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Antitrust enforcement has arrived on Wall Street

The Antitrust Division of the U.S. Department of Justice, which has exclusive jurisdiction over the prosecution of criminal antitrust offences, has arrived on Wall Street and appears to be settling in for the long haul. This development has positives and negatives for financial firms. On the one hand, the Antitrust Division’s involvement further complicates the already tangled web of enforcement agencies overseeing the industry and potentially expands the liability of executives for the illegal conduct of wayward employees. On the other hand, the transparency and predictability of the Antitrust Division’s enforcement program may provide some order and consistency to the at times chaotic swarm of enforcement in this area, as well as provide for some strategic advantages to those who properly navigate the process.

The Antitrust Division has prioritized the investigation and prosecution of matters in the financial services industry. Consistent with this mandate, the Division already has numerous ongoing investigations into price fixing, bid rigging and other activities in the financial services industry, including the CDS, municipal bonds and interest rate investigations. More importantly, signalling a potential long term presence in the area, the Division’s participation in the interest rate investigations demonstrates a definitive shift in the Division’s view of traditional market manipulation conduct as constituting a potential antitrust violation.

Aside from further crowding the enforcement landscape, the involvement of the Antitrust Division in the financial services industry raises the stakes yet again for firms and their executives. Unlike other prosecuting entities within the Department of Justice, the Antitrust Division routinely requires criminal convictions from corporations and criminally prosecutes not only the individual(s) who committed the illegal act(s) but also those executives with knowledge of the conduct and the authority to stop it. The Antitrust Division also enjoys a sentencing advantage vis-à-vis its prosecution brethren in the nature of a generous proxy by which it can estimate, as opposed to prove, the harm caused by a particular illegal act. This proxy, which applies equally to corporate fines and individual jail sentences, has the potential to produce disproportionately larger criminal penalties than other statutes targeting the same conduct. Finally, the antitrust discipline has a long and storied tradition of follow-on class action lawsuits, as well as a developing tradition of follow-on shareholder lawsuits, which prey on individual and corporate subjects and targets of Antitrust Division investigations and commonly result in significant penalties.

While the Antitrust Division may wield an arguably sharper sword than many of its fellow enforcers, it does so in a more predictable and transparent way. The Division’s leniency program establishes the benefits for corporate and individual whistle-blowers – complete immunity – without regard to the sometimes murky discretionary principles applied by other enforcers. Similarly, the Division’s policy for handling co-operators dictates generous discounts and has proven to generate consistent results across prosecutions. Further, because of its long history of handling corporate matters, the Division uniquely brings to the enforcement table in-house economic and technical resources and expertise that can help to more quickly short-circuit investigations that lack merit.

The rise of antitrust enforcement in the financial services sector places a premium on the evaluation of existing compliance policies and procedures. As with other areas of significant exposure, firms would be well advised to establish robust compliance measures to root out potential antitrust problems, as well as mitigate the risk for their executives. It also requires that significant thought be put into investigative and defense strategies upon discovery of a problem. The financial services space is fraught with potential challenges for antitrust enforcement and an early evaluation of those challenges will inform the best strategy for resolving or mitigating a problem. In the crowded enforcement environment, it will become increasingly important how a potential violation is characterized and pursued by a firm from the outset because that distinction may ultimately dictate which agency takes the lead role in developing the evidence and, consequently, what strategies the firm can employ.

Contributed by John Terzaken

Legal and Regulatory Risk Note
United States

Recognition