Fall 2012

The “Collection Gap” Explained: A White-Collar Practitioner’s View

The "Collection Gap" Explained: A White-Collar Practitioner's View

Friday, October 5, 2012 - 12:00pm
Andrew Friedman

*

Ezra Ross and Martin Pritikin’s well-researched article regarding the collection of fines and penalties imposed on corporate offenders answers the question of what happens after the enforcement action ends—the government does not collect the vast majority of corporate enforcement penalties imposed. In this Essay, I address some of the practical realities of enforcing corporate penalties. First, I provide a different explanation than Ross and Pritikin for the “collection gap”—that prosecutors and other government enforcers are highly motivated to impose high penalties but far less motivated to collect them. Second, I address some significant practical reasons why the government appears to place a low priority on collecting penalties—reasons that Ross and Pritikin have arguably under-emphasized, such as the existence of alternative nongovernmental remedies. Third, I agree to some extent with Ross and Pritikin’s observation that procedures already in place could, if the government were so inclined, be used to conduct more robust and effective collection activity. Finally, I suggest that narrowing the “collection gap” might occur just as effectively through reforms in how the government and the courts assess financial penalties as opposed to developing alternative collection strategies.

Introduction

Ezra Ross and Martin Pritikin’s well-researched article[1] regarding the collection of fines and penalties imposed on corporate offenders answers the question of what happens after the enforcement action ends—the government does not collect the vast majority of corporate enforcement penalties imposed. In this Essay, I address some of the practical realities of enforcing corporate penalties. First, I provide a different explanation than Ross and Pritikin for the “collection gap”—that prosecutors and other government enforcers are highly motivated to impose high penalties but far less motivated to collect them. Second, I address some significant practical reasons why the government appears to place a low priority on collecting penalties—reasons that Ross and Pritikin have arguably under-emphasized, such as the existence of alternative nongovernmental remedies. Third, I agree to some extent with Ross and Pritikin’s observation that procedures already in place could, if the government were so inclined, be used to conduct more robust and effective collection activity. Finally, I suggest that narrowing the “collection gap” might occur just as effectively through reforms in how the government and the courts assess financial penalties as opposed to developing alternative collection strategies.

 

I. Alternative Explanations for the Collection Gap

Enforcement-agency practices for determining the level of financial penalties for criminal or regulatory offenses lead to a significant discrepancy between the penalties that the government assesses and the sums that it ultimately collects. Ross and Pritikin suggest that a combination of factors—insufficient resources, individual incentives, institutional incentives, “agency capture,” and “confusion and blame-shifting”—all contribute to the government’s unwillingness or inability to collect fines and penalties.[2] In my opinion, these factors do not adequately acknowledge the impact of four additional factors that may play a significant role in creating the collection gap.

A. Strategic Use of Limited Resources

Ross and Pritikin’s article correctly observes that prosecutors and enforcement staff are not highly motivated to collect the fines and restitution they demand,[3] but it fails to recognize that such undercollection is largely a function of the government’s strategic use of limited resources. The United States Attorneys’ Manual (USAM) establishes that the primary mandate of United States Attorneys, Assistant United States Attorneys, and Department of Justice (DOJ) attorneys is “the prosecution of violations of federal law.”[4] The USAM places much more emphasis on prosecuting and penalizing illegal conduct than on enforcing fines and other penalties.[5] One might expect the DOJ to devote more time and attention to collection litigation given the enormous collection gap documented in Ross and Pritikin’s article. However, the fact that the DOJ is primarily charged with and focused on prosecution is further evidenced by the fact that, when prosecutors and the media publicly discuss enforcement matters, they overwhelmingly focus on the charges or allegations made and the penalties imposed, not on collections.[6]

Realistically, the government lawyers charged with prosecuting violations of law do not have the resources to focus fully on both prosecution and collection issues. The highest-ranking government lawyers—the decision makers—are generally political appointees who tend to emphasize broad initiatives that will have the greatest impact on the public. Charging alleged lawbreakers with serious or ground-breaking offenses and imposing large penalties sends a very public message that lawlessness will not be tolerated and will be severely punished.[7] This type of news is of interest to print, broadcast, and online media companies and consumers, not to mention shareholders, boards of directors, and executives. Today, large corporations faced with significant penalties are concerned not only about the penalties associated with government enforcement activity but also about the financial effect of negative media attention.[8] Whether fines and penalties are ultimately paid or not, public and high-profile companies cannot avoid the consequences of declining stock prices, market capitalizations, or credit ratings.[9]

In contrast, public statements about collection efforts would arguably have little deterrent effect and would rarely attract much media attention beyond the largest and most high-profile matters. Accordingly, in allocating limited resources, government officials will support the efforts that they believe will have the greatest effect on individual and corporate behavior. The more talented lawyers generally take responsibility for the most challenging prosecutions but not the most challenging collection cases. As Ross and Pritikin observe, Financial Litigation Units[10] responsible for collections are woefully understaffed and underfunded.[11] The public, including the pool of potential offenders, cares much more about the risk of substantial criminal charges and fines than about the future prospect of whether fines or restitution get paid, and this undoubtedly influences how the government allocates its resources.

