July 31st, 2015

Friday Roundup

RoundupScrutiny alerts, noisy exit, double standard, quotable and for the reading stack.  It’s all here in the Friday roundup.

Scrutiny Alerts

FIFA-Related

As predicted in this May post about the FIFA-related enforcement action, while the enforcement action was not an FCPA enforcement action it was likely to lead to scrutiny of various companies concerning books and records and internal controls issues.

Sure enough.

Various reports (see here and here for instance) suggest that the SEC is :examining the behavior of several companies with links to FIFA or other soccer bodies caught up in a major corruption scandal to see if there were possible violations of U.S. federal bribery laws, a person with knowledge of the matter said.”  According to the article:

“The civil probe, which is in its early stages and may not lead to any findings of wrongdoing or enforcement action, is being conducted by the U.S. Securities and Exchange Commission.” [...] The SEC probe centers on publicly-traded companies who have been involved in soccer contracts, such as athletic shoes and sportswear company Nike Inc, said the source, who asked not to be named because of the non-public nature of the investigation. The exact scope of the probe and the names of other companies being scrutinized could not be learned. An SEC spokeswoman declined to comment.”

GSK

Reuters reports:

“Drugmaker GlaxoSmithKline, which was fined a record 3 billion yuan ($483 million) for corruption in China last year and is examining possible staff misconduct elsewhere, faces new allegations of bribery in Romania. GSK confirmed it was looking into the latest claims of improper payments set out in a whistleblower’s email sent to its top management on Monday. A copy of the email was seen by Reuters. The company is already probing alleged bribery in Poland, the United Arab Emirates, Lebanon, Jordan, Syria and Iraq. The latest allegations say GSK paid Romanian doctors hundreds, and in one cases thousands, of euros between 2009 and 2012 for prescribing its medicines, including prostate treatments Avodart and Duodart and Parkinson’s disease drug Requip. According to the email, the doctors were notionally paid for speaking engagements, but in three out of six cases, including the most highly paid one, they did not give any speech. The other three medics gave only one speech each, despite receiving multiple payments. GSK also provided doctors with many international trips and made payments to them under the guise of participation in advisory boards, the email said. [...] The sender of the Romania email said its contents would be passed on to the U.S. Department of Justice and the Securities and Exchange Commission (SEC), which are investigating GSK for possible breaches of the Foreign Corrupt Practices Act.”

Noisy Exit

My article “Foreign Corrupt Practices Act Ripples” chronicles, among other things, how the FCPA is increasingly being used offensively by litigants.  One such example is a “noisy exit” a term coined by FCPA Professor in 2010 to describe an employee alleging unfair employment practices in connection with some aspect of FCPA scrutiny or enforcement.

The latest example is this civil complaint recently filed by Keisha Hall (a certified public accountant, certified fraud examiner and former director of finance for the Latin America region of Teva Pharmaceutical USA, INC.’s (“Teva”).

According to the complaint,  Teva allegedly fired Hall after she “began cooperating in a Securities and Exchange Commission/Department of Justice investigation into potential violations of the Foreign Corrupt Practices Act (“FCPA”) and the Sarbanes-Oxley Act (“SOX”), stemming from, among other things, allegations of bribery of government officials in the region.”

As highlighted in this prior post, Teva has been under FCPA scrutiny since July 2012.

Double Standard

A few weeks after an official is sworn in to a high-ranking government position, the official asserts herself into a pending government investigation against a corporation and brokers a settlement (an unusual task given the official’s position).

From that point forward, the corporation significantly increases its contributions to a charitable organization set up by the official’s family and pays the official’s spouse $1.5 million to participate in a series of question and answer sessions with the corporation’s CEO.

A prudent FCPA practitioner would immediately see numerous red flags and recommend an internal investigation.

But wait, the official is not a foreign official, it’s a U.S. official and once again it is Hillary Clinton.  (See here for the Wall Street Journal’s recent article “Clinton’s Complicated UBS Ties.”)

*****

On the other side of the Presidential ticket is Donald Trump.  Regardless of what you think of “The Donald” he is blunt.  In this recent Wall Street Journal article, Trump explains why he previously donated to Hillary Clinton’s 2008 presidential campaign and other political campaigns.

“As a businessman, [Trump] needed to curry favor with an influential senator from his home state. In turn, he said, [Clinton] had incentive to court him as a campaign donor. “As a businessman and a very substantial donor to very important people, when you give, they do whatever the hell you want them to do,” Mr. Trump said. “As a businessman, I need that.”

