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Handling Anticipated “Cause”Prosecutions Arising out of theFinancial Crisis: Lessons Learnedfrom the W.R. Grace Case
Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States;Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and JSM, a Hong Kong partnership, and its associated entities in Asia. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.
David KrakoffPartner
December 16, 2009
Gary WintersPartner
Lauren RandellAssociate
Outline of Today’s Discussion
• Overview of the Grace prosecution and trial
• Cause prosecutions and the pressure to hold someoneaccountable
− Bear Stearns
• How cause prosecutions may impact the financial• How cause prosecutions may impact the financialindustry
• Risks and challenges in cause prosecutions
• Pre-trial and trial strategies
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Overview of the Grace Prosecution
and Trial
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Overview: Tragedy “Uncovered” by the Media
• Media storm begins with the “uncovering” of a tragedy
• Despite the new media attention, the situation wasalready well known to many
− Huge, known asbestos exposures from a decades-oldmining operationmining operation
− Government studies and inspections
• Company’s explanation drowned out by media outrage
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Overview: Indictment
• Pressure to hold someone responsible results in 2005indictment of W.R. Grace and 6 current and formerexecutives
• Charged conduct:
− Conspiracy going back to 1976− Conspiracy going back to 1976
− Substantive Clean Air Act violations
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Overview: Delay and Trial
• Four years of pre-trial wrangling
− Government creates novel legal theories, which arepared back by the defense
− Dozens of motions to dismiss and motions in limine
− Interlocutory appeals of unsettled legal issues− Interlocutory appeals of unsettled legal issues
• Three months of trial
• Less than two days of jury deliberation
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Overview: Verdict
• May 8, 2009, 10 years after story broke in Seattle Post-Intelligencer
• Grace and three individuals found not guilty on allcounts
− Two defendants dismissed prior to verdictTwo defendants dismissed prior to verdict
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Cause Prosecutions and the Pressure toCause Prosecutions and the Pressure toHold Someone Accountable
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Cause Prosecutions: The Pressure to Hold SomeoneAccountable
• Grace prosecution was an attempt to use the criminallaw to hold someone accountable for harm to acommunity
• Prosecutors face similar pressure today
− Collapse of financial firmsCollapse of financial firms
− Implosion of the mortgage market
• The inevitable result will be more criminalindictments
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Cause Prosecutions: The Pressure to Hold SomeoneAccountable
• The past is instructive
− Enron’s collapse led to overreaching against ArthurAndersen
• Admitted frauds by Madoff, Dreier, and others may makepublic more willing to believe that fraud is pervasive inpublic more willing to believe that fraud is pervasive inthe financial industry
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Cause Prosecutions: Bear Stearns
• First wave of prosecutions arising out of the financialmeltdown yielded the Bear Stearns prosecution
− Bear Stearns was the first of the major financialinstitution failure
• Two hedge fund managers charged with securities fraud• Two hedge fund managers charged with securities fraud
− Loss of $1.6 billion to investors
− Acquittal in November 2009 in trial before working-classBrooklyn jury
− Defendants still face SEC action
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Cause Prosecutions: Winnable
• Bear Stearns and Grace cases remind us that causeprosecutions are winnable
• Bear Stearns had many of the same dynamics as theGrace cause prosecution
− Supposed corporate malfeasance injuring largenumbers of peopleSupposed corporate malfeasance injuring largenumbers of people
− Public outrage
− Highly technical issues outside a jury’s frame ofreference
− Venue potentially permitting jury to exact revenge
− Mountain of supposedly incriminating documents
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How Cause Prosecutions May Affectthe Financial Industrythe Financial Industry
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Financial Industry Prosecutions: Financial Fraud TaskForce
• Financial Fraud Task Force established November 2009
• Coordinated effort of the DOJ, the SEC, Treasury, HUD,with involvement by a dozen other federal agencies andcooperation of state and local law enforcement
• Targeting fraud in the mortgage industry, securities law• Targeting fraud in the mortgage industry, securities lawviolations, and fraud in stimulus spending and financialbailout money
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Financial Industry Prosecutions: Financial Fraud TaskForce
• SEC and DOJ:
− “The task force's leadership . . . [will] investigate andprosecute significant financial crimes, ensure just andeffective punishment for those who perpetrate financialcrimes, address discrimination in the lending andfinancial markets and recover proceeds for victims.”financial markets and recover proceeds for victims.”