Further, it is entirely unclear that devoting significant additional resources to collections would appreciably lessen the collection gap or even justify the additional financial commitment. If the DOJ or any other government agency could persuasively show Congress that collection reforms not only pay for themselves but might actually be profitable, Congress would very likely make the funds available, at least for a pilot program.

B. Private Collection Efforts

Private civil collection efforts may also contribute to the collection gap. White-collar criminal frauds that essentially end a business’s activities often lead to civil collection efforts in the courts. These collection efforts can take many forms. If the company involved in the alleged fraud experiences a financial collapse, claims are often addressed in the bankruptcy courts, where rules and practices are already designed to help untangle financial messes and recover assets to redistribute them to claimants. For example, in the case of the Madoff fund and the Bayou funds, receiverships filed massive clawback lawsuits that have played an extremely important role in recovering funds and compensating victims.[12] In private efforts to collect the proceeds of a fraud, such as a receivership, the receiver and its attorneys file civil actions against any party that obtained funds within a period of time specified under state or federal bankruptcy law. Those lawyers are paid out of the funds recovered, not by the government. As a result, large receiverships have far greater resources than the government’s financial collection apparatus to identify funds and collect them.[13] Outside the realm of bankruptcy and receivership, civil lawsuits serve as a crucial recovery mechanism for aggrieved parties in a number of criminal and regulatory contexts. Criminal investigations often run parallel to civil class-action or opt-out claims. In the late 1990s, seven of the large pharmaceutical companies agreed to pay nearly two billion dollars in penalties for their role in allegedly fixing the price of raw vitamins (such as the vitamin A, B, and E supplements that fortify many foods).[14] In addition, these companies paid over one billion dollars to settle a civil class-action suit that arose from the same alleged conduct.[15] This does not suggest that the pharmaceutical companies failed to pay fines and penalties, but the presence of large-scale class-action litigation, in which plaintiffs’ lawyers are paid from a portion of the recovery, helps explain why the government might have less incentive to pursue individuals and companies that fail to pay fines or penalties.

C. Over-Assessment of Fines and Penalties

Ross and Pritikin’s article fails to acknowledge that the government’s emphasis on the deterrent value of large penalties routinely results in the imposition of fines and penalties that the government likely knows it will never collect.[16] Consider the prison sentences, fines and restitution imposed on perpetrators of large-scale frauds. Bernard Madoff was sentenced to 150 years in prison and ordered to pay $170 billion in forfeiture.[17] In connection with the fraud at Cendant, Walter Forbes was sentenced to twelve years in prison, and E. Kirk Shelton was sentenced to ten years in prison; both were ordered to pay over $3 billion in restitution.[18] Sam Israel and Daniel Marino, principals in the Bayou hedge fund fraud, were each sentenced to at least twenty years in prison and ordered to pay $300 million in restitution.[19] Mark Lay, a financial advisor, was sentenced to twelve years in prison and ordered to repay the state of Ohio $213 million.[20] Former Tyco CEO Dennis Kozlowski was sentenced to eight and one-third to twenty-five years in prison and ordered to pay $170 million in fines and restitution.[21] Raj Rajaratnam was sentenced to eleven years in prison and ordered to pay $92.8 million in fines to the SEC as well as $63.8 million in fines and restitution for his criminal convictions.[22] While the government may not publicly document its reasons for routinely reducing or failing to collect such high penalties, there clearly is no realistic hope of the government collecting the bulk of these enormous penalties: In some cases, the age of the defendant and the length of his or her prison sentence effectively preclude him or her from ever earning income. In others, the nature of the charges effectively disables the individual from obtaining lucrative employment. Finally, in the case of fraud schemes in which the government alleges that investments never actually occurred, the government is well aware that substantial investor funds were already dissipated by payments to other investors and, in some cases, the defendant’s personal expenditures.

