Citing a “troubling return” to the kinds of risky behavior that led to the 2008 financial meltdown, Attorney General Eric Holder called on Congress Wednesday to sweeten “paltry” financial incentives for corporate insiders who blow the whistle on white-collar crime.
In remarks prepared for delivery in the same week that Lehman Brothers’ collapse sent financial markets reeling six years ago, Holder said the government has an opportunity “to leverage the insights, the experience and the lessons learned from investigating the last crisis to the potential cases unfolding before us today.”
Criticism has rained on the Justice Department for years over its failure to criminally prosecute senior officers of banks that peddled highly risky mortgage securities as part of a chain of deception that led to a burst of the U.S. housing market.
Speaking at the New York University law school not far from where he was raised, Holder noted that the department recently obtained guilty pleas from the Swiss bank Credit Suisse and the French bank BNP, ending speculation that some banks are too big to prosecute.
“We have put that myth to rest once and for all,” Holder said.
But he acknowledged the difficulty and complexity of reconstructing crimes after the fact to build criminal cases against senior officers, who often are insulated from illicit activities, have advice-of-counsel defenses or have shielded themsleves with artfully written disclosures.
“It’s important to secure the added legal tools necessary to police illegal activities in real time,” Holder said, meaning that the department needs cooperating witnesses such as whistle blowers.
The federal False Claims Act offers those who alert authorities to scams against the government a reward of up to one third of what investigators recover for taxpayers – a figure that Holder said has led to recoveries of more than $22 billion since 2009.
However, he said that the Justice Department has made increasing use of a 1991 law, passed after the savings and loan crisis of the 1980s, to develop novel mortgage-related cases accusing financial institutions of committing fraud against themselves. Those cases, while producing no criminal prosecutions, led to major settlements with JP Morgan, Citigroup and Bank of America, Holder said.
The problem, he said is that the whistleblower provision in that law caps the reward at $1.6 million for an individual who might risk his career to cooperate with investigators. He called that “a paltry sum in an industry in which, last year, the collective bonus pool rose above $26 billion and median executive pay was $15 million and rising.”
While $1.6 million normally would be viewed as a windfall, he said, that reward “is unlikely to induce an employee to risk his or her lucrative career in the financial sector.”
He urged modification of the Financial Institutions Reform, Recovery and Enforcement Act, known as FIRREA, to increase incentives, perhaps to the same level as under the False Claim Act.
Holder said the change “could significantly improve the Justice Department’s ability to gather evidence of wrongdoing while complex financial crimes are still in progress – making it easier to complete investigations and to stop misconduct before it becomes so widespread that it foments the next crisis.”