Full Force: Financial Fraud Task Force Given Broader Mandate

In Washington, it often seems that forming a new task force falls somewhere between convening a blue-ribbon panel and conducting a fact-finding mission on the list of things to do when you need to look like you're doing something.

The November announcement of the new Financial Fraud Enforcement Task Force, however, may not merit the usual skepticism. With representatives from 23 federal agencies, plus relevant inspectors general, the task force clearly has great breadth. More importantly, it has ample funding. The Fraud Enforce- ment and Recovery Act (FERA), enacted in May, devotes substantial new resources to financial crime enforcement.

"This will be effective in increasing the amount of financial fraud investigation because they've actually put some money behind it," says Rodger Heaton, a partner at Hinshaw & Culbertson and a former U.S. attorney for the Central District of Illinois. "The task force is not just a label--it has just short of $250 million per year for 2010 and 2011. When you spend several hundred millions of new dollars, you will see a substantial infusion of new FBI agents and prosecutors devoted to financial crime enforcement."

The task force will not likely alter the fundamental nature of corporate and individual fraud prosecution, experts say. But if it creates the intended level of interagency collaboration, investigators and prosecutors will bring a whole new level of sophistication to the table.

Task Force 2.0

The new task force actually replaces the Corporate Fraud Task Force, which was created by the Bush administration in 2002 after Enron, Worldcom and a litany of other corporate scandals.

"That was a pretty effective task force," Heaton says. "It prosecuted about 1,300 executives, including more than 200 CEOs."

But the Bush task force was more limited in its scope and mandate. It consisted principally of the Justice Department, FBI and state attorneys general. Bank regulators were involved only tangentially, and in the early years, the SEC did not play a major role. The effort was primarily focused on bringing to justice the individuals responsible for accounting, audit and backdating fraud.

In contrast, the Obama administration is casting a much wider net. The current financial crisis was precipitated by financial products and practices that crossed traditional regulatory boundaries, or simply slipped through the cracks.

"Unfortunately the government is not very nimble when it comes to adapting to changing global financial instruments and entities," says Wendy Wysong, a partner at Clifford Chance and a former federal prosecutor. "Particularly with regard to prosecution, they really didn't understand the marketplace."

Unpacking blame and delivering appropriate punishment in the current landscape requires a multidisciplinary approach. The new initiative will delve into mortgage fraud, health care fraud, securities fraud, abuse of TARP funds and other government handouts, and discrimination in lending and financial markets--in addition to the corporate focus of the previous task force.

"As financial crimes have become more complicated, it really requires a broader spectrum of expertise to understand what's going on," says Scott Meyers, a partner at Ulmer & Berne.

Play Nice

In addition to sifting through the rubble of the recent economic meltdown, the new initiative aims at preventing the next one--an adjustment that will test just how effectively such a large group of agencies can work with each other.

"To fight sophisticated financial crime you need more integration, more collaboration and more information sharing, so you don't just have a 23-headed monster running around without any coordination," Meyers says.

Traditionally, law enforcement's only role in crime prevention comes in the form of deterrence--the notion that would-be criminals will think twice when they see others face harsh punishment. The new task force will take that one step further, and engage in active corporate outreach and education efforts.

"They will be talking to good corporate citizens to learn how particular industries work. They want to understand what financial institutions and corporations are trying to do," Wysong says. "I wouldn't be surprised if they had town hall meetings where C-level executives are invited to talk with the agencies."

The concept is that if regulators and enforcers better gather and share information on current business practices, they can nip the riskiest behaviors before they blossom into full-fledged crises.

"It looks good on paper, but the reality is that these agencies are notoriously uncooperative," Meyers says. "The SEC and DOJ have been in turf wars forever. If they can overcome their own internecine squabbling and actually coordinate, there's an opportunity to have a meaningful impact. And to be fair, if you look at the recent cases that the SEC and DOJ have brought, they are collaborating more than they have in the past."

Leaders Needed

Buffeted by the past two years, agencies may actually be more open than usual to change. The SEC was so burned by its failure to catch the Madoff Ponzi scheme that it may be particularly predisposed to a new model. But ultimately the success of the Financial Fraud Enforcement Task Force comes down to leadership.

"The DOJ has been labeled the leader," Heaton says. "The attorney general is not going to do it personally. The DOJ announced that the deputy attorney general, David Ogden, would be [Attorney General Eric] Holder's leader for DOJ for the task force."

But just two weeks after the task force was unveiled, Ogden announced he would step down Feb. 5 and return to private practice.

"So immediately you have the possibility of a leadership challenge," Heaton says. "His successor needs to be somebody with credibility and charisma and the ability to make the task force work."

Only time will tell whether the task force proves to be merely another ambitious policy initiative.

"There are definitely substantial infusions of new enforcement resources for white-collar investigations and prosecutions," Heaton says. "At a minimum, corporate counsel can expect the number of financial fraud investigations to increase. There are thousands pending now, and that's only going to increase."

Contributing Author

Steven Andersen

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