Moreover, the government knows this information at the outset. After conviction, each of the above individuals likely was unable, for all practical purposes, to return to the businesses that they know best and that offer the best opportunity to actually earn enough to pay restitution. Even if the defendants were not barred from investing or from corporate management, there would be little or no chance that they would be hired for any significant position of authority. Whether directly or indirectly, substantial prison sentences for serious fraud either eliminate or severely limit the ability of the person to obtain well-paying employment. Though most financial frauds occur on a smaller scale than these spectacular examples, the same basic concerns apply to smaller frauds as well. Most individuals and companies that commit multimillion dollar frauds get put out of business (as they should be), and the penalties and negative publicity associated with their prosecution and conviction generally disable them from meaningful opportunities to pay fines and restitution.

Ross and Pritikin conclude that unreasonably high assessments cannot explain why enforcement-penalty-collection rates are dismally low,[23] but their position arguably fails to acknowledge the full effect of imposing massive, uncollectable fines and restitution. Prosecutors clearly have the discretion to take a more realistic approach to penalizing white-collar criminal offenses, as they have in other high-profile cases—even when wealthy white-collar defendants are charged with responsibility for multibillion dollar frauds. When he was sentenced to twenty-five years in prison for his role in WorldCom’s $11 billion accounting fraud, former CEO Bernard Ebbers turned over nearly all of his assets to a trust established to pay damages to WorldCom investors, but he was not ordered to pay billions in restitution, despite the fact that his net worth reportedly exceeded $1.4 billion at one point.[24] Former Enron CEO Jeffrey Skilling was sentenced to twenty-four years in prison for his role in the fraud that left Enron in bankruptcy, but his restitution order was confined to his actual assets.[25] Skilling forfeited roughly $45 million of his personal resources to a restitution fund.[26] These cases suggest that the government’s substantial discretion in determining fines and restitution plays a significant role in the collection gap documented by Ross and Pritikin.

 

D. The Value of Compromise

Ross and Pritikin’s proposition that more enforcement is necessary fails to give adequate weight to the value of compromise. The government clearly values compromise in white-collar prosecutions, as evidenced by the recurring phenomenon of government regulators requesting the maximum fine with the expectation of settling for and collecting significantly less than that amount. For example, citations by the Environmental Protection Agency and the Mine Safety and Health Administration each are subject to regulatory proceedings that precede state- or federal-court involvement.[27] During these regulatory proceedings, which can be fairly complex, the initial fines imposed in the citations are often reduced either by negotiation or through administrative proceedings.[28] Consequently, regulatory citations are arguably written with penalties that safety inspectors know or suspect will be reduced during the regulatory process. There is a large amount of routine regulatory-enforcement activity in highly regulated industries. In mining, for example, the process for appealing administrative penalties includes the opportunity to resolve the penalties by negotiating and settling them for a lesser amount. This may contribute in a meaningful way to a gap between the penalties that are imposed initially and the final outcome of the regulatory proceedings. Disputes with other government agencies—such as government-contract disputes and matters involving the General Services Administration—involve similar opportunities to obtain reductions in penalties through administrative litigation and appeals. If there is a pattern to these administrative procedures, it favors negotiation and compromise over efforts to simply collect the full amount of the original administrative enforcement penalty. In all likelihood, this unwritten policy acknowledges that the costs of collection efforts eventually outweigh the benefits, and the government is better off securing a lower, compromised payment than expending the resources to chase the full payment. While compromise administrative resolutions cannot fully explain the collection gap that Ross and Pritikin observed, it would be a mistake to conclude that compromise does not play an important role in this discrepancy.

Moreover, many criminal and regulatory penalties implicate an “ability-to-pay” analysis after the penalties are imposed. The DOJ, IRS, SEC, and other agencies are willing to consider reducing enforcement penalties when a defendant can demonstrate an inability to pay the fine or restitution that has been ordered. The U.S. Sentencing Guidelines expressly recognize that organizations may be unable to pay fines or restitution.[29] As a practical matter, when resolving criminal or civil enforcement matters, a defendant’s discussions with the government may include informal ability-to-pay advocacy designed to obtain a reduction in fines or restitution. Such advocacy necessarily involves substantial in-depth financial disclosures to the government. Experienced defense counsel will seek to obtain the government’s agreement to an ability-to-pay reduction because obtaining such relief from a court at a sentencing hearing would be far less likely.