Quotable

In this recent Law360 article “FCPA Challenges Make for Spotty Trial Record for DOJ,” Michael Levy (Paul Hastings) states:

“We’ve seen several trials in which the judges have been skeptical, if not outwardly hostile, to some of the government’s more aggressive interpretations of the FCPA. While those trials may have fallen apart for other reasons, that skepticism still played, I believe, a substantial role.”

“Without the development of the law through judicial decisions, it’s very unclear what judges believe the FCPA means compared to what the DOJ think the FCPA means.”

(See here for Levy’s FCPA Professor guest post titled “Prosecutorial Common Law”).

In the same article, George Terwilliger (McGuireWoods and a former high-ranking DOJ official) states:

“It is fundamental to due process that a person of ordinary intelligence should be able to read a law and understand what is required or prohibited, as the case may be. Many people of great intelligence on both sides of an FCPA question debate just such issues.”

“That does not produce the fair warning that those subject to the law deserve to have.”

For the Reading Stack

An informative article here by Jon N. Eisenberg (K&L Gates) titled “Are Public Companies Required to Disclose Government Investigations.”  While not FCPA-specific, the article is FCPA relevant and begins as follows.

“For many public companies, the first issue they have to confront after they receive a government subpoena or Civil Investigative Demand (“CID”) is whether to disclose publicly that they are under investigation. Curiously, the standards for disclosure of investigations are more muddled than one would expect. As a result, disclosure practices vary—investigations are sometimes disclosed upon receipt of a subpoena or CID, sometimes when the staff advises a company that it has tentatively decided to recommend an enforcement action, sometimes not until the end of the process, and sometimes at other intermediate stages along the way. In many cases, differences in the timing of disclosure may reflect different approaches to disclosure. We discuss below the standards that govern the disclosure decision and practical considerations. We then provide five representative examples of language that companies used when they disclosed investigations at an early stage.”

Posted by Mike Koehler at 12:03 am. Post Categories: Disclosure IssuesDouble StandardFIFAGlaxcoSmithKlineNikeNoisy ExitTeva Pharmaceuticals




July 30th, 2015

“Log Rolling” Is Not Corruption But Rather A “Common Exercise” In Politics

logrollingThe Foreign Corrupt Practices Act is about corruption, at least corruption of a certain type.

However, there are numerous other forms of corruption as well including here in the United States. Yet an uncomfortable truth is that here in the United States we accept many forms of corruption by assigning various euphemisms, code words and metaphors to the underlying conduct.

For instance, in both Citizens United and McCutcheon (cases dealing with various aspects of campaign finance laws)  the Supreme court stated: “ingratiation and access are not corruption” when it involves U.S. officials or political actors even though it would most certainly be corruption if it involved foreign official or foreign political actors.

Likewise, the Second Circuit recently stated the following about corporate lobbying:

“Lobbying has been integral to the American political system since its very inception.  […] In order to more effectively communicate their clients’ policy goals, lobbyists often seek to cultivate personal relationships with public officials. This involves not only making campaign contributions, but sometimes also hosting events or providing gifts of value such as drinks, meals, and tickets to sporting events and concerts.”

Yet if one were to provide those gifts or things of value to foreign public officials there would likely be an FCPA enforcement action.

Judicial blessing of forms of corruption through assigning various euphemisms, code words and metaphors to the underlying conduct continued recently as the Seventh Circuit held that a politician trading one favor for another (in which the politician would personally benefit) is not corruption, but “log rolling” – a rather “common exercise” in politics.

The recent opinion was in U.S. v. Blagojevich and involved former Illinois Governor Rod Blagojevich who is currently serving a lengthy prison sentence after being criminally convicted of various counts several years ago. Among the facts serving as a basis for certain of the convictions were the following as described by the court.

“Through intermediaries (his own and [those of President elect Obama]), Blagojevich sought a favor from Sen. Obama in exchange for appointing Valerie Jarrett, who Blagojevich perceived as the person Sen. Obama would like to have succeed him. Blagojevich asked for an appointment to the Cabinet or for the President-elect to persuade a foundation to hire him at a substantial salary after his term as Governor ended, or find someone to donate $10 million and up to a new “social welfare” organization that he would control. The President elect was not willing to make a deal, and Blagojevich would not appoint Jarrett without compensation, saying: “They’re not willing to give me anything except appreciation. Fuck them.”

As noted by the court, “the indictment charged [the above] negotiations as attempted extortion, in violation of 18 U.S.C. §§ 2 and 1951, plus corrupt solicitation of funds (18 U.S.C. §§ 371 and 666(a)(1)(B)) and wire fraud (18 U.S.C. §§ 1343 and 1346).”

