Latham & Watkins Litigation Department

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1 Number 802 February 9, 2009 Client Alert Latham & Watkins Litigation Department TARP Special Inspector General Introduces New Initiatives Targeting Recipients of TARP Funds A false response to a LOI could expose a TARP recipient to criminal liability under 18 U.S.C On February 5, 2009, the Office of the Special Inspector General for the Troubled Asset Relief Program (SIG- TARP) made its first report to the US Congress on the progress of its efforts to enhance oversight and improve transparency of TARP s operations (the SIG-TARP Report). As part of this report, SIG-TARP detailed its plans to send Letters of Inquiry (LOIs) to every entity that received TARP funds, requiring them to account for and provide documentation substantiating their use of the funds, and to provide certifications of accuracy from senior executive officers. This Client Alert provides a brief preview of the expected form and content of the LOIs, and summarizes the key legal issues that should be considered in preparing a response. Forthcoming Letters of Inquiry Since TARP began operating, there has been growing and significant scrutiny into both the Treasury Department s administration of the program and the use of program funds by recipients. By statute, SIG-TARP is endowed with a $15 million budget and is empowered to perform audits, conduct investigations and issue subpoenas related to the purchase, management, and sale of assets under TARP. 1 On December 15, 2008, Neil M. Barofsky, a former Assistant US Attorney in the Southern District of New York, was sworn in as Special Inspector General for TARP and announced his intention to initiate an across-the-board review of the use of TARP funds. 2 Almost immediately, Special Inspector General Barofsky began urging Treasury Department officials to include language in all future TARP contracts, obligating the recipient to, among other things, (1) acknowledge SIG-TARP s oversight role and provide the Office with access to relevant documents and personnel; (2) account for the use of TARP funds; (3) set-up internal controls to ensure compliance with the accounting requirements and other conditions of the agreement; and (4) provide a signed certification from a senior official attesting to the accuracy of the disclosures. 3 To date, while several of the more recent TARP agreements contain language similar to that advocated by SIG-TARP, the vast majority of agreements most of which pre-date Mr. Barofsky s confirmation do not. On January 22, 2009, in a letter to Senator Charles Grassley (R-IA) (the Grassley Letter), the Special Inspector General announced Latham & Watkins operates as a limited liability partnership worldwide with affiliated limited liability partnerships conducting the practice in the United Kingdom, France and Italy. Under New York s Code of Professional Responsibility, portions of this communication contain attorney advertising. Prior results do not guarantee a similar outcome. Results depend upon a variety of factors unique to each representation. Please direct all inquiries regarding our conduct under New York s Disciplinary Rules to Latham & Watkins LLP, 885 Third Avenue, New York, NY , Phone: Copyright 2009 Latham & Watkins. All Rights Reserved.

2 his intention to address this perceived shortcoming by sending LOIs to every recipient of TARP funds. As detailed in the Grassley Letter and SIG-TARP s February 5, 2009 report to Congress, the LOIs will require each recipient to provide SIG-TARP, within 30 days of the request: a. A narrative response outlining their use or expected use of TARP funds; b. Copies of pertinent supporting documentation (financial or otherwise) to support such response; and c. A certification by a duly authorized senior executive officer of each company as to the accuracy of all statements, representations and supporting information provided. Earlier indications were that the LOIs would also seek a description of the recipients plans for complying with applicable executive compensation restrictions, but it now appears that SIG- TARP will be collecting this information through a separate process. 4 The LOIs were expected to have been sent out the first week of February, but were delayed at the last minute due to concern from the Office of Management and Budget (OMB) that they would run afoul of the Paperwork Reduction Act. If OMB concludes that the Act is implicated, the LOIs will first need to go through a 15-day public commenting process before being distributed. SIG- TARP has requested Emergency Processing of OMB s review of the LOIs, however, and it is likely that they will be distributed imminently. Legal Issues Criminal False Statements A false response to a LOI could expose a TARP recipient to criminal liability under 18 U.S.C (False Statements or Entries Generally). Section 1001, which broadly prohibits false statements made to government officials, is often used by federal prosecutors and has a wide reach. The statute punishes, in relevant part, knowingly and willfully: making any materially false, fictitious or fraudulent statement or representation; or making or using any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States. As the text makes clear, the falsity must be material, but courts have interpreted that requirement to mean only that the statement is capable of affecting or influencing the government, not that it actually did so. 5 It is well-established that the statute applies to responses to government inquiries or forms, even if there is no statutory obligation to respond. 6 Given the broad reach of the statute above, the information sought by the LOIs and the current political climate, the possibility of criminal prosecution cannot be ruled out. Indeed, even a seemingly innocuous estimate of a recipient s expected use of TARP funds is potentially subject to criminal liability if it departs too far from reality. 7 SIG Barofsky s comments and recent congressional action leave little doubt that SIG-TARP is prepared to prosecute false certifications. 8 False Claims and Qui Tam Relators The certification requirement imposed by the pending LOIs implicates directly the False Claims Act, 31 U.S.C (West 2008) (FCA). The FCA is the government s principal weapon to combat fraud in federal contracting. The statute prohibits anyone from knowingly submitting or knowingly causing to be submitted a false or fraudulent claim for payment to the United States. 9 The statute authorizes private whistleblowers 2 Number 802 February 9, 2009