For example, in a recent plea and sentencing, Horizon Lines agreed to plead guilty to antitrust violations and pay a $45 million fine.[30] However, the court later reduced that fine to $15 million after Horizon claimed that the larger fine would trigger a default on Horizon’s debt—a reduction to which the DOJ agreed.[31] Horizon indeed had significant financial challenges, corroborated by events that included the company’s stock being delisted from the New York Stock Exchange.[32] Similarly, the IRS has “offer-in-compromise” procedures designed to settle tax debts for amounts less than the full debt.[33] Those procedures take into account a tax debtor’s ability to pay and expenses, among other factors.[34] The SEC has similar procedures and is willing to reduce or waive fines if a defendant adequately demonstrates financial hardship.[35] Defendants applying for penalty reductions virtually always have the burden of demonstrating financial hardship, and government agencies that undertake an ability-to-pay analysis generally demand in-depth financial information as a condition of considering a reduction in fines or penalties. Unlike the confused and sometimes conflicted regime described in Ross and Pritikin’s article, ability-to-pay or offer‑in-compromise advocacy offers the possibility of limiting protracted legal proceedings and preserving government resources. This advocacy is virtually always accompanied by substantial disclosures to and negotiations with the prosecutors or enforcement lawyers, who are most invested in the enforcement action and who have the best understanding of the underlying facts, rather than financial recovery units, which have no involvement in the underlying case.

 

II. Necessity and Direction of Reform

If one accepts the premise that government enforcement authorities seek high fines and restitution awards to serve larger political goals, then the collection gap may in fact represent a consequence that the government finds acceptable, or at least to be a necessary evil. Accordingly, the reforms that Ross and Pritikin recommend may unnecessarily overcomplicate the issue.[36] To the extent that the government decides to close the gap, more realistic initial evaluations and assessments of fines and penalties could substantially improve the discrepancy between the fines and penalties imposed and those actually collected.

Reforms designed to eliminate the collection gap may be unnecessary for several reasons. First, the government’s established collection procedures appear to be sound. The USAM includes fine-collection procedures that appear capable of guiding an efficient collection process.[37] “All monetary impositions” are supposed to be entered into a case-tracking system that includes the debtor’s personal or corporate information.[38] Entering that information is supposed to trigger demand letters, delinquency notices, and default notices consistent with federal law.[39] Under the procedures, Financial Litigation Units have the authority to obtain liens, enforce debts through bond forfeitures, and otherwise pursue all debts and restitution “to the fullest extent of the law.”[40] At the same time, Financial Litigation Units also have the discretion to evaluate, suspend, compromise, or close cases consistent with DOJ or local federal district policy.[41] It appears that the U.S. Attorney for each district primarily has the discretion to prioritize certain types of cases for enforcement.[42] Nothing about these procedures appears designed to avoid collecting fines and penalties or seems terribly inefficient. Even the most efficient collection procedures cannot account for defendants that simply cannot pay fines due to their respective financial situations. To the extent that government agencies are interested in adopting Ross and Pritikin’s suggestion to optimize existing collection efforts,[43] the provisions in the USAM might serve as a useful guide. In addition, Ross and Pritikin’s suggestion that collections become a consideration in performance standards and reviews[44] would be an effective way to incentivize management at multiple levels to place greater importance on collection efforts. The primary difficulty with these well-meaning suggestions is that the government appears to have relatively little interest in strengthening collection efforts.

Second, as Ross and Pritikin thoughtfully observe, even the most effective procedures cannot overcome a lack of commitment by decision makers in the government.[45] By giving collection activities a low priority in terms of funding and personnel, the government materially diminishes the strength, esteem, and effectiveness of its efforts to collect fines and penalties. However, the reality for the government is that funding is tight. With budget cuts and hiring freezes a fact of life for today’s federal agencies, the temptation to focus on core enforcement activities and to underfund financial recovery units increases, and the willingness to accept the logic that collection activities cost more than they are worth grows.

Third, there are sound policy reasons for the government to emphasize large financial penalties while devoting less time and resources to collections, despite the fact that these policies may contribute to the discrepancy between the regulatory penalties imposed and the funds ultimately collected. Resolving matters swiftly helps limit the costs associated with monitoring and pursuing defendants who lack the ability to pay penalties. At some point, the costs of pursuing unpaid penalties outweigh the benefits, and compromise can both reduce costs and help secure partial payment in a timely way. Ability-to-pay discussions are also productive in that they can translate into conditions that help ensure payment, such as by structuring payments over a period of years to ease the financial burden.[46]

The key policy reason underlying the collection gap is deterrence. Though Ross and Pritikin recognize that deterrence is the most important public policy underlying large monetary penalties,[47] they fail to embrace the broader impact of deterrence. The lack of resources that inhibits collections applies with equal or greater force to the government’s core enforcement function. Ultimately, deterrence serves the crucial role of dissuading companies and individuals from violating laws and regulations in the future and, in theory, decreasing the need for enforcement activity. Particularly in a world with twenty-four-hour media coverage and a keen focus on the public markets, large and highly public financial penalties can potentially have an even greater deterrent effect than the amount of the penalty itself. As discussed, such penalties could trigger expensive private enforcement lawsuits and downward pressure on a company’s public confidence and stock price. It may well be that the government derives more overall benefit from imposing large and perhaps uncollectable fines and penalties than from trying to collect them.

