October 3, 2005

The Multi-Agency Proceeding

10 min

Enforcement proceedings against financial institutions, their insiders, or their service providers now often resemble an Irish knot. This note is intended to help navigate those convoluted and unlucky turnings.

Enforcement proceedings against financial institution insiders always had the prospect of multiple agency involvement, if only by virtue of the FDIC’s insurance-based back-up oversight.  But the FDIC often simply deferred to other agencies when the FDIC was not the primary federal regulator. 

Today it seems to be more and more common for attorneys representing institution actors to be forced to deal with multiple enforcement sources. 

In the past couple of years, we have seen a huge variety of combinations.  Just recently we have seen:

  • An action involving the Federal Reserve Board, U.S. Attorney's Office, Main Justice (DOJ), state authorities, and the FDIC. 
  • An action involving the FDIC, DOJ and OTS.
  • An action involving the SEC, FDIC,  OCC and class action litigants. 
  • An action involving the OCC, OTS, HUD and the state insurance regulator.
  • An action involving the OCC, HUD,  U.S. Attorney's Office, and DOJ.
  • An action involving the state bank regulator, FDIC, SEC, and class action litigants.

Complicating many of these actions were multiple individual potential defendants, with differing levels of knowledge and responsibility.  One more complicating factor in many cases, of course, was the limited pool of insurance or other resources available to pay legal fees and, perhaps, claims.

Then, of course, to make life more interesting, Congressional committees may have an interest and their investigations may overlap criminal, regulatory and civil proceedings.  And ultimately, the institution’s investors and customers need to be satisfied that the institution remains intact and is still functioning well.

Strategies For A Quick Resolution:

We think it is unquestionable that our client’s goal is always to resolve the matter as quickly as possible.  Delay adds cost, leads to inflexible and positional bargaining, and keeps the client from pursuing other opportunities.   Moreover, early money is best.  Early settlements can sometimes be paid with insurance proceeds, which may be exhausted for latecomers.

Obviously, the first step is to try to persuade the regulator that the problem in fact does not exist or is much less severe than thought and can be remedied without enforcement action.  Usually, if discussions begin early enough, that works.  We do not talk much about the multitude of times an institution has a discussion with its regulator about a problem, explains in more detail, tweaks what is being done, and the regulator goes away satisfied.  Even after the lawyers get brought in, this dynamic is still possible. But if the primary regulator has already involved other government agencies, and invested its efforts and reputation in persuading the other agencies that a serious problem exists, that dynamic is largely foreclosed. 

If you cannot convince a regulator that the problem does not exist, your next step must be to try to fix the problem.  Usually, there is no simple solution, or someone would have fixed the problem as soon as a regulator brought it to light.  We recognize that some problems are incapable of solution without challenging the survival of the institution or the long term welfare of an individual client.  Nevertheless, massive efforts to solve the problem are likely to add considerable weight to later efforts to settle and only rarely impact ultimate determinations of liability.  (Obviously, the risk of such an impact must be carefully considered and the uncertainty of such a risk often deters clients from taking actions that would be in their best interest.)  Clients often recognize that they can throw themselves into solving the problem or throw themselves into preparing for a battle with the regulator.  Obviously, once a regulator gets interested, some of both needs to be done, but the question is where the balance is struck.

For the institution a solution may involve conducting an internal investigation.  In such a case, there is a substantial risk for any individual involved because the institution may decide to share with the regulator the results of such investigations, waiving attorney client privilege in the process. In some cases, the institution may not even have a choice in the matter, as most regulators believe that their right to complete access to information trumps any claim of privilege.  A individual has a difficult choice in such circumstances, when cooperating with his employer may involve undermining his later defense.  Sometimes the wisest course is to resign, even if the individual believes that his activities could be defended by the institution.

As with any dispute, being prepared to litigate is the best preparation for settlement.  War may be the last option of a diplomat, but it is an essential tool nonetheless.  It may be that, when your client evaluates the chance of success in litigation and weighs that against the settlement options that become available, the client may decide that litigation is preferable. 

Charles Hurwitz is a recent example.  After years of litigation, he seems to have prevailed, but he paid a substantial price.  Now he has even had some success in getting a district court order requiring the out of pocket portion of that price be repaid, although the FDIC has appealed.  It may be that this presages things to come, where the agencies are defeated or become more cautious about bringing claims.  We doubt it.  Few defendants have the resources of Mr. Hurwitz, and a target of an investigation by multiple agencies is very likely to be out-matched in resources. 

