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White Collar, Congressional, SEC, Energy Enforcement & Other Government Inquiries

Government, Regulatory & Criminal Investigations Group
CFPB

CFPB Reaches Settlement Agreement with Debt Relief Company and Law Firm

Last Thursday, December 4, 2014, the Consumer Financial Protection Bureau (CFPB) reached a settlement agreement with Premier Consulting Group LLC  and the  Law Office of Michael Lupoloverrequiring the defendants to pay a fine of roughly $69,000 for allegedly charging consumers illegal upfront fees for debt relief services. The Telemarketing Sales Rule prohibits companies from collecting fees for debt relief services in advance of any settlement. 16 C.F.R. § 310.4(a)(5)(i).

The complaint in this matter, filed in May 2013, alleges that Premier collected approximately $187,000 from consumers in advance of settling any debts, and that the Law Office of Michael Lupolover collected $112,000. In addition to the monetary penalty, the settlement agreement also requires the defendants to comply with additional steps to prevent future violations, including the submission of a compliance plan, reporting requirements and expanded record retention policies.

In addition, the complaint alleged that two defendants not included in last week’s settlement agreement, Mission Abstract LLC and Michael Levitis, impersonated a government agency when dealing with consumers and gave false statements regarding fees for their debt relief services. These charges led to the CFPB’s first criminal prosecution referral when the U.S. Attorney for the Southern District of New York brought mail and wire fraud charges against Mission, Levitis and five employees. Levitis was sentenced in November 2013 to nine years in prison and was ordered to forfeit $2.2 million and pay a $15,000 fine.

 

Ethics Rules, Government Ethics, Political Law

A Question of Ethics: The Year in Government Ethics

Roll Call | December 9, 2014

As long as there are governments, there will be government corruption. The temptations to abuse power are never going away, and neither is human frailty, which means government ethics will remain an important issue for, well, forever.

A look back on 2014 reveals yet another year of explosive government ethics stories, scandals and legal developments. As has been the custom for the year’s final column, I asked several of the top practitioners in the field to name the biggest government ethics stories of the year.

Before turning to those, I have one of my own to mention for its impact on the actual day-to-day operations of the practice of congressional ethics. Last month, John Sassaman stepped down as chief counsel of the Senate Select Committee on Ethics, a position he held for more than six years. Sassaman presided over many high-profile investigations during his tenure and, perhaps more importantly, led a staff that was invariably prompt and thoughtful in responding to questions about Senate Ethics rules. Long known as one of the most well-liked employees of the Senate, Sassaman leaves big shoes to fill.

Robert Walker, former chief counsel of the Senate Ethics Committee who is now with Wiley Rein, cited the death of Carol Dixon, the longtime director of advice and education at the House Ethics Committee, as the ethics story of the year.

“For many years, and for so many people in the House, she was the face, the voice, the source of House ethics advice,” Walker said. “If an institution can show emotion, her memorial service this summer showed how deeply and broadly the House was touched by both her life and her death.”

In terms of impact, Walker also named the Securities and Exchange Commission’s issuance of a subpoena to the House Ways and Means Committee and a committee staffer, seeking evidence relating to an insider trading investigation.

“The SEC’s action in this test case already gets the prize for chutzpah, but if the courts uphold the SEC’s subpoenas — even in part — against the House’s assertion of total immunity from investigation under the Speech or Debate Clause of the Constitution, there will be no denying that the [Stop Trading on Congressional Knowledge] Act drastically changed the rules of the game in D.C. on the private sector’s use and exchange of nonpublic government information,” Walker said.

Setting these aside, one story was a near-unanimous pick as the ethics story of the year: the trial and convictions of former Virginia Gov. Bob McDonnell and his wife, Maureen. On Sept. 4, after a five-week trial and three days of deliberations, a jury in a U.S. District Court in Richmond found the pair guilty of multiple counts of corruption stemming from gifts received from a political donor. The charges alleged the gifts violated not state gift rules, but rather broad federal prohibitions against depriving others of the intangible right to honest services.

“Hands down,” said Stefan Passantino of McKenna, Long & Aldridge. “There’s no competition,” said Meredith McGehee, policy director of the Campaign Legal Center, a public interest group focused on campaign finance and government ethics. “The major development,” said Walker.