3 or relators to act as private attorneys general and file qui tam suits on behalf of the government. 10 The FCA imposes treble damages and civil penalties of $5,500 to $11,000 per false claim. The prohibition on false claims consists of seven subsections, three of which are potentially relevant to the LOIs. For example, the act imposes liability on any person who knowingly presents, or causes to be presented, to an officer or employee of the United States Government or a member of the Armed Forces of the United States a false or fraudulent claim for payment or approval; knowingly makes, uses or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the government; or knowingly makes, uses or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the government. 11 Express certifications of compliance or accuracy that prove to be false can provide the basis for liability under the FCA where (1) the certifications are material to the government s funding decision; and (2) the defendant knew of or recklessly disregarded the falsity of the claim. As employed in a response to a LOI, the certification requirement provides the Department of Justice (DOJ) with a hook to investigate the use of TARP funds. Perhaps more importantly, the certification requirement presents a tremendous opportunity for private whistleblowers, who can recover up to 30 percent of the billions of dollars potentially in play. Funds already distributed by TARP could arguably give rise to a reverse false claims action under the last subsection of the FCA provided that some obligation to repay the government could be established. The existence of such an obligation would depend on: first, a condition on the use or administration of TARP funds; and second, an express or implied obligation to return funds if the condition was violated. Such an obligation could be derived from the authorizing statute or the contract entered into between the Treasury Department and the recipient of TARP funds. For instance, both the EESA and the contracts used for the first tranche of funds include conditions related to executive compensation. Arguably then, a false certification of compliance with the EESA s executive compensation requirements could subject a past recipient of TARP funds to FCA liability. 12 An even clearer case for liability can be made with respect to prospective (second tranche) funds, most of which will be distributed after responses to the LOIs have been submitted. In that situation, the DOJ or a qui tam relator could persuasively argue that a false representation or certification in a LOI response was material to the Treasury Department s decision to provide future funds. False claims to the government are also subject to criminal sanctions under 18 U.S.C. 287 (False, Fictitious or Fraudulent Claims). Section 287 makes it a crime to make[] or present[] to any person or officer in the civil, military, or naval service of the United States, or to any department or agency thereof, any claim upon or against the United States, or any department or agency thereof, knowing such claim to be false, fictitious, or fraudulent. Guidance In most circumstances, significant business and public relations factors will counsel in favor of full cooperation with SIG-TARP. In crafting a response to the forthcoming LOIs, however, it is crucial that recipients institute a comprehensive and unimpeachable process to ensure 3 Number 802 February 9, 2009

4 the accuracy of the disclosures and negate any suggestion of fraudulent intent. It is equally important that any potentially problematic issues discovered during the preparation of the response be fully understood by the recipient and disclosed, if necessary, on the recipient s terms. In this regard, recipients should be aware of recent guidance provided by the Financial Industry Regulatory Authority (FINRA) laying out the factors it will consider in granting companies credit for extraordinary cooperation. Endnotes 1 Emergency Economic Stabilization Act of 2008, P.L (EESA) 121(c)-(d),(g). 2 See Letter from Neil M. Barofsky to Hon. Charles Grassley (January 22, 2009). 3 See Letter from Neil M. Barofsky to Hon. Max Baucus (January 7, 2009). 4 Compare Grassley Letter at 2 with SIG-TARP Report at See United States v. McBane, 433 F.3d 344 (3d Cir. 2005). 6 See, e.g., United States v. De Rosa, 783 F.2d 1401 (9th Cir. 1986). 7 See United States v. White, 765 F.2d 1469 (11th Cir. 1985). 8 See Criminal penalty hangs over bailed-out bankers if they lie, Los Angeles Times, Feb. 5, On February 4, 2009, the Senate unanimously passed a bill that gives SIG- TARP the authority to make warrantless arrests and seek and execute search warrants without obtaining approval from the Department of Justice. See Special Inspector General for the Troubled Asset Relief Program Act of 2009, S.383, 111th Congress (2009). 9 See 31 U.S.C et seq. 10 See 31 U.S.C. 3730(b) U.S.C. 3729(a)(1),(2),(7) (West 2008). 12 More stringent conditions were imposed on funds distributed through TARP s Targeted Investment Program (Citigroup), Systemically Significant Failing Institutions Program (AIG) and Automotive Industry Financing Program (GM, GMAC and Chrysler). 13 The four factor considered by FINRA are: selfreporting of violations; extraordinary steps to correct deficient procedures and systems; extraordinary remediation to customers; and, providing substantial assistance to FINRA investigations. 14 FINRA Notice Number 802 February 9, 2009

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