Blue Collar Tactics in White Collar Cases Part II

Early last year, the government also used this traditional “blue collar” technique for the first time in a Foreign Corrupt Practices Act (FCPA) prosecution of 22 individuals: consensual tape recordings made through the assistance of undercover confidential informants. DOJ issued a press release when it filed the indictments.

This ongoing investigation is the first large-scale use of undercover law enforcement techniques to uncover FCPA violations and the largest action ever undertaken by the  Justice Department against individuals for FCPA violations . . . The fight to erase  foreign bribery from the corporate playbook will not be won overnight, but these  actions are a turning point. From now on, would-be FCPA violations should stop and  ponder whether the person they are trying to bribe might really be a federal agent.

In this case, the defendants have moved to dismiss the indictment, arguing that the FCPA requires proof of an actual “foreign official” and that bribing an undercover agent posing as a foreign official does not fulfill the element of the offense. The U.S. District Court of the District of Columbia has rejected that argument, but it will be interesting, in the event of a conviction, to see how the appellate courts view his issue.

Whistleblowers: The “Rats” Who reap the Rewards

Another confidential source utilized by the government during both civil and criminal investigations of white collar crimes is the whistleblower. A whistleblower is typically an employee in a private enterprise who confidentially provides information to law enforcement regarding his employer’s or colleague’s mismanagement, corruption, or other wrongdoing. The whistleblower provides this information with the hope of receiving a percentage of the money ultimately recovered as a result of his or her disclosure. The whistleblower may or may not be directly involved in her underlying illegal activity.

The government’s use of cash to award confidential sources for their information and assistance, a practice that dates back to the Civil War, is explicitly authorized in the False Claims Act and the Federal Whistleblower Act. Public opinion regarding this controversial system is naturally varied – with some deriding it as the “Award for Rats Program” and others touting it as a way for “folk heroes” to expose corporate wrongdoing. Regardless of public opinions, one thing is certain: whistleblowers have been effective and lucrative for the government, especially when it comes to white collar cases.

Over the past few years, whistleblowers have been especially prevalent in the area of health care fraud. As a result of qui tam suits filed under seal by relators, the Food and Drug Administrators and the Department of Justice have collected huge civil recoveries. The government’s success in the health care context has led both the IRS and SEC to follow suit.

Though the IRS has been authorized to pay awards to individuals who blow the whistle on delinquent taxpayers for over 140 years, the program was long “criticized for offering inadequate incentives and protections for would-be whistleblowers to come forward.” In 2006, however, Congress modified the program to boost the IRS’s authority to pay cash awards to tax whistleblowers. The Tax Relied and Health Care Act of 2006 increased the maximum potential award to 30 percent of the recovery, removed the $10 million cap, and established a separate “Whistleblower Office.” These changes increased both the quantity and quality of claims and resulted in some of the largest fines ever reported.

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act provided the SEC with these tools. The Act provides that the SEC shall pay awards to eligible whistleblowers who voluntarily provide the SEC with original information that leads to a successful enforcement action yielding monetary sanctions over $1 million. The award amount is required to be between 10 percent and 30 percent of the total monetary sanctions collected in the Commission’s action, including a criminal case. The new program expected to begin in August 2011.

It is important to note that these whistleblower programs do not require that employer’s internal compliance system before or at the same time they report to the government. Without this mandatory internal reporting, these programs undermine the ability of an entity to detect, investigate, and remediate violations and create an unhealthy atmosphere of distrust in an organization. In Response to this challenge, companies must strengthen their compliance programs by creating substantial incentives for internal rather than external, reporting. They will also need to create a corporate culture that fosters loyalty, collaboration, and commitment to the success of the organization.

Cooperating Witnesses: The Irresistible of 5K Incentive

Some defense clients choose to become cooperating witnesses in order to mitigate the harshness of the sentences they face. In 2010, the national rate of downward departures granted based on government motions due to a defendant’s cooperation was 11.5 percent and varied by district from 40.7 percent to 1.7 percent.

Unlike confidential informants, cooperating witnesses agree to testify in legal proceedings and typically have written plea agreements with the Department of Justice that spell out their obligations and their expectations of future judicial or prosecutorial consideration. White collar cooperation in federal court usually follows the same or similar pattern: an attorney will “proffer” to government counsel the information his client would hypothetically provide. If this proffer is well-received, the defendant and his counsel attend a proffer session with the prosecutor and at least one law enforcement agent. The cooperator will have to disclose his own criminal conduct and any other conduct of which he has knowledge. If all goes smoothly, the parties enter into a cooperation plea agreement. These plea agreements reference the familiar language of U.S.S.G. 5K1.1. The agreements are intentionally worded to weaken the defense cross examination of the cooperator by making it seem that the benefit of cooperation is up to the judge, not the prosecutor, and that it is not result-dependent. In practice, however, the prosecutor’s downward departure motion is rarely denied, and the “success” of a witness is a factor in the extent of the departure.

Cooperation in drug prosecutions and violent street crimes such as Hobbs Act robberies become commonplace as soon as the Sentencing Guidelines went into effect, as defendants had no other way to avoid draconian mandatory minimum sentences. Similarly, the bonds of loyalty and collaboration that white collar defendants enjoyed in the executive suites of their defendants enjoyed in the executive suites of their corporate offices quickly melted away in the face of multi-year, multidecade and even multi-century sentence for financial crimes.

While both blue collar and white collar defendants are similarly motivated to avoid incarceration, their cooperation can present some interesting differences. For instance, it is likely that the white collar cooperators will differ from their blue collar counterparts in terms of their apparent reliability and credibility: often, they will not have criminal histories that might be helpful for purposes of cross-examination. White collar cooperators will likely be more credible. Indeed, as one commentator pointed out, “It is of course conceivable that white collar cooperators may prove to be more sophisticated and more presentable in a courtroom, adding credence to deceptive testimony.” This presents an additional and interesting challenge to the white collar crime practitioner and may require more focused investigation of the cooperating witness, for instance, in bankruptcy or matrimonial court filings.

Notwithstanding a defense lawyer’s familiarity with the cooperating witness, it may come as a surprise that, predictment, the government can use these witnesses to reach out to the defense lawyers white collar clients, despite the prosecutor’s knowledge that she is contacting a represented party in apparent contravention of the ethics rules. In a recent securities fraud case, the government’s use of cooperating witness as a proxy to elicit information was held not to violate professional conduct rules because this conduct is “authorized by law.” Counsel representing an individual during the course of an ongoing investigation should repeatedly advise the client to refrain from speaking or corresponding about the investigation – even with friends and colleagues.

The Morales Law Firm would like to thank The National Association of Criminal Defense Lawyers Champion (September 2011 Issue) for sharing this information with us.