DOJ Hints at New Enforcement Ideas

The Justice Department is considering new approaches to handle companies that can’t pay monetary penalties as part of a corporate misconduct settlement; and is also warning securities and commodities traders to step up the data analytics they do to uncover market abuses.

So said deputy assistant attorney general Matthew Miner during a speech he delivered Thursday in Houston. Most of Miner’s remarks were a recap of policies the Justice Department has adopted recently to strike a more cooperative tone with companies under investigation, which we’ve heard many times before. The stuff about inability to pay penalties and about data analytics, however, is new.

First, Miner made passing remarks about inability to pay. Here’s what he said:

Although the U.S. Sentencing Guidelines and the sentencing provisions of Title 18 speak to this issue a bit, they don’t provide much in the way of concrete guidance or factors to consider. Accordingly, we are considering whether there are ways we can provide our prosecutors with better guidance and tools to assess such inability to pay claims.

What does that mean? I don’t know, although this is the Trump Administration, so one can assume it will ultimately mean a more conciliatory stance that businesses will appreciate. 

The U.S. Sentencing Guidelines address inability to pay in Sections 8C2.2 and 8C3.3, and Miner isn’t wrong when he says the material doesn’t provide much specific guidance. Those sections mostly talk about the court going below recommended penalty guidelines after a “preliminary determination” of inability to pay. They don’t say anything about what that determination process might look like.

One item of note: the Sentencing Guidelines do warn that a penalty should not impair a company’s ability to make restitution to victims. A penalty shouldn’t be so large that it leaves the company unable to repay victims. Nor should any reduction be “more than necessary to avoid substantially jeopardizing the continued viability of the organization.”

So one could imagine a scenario where companies have an incentive to offer restitution payments quickly and fairly, and once that’s done, start arguing that monetary penalties are harmful to operation of the business and only hurt blameless shareholders. That would fit nicely with folks like SEC chairman Jay Clayton (and many other Republicans), who often says that monetary penalties only take money away from current shareholders, who had no role in the misconduct in question. 

Anyway, watch for more guidance on that front.

Better Data Analytics

Miner also talked about how prosecutors are using data analytics to identify potential corporate frauds more precisely — and also warned companies that if the Justice Department can do it, so can private businesses, so you’d better be on your analytics game. 

For example, prosecutors have been crunching data about Medicare claims for a while, and “this use of data analytics has allowed for greater efficiency in identifying investigation targets, which expedites case development, saves resources, makes the overall program of enforcement more targeted and effective.”

Again, probably not news to compliance officers working with Medicare or Medicaid dollars. More pointed were Miner’s words about commodities fraud. They’re worth quoting directly, and I bold-faced what struck me as the most important parts:  

We know and have seen that trading data — whether in the commodities or securities arena  — can identify similar indicators or anomalies that are suggestive of market manipulation and other fraudulent activity. As a result, we are now approaching enforcement, particularly in the commodities arena, around a data-driven approach…

The reason I mention our focus on data analytics in identifying cases is both to tout what we are doing, but also to let compliance-oriented companies in the securities and commodities trading space know that this is an area of focus. Whereas we are able to identify indicators and anomalies from market-wide data, companies have better and more immediate access to their own data. For that reason, if misconduct does occur, our prosecutors are going to inquire about what the company has done to analyze or track its own data resources —  both at the time of the misconduct, as well as at the time we are considering a potential resolution. 

That’s as plain a warning as you can get from a Justice Department speech. Compliance officers in the trading world should take note now, and compliance officers in every other sector should keep it in mind too. What starts as a priority in that sector tends to become standard for every other sector eventually.