From Hollywood appeal to legal implications, each expert cited different reasons for the significance of the McDonnell story. “Not only did the lurid trial … spare no detail in delving into the personal lives of all involved,” Passantino said, “it also provided a catalyst for Virginia — and states everywhere — to take a hard look at their gift and travel rules.”

Although technically not a case focused on campaign finance, McGehee said it nevertheless raised questions going right to the heart of the Supreme Court’s campaign finance decision in Citizens United. “The buying and selling of access, the insistence/delusion that no favors were bought, and characters that are right out of a novel,” she said.

Walker noted the warning the convictions sounded for other government officials and their families. “After an indictment that to some looked shaky,” he said, the message was “that no official act is so small or routine that it can be sold with impunity.”

With this and so much other alleged misconduct in the news this year, one prominent practitioner wondered whether the biggest story of the year may be voters’ indifference to government corruption. Skadden attorney Ken Gross, former associate general counsel of the Federal Election Commission, cited the large number of instances in which an incumbent won re-election in November despite allegations of ethical abuses.

“Black clouds that were exploited in negative advertising against these members did not shake the electorate,” Gross said. “Perhaps the level of cynicism is so high among voters that ethics charges don’t resonate. That may be the biggest scandal of all.”

© Copyright 2014, Roll Call Inc. Reprinted with permission. Widely regarded as the leading publication for Congressional news and information, Roll Call has been the newspaper of Capitol Hill since 1955. For more information, visit www.rollcall.com.

False Claims Act, Qui Tam, Whistleblowers

Public Databases Increase Qui Tam Risk for Healthcare Providers

In 2014, the Centers for Medicare and Medicaid Services (CMS) released two new sources of data that are intended to increase transparency related to federal payments to physicians. They also, however, present a risk of being used by whistleblowers and attorneys to support qui tam lawsuits alleging violations of the False Claims Act (FCA), the Anti-Kickback Act or the Physician Self-Referral Law, commonly called the Stark Law.

In April 2014, CMS released the first of these databases, which shows payments the federal government made to physicians and other healthcare professionals for services provided to Medicare patients. The data offers detailed information on the payments, including the specific procedure codes for which payment was made. The data has generated media reports regarding which doctors receive the most compensation from Medicare. There also have been reports that certain doctors are billing for a disproportionate number of complex or expensive services, compared to the number of less complex services they provide.

The Medicare payment information cannot serve as the sole basis for a qui tam lawsuit against a provider, because the terms of the FCA bar claims based on previously disclosed information. 31 U.S.C. § 3730(e)(4). A qui tam attorney can, however, use that payment data to bolster a complaint by a relator who alleges that he has inside information to suggest that false claims have been made. Allegations of fraud must be pleaded with particularity under the Federal Rules of Civil Procedure, so the database may provide useful additional detail to render a relator’s complaint less vulnerable to a motion to dismiss. For example, a relator who alleged that the provider was performing unnecessary procedures could use the data to illustrate that the provider performed the largest number of a particular procedure in his state or region, or that the number of times the provider performed a given procedure was disproportionate to the frequency of other treatment options the provider used for the same condition. In this way, a qui tam complaint can use public and potentially innocuous data to support allegations of fraudulent billing.

The second database, released in October 2014, provides information on payments by the manufacturers of drugs and medical devices to physicians as well as information indicating whether physicians hold ownership interests in the manufacturers. CMS was required to collect and publish the data by the Physician Payments Sunshine Act, a section of the Affordable Care Act. The law requires drug and device manufacturers to submit the information to CMS, which publishes it in an online, searchable database.

The information in the Sunshine Act database may provide evidence of violations of the Anti-Kickback Act, which prohibits soliciting or offering to pay any remuneration in exchange for referrals that could result in payments by the federal government, and violations of the Stark Law, which prohibits a physician from making referrals to entities with which he has a financial relationship. An individual could bring a qui tam case under the FCA alleging violations of either of these laws. As with the payments database, the Sunshine Act database cannot be the sole basis for a qui tam complaint because the information is public, but the database could be used to bolster allegations made by the relator. For example, a relator who claimed that a physician prescribed patients a medical device in which he had an interest or for which he had received payments from the manufacturer, could use the Sunshine Act database to prove the existence of the financial interest or payments. The database also could be used to demonstrate payments by a manufacturer to support allegations that the manufacturer was violating the Anti-Kickback Act by improperly offering to pay physicians.

