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Let’s Be Civil: Why the False Claims Act is Not a Criminal Remedy to Fraud

It is good to see that the New York Times and a Virginia Professor are attempting to hold the Justice Department accountable to prosecute fraud.

Here’s the issue, though. Let’s not let the use of criminal penalties or the call for criminal penalties divide us and thwart us from using the False Claims Act to fight fraud.

There are plenty of reasons to complain as James B. Stewart of The New York Times does when reporting on a fact of life for corporate crime.  The fact is that prosecuting the individuals in charge of major corporations is a hard thing to do.  He has made a serious critique of the government’s activity in this area.

The Times cites a scholarly book to complain that the people responsible for massive fraud schemes such as the Standard and Poors rating of mortgages were not criminally prosecuted.

The implication of Stewart’s article is that the Justice Department has let us down in enforcing criminal actions financial fraud:

“Yes, plenty of people have been prosecuted for mortgage fraud and other financial crimes since the financial crisis: The Justice Department has charged over 4,000 people with mortgage fraud alone, according to a spokesman. And the department has filed 46,000 white-collar crime cases since 2009.
Yet almost all of these are low-level employees with little or no name recognition. Hardly any top executives at the financial firms paying multimillion- and billion-dollar-plus fines for engaging in criminal behavior have been charged or convicted. (One exception is Lee B. Farkas, former chairman of the mortgage firm Taylor, Bean & Whitaker, who is serving a 30-year prison term.
Now, thanks to Brandon L. Garrett, a specialist in corporate prosecution at the University of Virginia law school and author of the recent book “Too Big to Jail,” we know the notion that the government has been lax on individual corporate wrongdoers isn’t just folk wisdom.”

This is a pretty standard complaint, and, it is stunning just how bad the mortgage fraud issues have been and how few major executives were prosecuted. Those of us involved in filing fraud have heard tell of people who paid their mortgages being thrown out of their houses.  Millions were made and it’s been a mess. But collecting billions from the financial industry for fraud is not nothing (the way this article seems to imply).
We should remember that it’s a lot harder to prosecute these cases than it is to write about them in the New York Times (ok, and blog about them too).

Of course, I write this not to excuse criminal behavior (which of course should be prosecuted as Eric Holder states the DOJ does) but to remind potential whistleblowers that a criminal prosecution is out of the hands of the whistleblowers and their attorneys.

The False Claims Act is a civil, not a criminal remedy. The SEC whistleblower office puts the facts in the Commission’s hands.  We file our cases. It is the United States Government that has the authority to prosecute such cases.  The government can if it chooses prosecute a case criminally. That is not our role.  We start by providing the facts in a civil proceeding.  If you are looking for criminal prosecution as retribution on individuals, then chances are that you will be disappointed almost no matter what.

Worse, I worry about a danger at the heart of a potential movement towards “personal responsibility.” While I’m being paranoid, I fear for the False Claims Act.  Beware any movement that tries to create a way to shift corporate responsibility off to individuals (who will then be protected by the corporation anyway).

Absolutely, I’m for accountability by the major perpetrators of fraud.  Remember though, that sometimes all we can achieve, and it is not easy, is to get a favorable result from the company committing the fraud.

Some unscrupulous companies would gladly trade the very difficult prosecution that they can fight off in a criminal court for reduced whistleblower protections and rewards legislation.  Ultimately, they may get less liability and less likelihood of prosecution since the government needs the whistleblowers information most of all.  We must not let this become a trade. Absent the False Claims Act and its incentives for whistleblowers and the major settlements it produces, I see only a partially helpful system.

It is helpful to have serious critics of the government and its efforts to enforce these laws keep track of the government’s record.  But I hope they keep track of the most successful tools to fight fraud (the False Claims Act) at the same time.