Remarks as prepared for delivery
Thank you, Samantha [Greves]. It is a pleasure to be with you this morning. I appreciate the opportunity to be part of the SCCE’s (Society of Corporate Compliance and Ethics) annual gathering of ethics and compliance officials.
I first want to thank you for what you do. You are out there on the front lines – ensuring that companies develop and maintain a culture that values lawful and responsible corporate conduct, training employees to understand what that means day to day in the marketplace, reporting conduct that is inconsistent with that culture and helping management take appropriate action to address problematic behavior. And where there is a problem, you are often first responders – on the scene and gathering facts before anyone else. You play a crucial role in identifying possible misconduct at the earliest possible stage and correcting course to minimize damage to the public, to the economy, to the federal fisc, to your shareholders and to your company’s reputation.
Over the years I have seen this from a variety of perspectives – as an outside counselor to companies trying to come to grips with allegations of wrongdoing and learn from past mistakes, as an antitrust enforcer at the Federal Trade Commission and the Antitrust Division of the Justice Department and in my current position overseeing a large part of the department’s civil litigation. The department investigates and brings cases related to the cleanliness of the air we breathe and the water we drink. We bring actions to protect the safety of the food we eat and the medicines essential to our health. We ensure competitive markets, protect the public fisc, enforce our tax laws and defend the principle that equal justice is a right and not just a slogan.
The Department of Justice vigorously pursues wrongdoing in all these areas. But our resources are limited. And we depend on you – every day – to ensure compliance with the laws that help preserve the safety and security of our nation, its people and its economy.
Now, we all recognize that in any industry, despite your best efforts, training and self-policing may fail to prevent or detect misconduct. And at some times in some industries, the system breaks down more broadly, and certain practices take root, not just in one company or in isolated pockets of an industry, but much more widely. When that happens, the public deserves a vigorous law enforcement response.
You may know the example I have in mind. The recent financial crisis – the Great Recession – was in large part triggered by systemic abuses in the packaging and sale of residential mortgage backed securities, also known as RMBS. It exposed a stunning breakdown in the ethics, the training and the in-house compliance efforts of financial institutions here and around the world.
The close nexus between RMBS abuse and the broader financial and housing crises has been well documented. If you read The Big Short or saw the movie, you get the idea. For years the financial industry peddled hundreds of billions of dollars of securities consisting of residential mortgage loans. Investors bought the securities to receive a stream of payments as homeowners made monthly mortgage payments. Investors were assured by the banks that these securities contained quality mortgages. But the growing demand for RMBS and their profitability for financial institutions tempted banks increasingly to include in these securities – without disclosure or with false disclosures – home loans of ever decreasing quality. That practice, in turn, encouraged even more aggressive generation of mortgages that should never have been issued, saddling many homeowners with home loans they could not afford. When the bubble burst, these securities gave way to cascading losses that wiped out investors from Wall Street to Main Street. Homeowners suffered on multiple fronts. They were forced to absorb the shock to the financial system, along with its effects on savings and employment; and they found themselves with homes worth a fraction of their claimed value, facing foreclosure and the prospect of neighborhood destabilization.
Unfortunately, this was not a situation limited to a small group of rogue actors within the financial sector. Institution after institution failed themselves and the American public. They disregarded laws; they abandoned internal controls; they misrepresented – indeed, some flatly lied – about the RMBS products they were selling. And they ignored or overrode those who sounded a cautionary note.
In 2012, the President, in his State of the Union address, responded by calling for the formation of a targeted effort to “hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.” In short order, Attorney General Holder formed the Residential Mortgage Backed Securities Working Group as part of the Financial Fraud Enforcement Task Force, combining the leverage and insights of a broad collection of state and federal enforcement authorities. The goal was to ensure accountability for lawbreakers and relief for those victims whose lives were upended by this misconduct, all while keeping an eye on the future to try to prevent this devastating type of conduct – or any comparable conduct – from again metastasizing throughout the American economy.