Ultimately, the payments database and the Sunshine Act databases provide additional information that qui tam relators and their attorneys may be able to use to support their complaints, and make it more likely that a complaint survives a motion to dismiss. Claims that survive motions to dismiss and proceed to discovery will impose increased costs on defendants and give them additional incentive to settle. Detailed complaints that include supporting information from the databases also may do more to convince the government of the illegality or severity of the defendant’s actions and increase the chances that the government will intervene in the qui tam action.

CFPB, Financial Regulation, Regulation

CFPB Cautions Mortgage Lenders Who Request Proof of Social Security Disability Income

In a recent bulletin, the Consumer Financial Protection Bureau (CFPB) warned lenders against the dangers of requesting that mortgage applicants produce unnecessary proof of Social Security disability income. According to the CFPB, such requests may violate fair lending laws.

CFPB Bulletin 2014-03 explains that mortgage applicants who depend on Social Security disability income face challenges in proving that their income is likely to continue because the Social Security Administration (SSA) generally does not provide documentation of how long the benefits will last. The Bulletin reminds lenders that the proper way to verify Social Security disability income is addressed in the Bureau’s Ability-to-Repay and Qualified Mortgage Rule. Under that Rule, lenders should rely on the defined expiration date for benefits payments that is included in the SSA benefit verification letter or equivalent document. If the letter does not specify an expiration of benefits within three years of the loan origination, according to the Rule, “the creditor shall consider the income effective and likely to continue.”

The timing of the CFPB’s reminder is not surprising; in the last three months, three lenders have resolved allegations that they violated federal laws, including the Fair Housing Act and Equal Credit Opportunity Act, by requesting that mortgage applicants produce letters from doctors or the SSA to prove that their disability income would continue. In all three cases, the lenders executed enforcement agreements and were required to pay hefty fines:

  • an August 2014 consent order requires a lender to pay $1.52 million;
  • an August 2014 conciliation agreement requires a lender to pay $104,000; and
  • a November 2014 consent order requires a lender to pay between $1,100 and $5,500 to each affected mortgage applicant.

The bulletin also provides three tips for lenders who are concerned about managing fair lending risk in this area:

  • clearly articulate verification requirements for Social Security disability income;
  • provide training to underwriters, mortgage loan originators, and others involved in mortgage-loan origination; and
  • carefully monitor for compliance with underwriting policies.
Corporate Fraud, DOJ Policy, False Claims Act, Qui Tam, Uncategorized, Whistleblowers

With Record-Setting False Claims Act Recoveries, What Will DOJ Do for an Encore?

Last week, the Department of Justice (DOJ) announced that it had collected a record $5.69 billion in False Claims Act (FCA) settlements and
recoveries over the past year, marking the first time that recoveries have breached the $5 billion threshold. The DOJ press release announcing this accomplishment highlighted two key areas of recovery: healthcare and the financial sector.

While the healthcare field is likely to remain a fertile ground for future FCA litigation, many of the recoveries involving financial institutions arose from events leading up to the financial crisis. As a result, DOJ will likely be hard-pressed to replicate this value in the upcoming year. The Supreme Court may add further complications to DOJ’s recovery efforts when it decides Kellogg Brown & Root Services v. United States ex rel. Carter, which may limit the government’s efforts to toll the FCA’s statute of limitations. Despite its unprecedented success this year, DOJ is unlikely to declare victory and refocus its efforts elsewhere. To the contrary, it is highly likely that DOJ will redouble its efforts in pursuing FCA cases and up the stakes further by shifting from a focus on monetary recovery to a focus on seeking criminal penalties.

DOJ has already announced its intent to increase emphasis on criminal prosecutions in FCA cases. In remarks on September 17, 2014, Leslie Caldwell, assistant attorney general for the Criminal Division, announced that DOJ would be implementing new procedures regarding qui tam complaints. Caldwell stated that DOJ would be increasing the resources it devotes to FCA cases by bringing in the Criminal Division early and often. Going forward, the Criminal Division’s Fraud Section will review all qui tam actions as soon as they are filed to determine whether to open parallel criminal investigations. Caldwell suggested that even if criminal charges ultimately are not filed, the civil investigation will still benefit from criminal investigators’ expertise in uncovering fraud. She also encouraged prospective relators to contact criminal as well as civil authorities before filing a qui tam suit.