− “The task force . . . will build upon efforts alreadyunderway to combat mortgage, securities and corporatefraud by increasing coordination and fully utilizing theresources and expertise of the government's lawenforcement and regulatory apparatus.”
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Financial Industry Prosecutions: New ProsecutionsAnnounced Each Week
• December 7: New Century Financial Corp.
• Three former executives charged by the SEC
− Alleged securities fraud related to public statementsabout New Century’s subprime mortgage business
− “The SEC is devoting significant resources to identifyingand holding accountable those who committed fraud inthe subprime industry.”
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Financial Industry Prosecutions: CongressionalPressure
• December 9: Congress presses Justice Department tobring more fraud prosecutions against whoever isresponsible for the credit crisis and recession
• Lanny Breuer, Asst. Attorney General, Head of DOJCriminal Division, testifies:Criminal Division, testifies:
− The alleged crimes “took a long time in developing andhatching, and investigating them will take a long time,but they will be brought.”
− Bear Stearns acquittal “shows, of course, these are toughcases, but we're going to continue to bring them.”
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Financial Industry Prosecutions: Other Developments
• SEC is launching national specialized units focusing onsecuritized products, hedge fund fraud, and others
• Congress is considering various new laws, and agenciesare enacting new regulations for existing laws
− Consumer Financial Protection Agency− Consumer Financial Protection Agency
− New obligations, new prohibitions, new regulators
− Trap for the unwary
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Risks and Challenges in CauseRisks and Challenges in CauseProsecutions
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Risks and Challenges: Motivated Agencies
• Motivated agencies seeking to deflect criticism of theirown oversight or actions
− In the Grace prosecution, EPA was accused by the mediaand their own Inspector General of failing to stop theasbestos exposures in Libbyasbestos exposures in Libby
• SEC, the Federal Reserve, OCC, Treasury, and others,faulted for failing to prevent the economic crisis
− SEC Inspector General: “the SEC received more than ampleinformation . . . to warrant a thorough and comprehensiveexamination and/or investigation of Bernard Madoff and BMIS foroperating a Ponzi scheme”
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Risks and Challenges: Saturated Media Coverage
• Saturated, and critical, media coverage make it:
− Difficult for prosecutors to reject proposed prosecutions
− Even harder for defendants to tell their own story
• Montana coverage presumed guilt of Grace defendants
• Financial crisis and recession are the most important• Financial crisis and recession are the most importantstories of the past year, worldwide
• Steady drumbeat of pressure from activists may furtherlimit practical ability to avoid prosecution or trial
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Risks and Challenges: Us Versus Them Mentality
• Prosecutors emphasize the “us versus them” nature ofthe alleged crimes
• Goal is to convince jurors that company executives letgreed outweigh interests of company workers (Grace) orinvestors and homeowners (financial industry)investors and homeowners (financial industry)
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Risks and Challenges: Leveraging Civil Litigation
• Plaintiff’s bar may be involved in developing and feedinginformation to prosecutors
• Parallel SEC and criminal actions open door for discoveryin civil action to bleed over into criminal prosecution
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Risks and Challenges: Stretching the Law
• Existing law may not cover the alleged crimes, or mayrequire new, untested interpretations of law andregulations
− Grace prosecution involved a novel use of conspiracylaw, and the first interpretation of Clean Air Actlaw, and the first interpretation of Clean Air Actprovisions criminalizing releases
• Honest services fraud, the current darling of fraudprosecutions, may soon disappear as a prosecutorial tool
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Pre-Trial and Trial Strategies to
Position the Defense for Success
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Pre-Trial and Trial Strategies: Aggressive MotionsPractice
• Break down and pare back overly broad indictments
• Build credibility with the judge
• Link motions to dismiss with motions in limine, andultimately lay groundwork for favorable jury instructions
• In long pre-trial delays, limit the government’s ability tocontinually change its case
