Federal district court judge Jed Rakoff is no stranger to controversy.  He has admonished the SEC for failing to obtain admissions in two settlements and other judges have since followed suit (see here for example). This likely played some part in SEC Chair Mary Jo White’s decision in June to start seeking admissions during settlements.  White announced a few days ago that her lawyers are ready for more trials, and that in her view, trials facilitate public accountability.

Judge Rakoff has now set his sights on the Department of Justice, and his recent speech entitled “Why Have No High Level Executives Been Prosecuted in Connection with the Financial Crisis,” has made headlines around the world.  I heavily excerpt the speech below, but I recommend that you read it in full.  In his remarks, he sharply criticizes the DOJ for failing to prosecute individuals, a topic I discussed last week here. He also offers his own theories to rebut what the DOJ’s explanations. His remarks remind us that the 5-year statute of limitations on many crimes will run shortly and therefore many people may never face prosecution.

Judge Rakoff first acknowledged in his speech that prosecutors had other priorities including focusing on post-9/11 and insider trading cases.  He then minces no words in spreading the blame around. Some of his most biting censure is below:

 “…what I am suggesting is that the Government was deeply involved, from beginning to end, in helping create the conditions that could lead to such fraud, and that this would give a prudent prosecutor pause in deciding whether to indict a C.E.O. who might, with some justice, claim that he was only doing what he fairly believed the Government wanted him to do… [i]n recent decades, however, prosecutors have been increasingly attracted to prosecuting companies, often even without indicting a single individual. This shift has often been rationalized as part of an attempt to transform “corporate cultures,” so as to prevent future such crimes; and, as a result, it has taken the form of “deferred prosecution agreements” or even “non-prosecution agreements,” in which the company, under threat of criminal prosecution, agrees to take various prophylactic measures to prevent future wrongdoing. But in practice, I suggest, it has led to some lax and dubious behavior on the part of prosecutors, with deleterious results… [The prosecutor is] happy because [he] believe[s] that [he has] helped prevent future crimes; the company is happy because it has avoided a devastating indictment; and perhaps the happiest of all are the executives, or former executives, who actually committed the underlying misconduct, for they are left untouched… I suggest that the future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window-dressing. Just going after the company is also both technically and morally suspect.”

I am sure that general counsels, ethics officers and board members don’t think that their compliance programs are cosmetic, check-the-box initiatives, but they should take heed of Judge Rakoff’s words. Clearly the SEC has made a significant policy shift and perhaps the DOJ will as well.  In the meantime, companies and their counsel should prepare for the new paradigm in which settlements may require more than shareholder dollars.