Month: December 2023

The 2023 Corporate Rap Sheet

The splashiest corporate crime prosecutions in 2023 came in the crypto sector. Binance pleaded guilty to charges of violating anti-money-laundering regulations and paid over $4 billion in criminal and civil penalties; its founder and CEO Changpeng Zhao was also charged personally and admitted guilt. The Justice Department won a conviction on fraud and conspiracy charges of crypto mogul Sam Bankman-Fried in connection with the collapse of his FTX exchange.

Otherwise, the DOJ has not had many blockbuster cases this year, and many of its bigger successes have involved foreign-based corporate defendants. Among the latter are a $1.4 billion settlement with the Swiss bank UBS in a toxic securities case that originated during the financial crisis a decade ago and a $629 million settlement with British American Tobacco involving a scheme to evade economic sanctions against doing business with North Korea.

While major convictions and settlements lag, DOJ has stepped up its dubious policy of corporate leniency. This includes frequent use of non-prosecution and deferred prosecution agreements under which companies are allowed to sidestep criminal pleas by agreeing to pay monetary penalties and promising to change their behavior—promises that are often broken.

During this year, DOJ has offered companies NPAs and DPAs at least 17 times. Among these are the British American Tobacco case cited above, a price-fixing case against Teva Pharmaceuticals, and a foreign bribery case against the chemical company Albemarle. A DPA was also used by the Occupational Safety and Health Administration to resolve a case against a construction company called Skinner Tank on charges of willfully ignoring safety regulations and creating conditions that led to the death of a worker.

DOJ is also making increasing use of another form of leniency known as a declination. Companies that self-report illegal behavior that occurred under their roof are given a guarantee they will not be prosecuted and are allowed to pay a reduced fine. A DOJ webpage lists three declinations for this year, but a report by Public Citizen suggests that the department may be agreeing to keep some of these deals confidential.

Among most other federal agencies, this year has seen only a sprinkling of large case resolutions against major companies. For example, the Commerce Department’s Bureau of Industry and Security fined Seagate Technology $300 million for export control violations in its sale of disk drives to China’s Huawei Technologies. The Federal Reserve fined Deutsche Bank $186 million for failing to comply with previous consent orders involving sanctions compliance and anti-money-laundering practices.

Although most of its penalties are below $100 million, the Consumer Financial Protection Bureau has brought a steady stream of cases against financial predators. These include a $90 million penalty against Bank of America for imposing unfair overdraft fees, withholding reward bonuses explicitly promised to credit card customers, and misappropriating sensitive personal information to open accounts without customer knowledge or authorization.

The Securities and Exchange Commission has kept up its case volume, but the number of large resolutions in 2023 has been down from the previous year. And a larger portion of those major cases involve civil add-ons to criminal bribery cases brought by the Justice Department under the Foreign Corrupt Practices Act. There are also signs that the SEC is joining the leniency bandwagon. Recently, the agency waived a $40 million penalty against the drug company Mallinckrodt in a case related to its failure to disclose loss contingencies linked to an investigation of its Medicaid billing practices.

The Federal Trade Commission has also tended toward smaller settlements this year, though that agency handles many matters—including merger reviews—that may not involve monetary penalties. The biggest fine it imposed this year was $25 million in a case against Amazon.com for violating the Children’s Online Privacy Protection Act Rule.

The Environmental Protection Agency has held steady in 2023. Its largest settlement has been a $242 million deal with BP in which the oil giant paid a $40 million penalty and agreed to spend $197 million on emission control upgrades at its Whiting refinery in Indiana.

Major cases have been down at the state level. There have been about two dozen resolutions involving penalties of $50 million or more, compared to the previous year’s total of 50, which included numerous opioid-related settlements. This year there has been one such settlement involving a $1.4 billion deal with supermarket chain Kroger.

Year to year changes do not tell the whole story, yet it is discouraging to see a drop-off in successful major enforcement actions.  Let’s hope that in 2024 both federal and state regulators and prosecutors find the means to step up the pressure on rogue corporations.

Note: Details on the cases cited above and many more are in Violation Tracker.

The Other Problem with Airline Mergers

A proposed acquisition of Hawaiian Airlines by Alaska Airlines would be bad news for those traveling between the U.S. mainland and Hawaii. The combined company would have a huge share of that market and would thus be in a position to keep fares sky high.

Another negative feature of the deal is that it would enhance the position of a company with a checkered regulatory compliance record. As shown in Violation Tracker, Alaska Air and its subsidiaries have been cited more than 200 times by the Federal Aviation Administration for a variety of safety violations involving issues such as maintenance, hazardous waste and security practices.

All the airlines have such violations, and the larger carriers have been fined more times, reflecting their wider operations. But in relation to its size, Alaska Air’s record is worse than that of its counterparts. Its total of 220 FAA violations is not far behind that of Southwest’s total of 270, even though Southwest carries about four times as many passengers.

Alaska Air’s violations also tend to be more serious. Its 220 cases have generated more than $10 million in fines (the FAA’s penalty structure is not very onerous), while the total from the 539 fines paid by the much larger Delta Air Lines is below $9 million. (All the FAA statistics are limited to cases with fines of at least $5,000.)

Alaska Air has also racked up a series of penalties from the Transportation Department’s Aviation Consumer Protection Division. Including matters involving Virgin America, which Alaska Air acquired in 2016, there have been 13 of those cases with total fines of $777,500.

Then there is the issue of employment practices. Earlier this year, a federal judge in California ordered Alaska Air to pay nearly $31 million to a class of flight attendants who had sued Virgin for failing to pay proper overtime pay and failing to pay for break time as required under California law. The workers originally won $77 million in damages, but the company appealed and got part of the award overturned. Alaska Air also tried to get the U.S. Supreme Court to throw out the rest of the award but the high court declined to hear the case. The matter thus went back to the trial court, where the judge settled on the $31 million payout.

Hawaiian Airlines has a somewhat less egregious regulatory track record. It has been fined 31 times by the FAA and five times by the Transportation Department’s consumer division. There is every reason to suspect that if the merger goes through, its compliance practices would come to look more like that of its new parent.

When antitrust regulators review a proposed merger, they have to give primary consideration to the potential market impacts. Yet it is also worth keeping in mind that as companies grow larger, they often tend to become less mindful of safety matters and other regulatory obligations. Or if they already have a lax approach to compliance, that problem is likely to become worse. All this is just one more reason bigger is usually not better.