Book review: Encyclopedia of civil, criminal and administrative liability for financial industry

I had published a review of this remarkable book some time back at the American Bankers Association's Journal.  I am posting it again here because I believe that it should also be a required reading for the executives of every FinTech startup, whether or not they plan to conduct regulated services or whose services might unexpectedly become regulated.

Financial industry executives located outside of the US should not feel a false sense of security just because it describes US laws.  Perhaps a wishful thinking on my part -- but it might save them and their families much grief and many a sleepless night and unexpected legal costs.  Most of the relevant regulatory approaches are in effect extraterritorial and a long arm of numerous US enforcement agencies might reach quite far away.  Especially beware if you ever have to travel to (or even be in transit to your favorite Brazilian aunt through) the US.

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A comprehensive guide for defending banking executives and directors against civil, criminal, and administrative liability by governments and private parties.

Director and Officer Liability in Financial Institutions: A Deskbook by Samuel Rosenthal, Bloomberg BNA, 1,084 pp. Hardcover, 2012

This in‑depth book of historical, statutory, and practical analysis and reasoning is based on Mr. Rosenthal's ample experience as a practicing lawyer, representing directors and officers of financial firms. Previously, he was an Assistant US Attorney and also served as Chief, Criminal Appellate Section, US Department of Justice.

The book includes thousands of citations and numerous tables, legal forms, templates of resolutions, letters and agreements; as well as a comprehensive table of state statutes, lists of recent FDIC D&O lawsuits, selected jury instructions and case descriptions. Clearly written and well defined, it is a "must have" analytical and practical reference for lawyers and executives alike.

The book explores recent developments in liability that have been deeply affected by the new compliance and enforcement frameworks, by the financial crisis litigation and their impact on the Financial Industry (FI) directors and officers. Thus, a chapter on the statutory landscape lists no less than twelve (!) US Congress and Government comprehensive legislations as sources of FI directors and officers liability. These range from the Federal Deposit Insurance Act to the Federal Securities Laws to the Bank Secrecy Act to Gramm-Leach-Bliley to Sarbanes-Oxley to Dodd-Frank to Wall Street Reform and Consumer Protection Act to – privacy; and AML policies; the list goes on and on.

This book could help FI directors, executives and lawyers in mastering defense against civil, criminal and administrative liability originated by governments or private parties. In addition to court rulings, it also discusses the likelihood of liability prosecution brought by the regulators and enforcing agencies against FI directors and officers in the critical areas of liability for failing banks, privacy policies, AML, mortgage-backed security litigation, risk associated with lending, money transmitting, consumer protection, even risks of cooperating or non-cooperating with the authorities, and many others. Even more important, it outlines proven strategies for proactive defenses and includes useful document templates to prevent liability lawsuits. According to the book's Preface:

"Directors or executives can be sued, fined, barred from the industry or even jailed for conduct that years ago would have merited little or no attention from regulators and prosecutors."

Nineteen comprehensive Chapters are grouped in three Parts, with every chapter further split into subsections far too numerous to mention. After introductory Chapter 1 From crisis to crisis: Learning from the past, Part I Sources of Liability covers The statutory landscape; Duties of directors, officers, and other insiders; Civil liability of insiders; Civil liability of directors and officers under federal statutes; Civil liability of consultants to FIs; Criminal liability; Consumer protection and privacy; and Administrative actions.

Part II Governmental Enforcement includes chapters on Governmental agencies involved in enforcement; Recent civil actions and policies by the federal agencies; Recent criminal actions against directors, officers, and consultants to FIs; and The Government investigation. Part III Defense Techniques and Tactics treats The prelitigation defense investigation; The civil case; Criminal proceedings; Special problems of parallel proceedings; Joint-defense agreements and privileges; and Paying for the cost of defense – the last chapter providing practical guidance on how bank directors and employee can manage the cost of defense, which might happen sometimes years after the director or officer has already left the FI.

The coverage of crises in Chapter 1 is not just for its historic value or to learn from the past (if only!) The author illustrates that each banking crisis was inevitably followed by a wave of lawsuits and criminal prosecutions of bankers and FI executives and introduction of new, more restrictive and implementation expensive regulatory frameworks. As stated in the Preface:

"By virtue of the governmental pressure brought to bear on directors and officers, they now must account not only for the viability of their entities, but also for any transactions in which third parties are victimizing those same entities by engaging in illegal activities, such as money laundering or theft of customer financial data. Accordingly, while directors and officers had to be concerned twenty years ago about being sued or prosecuted for engaging in fraud or other self-dealing at the expense of the institution they served, they now have to be concerned about hiring sophisticated staff to handle issues that did not even exist in the eighties, such as those involving anti-money laundering and suspicious activity reports. These two areas alone obligate directors and officers to become familiar with complicated laws and to find the technology and skill sets required to identify and report suspicious transactions."

Rosenthal also noted that outside professionals retained by a bank, such as lawyers, accountants, appraisers, also risk being sued. Plaintiffs might claim damages for faulty loans, lending practices, consumer fraud, privacy protections, or just poorly managed operations affecting stockholder value. Moreover, many federal and states authorities plan to litigate both civil and criminal cases in parallel.

Every bank director, officer, auditor, accountant, and consultant to the bank who might conceivably find themselves facing liability charges (which today realistically means everybody in such positions) would be well advised to keep this essential book on their desk and learn about the covered issues on their own – rather than just rely on the formal legal advice, however well meaning and immensely qualified.

The only shortcoming of this otherwise excellent reference is ironically its legacy designation as "A Deskbook". Its restrictive paper medium clearly resists the rich message. Neither busy executives nor lawyers highly accustomed to online searching would find it convenient to use a heavy (more than a thousand pages!), hardcover volume as an everyday reference. Bloomberg, being a global leader in the new‑generation publishing, should have moved all its handbooks to the digital format some time back with printing only on demand – an environmentally sensitive step that might have also somewhat reduced a high price of this particular publication.