Webinar Presented by The American Association of Bank Directors & Nixon Peabody LLP March 3, 2009

Transcription

1 Banking Response to February 6, 2009 SIGTARP Letter Webinar Presented by The American Association of Bank Directors & Nixon Peabody LLP March 3,

2 Introduction Treasury s TARP authorized funding of $700 billion and the Federal Government s massive, unprecedented infusion of funding for all financial institutions some $2.775 trillion in total from all agencies was provided over a very short period. This massive expenditure of taxpayer money comes with the recognition by the federal government that a certain amount of waste, fraud, and abuse is inevitable. 2

3 Office of SIGTARP Congress created a dedicated law enforcement officer for TARP, the Special Inspector General for TARP ( SIGTARP ). The SIGTARP reports to Congress was established at enactment of the Emergency Economic Stabilization Act of 2008 ( EESA ). The SIGTARP is the voice and the protector of the funders of the program, the American taxpayer. 3

4 Under Section 121 of EESA, the Office of SIGTARP was created and provided that: SIGTARP, a Presidential Appointee, be confirmed by Senate SIGTARP reports to Congress SIGTARP, Neil M. Barofsky, was confirmed on December 6, 2008 Team assembled including several former federal prosecutors and agents from the FBI and IRS Coordinated efforts with other law enforcement agencies and Inspector Generals offices 4

5 Duties of SIGTARP Duty to conduct, supervise, and coordinate audits and investigations of the purchase, management, and sale of assets under TARP. 5

6 Powers of SIGTARP derived from the Inspector General Act of These powers include power to: obtain documents from federal agencies; and subpoena reports, documents, and other information from persons or entities outside government. This of course would include banks and (in all likelihood) directors. 6

7 SIGTARP says it has three core values: (1) Transparency Public has a right to know both how Treasury invested the money and what was done with it. 7

8 (2) Coordinated Oversight Oversight and coordinate with bank regulatory agencies. 8

9 (3) Robust Enforcement SIGTARP s third core value is to prevent, detect, and investigate cases of fraud, waste and abuse of TARP funds and programs. It is this third core value, Robust Enforcement, that should cause TARP recipients to proceed with extreme caution. Note that SIGTARP is committed to robust criminal and civil enforcement whether inside or outside of government, involving any persons or entities who waste, steal, or abuse TARP funds. 9

10 Organization of SIGTARP Audit Division Audit of recipients obligations under law and contract Internal controls, a particular focus Investigations Division Civil and criminal investigation of those in and out of government who waste, steal or abuse TARP funds Intentional misrepresentations made in: applications to Treasury; or in financial reporting to Treasury that may be in violation of several criminal statutes, including: securities fraud, wire fraud, mail fraud, and false statements. 10

11 Why are we here? The SIGTARP s audit function requires that it be able to report on how funds are used and how TARP recipients are dealing with executive compensation. Thus, on or about February 6, 2009, each of the over 350 financial institutions who issued preferred stock in exchange for TARP funding received a letter from Neil M. Barofsky, the SIGTARP. 11

12 What does the February 6 letter require and how should banks respond? February 6 letter is voluntary in nature. However, it asks for a response in 30 days on: Anticipated use of TARP funds Whether TARP funds were segregated Actual use of TARP funds to date Expected use of unspent funds 12

13 Letter continued Banks are also asked to provide compensation information: Specific plans, and status of implementation of executive compensation requirements Assessment of loan risks and relationship to executive compensation whether plans encourage excessive risk for example, a bonus based solely on growth in mortgage loans How executive compensation limitations will be implemented in line with Treasury guidelines Whether such limitations may be offset by changes to other longer term or deferred forms of executive compensation 13

14 Letter continued Nature of Documentation Quantitative and Qualitative Reference sources describing use of funds including: Statements to media Shareholders Others Internal and mail Budgets Memoranda 14

15 Letter continued Preservation Segregate and preserve all of the above documents Include copies of supporting documentation with response 15

16 Letter continued Signatory and Certification Sign by a duly authorized senior officer Certify accuracy of all statements, representations, and supporting documentation provided subject to 18 USC

17 So why is this different than what we have done in the past? Banks and bankers are used to government letters. Inquiries are a routine part of the examination process of banks. The letter from the SIGTARP, however, as we will point out, is unique and targeted. It seeks information that is very detailed and is provided to an entity that has Robust Enforcement as a core value. This, we submit, is very different than the core values of traditional bank regulatory agencies which focus on regulation of banks and their activities, not enforcement as a core value. 17