 Even if one assumes that the government truly wants to collect a greater percentage of the financial remedies it imposes, there would be a much simpler way to accomplish that goal than implementing Ross and Pritikin’s suggested reforms. Government agencies might just as effectively close the collection gap by making more realistic internal assessments and preliminary demands and engaging in ability-to-pay evaluations on a broader scale.

 

Conclusion

Changing or privatizing collections processes would do little to affect the broader concerns that drive overly high penalties or favor private remedies when they are available. Frankly, receiverships and civil suits help to conserve government resources and should be a welcome part of the equation for penalizing companies that violate the law. While devoting more and better resources to collection would probably benefit the government and improve penalty collections, there is a real risk that spending more on collections would yield increasingly diminished returns.

*         Partner, Patton Boggs LLC. Andrew Friedman primarily represents clients involved in criminal and civil investigations and prosecutions, as well as in parallel administrative, regulatory, and civil litigation. In particular, Mr. Friedman has substantial experience and expertise defending investigations involving antitrust, securities, foreign corrupt practices, banking law, environmental law, hedge funds, mining, export controls, and contractor corruption. He also has significant experience counseling individuals and corporations involved in congressional investigations. He received his A.B. from Brown University in 1988 and his J.D. from the University of Minnesota Law School in 1993.

[1].        Martin H. Pritikin & Ezra Ross, The Collection Gap: The Underenforcement of Corporate and White‑Collar Fines and Penalties, 29 Yale L. & Pol’y Rev. 453 (2011).

[2].        Id. at 496-506.

[3].        Id. at 498-503.

[4].        U.S. Dep’t of Justice, United States Attorneys’ Manual § 1-1.100 (2009) [hereinafter USAM], available at http://www.justice.gov/usao/eousa/foia_reading_room/usam/title1/1mdoj.htm.

[5].        Id. § 3-12.000 (collection of fines).

[6].        See, e.g., Tracie Mauriello & Len Boselovic, Historic Fine Issued for Upper Big Branch Mine Disasters, Pittsburgh Post-Gazette (Dec. 7, 2011), http://old.post-gazette.com/pg/11341/1195085-455.stm (announcing a record $209.5 million settlement following a mine disaster, but omitting that over half the settlement encompasses future expenditures on safety measures); Joe Milicia, Advisor Gets 12 Years in Prison in Ohio Fraud Case, San Diego Union-Trib. (July 8, 2008), http://legacy.utsandiego.com/news/business/20080708-1055-investmentscand… (noting that investment advisor Mark Lay was given a twelve-year prison sentence and ordered to pay restitution of almost $213 million); see also 2012 Press Releases, U.S. Attorney’s Office Middle Dist. La., U.S. Dep’t Justice, http://www.justice.gov/usao/lam/press/press1201.html (last visited June 4, 2012) (providing numerous press releases emphasizing penalties rather than collections).

[7].        Erin McClam, WorldCom’s Ebbers Gets 25 Years in Prison, Hous. Chron. (July 13, 2005), http://www.chron.com/business/article/WorldCom-s-Ebbers-gets-25-years-in… (reciting the court’s comments on how the seriousness of former WorldCom CEO Bernard Ebbers’ crime warrants a very substantial sentence); see also Division Update: Spring 2012, U.S. Dep’t Justice, http://www.justice.gov/atr/public/division-update/2012/criminal-program…. (last visited Apr. 23, 2012) (emphasizing the criminal fines imposed by the Department of Justice (DOJ) Antitrust Division, yet failing to address collections). For examples of other DOJ press releases emphasizing fine imposition rather than collections, see Press Release, U.S. Attorney’s Office for the S. Dist. of Fla., U.S. Dep’t of Justice, Wachovia Enters into Deferred Prosecution Agreement (Mar. 17, 2010), http://www.occ.gov/news-issuances/news-releases/2010/nr-occ-2010-30a.pdf; Press Release, U.S. Attorney’s Office for the W. Dist. of La., U.S. Dep’t of Justice, Remaining Defendants of an Anabolic Steroid Drug Trafficking Organization Plead Guilty (June 28, 2011), http://www.justice.gov/usao/law/news/wdla20110628.pdf; and Press Release, U.S. Dep’t of Justice, Justice Department Requires Morgan Stanley To Disgorge $4.8 Million in Profits from Anticompetitive Agreement (Sept. 30, 2011), http://www.justice.gov/atr/public/press_releases/2011/275740.pdf.

