COVID Crimes: Feds Set To Boost White Collar Crisis Cases

By Stewart Bishop
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Law360 (June 19, 2020, 6:26 PM EDT) -- White collar enforcers say they are pressing forward with investigations and enforcement actions during the COVID-19 crisis, hewing to their traditional priorities while increasingly targeting pandemic-related actions.

While the restrictions imposed by the pandemic have presented some roadblocks, such as the inability to do in-person witness interviews, prosecutors and regulators say they're forging ahead with a growing range of cases related to COVID-19, in addition to traditional enforcement actions.

At a panel discussion at the American Bar Association's virtual white collar conference Wednesday, outgoing U.S. Department of Justice Criminal Division head Brian Benczkowski said the division has brought eight cases thus far in connection with the U.S. Small Business Administration's Paycheck Protection Program.

"I can assure you there will be many more prosecutions that are coming," he said

White collar attorney David Rybicki of K&L Gates LLP told Law360 that whenever there's a race for money provided by government programs such as the coronavirus relief legislation known as the CARES Act, corners can get cut, often because of uncertain guidance and ambiguities at the outset of the programs. However, the government may not take that into account when bringing an enforcement action down the road.

"Regulators and enforcement agencies may be a lot less sympathetic to claims that there was ambiguity at the beginning of a program when they're looking at that conduct retrospectively," Rybicki said.

Benczkowski also spoke of health care fraud investigations related to COVID-19 testing, involving either the overcharging of the government for tests or the provision of bogus tests to individuals.

But more sophisticated COVID-19-related cases are in the works, and experts say they're on the lookout for a wave of enforcement actions involving insider trading, market manipulation, accounting fraud, disclosure fraud, and valuation fraud or mismarking.

Rybicki said the market volatility brought on by the crisis will be a major driver of the enforcement response to the pandemic. Companies may further find themselves at risk due to the difficulty in ensuring compliance programs and due diligence measures are being carried out by employees working remotely.

The U.S. Securities and Exchange Commission's Enforcement Division has made clear it is devoting significant resources to combat investor fraud related to the COVID-19 crisis. During the ABA's conference Wednesday, Enforcement Division co-director Steven Peikin said the agency has halted trading of securities of over 30 issuers who have made questionable coronavirus-related claims, and has brought five fraud actions against issuers and at least one senior executive.

Peikin also noted that the market volatility during the pandemic in some respects mirrors the market disruptions that took place during the global financial crisis of 2008. He said drawing on what the SEC learned in the aftermath of that crisis, the commission is now looking across a broad range of companies to see if past misconduct has been revealed or whether market disruption is creating opportunities for more misdeeds.

One area of expected heightened scrutiny during and coming out of the COVID-19 crisis is insider trading. Already, several U.S. senators have faced accusations of trading ahead of the market declines caused by the pandemic, based on information gleaned from Senate hearings. Sen. Richard Burr, R-N.C., last month stepped aside as chairman of the Intelligence Committee while an investigation into his stock trading played out.

Former federal prosecutor Nancy DePodesta of Saul Ewing Arnstein & Lehr LLP told Law360 that while the enforcement priorities of the DOJ regularly change, it's a no-brainer that insider trading is going to become a priority.

"We're going to see it not just with senators, but CEOs and company insiders. This is an area where I expect to see a large amount of enforcement," DePodesta said.

Another issue for public companies is the disclosures they make to investors during the pandemic, given the widespread financial strains on businesses.

DePodesta said it's a unique time, especially considering that disclosure filings might be delayed due to COVID-19.

"We've seen that when times are even good, there are questions about what information is disclosed and whether or not to disclose it, and that is just heightened in this environment," DePodesta said.

DePodesta noted the substantial resources the SEC is deploying right now to ensure that investors don't fall prey to fraud in light of unprecedented market conditions. She said she is advising clients to be ready to justify any actions to investigating enforcement entities.

David Oliwenstein of Pillsbury Winthrop Shaw Pittman LLP, a former senior counsel at the SEC's Enforcement Division, said he expects enforcement of disclosure requirements to be even sharper than it was in the wake of the 2008 financial crisis.

Oliwenstein noted the corporate bankruptcies that occurred around the time of that crisis, and the criticism at the time as to why the disclosures leading up to those bankruptcy filings didn't necessarily reflect the financial realities of the companies. He said there will likely be an expectation in the current climate that issuers describe risks in real time and not just wait until the worst-case scenario materializes.

"The SEC is an agency that learns from its past mistakes and adapts," Oliwenstein said. "The agency obviously was subject to a lot of negative attention following the financial crisis. I think that's something that the current leadership, particularly in the Enforcement Division, is going to be particularly attuned to this time around."

One apparent certainty is that prosecutors and regulators are preparing for a wave of enforcement matters when the pandemic slows down. At a conference last month, Brian Rabbitt, principal deputy assistant attorney general for the DOJ's Criminal Division, and James McDonald, enforcement director at the U.S. Commodity Futures Trading Commission, said they expect a groundswell of cases and trials toward the end of the year.

--Editing by Aaron Pelc and Michael Watanabe.

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