The government response is still a work in progress. But I can report that the effort has thus far yielded some real results. The United States and its partners in the working group have secured almost $46 billion in penalties, compensation and consumer relief relating to misconduct by ten different financial institutions. We imposed over $16 billion in penalties, including the five highest civil penalties ever secured through the FIRREA statute – the law that allows for the imposition of a civil penalty where the department can show by a preponderance of the evidence that a financial institution engaged in fraud.
In each of these cases we obtained from the bank a detailed statement of the fundamental facts uncovered through our investigations. The admissions are revealing and deeply troubling. Bank after bank has acknowledged that, despite offering assurances to investors about the quality of the home loans underlying these RMBS, they knew better. Banks admitted that they told investors that the loans were associated with houses of certain minimum values, when the banks’ own analyses showed definitively that these values were wildly overstated. The banks admitted that they knew that homeowners had less equity in their homes than the banks represented to investors; in fact, many homeowners were “underwater” from the get-go – they owed more on their homes than the homes were worth at the time the mortgage issued. Banks admitted that they told investors that the borrowers associated with these mortgages would be able to make all required payments on these loans, when internally, the banks recognized time and time again that this was simply false. The banks also admitted that they assured investors that the loans complied with all applicable legal requirements, when the banks were well aware that these loans were often fraudulent or issued in violation of laws prohibiting deceptive or abusive lending. The banks internally recognized the myriad and escalating problems associated with these loans, with one bank’s internal documents recommending that the bank “should start praying” because of a sense that it was “amazing that some of these loans were closed at all.”
Despite knowing the flawed nature of their product, the banks continued to sell, sell, sell – motivated by the desire to pull in quarter after quarter of RMBS profits, without regard to their duty to investors and the potential for a concussive effect on the American economy.
Assessing substantial penalties and securing acknowledgment of underlying bad conduct were steps in holding banks accountable for their recklessness. But investors lost untold billions in these securities. By coordinating our enforcement efforts with credit unions, home loan banks, the FDIC and state investors, the RMBS Working Group obtained billions of dollars in compensation for injured investors.
The settlements also secured relief for homeowners around the country who were injured when the bubble burst and who saw their property values plummet, refinancing opportunities vanish, and foreclosures spike. Our settlements to date have required banks to provide $15 billion in consumer relief designed to help alleviate the burdens faced by individual homeowners and the housing market generally. The relief includes mortgage modifications, reductions of burdensome interest rates, new loan origination activity targeting underserved populations, investments in foreclosure prevention and legal aid and investments in affordable housing.
As part of our settlements, independent monitors evaluate the consumer relief the banks are obligated to provide. And the initial monitor reports show we are making progress:
- To date, some 140,000 loans have been modified as a direct result of these settlements.
- In the Bank of America settlement, the average affected borrower had her mortgage written down by $132,000, or an average of over 50 percent of the mortgage.
- The settlements reduced the outstanding debt obligation so that many homeowners were no longer underwater. In one settlement, the average loan-to-value ratio was lowered from 175 percent to 75 percent – meaning those homeowners went from owing 75 percent more than the value of their home and having no equity, to owing less than the value of the home and having 25% equity in the property.
- The settlements also mandated reductions in mortgage interest rates for homeowners misled by lenders who set interest rates deceptively low at the front end, with hidden terms that would result in a dramatic (and unaffordable) rate hike soon after the mortgage was securitized. In the Citibank settlement, for example, interest rates have been reduced by 50 percent.
- These interest and principal reductions work to make monthly payments more sustainable. In one settlement, borrower payments were reduced by approximately $600 per month – nearly 38 percent.
- Settling banks also committed to hundreds of millions of dollars in investments in affordable housing. By the time this financing is fully deployed and construction completed, the settlements will result in thousands of units of new, affordable housing.