[8].        See, e.g., Cindy R. Alexander, On the Nature of the Reputational Penalty for Corporate Crime: Evidence, 42 J. Law & Econ. 489 (1999); Jonathan M. Karpoff, Why Reputation Counts More Than Regulation, Eur. Bus. Forum, Mar. 22, 2002, at 78, available at http://faculty.washington.edu/karpoff/FIN%20509/Enron_EBF.pdf; Jonathan M. Karpoff & John R. Lott, Jr., The Reputational Penalty Firms Bear from Committing Criminal Fraud, 36 J. L. & Econ. 757 (1993).

[9].        Vicki Smith, Massey Shareholders Lawsuit Stands, Charleston Gazette (W. Va.) (Mar. 29, 2012), http://www.wvgazette.com/News/201203280221; BP Share Plunge Wipes Billions Off UK Pension Funds; Spill Crisis Deepens as U.S. Starts Criminal Probe, Daily Mail (U.K.) (June 2, 2010), http://www.dailymail.co.uk/news/article-1283338/BP-oil-spill-crisis-deep… (noting that BP’s stock share price dropped upon news of a criminal investigation after the Deepwater Horizon accident).

[10].      The DOJ maintains Financial Litigation Units to litigate debt-collection issues and enforce criminal and civil debts. See, e.g., Programs: The Financial Litigation Unit, U.S. Attorney’s Office Dist. Conn., U.S. Dep’t Justice, http://www.justice.gov/usao/ct/flu.html (last visited Apr. 22, 2012).

[11].       Ross & Pritikin, supra note 1, at 496 (providing statistics supporting the proposition that “[a]n agency may simply lack the quantity of asset investigators or collections personnel needed to devote sufficient time and attention to each case”).

[12].      For examples of news coverage on the Madoff clawback suits, see Zachary R. Dowdy, Investors’ Gains Open to Lawsuits, Newsday (Mar. 13, 2009), http://www.newsday.com/news/investors-gains-open-to-lawsuits-1.770903; Beth Healy, $100m in Madoff Claims Likely To Be OK’d Soon; Trustee Also Pursuing $11b in Assets To Repay Some Clients, Bos. Globe (May 15, 2005), http://www.boston.com/business/articles/2009/05/15/100m_in_madoff_claims… Madoff Relatives and Others Are Sued for $69 Million, N.Y. Times (Nov. 28, 2010), http://www.nytimes.com/2010/11/28/business/28madoff.html; and Bob Van Voris, Madoff Firm Trustee Seeks $50 Billion as Clawback Window Closes, Bloomberg (Dec. 13, 2010), http://www.bloomberg.com/news/2010-12-10/madoff-trustee-sues-sonja-kohn-…. For examples of news coverage of the Bayou Funds clawback suits, see Bernard Condon, Bayou Bog, Forbes (Feb. 26, 2007), http://www.forbes.com/free_forbes/2007/0226/044b.html; Ianthe Jeannie Dugan, Bayou Holders Can Sue Others Who Cashed Out Before Collapse, Wall St. J., Feb. 26, 2007, http://online.wsj.com/article/SB117227816284418003-search.html; and Failed Hedge-Fund Firm Bayou Sues Investors To Return Money, Wall St. J. (Sept. 13, 2006), http://online.wsj.com/article/SB115810478779561307-search.html.

[13].       Receivership collection efforts are not without controversy. Investors who believe that they have lawfully retrieved their principal and profit from an institution often claim that they did not know the enterprise was fraudulent. Receivers generally litigate such claims and attempt to prove that the investors knew or should have known about fraudulent acts. See, e.g., Michael Rothfeld, Madoff Investors
Brace for Lawsuits, Wall St. J. (July 26, 2010), http://online.wsj.com/article/SB1000142405274870471910457538914162047350….

[14].      David Barboza, $1.1 Billion To Settle Suit on Vitamins, N.Y. Times (Nov. 4, 1999), http://www.nytimes.com/1999/11/04/business/1.1-billion-to-settle-suit-on….

[15].       Id.

[16].      See Ross & Pritikin, supra note 1, at 482 (“[A]gencies often fail to document why fines are reduced subsequent to initial assessment, making it difficult to determine if over-assessment explains low collection rates… . Further, if over-assessment were a significant explanatory factor in low collections, one would expect agencies to invoke it in response to governmental audits criticizing collections performance. However, in the dozen GAO audits in which agencies responded to GAO’s collections-related findings, no agency relied on this rationale… . [O]ur findings belie any strategic over-assessment of fines by agencies that would favorably explain low collection rates.”).