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Pre-Trial and Trial Strategies: Aggressive MotionsPractice
• Beyond limiting evidence, use motions in limine toeducate the judge:
− Explain complicated topics like derivatives
− Fundamental issues like applicable accounting principlesand market regulationand market regulation
− Show how many regulators cover the relevant market
− Explain what is a duty to report or disclose, versus whatprosecutors charge should have been done
• Don’t wait to simultaneously educate the judge and jury
• Bring inflammatory allegations back to reality in judge’smind
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Pre-Trial and Trial Strategies: Aggressive DiscoveryDemands
• Multiple government agencies likely to be involved
− Each agency may have relevant documents
− Each agency’s files should be considered to be underprosecutors’ possession, custody, or control
• Other agencies’ files may not be searched without• Other agencies’ files may not be searched withoutexplicit demand and Court order to do so
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Pre-Trial and Trial Strategies: Aggressive DiscoveryDemands
• Do not assume that Brady and Giglio obligations toproduce exculpatory evidence will be met, despite beingself-executing
− Explicitly demand categories of documents likely to exist
− Get the government on the record regarding its− Get the government on the record regarding itscompliance with its obligations
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Pre-Trial and Trial Strategies: Aggressive DiscoveryDemands
• Continuing reminders of disclosure obligations, evenduring trial
− May reveal lack of compliance and/or misconduct
• Monitor multiple forums for disclosure of relevantdocuments—civil litigation, Congressional investigationdocuments—civil litigation, Congressional investigation
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Pre-Trial and Trial Strategies: Explain ComplicatedConcepts Like Risk
• Explain how risk is evaluated to avoid being judged inhindsight
• Simplify complex financial transactions for lay jurors andjudge
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Pre-Trial and Trial Strategies: Conserve Resources
• Whether the company is charged along with individualsor not, the company is likely to be bearing the costs ofthe defense
• Coordinate defense to avoid over-trying the case andpresent a united front, particularly in conspiracy casespresent a united front, particularly in conspiracy cases
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Pre-Trial and Trial Strategies: Ex Post Facto
• With new laws and regulations targeting conduct seen tohave contributed to the financial crisis, indictments maysweep pre-enactment conduct in among post-enactmentallegations
− Aggressively use motions to dismiss− Aggressively use motions to dismiss
− At trial, emphasize the law and industry practice at therelevant time
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Pre-Trial and Trial Strategies: E-mails and Documents
• Put in the correct context: Documents that appeardamning when viewed on their own may be explainablethrough witnesses
− E-mails regarding a problem—excessive asbestosexposures or declining fund values—may be described asexposures or declining fund values—may be described asa cover-up, but really were part of the company’s effortsto address the problem
• Prosecutions arising out of the financial crisis are likelyto be based on e-mails
− Jurors are familiar with informal communication, andmay not view e-mails as automatically credible anymore
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Pre-Trial and Trial Strategies: Government Awarenessof Conduct
• Attack government awareness of the charged conduct
− The Grace defendants were alleged to have hiddeninformation about asbestos exposure, yet years ofgovernment studies showed government knowledge
• Regulatory oversight and public statements by a financial• Regulatory oversight and public statements by a financialdefendant may contradict the idea that information washidden or misrepresented
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Pre-Trial and Trial Strategies: Counter-Story
• Most significant lesson learned from defending theGrace prosecution: The importance of telling a counter-story
− Go beyond merely reacting and shooting holes in thegovernment’s theorygovernment’s theory
− Tell a more plausible story than the government’s story
• Tell a story through the government’s own witnesses
− Gets your story in front of the jury faster
− May require difficult decisions about whether to attackwitnesses’ credibility
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Conclusion: Prosecutors in CauseProsecutions Have Advantages, butProsecutions Have Advantages, but
Experience Shows CauseProsecutions Are Winnable At Trial
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