The upshot of these developments is that companies should expect an increase in criminal investigations that accompany FCA cases. In particular, they should expect DOJ to intensify efforts to hold individuals criminally responsible for FCA violations. In a particularly ominous statement, Caldwell highlighted the Criminal Division’s ability to freeze assets. While this power ostensibly is used for “preventing criminals from enjoying the proceeds of their schemes,” DOJ regularly freezes assets before trial as a tactical tool to impede individuals’ ability to defend themselves against the charges.

Increased criminal scrutiny makes it even more vital for companies to undertake a comprehensive internal investigation when first confronting an FCA investigation. As a criminal investigation likely will include individual employees becoming subjects or targets, the company should identify individuals with potential exposure to government scrutiny as early as possible. Companies also should ensure that they have sufficient D&O insurance coverage to withstand an investigation involving senior-level employees. On the preventative side, this only further underscores the importance of robust compliance programs that ensure employee concerns are addressed and resolved before they turn into whistleblower or FCA cases.

CFPB, Financial Regulation

CFPB Issues Sweeping Proposal to Regulate Prepaid Financial Products

On November 13, 2014, the CFPB proposed expansive federal regulations establishing requirements for prepaid financial products. The proposed regulations cover “traditional” prepaid cards that can be loaded with money and used to store funds, make payments, withdraw cash, receive direct deposits, and send funds to others. According to the CFPB , consumers are expected to load nearly $100 billion onto general purpose reloadable cards in 2014. In addition, the proposed new regulations also cover payroll cards; certain federal, state, and local government benefit cards; student financial aid disbursement cards; tax refund cards; peer-to-peer payment products; and even mobile and electronic accounts that store funds.

The proposed regulations come as no surprise, as the CFPB has made its intentions to regulate prepaid financial products clear since May 2012. CFPB Director Richard Cordray characterized the regulations as “clos[ing] the loopholes in this market and ensur[ing] prepaid consumers are protected whether they are swiping a card, scanning their smartphone, or sending a payment.”

Based on the proposal’s broad scope, however, it appears to do much more than simply close loopholes. The summary below discusses key provisions of the proposed regulations.

Disclosure Requirements

The CFPB proposal seeks to standardize disclosures by requiring that prepaid card issuers adopt two model disclosure forms: a short form and a long form. These forms are available here . The short form highlights basic account information, including disclosures about monthly fees, purchase fees, ATM fees, and fees to reload cash. The long form contains all the fees of the short form, plus any other fees that could be imposed.

Prepaid card issuers also would be required to post their account agreements on their websites and submit their account agreements to the CFPB. In turn, the CFPB would create and maintain a public website housing all submitted account agreements.

Access to Account Information

Under the proposed regulations, prepaid card issuers must provide consumers with free access to account information. That information can be disclosed online or through sending periodic statements. When providing a statement or account information, the prepaid card issuer would need to disclose monthly and annual totals of all fees imposed on the account and the total of all deposits to, and debits from, the prepaid account.

Credit Features

The proposed regulations also impose a variety of limitations on extensions of credit, triggered when prepaid products “allow consumers to pay to spend more money than they have deposited in the account.” For example, the proposed regulations treat overdraft coverage as an extension of credit. This means that if prepaid card issuers provide overdraft coverage and charge for it, consumers receive the same protections as credit card holders.

In addition, the proposed regulations would require providers of prepaid products to assess the consumer’s ability to repay the debt. The proposed regulations also place limits on when prepaid card issuers can offer credit products and when they can move funds, requiring them to wait 30 days after a card is registered to offer a credit product. Prepaid card issuers also would be prohibited from automatically moving funds to pay a debt unless a consumer affirmatively opts in. Even if the consumer opts in, the prepaid card issuer cannot take funds more than once per month. Prepaid card issuers also must give each consumer 21 days to repay a debt before charging a late fee that is “reasonable and proportional” to the violation of the account terms in question.