[17].       See United States v. Madoff, No. 1:09-cr-00213-DC (S.D.N.Y. Sept. 22, 2010) (second final order of forfeiture), available at http://www.justice.gov/usao/nys/madoff/20100922madoffsecondfofecf.pdf; see also Diana B. Henriques, Madoff Is Sentenced to 150 Years for Ponzi Scheme, N.Y. Times (June 29, 2009), http://www.nytimes.com/2009/06/30/business/30madoff.html?_r=1&hp.

[18].      United States v. Forbes, No. 3:02-cr-264-AHN (D. Conn. Jan. 23, 2007); United States v. Shelton, No. 3:02-cr-264-AWT (D. Conn. Aug. 4, 2005) (order of judgment); see also Joshua Lipton, No Leniency for Walter Forbes, Forbes (Jan. 17, 2007), http://www.forbes.com/2007/01/17/walter-forbes-cendant-cx_jl_0117autofac… Press Release, U.S. Attorney’s Office for the Dist. of N.J., U.S. Dep’t of Justice, Former Cendant Chairman Walter Forbes Sentenced to 151 Months in Federal Prison for Lead Role in Massive Accounting Fraud (Jan. 17, 2007), http://www.justice.gov/usao/nj/Press/files/pdffiles/Older/forb0117rel.pdf.

[19].      Thom Weidlich & David Glovin, Bayou’s Israel Gets 20-Year Term for Hedge-Fund Fraud, Bloomberg (Apr. 14, 2008), http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a7_CvbPGGC3U&refe… Press Release, U.S. Attorney’s Office for the S. Dist. of N.Y., U.S. Dep’t of Justice, Chief Executive Officer of Bayou Funds Sentenced to 20 Years in Federal Prison for Massive Investor Fraud (Apr. 14, 2008), http://www.justice.gov/usao/nys/pressreleases/April08/israelsamuelsenten….

[20].     See United States v. Lay, 568 F. Supp. 2d 791 (N.D. Ohio 2008).

[21].      See People v. Kozlowski, 898 N.E.2d 891 (N.Y. 2008); see also Jennifer Bayot, Ex-Tyco Executive Sentenced to 8 1/3 to 25 Years in Prison, N.Y. Times (Sept. 19, 2005), http://www.nytimes.com/2005/09/19/business/19cnd-tyco.html.

[22].      Press Release, U.S. Attorney’s Office for the S. Dist. of N.Y., U.S. Dep’t of Justice, Hedge Fund Billionaire Raj Rajaratnam Found Guilty in New York Federal Court of Insider Trading Charges (May 11, 2011), http://www.justice.gov/usao/nys/pressreleases/May11/rajaratnamrajverdict… Press Release, U.S. Attorney’s Office for the S. Dist. of N.Y., U.S. Dep’t of Justice, Hedge Fund Founder Raj Rajaratnam Sentenced in Manhattan Federal Court to 11 Years in Prison for Insider Trading Crime (Oct. 13, 2011), http://www.justice.gov/usao/nys/pressreleases/October11/rajaratnamrajsen….

[23].      Ross & Pritikin, supra note 1, at 482 (“At the same time, our findings belie any strategic overassessment of fines by agencies that would favorably explain low collection rates.”).

[24].      Press Release, U.S. Attorney’s Office for the S. Dist. of N.Y., U.S. Dep’t of Justice, U.S. Reaches Settlement Regarding Ebbers’s Restitution Obligations (June 30, 2005), http://www.justice.gov/usao/nys/worldcom/ebberssettlementpr.pdf.

[25].      Skilling v. United States, 130 S. Ct. 2896 (2010).

[26].      See id.; Thom Weidlich & Laurel Brubaker Calkins, Enron’s Skilling Sentenced to 24 Years for Fraud, Bloomberg (Oct. 23, 2006), http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a_Jbjnng.4u4.

[27].      Mine Safety and Health Enforcement, Mine Safety & Health Admin., http://www.msha.gov/mshainfo/factsheets/mshafct4.htm (last visited Apr. 23, 2011); RCPA Enforcement Press and Authorities, Envtl. Protection Agency, http://www.epa.gov/compliance/civil/rcra/rcraenfprocess.html (last updated May 18, 2010).

[28].      The Environmental Protection Agency has acknowledged that alternative dispute resolution, “[w]hen strategically applied in the context of enforcement negotiations[,] … has proven to be a useful tool.” What is ADR?, U.S. Envtl. Protection Agency, http://www.epa.gov/region1/enforcement/adr/whatis.html (last updated Feb. 6, 2012).

[29].      U.S. Sentencing Guidelines Manual § 8C2.2 (2010).

[30].      Press Release, U.S. Dep’t of Justice, Horizon Lines LLC Agrees To Plead Guilty To Price Fixing on Coastal Water Freight Services Between the Continental United States and Puerto Rico (Feb. 24, 2011), http://www.justice.gov/atr/public/press
_releases/2011/267605.htm.