As next stated by the court:

“[A] problem in the way the instructions told the jury to consider the evidence requires us to vacate the convictions on counts that concern Blagojevich’s proposal to appoint Valerie Jarrett to the Senate in exchange for an appointment to the Cabinet. A jury could have found that Blagojevich asked the President-elect for a private-sector job, or for funds that he could control, but the instructions permitted the jury to convict even if it found that his only request of Sen. Obama was for a position in the Cabinet. The instructions treated all proposals alike. We conclude, however, that they are legally different: a proposal to trade one public act for another, a form of logrolling, is fundamentally unlike the swap of an official act for a private payment.

Because the instructions do not enable us to be sure that the jury found that Blagojevich offered to trade the appointment for a private salary after leaving the Governorship, these convictions cannot stand.

[...]

A political logroll … is the swap of one official act for another. Representative A agrees with Representative B to vote for milk price supports, if B agrees to vote for tighter controls on air pollution. A President appoints C as an ambassador, which Senator D asked the President to do, in exchange for D’s promise to vote to confirm E as a member of the National Labor Relations Board. Governance would hardly be possible without these accommodations, which allow each public official to achieve more of his principal objective while surrendering something about which he cares less, but the other politician cares more strongly. A proposal to appoint a particular person to one office (say, the Cabinet) in exchange for someone else’s promise to appoint a different person to a different office (say, the Senate), is a common exercise in logrolling. We asked the prosecutor at oral argument if, before this case, logrolling had been the basis of a criminal conviction in the history of the United States. Counsel was unaware of any earlier conviction for an exchange of political favors. Our own research did not turn one up. It would be more than a little surprising to Members of Congress if the judiciary found in the Hobbs Act, or the mail fraud statute, a rule making everyday politics criminal.

[...]

The prosecutor insists, however, that Blagojevich’s situation is different and uncommon because he sought a post in the Cabinet for himself. It isn’t clear to us that this is unusual. The current Secretary of State was appointed to that position from a seat in the Senate, and it wouldn’t surprise us if this happened at least in part because he had performed a political service for the President. Ambassadors, too, come from the House or Senate (or from state politics) as part of political deals. Some historians say that this is how Earl Warren came to be Chief Justice of the United States: he delivered the California delegation at the 1952 Republican convention to Eisenhower (rather than Senator Taft) in exchange for a commitment to appoint him to the next vacancy on the Supreme Court.

If the prosecutor is right, and a swap of political favors involving a job for one of the politicians is a felony, then if the standard account is true both the President of the United States and the Chief Justice of the United States should have gone to prison. Yet although historians and political scientists have debated whether this deal was made, or whether if made was ethical (or politically unwise), no one to our knowledge has suggested that it violated the statutes involved in this case. (Whether it might have violated 18 U.S.C. §599, and whether that statute is compatible with the First Amendment, are issues we do not address.)

What we have said so far requires the reversal of [various criminal convictions], though the prosecutor is free to try again without reliance on Blagojevich’s quest for a position in the Cabinet.”

*****

The most recent issue of the always informative FCPA Update from Debevoise & Plimpton states as follows regarding the Blagovevich decision.

“[T]he Seventh Circuit’s decision in the Blagojevich matter raises serious questions whether some of the broader theories invoked by the government in FCPA cases (or by government officials in published remarks) are valid.

 

Posted by Mike Koehler at 12:03 am. Post Categories: Double Standard




July 29th, 2015

Next Up – Mead Johnson

MeadFirst it was Johnson & Johnson (see here – $70 million enforcement action in April 2011).

Then it was Smith & Nephew (see here - $22 million enforcement action in February 2012).

Then it was Biomet (see here – $22.8 million enforcement action in March 2012).

Then it was Pfizer / Wyeth (see here  – $60 million enforcement action in August 2012).

Then it was Eli Lilly (see here – $29 million enforcement action in December 2012).

Then it was Stryker (see here – $13.2 million enforcement action in October 2013).

The latest of the most recent Foreign Corrupt Practices Act enforcement actions (there are many more than those listed above) premised on the theory that physicians of certain foreign health care systems are “foreign officials” under the FCPA is Mead Johnson Nutrition Company. Some will say this enforcement action – like certain of the others mentioned above – merely involved the FCPA’s books and records and internal controls provisions, but make no mistake about it, this action – as well as the prior actions – was all about the alleged “foreign officials.”

Yesterday, the SEC announced that Mead Johnson (a leading pediatric nutrition products) agreed to pay approximately $12 million pursuant to an administrative cease and desist order in which the company neither admitted or denied the SEC’s findings.

The substance of the order is approximately four pages and states in summary fashion as follows.

“This matter concerns violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Mead Johnson. The violations, which occurred in connection with the operations of Mead Johnson’s subsidiary in China, took place up through 2013.

