COVID Crimes: White Collar Cases To Expect From The Crisis

By Stewart Bishop
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Law360 (May 11, 2020, 9:02 PM EDT) -- With much of the country on lockdown, many white collar cases and investigations have slowed considerably, but the COVID-19 pandemic and resulting economic fallout are expected to bring about a wave of enforcement for activities such as price-gouging and insider trading.

Volatile markets, an economic downturn and a global public health crisis are likely to create a perfect storm for illicit activity and lead to cases under a range of statutes, experts say.

Federal and state prosecutors have stepped up efforts to combat price-gouging and hoarding of key supplies, such as masks and other personal protective equipment, under the Defense Production Act and state laws.

U.S. Attorney General William Barr in March directed the creation of a task force to focus on COVID-19-related market manipulation, hoarding and price-gouging, to be staffed by an experienced attorney from each U.S. attorney's office.

New York federal prosecutors made waves in recent weeks with a number of criminal cases brought against individuals as part of the nationwide crackdown, including the first-ever charges under the DPA since President Donald Trump signed an executive order invoking the law in response to the pandemic.

Former state and federal prosecutor Erin Harrigan of Gentry Locke told Law360 she thinks the recent cases are just the beginning of what will be a very large effort to pursue prosecutions of violators of hoarding and price-gouging laws. Harrigan expects not only federal prosecutors and investigators to look into high-priced protective equipment, but also states' attorneys general, who are doing their own investigations and receiving consumer complaints.

"There are price-gouging laws on the federal level, but there are also price-gouging laws in 36 states, and those were triggered by declarations of emergencies, so a business that is engaging in sales of this equipment has exposure on both fronts," Harrigan said.

Complicating matters is the fact that industries currently affected by anti-price-gouging provisions are not the ones usually affected by laws such as the DPA. While construction, insurance and other businesses that play a role in responding to natural disasters such as hurricanes have compliance policies in place, suppliers of personal protective equipment, or PPE, and other affected materials may not, Harrigan said.

"They are not used to having their supplies of PPE, for instance, scrutinized," Harrigan said. "They don't have protective measures to make sure they're doing things like, are they actually tracking what the price is? Are they tracking what are the laws that apply to them at this point?"

Given the amount of money that has been distributed by the federal government due to the crisis, False Claims Act cases and health care fraud prosecutions could also increase, said Timothy P. O'Toole, the head of Miller & Chevalier Chtd.'s white collar group.

"I've seen a number of claims being made about what particular drugs and treatments can and cannot do, and to the extent those are potentially false, I think you'll see some focus on that sort of conduct," he said. "After the pandemic is over, I think that's what people will be looking back towards — were people and companies trying to exploit the emergency to make money through fraud?"

Apart from explicit COVID-19-related crimes, experts say a host of other fraud prosecutions are likely to arise from the crisis.

Nicole Sprinzen, a former federal prosecutor and vice chair of Cozen O'Connor's white collar group, said a situation where competition is difficult and markets are volatile can create an environment for financial crimes.

"I think it's the perfect storm for certain kinds of conduct, like antitrust charges that may later get filed," Sprinzen said. "Anti-competitive activity is something that tends to thrive in those conditions."

Former federal prosecutor David Miller of Greenberg Traurig LLP noted that market corrections often reveal prior fraudulent conduct, namely Ponzi schemes, offering frauds, boiler rooms and the like.

Miller also said there's likely to be a lot of enforcement in the area of insider trading amid the pandemic. The U.S. Securities and Exchange Commission's Enforcement Division in late March warned that given the current situation with COVID-19, corporate insiders are learning new material, nonpublic information that may hold greater value than it would under normal circumstances and may be accessible to a greater number of people.

"Recent reporting of potential DOJ and SEC investigations of COVID-19-related trading by members of Congress highlights that the government will use a variety of legal mechanisms, including the STOCK Act, to police insider trading," Miller said, referring to the Stop Trading on Congressional Knowledge Act, which says that Congress members and employees are not exempt from the laws and rules that prohibit insider trading.

Another area that is ripe for enforcement is mismarking and valuation fraud by asset managers, which Miller said increased after the 2008 financial crisis.

"During periods of economic turmoil, the valuing of illiquid assets becomes challenging," Miller said. "That's partly due to the decreased visibility you have into valuation mechanisms used by asset managers and hedge funds, etc."

Miller said mismarking and valuation fraud is a significant priority for the DOJ and SEC, and he believes a new round of enforcement actions may be coming in the next few months.

"I suspect that come late summer to fall, white collar and securities practitioners are going to be very busy," Miller said.

--Editing by Breda Lund and Michael Watanabe.

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