Error Resolution and Fraud Protection

The CFPB’s proposed regulations also enhance consumer protections in cases of error or fraud. If there is a dispute − for example, where a consumer is double-charged − the prepaid card issuer has 10 days to investigate. If an investigation cannot be timely resolved, the issuer has up to 45 days to resolve the dispute but must deposit the disputed funds back into the consumer’s account in the interim. The proposed regulations also limit consumers’ liability for fraudulent activity. If a consumer timely reports that a prepaid card was lost or stolen, the consumer is only responsible for up to $50 in unauthorized charges.

The proposed regulations will be open for comment for 90 days, and prepaid card issuers also should expect a nine-month implementation period before the final rule becomes effective. If the proposed rule becomes final, it would mark the first set of comprehensive federal regulations over the prepaid financial product industry.

CFPB, Enforcement Actions, Financial Regulation

CFPB Supervision Exposes Violations by Service Providers

Last month, the CFPB released the fifth edition of its Supervisory Highlights report describing findings from recent examinations of consumer financial products and services providers.

The report highlighted regulatory violations − or unfair, abusive, or deceptive trade acts or practices (UDAAPs) − in the consumer reporting, debt collection, deposits, mortgage servicing, and student loan servicing industries. Key highlights include the following:

  • For the consumer reporting industry, the report primarily addressed agencies’ dispute-handling obligations, including their failure to provide certain information about reinvestigation of consumer disputes related to the completeness or accuracy of information contained in agency files.
  • Unsurprisingly, the CFPB maintained its focus on debt collectors and violations of the Fair Debt Collection Practices Act (FDCPA). It observed debt collectors (1) exceeding FDCPA limits on imposing convenience fees, (2) threatening litigation without intent to pursue, (3) permitting disclosure of an employer’s name before receiving a disclosure request, (4) overstating the annual percentage rates in documents provided to debt buyers, and (5) delaying forwarding of payments to appropriate debt buyers.
  • In the deposit area, the report noted several violations of Regulation E’s procedures on electronic funds transfers, including (1) violations of error resolution requirements, (2) violations regarding liability for unauthorized transfers, and (3) notice deficiencies.
  • With respect to student lending, the report highlighted a number of UDAAPs, including (1) allocation of partial payments to maximize late fees, (2) misrepresentation of minimum payments on billing statements, (3) improperly charged late fees, (4) failure to provide accurate tax information, (5) misrepresentation of rules on discharge through bankruptcy, and (6) improper telephone communications.

In addition, the report offered updated supervisory guidance and identified public enforcement actions addressing regulatory violations.

  • On the mortgage front, the report noted the CFPB’s new mortgage servicing rules that went into effect on January 10, 2014. These rules require servicers to maintain certain oversight policies and procedures, but the CFPB observed deficient or, in some cases, nonexistent procedures. The report also addressed misrepresentations and deceptive acts relating to loan modifications and short sales.
  • In addition, in January 2014, the CFPB announced a different resubmission standard for any institution reporting 1,000 or more loans on its Home Mortgage Disclosure Act Loan Application Register. The CFPB will continue to follow previous standards in reviewing 2013 and earlier HMDA data, which will allow larger reporters an opportunity to comply with the new standards.
  • For larger nonbank participants, the CFPB discussed a final rule in the international money transfer market and a proposed rule expanding supervisory authority in the automobile financing market.
  • The report also described CFPB guidance on (1) marketing credit card promotional APR offers, (2) FFIEC credit practices, (3) mortgage servicing transfers, and (4) mortgage transactions involving “mini-correspondent” lenders.
DOJ Policy

DOJ Wields Financial Institutions Reform, Recovery, and Enforcement Act Against Financial Institutions

In 2012 and 2013, the Department of Justice brought a slew of actions against several financial institutions under a rarely used and little-known statute from the late 1980s for conduct related to the mortgage crisis. Outcomes in these cases in recent months show the statute’s potency and likely indicate that the government will continue to use this statute in the future.