The conduct at issue relates primarily to the misuse of marketing and sales funds in China. Despite prohibitions in the FCPA and Mead Johnson’s internal policies, certain employees of Mead Johnson’s majority-owned subsidiary in China, Mead Johnson Nutrition (China) Co., Ltd. (“Mead Johnson China”), made improper payments to certain health care professionals (“HCPs”) at state-owned hospitals in China to recommend Mead Johnson’s nutrition products to, and provide information about, expectant and new mothers. These payments were made to assist Mead Johnson China in developing its business. For the period from 2008 through 2013, Mead Johnson China paid approximately $2,070,000 to HCPs in improper payments and derived profits therefrom of approximately $7,770,000.

Mead Johnson China failed to accurately reflect the improper payments in its books and records. Mead Johnson China’s books and records were consolidated into Mead Johnson’s books and records, thereby causing Mead Johnson’s consolidated books and records to be inaccurate. Mead Johnson failed to devise and maintain an adequate system of internal accounting controls over Mead Johnson China’s operations sufficient to prevent and detect the improper payments that occurred over a period of years.”

Under the heading “Mead Johnson China’s Improper Payments to HCPs,” the order states in full as follows.

“A portion of Mead Johnson China’s marketing efforts during the 2008 to 2013 period was through the medical sector, which included marketing through healthcare facilities and HCPs. Despite the prohibitions in the FCPA and Mead Johnson’s internal policies, certain employees of Mead Johnson China improperly compensated HCPs, who were foreign officials under the FCPA, to recommend Mead Johnson’s infant formula to, and to improperly provide contact information for, expectant and new mothers.

Funding for those payments came from funds generated by discounts provided to Mead Johnson China’s network of distributors.

Mead Johnson China uses third-party distributors to market, sell and distribute product in China. Some of Mead Johnson China’s funding of its marketing and sales practices were effected through discounts provided to the distributors. Pursuant to contracts between Mead Johnson China and its distributors, Mead Johnson China provided the distributors a discount for Mead Johnson’s products that was allocated for, among other purposes, funding certain marketing and sales efforts of Mead Johnson China. This form of funding was referred to as “Distributor Allowance.”

Although the Distributor Allowance contractually belonged to the distributors, certain members of Mead Johnson China’s workforce exercised some control over how the money was spent, and certain Mead Johnson China employees provided specific guidance to distributors concerning the use of the funds. Mead Johnson China staff also maintained certain records related to Distributor Allowance expenditure by distributors. In addition, Mead Johnson China used some of the funds to reimburse Mead Johnson China’s sales personnel for a portion of their marketing and other expenditures on behalf of Mead Johnson China.

Mead Johnson China’s sales personnel marketed product through medical channels, including healthcare facilities. These sales personnel encouraged HCPs at the healthcare facilities to recommend Mead Johnson products to mothers and to collect contact information of the mothers for Mead Johnson China’s marketing purposes. To incentivize HCPs to recommend Mead Johnson product and collect information from the mothers, these sales personnel improperly paid HCPs, providing cash and other incentives, contrary to Mead Johnson’s internal policies. The Distributor Allowance was the funding source for the cash and other incentives paid to HCPs.”

Under the heading “Mead Johnson Failed to Make and Keep Accurate Books and Records and Devise and Maintain an Adequate Internal Control System,” the order states in full as follows.

“The Distributor Allowance funds contractually belonged to the distributors, but were in large part under Mead Johnson China’s control. Mead Johnson China’s employees maintained certain records related to the Distributor Allowance, including records reflecting payments to HCPs. However, those records were incomplete and did not reflect that a portion of Distributor Allowance was being used contrary to Mead Johnson’s policies.

Mead Johnson failed to devise and maintain an adequate system of internal controls over the operations of Mead Johnson China to ensure that Mead Johnson China’s method of funding marketing and sales expenditures through its distributors was not used for unauthorized purposes, such as the improper compensation of HCPs. The use of the Distributor Allowance to improperly compensate HCPs was contrary to management’s authorization and Mead Johnson’s internal policies. Mead Johnson failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that Mead Johnson China’s funding of marketing and sales expenditures through third-party distributors was done in accordance with management’s authorization.”

Notwithstanding the above, the order otherwise specifically states:

“Mead Johnson has established internal policies to comport with the FCPA and local laws, and to prevent related illegal and unethical conduct. Mead Johnson’s internal policies include prohibitions against providing improper payments and gifts to HCPs that would influence their recommendation of Mead Johnson’s products.”

