A top Justice Department official issued a stark warning this week that the next time the agency finds wrongdoing at a financial institution, the bank had better hand over all pertinent data quickly or face severe penalties.
That was the upshot of a speech Tuesday by Bill Baer, the principal deputy associate attorney general, who offered an extensive discussion of the need for banks to cooperate in civil fraud investigations.
"Mere compliance with legal requirements such as subpoenas, or one-sided presentations urging the department to decline an enforcement action, do not measure up," Baer said at a compliance conference in Chicago. "A company that offers meaningful cooperation and timely victim relief should be afforded a more favorable resolution than a company that fights kicking and screaming until the end."
Justice recently issued new internal confidential guidance on cooperation in civil enforcement matters, a spokesman said.
Companies now are expected to "materially assist" the agency in providing documents, access to witnesses and even "inculpatory documentary evidence such as emails and text messages," Baer said. But he did not explain how much "cooperation credit" a bank would receive for providing that information.
He also emphasized that firms should not try and protect individuals within the company.
"Defendants that want credit for their cooperation must disclose all facts relating to the individuals involved in the wrongdoing, no matter where those individuals fall in the corporate hierarchy," Baer said. "We will not credit cooperation unless this threshold requirement has been met."
His comments echo a memo last year by Deputy Attorney General Sally Yates who said the most effective way to combat corporate misconduct is to hold individuals accountable.
Still, it remains unclear what kind of credit Justice would offer to a company in a civil investigation. Cooperation in the early stage of an investigation is more helpful than later on, but "no cooperation credit" will be given for information received after Justice had completed most of an investigation, Baer said.
It also is unclear how much credit a company would get for providing information about conduct the government does not know about, lawyers said.
"They have to be a little more specific and give more clarity as to what they are offering in terms of cooperation credit," said a former DOJ official. "This trust-us approach isn't going to cut it. Companies might say that's great but they may have no idea what benefit they are talking about."
The Justice Department has been criticized for failing to prosecute any high-level executives in the wake of the financial crisis. But Baer faults the largest 10 financial institutions for refusing to cooperate with the residential mortgage-backed securities working group — and then taking credit for doing so only after settling with the government.
Ten financial institutions have paid nearly $46 billion in penalties, compensation and consumer relief related to misconduct in the packaging and sale of residential mortgage-backed securities.
"Each of the financial institutions … did ultimately settle and admit to the facts demonstrating its wrongdoing," he said. "Each presumably incurred significant legal costs over many years. Each prolonged the period in which a cloud of uncertainty hung over the institution. And each paid a lot more than it would have if it had cooperated early on."
The agency would have resolved the mortgage securities fraud cases sooner if banks had cooperated, he said.
"For the most part, that did not happen," Baer said. "The government built these [residential mortgage-backed securities] cases from the ground up — reviewing millions of emails, texts and business records; transcribing recorded audio; talking to hundreds of witnesses; and deciphering dense and technical tomes of financial information."
The residential mortgage-backed securities working group was part of the Financial Fraud Enforcement Task Force that was created by President Obama in 2009 to investigate and prosecute financial crimes.