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Ineffective regulation creates a false sense of confidence that causes people and markets to be less diligent than they otherwise would be.
March 27 -
Proponents of breaking up big banks trumpet Attorney General Eric Holder's complaint that some are too large to prosecute. But indicting companies for individual employees' actions would indeed be reckless.
March 11 -
Attorney General Eric Holder's stunning admission that it was difficult to prosecute large banks because of the potential economic impact adds significant ammunition to those seeking to break up such institutions.
March 6 -
Sens. Mark Warner, D-Va., and Bob Corker, R-Tenn., are asking Attorney General Eric Holder to clarify his surprising remarks last week about whether some institutions are too big to prosecute.
March 12
Banking has become a tough business, and it is not getting any easier from a liability point of view. Recent statements regarding the "too big to jail" theory articulated by U.S. Attorney General Eric Holder have reignited debate over "too big to fail". But it has also raised questions and perhaps suggestions about whether individuals – directors and officers and employees of banks – who caused losses are being held accountable, even if actions against their companies aren’t feasible. Indeed, the Office of Foreign Assets Control followed Holder's remarks with a public statement saying that it intends to hold individuals personally liable for company violations of
Banking continues to be among the most highly regulated businesses in the country. The record demonstrates that a significant percentage of individuals in the banking business have and continue to be held accountable for their actions and the failure of their banks. Let's look at some of the facts.
In the banking crisis between 1985 and 1992,
Fast-forwarding to the most recent financial crisis, as of March 2013, the FDIC
The facts suggest that bank D&Os and other employees are held accountable for their actions in ways which impact both their personal net worth and freedom. Nevertheless, current debates suggest a pressure to bring even more civil or criminal actions against individuals. While it may not be possible to create a sense of greater accountability, it seems prudent for banks and bankers to consider how such actions could impact them.
First, from an institutional point of view, actions against individual D&Os significantly complicate the issues that a bank and its board of directors must confront. For example, allegations against company executives may trigger the need for an internal investigation by independent advisors and/or formal notifications to auditors. If the company's auditors determine that they can no longer rely on the statements of an executive who has been targeted, that may impact the auditors' ability to certify the company's financials, which usually significantly delays their release. Some or all of these considerations, in turn, may result in the auditors having to give notice to the Securities and Exchange Commission, which may trigger additional regulatory issues. And then there are the complex public disclosure issues that public companies must confront.
In a criminal context, any hint of an investigation of a D&O may create enumerable pressures on the bank long before guilt or innocence is determined because of the importance to banks of their reputations and the confidence and trust of their customers.
From an individual's perspective, the protections that D&Os may avail themselves of are not without gaps. First, they should understand the quantity and quality of the protection provided by the company's D&O insurance. That means considering both the adequacy of its limits of liability, and the nature and breadth of the policy exclusions. Unfortunately, exclusions often limit the coverage available to D&Os.
Second, the governing certificate, charter or bylaws will usually provide D&Os and other employees with indemnification protection. But not all provide for the advancement of expenses to the extent permitted by law when charges are first alleged against a D&O. This is critical to the defense of an individual, since D&Os and employees who do not have the resources to hire their own lawyers are often at a significant financial disadvantage if their legal costs are not reimbursable until they prevail. However, even if the advancement of expenses is permitted, individuals are often left to fend for themselves because federal law limits the extent to which a bank or its holding company may allow its resources to be used in the defense of a D&O against certain criminal and regulatory charges.
Individuals in the banking business are already held accountable in significant ways. That does not suggest that improper actions do not occur. But it is to suggest that when the issue of accountability is considered, it should be evaluated in a factual context that fairly evaluates the extensive obligations, liabilities and penalties that are imposed on bankers.
Thomas P. Vartanian is the Chairman of the Financial Institutions practice at Dechert LLP. A former regulator at two federal banking agencies, he regularly represents financial institutions and directors and officers in matters discussed in this article.