[31].       See United States v. Horizon Lines LLC, No. 3:11-cr-00071-DRD (D.P.R. Apr. 28, 2011) (order granting motion for modification of fine pursuant to 18 U.S.C. § 3573); Press Release, Horizon Lines, Inc., Court Reduces Horizon Lines’ Fine to $15 Million (Apr. 28, 2011), http://www.horizonlines.com/News/Press-Releases/Court-Reduces-Horizon-Li…$15-Million.aspx.

[32].      Joseph Bonney, Horizon Stock Moves to Over-the-Counter, J. Com. (Oct. 20, 2011), http://www.joc.com/container-lines/horizon-stock-moves-over-counter.

[33].      Offer in Compromise, IRS, http://www.irs.gov/individuals/article/0„id=243822,00
.html (last updated June 8, 2012).

[34].      Id.

[35].      17 C.F.R. § 201.630 (2000); see, e.g., In re Terry T. Steen, Exchange Act Release No. 133, 68 SEC Docket 314, 1998 WL 689861 (ALJ Sept. 29, 1998) (supplemental initial decision).

[36].      Ross and Pritikin’s suggestions for closing the collection gap generally fall into a few categories: optimization of existing collection practices, increasing specialized collection units, creating or modifying collection incentives, and privatization of the collection function. See Ross & Pritikin, supra note 1, at 507-24.

[37].      Offices of the U.S. Attorneys, U.S. Dep’t of Justice, Executive Office for U.S. Attorneys Resource Manual § 112 (1997), available at http://www.justice
.gov/usao/eousa/foia_reading_room/usam/title3/usa00112.htm; see also USAM, supra note 4, § 3-12.200.

[38].      Offices of the U.S. Attorneys, supra note 37, § 112; see also USAM, supra note 4, § 3-12.200.

[39].      See 18 U.S.C. § 3612 (2006).

[40].     Offices of the U.S. Attorneys, supra note 37, § 112; see also USAM, supra note 4, § 3-12.200.

[41].      Offices of the U.S. Attorneys, supra note 37, § 112; see also USAM, supra note 4, § 3-12.200.

[42].      Offices of the U.S. Attorneys, supra note 37, § 112; see also USAM, supra note 4, § 3-12.200.

[43].      Ross & Pritikin, supra note 1, at 508-10.

[44].      Id. at 513-14.

[45].      Id. at 507 (“The incentive problems that undermine a commitment to collections at the personnel and management levels of administrative agencies likely lie at the heart of undercollection. Although a lack of resources plays a role, it does not explain why agency collectors do not make the most of the funding and tools they already have. And other explanations, like blame-shifting, appear to flow in large part from the underlying distortion in agency incentives. Incentive-based commitment to collections is apparently a prerequisite to collections success.”).

[46].      See, e.g., United States v. Horizon Lines, LLC, No. 3:11-cr-00071-DRD (D.P.R. Mar. 25, 2011) (plea agreement), available at http://www.justice.gov/atr/cases/f268600/268680.pdf (noting that Horizon Lines agreed to pay criminal antitrust fines in installments); United States v. Japan Airlines Int’l Co., 1:08-cr-00106-JDB (D.D.C. May 7, 2008) (plea agreement), available at http://www.justice.gov/atr/cases/f232900/232913.pdf (noting that Japan Airlines agreed to pay a $110 million fine for antitrust violations in installments, payable over five years).

[47].      Ross & Pritikin, supra note 1, at 460 (“Monetary remedies can serve various regulatory objectives. First and foremost is deterrence: Motivating future behavior is the most obvious and widely acknowledged purpose of administrative fines.” (internal quotation marks and alterations omitted)).

Andrew Friedman is a partner at Patton Boggs LLC. He primarily represents clients involved in criminal and civil investigations and prosecutions, as well as in parallel administrative, regulatory, and civil litigation. In particular, Mr. Friedman has substantial experience and expertise defending investigations involving antitrust, securities, foreign corrupt practices, banking law, environmental law, hedge funds, mining, export controls, and contractor corruption. He also has significant experience counseling individuals and corporations involved in congressional investigations. He received his A.B. from Brown University in 1988 and his J.D. from the University of Minnesota Law School in 1993.

Cite this piece: Andrew Friedman,

The “Collection Gap” Explained: A White-Collar Practitioner’s View

, Yale L. & Pol'y Rev. Inter Alia (Oct. 5, 2012, 12:00 PM), http://ylpr.yale.edu/inter_alia/collection-gap-explained-white-collar-practitioners-view.