18 Why is this any different than other regulatory requests? Neil Barofsky s background as a criminal prosecutor SIGTARP s office made up of other former federal prosecutors and federal agents from the IRS and FBI Neil Barofsky s testimony before the Senate Judiciary Committee (coordinated planning efforts with law enforcement and other IGs) The highly political and sensitive environment 18

19 What does the environment have to do with this? Truth is that the environment does influence the direction of criminal investigations (e.g., mortgage fraud task forces after subprime problems, increased anti-terrorism focus after 9/11) Want to show the public that the government is keeping track of dollars in big and small institutions alike Government responds by assigning more agents to investigate 19

20 Practical response to SIGTARP letter - Document Preservation Issuance of document hold/preservation notice Suspend any routines for deletion, recycling, or destruction of documents as they relate to TARP, executive compensation Paper and electronic documents Letter identifies non-exclusive list internal , budgets, or memoranda regarding anticipated or actual use of TARP funds Segregation of documents avoid spoliation 20

21 Q&A - SIGTARP Letter Published to SIGTARP website on February 25, 2009 Following meetings between bank representatives and SIGTARP officials Useful (but general) response to key issues including: Level of specificity required in explanation of use of funds Amount and type of documentation to include Meaning of reference to executive compensation requirements Concerns regarding production of confidential documents Certification language required 21

22 What about the Certification Language? Letter asks that a senior executive officer certify as to the accuracy of the institution s response Not a request for certification that institution is in compliance with TARP Applicable statute is 18 USC 1001 (false statements) Prohibits any false or misleading statement sworn or unsworn that is made to the federal government Up to five years imprisonment Sample certification in SIGTARP Q&A tracks 1001 Language Note reference to response and supporting documents Sample language does not purport to be exclusive 22

23 Confidential information and the Freedom of Information Act (FOIA) Exemptions from public disclosure are set forth in statute (5 USC 552(b)) Includes trade secrets and privileged or confidential commercial/financial information (5 USC 552(b)(4)) Inform FOIA officer that exemption applies Opportunity to object in the event of a FOIA request Agency decision regarding release can lead to FOIA or reverse FOIA litigation Party seeking to prevent disclosure bears burden of proof 23

24 What can we expect in the coming weeks? Extreme Transparency SIGTARP will post lots of information on website, i.e. who responded to February 6 letter who did not respond to February 6 letter what responders said in some cases said specifically detailed information on loan activities such as percentage of TARP funds loaned out 24

25 What can we expect in the coming weeks? Continued Follow-up on complaints whistleblower section of SIGTARP already up-and-running Protection of information may be difficult to protect information citing confidentiality Compensation may be the most difficult to protect for privately held banks 25

26 SIGTARP letters do not mean addressee institutions are targets of an investigation But And It is an audit to be treated with high degree of seriousness and care Key initiative of SIGTARP s Audit Division SIGTARP has authority and staff to conduct investigations (Investigations Division) Already opened several criminal investigations involving multiple jurisdictions (Feb. 11 testimony to Sen. Judiciary Committee) Coordinating efforts with NY Attorney General Cuomo on executive compensation ( long and productive partnership ) Outreach to potential whistleblowers via fraud/abuse hotline Proposed amendments to False Claims Act (31 USC ) and Major Fraud Statute (18 USC 1031) ensure applicability to TARP participants 26

27 Letter now vs. Subpoena later One question you might be asking is, The letter is voluntary, isn t it? Suppose I do not respond -- what are the consequences? SIGTARP Letter is not a subpoena But SIGTARP has power to issue subpoenas SIGTARP will report to Congress and post on its website as to institutions that do or do not respond Some responses received by SIGTARP SIGTARP has promised interim report to Congress after responses received Business and public relations factors Possible reputational damage Renewed attention from potential whistleblowers 27

28 So, what should I do if I receive(d) a letter? Treat letter as a formal request Preserve applicable documents and data Comprehensive and unimpeachable response process Bring to attention of appropriate senior personnel May include seeking counsel Important to discover/identify any potentially problematic issues early on Ask for additional time if warranted (letter requests answer within 30 days) On substance: level and type of reply will vary Recognized by SIGTARP in its Q&A document 28

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