Déjà-vu All Over Again: Government Enforcement in Response to Economic Crises
With the dust from enforcement actions stemming from the post-2008 recession beginning to settle, COVID-19 (“Coronavirus”) has thrust the world into an uncertain economic future. Companies must confront the obvious public health implications of COVID-19, as well as pandemic-induced shocks to supply chains, demand conditions, and business operations. Many will debate the similarities and differences between 2008 and 2020, but one similarity is apparent and inescapable: a crisis requiring trillions of dollars of government stimulus invites significant regulatory oversight and enforcement scrutiny. This oversight and scrutiny will look not only for the causes of the crisis, but also reactions thereto, by both public and private actors. Company actions, including those viewed as necessary to respond to the crisis, will be evaluated by government investigators in hindsight with a rearview mirror after the crisis has subsided and in the light of subsequent events and perceived consequences not known at the time of the crisis. If the past is prologue, the following areas will draw the most governmental interest and may require extra diligence.
1. False Claims Act Investigations
The False Claims Act (“FCA”), 31 U.S.C. §§ 3729-3733, prohibits false statements or misrepresentations to the government in connection with billing, contracting, or procurement. It provides for civil penalties and treble damages when the party submitting the claim knew, or should have known, the statement was false or misleading. It also applies to “any person” who “causes” a false claim, including companies, funds, or individuals who exercise control over the funds or are involved with submitting the false statement.
FCA violations can take a variety of forms, but largely fall into three broad categories as a result of COVID-19. The first group includes applicants for relief under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. Applicants are required to make several representations and certifications during the application process, including about eligibility for funds, necessity and use of proceeds, presence or absence of conflicts, compliance with conditions or use of funds, and other representations and covenants. Any person responsible for the funds or involved with the submission of false statements is subject to investigation and possible lawsuit for penalties and damages. The second group comprises banks or other lenders distributing the CARES Act relief. Although the Act provides certain protections, including allowing lenders to rely on certifications by borrowers, lenders likely will face questions about whether their reliance was reasonable and whether they knew or should have known that certain borrowers did not meet the qualifications for relief. Lenders also may face questions about whether they favored existing clients with outstanding loans over other clients or new applicants, raising questions about conflicts of interest. A third group includes firms enlisted by the government to provide services for combatting the virus or assistance with the economic recovery, including, for example, urgent needs for pharmaceutical therapies or medical supplies. These companies also can anticipate questions and audits as the urgency of the response fades from collective memory. False claims relating to government services typically include billing for services not rendered or goods not delivered, overcharges billed to a federal government agency, or other misstatements about the character and performance of the goods and services provided.
The FCA is not only a civil statute, authorizing the DOJ to pursue civil money penalties and treble damages
2. Antitrust Investigations
In times of crisis, we often band together and seek cooperative approaches to problem-solving, many of which may be pro-competitive. Despite the pandemic emergency, U.S. antitrust law continues to apply, and authorities are monitoring industries to detect indications of collusive behavior. The DOJ recently warned the business community of its intent to focus on public health products during the Coronavirus emergency.
Legitimate competitor collaboration may raise questions of anticompetitive conduct. While there is much work that competitors can do together that is lawful—research and development toward a vaccine or therapy, for example—cooperation among competitors is subject to antitrust scrutiny and may be viewed differently after-the-fact. In a Joint Federal Trade Commission (“FTC”)-DOJ Statement,
Reactions to volatile demand may raise questions about price fixing or bid rigging. As demand conditions experience significant volatility, sales employees facing pressure to meet targets have greater incentives to participate in price fixing or bid rigging. Moreover, even where there may not be explicit wrongdoing, parallel actions may be viewed with suspicion and result in antitrust investigations. One illustrative example involved the air cargo industry’s response to the Iraq War and resulting spikes in fuel prices. In reaction to this sudden volatility, the air cargo companies adopted fuel and war surcharges to cover increased costs associated with avoiding the combat theatre. Parallel pricing and similar announcements led to costly criminal antitrust investigations of industry coordination of those surcharges, which lasted several years. Late last year, a former executive at a large European air cargo company was extradited and arraigned in Georgia almost ten years after the investigation began and well after her employer settled its liability. Another area of focus is procurement by government agencies at the federal, state, and local levels. Training and detection efforts undertaken by the
Companies with a strong position may face heightened scrutiny. Companies with a strong market position in their sector can anticipate increased scrutiny from their critics, including competitors. Already, politicians and others are expressing substantial concern about whether large companies will increase their positions during the COVID-19 crisis, resulting in permanent harm to the economy.