The statute involved is the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). Originally passed by Congress in response to the savings-and-loan crisis of the late 1980s, FIRREA was enacted as a tool to protect financial institutions and others from fraud and insider actions by allowing the government to bring civil actions when certain criminal statutes (including mail and wire fraud) have been violated, as long as the violation “affected a federally insured financial institution.” Essentially, FIRREA allows the government to prosecute alleged criminal conduct while taking advantage of the lower burden of proof used in civil cases. In addition, the Act comes with a 10-year statute of limitations, as opposed to the typical five- year limitation common in criminal statutes.

Courts have strengthened the government’s ability to bring FIRREA cases in the future by declining to limit the scope of the law. The Act allows the government to bring an action for civil penalties against anyone who violates certain criminal statutes when the conduct “affects[s] a federally insured financial institution.” District Courts faced with the issue have ruled that the defendant financial institution can, in the same case, be both the defendant and the financial institution “affected” by the conduct (as opposed to frauds by third parties that affect the bank). The Courts of Appeals have not yet been afforded the opportunity of limiting the statute’s use.

In addition, Attorney General Eric Holder recently proposed raising FIRREA’s whistleblower payment from the current $1.6 million cap, yet another indication that the government plans on bringing additional FIRREA actions in the future.

 

Anti-Corruption, Compliance, FCPA, FCPA Investigations, UK Bribery Act, White Collar Crime

Update on Brazil: Embraer SA and Anti-Corruption Progress

Imagine you are a compliance officer for a multinational company with securities listed on a U.S. stock market. The Foreign Corrupt Practices Act (FCPA) falls squarely within your purview, but other anti-corruption regimes seem less relevant because of a lack of enforcement (with the exception, perhaps, of the UK Bribery Act). Until recently, Brazil may have fallen into the category of countries about which you had lesser concerns in terms of vigorous anti-corruption enforcement. However, new enforcement efforts may be tilting the scale. Just ask Embraer SA, which finds itself dealing with criminal prosecutions of employees in Brazil, while facing parallel bribery-related investigations of the company in the United States and Brazil.

On September 23, 2014, The Wall Street Journal reported that Brazilian authorities had filed a criminal complaint alleging that eight Embraer employees bribed government officials in the Dominican Republic to secure a $92 million military procurement contract. According to the report, the U.S. Department of Justice and Securities and Exchange Commission provided evidence to the Brazilian authorities and are assisting in the investigation. The complaint alleges that Embraer vice presidents, regional directors and sales managers agreed to pay $3.5 million to a retired Dominican Air Force colonel who was serving as the director of special projects for the Dominican military, in exchange for his influence over the legislature to approve the contract with Embraer. The money was paid through three shell companies owned by the colonel and allegedly was intended for a Dominican senator. After Embraer’s compliance department prevented the employees from completing the transactions, the employees allegedly concealed the remaining payments as consulting fees in connection with a deal to sell aircraft to the Kingdom of Jordan. The employees are charged with corruption in international transactions and money laundering, and each faces eight years in prison if convicted.

It initially was reported in November 2013 that U.S. and Brazilian authorities were investigating whether Embraer had bribed a government official in the Dominican Republic in exchange for a contract to provide military aircraft. At the time, it was one of the first known investigations by Brazilian authorities into a Brazilian company for bribing government officials outside Brazil, and an indicator that the then-recently passed Brazil Clean Companies Act was in action. It is unknown whether the Brazilian investigation has ended with the criminal indictments. There are no indications that U.S. authorities have ended their investigations into Embraer or that Brazilian authorities have chosen not to pursue the company under the Clean Companies Act. Accordingly, more trouble may still be coming Embraer’s way.

The Organization for Economic Cooperation and Development (OECD), which recently published its Phase 3 report on Brazil’s implementation of the OECD Anti-Bribery Convention, has commended Brazil for enacting its Clean Companies Act and for the indictments handed down in the Embraer case. However, the OECD remains generally critical of Brazil’s anti-bribery enforcement efforts to date. The Phase 3 report cites several contributing factors for OECD’s ongoing concerns, including Brazil’s failure so far to issue the decree necessary to fully enforce the Clean Companies Act, a statute of limitation issue, and the lack of private-sector whistleblower protections.