- Under these settlements, approximately 121,000 new borrowers have been issued mortgages. As you all know, the financial crisis resulted in a significant tightening of the credit markets. The effects of this tightening were especially profoundly felt among certain vulnerable populations. Our RMBS settlements created opportunities for thousands of new homeowners.
Summary of RMBS and Consumer Relief Activity
Total Number of Resolutions
6 Settlements, Involving 10 Financial Institutions
Over $16 Billion
Total Relief Commitments to Date
Over $15 Billion
140,000 Loans Modified, With Principal Reduction, Rate Reduction, Or Both
New Origination Activity
Mortgages Issued to 121,000 New Borrowers, Including Activity with Low and Moderate Income Borrowers, and in Hardest Hit Geographical Areas
Financing for Affordable Housing
Over $500 Million to be Invested in Affordable Housing
These early results represent just the beginning. Banks are still in the process of fulfilling their consumer relief commitments.
The RMBS Working Group continues its work too. Although I can’t say anything about pending law enforcement matters, I can tell you our work to hold accountable those who engaged in wrongdoing is far from finished.
But I think we all agree that the nation would have been better served if we had not had to go down this road in the first place – whether because banks never engaged in this conduct, or because the industry took the necessary steps to detect and close out the bad behavior as soon as it surfaced.
We also could have resolved many of these RMBS cases more quickly if the financial institutions involved in the conduct had decided early on to cooperate with the working group investigations. For the most part that did not happen. The government built these RMBS cases from the ground up – reviewing millions of emails, texts, and business records; transcribing recorded audio; talking to hundreds of witnesses; and deciphering dense and technical tomes of financial information.
Now, no company is obligated to cooperate in an investigation. No one is required to settle potential charges. No one needs to surrender its right to put the government to its proof at trial. Those are givens.
But each of the financial institutions I’ve discussed so far did ultimately settle and admit to the facts demonstrating its wrongdoing. Each presumably incurred significant legal costs over many years. Each prolonged the period in which a cloud of uncertainty hung over the institution. And each paid a lot more than it would have if it had cooperated early on.
As I noted, whether to cooperate with the government in these matters is a choice companies need to make. The RMBS banks chose not to. And yet when some of these financial institutions approached us about settlement, they, through their lawyers, claimed to have cooperated fully with our investigation. They argued for some sort of significant cooperation credit. We dismissed the arguments quickly because they so lacked merit.
But that did get me to thinking. The ex post facto effort to claim to have cooperated with a DOJ civil investigation is not unique to banks and to RMBS matters. We hear the argument all of the time. And so often it lacks any credible basis. To clear up any misunderstanding, I thought it might be productive to take a few minutes to elaborate on our view of what does and what does not constitute meaningful cooperation in a civil law enforcement investigation.
I recently issued new guidance within the department on cooperation in civil enforcement matters. This guidance makes clear that the department encourages productive self-disclosure and cooperation from would-be defendants in civil enforcement matters. The department often has latitude to determine the contours of an appropriate resolution – discretion that can and will be exercised to credit significant and timely cooperation.
What do I mean by this?
As a threshold matter, consideration for cooperation credit is only available where an entity has satisfied the requirements of the department’s Individual Accountability policy. Defendants that want credit for their cooperation must disclose all facts relating to the individuals involved in the wrongdoing, no matter where those individuals fall in the corporate hierarchy. This is core to the individual accountability principles articulated by the Deputy Attorney General last fall. We will not credit cooperation unless this threshold requirement has been met.
Outside of this threshold requirement, the specific steps that may earn cooperation credit will necessarily vary: Steps that may assist the investigation in one matter may be unhelpful (or counterproductive) in another. But some commonalities emerge across the civil enforcement caseload.