Advance preparation is key. Being prepared to litigate means drafting briefs on key issues early.  The question of whether to share such briefs with the regulatory agencies is a difficult one.  The decision depends on a strategic evaluation of whether the brief is likely to have a positive impact on discussions with the agencies or, rather, will do no more than educate the agencies so that they have time to develop arguments highlighting weaknesses in your position.   In our experience, most agencies will be more likely to find a reasonable resolution of the matter if you have a substantial argument that the criticized activity is defensible.  The agencies generally are unlikely to abandon their claims, though, even if you think you have shown that the claims are baseless.  It may be difficult to decide whether this “refusal to be persuaded” is bureaucratic inertia (it is never a lack of intelligence) or simply an inability on your part to set aside your passion for your arguments and view them objectively. 

Even if you provide a briefing, it is almost unheard of for the agencies to provide you with any written response.  If you develop a rapport, they may point you to cases or actions that they think rebut or diminish the import of what you wrote.  Gaining their perspective on the law can be as advantageous as gaining their perspective on the facts.  You will know better where to place your focus and your efforts at persuasion.   Moreover, it will sometimes be the only way to achieve clarity on exactly what the agencies think your client did wrong.

If favorable resolution of a small number of issues would completely defeat the claims of the agencies, the rationale for litigating before settlement is strengthened, as is your ability to negotiate for a lesser sanction. 

Settling with Multiple Antagonists:

Flowing naturally from the goal of an early resolution is an initial strategy of seeking to simplify the investigation and proceeding.  As much as possible, it is preferable to transform a matter involving multiple agencies to one involving just one agency, or more realistically, one where one agency takes the lead role in negotiations. 

It may be possible to achieve this result even if the issues asserted by the interested agencies do not wholly overlap.  In the simplest case, where most issues do overlap, you may still need to expend substantial effort to persuade the agencies to work cooperatively.  When this works well, it may be because of a remarkable effort by a single individual at one of the agencies who takes upon himself or herself the responsibility of achieving such a result. 

The burden is on the defendant to create a situation in which a global resolution can occur.  Early in the matter, it is critical to identify the agency that is most interested in pursuing claims against your client.  You should make every effort to persuade the lead contact at that agency that a settlement will proceed more quickly with input from and the consent of all interested agencies.  While the regulatory agencies have vast resources, those resources are not unlimited, and they are interested, like defendants, in reaching cost effective resolutions.  Moreover, they will understand completely why your client simply cannot settle with one agency until it achieves a resolution with the others. 

A first step toward a global settlement is to encourage that primary contact to play a central role in coordinating the actions of the agencies.  Your best hope in reaching a quick and comprehensive settlement is to involve a capable lead attorney from one agency, who is trusted by the other agencies to evaluate the facts, to relate those facts to the claims of the agencies, to accurately and frequently report to the other agencies the progress that is being made in the investigation and the negotiations, and who will devote the time to the matter that it deserves to move it to a reasonable conclusion. 

Obviously, while the agencies will share information, they also will conduct and evaluate their own investigations.  As the investigation progresses, though, your goal is to get every party with a potential claim to the same table.  Unless an agency expressly asks you to meet with them alone, invite every agency to every meeting.  This provides you with opportunities to encourage the agencies to let a primary contact take the lead for them all.  Offer to address issues later that are unique to the mission or powers of the agencies that defer.

Once you have achieved substantial progress in negotiation with a lead agency, try to identify the unique issues that are critical for each agency.  A settlement negotiation that demonstrates some initial progress develops a momentum and an inertia all its own.  Occasionally an agency may give way on a position it ordinarily espouses so as not to undermine a global settlement.  More often, the agencies may find ways to acknowledge the real monetary penalties being paid by the client so that the settlement with each agency properly reflects that it is consistent with past actions of the agency, even though the defendant is making only one payment.

Finally, once a settlement is achieved, a press release is almost always issued by the agencies.  You would like the agencies to issue a release jointly with the defendant but it is rare for the banking agencies to be willing to make any modifications in what they write.  The crafting of the settlement agreement itself is really the only way to affect their release, because they will report what the agreement says.  If the agreement contains explanations or exculpations, the release will likely reflect those as well. 

Most defendants wish to issue their own press release, and we encourage them to do so.  Obviously for institutions who are public filers, the release must be written with due concern to the SEC’s views about whether  the institution’s characterization of the settlement is at all misleading.  One step along the way toward avoiding any such risk may be to submit the release to the settling agencies’ before it is issued.  They are only rarely willing to react, and their review is not a guarantee of the SEC’s concurrence, surely, but because the financial regulatory agencies do take substantial umbrage at anything they view as a misstatement, it is a safety valve of sorts.

It is important for institutional defendants to issue such releases, despite the risk.  Public filers may be obligated to do so.  Even for others, though, their employees, customers and investors alike want reassurance that the institution is not going to fail, and that its functioning and its reputation will not be seriously damaged -- or if it has been, that it can be repaired.   A press release may be critical for providing such reassurance, especially one demonstrating how reasonably the institution has worked with the regulators, how manageable a settlement has been achieved, and how the institution has arranged itself and events to reach a successful resolution of the problem and to ensure its future non-recurrence.

Copyright: Glancz & Beaty