company should seek a reciprocal commitment from its business partners.

Litt stressed the importance of conducting periodic reviews and testing the code of conduct and the standards and procedures designed to evaluate and improve their effectiveness in preventing and detecting violations of the law.

According to Litt, the company should review compliance standards and procedures, including internal controls and the E&C program, no less than annually and should update them as appropriate taking into account relevant developments in the field and evolving international and industry standards.

Litt recommended that a company should include where appropriate provisions in agreements, contracts and renewals with all agents and business partners that are reasonably calculated to prevent violations of accounting procedures, securities laws and anti-corruption laws. The contract provisions should provide the right to conduct audits of the books and records of the third party. It should include the right to terminate an agent or business partner as a result of any breach of law, representations or undertakings.

If issues surface, Litt recommended that first and foremost a company should establish and maintain its credibility. He suggested that a company should seriously consider making a voluntary disclosure as encouraged by the Organization Sentencing Guidelines and the Corporation Prosecution Principles. Litt noted that DOJ is committed to rewarding voluntary disclosure. Finally, he urged companies to cooperate with the government’s investigation.