Top Executives Involved in Financial Fraud Cases Are Still Innocent Until Proven Guilty … For Now

By Claudio Arruda

“The scars of the Great Recession, its lingering impacts and its echoes throughout our financial system are not hard to find.” These words, spoken by then Attorney General, Eric Holder, to an auditorium filled with judges, U.S. Attorneys, law students, faculty members, administrators, staff and alumni at the New York University School of Law on September 17, 2014, drives a chill through the spine of the majority of investors – large and small.

In an age where financial institutions are facing court battles regarding accusations of money laundering, conspiring to aid tax evasion, and taking risky bets relying on federally-insured capital, all investors should be concerned. Since 2009, the Department of Justice (“DOJ”) has brought over 60 cases against financial institutions which have resulted in recoveries totaling over $85 billion. However, there are rarely any criminal charges against top executives of these financial institutions.

In his speech at NYU, Holder expressed his frustration that the DOJ remains largely powerless to hold top executives liable for their alleged criminal actions. Holder asked “whether the law provides an adequate means to hold the decision-makers at these firms properly accountable.” His answer to the problem is simple: set a strict liability criminal standard in the financial industry.

Thus, he proposed three approaches designed to set a different standard: (1) extend the Park liability doctrine to the financial sector; (2) apply the Sarbanes-Oxley (“SOX”) requirement that senior executives certify financial statements; and (3) create regulations similar to the regulatory reforms in the United Kingdom (“UK”) that require senior bank executives to file a “statement of responsibilities” with the UK regulators.

It is improbable that strict criminal liability will be applied to financial crimes. First, it would require congressional action, which is not likely to gain traction for many reasons. Second, strict liability runs contrary to the principle that justice is fundamentally reserved for intentional wrongdoing. Third, the policy rationale for applying the Park “strict liability” doctrine in food and drug cases, where death can actually occur because of the wrongdoing, is unlikely to have a similar sway for financial crimes. On the other hand, we must always remember that financial losses can cause enormous hardships for investors who lose retirement savings or whose losses leave them unable to afford medical or other expenses.

The practical effect of the Park doctrine, however, should not be ignored. Health care companies doing business under the “threat” of the doctrine have strengthened their compliance programs and required their Boards of Directors to be more closely involved in overseeing regulatory and legal issues of their corporations. Equally, the strict liability threat in the financial services industry would likely spur companies into creating more robust compliance systems, ensuring a free flow of information to top executives, and involving these executives more intimately in managing any of their companies’ operations that raise regulatory or legal risks.

Whether top executives of financial companies will be strictly liable for their companies’ criminal conducts remains to be seen. One thing is certain: the DOJ’s focus has now shifted to making senior corporate executives in the financial industry accountable for wrongdoing within their companies. That is undoubtedly a step in the right direction.