Compliance officers whose companies have operations in, or do business in, Brazil should continue to monitor the legal developments in that country − and all should view the Embraer case as a cautionary tale. The apparent cooperation between U.S. and Brazilian authorities in that case highlights the importance for compliance departments to be mindful of the other anti-corruption laws that can impact businesses in non-U.S. jurisdictions. Brazil is just one example of several countries that recently have focused on combating bribery and corruption, especially that perpetrated by multinational companies and their employees.

 

Ethics Rules, Government Ethics, Political Law

A Question of Ethics: Are Members Permitted to Help Companies in Which They Own Stock?

Roll Call October 14, 2014

Q. I heard that Rep. Tom Petri, R-Wis., may face ethics discipline because he assisted companies in which he owned stock. I know that Members are not supposed to use their position for their own personal gain, but I didn’t realize that meant they are disqualified from taking action on behalf of any companies in which they might own stock. Is that really the rule?

A. No, it is not. A member’s mere ownership of stock in a company does not disqualify the member from taking official acts on the company’s behalf. But, as the Petri matter illustrates, members should take special care when they assist companies in which they happen to own stock. Exactly what that means, unfortunately, is less than clear.

In a report made public last month the Office of Congressional Ethics, which filters allegations of misconduct for review by the House Committee on Ethics, concluded there is substantial reason to believe Petri “improperly performed official acts on behalf of companies in which he had a financial interest.” The OCE therefore recommended further review by the House Committee on Ethics, which it is now considering.

There is no dispute that Petri took official acts for companies in which he owned stock. That is allowed. At issue in the Petri case is whether he did so “improperly.” That is not.

According to the House Ethics Manual, acts that involve a degree of advocacy above and beyond merely voting on legislation require special care. For these acts — such as sponsoring legislation, participating in committee action or contacting an executive agency — a decision that may affect the member’s personal financial interest requires what the Committee calls “added circumspection.”

The OCE concluded there is substantial reason to believe Petri failed to meet this standard when he helped Wisconsin companies in which he or his wife owned stock by contacting other government officials regarding government contracts and regulations impacting the companies.

While the OCE acknowledged that in many instances Petri’s office sought Ethics Committee guidance before assisting the companies, “he did not seek advice before taking all official acts.” Moreover, in some instances, the requests for Ethics Committee guidance included inaccurate information, the OCE report said. The OCE also noted it interviewed two Petri aides who said there were “no written office policies or training specifically related to handling requests for official action by companies in which Representative Petri owned stock.”

Petri’s counsel disputed the OCE’s conclusions in a letter to the Ethics Committee, and urged the committee to complete its investigation before the end of Petri’s term. (Petri has announced he is not seeking re-election.) The letter noted that the companies Petri assisted are two of the largest employers in his district which, as a congressman, he assisted for many years. Moreover, the type and degree of assistance he provided did not change after he purchased stock in the companies in the mid- to late-2000s. “In every instance,” the letter said, “Representative Petri has made a good faith effort to comply fully with both the letter and spirit of the rules and the guidance his staff received.” The OCE, the letter argued, “seeks to impose a novel standard of conduct that would undermine the ability of all Members to rely with confidence on the ethics advice they receive from Committee staff.”

So, who is right? Precedent in this area is unclear. On the one hand, a 2012 Ethics Committee report about a conflict of interest investigation stated: “If a Member seeks to act on a matter where he might benefit as a member of a large class, the Committee has taken the position that such action does not require recusal.” On the other hand, that same report also said this does not “permit Members free rein to act on behalf of a single entity … merely because there are numerous shareholders.” The report concluded “the time has come to engage in a comprehensive review of the House conflicts standards so that they are clearer and more easily digested by the House community.” An Ethics Committee report later that year did include additional conflicts of interest guidance but did not address specifically the issue of members assisting companies in which they own stock.

Ultimately, then, in an environment in which it is unclear exactly what precautions House rules require of members who own stock in a company they wish to help, the Petri matter may come down to whether the precautions he took are deemed adequate, ex post facto. The OCE report includes many examples of efforts by Petri and his staff to make sure they were complying with the rules and committee guidance. They were careful. It may be up to the Ethics Committee to determine if they were careful enough.


© Copyright 2014, Roll Call Inc. Reprinted with permission. Widely regarded as the leading publication for Congressional news and information, Roll Call has been the newspaper of Capitol Hill since 1955. For more information, visit www.rollcall.com.