Opinion

Alison Frankel

DOJ should end secret selection process for corporate watchdogs

By Alison Frankel
July 14, 2014

Thomas Perrelli just won quite a plum assignment. The former U.S. associate attorney general, who resumed his partnership at the law firm Jenner & Block in 2012, was appointed Monday to serve as Citigroup’s independent monitor as part of the bank’s $7 billion settlement with the Justice Department and five state attorneys.

Perrelli and the team of Jenner lawyers who will undoubtedly join him in watching over Citigroup will be paid by the bank, as is customary in corporate monitorships. The specifics on what Citi will pay him aren’t public, and, to be sure, Perrelli’s mandate under the settlement agreement is limited. But rest assured: He and his firm are going to earn a lot of money as Citi’s monitor. As a federal judge who has overseen a corporate monitor told my Reuters colleague Casey Sullivan, “It is a huge cash cow. These are very, very lucrative appointments.”

Perrelli also bears enormous responsibility. His charge, according to the Citi settlement agreement, is to make sure that the bank properly distributes $2.5 billion in mortgage relief to homeowners who were allegedly injured by Citi’s voracious appetite for loans to bundle into mortgage-backed securities. It’s up to Perrelli to verify that the bank follows through with promises to modify and refinance mortgages for borrowers struggling to make payments or paying mortgages on houses worth less than the loans.

How was Perrelli picked for this important and lucrative job? We don’t really know, at least not in any official way from the Justice Department or the bank. Unofficially, sources have told Reuters reporters that after the Justice Department informed Citi that the bank had to hire an independent monitor, Citi suggested Perrelli, who was then approved by his former Justice colleague Tony West. West, after all, could hardly question the integrity and credentials of the lawyer who preceded him as associate attorney general.

It’s entirely possible, even probable, that Perrelli is the best possible steward of the public’s interest in Citi’s distribution of $2.5 billion. When he was at Justice, Perrelli led negotiations of the government’s $25 billion global mortgage servicing settlement with the biggest banks in the country, including Citigroup. He also oversaw the Justice Department’s deal with BP after the Deepwater Horizon spill, in which BP agreed to set aside $20 billion for spill victims. Perrelli certainly appears to be above reproach.

But the process that led to his appointment is not. Secrecy breeds cynicism. If the Justice Department wants the public to trust the watchdogs it appoints to safeguard the public’s interest in megasettlements like the one with Citigroup, it should tell us why it selected the monitors it did and how they’ll be held accountable.

According to law professor Brandon Garrett of the University of Virginia, who has analyzed corporate monitor assignments for his upcoming book “Too Big to Jail,” half of all corporate monitors appointed in Justice Department deferred prosecution and non-prosecution agreements with corporate defendants since 2001 are former prosecutors.

It could be, Garrett said, that these are exactly the right people for the jobs they landed and not the recipients of largesse from old friends in the Justice Department. The problem, Garrett told me, is that “there is no way to know.”

That’s especially true, Garrett said, in civil settlements like the Citi deal, in which no judge is involved. “There are a range of concerns that flow from having highly paid monitors that do important work hired by prosecutors and not approved and supervised by judges,” Garrett said in an email. “There is the window-dressing concern that so many of these monitors serve short terms. There is the transparency concern that their work is not public. There is the cronyism concern that so many of them are former prosecutors.”

Garrett continued: “Monitoring corporate violators and making sure compliance is improved is so important that it shouldn’t be done in the dark, even if the settlements themselves are negotiated behind closed doors.”

I’m not saying anything the Justice Department hasn’t heard before. In early 2008, the Senate held well-publicized hearings on corporate monitorship after it got wind that then New Jersey U.S. Attorney Chris Christie had appointed former Attorney General John Ashcroft — his old boss — to monitor an Indiana medical supply company called Zimmer Holdings. Ashcroft was due to receive between $28 million and $52 million for 18 months of work.

To ward off legislation restricting a prosecutorial device that was becoming ubiquitous in deferred prosecution and non-prosecution agreements between corporate defendants and federal authorities, the Justice Department adopted guidelines on preventing conflicts in monitor appointments. The guidelines appeased Congress, but they really just urged prosecutors to be wary of conflicts, establish standing committees to review monitor candidates, and get their selections approved by the deputy attorney general.

Law professor Garrett called the guidelines “a fig leaf.” And to be clear, the Justice Department does not even need to abide by those loose strictures in civil cases like the Citi settlement or the $25 billion national mortgage servicing settlement with big banks, in which the monitor is Joseph Smith of Poyner Spruill, a former North Carolina bank commissioner.

I’m sure the Justice Department would say that it appoints dozens or even hundreds of monitors a year in all kinds of civil settlements and it would be too disruptive and burdensome to be obliged to disclose its selection process in all of them. Prosecutors could justifiably argue that prosecutorial discretion ought to extend to the selection of watchdogs.

I think Justice can do better, and occasionally has. Garrett found three criminal cases, for example, in which federal prosecutors and defendants reached agreement on three potential watchdogs, then asked a judge to pick among them. (To be fair, that model wouldn’t work in civil settlements reached outside of the courtroom, like the Citi deal — but I’d argue that the Justice Department ought to be asking judges to approve its settlements as well as its monitor choices.)

Judges provide important reassurances. In the SAC Capital prosecution, SAC proposed that it be monitored by longtime corporate compliance watchdog Bart Schwartz of Guidepost Solutions. The Justice Department agreed to appoint Schwartz as the monitor and U.S. Judge Laura Taylor Swain of Manhattan signed off, but not before checking on Schwartz’s qualifications.

New York’s Department of Financial Services, which has recently appointed monitors to oversee its agreements with three big foreign banks (Standard Chartered, BNP Paribas and Credit Suisse) has a somewhat more transparent appointment process than the Justice Department.

The department’s superintendent, Benjamin Lawsky, is a former federal prosecutor, so to avoid the appearance of a conflict of interest he has recused himself from all monitor appointments. When a watchdog assignment is up for grabs, according to the DFS, it publicly invites applicants. More than 15 firms, for example, applied to serve as Credit Suisse’s monitor after the bank’s $2.6 billion settlement for helping U.S. citizens dodge taxes. A DFS committee with rotating membership makes the final pick after interviewing candidates.

DFS ended up picking former New York federal prosecutors for all three bank assignments: Ellen Zimiles of Navigant to monitor Standard Chartered, Shirah Neiman of SN Compliance for BNP Paribas (with support from Schwartz’s firm), and Neil Barofsky of Jenner & Block for Credit Suisse. But it’s tough to accuse the state agency of dishing out assignments to Lawsky’s friends because we know at least a little bit about the selection process.

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(Additional reporting by Casey Sullivan.)

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