Under the heading “Internal Investigation and Remedial Efforts,” the order states in full:

“In 2011, Mead Johnson received an allegation of possible violations of the FCPA in connection with the Distributor Allowance in China. In response, Mead Johnson conducted an internal investigation, but failed to find evidence that Distributor Allowance funds were being used to make improper payments to HCPs. Thereafter, Mead Johnson China discontinued Distributor Allowance funding to reduce the likelihood of improper payments to HCPs, and discontinued all practices related to compensating HCPs by 2013. Mead Johnson did not initially self-report the 2011 allegation of potential FCPA violations and did not thereafter promptly disclose the existence of this allegation in response to the Commission’s inquiry into this matter.

As a result of its second internal investigation commenced in 2013, Mead Johnson undertook significant remedial measures including: termination of senior staff at Mead Johnson China; updating and enhancing financial accounting controls; significantly revising its compliance program; enhancing Mead Johnson’s compliance division, adding positions including a second senior-level position; establishing new business conduct controls and third party due-diligence procedures and contracts; establishing a unit in China that monitors compliance and controls in China on an on-going basis; and providing employees with a method to have immediate access the company’s policies and requirements.

Despite not self-reporting the 2011 allegation of potential FCPA violations or promptly disclosing the existence of this allegation in response to the Commission’s inquiry into this matter, Mead Johnson subsequently provided extensive and thorough cooperation. Mead Johnson voluntarily provided reports of its investigative findings; shared its analysis of documents and summaries of witness interviews; and responded to the Commission’s requests for documents and information and provided translations of key documents. These actions assisted the Commission staff in efficiently collecting valuable evidence, including information that may not have been otherwise available to the staff.”

Based on the above findings, the order finds:

“Up through 2013, certain Mead Johnson China employees made payments to HCPs using funds maintained by third parties. These funds and payments from the funds were not accurately reflected on Mead Johnson China’s books and records. The books and records of Mead Johnson China were consolidated into Mead Johnson’s books and records. As a result of the misconduct of Mead Johnson China, Mead Johnson failed to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflected its transactions as required by [the FCPA's books and records provisions].

Up through 2013, Mead Johnson failed to devise and maintain an adequate system of internal accounting controls to ensure that Mead Johnson China’s method of funding marketing and sales expenditures through third-party distributors was not used for unauthorized purposes, such as improperly compensating Chinese HCPs to recommend Mead Johnson’s products. As a result of such failure, the improper payments to HCPs occurred contrary to management’s authorizations, in violation of [the FCPA's internal controls provisions].”

In the SEC’s release Kara Brockmeyer (Chief of the SEC Enforcement Divisions’s FCPA Unit) stated:

“Mead Johnson Nutrition’s lax internal control environment enabled its subsidiary to use off-the-books slush funds to pay doctors and other health care professionals in China to recommend its baby formula and give the company marketing access to mothers.”

As noted in the release:

“The company consented to the order without admitting or denying the findings and agreed to pay $7.77 million in disgorgement, $1.26 million in prejudgment interest, and a $3 million penalty.”

In this press release, Mead Johnson’s CEO Kasper Jakobsen stated:

“We are pleased to have reached this final resolution with the SEC. Integrity and compliance with laws and regulations are central to the success of our operations around the world. We will continue to reinforce these operating principles in all our interactions with customers and business partners. Our China business is one of Mead Johnson’s most important operations, and we remain confident in its continued long-term growth.”

Yesterday Mead Johnson’s stock closed up .64%.

According to reports, Mead Johnson was represented by F. Joseph Warin, Michael S. Diamant and Christopher W.H. Sullivan of Gibson Dunn.





July 28th, 2015

The DOJ’s Seeming Unwillingness To Accept Its Recent FCPA Trial Court Debacles

Not HearingFailure is a basic element of the human condition.

Thus when a failure occurs, one is often judged by whether one takes ownership of the failure or whether one offers excuses for the failure.

Against the backdrop of yet another DOJ FCPA trial court debacle in the recent Sigelman matter (see here for the prior post), the DOJ seems to have adopted the later approach.

In this recent Bloomberg article titled “Plea Deals Are Easy, Juries Are Hard,” a DOJ spokesman states:

“FCPA cases, by their very nature, often require proof of criminal acts carried out in foreign countries. While obtaining foreign evidence—documents and witnesses—poses particular challenges in FCPA cases, the department remains committed to working with its domestic and foreign law enforcement partners to continue to bring successful prosecutions against the individuals who bribe foreign officials and the companies they work for.”

The inability to obtain foreign evidence to secure an individual FCPA criminal conviction seemingly has little to do with the DOJ’s recent trial court debacles.