Supply shocks will give rise to questions about price. As families hurried to prepare for self-quarantining and shelter-in-place orders, bulk purchasing depleted store shelves and quickly exhausted supplies readily available online. In a now-widely reported story, two Tennessee brothers purchased 17,000 bottles of hand sanitizer for later sale online.
3. Securities and Commodities Law Investigations
Times of crisis and volatility also tend to engender closer scrutiny of securities and commodities markets and their participants, as the Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) seek to ferret out fraudulent or manipulative activity, or activity that could be perceived as such.
Fraud and manipulation. In the midst of the 2008 financial crisis, a number of London Interbank Offered Rate (“LIBOR”) contributor panel banks allegedly made inaccurate rate submissions in attempts to make themselves look better and more financially sound, to counter concerns about credit, and in some instances to benefit their traders’ positions. International investigations by regulators across the globe ensued, resulting in numerous prosecutions, massive fines, and a slew of private litigation. In the midst of the Coronavirus pandemic, actions by traders in an illiquid or constrained market may be questioned in hindsight, particularly if they exacerbate the constraints or are perceived as benefiting disproportionately from illiquidity by, for example, engaging in aggressive pricing behavior, driving a hard bargain and requiring counterparties to pay higher prices, or engaging in conduct viewed by regulators as inconsistent with legitimate price formation. More than a few SEC and CFTC investigations have been initiated by counterparties who feel abused in such situations.
Likewise, the asset-backed securities (“ABS”) market, and likely the home and auto loan markets as well, may face close scrutiny, as large numbers of borrowers find themselves unable to pay in the midst of job losses and furloughs—just as the residential mortgage markets, and in particular, the subprime and alternative loan markets, underwent lengthy investigations, enforcement actions, and private lawsuits in the wake of the 2008 financial crisis, following a period of allegedly “poor underwriting, irrationally exuberant investing, and weak regulatory controls.”
In periods of volatility and market unrest, even legitimate activity may lead to questions from regulators. Legitimate trading behavior, such as an aggressive trading strategy or approach to the market, runs the risk of misinterpretation in times of crisis, leading to expensive investigations, even if no enforcement actions subsequently occur. Withholding a product from the market in an attempt to get a better price also may lead to questions from regulators about intent and market disruptions, and potential future investigations. As in the case of antitrust investigations, behavior often is viewed in hindsight, and as such, market participants should ensure that they have sufficient compliance and oversight in place—particularly in the midst of largely, if not entirely, remote working environments—to ensure accurate disclosures and legitimate, market-based approaches to illiquid or constrained markets.
Material Nonpublic Information (“MNPI”) and Insider Trading. Insider trading also poses significant risks. As we previously
Disclosures. As we have previously reported
In sum, in the midst of such an uncertain environment, participants in the securities and commodities markets should take steps to ensure that they have appropriate systems in place to monitor trading and other activity remotely. Although the SEC and CFTC have relaxed certain regulatory requirements in light of the Coronavirus, market participants nonetheless are expected to continue to abide by their respective antifraud and anti-manipulation regulations to ensure maintenance of market integrity. If the 2008 financial crisis is any indication, these and other regulators will be on the lookout for and aggressively pursue what they perceive as misbehavior, even if the conduct is at bottom legitimate.
Many investigations arise from whistleblowers. Accordingly, how a company treats its employees during a crisis may reduce or greatly increase the risk of whistleblowing. Both the SEC and CFTC have granted whistleblower awards for millions—and in some instances tens of millions—of dollars, to incentivize individuals to come forward and provide the agencies with information.
The COVID-19 pandemic creates significant uncertainty to companies and their employees. In the face of such uncertainty, companies can avoid larger risks by redoubling their compliance efforts and reminding employees to remain vigilant in their compliance with laws and regulations.
* Special thanks to Paul Hastings Associate Kathryn Harris for her assistance.