Cooperation should be proactive; that is, the company should materially assist us, including by disclosing facts that are relevant to the investigation, even when not specifically asked to do so. It may involve, in part, the company describing its own conduct and pointing us to inculpatory documentary evidence, such as emails and text messages. And it also may involve providing documents or access to witnesses that the department might not have obtained through compulsory process – such as providing information that the government did not know about or did not recognize would be significant, and therefore did not subpoena; providing summaries of evidence prepared specifically to assist the government’s investigation; providing reports to the department that compile data in a manner that is helpful for the department and that the department could not readily achieve on its own; encouraging individuals with knowledge of the relevant conduct to cooperate with the investigation; or providing information that might otherwise not have been discovered in the ordinary course of the investigation.
The value understandably depends on the timeliness: Cooperation that calls our attention to a problem that we previously did not know about at the early stages of an investigation is substantially more helpful than cooperation after we have invested significant time and energy in exposing problematic conduct. And little or no cooperation credit will be afforded in situations where the supposed cooperation occurs after the department has completed the bulk of its investigation. A company should come in as early as it possibly can, even if it has not completed an internal investigation. A company will not be disqualified from receiving cooperation credit simply because it doesn’t have all the facts lined up on the first day; rather, under those circumstances, we expect that cooperating companies will simply continue to turn over the information to our lawyers as they receive it.
Additionally, a company or individual will be considered for credit where it provides information that allows the department to secure resolutions that are more significant – meaning, where a cooperator enables the government to pursue conduct that might not otherwise have been addressed. This type of cooperation may involve detailing relevant conduct by a different party (or parties) participating in the same or similar scheme or that enables the department to net greater recoveries.
The department may also consider other actions by a corporation or individual that lead to a more positive result. Such actions may include an acknowledgment of responsibility or efforts that help assist victims of the relevant conduct. These actions are distinct from cooperation, which is focused on helping us uncover and understand the underlying conduct. But they can be important additional factors in the department’s determination of an appropriate outcome.
I’ve already spent some time talking about the potency of victim relief. As I mentioned earlier, in several RMBS Working Group matters, settling banks agreed to provide billions of dollars in relief for homeowners and those seeking to enter the housing market. We considered these commitments in deciding on the other terms of settlement as to those banks.
Although cooperation may take many forms, not every interaction between the government and a party under investigation will constitute cooperation. As we told the RMBS banks, mere compliance with legal requirements such as subpoenas, or one-sided presentations urging the department to decline an enforcement action, do not measure up. Indeed, the department may view some such activities – including the belated provision of information that an entity was legally obligated to produce – as impediments to investigative work rather than genuine examples of cooperation.
On the other hand, a company that offers meaningful cooperation and timely victim relief should be afforded a more favorable resolution than a company that fights kicking and screaming until the end. My internal guidance makes the point that the department often has latitude in deciding how to resolve civil cases – discretion that can be exercised to credit meaningful cooperation, including through an appropriately reduced monetary sanction or penalty. If it’s helpful, you can think of this as analogous to a “downward departure” where a criminal defendant has provided substantial assistance to the government’s investigation.
We know meaningful cooperation when we see it. In a recent civil investigation, a prescription drug chain overbilled the government for orders of prescription drugs that were never picked up by customers. The relevant evidence involved handwritten pick-up signature logs kept at the cash registers of thousands of pharmacies. The company decided to cooperate early and in ways that mattered. In addition to the thousands of pages of the handwritten logs, the defendant produced extensive spreadsheets reflecting the information on the logs. To accomplish this, the defendant had a team enter the information line by line into a format where it could be analyzed. The defendant also shared its analysis using the information from the logs. This effort avoided the need to spend months and significant government resources tabulating the logs.
Let me end where I began. As officials on the front line, responsible for establishing and maintaining a corporate culture that values business ethics and corporate responsibility, you are well-positioned to help your company identify problematic behavior, to work with us in understanding its nature and extent, and to help secure a prompt resolution that ensures accountability and at the same time puts the problem behind you. We encourage that approach; and you will find a willing partner at the department should you choose that path.