For instance, the Sigleman matter originated in a corporate voluntary disclosure (in which a company gift wraps witness statements, relevant e-mails, etc. for the DOJ).  Moreover, during the Sigelman trial it was revealed that the alleged “foreign official” bribe recipient was openly in the United States (he even visited Disney World), but the DOJ made no effort to prevent his exit from the U.S. Moreover, as highlighted in this prior post, the trial court judge in the Sigelman matter blasted the DOJ and its oft-stated rhetoric about the purported difficulty of prosecuting FCPA cases.

The Sigelman matter was not the only recent DOJ FCPA trial court debacle in which the inability to obtain foreign evidence seemingly had little to do with the DOJ’s failure.

For instance, the Africa Sting enforcement action resulted from a multiple-year undercover investigation with a cooperator that had pleaded guilty to real-world FCPA offenses.  During the course of its investigation, the DOJ amassed, among other things, the following evidence according to its discovery filing.

“615 audio and video recordings of more than 150 meetings;”

“5,287 recorded telephone calls between the defendants and the cooperating witness … and between the defendants and undercover FBI agents;”

“nearly 3,000 pages of text messages from the telephone [the cooperator] used in connection with the undercover operation;”

“materials seized during the 13 search warrants executed in connection with the undercover investigation relating to the defendants” including a total of “approximately 242,000 pages of documents,” “electronic media, including desktop computers, laptop computers, USB drives, zip discs, memory cards and DVDs, among other items, seized during the searches,” and “photographs taken in connection with the search warrants and logs of those photographs, as well as search diagrams and seizure inventories.”

The reason the Africa Sting enforcement failed was not because of any difficulty in obtaining foreign evidence, but rather the quality of the evidence the DOJ obtained, the DOJ’s legal theories and – in the words of the jury foreperson – a belief among the jury that the “defendants had acted in good faith and the FBI/DOJ in bad faith.” Indeed, in the words of the presiding judge, part of the DOJ’s failure was attributable to conduct “that [has] no place in a federal courtroom.”

Similarly, the DOJ’s FCPA trial court debacle in the Lindsey Manufacturing enforcement action (in which the company and two executives were criminally charged) was not due to the inability to secure foreign evidence.  Indeed, the DOJ offered sufficient evidence to secure a trial court conviction, a conviction that was short lived though because of numerous instances of prosecutorial misconduct.  In the words of the presiding judge the misconduct was “so varied and occur[ed] over so lengthy a period … that they add up to an unusual and extreme picture of a prosecution gone badly awry.”

Like the recent Sigelman action, the DOJ’s 2012 trial against John O’Shea also originated in a corporate voluntary disclosure with the DOJ also having the assistance of a cooperating witness.  However, that trial ended with the judge granting a defense motion of acquittal after the DOJ’s case.  In doing so, the trial court judge stated:  ”the problem here is that the principal witness against Mr. O’Shea … knows almost nothing.”

In short, the recent DOJ FCPA trial court debacles seemingly had little to do with the purported difficulties of obtaining foreign evidence, but rather were the result of aggressive legal theories, sloppy and unprofessional investigations, and jury resentment.

The notion that the DOJ is somehow disadvantaged in a criminal FCPA trial vis-a-vis the defense is outlandish.  The DOJ has the full information gathering resources of the government and among other things benefits from mutual legal assistance treaties, government to government cooperation, and often corporate voluntary disclosures and cooperating witnesses.

Rather, it is the individual defendant who is often disadvantaged as the defense does not have access or the same type of access to the above information and materials. Indeed, in most FCPA trials individuals are facing two adversaries – the DOJ and the cooperating company.

The concern that individual defendants would be disadvantaged in FCPA criminal trials was so prominent during the FCPA’s legislative history that Representative Bob Eckhardt (a leader on the FCPA in the House) insisted on the original FCPA containing the so-called Eckhardt Amendment.

As explained in this prior post, the Eckhardt Amendment basically stated that an individual could only be found liable for FCPA violations to the extent his corporate employer was also found liable.

After the DOJ lost an individual enforcement action against George McLean in the early 1980′s (the first time the DOJ was put to its burden of proof in an FCPA enforcement action) the DOJ convinced Congress to eliminate the Eckhardt Amendment in the 1988 amendments to the FCPA.

 

Posted by Mike Koehler at 12:03 am. Post Categories: DOJFCPA Trials




July 27th, 2015

And The Apple Goes To …

applepicRichard Morvillo recently penned this spot-on Law360 article titled “Devaluing the Currency of Settlements.”

In the article, the veteran lawyer asks whether white-collar settlement amounts have increased just because, opines that the DOJ and SEC have cheapened deterrence, raises questions about the lack of individual prosecutions and how this contributes to a facade of enforcement, and discusses how the role of defense counsel has morphed in regulatory investigations.

In pertinent part, Morvillo states:

“Now that the Arthur Andersen debacle is a distant memory, financial and other institutions are begrudgingly accepting guilty pleas and deferred prosecution agreements (“DPAs”). Penalties and fines in the hundreds of millions of dollars that must be borne by existing shareholders, many of whom were not stakeholders at the time of the alleged violations, are also more common. In addition, there is continuing concern within the defense bar that the DOJ is criminalizing conduct that historically was considered to be the grist of civil prosecutions. Similarly, the SEC now appears to be willing to bring more marginal cases as well as those involving “broken windows” and innocent mistakes.

Deterrence is a laudable goal for the DOJ and the SEC. But, despite the fact that generations of prosecutors have invoked “deterrence” as an excuse for being tougher than their immediate predecessors, there is scant evidence that increasing sanctions has had a marked impact on fraudulent and other misconduct. The sheer number of civil and criminal prosecutions brought over the last several years suggests that increasing penalties into the many tens of millions of dollars prior to that time did not forestall misconduct. If the converse were true, the government would not feel the need to ratchet up penalties.

Admittedly, vigorous enforcement, coupled with Dodd Frank, has contributed to enhanced internal controls and greater scrutiny by internal and outside auditors. These improvements began before the recent increase in sanctions and were driven in large part by companies’ self-interest in improving their culture and compliance regimes. Indeed, many institutions re-evaluate and strengthen controls and procedures, especially when they discover a whole or a lapse in existing functions, without waiting for the government to force such changes. Compliance has come a long way. Still, efforts to prevent and to detect misconduct have more to do with the desire for good corporate governance and avoiding future charges of misconduct than with the increasingly punitive size of sanctions the government has been handing out.

Criminal cases and daunting penalties are fodder for headlines, but they will not eliminate the root cause of serious misconduct — the behavior of a few individuals. For example, history teaches us that, though the DOJ and SEC have made insider trading an enforcement priority for years, there is no dearth in insider trading cases they bring year after year. Those willing to violate the law for personal aggrandizement or other reasons will find a way to do so. No compliance or control system can provide a failsafe against one or a few rogue misfeasors in a large company. Economic crime, fraud and other intentional misconduct will be with us so long as greed, arrogance, ego, poor judgment and other such traits are part of our human chemistry.

Criminal fines that are multiples of what they were in the not-too-distant past are now fairly commonplace, as are other forms of costly relief (e.g., compliance monitors). The same holds true for SEC Enforcement settlements, where tens, if not hundreds, of millions of dollars in penalties have been levied in settlements also requiring entities to disgorge large sums ostensibly reflecting the benefits attributable to the misconduct.

[...]

In other words, in raising the ceiling on settlements, the government is also raising the floor. What sufficed to settle a case only a few years ago is a far cry from the minimum sanction the government will demand today. Though, according to the government, the matters recently resolved criminally or at the high end of the sanctions range involved serious misconduct over a prolonged period of time by multiple actors, cases meeting that description are not new. The government said the same thing about its cases years ago after Enron and even before that following the revelations concerning Drexel Burnham and others. Today’s cases are not substantially different at their core from yesterday’s even while, in the interim, the government notched up the price of settlement several times.

[...]

It is rare for a regulated entity to litigate with its regulator, and the government knows that when it arrives at the negotiating table to discuss a resolution. Government prosecutors also count on the fact that companies are anxious to settle in order to get government investigations behind them. While most prosecutors try to be fair, they generally believe in their cases and demand terms the settling company finds inappropriately costly given its perception of the underlying conduct and available defenses. Company management values certainty and finality above all else, however, and often succumbs to the government’s demands simply to end an investigation. For these and other reasons, the government has the leverage to insist on sanctions that the company’s lawyers may not feel are warranted but at some point feel obliged to accept.

[T] he government’s policy of giving credit for cooperation has caused an evolution in the way cases are developed and settled despite the attendant costs. Over the past 10 years or so, the government has come to expect that entities will cooperate with it by identifying problems deserving scrutiny and delivering the facts the government needs to evaluate the conduct of the entity, its employees who were involved and those who supervised the actors. In an era of self-reporting and internal investigations, the traditional role of defense counsel has morphed often into the role of “fact finder” (for, among others, the government). The relationship between the corporate client and the inside and outside counsel is altered in these instances. For example, counsel conducting an internal investigation finds herself giving Upjohn warnings to employees in order to get facts not with which to defend the company but to share with the government. Where credit for cooperation is highest when approaching the government early and being forthright, a company generally wants to take advantage of the opportunity and set the tone for interactions to come. At the same time, having spent the money to investigate and to blow the whistle on itself, the company sets in motion a dynamic that favors a resolution, one in which cooperation should lead prosecutors to offer a more attractive package (albeit not as attractive as one available in the past). Although few defense lawyers and their clients believe that they are rewarded with benefits commensurate with their cooperation, most are not willing to risk the potential outcome of an investigation in which the company declines to cooperate.

The irony is that, while cooperation with the government is at an all-time high, so are the sanctions visited on cooperators. Because many government prosecutions, especially international cases where information is not always easily obtainable by U.S. authorities, resulted directly from extensive and costly cooperation, the government should ensure that corporations perceive that there is a clear benefit in sharing information. There are examples where the government has not brought certain charges or exempted a cooperator from the kind of monetary sanctions typical in cases involving similar misconduct. Yet, many lawyers find it difficult to explain to their clients why cooperation was worth it when the settlement they negotiated still wound up requiring exceedingly large penalties.

Finally, a more insidious problem that may arise from the devaluation of settlement currency is its potential negative impact on deterrence. As noted, deterrence and appropriate punishment for wrongdoers are important, and so is the stigma of being on the wrong end of such charges. A true criminal enterprise should be put out of business, and criminal prosecutions can help bring that about. Caution is necessary, however. Small companies and those in certain businesses, like investment advisers, are not likely to survive criminal or serious civil fraud charges or large penalties, and death is cruel and unusual punishment for their innocent employees who try to do the right thing. While larger entities are better able to withstand similar charges and hefty penalties (especially as the SEC is appropriately inclined to grant relief from the lifeblood-threatening collateral consequences of settlements), there is still cause for concern. Because we now live in an era where felony convictions of entities, DPAs containing punitive sanctions and huge civil penalties are part of the new norm, society will slowly learn to tolerate, if not become callous to, the emerging state of affairs.

The more cases there are with previously unthinkable sanctions, the more readily people will accept those sanctions as a normal cost of doing business. This cheapens the deterrence value of large penalties. The employee bent on violating the law will be dissuaded, if at all, by the threat of individual prosecution, not greater penalties for his employer. The increase in the nature and price of settlement will not alter the perception that companies can still buy their way out of trouble at their shareholders’ expense. That view has already taken hold — whereas Arthur Andersen did not survive after the charges against it, large institutions are now weathering the storm. The fact that institutions can accept responsibility for crimes and previously unheard of monetary penalties suggests that these settlements cause pain in the short term, but are not an effective deterrent in the long term.

Prosecutors understandably feel the need to be tough on intentional misconduct that harms the public. And they should be. At the same time, they should rely less on the “WOW” settlement factor and moderate their thirst for punitive sanctions whose efficacy as deterrence is questionable at best. Rather, they should focus on relief addressing the cause of the conduct and means of preventing it. The public benefits when companies, instead of paying for headline-grabbing fines, use funds to take remedial actions that increase the likelihood of preventing future misconduct.

However much the government claims it takes a company’s pre-settlement remedial actions into consideration, settling defendants are looking for more concrete evidence that their efforts pay dividends. The government should reward these companies more directly for their remedial actions; if penalties are nevertheless appropriate in particular cases, they should be kept in check and reflect, in quantitative terms, substantial offsets for voluntary improvements in internal controls and processes. That will still allow the government to insist that entities that have not taken needed corrective action expend funds adopting better governance procedures going forward.

There is also a perception among many in the defense bar that, while the penalty may vary, the same kind of costly ancillary relief is sought in certain types of cases whether or not the settling company took appropriate remedial steps. For example, compliance monitors and reviews are sometimes mandated in Foreign Corrupt Practices Act settlements notwithstanding the likelihood that their benefits are marginal where a settling entity took appropriate remedial steps before or during the government’s investigation. In recognition of pre-settlement steps, the government should propose more creative prophylactic relief that ensures adherence to newly improved policies. Reviewing and policing how a company handles them going forward are more apt to deter recidivism than redundant exercises or large fines. Thus, for example, the government might defer imposition of a penalty or other sanctions pending a company report on progress over a few years in the compliance area implicated by the settled charges; the sanctions could be triggered if defined compliance milestones are not met.

Government officials believe that they already adequately fashion resolutions in light of remedial actions taken by the settling defendant. Few in the private sector agree, however, and some think that the recent spate of increased sanctions demonstrates that the government has taken the opposite tack. We can hope that the government stops the seemingly never-ending escalation of sanctions and adopts a more measured approach focused on deterrence and not on headlines and out-sized penalties.”

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Posted by Mike Koehler at 12:03 am. Post Categories: Apple Award